4 Jul

Purchase Plus Improvements Mortgage.

Mortgage Tips

Posted by: Tessa Parascak

Purchase Plus Improvements Mortgage.

When it comes to shopping for your perfect home, it can be hard to find the exact one ready to go! If you are looking into a home that requires improvements, there is a mortgage product known as Purchase Plus Improvements (PPI). This type of mortgage is available to assist buyers with making simple upgrades, not conduct a major renovation where structural modifications are made. Simple renovations include paint, flooring, windows, hot-water tank, new furnace, kitchen updates, bathroom updates, new roof, basement finishing, and more.

Depending on whether you have a conventional or high-ratio mortgage, if it is insured or uninsurable, and which insurer you use, the Purchase Plus Improvements (PPI) product can allow you to borrow between 10% and 20% of the initial property value for renovations. Additional insight on how the qualifying structure works can be found in the table below:

Type Requirement
Uninsurable $40,000 or 10% of the “initial” value of the property, whichever is less
CMHC Insurable Can exceed $40,000 but not 10% of the “as improved” value of the property.
Sagen™/Canada Guaranty Insurable Can be 20% of the “initial” value of the property but the improvement amount cannot exceed $40,000

The main difference between a regular mortgage and a purchase plus home improvements program is the need for quotes. As part of the verification process, your mortgage professional and the lender will need to see a quote for the work that is planned for the improvements. The quotes will provide us with the cost and plan details required to secure the final approval.

Working with your realtor, your mortgage professional will help guide you through the final approval process, which works as follows:

  1. Find a home
  2. Apply and get approved for a Purchase Plus Improvements mortgage
  3. Get firm quotes on the improvements
  4. Get an appraisal for the estimated as-is and as-improved value of the property.
    • This will be ordered by your lender or broker and quotes are typically reviewed by the appraiser.
    • Note: If you are putting less than 20% down payment on the purchase, often only a final inspection is required to confirm the work on the quotes has, in fact, been done.
  1. Close the purchase
  2. Depending on your down payment, the lender may provide up to:
    • 80% of the as-improved value, less the cost of improvements (if on an uninsured mortgage)
    • 95% of the as-improved value, less the cost of improvements (if on a default-insured mortgage)
  3. Start the improvements
    • The initial advance of funds will be up to 95% of the approved value of the property minus the improvements. You will usually have to pay a portion of the improvements upfront via savings, credit card, personal line of credit, parental funds, etc.
  4. Notify the lender when the project is complete
    • At this point, an inspector/appraiser will confirm the work has been completed to the specifications agreed by the lender
    • Once the lender verifies the inspection report, the balance of funds is advanced.

If you have questions about how a Purchase Plus Improvements Mortgage could work for you or are considering taking this route for your next home, please do not hesitate to reach out to a Dominion Lending Centres mortgage professional for expert advice!

Written by my DLC Marketing Team.

27 Apr

Benefits of Home Ownership.

Mortgage Tips

Posted by: Tessa Parascak

Benefits of Home Ownership.

So, you have decided to utilize your buying power in the Canadian retail market and are looking to purchase a home – congratulations! This is a great step towards ensuring your future.

As a potential homeowner, there are some amazing benefits that we think you should be aware of right out of the gate:

  1. Homeownership is the single largest source of savings for Canadian households.
  2. Your payments build equity (as opposed to renting, where your money goes to the building owner).
  3. Equity you build in your home can be used as security for other loans.
  4. The return on investment is substantial – in fact, the average price of a house for sale on the Canadian real estate market has increased every year since 1998.
  5. While other investments can prove volatile, investing in real estate is a solid use of your hard earned money.

Buying a home is not just about equity and investments, but it is about the future. While it is important to know what a mortgage is and how much you qualify for (and can afford), ensuring your new home is so much more than numbers. In these changing times with the cost of living constantly increasing, having home equity to fall back on can have a huge impact on your quality of life. Not only that, but owning your own home gives you a sense of pride, a feeling of security and the freedom to design the perfect living space for yourself – without having to ask permission from strata or a landlord! Moving into your first apartment or moving on up to your first house is an incredible step in the journey of life!

Now, as excited as you are to get started, you probably have some questions! Let us take you through some of the most important things to know when it comes to home ownership to ensure your experience is as smooth as possible – and provides the best possible outcome for you!

WHAT EXACTLY IS A MORTGAGE?

It is amazing how many people really don’t know what a mortgage is. Maybe you weren’t sure you would be in a position to have one or maybe you just never asked! Never fear – we have the answers.

To keep it simple, a mortgage is a loan that is specific to properties and homes. This type of loan uses the home or land you purchase as security in the event the loan cannot be paid. Mortgages are registered as legal documents and can be obtained through a variety of sources (or lenders) including banks, credit unions and alternative lenders or through the use of a mortgage broker!

MORTGAGE TERMS TO KNOW:

Principle The principal is the amount of the loan that is actually borrowed.
Interest Rates As with any loans (credit cards, lines of credit, etc) interest will be incurred. This is the amount that the lender charges for the privilege of funds borrowed. The amount of your interest payment will depend on the interest rates, which vary depending on terms and conditions of the mortgage and the borrower’s credit history.
Mortgage Payments These can occur monthly, semi-monthly (twice a month), bi-weekly (every other week), accelerated bi-weekly or weekly and are made to the lender. These payments encompass both payments to the principal amount borrowed, as well as interest charges.
Amortization Period This is the number of years it will take to repay the entire mortgage in full and is determined when you are approved. A longer amortization period will result in lower payments but more interest overall as it will take longer to pay off. The typical range is 15 to 30 years.
Term Term is the length of time that a mortgage agreement exists between you and the lender. Rates and payments vary with the length of the term. The most common term is a 5-year, but they can be anywhere from 1 to 10 years. Generally a longer term will come at a higher rate due to the added security. A “Fixed Mortgage” means you are locked in at the interest rate agreed for a longer length of time.A “Variable Mortgage” features an interest rate that is adjusted periodically to reflect market conditions.
Maturity Date The maturity date marks the end of the term. At this time, you can repay the balance of the principle or renegotiate the mortgage at the current rates. Note: If you choose to repay or renegotiate the mortgage before the term is up, penalties may be charged.

HOW MUCH DO I QUALIFY FOR AND WHAT CAN I AFFORD?

One of the biggest factors to purchasing a home is knowing how much you qualify for when it comes to a mortgage – and how much you can afford!

To determine the amount of the mortgage you qualify for, banks will utilize a set of ratios which determine the amount of your income that will be used to pay down the debt. These ratios are Gross Debt Servicing (GDS) and Total Debt Servicing (TDS).

It sounds confusing, but let us help break this down for you!

GROSS DEBT SERVICING (GDS) RATIO

The first ratio, Gross Debt Servicing (GDS) is the percentage of gross income that is required to cover housing costs. If you are looking at getting an insured mortgage (less than 20 percent down payment on the purchase price) the limit is 32% GDS. For uninsured mortgages (20 per cent or more down payment) the limit is 39% GDS.

To calculate this, you would take any home-related expenses (mortgage payments, property taxes, utilities and strata fees when applicable) and divide them by gross monthly income to get your GDS percentage.

Gross Monthly Income $4,500.00
Mortgage Payment $1,000.00
Property Taxes $200.00
Heating Expenses $150.00
Total Expenses $1,350.00
Gross Debt Servicing (GDS) 30%

The rate of 30% GDS is well within the requirements and would be approved.

TOTAL DEBT SERVICING (GDS) RATIO

The other ratio banks use is known as Total Debt Servicing (TDS). This is the percentage of your gross income required to cover housing costs (same as with the GDS) but also any other debts. The guidelines for an insured mortgage (less than 20 percent down) has a limit of 40% TDS while an uninsured mortgage (20 per cent or more down) is 44% TDS.

To calculate this, you would take all home-related expenses (mortgage payments, property taxes, utilities and strata fees when applicable) and other debts (credit cards, personal loans, student loans, car payment or a line of credit) and divide them by gross monthly income to get your TDS percentage.

Gross Monthly Income $4,500.00
Mortgage Payment $1,000.00
Property Taxes $200.00
Heating Expenses $150.00
Student Loan Payment $100.00
Car Payment $300.00
Total Expenses $1,750.00
Total Debt Servicing (TDS) 39%

The rate of 39% TDS is well within the requirements and would be approved.

DECLARING YOUR INCOME

In order to get approved for the mortgage, you need to declare your income so the bank can compare it to your expenses and determine the ratios noted above.

If you are employed with a company, you would provide an employee statement declaring minimum guaranteed gross wage OR last two-year average if there were bonuses or commissions that put your income above your guaranteed wages. If the most recent year was lower, that year will be used instead of the average.

If you are self-employed, you would provide the average of your last two years of income based on line 150 of your tax returns. It is important to know that there are programs available for self-employed borrowers in cases where the two-year average does not qualify them for a mortgage. Just ask your mortgage broker!

BE SMART!

There are many cases where buyers will qualify for more than they intend on spending – but don’t get greedy! It is vastly more important, especially for your first home, to stay within a budget that you can afford each month instead of overextending yourself simply because it is available to you. The most important aspect is that your payments are reasonable and affordable. There are always options to move to a larger home in the future!

25 Mar

The Credit Challenge.

Mortgage Tips

Posted by: Tessa Parascak

The Credit Challenge.

For most people, credit score isn’t something you spend much time thinking about. Especially if you are someone who is making good money and paying all your bills on time. When you are in that boat, it feels pretty good! But, when you miss a payment or you struggle to pay all those credit cards, lines of credit and even your mortgage, it can feel like a sinking ship.

This is especially true if you’re credit challenged, but are looking to get into the housing market. Improving your credit is the best first step to getting a lender to give you a chance and fortunately, it is very doable!

why does credit score matter?

The reason your credit score is so important is because it tells lenders the basic story surrounding your credit. It essentially indicates whether or not you are a “good investment” by relaying how long you’ve had credit, your ability to pay back that credit and how much you currently owe. Your credit score is affected by how much debt you’re carrying in relation to limits, how many cards or tradelines you have and your history of repayment.

If you are considering getting your first mortgage, keep in mind that a credit score above 680 puts you in a good position to get financing, while a score below that will make it tough and improvement is needed.

CREDIT REPORTS

To ensure your credit score remains in good form, it is important to take a hard look at your credit report and review your credit score for any old or incorrect information. If you find any errors, contact Equifax to have them corrected or removed. Another big factor includes paying off any collections (such as parking tickets or overdue bills).

CONSIDER THE 2-2-2 RULE

If you’re a young person and new to the world of credit, consider the 2-2-2 rule to help build up your credit. Lenders typically like to see 2 forms of revolving credit (i.e. credit cards) with a limit of no less than $2,000 and a clean history of payment for 2 years.

It is important to note, a great credit score means keeping a balance on all those cards at any given time, below 30 percent of the overall limit. For a card with a limit of $2,000, this means having no more than $600 of it in use. It is also a good idea to check if your credit card requires an annual fee and make sure you are paying that off too.

If you’ve been advised to get a couple credit cards but have locked them in a vault where only a sorcerer’s spell can access them, you’re going down the wrong path. The goal is not just to have credit but to show potential lenders that you know how to use it responsibly!

rock bottom credit

When things get really bad, there is a tendency for clients to consider declaring bankruptcy or a consumer proposal. Bankruptcy is a legal process where an individual or entity can seek relief from some or all of their debts when unable to repay them. A consumer proposal is a formal, legally binding process to pay creditors a percentage of what is owed to them.

The truth is, it is best to avoid these two options. Instead, there are companies out there that will perform the same function with regards to negotiating your debts – but it won’t impact your credit or carry the stigma of bankruptcy or a consumer proposal.

CONSIDER REFINANCING

If you already own a home and have some equity, but you are still drowning in credit debt, consider refinancing your mortgage. While you might not get the same great rate you have now, or might get dinged for breaking your mortgage early, using the equity in your home can be a great way to get rid of high-interest credit card payments and consolidate debt to keep more money in your pocket at the end of the day.

keeping your score in-tact

Once you have your credit score where you want it, it is important to maintain that score. You can do this by ensuring you never use more than 30% of your available credit and that you pay your bills each month, and on time. Even if you can only pay the minimum amount due, it is important to be making those payments and recognizing the requirements.

Written by my DLC Marketing Team

1 Feb

Staying Out of the Penalty Box.

Mortgage Tips

Posted by: Tessa Parascak

Staying Out of the Penalty Box.

When it comes to mortgages, it is easy to focus on the rates and your current situation, but the reality is that life happens and when it does, rates won’t be the only thing that matters.

First and foremost, the most important thing to remember is that a mortgage is a contract. That means that there is a penalty involved if the contract is ever broken. This is something that every homeowner agrees to when you sign mortgage paperwork, but it can be easy to forget – until you’re paying the price.

why break your mortgage?

You’re probably wondering why you would ever break your mortgage contract? Well, you might be surprised to find out that 6 out of 10 mortgages in Canada are broken within 3 years and there are typically nine common reasons that this happens:

  • Sale and purchase of a new home
  • To utilize equity
  • To pay off debt
  • Cohabitation, marriage and/or children
  • Divorce or separation
  • Major life events (illness, unemployment, death of a partner)
  • Removing someone from title
  • To get a lower interest rate
  • To pay off the mortgage

It is always important to think ahead when signing a mortgage agreement, but not everything can be planned for. In that event, it is important to understand the next steps if you do indeed need to break your mortgage.

calculating penalties

Typically, the penalty for breaking a mortgage is calculated in two different ways. Lenders generally use an Interest Rate Differential calculation or the sum of three months interest to determine the penalty. You will typically be assessed the greater of the two penalties, unless your contract states otherwise.

INTEREST RATE DIFFERENTIAL (IRD)

In Canada there is no one-size-fits-all rule for how the Interest Rate Differential (IRD) is calculated and it can vary greatly from lender to lender. This is due to the various comparison rates that are used.

However, typically the IRD is based on the following:

  • The amount remaining on the loan
  • The difference between the original mortgage interest rate you signed at and the current interest rate a lender can charge today

In this case, these penalties vary greatly as they are based on the borrower’s specific mortgage and the specific rates on the agreement, and in the market today. However, let’s assume you have a balance of $200,000 on your mortgage, an annual interest rate of 6%, 36 months remaining in your 5-year term and the current rate is 4%. This would mean an IRD penalty of $12,000 if you break the contract.

Ideally, you will want to be aware of what your IRD penalty would be before you decide to break your mortgage as it is not always the most viable option.

THREE MONTHS DIFFERENCE

In some cases, the penalty for breaking your mortgage is simply equivalent to three months of interest. Using the same example as above – balance of $200,000 on your mortgage, an annual interest rate of 6% – then three months interest would be a $3,000 penalty. A variable-rate mortgage is typically accompanied by only the three-month interest penalty.

paying the penalty

When it comes to making the payment, some lenders may allow you to add this penalty to your new mortgage balance (meaning you would pay interest on it). You can also pay your penalty up front.

Whenever possible, if you can wait out your current mortgage term before making a change to your mortgage, it is the best way to avoid being stuck in the penalty box. If you cannot avoid a penalty, do note that, while only calculators can be great tools for estimates, it is best to call your lender or mortgage broker directly for the accurate number in the case of determining penalties.

If you are unsure about getting the best penalty terms, reach out to a Dominion Lending Centres mortgage broker today! They can help you find the best mortgage product for you.

Written by my DLC marketing team.

18 Jan

How to Save with a Variable Mortgage.

Mortgage Tips

Posted by: Tessa Parascak

How to Save with a Variable Mortgage.

When it comes to mortgages, the age-old question remains: “Should I go with a variable or fixed-rate?”. To make an informed decision, it is important to look at the type of buyer and the historical trends.

When it comes to variable versus fixed-rate, it is important to understand what these mortgages are based off of. Fixed mortgages are so named as they are based on a fixed interest rate that is set for the duration of the term with fixed payments. On the other hand, variable-rate mortgages fluctuate with the Prime Rate. This can either mean fluctuations in your payment, or if you choose to have set payments, the interest portion of the payment.

In the last 10 years, the prime lending rate has gone from 2.50% to 3.95% and now sits at 2.45% as of January 2022. Due to recent events, these rates have seen even more of a downturn providing huge benefits to new borrowers looking to pay as little as possible.

While a variable-rate mortgage is linked to the Prime Rate, which could cause fluctuations, historically the choice of a variable rate mortgage over a fixed term has allowed borrowers to save in interest costs.

However, due to the uncertainty and potential fluctuations that can occur with a variable-rate mortgage, it comes down to the borrowers comfort. Some individuals have no wiggle room in their budget for potential changes in mortgage payments, or they do not like the uncertainty. For these clients, a fixed-rate would be the best choice.

On the other hand, clients who qualify for variable-rate mortgages have a unique opportunity to take advantage of lower interest rates. If you have a variable-rate mortgage, you can either set a fixed-payment so that, if the interest rate drops, it means you are paying more on your principal loan each month. Or, if you have flexible payments, you may see your monthly payments drop in accordance to decreases in the Prime Rate. However, since every 10% increase in payment can save three years off the amortization of a five-year term, having fixed payments provide extra benefits. After all, extra pennies towards the principle can help make a difference over the life of a 25 or 30 year mortgage.

Let’s look at the following example:

Amy and Jake have a balance owing of $300,000 on their mortgage with a variable rate at Prime minus .80%, (giving us 1.65%) with current payments set at $703 bi-weekly. The mortgage matures in 24 months but they are considering locking in for a new five-year term at 3.34%. New payments would be $739. As much as they love their home, they are considering a move in the next couple years.

When reviewing this mortgage, it is more beneficial for them to keep the remaining variable-rate in place for two years. However, if they set the payments based on 3.34% or $739 bi-weekly, this allows them to pay an extra $72 on their mortgage per month. In 24 months, the savings on interest is $4,000 and their outstanding balance is $4,000 less than by staying in the fixed rate.

Another benefit to variable-rate mortgages is that, if you choose to sell before the mortgage term is up, the penalty is typically only three months interest as opposed to much heavier interest rate differential (IRD) calculations used to determine fixed-rate mortgage penalties.

With this strategy they don’t have to feel pressure to lock-in today, plus they can continue taking advantage of the lower variable rate.

If your mortgage is maturing in the next 90-180 days and you’re not quite sure what to do, it is a good idea to contact a Dominion Lending Centres Mortgage Professional. Not only can they provide tips for your existing variable-rate mortgage to help save you money, but they can help you assess whether fixed-rate is right for you or if you should make the switch.

Written by My DLC Marketing Team.