Well it is that time of the year again. RRSP contribution season. I had two calls today asking “I want to buy a new home but want to save for my retirement as well. I can’t do both as the downpayment would then be used for the RRSP contribution. What are my options?”
After further analysis I believe the just announced mortgage rule changes punish responsible, and especially first time, homebuyers. I am specifically referring to the reduction in maximum amortization from 35 to 30 years.
Over the last several months, the Federal Government and the Bank of Canada have been giving “hints” that they were concerned that Canadian debt loads were getting to high. These “hints” came in light tones to start and became louder. This was widely reported by the media. So I knew they were going to do something about it. It would be whether by raising interest rates or by regulation changes.
The 2011 BC Property Assessments are now available online. All property owners should be receiving these notices by mail in the next few weeks. However, for a limited time all this information is available at BC Assessment.
For those unfamiliar with what this is, the BC Assessment Authority is a Provincial Government agency that annually values all properties in the Province. This data is primarily used by municipalities to determine property taxes, school levies, etc.
Of course, other agencies, the general public and others can also use this information as a measurement of what the value of a property may be worth.
I caution everyone that these values are not “set in stone”. There are reasons why an actual property may be worth more or less (renovations, deterioration, alterations, etc.). As well, these “valuations” were done as of July 1, 2010 and depending on what the market has done since then, will influence the actual value on a particular date.
In a post dated May 7, 2010, I alerted readers that Canadian mortgage insurers were not insuring “non-conforming strata” properties. For the full post read here.
I subsequently wrote an update post on May 19, 2010 advising that the decisions by the mortgage insurers had been reversed and all was okay again. Read more here.
During that time frame, most lenders I spoke to had no issues providing that financing for those types of properties on a conventional basis (equity of 20% or more).Therefore, I thought the issue had died since the insurers were again okaying them. All was good again.
Well, apparently not. I was just sent an email this reader of this blog and was told of a potentially serious problem that he had with a lender. I have his permission to publish what he sent me but he wanted to remain anonymous. This is what happened to him.
I wanted to thank you for your above noted article. My wife and I have recently agreed to purchase a new property that is part of a non-conforming strata. The purchase completeion date is later this month.
We were pre-approved for the mortgage on the new property by Coast Capital, which holds the mortgage on our current property. Coast Capital was informed that the new property is non-conforming with no Form B, no regular meetings, and no minutes of meeting. Coast Capital was also aware that we would be putting more than 20% of the total mortgage value towards a down payment.
Coast Capital informed us after we had removed all of our subjects on the purchase agreement that it could not provide us with a mortgage for the property because it is non-conforming despite our significant down payment. This has left us scrambling to find another lender at the last minute.
We are now working through this issue with our agent and broker but I wanted to let you know what my wife and I recently encountered with Coast Capital and encourage you to publish more articles on this issue because there appears to be a lack of understanding about this issue amongst agents, brokers, and lenders.”
This was the first time since early spring of 2010 that this issue has creeped up again. I have sinced spoke with a handful of lenders and have been advised that there are no changes to their guidelines and are okay with these types of properties.
I was informed by the writer that he did manage to obtain financing elsewhere and it appeared that all turned out okay. I wish to thank him for writing me and telling me his story.
Aside from the potential problems with properties of these types, I would also like add an additional caution. NEVER, EVER remove the subjects on a property unless you are 100% certain that the financing is in place. Even if you are pre-approved make sure you have a firm commitment from the lender before doing so. The type and condition of the property may be the problem and not you.
As always, I want to hear from you.
Whenever you take out a mortgage you have been or will be offered Mortgage Life Insurance. This is not to be confused with the mortgage insurance that is offered by CMHC, Genworth or Canada Guaranty and is required if you have less than 20% equity in your property. I am referring to insurance that will cover the mortgage in case you die.
Many do not give too much thought about life insurance. Why would you? You are moving into a new home, maybe the first one you have ever owned, it would be the last thing you think about. And the cost….
Well, it is my opinion that you should! Have you ever considered what will happen if something happened to you (death)? Will your family still be able to afford the mortgage payments? Will the kids still have a roof over their heads?
Mortgage Life Insurance coverage would take care of those questions. It would pay out the outstanding balance on your mortgage thus allowing a clear title home to be left behind for your family. They would be taken care of.
What if you are single? Have no dependents? If you are the rare individual that will always have no dependents or anyone you want to leave the property to…then yes, forget about coverage.
Not all Mortgage Life Insurance policies are the same!
Your mortgage broker and the lender will be offering you coverage when signing for the mortgage. These types of policies are easy to get (just sign) and are generally group policies. For those that are too busy and just want coverage this is an easy way to go.
However, I would suggest that you find an independent life insurance agent to provide you with the coverage. Why?
Well, to start they can give you quotes from many different companies. They shop around for you and can probably get you a better deal. Secondly, insurance policies from the lenders only cover you as long as you are a mortgage client. What happens if you transfer the mortgage in the future? The coverage ceases and you will have to buy a new policy. As age is a big determining factor and we all get older, it may cost you more. A policy that is independent of where you bank, work, etc. will provide you with long term coverage without the worry about it ever terminating due to life changes or decisions.
Regardless of where you decide to get your mortgage life insurance coverage, just get yourself covered! I have experienced instances that it sure came in handy for the surviving family and the kids.
While you are looking at coverage maybe check into disability insurance as well. That will be a topic for another day.
So do you have coverage? Comments welcome.
This week all B.C. homeowners started receiving their annual property tax bills and inside there is information about the new option to defer the payment of them if you meet certain criteria. I previously wrote about this under 2010 BC Budget Homeowner Changes.
So if you qualify, why not take advantage of this?
Most certainly if you had to, this is a good new option in what are still hard economic times for many B.C. families. However, I do want to caution you and ensure you take a few things into account before doing so.
Please use this option only if necessary as you will just be increasing your debt load. Deferring the taxes means you will have to pay it back at some point. Interest is being charged (currently at Bank Prime, which is very low but is expected to increase) and accumulating on it. Plan on paying it back as soon as you can.
If you cannot pay it back and defer it each year it will be very easy to accumulate thousands, if not tens of thousands, dollars of additional debt. Some of you may be thinking…I will just pay it all back when I sell the home, whenever that is. Partially true. You may have to pay it back sooner than you think.
Let me explain.
If and when your mortgage comes up for renewal you may want to shop around and see if you can get a better deal somewhere else. This may pose a problem. Most lenders will want to ensure that the property taxes are up to date before approving you. Therefore, if you have deferred the property taxes you will need to bring them up to date at that point. What will you do if this occured? You would have to find the money to pay it or add it to the mortgage (and increase what you owe).
What happens if the equity in your home has decreased due to a drop in market values at that time? Remember, one criteria in this new deferment program is that you only need 15% equity in your home currently. What happens if values dropped when your mortgage came up for renewal? It would not take much of a drop in the market combined with the amount you deferred over more than a few years to create a possible situation where you would have insufficient equity to be able to increase the mortgage to pay the taxes. Each time you apply for a mortgage, the new lender will re-qualify you and an appraisal is one requirement.
Should this happen you will be unable to take advantage of any better deals out there. It may leave you stuck with your existing lender regardless of what they offered you.
And even if you had sufficient equity to add it to the mortgage, think of all the additional interest you would be paying over time.
In the long run you may pay more for the tax deferral than you may have anticipated.
I encourage you to give it a good deal of consideration before jumping in and deferring your property taxes. It is not something to take lightly.
So are you going to do it? Do you like the new program? I would love to hear from you.
Wayne Mah, AMP / Senior Mortgage Planner / firstname.lastname@example.org / 604.880.1899
CMHC has just announced that they will now be insuring mortgages on “non-conforming stratas” again. This reverses an earlier decision (see previous post). A requirement is that title insurance must be taken out.
This is super news for both buyers and sellers. Now buyers can go as low as 5% down again!
Further update: Genworth and Canada Guaranty are now on board as well.
This is a very recent change!!!
I found this very strange and having been in the industry for many years I decided to find out why. In the past these were not an issue.
Some background on these types of properties. Although strata duplexes are not rare, they are not abundant. I have seen some strata four-plexes as well in the past. As these complexes are small (usually only 2 owners) many do not follow the rules and regulations of the B.C. strata property act (holding meetings, having bylaws, collecting monthly strata fees, etc.). This is called a “non-conforming strata”. Why would they when there are only such a small number of owners? The owners would just have an informal agreement to do what needs to be done.
Apparently, this is the problem and has caused the recent change by the insurers. With no “formal” structure I was told there have been instances of “litigation” between owners in a few complexes. Ultimately this involved the lender and thus the insurers. The insurers do not want to be involved in such incidences and thus are now not insuring such properties.
This is a big problem as this means a minimum of 20% down if you wish to purchase such a property. Ultimately, our client could not make the purchase. They were upset and so were the real estate professionals involved.
I have been told by one insurer that they are working with their legal department to see if there is a remedy and get these properties okayed again. However, in the meantime the only way they will approve loans on such properties is if they fully comply with the B.C. strata property act. This mean to hold meetings, keep minutes, implement bylaws, etc.
Thus far I am not aware of any lenders not approving mortgages on these properties if the client has more than 20% down (bypassing the insurance regulations).
I would love to hear your comments. Are you planning to buy or sell one of these properties? Have you encountered this problem?
It has now been confirmed that the new qualifying rate, effective April 19, 2010, for all CMHC insured mortgages will be as follows:
- The greater of the chartered bank’s posted 5 year term rate or the contract rate.
This will apply to all variable rate mortgages and for fixed rate terms under 5 years.
We were all waiting to find out what the new qualifying rate would be ever since the Federal Finance Department announced changes back on February 16, 2010. See New Rules: Not as bad as speculated
As of today the qualifying rate would be 5.39%.
This is a significant setback to borrowers and to many non-bank lenders. For all borrowers this will mean that they will be qualifying for much less money post April 19 compared to now. To many non-bank lenders, who have been qualifying many of their applicants on discounted 3-year fixed rates currently for variable rate products, this will level the playing field with their bank competitors. It may have an impact on their bottom line as this current policy had given them edge in attracting would be borrowers who needed just a bit more money.
As an illustration on the impact, below is the amount a borrower can get using three different scenarios. In all of them I am using an income of $60,000 per annum, a 25 year amortization, the assumption of no other debts, a 32% GDSR and a figure of $2500 per annum for property tax and heat.
- One non-bank lender today is using 3.65% as a qualifying rate for their variable rate mortgages. $274,000
- Using today’s 5 year fixed discounted rate from many lenders of 3.79%. $270,000
- After April 19, 2010 assuming the qualifying rate is today’s bank posted 5 year rate of 5.39%. $230,000
A client in this example would be able to borrow $40,000 LESS on a variable rate product after April 19, 2010 compared to today.
If current mortgage volumes are any indication, we will see a continued surge in clients attempting to finalize their mortgages prior to the new rules implementation.
As always your comments and feedback are welcome.
As widely reported yesterday, Minister of Finance Jim Flaherty tightened the rules on qualifying for a mortgage today. It was not as bad as many had feared (increasing the downpayment to 10% etc.) but it will definitely still have an effect on the overall housing market. Here are the rule changes:
1. Regardless of mortgage product all borrowers must meet the standards for a 5-year fixed rate mortgage. This includes if a borrower wants a variable rate product.
2. When refinancing a home and doing an equity take out, the maximum one can borrow will be 90% LTV.
3. A minimum downpayment of 20% on all non-owner occupied properties.
All changes take effect April 19, 2010.
Let me address each point and what I believe the impact will be:
1. Most lenders currently use their 3 year fixed rate to qualify clients on variable rate mortgages. The thing that is not clear in the press release is what is meant by “the standards for a 5 year fixed rate mortgage”. Does this mean the bank’s posted 5 year rate? Will the government set the 5 year rate? Some lenders do not have “posted rates” (Firstline Mortgages as an example) and currently use their 3 year “best rate” to qualify clients. Will this new rule translate to having them use their own 5 year “best rate” or will they have to qualify clients based on an arbritarily set 5 year rate? The difference between the two will determine the impact. If it is just a matter of using each lender’s own 5 year fixed rate for qualifying then a borrower will be able to qualify for more money via lenders that do not a higher “posted rate”. This will have the least impact. Now if the “standard 5 year fixed rate mortgage” is arbitrarily set this will mean that the borrower will qualify for much less, even from the lenders that have no “posted rates”. We will have to see once this is clarified.
2. Limiting refinances to 90% LTV will have the least impact of the 3 new changes I believe. It is currently rare, based on my experience, to have clients re-borrow up to 95% LTV.
3. Requiring 20% downpayment for all non-owner occupied properties will have the most immediate significant impact in my opinion. With current low interest rates and the recent price declines in most areas (now back up in the Vancouver area) we had seen more investors in the market. Although, small downpayments are still not the norm for these clients we have seen an uptick in investors with smaller amounts down. This will take these clients right out of the market. I personally think that this is a solid change. If one is to invest/speculate on real estate one should have more money put into the property. It should not be the insurer or the bank that is a potential “partner” in it.
Overall, these changes will mean pains for some. However, if change #3 has the impact as I think it will, this will mean that prices should stabilize or at least slow it’s rise in most markets. Bad news for current owners but great news for those in the market.
What do you think? Comments welcome.
The full press release can be viewed here.