Spencer Murray

Heed some advice on how to best set yourself up to maximize the mortgage and purchase price you are able to afford as a buyer!

When working on applications for clients, I need to take two debt servicing ratios into account. One is called the Gross Debt Servicing Ratio and the other is the Total Debt Servicing Ratio.

Your GDS is a ratio based on what would potentially be your mortgage payment + property taxes + heat on a monthly basis relative to your income amount. For qualifying purposes heat can range from $75 to $100/month depending on the property – this is not your actual heating cost per month. Typically, this ratio cannot exceed 39% (that means mortgage payment + property taxes + heat cannot exceed 39% of your income).

Your TDS is a ratio similar to GDS only it also takes your monthly debts into consideration (mortgage payment + property taxes + heat + debts) relative to your income. In most cases, this ratio cannot exceed 44% (that means mortgage payment + property taxes + heat + debts cannot exceed 44% of your income).

For qualifying purposes – a couple years ago, the government introduced a mortgage qualifying rate. For most mortgages to qualify, they have to be qualified at either the Benchmark Qualifying Rate or the Contract Rate (the rate I can get you) plus 2%, depending on the mortgage type and the lender. This qualifying rate is not the rate you pay, but the rate I would have to qualify you at. It’s unfortunate because it lowers the amount of the purchase price for home buyers by about 20%.

There are many moving parts when it comes to a mortgage pre-approval. Income, down payment amounts, current debts obligations and future debts obligations all play a major factor in the pre-approved purchase amount. Your credit score and history also sit closely on the back-burner ready to cause chaos should your score come in low. Each of these factors can be broken down further into smaller variables as well.

The most common roadblock I run into with clients, aside from everyone wishing they made more money, is current debt obligations – more specifically, car debts!Although you may be able to afford that ~$500/month car payment on paper without breaking the bank, it really dampens the mood when you want the most out of your home buying experience.

Let’s put this into perspective. Based on the ratios above, your overall monthly debt expenses cannot exceed 5% of your monthly overall income, that is – if we’re looking to maximize your affordability for a home. My advice if you’re looking to purchase a home – WORK YOUR ASS OFF! Short-term pain for long-term gain. Not only does this look better on paper for your application, it’ll help you pay off those debts, save more for your down payment and sweeten the reward once you move into your new home.

In sum, if you maximize your income earnings, minimize your monthly debts, save for a higher down payment and utilize your credit appropriately you’ll be able to confidently put in an offer on a home in this seemingly endless hot housing market!

I hate paperwork as much as anyone, but when it comes to the paperwork required for a mortgage application, there is no way around it!

Mortgage lending is becoming tighter and tighter with regards to lending risk, government regulations and guidelines set out by each lender. As with any investment, lending mortgage funds is a risk/reward scenario for the lender. For the borrower – the riskier they are to lend to, the higher their interest rate will be. Why are even the best applicants – individuals with good employment, good credit, minimal debts and a reasonable down payment – still subject to all this paperwork? Below are the various categories for which paperwork is required.

Income:

Lenders will always want to see a recent employment letter, recent pay-stub and the previous year’s T4 to prove income. If you’re self employed, they’ll want to see even more – your last 2 year’s T1 General Forms and Notice of Assessments (NOAs), business license/articles of incorporation, and possibly your statement of business activities or business’ financial statements. They need all these documents as proof on multiple fronts that your income is as stated in the application. Many of these lenders are requiring these income documents upfront – meaning when the application is submitted. My advice to you – FILE YOUR TAXES!

Down Payment and Closing Costs:

This also tends to be a paperwork nightmare. Most lenders require anywhere from 30–90 days of transactional banking history showing proof of down payment and closing costs when purchasing a home. I can’t stress enough – this is a must and cannot be avoided! Reason being – regulations set out by FINTRAC (Financial Transactions and Reports Analysis Centre of Canada) and OSFI (Office of the Superintendent of Financial Institutions) with regards to anti-money laundering and compliance. The lenders will question any abnormal, large deposits going into the bank accounts supplied to them. If there are any large deposits showing, be prepared to show where the money came from (either a relative’s bank account, or the receipt from the sale of a personal item etc.).

Other:

• Current Mortgage Statement and Property Tax Statement – if you currently own a home
• Signed Agreement of Purchase and Sale plus the MLS Listing – typically supplied by your Realtor
• Statements of debts to be paid out or proof they’ve been paid off – lenders will require to ensure the debt ratios are still in line
• Separation/Divorce/Child Support Agreements – this is for the lender to ensure agreed upon payments are being received or paid out on a recurring basis

Every mortgage is different. Every lender has different requirements. I’ve gone over the most popular paperwork that is needed by most lenders but if you’re applying for a mortgage, the lender may require more than what I’ve listed above.

When giving clients a pre-approval for a mortgage, I can only work with the information I have been given. If there are missing pieces to the puzzle, I can’t supply them with the whole picture. Pre-approvals can be fast, if you’re prepared.

I have come to use an online resource called Floify to manage most of the paperwork when dealing with clients’ applications. Not only does it save us trees, but the user friendly interface makes it incredibly easy for my clients to upload the specific paperwork I need to submit an application.

There is more to just a number when it comes to your credit score. With regards to mortgages, lenders will not only consider the score itself, but they’ll also look at the payment history, outstanding balances, minimum monthly payments, how many sources of credit are on the report, and the length of each credit account.

At minimum, lenders like to see what we call, “two years and two trades”. Even though a credit score may be within the ‘good’ or ‘great’ range, the credit may be considered ‘thin’. With thin credit, there is typically less than two years of credit history shown on the credit report, or there may only be one credit source from a major banking institution.

Lenders like to see credit sources from major banking institutions to prove history of repayment. These include but are not limited to credit cards, student loans, car loans etc. If you’re considering getting rid of a credit card, try and lose the card you have owned for the shortest amount of time. The cards you have owned the longest help improve your credit score (assuming you pay off the balances of course!)

Using credit is a double-edged sword! Make sure you plan your finances accordingly so you don’t end up wasting your hard earned money on paid interest!

“Your reputation is like a credit score. Everything you do can affect it.” – Michelle Parsons

I’ve had many people ask why they should get a mortgage pre-qualification or pre-approval BEFORE starting the search for their dream home.

But first – what is the difference between a pre-qualification or pre-approval? Let me explain. I use a mortgage pre-qualification to let my clients know what they should be able to afford based on their household income, current expenses, credit history and down payment amount. A full pre-approval goes one step further, in which, we submit an actual pre-approval application to one of our lenders.

A pre-approval gives you more confidence in knowing you’ll be approved for a specific purchase price when the time comes for you to put in an offer on a property with your Realtor. With a particularly heated housing market, you’ll know if you are able to place an offer above the listed asking price if a potential multiple offer situation were to arise.

With a pre-approval from a lender, we are able to hold onto that interest rate for up to 120 days. This leaves you with no fear of losing out on a decent mortgage interest rate, should the government raise interest rates between your pre-approval date and closing date. Another benefit – if mortgage rates fall before your closing date, so does yours!

If you’re planning on purchasing a home in the future, it may be best to sit down with a mortgage agent so they can advise you on the proper steps to take to put you in a good position when it comes time to search for that home!

What a better way to bring in the new year than by winning a London Wine and Food Show Package!

Win entry into one of London’s most popular events of the year! Simply connect with Spencer Murray Mortgages on Social Media to enter, winner will be chosen by Thursday January 18th at 7pm.

Any one of the following will gain entry to the contest – Multiple entries are allowed!

• A Facebook Share of this post
• A Facebook Page Like of Spencer Murray Mortgages
• An Instagram Post Like of this post
• An Instagram Follow of spencermurraymortgages
• A Twitter Like of this post
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• A Twitter Follow of S_M_Mortgages

“Couples Ticket” Package includes 2 Single Admission tickets along with 30 Sample Tokens for Saturday January 20th from Noon to 4:30pm only.

Given the recent introductions of new rules proposed by the government – I am compelled to write a post on how these changes are going to affect any homebuyers, especially those who have worked hard to save their hard-earned money, or current home equity, for a 20% down payment on their next purchase.

For those who are getting up to speed: the Canadian government has proposed new ‘stress test’ rules to those individuals purchasing a home with 20% down or more. Buyers will have to qualify at the Benchmark Rate (set out by the government – currently 4.99%) or the contract rate (set by the lender – the mortgage rate you would pay) plus 2.00%, whichever is higher. Currently, a decent mortgage rate with a 20% down payment is around 3.44% – That means, with the proposed stress test, these buyers would have to qualify at a rate of 5.44% if the rules were put in place today.

The results of these proposed changes will move even more potential buyers away from purchasing a home of their own or significantly reduce the purchase price they can afford.

Here is an example. Currently an individual, or couple, with a combined annual income of $88,000 could afford to purchase a $501,000 home with a $100,000 down payment, at a rate of 3.44% assuming they have minimal non-mortgage debts. With the proposed stress test changes, the same individual or couple would have to qualify at a rate of 5.44%, thus reducing the purchase price of the home they can afford to $411,000. That’s a 22% decrease in purchase price even though they have a 20% down payment towards the purchase of their home!

In my opinion, the government is changing the mortgage industry too quickly. The above example is only a couple of the explained factors that will change come January 1st, 2018 (or sooner). There needs to be more time in-between government changes and regulations to properly assess how the changes are truly impacting the Canadian housing market and trends. Changing the rules on mortgage approvals (October 2016) and then having a large, nation-wide (for the most part), housing boom doesn’t work for tracking the appropriate results.

By all means, feel free to reach out should you have any questions!

As the real estate market begins to cool down after an intense first half of 2017, here are a few points to consider when it comes to purchasing a home with inflated purchase prices.

Mortgage Lending

Lenders will only fund mortgages based on the purchase price or value of the home, whichever is lower. That being said, here’s how it works.

You see a home listed at the reasonable price of $299,900. This home checks all the boxes on the list of ‘must haves’. Convinced this is the home for you, you decide to put in an offer of $305,000 which is within your budget and the amount you were pre-approved for by your mortgage broker. You receive a call from your Realtor explaining that there is another offer on the table and they ask if you want to change your offer. You are determined to purchase this home so you increase your offer to $310,000 – still within your pre-approved amount but is stretching your budget a bit. You wait to hear back. You wait some more. The phone rings – it’s your Realtor – the seller has accepted your offer! Congratulations! Time to celebrate!

Your broker gets the ball rolling with financing and the first item the lender requires an appraisal on the property which your mortgage broker requests on your behalf. A few days go by and you receive a phone call from your mortgage broker. Not good, really not good. The appraisal of the property has come in low – considerably lower than anticipated, at a value of $285,000. Oh no.

To reiterate, the lender will only lend on the value of the home, in this case, the amount of $285,000. You are left with the decision to make up the difference between the purchase price and value of the home or walk away from the deal. Its a $25,000 difference – which is probably a lot more than your anticipated 5% down payment of $15,500. To purchase the home you’ve pictured yourself moving into, it’s now going to cost you more. You are required to come up with a total of $39,250 (the difference of $25,000 plus your 5% down payment of the appraised value, being $14,250) and an additional $4,275 in closing costs by the closing date, making for a grand total of $43,525.

Regardless of having those funds in a savings account or not, it will be a scramble to get the appropriate paperwork required and get the funds as a gift from an immediate family member, if needed.

Equity

Another factor you may want to consider if you are purchasing a home with an inflated purchase price is the equity in your home. If you purchase a home for an inflated price you run the risk that the other homes in your neighbourhood won’t sell at inflated prices leaving the value of your home the same as when the appraisal was initially done.

This leaves you at a disadvantage with your investment. You may be paying your mortgage, which increases the equity in your home, but because of the inflated purchase price it may take you longer to get to reach your financial goals with your investment. Your idea of a 5-year home may become a 10-year home pretty quickly.

Risk

In a heated real estate market, the competition can be fierce. Buyers are putting in offers with little or no conditions – the two biggest conditions being financing and home inspection.

These buyers run the risk of not being able to obtain financing, or potentially purchasing a ‘lemon’ of a home. This leaves them unable to walk away from the purchase without penalty, should they need to. They risk the loss of their deposit (which, at closing, is used towards the down payment of the home) and in rare circumstances, any potential legal consequences that may arise from backing out of a legal commitment.

If I can offer any advice, do your own due diligence before your purchase. Research the area to ensure the purchase price is reflective of the value of the home; use the judgement of your valued Realtor; have a trusted home inspector in to give you an honest opinion on the condition of your home; do whatever it takes to ensure you will be happy with your purchase.

My biggest fear as a mortgage broker is that my clients have any buyer’s remorse when it comes to making, what is most likely, the biggest purchase of their lives. I want them to enjoy the process of purchasing and moving into a new home.

Like any large purchase, beware of what you’re getting into to avoid future disappointment!

When it comes to mortgages, one of the most important conversations I have to have with my clients is whether to choose between a variable or a fixed interest rate. It raises the common question – which is better? Each has their own advantages and disadvantages. Do you choose a bit of risk when it comes to payments or more stability? My goal here is to educate you on your options for you to make an informed decision.

Variable Interest Rate Mortgage:

Choosing a variable rate mortgage is most dependent on your lifestyle, spending habits, income and risk tolerance. Will your budget be able to manage an increase in payments if interest rates are to rise? If so – you will be rewarded with the ability to save money over the amortization of your mortgage. A variable rate mortgage (VRM) usually has a lower interest rate compared to that of a fixed rate mortgage and this is what gives you the ability to save money relative to a fixed rate mortgage. The risk involved is when the Bank of Canada raises their lending rates causing mortgage lenders to raise their lending rates and thus, the allocation of each payment (between principle and interest) will change.

There are a few ways to mitigate the risk of a variable rate mortgage. Although you can’t control an increase in interest rates, you can certainly prepare yourself for them. Variable rate mortgages give you the ability to switch into a fixed rate mortgage at no cost to yourself. If you feel as if there will be an increase in interest rates, we can make the switch to a fixed rate for the remaining term of your mortgage.

Another way to mitigate risk is by choosing to have your mortgage payment higher than the minimum payment set out by your lender – because your interest rate is lower in a variable rate mortgage, your payments will be lower as well. This allows you to create a buffer zone in case mortgage rates are to rise. In other words, you’d be ahead in payments towards the outstanding balance of your mortgage and because of that, your amortization period would be shorter. TIP – look into accelerated payment options to decrease the amortization period of your mortgage.

Fixed Interest Rate Mortgage:

The biggest benefit of having a fixed rate mortgage is that you know what your exact payment will be for the term of your mortgage – assuming you don’t refinance or take out some of that hard earned equity. It is the most popular choice of mortgage types as it is more for the risk-free individuals. It gives you the confidence of not having to factor in for future fluctuations when it comes to budgeting your money.

Although there is no need to mitigate risk with regards to a fixed rate mortgage – there are still ways to get ahead and reduce the amortization. As mentioned earlier these come in the form of increased payments, lump sum payments or accelerated payments.

Penalties:

If, for some reason, you need to break your mortgage before the term is up (maybe because of an equity take out or debt consolidation), the lender will charge you a penalty to do so. They come in the forms of either a 3 month interest rate penalty or an interest rate differential penalty. With a Variable Rate Mortgage, the penalty will be a 3 month interest rate penalty. The penalties get a bit complicated when it comes to a Fixed Rate Mortgage – the lender will choose between a 3 month interest rate penalty and an interest rate differential penalty, whichever is the GREATER amount. An interest rate differential penalty often results in astronomical penalties (anywhere from 2x to 9x larger than a 3 month interest rate penalty) being charged on fixed rate mortgages, depending on the lender.

As a mortgage agent, I am stressing that you – as a buyer – are aware of your options and the specifics of your mortgage before you sign the dotted line. Although you may like the idea of being able to save money over the length of your mortgage, you may have more peace of mind knowing your mortgage payments will be consistent throughout the term of your mortgage.

This article is meant to inform you on the basic mortgage terms I use in my day-to-day work environment.

Conventional Mortgage (Uninsured)

The mortgage amount does not exceed 80% of the property’s value. Therefore, purchaser is supplying a minimum of 20% of the purchase price as a down payment.

Hi-Ratio (Insured)

The mortgage amount exceeds 80% of the property value. Purchasor is supplying a down payment of 5% to 20% of the purchase price. Lenders will require the mortgage to be insured to provide them with default insurance.

Gross Debt Service Ratio – GDS

The total of your Principle + Interest + Propety taxes (PIT), + 1/2 condo fees + heating costs. This value should not normally exceed 32% of your gross incomes.

Total Debt Service Ratio – TDS

The total of your above payments from GDS + payments to personal loans, credit cards, line of credits should not normally exceed 40% of your gross incomes.

Term

Fixed rate mortgages range from 6 month to 10 years – Interest rate will not change during term. With variable rate mortgages the interest rate will change based on changes to your Lenders Prime Rate, which are effected by the Bank of Canada’s Prime rate.

Amortization

The actual number of years that it takes to pay off your entire mortgage. Can be up to 25 years on hi-ratio (insured) mortgages and up to 35 years on conventional (uninsured) mortgages.

Mortgage Insurance (C.M.H.C./Genworth/CG)

Premiums are charged and added to your mortgage based on the loan to value ratio.

NOTE: Loan to value is based on the lower of the purchase price or the appraised value.

For example:

• $200,000.00 – Purchase price
• ($10,000 00) – less 5% Down Payment
• $190,000 00 – Mortgage Required (95% LTV)
• $7,600.00 – plus 4.00%
• = $197,600.00 – Total Mortgage Advance