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.

Do mortgages exist that have no penalty but a guaranteed rate. The short answer is yes, but the reality is that they are not a product you want.

This video blog goes into this type of mortgage and answers the question for Canadians: “Can you have your cake and eat it too in the mortgage world?”

Enjoy!

Transcript of Video Blog:

So you’re wondering, can you have your cake and eat it, too? Can you have a fixed rate mortgage that has no penalty to pay it out? The answer, in Canada, not if you are going to be getting fully-discounted rates.

Some institutions do offer one-year or six-month fixed rates, but they are rates in the 6.45% and 6.55% range, and they are generally not something anybody opts for. The product does exist, but in Canada you really don’t get to take advantage of it.

Down with our neighbors to the south, the Americans are quite used to taking the long-term mortgages, 30-year amortizations and 30-year terms and having no penalties to get out of their mortgage. They can break it at any time they want.

This is a substantial advantage they enjoy, that their banking system allows. Now having said that, many Americans actually end up paying a fee just to set up a standard mortgage. While we in Canada, generally, don’t have to pay a fee unless there are some quirks or other things to do with your mortgage that don’t fit the bank “box.”

I, as a broker, don’t charge any lender fees, any lender or broker fees. I, as a mortgage broker, do not charge any broker fees on a standard residential bank mortgage.

There are times when we do have to charge fees, and a lot of it has to do with foreclosure bailouts and bankruptcies and whatnot like that, but that is not for the standard mortgage you are getting renewal or purchase or whatnot, and you qualify for it.

If you’re looking at those rate sheets and you’re wondering “Wow, the variable rate is great but I’ve still got to pay a penalty. I would really like a fixed rate, but I don’t want to be stuck for five years.” Unfortunately, you can’t have your cake and eat it too in this industry. I’m sorry. For the Mortgage Centre, I’m Rowan Smith.

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…

Have you ever wondered if rental restrictions, age restrictions, or pet restrictions affect financing options and availability? This video blog addresses this question.

Transcription of Video Blog:

Hi. It’s Rowan Smith with the Mortgage Centre.

As many of you know, I recently got a new baby puppy that I brought home. As I was bringing him back to my condo, I got to thinking to myself, “I don’t actually know if pet restrictions are in place in my building.” I had to go back and read my condo by-laws, and found that “yes,” there’s no problem bringing pets. You can have any pets you want.

Now, that’s very different. Some buildings have restrictions of size or number of pets or whatnot, but it got me to thinking, “What other restrictions are there out there, and how do they affect market ability of your home?”

There’s really three restrictions that you’re going to see; pets, rental restrictions, and age restrictions. Of those three types of restrictions, pet restrictions have really no baring on market ability of property. I’ve never seen one property sell higher than another, solely because of all things being equal, that the pet restriction was the reason.

Rental restrictions have a very material affect on your resell of your property. If you’re in a building that has a limited number of rentals or has no rentals allowed, and it’s often done because owners take better care of their property then tenants do, it’s just a fact of life. It is harder to sell those homes or they sell for less money, because the investor market is not able to buy it, able to put a tenant in it and earn a revenue off of it.

Age restrictions, the third type, do have a very profound affect on market ability. If you’re in a building that’s 40 plus, 30 plus, generally, they’re very marketable, and you can still finance them quite easily. Where you run into problems is when you’re in a building that’s 55 plus.

At that point, you’ve really started to narrow down the market that is going to be able to buy your property, and how many of that in that market want to live in an age restricted community. You see it a lot in seniors homes where they’re even older. They’re 65 plus, where they just want retirees.

So if you’re looking at one of these properties thinking, “This is a fantastic deal,” first off you’ve got to look at if you’re going to have kids, they’re not going to be allowed to live in the property. Strata council can enact fines against you, and they can block the purchase of something if they really so desire. Now, I’ve yet to see it happen.

But one more note on financing these properties, CMHC cannot insure them. So if you’re trying to put less than five percent down, you have to go with one of the other mortgage insurers. The reason CMHC can’t insure them is because it’s a form of age discrimination, and the government can’t be seen to support any form of discrimination. So if a strata council is preventing people from under 55 from buying it, they’re semi-discriminating. CMHC won’t insure it.

So you either have to have 20 percent down or you have to go to Genworth or AIG as the mortgage insurer. Genworth still has a very good market share in Canada, but AIG has shrunken dramatically and given the recent takeover, I’m not sure if they’re actually still conducting business or not.

So the message from all this is financing a building 55 plus can be difficult, financing it for 30 plus, 40 plus, we can probably get it done and not have very many problems. So, if you know somebody who’s looking in the age restricted building thinking it is a great deal and if it does fit their lifestyle, have them give me a call.

It’s Rowan Smith at the Mortgage Centre.

I get a call from an angry home owner at least once a week that is disgusted with the penalty their bank is trying to charge them. They always ask me, “there must be some way around this, isn’t there? What if I stay with them and give them my business, will they waive the penalty then?”

For the answer, you’ll have to watch the video blog below. Enjoy!

Hi everyone, Rowan Smith at the Mortgage Centre. I want to answer one of the most common questions that we get, “Will the bank absorb some of my penalty if I give them my business?” The answer, absolutely not.

The bank has a legal right to that penalty in exchange for granting you a fixed rate for whatever length of time they gave you — whether it was a five-year, or a three-year, or a one-year — if you’re attempting to break that term, they can’t break the term on you and suddenly jack the rates if interest rates have gone up. They have to just absorb it.

On the opposite end of that pendulum, is the fact that you have to pay a penalty if you break the term. Now if you’re with a bank — and I’m just grabbing “hypotheticals” here. If you’re with Vancity, and you’ve been with them for three years; there’s two years left in your term, maybe you got in when mortgage rates were 5.7%, something like that.

At the time it was a great rate. Now looking back, it doesn’t look like such a great move. There is no way for you to have known that. Now that said, you made the best decision you could at the point in time.

You’re now getting an offer from Scotiabank to go over there at 3.89 for a five-year. Vancity is offering you 4.14, but they’re giving you a big penalty, somewhere to the tune of $20,000. And you’re thinking “This can’t be right. This has to be wrong.”

It probably isn’t if your rates have come down dramatically. Your penalties are calculated on the greater of three months interest or the interest rate differential at most institutions.

The interest rate differential is kind of a complex formula, but it basically looks at how much time is left in your mortgage, what rate would the bank be charging on money for the remainder of your term today, and looking at, therefore, how much they are losing and what they are going to charge you for it.

If rates have moved considerably, a percentage point or more, maybe not even quite that high in some cases and depending on the length of time left in your term, your penalty could be the equivalent of 10 months of interest. It could be very, very high.

If you are getting a quote of $15,000 or $30,000, you may want to double check with them. Don’t expect the next institution who’s coming along to try to pick up that penalty. They just won’t do it.

In the 10 years I’ve been in banking and finance, I have never seen one institution pay another’s penalty to bring the business over. I’ve never seen it. It just has never happened. I have seen institutions, when you stay with them, reduce the penalty, but I can count the number of times on one hand. And all of it has occurred with one financial institution.

So if you are thinking your penalty is exorbitant, it probably is, but we can still determine whether or not it’s a fair penalty. We can push back and make sure that their calculation that they are doing for the penalty is in line with what they are doing for their standard mortgage terms.

Now what does that mean? You’ve got to get those standard mortgage terms. You were given them when you signed the mortgage at the notary or lawyer’s office, if you are in BC. It should be a very thick booklet.

It could be 45 to 110 pages, depending on your institution. In there is a very detailed breakdown of how to calculate the interest rate differential. Now you are going to have to go to their website and pull up some of their rates. Find out what rate they are using and it’s not going to be very simple. I can help you with that.

If you want to know if you’re getting a fair shake with your penalties, what options you have, maybe I can get a bank to kick you some cash back as part of the deal to help offset some of those costs. Give me a call. From the Mortgage Centre, I’m Rowan Smith.

We take a lot of calls from people looking to buy expensive homes (or even just average homes in Vancouver) who are being declined by their bank due to a “sliding scale” issue. If you are considering financing a high end home (anything over $750,000) you may run into a sliding scale at your bank, and the purpose of this post is to explain what they are, how they work, and why I should be representing you if you are thinking about looking for any financing over a million dollars.

Enjoy!

TRANSCRIPTION OF VIDEO BLOG:

Today’s topic is going to be high end homes and why they are really tricky for us brokers often to get people financing that they are looking for. The most misunderstood concept, and something that seems to bite high end buyers on many occasions is the concept of a “Sliding Scale.”

The way a sliding scale works is lenders, for the most part, don’t run into a sliding scale with the average home. If you are purchasing something that is less than $750,000 as a purchase price, you probably have never run into this. You probably have never even heard of it. However, for very high end homes, and we are talking homes that are three, four, five million dollars plus, this becomes a very real concern.

So here is how a sliding scale works: I’m going to use one of the institutions that we use, CIBC. They’ll allow you to finance 80% of the first $750,000 and 60% of the balance. So if you are looking at something that is $5,000,000 and you are thinking, “well, I don’t want to have CMHC fees, so I’d like to put 20% down,” when you go and look at that 80% overall financing is NOT going to be available through that bank that has a sliding scale. This becomes really prevalent with institutions like HSBC and some of the credit unions because they are smaller in size, they are a little tighter in terms of what they’ll accept and how much money they are going to lend on any one property.

Some of them will only lend 80% of the first $500,000 and 50% of the balance. So if you imagine a $5,000,000 home like some of the stuff in West Vancouver is way up there, and also in Point Grey. I’ve seen properties that are listed for $11,000,000. Let’s look at a $5,000,000 property. So they’re going to give you 80% of the first $750,000 and only 50% of the balance. So you are going to have to have a down payment of upwards of $2,500,000. Now, the number buyers that has that kind of money, is not very high. Most people looking at those properties are tying to put a block of 25% or 35% down. It is doable, but it is not doable through an institution with great bank rates across the board.

Often what we end up having to do is take whatever the maximum amount an institution is going to do – we’ll do that with, say, CIBC. We’ll do that, then we have to get a second mortgage and “top it up” and the 2nd mortgage may have higher rates, and may have a little more punitive terms. But, when you are dealing with ultra high end real estate the banks are going to be very conservative.

The reason is marketability. If you look at a high end home during a market decline, it is very hard to move them. I would say impossible. During the slowing down following the Lehman brothers meltdown back in October 2008 through maybe March of 2009 there were virtually no sales of these high end homes. It made life very very difficult for these sellers.

There is one property that one of my clients is looking at that was listed for $7,000,000 and it has come all the way down to (just over) $4,000,000. Now if you think about that, that is only over a one year period of time. So banks that loan something, even in their sliding scale, may have ended up “under water” even though they only gave a loan of 50% – 55% of the actual purchase price when that client purchased it.

If you or somebody you know is looking at buying something that is ultra high end, you’ve got to work with somebody who is used to dealing with it, knows how sliding scales work, knows where exceptions can be made, and where they can’t be. I can help you with that. I’m Rowan Smith for the mortgage centre.