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When it comes to mortgages rate is not always a deciding factor

Cheaper not always better

Over the last two weeks, we’ve seen several lenders drop their fixed five-year interest rate.

When deciding where to place my clients’ mortgages, rate is only one piece of the puzzle. It is an important piece, of course, but not necessarily the deciding factor.

I’ve talked about this previously and feel it warrants revisiting.

Many of the mortgage lenders offer both a standard mortgage product and a cheaper no-frills mortgage. By cheaper, I mean the no-frills options are generally priced about .05 per cent less than the standard mortgage.

Differences between the standard mortgage product and the no-frills option can include:

• Higher penalty for breaking the mortgage early, either to refinance or port to another home

• Extend and blend may not be an option (ie: a refinance without penalty part way through the term)

• Any increase or port of the mortgage means a penalty charged

• Mortgage is not assumable

• Mortgage is not portable

• May require a bona fide sale to break the mortgage (ie: no early payout permitted)

I have only put clients into a low-rate option twice (at their insistence) and both times they have been in the position of needing to break those mortgages prior to maturity.

We were able to find a great solution for one of the clients, and the other had to pay a penalty she could have avoided had she chosen the standard mortgage instead.

If you have been holding off purchasing a home or refinancing your current mortgage, now may be the time to have a conversation with your mortgage person.

We have a great calculator that can show you whether it makes financial sense to do an early renewal or whether it makes more sense to stay the course with your current mortgage.

A few minutes speaking with a professional may save you thousands of dollars in the long run, or might reassure you that you are already in the right mortgage.



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Check your credit before applying for a mortgage

Mortgage preparation

In the past I’ve talked about the importance of connecting with a mortgage professional before you head out shopping for a new home.

Even if you currently own a home, qualification guidelines and available programs change from time to time so even if you qualified in the past your numbers might look different now. Another important reason to do your homework is to find out if you have any issues like blips on your credit that need to be addressed. Taking the time upfront to make sure you are ready to go can save stress and heartache down the road.

Lenders and insurers (CMHC, Sagen, and Canada Guaranty) want to work with clients that have a demonstrated track record of managing their credit responsibly.

I am currently working with a lovely couple that have both been through challenging separations. In her case, her ex refused to pay any child support, so she raised her children on her own. As a single mom, her finances were tight and sometimes she had to make difficult decisions about what got paid and what did not.

In his case, things were pretty amicable with his ex until they weren’t. He hadn’t bothered to take his name off one of their credit cards and left all of the utilities in his name on the understanding that she would be paying them on time.

The couple I’m working with has been together for about five years. They have worked hard and saved over $30,000 for their down payment and closing costs. They are limited credit seekers and are meticulous with managing their credit cards and car loan. We had their application ready to go and as the last step I pulled their credit reports to make sure there were no surprises before I sent them out shopping.

Ugh.

It turned out that she had three unpaid parking tickets that had gone to collections.

His ex had moved and left significant outstanding balances on all of the utilities. The credit card was consistently paid over 30 or 60 days late. Because the mail and calls went to her, and because he hadn’t applied for credit in over four years, he wasn’t aware of the damage done to his credit bureau.

Although life happens and there are explanations for these situations, I couldn’t find an insurer that was willing to entertain an application for them. Heartbreaking when they’ve worked so hard.

I recommend that everyone, not just clients preparing to buy a home, check their credit at least once a year to make sure there are no surprises.

If you have suffered through identity theft in the past, even if you have a warning on your credit bureau, this is even more important. Over the last few years I’ve worked with two clients whose information was compromised not once but twice.

Your track record of managing your credit is one of the most important pieces considered by lenders when deciding whether to approve or decline your application.

The positive news is that if you have had credit issues in the past, there are ways to update and correct your credit history. Take a few minutes to check your credit bureau – you may be glad you did



Right time to buy a home?

Over the last year and a half or so I have watched multiple clients scrimp and save and try to figure out how to buy a home given their budgets and the exploding housing market.

The rub for me is that clients in our area are paying rent that is well over what they would be paying towards their own mortgage.

In some cases, client expectation versus price point is the stumbling block.

Some clients want a brand-new shiny updated home right out of the gate. Nothing wrong with that – when you are spending this kind of money on a house you’d like it to be beautiful to come home to.

One thing to consider is finding a home with good bones in a great location that needs some updating. By putting some time and money into renovations you can accomplish the same thing but potentially at a lower price.

There is a specific program to help you achieve this called Purchase Plus Improvements. I talked about this in a previous column called Creating Your Dream Home. Essentially, you are able to add money to your mortgage upfront to renovate your home or replace items such as the furnace, hot water tank, roof, etc.

Another thought is to consider looking for a home with a suite. I appreciate that people want their own space. When I moved to the Okanagan I ended up buying a home that had a suite, even though I planned to use that space for my family. Life changed a little, and I am certainly glad I have the extra income from the suite.

Sharing your space may be a short-term way to get into the housing market and build equity in your own home. You may adjust to sharing your space with the trade-off being the extra income to help cover your mortgage.

Or maybe now is not the right time to buy. I have several clients who have decided to hold off for now as they have grown exhausted with the stress of it all. I also have other clients who are working towards saving more of a down payment to increase their price point.

Either way, the more prepared you are the more realistic you can be with your expectations. Connect with your mortgage person before you head out shopping. Much has changed in the last few years, so even if you are currently in a home you might be surprised when you find out what you actually qualify to borrow now.

Finally, and on a different note, if you are in the process of buying a home during fire season please buy your home insurance as soon as you possibly can. Ideally your realtor has included a clause in your purchase contract to allow your closing date to be pushed back in the event that you cannot get insurance due to fires in the area.





There is a time and place for reverse mortgages

High net worth, low income

From time to time I have calls from clients who are retired or self-employed that have substantial net worth but little income on paper.

These clients often own their homes clear title or have minimal mortgage balances.

For whatever reason, they are now looking to pull some of that equity back out of their homes. Some of the common reasons these clients are looking to refinance include:

  • Helping their children with a down payment for a home
  • Purchasing a second residence, like a winter getaway home or rental property
  • Consolidating debts to improve cash flow
  • Pulling money to take advantage of investment opportunities
  • Buying another asset such as a new vehicle

Under mortgage rules, despite significant net worth and a history of managing their credit responsibly, these clients sometimes struggle to be approved for a mortgage.

The good news is that there are several great options available.

For clients who are over 55, several companies in Canada offer reverse mortgages. Reverse mortgages have had a bit of a bad rap because of what has happened in the U.S. reverse mortgage market. In Canada, they are highly regulated to protect consumers.

People have mixed opinions about reverse mortgages. I admit I had a negative opinion myself. However, after helping several seniors stay in their homes or regain positive cash flow to enjoy their retirements I definitely feel there is a time and a place for reverse mortgages.

For clients who are not over 55 or not interested in reverse mortgages, there are several lenders that offer mortgages specifically for clients with high net worth that don’t qualify under the standard mortgage rules.

The very short version is that these mortgage products consider the percentage of equity you have in your home and the balance of your liquid assets (ie: your investment portfolio).

One of the things I discuss with my clients who are in their mid-40s and refinancing or buying a home, is setting them up with credit for down the road when they may need it. In my experience it is much easier to qualify for credit while you are still working and don’t need it, as compared to waiting until you are retired and an emergency comes up.

If you find yourself in this situation we are happy to chat about some of your options.



More The Mortgage Gal articles

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About the Author

Tracy Head and Laurie Baird help busy families find mortgage solutions. Together they have more than 45 years of experience in the mortgage industry.

With today’s increasingly complicated mortgage rules, Tracy and Laurie spend time getting to know the people they work with and help them to better understand the mortgage process. They support their clients before, during, and after their mortgage is in place.

Tracy and Laurie work closely with their clients, offering advice and options. With access to more than 40 different lenders, Tracy and Laurie are able to assist with residential, commercial, and reverse mortgages in order to match the needs of their clients with the right mortgage package.

They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit www.okanaganmortgages.com

Visit their blog at www.okanaganmortgages.com/blog

 



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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