I take calls all the time from realtors and clients looking to upgrade to a new home and always asking for “Bridge Financing” by name, but rarely understanding how it works or if they qualify for it.

The context in which it is asked for is usually because the clients are looking to move from an existing home that they own into another one, but don’t necessarily have a firm sale yet on their existing home. In this situaiton, Bridge Financing will not be available.

Think of it like this: a bridge is a connection between two firm places, and those two places need to be firm. You need to have a firm and binding sale on your existing home (a firm offer with no subjects outstanding) and an accepted offer on your new home. The dates need not line up. Let’s look at an example:

A husband and wife are living in a downtown condo they have owned for five years. It is worth around $400,000 and their mortgage is about $200,000. They want to move into a larger more luxurious townhouse, and they have been out looking with their realtor and have found a home for $600,000 that suits their needs perfectly. They want to write an offer on the new place to “secure it,” so someone else does not buy it, but they have not even listed their existing condo for sale yet. They ask their broker if they can get some bridge financing, and the answer in this instance is NO. Bridge financing allows them to get a loan from the bank doing the mortgage on their new home based on the $200,000 equity that they have in their current home. However, the bank cannot FORCE you to sell your existing home, so before they approve the request for Bridge Financing, they will want to see that you have a firm and binding offer to purchase on your existing home (with no subjects) before they will advance you the money. They want to make sure that your old home will sell (eventually), even if the dates don’t line up.

As a second example, let’s assume that all things are the same above, but that the clients have a firm offer to sell their existing condo that completes on August 1st. They go looking with their realtor, find the perfect place, again for $600,000 but we have another problem: the sellers of this new condo have been transferred to a new job back east and they need to sell by July 1st! In other words, our clients have to complete on the new purchase 1 month before they get their money from the sale of their existing home. Are they eligible for Bridge Financing? The answer in this case is YES, because they have a firm sale on their existing residence.

A couple of notes:
1. Both examples above assume that the clients still qualify for the new mortgage. Depending on life situations, changes of employment, changes in credit, this might not be the case. The example is intentionally simplistic.

2. Someone may say, “but yes! they can do an equity take out on their existing home, put that money up as a down payment, not sell their existing home, and then can own both properties and sell their old one at their leisure!” This MIGHT be true, but it is not a guarantee. They have to be able to QUALIFY for both properties based on income, credit, etc… If they DO qualify, then bridge financing will not be necessary, but it is my experience that prices in Vancouver are now so high that people rarely qualify for the 2nd property unless they are very solid on paper (i.e. they have a lot of income). It is possible, but usually Bridge Financing is the better (or only) choice.

Before you go shopping for properties, take the time to get pre-approved for the new purchase, and speak to your broker about the availability of Bridge Financing. I have seen it too many time where clients go looking at homes before making sure their finances are in order, only to get excited, write an offer, find themselves in a bad situation forced to complete a transaction with an expensive lender and poor terms. Don’t let this happen to you. Find out if Bridge Financing is available up front, before you go house hunting, and your life will be a lot easier.

People often call me up and when asking for rates seem to ignore all that I am saying and ask, “Is that open or closed?” to which I want to respond, “Why do you care?” Clients often are unable to explain to me what the difference is, why they need it, and what the word “open” even means. They have been listening to some Money program on AM radio, or reading some article in mainstream media, and have been programmed to ask for this element from their banker or broker as part of the negotiation.

An “open” mortgage is one that can be paid out at any time with no penalty of any kind. On the surface it sounds like everyone would want an open mortgage. However, there are some limitations to them, and there are some reasons why they are not a perfect fit for everyone. That said, there are some very compelling reasons to request an open mortgage.

First, let’s look at the reason that an open mortgage is not for everyone. Most open mortgages are a variable rate. Your payment will fluctuate (at most lenders) with prime rate. Currently, at the writing of this article, prime rate is at 4.75%. Compare that to a fixed or “closed” mortgage rate of 5.35% currently available. In this case, an open mortgage represents the best of both worlds: lower overall rate, and no penalty to pay it out. This relationship is not always true. However, as the rate is not guaranteed (remember, it varies with prime rate) the bank will qualify you different. You will need to have more taxable income to qualify for an open mortgage as the bank has to factor in the very real possibility that prime rate will RISE, and thus your payment will rise. Can you afford a rising payment if rates should rise? Will you be paying enough attention to mortgage rates in the market to know when to fix it into a “closed” mortgage? These are questions that only you can answer.

Second, “open” mortgages RARELY get the same discount below prime as a “closed” mortgage. At the time of the writing of this article, most open variable mortgages are at PRIME RATE (currently 4.75%) whereas most closed variable mortgages are available at prime – 0.60 (4.15%).

However, there are some very good reasons to get an open mortgage. First, flexibility is a major advantage. If you decide to move and sell your property (or if you buy and flip properties for a living) then you will surely want an “open” mortgage as you will be paying it out and penalties can be several thousand dollars. However, if you intend to live in your property for a few years, or at least intend to continue owning property (as you can likely port your closed mortgage from one property to another if you decide to move), then why take the higher rate open mortgage when you can get a lower rate closed product? If you intend to continue owning your home (even if you move from one to the other) why take the higher rate of an open mortgage?

To put this into a concrete example, on a $300,000 mortgage the difference between an open mortgage at prime rate and a closed mortgage at prime – 0.60% over 5 years is approx. $5,990 in savings. On the same mortgage, should you be forced to sell and pay out the mortgage, in full, without getting another one on another property, the penalty will likely be lower.

Bottom line: unless you are planning on selling the property and paying out the mortgage in full (and not getting a mortgage on another property immediately afterwards) then an open mortgage is not worth the fight to get nor the hassle to get approved for.

Situations where an OPEN mortgage is suitable:

1. An investment property that you likely will sell in a short period of time

2. An investment property that you intend to buy, fix, and “flip” for a profit

3. A situation where you only need to borrow the bulk of the funds for a short period of time (for example, until your other property sells and you can pay out the mortgage)

4. A situation where you may move to a new property in the next few years, but may not continuously own a property (thus you cannot “port” or transfer your existing mortgage to the new property – penalty free)

Situations where a closed mortgage is suitable:

1. Where you want to save money by getting a deeper discount from prime rate

2. Where you intend to live in your home for several years

3. Where you do NOT intend to buy and flip

4. When it is for your primary residence (you can always “port” or transfer your mortgage to your next property if you upgrade – talk to your broker about how this is done)

5. If you are buying an investment property for a long term hold and profit (you’ll save money by getting a deeper discount on the rate which will amount to thousands over the term of the mortgage)

If you have any questions about this, or if you want to see if an open or closed mortgage is appropriate for you, contact Rowan Smith at 604-657-6775 for a personal analysis of your situation.

I was reading an article recently on the cost of real estate in Vancouver. This particular article published in the Vancouver Sun was explaining that the cost per square foot of some real estate in Vancouver was in excess of $1,000 per square foot.

On the surface, this might seem excessive and to be the sign of a market wildly out of control. However, if we look a little deeper at what is going on in other parts of the world (other PREMIUM parts of the world) we find an interesting article out of the UK.

For those keeping score, this is 14,167 POUNDS STERLING per square foot (about $28,000 in Canadian dollars). Let it never be said that Vancouver is overpriced!

Click the link below for the PDF of the article…

Crazy UK Real Estate Prices <— Click Here

Many clients have asked about mortgage insurance, and several of them have asked for it by name. I highly recommend you NOT take your bank’s (or broker’s) offer of “Mortgage Insurance” whether it is life or disability, and instead speak to an independent insurance broker.

Many times, Mortgage Insurance underwriting is done AFTER there is a claim. In other words, clients will sign the insurance application, and, hearing nothing from the insurer, will assume they are covered. The insurance company will often only “underwrite” (assess whether or not you should get insurance) AFTER the client makes a claim. It will be when the claim is made that they will go over the original questionnaire, scrutinize the application, and then make a decision whether or not the client was insurable. This will potentially happen long after the client got the insurance and has been paying premiums! Life or disability insurance through an independent insurance broker is underwritten UP FRONT. This way, the client knows if they will be paid out in the event of the claim and will prevent any unwanted surprises in the future when it is too late.

The three videos below are all part 1, 2, and 3 of a mortgage insurance expose done by CBC Marketplace. They do a good job of showing some of the potential pitfalls of “mortgage insurance” and explain why it is not a great idea. Instead, they explain the stories of several Canadians who opted for Mortgage Insurance instead of independent life insurance.

Before you make a decision either way, check out the videos below!

[youtube=http://www.youtube.com/watch?v=B2JZoHK0KWA]

[youtube=http://www.youtube.com/watch?v=y7AlonVj0r0]

[youtube=http://www.youtube.com/watch?v=Y6sx9lGypWc]

Feel free to contact me with any questions and/or concerns about the foregoing video.

While I did not produce it, the video does demonstrate POTENTIAL problems that applicants may have with a Mortgage Insurance application.

Go independent! See a broker!

I recently attended an industry function along with around 700 other mortgage brokers from Vancouver and all across the country. It was the annual MBABC Mortgage Broker Conference and all the lenders from all over Canada had trotted out their newest and innovative mortgage products, in-house talent, and marketing materials.

The event followed a typical industry format: trade show, dinner, and private parties at all the most exclusive restaurants in town. The following day was much of the same with me hearing a lot from lenders and brokers about “what makes a GOOD mortgage broker.” People talked about integrity, disclosure, fiduciary duty, and all manner of vaunted and eloquent terms, but no one really wanted to address the question: “What Makes a BAD Mortgage Broker?” I’m not talking about ethics or morals, as these are pretty clear in most cases. I’m talking about what makes a broker “bad” to deal with, and gives the clients a bad experience, and therefore taints the public view of a broker.

I got to thinking about it, and spoke with a couple of my fellow broker friends, and what we decided was that it was best to figure out where we get most of our deals from. As younger, GOOD brokers in the business, often competing against people with 20+ years in the business, little drive to build new business, and a large and established list of quasi-loyal clients, we wanted to know how we managed to steal these clients on a regular basis from the competition. In other words, what were they doing WRONG?

The single most important thing that I offer, and that I make mention of to clients to expect is SPEED. In a time when people want everything sooner, faster, now Now NOW, the ability to get answers quickly, or at the very least RETURN THEIR CALLS quickly, is an invaluable asset. Clients should expect a fast call back time of no more than two hours if they have to leave a message. A bad broker, and one that I would avoid, is one that is low and takes a long time to return calls, get answers, or return emails. The fact is that in the mortgage and finance business, time is very critical as buyers often have looming subject removal deadlines, closing date deadlines, or othe time sensitivities that warrant (and demand) a fast turnaround. If your broker is not offering you same day callbacks (at the very least), same day emails, or 24 hour turnarounds on getting an approval, then you should start looking elsewhere and find another broker.

The next atribute that a BAD broker exhibits is inaccessibility. With the absolute myriad methods of communicating available (telephone, in-person, email, fax, blackberry, SMS, websites, Blogs, etc…) there is NO REASON that you can’t get hold of your broker in a timely fashion. Is there anything more aggravating than calling and calling and calling a banker or broker and just getting voicemail over and over over? If you’ve had the same experiences as me, you’ve been calling for days, and getting a new voicemail each day that is always up-to-date with the day of the week mentioned, and a polite message saying they will call you back “as soon as possible” followed by hearing nothing from them for days…. if at all. This behavior is unacceptable. Every broker that I know has not only a cell phone, fax, and email, but also usually has a BlackBerry, I-Phone, TREO, or some other wireless device. The fact is, they ARE getting your messages, but just don’t value your business, time, and feelings of stress and worry as much as they should. If you are getting this treatment, then it is time to find another broker. I know, I know…. Everyone is “busy,” but at the very least they could make a quick call to you so that you know when you CAN expect to hear from them in a more in-depth manner. If you are not getting your calls or emails returned, find another broker.

Another attribute that many young or inexperienced brokers exhibit is what I will term, for lack of a better term, as “flakiness.” Perhaps you’ve had the experience of speaking with a banker or broker, getting told “I’m fairly sure this will get done. You can start looking for a home,” and you subsequently spend weeks shopping for a house (chewing up many hours of a realtor’s time) only to have everything unravel when you finally find that perfect home and write an offer. Perhaps you’ve gotten statements and lines from your banker or broker such as, “they declined the deal,” with no explanation of why. Or perhaps you have gotten statements such as, “well you said you make X dollars and really you only make Y dollars…” Or perhaps it’s 4pm on the subject removal day, and you get a call from your broker asking for a lot more documentation or paperwork that simply cannot be obtained in time. This situation is unacceptable on a personal and professional level. Your broker should be able to clearly tell you, before you spend time looking for a home, what you can and can not afford (or what they can or can not get approved). Brokers are well versed in all the rules that the banks and lenders have, and they should be 99% sure of whether or not a mortgage will be approved before they even send it to the bank. If your broker is “flaking out,” or not giving you a clear picture of whether or not they feel your mortgage is going to get approved, then find another broker.

In summary, clients should avoid brokers that are slow, inaccessible, and flakey. While this might sound like obvious advice, if you have experienced any of the situations that I have described above, then you need to FIND ANOTHER BROKER…. or just give ME a call.