April 19th, 2010 is the date, and the new mortgage rule changes go into effect today.

Our office did a presentation to 50 realtors and clients last week, and below are the three videos that came from it where the changes are discussed at much, much greater length than previously.

Enjoy!

Transcription of Video Blogs (All 3)

PART 1

Wayne: I want to take this opportunity to welcome all of you to this presentation. As you are all aware, there have been multiple changes that have taken place in the mortgage financing business over the last couple of weeks and most of it is taking place this Monday. Thus, the reason for this seminar. From my point of view, these are probably the most changes in a very short period of time since I’ve been brokering, which is over 15 years now. We hope that this presentation will give you a better understanding of the changes so that you can modify your business plans accordingly, if necessary.
We are doing this presentation in three segments, but we encourage you, if you have any questions during the presentation to just raise your hand. I’ll bring the microphone over and you can ask your questions, rather than waiting until the end of the presentation.

At this time, I would like, if you haven’t, maybe to turn your cell phones to silent mode so that we don’t get interrupted. We’re ready to get started, and first up will be Maury. So Maury, take it away.

Maury: OK. Can everybody hear me without this? That sounds all right. Yeah. OK, so what the hell’s going on? Well, hopefully today we’ll try and address these questions. Today, what we’re going to cover is a quick into and just making sure we understand the difference between high ratio and conventional because that is going to kind of set up explaining the changes and making sure when you know the changes apply and don’t.

There is a set of government mandated changes that we’re going to be going over. That will be followed by the insurers that have some changes that they will be setting up for some of their programs, specifically, self employed and rental programs. That’s pretty much going to wrap it up.

We’re going to have questions at the end, but also, as we’re going through to try and make sure that we’re covering each topic and it’s clear. If you have a question, please ask it when you have it.
So starting out here. The high ratio conventional, by definition, when a deal is defined as high ratio, whenever there is less than 20 percent down payment going into the deal.
This is the same definition at all banks.

When there is less than 20 percent, the deal has to be insured. It can be insured by any one of the three insurance companies we have in Canada. CMHC is by far the largest one used, but Genworth is second, and there is also AIG.

The bank typically decides. The bank usually develops a relationship with one or two of the insurance companies. They typically choose where the deal will best fit at the insurance company. They are all pretty much the same. The fees are the same. It’s pretty much lying to the client, for all intents and purposes, but there are three in Canada.

Then, conventional is when there is more than 20 percent in the deal. So just to do a broad category of high ratio and conventional.

We wanted to set that up because, the government mandated changes, these apply to all deals, at all banks, at all insurance companies when there is less than 20 percent down.

The first change is there is a new maximum amount someone can refinance their property to. So we’ll go over that more in a second here.

The second change is to help the banks. Insurance companies are going to determine the amount someone can qualify for, the amount of the mortgage, so this is changing.

The third change is there is a new minimum down payment requirement for a non owner occupied rental property.

There is one common misconception that is commonly asked about the changes is the new minimum down payment. If somebody is going to live on the property, there is no change to this. So if someone is going to buy a house and they’re going to live in it, there is no change. They can still buy with as little as five percent down.

The first change, the maximum refinance amount, it is, the limit now is 90 percent. So if someone has had a house, they’ve had it for a while. Maybe they’ve done rentals, they want to take equity out. They can now only go to 90 percent of the property’s value at the time that they want to do it. Before, it was 95 percent they could go up to.

This was more put in place to address some problems we’ve seen in the States, more than in Canada, where the market took property values up. People just refinancing every year and they weren’t really doing anything with the property, but kind of treating that house like a bank account. So it is to discourage this.

But in Canada, this product was not really used, they were never really taking, they might have been refinancing, but they were never taking it out to the max, for the most part, 95 percent. A change, but probably something that won’t affect most people.

This is a more significant change. This is the rate that is going to be used to determine how much people can qualify for a mortgage. There’s a couple of situations, so this is the first one.
If someone is going to be taking, or would like to take, a fixed rate mortgage of less than five years, a term of less than five years, or if they wanted any variable rate mortgage, this is what they have to do.

They have to qualify for the amount that they want using the Government of Canada benchmark posted rate.
Right now, it’s 5.85.? So I put “versus 3.85″ there because before today, someone could qualify for a variable rate mortgage using a much lower rate than they’re going to be forced to now.

If they want to qualify for a $500,000 loan and they want a variable rate mortgage, they’re going to have to try to qualify for the mortgage using that higher rate.

We’ll go into an example in a second, and you can see some numbers. So that’s the second case.

If someone says “Well, just forget it, I’m just happy with a five year fixed term, ” or “I’m going to take any term longer than five years with a fixed rate.” Guess what? You can use the rate, that’s the contract rate, the discounted rate, the rate that they’re actually going to get for their mortgage.

So clearly, you can see here, the point of using this higher rate, even though someone might be using a product that gives a lower rate, the government really wants to make sure that someone is going to be able to afford their payment over a significant amount of time.

Everybody knows we had record low rates, variable rates, like bottom basement, right? They’re only going to go up and there kind of wants to be some assurances in place that people are going to be able to afford their mortgage if it goes up two percent on a variable or if they have to renew in a year and rates have gone up. That they have comfort that they know that they are going to be able to make their payments at time of renewal.

I’ll give you an example. In this example, what we’re going to use is that we’re going to use someone that has a gross annual income of $60,000 per year. I used average property taxes amount, and I’m assuming they have no other debts, car loans, student loans, stuff like that.

The old max, meaning that 3.85 rate, so if someone was taking a very low rate mortgage or something, yesterday this person, or these two people or whatever it is could have qualified for a mortgage amount, not just a purchase price, but a mortgage amount of $439,000.

So if this person today says, “I still want a variable rate mortgage but I have to qualify for this thing under the new guidelines of 5.85.” They’re only going to be able to qualify for a mortgage for $342,000.
They can still have a variable rate mortgage, but the amount that they can get if they want a variable or a term less than five years is much lower. But then, there is some saving grace there. That if you say, “Forget it, I’ll take a five year fixed because then I qualify for it at the rate I am going to get.” They can qualify for a mortgage of $396,000.

So clearly, especially in Vancouver, there’s going to be a pressure, a funnel, I would say, to more people maybe taking a five year fixed. In order to qualify for the amount they need. It may not be a huge deal for a lot of people, there is a clear preference in Canada for five year fixed, but we all know that everybody doesn’t take a five year fixed.
This has just been how the numbers line up with the qualifications, so any questions on this one? [pause] No?

OK, so the last…

PART 2:

Maury: So the last change is the minimum down payment for rental properties. The new minimum down payment is 20 percent, and it was previously five percent.

So someone, if they qualified, had enough income, had enough rental income coming from the property, they could buy it. There were programs available for as little as five percent down. They did have a hefty, hefty insurance premium because the deal, of course, was insured, but it could be done.

So if that property was $500,000 before, obviously $25,000 minimum, and there will be the insurance but now, obviously, 20 percent of 500 is 100, so if they’re going to rent it out, they are going to need a much larger down payment.

This does not apply to second homes. There is a category of non owner occupied properties which are deemed as second homes. So a true second home, meaning you cannot count any rental income coming from it, in order to qualify for the mortgage.

This is not affected by this, you can still buy those. You don’t need to put 20 percent down. But if you need the rental income generated to qualify then you will need 20 percent down.

That is it. So the next section here, I will just turn over to Rowan.

Rowan: All right, so Maury covered what a conventional mortgage is and all of these changes that apply, as we have been talking about high ratio so the government mandated changes apply to things, there are three different changes; the investments, refinance, and the amount of down payment that is required.

However, just because that only applies to 80 percent financing or more, that less than 20 percent down, there’s actually more banks that are going to follow that all the way down the road. It doesn’t matter if you have 35 or 40 or 50 percent down, a lot of banks are still going to follow these new guidelines.

The reason is kind of complicated and involves how the banks raise their money in the markets and whatnot. But if they’re going to be doing that, you can see that these changes and there’s a lot of lenders that are going to be following that. I would say half or more.

It’s going to have a lot of impact for any loans of value, even though the mandated change only applies to 20 percent down or less.

So rental income changes, in Vancouver, this is huge. As we’ve heard, the percentage of properties, especially the condo market, is rentals. It’s definitely the most dramatic change, and ironically, this one isn’t even mandated. This is simply something that come down through CMHC and then all the other insurers have jumped on board with similar policies, not identical.

We have three different insurers we talked about. We’re not going to get into the specifics of who does exactly what type of product. But I can say that the rental industry is treated far less valuably than it was in the past.

Now this includes rental income from multiple different sources. You’ve seen on purchases, you see mortgage helper, you see in-law suites, you see nanny suites, it doesn’t matter what you call it.

If it’s a secondary suite within the property, if there is a second kitchen and as a rate they are bringing in revenue for this property, than that income is going to be treated far less favorably than it was.

It used to be that you could take a certain percentage of that income, say 80 percent is the number. OK, and we would go “You have got $1,000 in rent, you’ve got $800 we’re allowed to use. How much mortgage does that support?” The answer was like $180,000 or something. So right away the person qualified for $180,000 more just by virtue of having that suite in the property.

Well in Vancouver, we’ve got the whole authorized/unauthorized suite issue, right? And if something is authorized, can we use it? If it is unauthorized, can we use it? And the answers vary from insurer to insurer, so that’s something where the brokers have to know every one of the guidelines and rules for the different institutions.

Let me give you an example of how the new rules are going to take effect. We’re going to take the same example, say $60,000 average cost, clean credit, et cetera. So this is assuming a $1,000 basement suite. 680 to 515, so the old approval amount. In Vancouver, if you can picture East Vancouver, almost every home has a basement suite.

Picture Surrey, all these different areas. All these basement suites that we were previously able to bring into the mix. We can, but at a much lesser and more constricted treatment. That’s a 24 percent decline or reduction in how much somebody can qualify for based on that income. 24 percent is going to translate into an effect on how many buyers can afford properties in a particular price.

Now rental income, I was just talking about suites there, but it comes from multiple sources including three different ways, the basement suite, then you’ve got your rental property.

You’re living in your home, maybe you have a rental condo and it’s rented out. This third one is really where the rules are murky. That is going to be interesting to see how that plays out. When someone owns a home, especially a first time home buyer, they own their property, they want to upgrade to a new property, but they don’t want to sell the first one.

Maybe they’ve been there five years, they’ve built up significant equity, maybe the property can rent for a specific amount. So they want to get out of that property and move into a home. In that circumstance, that is where the treatment of that income for the old property is not really clear, the reason being is that they don’t have it at this point in time.

So if somebody has a rental property and they’ve had it for an extended period of time, the new rules actually favor those, that treatment of that income over all else, as long as the people are declaring it to pay tax on it. Going forward it will be far, far harder to qualify.

So you should declare it anyway because then you can offset your interest with a possible mortgage, so it makes sense to declare it but a lot of people still aren’t doing it. Is there any questions on the rental income or how this affects suites being authorized or unauthorized? That’s the rental income section.

I’m going to pass it over to Leah who is going to cover self employed.

Leah: All right, so pretty much all of us in this room are self employed so you can probably relate to this section as to how this is going to affect you specifically. Definitely clients who I encounter in Vancouver, a lot of self employed people.

Up until now, there has been a program called the Stated Income Program. Now, it’s exactly that, you are stating your income. And the reason that they have this is because in businesses, if you are a mechanic, you’re getting a lot of cash jobs.

Like us, we write off our cars, our cell phones, even part of our homes, and our rents, and our mortgage amounts. So because of this, banks and lenders, the insurers, even they understand that there is bit of a grey area. What exactly are you making at the end of the day because you have all these write offs?

So what they’ve done is they invented a program called the Stated Income Program. They’ve had this for quite some time and with this, traditional income verification is not necessary. You don’t have to show your D4s, what you’re simply doing is “I make $60,000 a year,” or whatever sounds reasonable.

Now with this, it isn’t that good to be true because you are going to have higher premiums with this which of course is more costs. You can’t just say that you sell coins or you collect bottle caps and you make over $100,000 a year. It does have to be reasonable.

How do they deem reasonable? Well, there are various amounts of things that leads me into where the changes are. Before they were a lot more lenient on what was deemed reasonable. Now they’re really focusing on different websites and economic studies and they’re going to ask you first, “What do you think you make?”

And then they’re going to look at what their stats tell them. If that seems to fall within their realm, they will deem it reasonable and they will accept it. Now the other change, and again, this is only for the Stated Income Program, the down payment has changed.

It used to be you only have to put down five percent, but it is now going to be a minimum of 10 percent down payment. That’s not to say that if you are self employed that you automatically have to pay 10 percent. It’s only if you decide to use the Stated Income Program.

With that being said, proving your income is always going to obviously stand up stronger with the lenders. So if you are able to, if you are properly declaring how much you make, and you’re paying taxes on that, you might if you are self employed, whatever it shows on line 150 on your tax returns, you actually get to add 15 percent of that back, to account for write offs. So if you’re able to, use proven income rather than stated income. You’ll save on your premiums and you’ll be able to put down a lower down payment down if you like.

As well, like Rowan mentioned, each insurer is a little bit different and so their internal policies are varying based on the amount of years you’ve been in the industry and the amount of years that you’ve actually been in your own business.

So that again is where…

PART 3:

Leah: …two years and maybe they’ve done it in their own business for 25 years. That is going to depend, or we’re going to have to then look at different insurers and we can send it to one insurer, but we can’t send it to another. So they do have differences of opinions on that.

So, this is actually a really short and sweet presentation. So, again, at this point, I will actually stop. Does anyone have questions on the self-employed program or anything that we’ve covered up until now? Yes.

Audience Member: Can we get a list of incomes which they will use for assessment?

Leah: Oh, of what they’re going to use? I don’t know. Are there websites that they can go to?

Maury: You mean when they’re looking at the reasonability test? They don’t really disclose that info to us. They have their own internal guidelines.

Leah: Yeah, because they’re really just going to state something in that, right?

Man 1: Isn’t it public knowledge?

Maury: Not really. No, they use a number of different sites that they look at. Let’s say somebody is a contractor, there’s a “range of most contractors in Canada” file. They can look at that information.

If someone says $250,000, they can look at that site and go, “Well, you know, by this they only made $60,000 or $70,000″ and that’s the number they’ll use. But I don’t believe that we have access to this.

Leah: Yeah.

Guest 1: For the States, it’s available free.

[crosstalk]

Leah: Yeah here it’s not so much.

Guest 1: If you guys want to know what a lot of business are making, we use labor market information. So you have an LMI or BC or for your province and you’ll find it probably, LMI.

Leah: LMI. It’s also important to know as well, one of the — which is on [inaudible 01:36] here — having a mortgage broker that you can go to and using as a resource. Because we deal with these, we can literally call up any one of our lenders right now and have a one-on-one conversation with them.

There is grey area. If you do have a contractor and maybe he really does make a crazy amount of income because he has so many people working for him or so many projects on the go, we’re able to have that relationship to somewhat tell the real truth of the situation.

If there is a good argument for it, there is always that possibility of things happening as well. So that’s really important to have a good relationship with your broker. Because you do speak to the lenders one-on-one every single day. So, leaving that into the to-do list-is there any other questions before we get on?

All right. So, first thing on your to-do list is definitely knowing your mortgage broker, especially for the Realtors in the room. You’re spending all of this time with your clients and to just say, “Go to your bank and take care of it on your own.” Not what I would encourage because with the banks, they have very tight regulations.

They also are out to make as much of an interest rate as possible. So, maybe your client won’t qualify for as much, or whatever the case may be. We’re actually able to handhold your client and insure that it’s getting done. Plus, we’re able to call you and we can tag team with you on the client to make sure that they’re getting us the paperwork that we need in the certain amount of time. Make sure that you get your approval deadlines on time.

Now, full disclosure of income and sources, this is more for clients. For those of you who are getting a mortgage yourself, you have to fully disclose not just what you make, but where the sources are coming from. There is, again, a lot of grey area in terms of income.

So, if you think you make $80,000 a year, because that’s what you made last year, it might not be. You may only make $60,000 because of a two-year average or based on your commissions and bonuses that aren’t going to qualify, or things of that nature. So, you need to not only disclose your income, but always your sources.

Prepare your documents early. If you go into the bank and ask for a pre-approval — which is actually the next point on here — if you’re approved, you’ll go into your bank and they’ll say, “Well, how much do you make? Do you have any payments?” So they’re taking things for face value and they’re basically saying, “Well, based on what you tell us, if all that is true, then you qualify for X amount.”

You go to a mortgage broker, then they’re not only going to ask you those question and take you for face value, but then they’re going to follow up on you and say, “OK, let’s start doing that paperwork together.”

And essentially what they’re doing is they’re going through the full approval process for you so that when you as a Realtor take your client or as a client you find that home of your dreams, and then you go to get approved and you realize, “Well, I thought I made this much.”

Or, “Oh, I thought I could get my paperwork together.” Or, “I thought I had this down payment. You mean I can’t use my credit card for my down payment?” Or whatever the case may be, you’re not going to have that disappointment of losing the property. So, get your documents before even looking at properties, get everything in order.

Then, again, confirming the pre-approval of the appropriate paperwork, a mortgage broker should go through all that for you. If you’re unsure what paperwork you are going to need, ask, and they will definitely let you know.

So, with that being said, are there any questions? Because we’re pretty much — we’re there. We’ve gone through all the requirements. Yes.

Woman 1: Are you still giving 120 days guarantee on the rate?

Leah: It depends on the lender. Some of them are 60, some are 90, some are 120; it’s all internal policy. So, yeah, depending on what the rate is, your broker can let you know at that time what the rate hold will be.

That’s something to note as well. If you want to get pre-approved, a lot of us brokers in the room here, we can do that on the phone for you, we can give you pre-approval of an amount. If you want to get an actual rate hold, you need to let us know because that actually takes a bit more of a process to go through.

We have to start actually choosing which lender you’re going to go with, and pre-approve you and give you that rate hold of 90 or 120 days. But, in general, for your pre-approval, we can tell you a number and to get going, but it’s different than a rate block.

Any other questions? You guys are all awesome! You know what you’re talking about now? All right. I guess we can — do you want to go ahead and close this up?

Wayne: Sure. The final thing I wanted to say, I guess, is for the Realtors out here or people who are sending their clients to the bank. I plug the mortgage brokerage industry with these new financing rules and things like that.

You really should have a broker as a first choice, but definitely a broker as a second choice. Just as a second opinion. The reason is, we didn’t want to make this too technical, but as we showed in an earlier slide, there were three insurance companies.

Realistically, not all the banks use all three. For example, very few lending institutions use AIG. They’re probably going to be disappearing off the map. So, when you need, say, a basement suite income or a self-employed program, there are variances from not only the institutional internal guidelines, but also with the insurance company.

I’ll give you a classic example — Scotiabank does use Genworth and Genworth does do illegal basement suites, which is great for Vancouver, but Scotiabank does not. So if you send your client to Scotiabank and that’s their home bank, and they want to purchase something — they’re going to qualify, basically, only on their income without any rental income.

If they want to buy something a little bit more expensive, you want a second opinion. And, as a broker, that’s where we come in and we can mix and match between the insurers and the lenders, we know what each one does.

We could, in a sense, get them a little bit more money to get into that dream home in Vancouver rather than, say, moving out to Burnaby — which is not a bad thing.

[laughter]

Wayne: So, I think that I would encourage you to use brokers to begin with because there’s 40, 50 different lenders and there’s all mix and match. But more importantly, if the client says, “Oh, I’ve been to see my bank, this is what they qualified me for,” but it doesn’t line up with what their expectations are, at least give one of the brokers in this room a call. Get a second opinion. We may be able to get them that little bit extra to get them into the home that they want. OK?

Other than that, we will be around if you have any further questions. Thank you all for coming and best of luck in the spring market.

I took more calls today than I could count asking, “Is it too late to get in under the old rules?”

The short answer is: “YES”

The reality is that lenders are swamped with applications from people that got them in within the last 7 days. They’ve been working around the clock to the mortgages submitted.

However, the first question I ask when I get this request is, “Do the changes even apply to you?”

The changes primarily affect investors, variable rates, and rental or self employment income. If this isn’t you, then rest easy. Otherwise, watch this video blog that explains it in greater detail.

Transcription of Video:

Hi everyone, it’s Rowan Smith with the Mortgage Centre.

Today is Friday, April 16th and a lot of people have called me today and said, “am I too late to get in on the old mortgage rules?”

And the first question I always ask them is, “What mortgage rules are you afraid you will be missing out on?”

In many cases people say to me, “well I want to refinance my house and take out some equity,” or they say, “I want to buy a place.”

I say to them, the three changes only affect three things. I guess technically, four things.

One, self employed people that can’t prove their income.

Two, investment properties.

Three, qualifying for variable rate mortgages.

Four, refinancing to 95 percent.

If none of that is you, then you don’t have to worry about the changes. However, for those of you that do fit into those categories, chances are, YES, if you are watching this video it is after or on April 16th, and it is too late.

Even though the laws change on April 19th, our ability to get you realistically approved and reviewed by the relevant parties (in time) is slim to none.

If you do have somebody in this situation, and you want to at least explore the option of perhaps getting it put before CMHC or one of the other mortgage insurers on Monday, please give me a call over the weekend. I’ll make myself available.

My name is Rowan Smith, for the Mortgage Centre.

More mortgage changes are commented on, particularly, those for self employed people:

Transcript of Video Blog:

Hi everybody, Rowan Smith at the Mortgage Centre. So once again, there’s been another rule change that’s come down and this one deals specifically with self-employed people.

I have heard statistics, and I have nothing to back this up, but I have heard statistics that over 60 percent of the people in BC are self-employed or have some self-employment income. So, if that’s the case, this rule is going to effect a lot of people.

Previously, if you had a very good credit rating, and I mean pristine. You were able to put five percent down and if you were self-employed, you could state your income. You did not have to document it. You did have to document that it was reasonable, that that number was not just something that you fictitiously pulled out of the air; because that would be mortgage fraud.

You had to document simply that you had a business for the last couple of years, or that you’ve been in the field for a couple of years. You can’t do five percent down under that program any more. The fact is on April 19th, you are only going to be able to do 90 percent financing. You will require 10 percent down as a self-employed person, if you can’t document your income under traditional rules.

Now how many of these deals are out there and how many people are affected by this? Generally, self-employed people, I would say, they’re usually putting down 10 percent or more down. I did not get a lot of five percent down self-employed stated income programs.

I have seen, I can count on my hands in the last 40 years, so I don’t think that this change is necessarily going to affect a lot of people in the market as a whole, but it will bring some stability back again. This is the whole purpose of the government’s changes, is to prevent speculation and there has been a lot of it in the last while and some of these stated income programs have certainly been taken advantage of by some banks, lenders, and brokers.

So, if you have any questions about stated income, or if you’re self-employed and you’re thinking of buying a place and you’re not sure if you qualify under the new guidelines, please give me a call. It’s Rowan Smith from the Mortgage Centre.

Hi everybody. It’s Rowan Smith with the Mortgage Centre. The last couple weeks we’ve seen a lot of announcements about mortgage changes, rules changes, and how people are going to be qualifying for mortgages going forward, especially the variable rate. And that’s one of the biggest changes and it’s something I wanted to cover today and talk about was how are variable rate mortgages going to be affected? How are people’s ability to qualify going to be affected under the new rules?

Transcript of Video Blog:

So the government has officially announced now that the rate they’ll be using to qualify people for a variable rate mortgage is going to be the five year posted rate. Presently, that’s 5.39%. Compare that to currently, with a lot of the non bank institutions and the non traditional institutions.

One of their biggest abilities to gain market share has been that they qualify people for the variable based on many times ahe three year discounted rate or a five year discounted rate. There’s various policies all over the place that vary from lender to lender to lender. Now we as brokers took advantage of that by finding the best rules that fit our client and so getting the most amount of mortgage that we could.

Now going forward, that won’t be the case any longer. The government has officially leveled the playing field. So anybody offering a variable rate mortgage will have to have to qualify at the new five year posted rate. Well, not the new posted rate, but the existing posted rate.

So let’s see what kind of difference that will have. If previously under the old guidelines, if you made $60,000 a year and just assuming that the average taxes and fees and stuff, and assuming no other debts, you’re able to qualify for $460,000 of mortgage for a variable. Under the new guidelines, that’s reduced to $364,000 that you are able to qualify for.

That’s a reduction of 20%, almost 21%, that you’re no longer able to afford. So if you’re looking for a property that is worth $800,000 in today’s market under today’s rules fast forward six months and the number of people who qualify for that is going to be dramatically reduced.

Everybody is going to be qualifying for 20% less than they do today. Now this may bring us long term stability to market, but I am going to bet that there’s going to be some growing pains from the transition of the old rules to the new.

Now when is that going to take effect? Well, April 19th is the date that this “law” as it were, however, some other institutions may move to this sooner, often they do. That’s the deadline when everybody has to be on board with this system. A lot of institutions already use this rule. Some of the big banks, the HSBC and whatnot, they already qualify you based on a posted rate.

Now they already use a three year posted rate, in many cases, and there is a big difference between a three and a five year. The whole purpose of this is to determine what can somebody afford now, and what can they afford if rates should rise. It builds in a safety net, it builds in a budget builds into the budget that rates may increase and that payments may increase and this may be better for us in the long term.

In the short term though, if you are trying to stretch to get the maximum amount of mortgage that you can, perhaps because the bank doesn’t accept your income, or you’re on a relatively new job, or there’s mat leave, or something like that coming up, you need to get on this now to qualify and purchase now. For the Mortgage Centre, I’m Rowan Smith.

We get many questions from clients who think that we don’t order appraisals until everything else in financing is done and that the appraisals is just to “finalize some numbers,” and nothing could be further from the truth. The appraisal is the cornerstone to the entire mortgage deal. If the bank is lending YOU money, they are doing so on the basis of your financial strength, and that of the collateral (the home).

The appraisal is a fundamental part of the purchase process, and takes 2-3 days to do (unless rural takes 5-10 days) and costs around $265 (unless rural is around $500-$750 depending on how remote).

Your broker will (should) know the time on ordering an appraisal, and will order it when he or she thinks appropriate. Certain purchases require an appraisal 100% of the time (former grow ops, stated income, equity deals) and some don’t. You need to trust your broker on when to order it, who to order it from (not all lenders accept all appraisers – usually they have an “approved list”), and what a reasonable price is.

Lastly, the appraisal is $265 – $500 on a purchase that is going to cost several hundred thousand dollars. It’s the “cost of doing business” and you shouldn’t begrudge your bank (or any lender) for requiring it, as it confirms the value of their security (the house you are buying).

Transcript of Video Blog:

Hey, everybody, Rowan Smith from the Mortgage Centre.

I wanted to cover a topic today, which is appraisals and what part in the process they hold. When you’re going to require them, and when you’re not going to require them for financing. Oddly enough, the more you put down, the greater chance you’re going to need an appraisal.

Whenever you buy something that’s CMHC-insured [Canada Mortgage and Housing Corporation], for example, five or 10 percent down, your appraisal is done electronically by the lender, by CMHC, who has an internal valuation model that they use. They’ll look at that model, determine whether the price you’re paying is fair based on comparable sales.

Actually, it’s often an automated process, unless you’re on the high end of the property values, in which case, it may have a person actually involved. If you do have a person involved in the process, they may insist on an appraisal anyway.

The standard rule is up to 20 percent down, you’re probably not going to need an appraisal. Now if you have more than 20 percent down, you will. That’s totally counterintuitive because you’re putting more money down.

Why do they need an appraisal if you’re putting more cash down? The answer is that when you’re not putting 20 percent down, CMHC is insuring that loan so the bank isn’t taking the risk. CMHC is the one taking the true risk that they’re going to lose money in the file.

If you put more than 20 percent down, then the bank is taking the full amount of the risk. In those circumstances, they’re going to insist on an appraisal for sure.

So does that ever stop? Well, with some banks, no; it’s always an appraisal. In a lot of cases, if you’re going to put 50 percent or more down on a property, then you may not need an appraisal. You may just be able to use the tax assessments or a desktop appraisal, which is just something that an appraiser does based on historical sales.

In the event that you’re looking at buying a property, and a broker is telling you that you need an appraisal, you have to realize this is an integral part of the process. Your home, your property, is the security for that mortgage. So to think that they’re going to take your word at the value or they’re going to look at other homes that are for sale, that’s not the lender’s job. That’s the appraiser’s job.

You can guarantee that there’s going to be some form of appraisal or value estimation on every single deal that you do. So if you or somebody you know is being asked to get an appraisal by their lender, this is standard procedure.

For the Mortgage Centre, I’m Rowan Smith.

So did you take a 5.69% mortgage two years ago and are now kicking yourself? A lot of us did. However, we can’t kick ourselves. You make the best decision you can with the information available to you at that point in time.

This video blog talks about imperfect information, and dealing with the “what if” of mortgage planning.

Transcription of Video Blog:

Hi everybody. I want to talk today about something that’s come up several times. I alluded to it recently in a blog post, but I want to talk about making decisions on imperfect information.

At any point in time when we’re, as brokers, selling you an interest rate. We do so with the same economic news that everybody else has, the same economic fundamentals. Things change. Prior to September 11th, none of us knew what was going to happen. We didn’t know the economy was going to go into an immediate dive, thereafter None of us knew that Lehman Brothers were going to go down.

In hindsight, looking at the financial practices of some of those financial institutions that went down in the United States, maybe some of us should have seen it coming, but we didn’t. When I say “we, ” I mean the overall financial institutions sector, the financial sector, and particularly the mortgage lending sector.

Now, why am I bringing this all up? Well I, myself, got into a rate that was well over 5% a few years ago. At the time, it was a fantastic rate. It was a promotion. I had to quick close in a very short period of time to get it.

The reality was when I got it, it was the best deal in town. It couldn’t be matched anywhere. I got it for as many clients as I possibly could. Those same clients, a few years later, are now looking, going “That 5.25 rate, which while fantastic at the time, is looking God-awful right now.”

There’s very little you can do about that. You can absorb the penalty and refinance down, presuming you have the equity or the ability to pay the penalty off in cash. Maybe you can get a bit of a cash-back offer from the new lender. You probably have to pay a slightly higher rate to do it, though. It may make it not worthwhile.

When you’re looking at yourself, if you are kicking yourself, thinking “Wow, I took a product. I took a variable rate when variable rates were prime plus a half. Now they are prime minus a quarter, ” or “I took a five-year when they were 5.50, and now they are 3.79.” If you are in that situation, do not be beating yourself up about it. You made the best decision you could at the time. If it was a good deal when you got it, it’s still a good deal today.

Frankly, any time I see interest rates below 5% to borrow money, that’s pretty darn good in my books. You think back even just eight years ago, ten years ago, at what interest rates people were paying, happily, compared to what they are paying now and you’d be shocked.

You may say, “It’s a totally different market. This is an entirely new paradigm in lending. What applied before no longer applies.”

I would argue that the lending practices that have stood the test of time and the interest rate averages that we all have seen are very accurate. The fact that we are well below those average should suggest there isn’t a lot of downward room but that there should be some upward motion.

When? That’s the question that’s worth a billion dollars. I can’t answer it but I can guide you with some of the recent economic news. If you would like further information or you would like to write a comment, please do so. Otherwise, I’m Rowan Smith for the Mortgage Centre.

All I read is that the market is awesome, everything is awesome, prices are up and going higher, and home ownership is perfect for everyone.

Frankly, I’m tired of this rhetoric. If you are reading some news, such as a developer telling you they are projecting a 5% – 7% increase in prices, ask yourself, WHAT ELSE COULD THEY SAY? If they said they expected a decrease of 5%, you wouldn’t buy their product!

Look to neutral third parties for this type of info. On this topic, and in more detail, watch the blog below.

Transcription of Video Blog:

Hey everybody, Rowan Smith at the Mortgage Centre. I want to talk today about some of the overwhelmingly exuberant good news that keeps coming out in the media right now. A lot of it, I encourage you to view the source of who is issuing this news, before you really put a lot of stock in it.

I recently read an article from the Rennie Marketing group talking about some of their projects that they had on the go, and how they were ecstatic there was going to be a five to seven percent increase in real estate prices in Vancouver.

I look at that and I say, “What else could that organization say? What else could somebody in that situation say, when it’s their financial livelihood?” Now I have a vested interest in the real estate market, but I also have a fiduciary duty to my clients. If I see them getting into something I think is a bad financial move, I have to tell them.

Now that’s very different from a developer whose financial interest that they’re protecting is their own. When a developer issues a statement saying, “Oh, I’m so glad the market is recovered, ” and “Wow! Things have really taken off, ” and they turn and point to stats that have been issued by the mass media in the last couple of months, chances are that trend has already run it’s course.

It’s time and time again that I see great, great news come out, and immediately we seem to suffer a pullback. Now back in 2007, there was a lot of exuberance. People were writing offers, multiple offers, asking me, “Could we go in with no subject to financing?” Generally, the answer is “No,” by the way.

They were going in against 16 other offers, to try to get in on that property and not getting it. Even though they were going 20 percent over asking price and this kind of thing. That kind of behavior is back again, and with it comes the irrational exuberance of the banks who are now suddenly going, “Well, the market’s clearly recovered. Now is the time to get in.”

The chances are, the time to “get into the market” should have been back in January of 2008. When everybody was screaming and crying about real estate being a terrible investment.

Of course, this is 20/20 hindsight that I’m using right now. I, myself, purchased something at that point in time and I think that anybody that did, has reaped a lot of rewards as a result.

I think the old saying goes “when there’s blood in the streets, buy real estate, ” and that is never more true. Right now in the Vancouver real estate market, there is no blood in the streets. If anything, there’s a lot of wolves. I’m Rowan Smith for the Mortgage Centre.

Today was another big day in the mortgage business. The finance minister announced some large changes to mortgages in Canada.

A quick summary of those changes is as follows:

1. Non-owner-occupied properties must have a 20% down payment
2. Maximum financing on a refinance is 90% (instead of 95%)
3. Variable rate mortgage qualifications have been standadrized (sort of)

The video blog below explains these changes, and also gives my commentary on the changes. Enjoy!

Transcription of the Video Blog:

Rowan Smith: Hi, everybody. It’s Rowan Smith from the Mortgage Centre.

As many of you are aware, today on February 16, the government made some announcements as to some changes that they are going to be enacting on mortgage lending in Canada.

These changes were largely the result of the banks going to Ottawa hat in hand and pleading that there was some requirement for some changes. The mortgage industry was getting ahead of itself. Many people were citing there was a bubble and that kind of thing.

I’ve always found this mentality of the banks claiming that the government has to rein in their private lending practices to be a strange one at best. That’s very akin to a car dealership going to the government to say, “We need you to enact laws that make our cars less fast because the clients just like them too much, and they’re buying them all up. We have to provide them. We have to do whatever they want.”

I’ve always thought that was a very strange argument. It just plays out doubly strange here with the banks, who could choose if they wanted to simply to not offer the products that they feel are risky. But they know they’ll lose market share, and so rather than do the right thing, they have the government go and legislate laws instead.

So what were the changes? Well, the first thing is they have enacted some sort of policy regarding the qualification for variable mortgages.

There’s a big discrepancy right now between the rates you pay in a variable mortgage — as low as 1.9% — and rates that you’re paying on fixed mortgages, which if you’re taking a similar five-year term you’re going to be paying around 3.69% or somewhere in that range.

If you’re looking at those two different rates, that’s almost a two percent full difference based on exactly the same amount of debt. So how do you as a borrower justify taking such a substantially higher fixed rate? A lot of people haven’t been; they’ve been opting for the variable.

The problem is a lot of them need that variable rate in order to qualify, and that is a problem, because that is going to be testing affordability shortly. If rates rise, those same people could be in a lot of trouble.

The government has said that from now on, you have to qualify using the five-year fixed rate. What they haven’t said is what five-year fixed rate they’re going to be using. It could be posted rates. It could be the five-year discounted rate. It could be some government-mandated five-year rate.

Let’s not forget: discounted and posted rates are both something that are set by the banks. So if they don’t use a government-mandated rate, that means the banks are still free to adjust posted rates and manipulate how people qualify for variable-rate mortgages.

I’m not too sure how that one’s going to play out yet. We need a little more clarification.

The second thing they’ve done is restrict refinances from 95% loan to value. So you can no longer borrow right back up to 95% and take your home back to the hilt, you can only do it at 90%.

We sat there talking in our office about this today, and it doesn’t really seem like that was a product we were really using much. I think I can count one in the last two years where I’ve had to do a refinance to 95%, and that was really more of a husband buying the property off of his wife and refinancing it through a divorce.

So it’s not a product that’s used very often. It’s odd that they jumped on that one. The rationale is that of course that they want to force homeownership to be a bit more of a savings account, if you will, then people refinancing and using their home as a piggy bank.

The last rule and change that came down had to do with investor properties, so properties when it’s not going to be owner-occupied. Previously you could buy a property as a rental with 5% down. Now you faced some very heavy CMCH premiums to do that, but it was at least something that was technically possible.

Well, the new move by the government is going to restrict all non-owner-occupied properties to requiring a 20% down payment. That’s a substantial market in the Vancouver market, especially all those properties in Columbus and Fall’s Creek and downtown Yaletown that have cropped up. A lot of those condos are investment.

A lot of those people probably got pre-approved with 5% or 10% or maybe 15% down, and they’re going to be forced to complete with 20%. The question that’s going to remain to be seen is: do they have that money?

They didn’t think that this rule would be coming down the pipe when they probably went into those offers, so I suspect we’re going to see a bunch of miscompletions again due to the rule changes, like we did the last time CMHC rules got changed by the government.

The investor market, in my opinion, comprises a very large portion of the Vancouver condo market. In the outlying areas, it’s not such a big deal. But nonetheless, I do think that we’ll have a material impact on the investor demand for properties and could affect pricing in the market at large.

Overall, I think these moves are probably good to try to stave off an American-style bubble. The government’s been good about proactively jumping on this. I don’t know if I agree with the choice of products that they’ve gone after. I don’t really know how that’s going to play out.

Certainly the rental market was getting ahead of itself, and 5% down on a rental property was probably a little bit excessive. It was probably a little too wide open, and they’ve reined it back in to a more respectable level.

If you have any questions or comments on this, please leave them. I’d love to hear other people’s take on this. For the Mortgage Centre, I’m Rowan Smith.

To come soon…

People ask the question all the time:

“Why should I use you? Why not just go to my bank?”

There are a lot of reasons. Watch this video blog for my explanation.

Transcription of the Video Blog:

Hey everybody, Rowan Smith from the Mortgage Centre.

I got several comments back on some of my videos I posted recently, and one of them was an email to me personally that said, “why should I use you? What makes you different than my bank?” especially given that one of the rates I was quoting, and one of the products I was talking about, was issued by his own bank. So, I wanted to put together a post on why you should use a mortgage broker.

There is a service component. That is first and foremost. The most important thing. We are available, or at least, I am available, seven days a week, from 9am to 9pm. I make myself available later than that if clients require it.

Now the reason being is, it’s not just that I’m a workaholic, although, many would say that. It’s also because people are writing offers in the evening. You work during the day, and your bank is open during the day, but you start writing an offer oftentimes 9, 10, 11 o’clock at night. You are going to need assistance from somebody at those hours to say “yes you can qualify for that,” or “yes, we can stretch to $700,000” or perhaps, “yes, we can use the basement suite income,” or “no, we cannot in that city can’t” for whatever reason. There are a multitude of reasons and a multitude of rules that apply to financing.

You banker won’t be available during those hours. We are.

Now, we offer the same product. I always liken us to a Saturn dealership. You come to us, we offer you one price. It doesn’t matter how much money you’ve got, or how much money you earn, you are going to get the lowest rate from us that we can possibly give you because we are under a fiduciary duty, which is to protect your financial best interests. So, the products you are going to get from us, and the rates, are going to be the lowest that we can possibly get.

Now, if I give you a TD mortgage, why wouldn’t you just have gone with TD, as an example? Well we as brokers harness and band together. We harness the power of the many of us within our office, and there are about 15 of us in our office right now. We do hundreds of millions of dollars worth of mortgages a year. So, we come to the table Toronto Dominion, and, you know, Vancity, and all these other institutions; we come to the table with a lot more clout than one client does.  Though they have a $500,000 mortgage, which, to an individual is a massive amount of money; to an institution on Toronto Dominion’s scale it’s not as big. Now if we approach them and try to get that rate negotiated down, well we get volume discounts just as if you bought one thousand widgets instead of one, and you’re going to get a better deal on all of them. It’s the same with us. It’s a discount game. It’s a volume game.

So you’ve got:

1. Service
2. Rate
3. Third party knowledge and unbiased advice

As a broker, and I want to clarify the difference between a “broker” and the guy that is sitting in your TD bank, or RBC bank, or is a mobile mortgage specialist that we see all the time. They are not mortgage brokers. They are individuals that work for the organization and they sell TD or RBC product FIRST, and if they can’t get it done they usually have contacts who are guys like myself  who work with all the other banks and arrange the financing as best they can.

When you are sitting in front of a mobile mortgage specialist that represents one organization, you are NOT dealing with a broker who is offering you that service level, that rate negotiation power, and that unbiased third party advice.

We [brokers] get paid (roughly) the same at every institution. There are some that pay more, and there are some that pay less and we, as brokers, are paid more for longer terms than we are for shorter terms. But, by and large, we are going to be doing what is in your best interests or you won’t use us! So we create that value through service, expertise, and being available whenever you need our help.

So if you are in that situation: you are unhappy with slow, lazy turnaround from your bankers, or you’re upset with the fact that they’re going home at 4:30pm and the don’t even pick their phone up at 4:29pm give me a call and it will be a world of change for you.

It’s Rowan Smith at the Mortgage Centre.

Hello again,

People are constantly asking me what product to take, and are quite obviously torn up about it, so I did this video blog to explain what product to take: fixed or variable.

Transcription of the Video Blog:

Hi everybody, it’s Rowan Smith from The Mortgage Centre. I’m going to tackle the biggest question I get every day: should I get fixed, or should I take variable, and what’s going to happen. I don’t have a crystal ball, but I do have several years in the industry – it adds up to about 10 – and while I haven’t seen the 80’s since I was a kid, I do remember what was going on at those times and I’ve still dealt with many clients that have told me stories.

Here’s my opinion, for what it’s worth, and what I think you should be looking at:

First off, which strategy is best?

It depends on your situation.

Anybody that say otherwise is not worth the license on the wall. Your unique financial position dictates whether or not a variable rate is an option for you, and it dictates whether you should be taking a fixed rate.

Picture two people in exactly the same situation with mortgage amounts and income that are the same. The thing is: one guy is a commissioned person. The second guy makes a base salary. Obviously, the person that makes a base salary, that makes that amount of money  can know it’s going to be there. The guy with the commissions doesn’t know that.

Now, if they had to stretch, or even worse, if they needed the variable rate mortgage in order to qualify for that in the first place. If they need to take variable, so they know they can afford it, well, variable rates change. Rates rise. People in that situation should absolutely not be in variable. They should be in a fixed rate so they know what their payment is going to be, because they know that their salary is going to be a set amount.

Now, on the flip side, if somebody is buying well within their means, and they have the affordability of the payment; maybe the payments make up a very small percentage of their annual income, then they can take that risk that the rates are going to rise. They can afford to take a variable rate mortgage.

I myself have taken fixed rate mortgages on 2 out of 3 that I’ve had. The reason being is, my income fluctuates. I want to know at least one thing is stable, and that’s the payments. So I took the fixed rate.

People that have a risk aversion to possibly paying more, or are going to lose sleep over their rate possibly increasing: these are not good candidates for a variable rate mortgage.  Sometimes it’s best to just take fixed if that will give you peace of mind and put your mind at ease, and also provide you with two, three, five, or ten years of price stability

You look at a payment right now that is $2,200. I’m just grabbing this number out of the air. Look five years from now. Look ten years from now! What is $2,200 going to mean for the house that you’re in right now. Is that going to mean a lot of money? Chances are, with inflation, job increases, wage increases, promotions, moving up within your career, that payment will present a much lower percentage of your overall income in 5 years. So if you are struggling to make ends meet, and you’re looking at that mortgage payment that I’m presenting you with and you’re saying, “Rowan, I don’t think I can take a 5 year, I need to take a variable,” then I don’t think you should buy the house. Variable rates are not a way to lower your monthly payments so you can afford it, it’s a way to take a risk and take a lower payment, but face the upward chance that rates could rise, and thus your payment could rise.

It doesn’t take a lot of rate increase just to make that payment quite high. If today’s prime rate is two and a quarter, and you’re in a variable rate at prime, and you’re looking at it going, “yeah, but I took a three year at 3.49%,” well how much is that? It’s a point and a quarter that rates have to move, FROM THE LOWEST HISTORICAL  POINT THAT RATES HAVE EVER BEEN.

So what should you be taking today when all you have above you is rate room to move upwards ,with virtually no downward move, again:

It depends on your unique situation. Call me up, we’ll go over your numbers, we’ll go over your job, your career, what you’re going to do in the next few years. Are you going to have kids? Is someone going on mat leave? Are you going to be leaving the country? Are you going to travel? These are all things which play into this. If it’s going to be a rental property, then perhaps your want to simply minimize carrying costs. If it’s going to be a home, then maybe you should be looking at keeping your costs stable so your housing is a fixed cost in your budget.

I don’t know what your situation is, but I can certainly help guide you and coach you in what is best for you.

Anybody that doesn’t look at your personal situation and just screams, “variable is best and always best. You save the most!” is absolutely providing dangerous financial advice and you should be asking around.

Thanks for watching!