In the previous post I described why private mortgages cost more, why you would use them, and why they are more risky for the lender.

In this post, I will cover some specific situations that private mortgages are ideal as well as the rates and fees you can and should expect on the deal.

Here is the list I provided in the earlier post, and I will now elaborate on it:

1. Prior recent bankruptcy
2. Current divorce, not yet settled
3. Very poor credit
4. Collections and judgments on credit
5. Child support in arrears
6. Unemployed applicant who hasn’t yet found a job
7. Fast turnaround situations requiring funds in as little as one day
8. Properties that the bank doesn’t like to finance (leaseholds or bed and breakfasts homes, for example)
9. Bridge financing when the bank won’t offer the bridge from one home to another
10. Top up financing when the bank will only lend a portion

1. PRIOR BANKRUPTCY

When applying for a bank mortgage, they usually want to see two years between the time you are discharged and the and the time you apply for a new mortgage. Also, they will want to see 12 months of re-established credit since the discharge. These are bank guidelines for bank mortgages. However, opportunities sometimes come up that you may wish to take advantage of even if you can’t get bank rates on the mortgage. If you haven’t met their guidelines, you will need a private mortgage in order to get the financing.

2. CURRENT DIVORCE NOT YET SETTLED

If you apply for a mortgage, and are married, many lenders will want “spousal consent” to prove that your spouse consents to you buying a new home. They will want this proof in writing, notarized, and it is due to the fact that in most provinces the spouse (even an estranged one) have a right against a home that another spouse purchases. Lenders need to protect themselves from any potential claim, and banks are very nervous about this situation. Private lenders often don’t even ask the question about spouses, and if a divorce isn’t settled, but you find a perfect home, you may need to temporarily get a private mortgage to secure the property.

3. VERY POOR CREDIT

Banks often have very stringent credit requirements, and oftentimes if a person has a recent divorce, business failure, or job loss, they may have very poor credit. Even if it was only for an isolated period of time, the poor credit repayment will stay on record for at least 6 years. If your credit has challenges, you may need to get a private mortgage for PART of your financing, if not all of it, depending on how bad your credit is.

4. COLLECTIONS AND JUDGMENTS ON CREDIT

There are many ways that your credit an be harmed, and if you have a prior cell phone bill, cable bill, or, for example, student loan that has gone to collections, it may have damaged your credit bureau sufficiently that you cannot obtain bank financing. In these cases you will need a private mortgage for some or all of your mortgage.

5. CHILD SUPPORT IN ARREARS

If you have child support payments that are not being made, your ex can register a claim on your credit bureau so that all future lenders can see it. In this case, the banks will not lend a mortgage to you, and you will therefore need to clear this item up prior to getting a mortgage. If you cannot clear this up, or do not want to because of a dispute as to the amount or validity, then you will need a private mortgage until the matter is cleared up.

6. UNEMPLOYED APPLICANT WHO HASN’T YET FOUND A JOB

There are times when even professionals in rock solid jobs can be laid off due to economic conditions, industry changes, or what have you. Oftentimes people have large savings set aside, and may wish to downsize. However, the banks will insist that you have a job before giving you a mortgage for a new property. If you have been laid off, fired, or quit and suddenly find a dream home, then you will need a private mortgage to close on the property temporarily until you find new employment and can pay out the private mortgage with a bank mortgage.

7. FAST TURNAROUND SITUATIONS REQUIRING FUNDS IN AS LITTLE AS ONE DAY

It generally takes between 7 and 14 days to apply for, get approved, and close on a bank mortgage. Sometimes situations arise that require funding in as little as 1 day. No bank can close in this situation, but a private lender can. If you require funding in a short period of time, whether it is a purchase or refinance, then a private lender is your best friend until you can get a bank mortgage arranged.

8. PROPERTIES THAT THE BANK DOESN’T LIKE TO FINANCE

There are a number of property types that appear great to a particular client, but which the bank won’t finance. A partial list of these are:

1. Farms
2. Hobby Farms
3. Bed and Breakfasts
4. Homes with a commercial zoning or component
5. Hotels
6. Single Room Occupancy Homes (Rooming houses)
7. Houses with multiple unauthorized suites
8. Gas Stations
9. Properties that were formerly dry cleaners
10. Past Grow Ops (the subject of a future post as they are a huge issue)

This is just a small and partial list, but banks don’t like to finance these properties for a variety of reasons. The essential point is: if you can generate income off the property itself (bed and breakfast) and require that income to qualify for the mortgage, then the bank won’t want to finance it, in most cases, and you may need a private mortgage.

9. BRIDGE FINANCING WHEN THE BANK WON’T OFFER BRIDGE FROM ONE HOME TO ANOTHER

If you have a home, and it sells on, say November 30th, but you find a home that is perfect but you need to close on the purchase before your home closes, then you need bridge financing. This is NOT available in all situations, and it is NOT available at all banks and lenders. Many times, you will need to take equity out of your home that you currently own (often 20% of the new home’s purchase price) temporarily until your old home sells. We often have to arrange private mortgages for a short period of time while you sell your old home. People often blanche when they hear 12% or 14% as the rate, but if it is only for 2 months, then that is only 2% or 2.33% and when you compare that with a purchase of several hundreds of thousands of dollars, that is not a large cost and you need to look at the bigger picture.

10. TOP UP FINANCING WHEN THE BANK WILL ONLY LEND A PORTION

There are many situations where a bank will only lend, say 65% or 75% of a purchase price (possibly due to credit, income, or property issues and the client will need another 10% or 15% to complete on the transaction. In these cases you may need a small private 2nd mortgage until you can clear up the other issues.

WHAT IS THE BOTTOM LINE

There are four primary things a lender looks at when doing a mortgage:

- Property
- Income
- Down Payment
- Credit

If you have problems with any ONE of these issues, then you may still qualify for bank financing, but if there are issues with two of the above things, then you likely will need a private mortgage.

The times you will want a private mortgage is when you are short on TIME, short on CREDIT, short on INCOME, or buying a property the banks don’t like.

If you can make a quick $25,000 on a  deal, but it will cost you an extra $300 for two months, but has a sticker price (rate) of 15% would you take it? Of course you would! Look at the bottom line, and think of private financing as a temporary measure and you will often see that the benefits far outweigh the costs.

WHAT SORT OF RATES AND FEES CAN YOU EXPECT?

Private First Mortgages:
Rates usually ranging from 8% to 12%  (depending on credit, property, income and down payment)
Fees usually ranging from 1% to 3% (depending on credit, property, down payment and income)

Private Second Mortgage:
Rates usually ranging from 12% to 18%  (depending on credit, property, income and down payment)
Fees usually ranging from 2% to 8% (depending on credit, property, down payment and income)

Private Third (or more) Mortgages:
Rates can be 15%+ with fees in the 8% range

Are private mortgages expensive? Yes. Do they have very good and compelling reasons to get then? Yes, usually temporary, but often you have no other option.

“Twelve Percent!” the client screamed into the phone, “that is highway robbery!”

This is a common phrase I hear everytime I quote the rates on a private mortgage. The reality is that no matter what the market is doing, private lenders tend to want around 12% (possibly plus fees).

So why are the rates so high? Who would take those rates? The answers to these questions are important, and they are the subject that we will explore today.

First, why are the rates so high? Well that depends on if it is a first or second mortgage, what percentage of the home’s value is being borrowed, and the client’s credit and situation. These are complicated questions, so this is going to be a two part post. Let’s address each in turn. We’ll start with a few topics today and few more tomorrow.

FIRST OR SECOND MORTGAGE

First mortgages are generally more safe than seconds, and seconds are more safe than thirds, and so on and so forth. The reason is that in the foreclosure process, if a client isn’t paying the first mortgage, the 2nd (or 3rd) mortgage holder may have to pay out the 1st mortgage to preserve their investment. If the foreclosure process is started, the owner generally has 6 months to bring things back up to date or the courts will issue an “Order Absolute” which wipes out all mortgages behind the 1st mortgage and leaves the property in the possession of the 1st mortgage holder. While this is VERY rare, it does happen, and therefore, if a client defaults on his first mortgage, the 2nd mortgage holder (or third) may have to pay out the first mortgage (in cash) so that they move into 1st position and preserve their investment.

Let’s use a concrete example so that this makes sense:

Assume a home is worth $400,000 and the client has a $200,000 1st mortgage with, say, TD Canada Trust. They have accumulated $50,000 of credit card debt, and have started missing payments. Their credit score gets hurt, and as a result, TD will not advance them any additional funds. However, there is a LOT of equity available there ($200,000 worth!). This is a prime situation for a private mortgage where a lender will take a 2nd mortgage, usually at rates of 10% – 14% depending on the risk and property.

Now, if the client doesn’t keep their 1st mortgage up to date, TD may start a foreclosure process which will (in general) give the clients 6 months to bring things back up to date or TD takes the house in lieu of payment. IF this happens, the 2nd mortgage holder loses their money! Their mortgage is wiped out!

To prevent this from happening, the 2nd mortgage holder needs to have enough money on hand to pay out TD (in this situation) so that they take over the 1st position (and thus take over the foreclosure). There is an alternative that the 2nd mortgage holder can pursue called “Conduct of Sale” where they can force the home to be sold through court ordered sale to recover their money – but they have to prove their equity is at risk – and this can be difficult depending on the situation.

So, as you can, the possible responsibility of having to come up with $200,000 cash is a serious risk, plus the hassle factor, that results in private lenders looking to get paid a higher rate of interest (and fees) to do a 2nd mortgage.

WHAT PERCENTAGE OF THE HOME’S VALUE IS BEING BORROWED?

As a general rule, you can borrow only 75% of a home’s value by way of a private mortgage. There ARE some lenders that will, in this market, go to 80% or even 85% but you can expect VERY high rates and fees for this as the risk (especially in today’s market) is that the prices will continue to fall and the lender may end up having loaned more than the home is then worth.

The higher the percentage being purchased, the higher the risk, the higher the rate you will pay. I have seen private first mortages as low as 6% when the client is borrowing less than 50% of the home’s value. I have also seen private mortgages of 19.5% when the client was borrowing 85% of the home’s value.

So what is the “value” that the lenders use? They will usually request an appraisal from one of their preferred appraisers who they trust, and who has sufficient experience in an up AND down market to properly peg the value of a property. You should consult the lender or your broker before shelling out cash for an appraisal as many lenders will only accept one or two appraisal firms in town.

Bottom line: the higher percentage you borrow, the harder it is to get financing, and the harsher the terms, rates, and fees.

THE CLIENT’S PERSONAL SITUATION, CREDIT, AND STRENGTH

When you get a bank mortgage, they will do a lot of due diligence to confirm that a client has sufficient income, credit history, and character to repay a loan. Private lender’s don’t care as much about income and credit as they do about equity. They are, generally, more concerned with the amount of equity behind them than with the client’s credit or job. In many cases, they will not even condition for proof of employment! For this reason, private lenders are the lender of choice for people in tough situations such as:

1. Prior recent bankruptcy
2. Current divorce, not yet settled
3. Very poor credit
4. Collections and judgments on credit
5. Child support in arrears
6. Unemployed applicant who hasn’t yet found a job
7. Fast turnaround situations requiring funds in as little as one day
8. Properties that the bank doesn’t like to finance (leaseholds or bed and breakfasts homes, for example)
9. Bridge financing when the bank won’t offer the bridge from one home to another
10. Top up when the bank will only lend, say 65% but the client needs another 10% to close on the purchase

There are many many more reasons, but these are all situations where a private lender may step in.

In the next part of this article I will provide the type of terms you can expect, rates, fees, as well as some elaboration as to specific situations where a private mortgage is highly beneficial and the preferred choice.

A realtor friend of mine gave me an article she read recently on the Vancouver Real Estate market by Jim Rohn. I have no idea where it was published, but it was his, and it is VERY good and accurate describing how Vancouver’s Real Estate Market is a “Buyer’s Market” yet no one is buying. I wanted to reproduce part of it here for your reading pleasure:

A Buyer’s’ Market should be just that – a buyers’ market. It’s not a fence sitting, waiting , loitering, delaying, dawdling, postponing, vacillating, hesitating, wavering, faltering, pausing, foot-shuffling market. It’s a buyers’ market. By its very name it means buyers should be doing one thing and one thing only – buying. So where are the buyers and why aren’t they buying?

The irony of a buyers’ market is that even though the opportunity to buy is high, buyer urgency tends to hit an all-time low. The media becomes excited purveryor of negative news and uninformed advice, and buyers buy it all. Actually, it feels like the only thing they’re buying. Their reluctance is ironic since not so long ago buyers were incredibly excited about buying – and it was a sellers’ market. Prices were escalating and it was perhaps one of the most difficult times to buy value and yet people were buying like there was no tomorrow. Buyers were afraid of losing out by not buying even though the advantage was all to the seller. Now a shift has occured and it’s a true buyers’ market and what happens? Fear is in the driver’s seat but the tables are turned – the fear of paying too much seems to stop most in their tracks and immobilizes them.

I found that this was an EXACT description of the Vancouver Real Estate Market. Buyers are ready, willing, and able to buy, but are so concerned about “getting a deal” that they are ignoring the fact they are sitting on the sidelines in one of the best buying opportunities in the last 8 years. I am seeing East Vancouver homes, with basement suite income of $750 per month, selling below $500,000. Instead of looking at the low carrying costs of real estate versus the high income potential, people are treating their home like it is an investment.

YOUR HOME IS NOT AN INVESTMENT!

By it’s very definition, an investment is something that generates returns or profits and that is it. If you rented a home instead of purchased, you would be throwing money away every month. It would be better to buy a home, and ride it out for the long term despite price fluctuations as, at the very least, you would be paying down the principle and would eventually own something. Those people sitting on the sidelines are building no equity at all.

Many people are acting like their financing options will be the same in 6 months, with lower prices. The truth is that financing DRIVES prices, and if the prices are lower, it is because the financing isn’t there (or is there, but is more expensive – thus making the purchase less attractive). A person who purchased a home 6 months ago with a variable rate mortgage of prime – 0.75% for $500,000 and financed 100% of it would face a payment of $2,078 per month (including all fees). However, that some home, today, would require a down payment of 5% ($25,000 cash up front) and would now have payments in the amount of $2,426 per month for the SAME HOUSE. Nothing about the home is better.

“But prices have fallen 10%!” some smarty pants may cry. Ok, so the house is $450,000. With 5% down that is still $22,500 cash out of pocket as a down payment, and payments will still be $2,184 per month! So, you’d have to find a way to save $22,500 AND pay $106 more per month for a house worth $50,000 LESS!!

Are you better off waiting and buying when prices are falling and the financing market is tighetening up? I don’t think so. There are EXTREME cases of prices falling in markets that are far, far and away ahead of them selves (Las Vegas, Nevada comes to mind…) but Vancouver isn’t one of them. With upstairs rent easily $1,500 and downstairs rend easily $750 per month. That still more than covers your entire mortgage payments. Not surprisingly, if you bought then OR now, the rent essentially covers the mortgage and not much more. That is the sign that prices are in line with cost and value – in my opinion.

I have had many clients bail out of this market in the past month claiming they will wait until spring to see if the market is better. Meanwhile, they are paying $1,500 a month in rent, for 6 months ($9,000) and the payments on the same home they wanted to buy before will likely be HIGHER.

Pay attention to this point: the sticker price isn’t what you need to be worried about – it’s the payment. Payments on homes have risen, so of course the prices will fall. So if payments continue to rise with global instability, does that mean prices will continue to fall? Yes! Of course it does. Does it mean you shouldn’t buy? If you are buyinga home, you should still buy and start paying it off. Vancouver has value that cannot be ignored. If you are a buyer and flipper, then I would stand out of this market as quick returns will likely be unavaiable for a very, very long time.

So there is my opinion. Happy shopping!

I was watching David Letterman on Youtube this week, and saw Bill Clinton do a lengthy interview in which he described his take on the sub prime meltdown, the economy, and how it came about. The interview starts off with him talking about his philanthropic efforts around the world, but quickly turns to the economy and provides a very clear description of the sub prime meltdown, the resulting economic crisis, and how it all came about.

I am going to post links to all three parts of the Clinton interview, and it is good (although relatively long) viewing. My comments on this interview will follow the three parts of the video. The links to the videos are below in the order that you should watch them.

MY THOUGHTS AND COMMENTARY:

First, I am going to do what a lot of viewers on Youtube are unable to do, and ignore Clinton’s past as presidency and past policy decisions. He is not throwing stones in this interview, and is instead simply describing what happened for the banking crisis to get this bad. Many comments seem to circle around the Gramm-Leach-Bliley act as a policy that Clinton was responsible for, and while this is true, it has NO bearing on the sub prime crisis “Description.” Is that act responsible for it? Sure it is, but that isn’t the point of this video and interview. The point is simply to show my readers Clinton’s take, as I thought it was a very good explanation, understandable by all, as to how this situation arose.

I think that Clinton does a good job of explaining how derivatives, and excess supply of money floating around were largely responsible for this. He doesn’t name Greenspan in this article, although clearly when he says, “we didn’t give them alternative investment opportunties,” he is referring not only to Greenspan, but to the entire American Administration as a whole. He makes a very good point that there weren’t enough incentives to pull money in other directions (such as tax breaks for investment in green initiaves and cleaner sources of fuel and energy). The only thing people understand is consequence and incentive. Consequences when they do something they shouldn’t and incentives when they do something they should. In the past real estate market, the incentives were all aligned with doing more mortgages, more loans, and more purchases, but the consequences of that are now coming to light. As money floods out of real estate, it will find a new haven, and those people who are forward thinkng are already moving their money there now.

Where is that new haven? I have no idea, yet, but I’m watching. As this crisis unfolds I’m sure we’ll see and learn something. We better…

There is a lot of talk amongs real estate “investors” and specialists saying that the key to buying real estate at low prices is to find foreclosures, pre-foreclosures, court ordered sales, and other distressed sales.

IS THIS A VIABLE METHOD OF INVESTING IN REAL ESTATE?

This is not an easy answer. The quick answer is NO. Otherwise, everyone would be doing it. The longer answer is “it depends who you know.”

Let’s address a few of the terms that are being tossed around, and see how they apply to the Canadian market.

FORECLOSURE

This is the process whereby a lender takes the property away from an owner if they miss too many payments. Usually, the process is about 6 months long starting with an “Order Nisi” into court and ending with an “Order Absolute” when the property is taken away from the borrower and given to the lender. Usually, it doesn’t get this far, and a “Order for Sale” is given and the lender will usually sell the place (possibly by also taking possession and kicking the people out of the home).

PRE-FORECLOSURE

This is a very misleading term that a lot of experts are telling clients to search out. Clients are being told to see out pre-foreclosure by looking for signs of “distressed sales,” or other terms that describe highly motivated buyers. Pre foreclosures are very, very hard to find without having an “in” in the industry. As a mortgage broker, often dealing with a lot of distressed sales, I cannot tell people about my clients in situations that they are being told to seek out. In other words, any broker telling you about specific foreclosures is often violating the confidentiality of their clients. There ARE cases, where the clients are OK with this (for example, when they want to sell desperately), but in most cases those people being foreclosed on don’t want to sell. They want to keep their home just like anyone else.

So where do you find pre-foreclosures? There are often several lawyers in town that deal with foreclosures, and they MAY be willing to provide you with names and addresses of properties that are nearing foreclosure. Alternatively, a broker (me for example) who deals with a lot of hard financing and hard situations may have some clients that are seeking to get out of the property. With proper written permission, I, or other brokers like me who deal with a lot of difficult financing situations, can provide you with people who are highly motivated sellers. However, dont’ expect this information to be widely available for the public at large. You are going to have to work for it, and it won’t be easy. If it was, EVERYONE WOULD BE DOING IT!

The last way to find pre-foreclosures is to look at what is being heard “in chambers” in the local provincial courts. For example, if you go down to the courts you can see what is being heard that day, and if you see “Royal Bank of Canada vs. John Michaels” (for example) you can be relatively sure it is because the bank is starting an action against Mr. Michaels, and it is usually due to a possible foreclosure beginning. This info is also available online on the provincial court websites (depending on what province you are in). However, it will NOT say “Foreclosure Hearings” conveniently labelled. It will take a bit of deduction and work to figure it out because you are trying to get very private info. Again, if it was easy, EVERYONE WOULD BE DOING IT!

COURT ORDERED SALE

Oftentimes, when there is a first and second mortgage holder, the clients may fall behind on payments to the first mortgage holder (often the larger of the two) and have problems making their payments. This will put the second mortgage holder at a disadvantage, because if the first mortgage holder gets an “Order Absolute” it will wipe out the second mortgage holder’s claim. This usually takes at least 6 months, and is a huge song and a dance from a legal perspective, so it tends to result in interest piling up and further equity being eroded. Now, this is a simplification of the process, but if the second mortgage holder sees their equity being eroded with interest (or a falling market) they can apply to the court for Conduct of Sale granting them the rights to sell the property for a fair price to pay out the first mortgage, and themselves, and ensure they don’t lose money on the deal. In order to be granted this, they usually have to demonstrate that their equity is in jeopardy by way of appraisals or other market valuation techniques accepted by the courts. In a falling market, with interest piling up, they will usually be granted an order for sale unless a massive amount of equity exists.

So, when reading and hearing about “Court Ordered Sales” you are hearing about highly motivated sellers. However, don’t expect to waltze in and pay pennies on the dollar. The court still overseas the sale price, and makes sure that the price that is received is fair market value. For this reason, just the fact that someting is a court ordered sale doesn’t automatically make it a “deal.” You still have to do your homework and find a motivated seller through the methods I list in the section above regarding pre-foreclosures.

SUMMARY

The process of seeking our foreclosure and “pre-foreclosures” is not a cut and dry issue whereby you can simply find someone willing to give you a “list.” It takes effort, ingenuity, or industry contacts to track them down, and even then, they might not be a great deal. You still need to look at the direction of the market, the cost of the property, and whether or not it is highly marketable in order to discover how good the purchase really is.

Remember, if it was super easy, EVERYONE WOULD BE DOING IT!

The Bank of Canada anounced today that they are reducing their key lending rate from 2.50% to 2.25% which is a 0.25% reduction in line with market expectations. However, many people were calling for a large decrease equal to 0.50% (also referred to as 50 basis points). So the big question on everyone’s mind is:

Will the major banks follow the Bank of Canada and lower their prime rate?

This is a very tough thing to comment on, but I will give you my gut feelings on this. Let’s first look at the comment released by TD Canada Trust at about 10am this morning:

“There has not been any update at this point if TD will reduce their prime rate further to reflect this latest decrease.”

Talk about sitting on the fence wondering what the other banks will do! The reality is that the cost that banks face to raise money has been rising dramatically, and if they reduce their prime rate it cuts directly into their profits. In the cases of some banks, who are already losing money on variable rate mortgages, this further cut simply cuts deeper into their already bleak profit margins.

I am going to reproduce for you, the comments from the Bank of Canada that came out with the announcement:

“In the face of diminished inflationary pressures, the Bank of Canada lowered its policy interest rate by 50 basis points on 8 October, acting in concert with other major central banks. This extraordinary move, combined with today’s announcement, brings the cumulative reduction in our target for the overnight rate to 75 basis points since the Bank’s last fixed announcement date. These actions provide timely and significant support to the Canadian economy. The cumulative reduction in the Bank’s policy rate since last December is now 225 basis points.

In line with the new outlook, some further monetary stimulus will likely be required to achieve the 2 per cent inflation target over the medium term. The evolution of the financial crisis, its impact on the global economy and the timing of the effects of the various extraordinary measures being taken to address it pose significant risks to the projection on both the upside and the downside.”

So, in light of these comments, I think we can safely say that further rate cuts are in store for us. However, this brings us to the next very difficult question:

Will the rate reduction filter down to the mortgage market?

Historically, and in my experience, moves in prime rate have very little to do with FIXED rates. Oftentimes, there is a couple week lag between the time prime rate comes down to the time that fixed rates also go down… IF they go down. They don’t always go down because fixed rates are not pegged to prime rate. However, when prime goes down, a lot of other rates also go down (for example, bond rates), and this usually drags fixed rates with them.

Variable mortgages are a different monster altogether. While prime rate has been falling, the banks have been changing the discount to NEW variable rate mortgage holders. For example, 6 months ago I was doing prime – 0.75% mortgages (would place you at 3.5% today!!!) but now the lenders are prime + 1.5% which puts you at 5.50% (not surprisingly, nearly the EXACT same as the fixed 5 year rate).

So while the prime rate has been falling, and offering savings to people with EXISTING variable rate mortgages, any new variable rate mortgage applicants will face a higher rate.

So what is the net effect?

With variable rate savings no longer available to new home owners, I suspect we are going to continue seeing more and more price rollbacks as the affordability is being reduced by the banks changing the discounts on variable rate mortgages to Prime + 1.5%

Let me give you a concrete example to see how this will be very costly to a home buyer in Vancouver.

If a person bought a $600,000 home (well below the Vancouver average, by the way) and put $120,000 down, this would leave them with a mortgage of $480,000. Assume prime rate is 4.25%.

If the got a prime – 0.75% mortgage 6 months ago (and they will get the same discount for 5 years) their payments on a 35 year mortgage would be $1,977 per month.

If they got the home today, and had to take a prime + 1.5% variable, they will face a payment of $2,636 per month.

LOOK AT THAT! Why isn’t the media reporting on this!!!

The same house, purchased for the same price, in the same market, BUT with current rates costs $659 more per month today!!!

I’m going to close this entry today with the following comment:

When the average family cannot buy the average home, there is trouble ahead.

I’ve been made slightly crazy this week with clients telling me they have been working with a “TD Mortgage Broker” or a “RBC Mortgage Broker.” Why is this making me crazy?

Because, they are NOT Mortgage Brokers!

The very essence of a Mortgage Broker and our service, is that we are independent, not tied to any one lender, and able and willing to access lenders with the best rate, product, and service to fit a client’s unique situation. If you are dealing with someone from TD or Royal Bank or BMO who is a “Mobile Lending Specialist” or Business Development Manager, THEY ARE NOT A BROKER. They are just the same as the person in the branch. They are there to drive business to their respective institution, but they are given a slightly different mandate: They can come to you, at your house, or in a move convenient location. However, they are, and always will be, working for the institution with their parent company’s best interests ahead of your own.

A true mortgage broker does not deal with only one lender (or even two or three!). A true mortgage broker acts as a third party who has a fiduciary duty to their client. This is a duty to look out for the financial best interests of their client. If TD is offering a rate of 5.55% for a standard 5 year closed mortgage, and, all other things being equal, we can get you the same product at Scotiabank but at a rate of 5.25%, a mortgage broker will ensure that your mortgage gets done at Scotiabank. A TD “Rover” or Mobile Lending Specialist is only equipped (and heavily incented) to send the business to their own company.

Now, there are exceptions to this rule. I have seen TD Mortage Specialists that can’t get a deal done at TD, and then end up using a broker-channel lender once TD has declined the business. However, the business still gets first shot at TD.

I am naming TD here, not because of any inherent dislike of them, but rather because their TD Rovers and mobile lenders are often confused with mortgage brokers because many of them work out of real estate offices, and work non-traditional hours. Naturally, they don’t want to change this image of themselves as independent brokers, so they say little to contradict the rumour that their client is dealing with a mortgage broker.

Be very wary when dealing with a mobile lender that deals exclusively (or primarily) with one lender. As a true, independent, mortgage broker, I take your mortgage “to market” and shop for the best rate and terms at ALL lenders (except RBC, Coast Capital, and BMO because they won’t deal with mortgage brokers and have their own mobile lending staff which they feel is more cost effective). I have over 30 institutions that I can take your mortgage to: many you will have heard of, and many that you will not have heard of.

Lastly, a mortgage broker is a licensed individual, who is overseen by FICOM (Financial Institution Commission) who regulates and assures ethical practices amongst its member brokers. Most mortgage brokers also are members of their provincial and national broker associations. In my case, I am a Member of the Canadian Assocation of Accredited Mortgage Professionals (CAAMP) as well as the Mortgage Broker Association of British Columbia (MBABC). Lastly, I hold my AMP designation making me an Accredited Mortgage Professional, and this is the highest level of education, oversight, ethical training, and continuous education in the country for lending professionals. Your local bank employee rarely has any of the the above certifications that attempt to ensure ethical practices and ensure proper training and oversight.

When dealing with me, you can be sure that you are getting truly independent advice. I don’t favour one lender over another (unless they have the best rate or product in the market at that time) and always send my deals to whichever institution offers the best overall package. Rate is a very important part of the package, but it is by NO means, the only issue. Term, ammortization, pre-payment priviledges, flexibility, portability, assumability, and many other concerns need to be given equal consideration along with long-term plans, career aspirations, and credit worthiness.

Don’t mistake your local banks’ mobile staff members as brokers. They aren’t. Deal with a true broker, and you will receive superior rates, service, and product selection. Call us up, you’ll be glad you did.

This is a very common question, and one that I have addressed before, but have taken three calls from all around North America this week.

Usually the question runs like this: “I would like a fixed mortgage, but I want it to be open. What is your best rate?”

This is a confusion of two common terms. Let me first address the different types of mortgages. For simplicity sake, there are four common types of mortgages, that all combine with one another. They are:

1. Fixed Mortgage
2. Variable Mortgage
3. Open Mortgage
4. Closed Mortgage

Let’s address each in turn. NOTE: these terms are being described as they relate to the CANADIAN mortgage market, not the US:

FIXED MORTGAGES:

A fixed mortgage is one where the rate is fixed for the entire term of the mortgage. For example, if you have a 35 year amortization (pay it off over 35 years) but a 5 year term, that means that you will have a fixed rate for 5 years, with a fixed payment for 5 years, and a fixed rate for 5 years. The mortgage rate and payment are FIXED for the term. Terms vary from 1 to 10 years (a couple lenders do longer) and the average term people choose is 5 years (which is also the length of time over which the banks compete most aggressively).

VARIABLE MORTGAGES:

A variable mortgage is one where the rate varies with some other rate. The most common rate that the mortgage moves with is the “Prime Rate.” Traditionally, the Band of Canada (BOC) sets their prime rate, and the banks then follow and set theirs at the same rate. The prime rate is the rate that preferred borrowers with clean credit and good income can receive. There is no law that says that the banks must follow what the BOC does, and in the current market in Sept / Oct 2008 the banks have chosen on a couple of occasions to NOT follow the BOC right away or to follow them precisely. A variable rate mortgage usually results in a payment that also varies with prime rate (often making budgeting difficult), and a rate that varies according to the market. While most variable rate mortgages are convertible into a fixed rate at any point in time, the rate you can convert at is “usually” quite high relative to what you would get on the open market.

OPEN MORTGAGES

An Open Mortgage is a mortgage that has no pre-payment penalty. With most mortgages in Canada, if you pay out the mortgage before the end of the term, you will pay an interest penalty (usually equal to 3 months interest payments but there are alternative penalty calculation methods). Open mortgages do not face the interest pre-payment penalties that other mortgages face.

CLOSED MORTGAGES

With a Closed Mortgage, you WILL face an interest penalty to pay it out prior to the end of the term. For example, if you have a 5 year term, and you pay off the mortgage in 2 years (whether it is due to a sale of the home, lump sum of cash, or any other manner) you will face an interest penalty usually equal to 3 months of interest. There are other methods of determining pre-payment penalties, but the 3 month interest is the most common unless rates have fallen dramatically during the term of the mortgage.

So why would anyone take a closed mortgage? Answer: Because they (typically) have far, far better rates when you commit to a set term. Also, that is the industry standard in Canada.

So, based on the info above, you can combine the terms (no more than 2 per combination) to get a feel for what is available in the Canadian market place.

You could have:

Fixed Closed Mortgage
Fixed Open Mortgage
Variable Closed Mortgage
Variable Open Mortgage

You may wonder, “Why doesn’t EVERYONE get a fixed OPEN mortgage?” As that seems like the best combination of security (fixed rate) and no penalty (open). The answer is: the rates are far higher. If the banks are going to go through all the effort and time to do a mortgage for you, and commit the money, they want to know they are going to get that stream of income for the length of the term. When you purchase a term deposit fromt he same bank for, say, 2 years, you expect to get 2 years interest, not get 1 year and have the bank cancel after 12 months because they can pay less to someone else! What’s fair is fair. If you commit to a term, expect a penalty.

Often people say to me, “yes, but what rates are available for each product?” I’ll show you my best rates currently for each product below:

5.35% – Fixed Closed Mortgage (based on a 5 year term)
8.10% – Fixed Open Mortgage
5.25% – Variable Closed Mortgage (Based on Prime rate plus 1%)
5.25% – Variable Open Mortgage (Based on Prime rate plus 1%)

Clearly, taking a Fixed Open Mortgage is the best in terms of flexibility, but the rate is far higher and thus payments of a huge obstacle. Also, the difference between a fixed and variable rate is not much. In fact, you can get a 0.10% lower rate by taking a variable rate! This might sound like a good deal, but how much is your peace of mind worth? If rates shoot up by 1% due to an economic crisis, your payment will jump substantially (by 1%) and this will result in a much much higher payment.

How much higher?

Assuming a $300,000 mortgage, the savings of taking a variable rate mortgage (0.10% savings) will result in a savings of $22.14 per month. Assuming rates stay steady for ALL FIVE YEARS you will save $1,328.40 by taking a variable rate mortgage. Not bad, right?

Wrong. If you assume that prime rate moves up by 1% due to a shocking economic crisis (much like we are facing now) your payment would jump from $22.14 lower to $203.85 HIGHER simply due to factors beyond your control. This, by the way, assuming it happens 2 years into the mortgage, will result in 3 years of higher payments equaling $7,338,60 more. So you would be out by THOUSANDS of dollars just for trying to save $22.14 a month.

My advice: In this market, take a fixed rate. Enjoy the fixed payments, and sleep easy at night knowing your payment will be the same this month as it will next month for the entire term.

With respect to Open vs. Closed mortgages, unless you are buying with the intent of flipping it off (and NOT buying another property) ignore this. Take a fixed closed mortgage, and you’ll be glad you did.

If you are considering buying an investment property which you may quickly sell, THEN, and only then, do I recommend an open term.

On September 16th, Stephen Harper made an election announcement of a tax credit of up to $5,000 for First time home buyers which will provide tax savings of up to $750. The announcement was welcomed warmly by the Canadiam Home Buyers Association (CHBA).

CHBA President, John Hrynkow said, “This is a practical measure that will help many first-time buyers as they struggle to realize their dream of owning a home.”

This annoucement provides a subtle clue to the stance of the Conservatives as to the importance of home ownership to Canadians as well as the impact that the New Housing industry has on the national economy and overall well being. The New Housing market has been one of the key reasons, speculate economists, that Canada has fared well in the slowing economy as the New Housing industry has remained strong.

Mr. Harper indicated that if elected (and as of the writing of this article he has been re-elected) the Conservative government will phase in a tax credit over four years for up to $5,000 of the closing costs on the purchase of a new home. According to Mr. Harper, this will result in tax savings of $750 for first-time home buyers.

My opinion on this announcement is, “In this market? (Vancouver) Who cares?”

This $750, or even $5,000 is a drop in the bucket in terms of home ownership in Vancouver. Also, the only mention in the announcement is that this will be a tax savings of UP TO $750 for those first time home buyers who buy a “New Home,” not just “their first home.” So, it seems to imply that if a first time homebuyer is buying their first home, and it is NOT a brand new home, then they may not receive the tax credit. While I am not sure about precise percentages, I suspect that the RE-sale market is far, far larger than the new home market, and furthermore, that most of the people buying brand new homes are NOT first-time home buyers (unless buying a condo – to which it is unclear if this tax credit will apply).

In a market where a 1 bedroom condo is selling for upwards of $400,000 a $750 sounds like it will hardly make a dent. I know the government’s heart is in the right place, and across the country I am sure it adds up, in the aggregate, to a substantial tax savings for everyone. But on an indvidual basis, it doesn’t look all that great. Also, what elements of closing costs constitute a deductibe expense is another thing that isn’t clear.

Regardless, I don’t think it will have much economic impact, although I am pleased to see the government recognizing the importance of home ownership to Canadians.

Despite the chaos going on in the US, the Canadian real estate market has done fairly well. With builders going out of busines all over the US, housing starts in Canada remained steady at 218,000 in September. This is shocking considering it is a slower part of the year to start building with only 200 units difference from August, and at the same time, it is interesting to note how the housing start numbers are broken down.

The number of housing starts for single family dwellings (houses) fell by 6,200 which is a 8.1% decrease month over month. However, the number of starts for multiple family dwellings (Condos, Townhouses, and Aparments) increased by 6,400 (or 5.5% month over month) offsettng the number of houses almost 1 to 1.

This trend of less houses and more multiple family dwellings is consistent with the last year and a half where we have seen a 65% growth in these units from July of 2007 to August of 2008.

So, does this mean the market is not slowing down the production of homes? Well, let’s discuss that for a moment. Firstly, single family dwellings are much easier to plan, finance, and build. Many of the single family homes being built are by those people that intend to live in them. Owner occupied builders. However, multi family dwellings take a LOT more time (months or years) to secure the land, get the relevant studies and architectural work done, environment work done, geological work done, and other long-term soft costs. This means that the number of multi-family dwellings that we see still being built may be the result of a much longer pipeline that has been approved and ready to commence for quite a long time. This trend of reducing single family dwellings was thought to have leeched into the multi family sphere when there was a massive drop in the number of multi family dwelling starts in july. However, August was a similarly large bounceback and september supports that this trend may not yet exist. However, it appears only a matter of time before multifamly dwelling starts begin to reduce as financing for them on a commercial level is far, FAR more difficult.

Regionally, starts were pretty stable except the Ontario was down 6.3% and BC was UP 9.3%!!! This is good news for Vancouverites as continue to build and maintain a stable market. TD Economists have predicted, however, that housing starts in BC will fall off by up to 15% over the coming year as there is significant weakness in the pricing of the historically pricey BC markets.

SO WHAT DO HOUSING STARTS HAVE TO DO WITH REAL ESTATE PRICES IN VANCOUVER?

Well, that question and answer are twofold:

1. What does it tell us about the economy NOW?

2. What does it tell us about where th economy is going in the FUTURE?

THE PRESENT:

Think of basic supply and demand, if housing starts are relatively solid, the supply of houses coming onto the market should essentially replace what is being torn down, plus some small increase to account for population growth. If we see a rapid spike in housing starts, it may indicate that the builders are getting good money for their properties and are wanting to ramp up production to capture profits. On the other hand, when we see starts falling, it may indicate that builders are not being compensated properly for their efforts and they are scaling back their construction or business in an effort to reign in costs or cut losses.

THE FUTURE:

Housing starts are often seen as a “leading indicator” which gives clues as to which way the economy is heading. When housing starts rise, it tends to mean that the outlook on the future market is good as builders take several months (or years) to complete a unit. If the housing starts are falling, this is generally considered an indicator of a slowdown, downturn, recession, or possible crash (depending on the severity of the indicator). As long as housing starts are continuing their stable trend, it should indicate a relatively stable market in the future.

MY TAKE ON THIS:

I personally don’t like the trend away from single family dwellings into multi famly units. I think this indicates a problem with the market that the growth of condos is overlooking. Clearly, we have a lot of spare land in Canada (and still in the Greater Vancouver market) so there is no need (as in japan, for example) to always build high density. Also, with the fact in mind that multi-family units tend to take so much longer to show up in the stats, I suspect our housing start numbers are lagging in terms of accuracy. If I am correct about this, we will see a slowdown in housing starts, likely starting next spring and continuing until the market is out of whack – and yes, I do believe our BC market is slightly overpriced, although there is a very good value that you get by buying and living in BC.

That is all for now. As always, any questions, leave a comment or call / email me.