Preparing in advance of house-shopping is the best thing a homebuyer can do. There are several reasons why it is helpful to prepare in advance:
1. Clear understanding of the process: By talking to a mortgage advisor early on in the process, clients can become familiar with the offer process, the steps needed to secure a mortgage, and their options available.
2. Reduce the time needed for mortgage financing approval: When the majority of documents are prepared and on hand, the mortgage application can be submitted to a lender much more quickly, and the lender will be able to review the application and supporting documents up front, meaning the approval can be wrapped up in just a few days.
3. Reduced stress: The joy of a new home purchase can quickly turn into a stressful time when scrambling to find documents, discuss rates/lenders, ideal timelines, etc. Preparing in advance provides more lender options, more rate options, and an overall more enjoyable process.
The process starts with a simple phone call, and doing a bit of pre-work up front can save you money and energy later on.
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As a result of the pandemic, most homeowners are spending more time at home, resulting in an increased desire to make home improvements. Some homeowners have savings set aside for renovations, while many others have most of their assets tied up in the equity of their home. Home equity is the homeowner’s interest in a home, and the equity increases as the homeowner pays down their mortgage principal, and as the home increases in value. With mortgage interest rates at historical lows, here are two common ways that homeowners access their equity to complete home renovations.
A qualified mortgage professional will be able to advise if the timing to access the equity makes sense. Depending on the type of mortgage the homeowner has, refinancing requires can result in a prepayment penalty. The penalty amount is based on a combination of several different variables: the lender, the contract interest rate, the current mortgage rates, and the months remaining in the term. Most of the time the refinance transactions require an appraisal and a lawyer, however some lenders cover the fees or reimburse the homeowner after the transaction is complete.
While taking out equity can be beneficial, a qualified mortgage advisor can review the home and mortgage details and offer professional advice based on all available options.
You may have read headlines mentioning that OSFI (Office of the Superintendent of Financial Institutions) is considering a June 1 “hike” to the qualifying rate (i.e., Stress Test). Qualifying rates were introduced to mitigate the risk of mortgage default by ensuring that borrowers can continue to make their payments in the event that mortgage rates increase over the course of their term. The projected Stress Test rate increase would be from 4.79% to 5.25% (or the contract rate + 2%, whichever is greater), which is not much more than the 5.19% rate that was in place until spring of last year, and is less than the 5.34% that was in place prior to the 5.19% qualifying rate.
What does this all mean? For example, if client gets a mortgage rate of 2.09% today, they would have to be able to qualify for a mortgage with an interest rate of 4.79% (which is greater than 2.09% plus 2.00%). Many news outlets, mortgage agents, and others are making this sound like it is going to have a major impact on home-buyers, and in my opinion this is definitely not the case.
First, the potential increase to the qualifying rate from 4.79% to 5.25% would only be for uninsured mortgages. The change would reduce an average borrower’s purchasing ability by approximately 5%. Here are the types of mortgages that are uninsured:
Second, OSFI regulates only the chartered banks in Canada; so not all lenders are directly impacted by OSFI’s decisions.
Third, many people are asking if the qualifying rate will increase for insured purchases. Based on what I’m reading, and what I’ve seen, the proposed changes are designed mainly to cool down some of the major markets with the million dollar mortgages and offers coming in up to half a million over list. The majority of purchases in Toronto and Vancouver are going for one million dollars and up, and in order to cool things down OSFI is tightening up the lending guidelines on those uninsured transactions (i.e., over $1 million). The other bucket of uninsured mortgages that tend to be the riskiest to the lenders are those with 30 year amortizations, as stretched borrowers often need the 30 year amortization to qualify. The qualifying criteria already in place for insured purchases has already done a good job of limiting the risk of mortgage default on insured mortgages, and therefore I don’t expect to see a change in the qualifying rate for insured mortgage any time soon.
When qualifying a client for a mortgage lenders typically look at four key areas. The stronger a client is in each area, the likelihood of qualifying increases.
Paul holds a Master's degree in Business Administration, loves to golf, watch hockey, and drink black coffee.