​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.

1. Home Equity Line of Credit (HELOC): A HELOC is a line of credit that is secured to the property and comes with a much lower interest rate compared to the rates associated with unsecured lines of credit. Depending on the lender, the available equity, and how the lender originally set-up the mortgage, a homeowner may be able to have access to a HELOC without visiting a lawyer or registering a new charge against the property. A HELOC is an excellent way to have immediate access to the home’s equity without having to pay any interest until it is used.
2. Refinance: If it will take a while to pay off the cost of the renovations, or if the mortgage was not set-up with the ability to easily add a secured line of credit, then a refinance could be a viable option. Up to 80% of the home’s value can be accessed, meaning the combination of the mortgage and the equity taken out cannot exceed 80% of the home’s value. The new mortgage pays out the original one, and any extra equity can be used to consolidate other debts or be taken out as a lump sum. Some lenders will let you set up a new mortgage, HELOC, and take out a lump sum up to the total of 80% of the home’s assessed value.

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:

1. Purchases with more than 20% down (at big banks… see below for other lenders)
2. Rentals
3. 30 year amortizations
4. Purchase prices over $1 million

 
Second, OSFI regulates only the chartered banks in Canada; so not all lenders are directly impacted by OSFI’s decisions.

1. Monoline lenders are mortgage financing companies that typically work with mortgage brokers, and these lenders are not regulated by OSFI. Some examples are First National, MCAP, Merix, and RMG. Credit unions are regulated provincially, and some provinces apply OSFI’s rules, while others do not. These lenders may decide to mirror the changes proposed by OSFI, but may not.
2. When homebuyers put down 20% or more with a monoline lender, the lender often pays for the mortgage default insurance themselves, and therefore at 20% down the mortgage is not considered uninsurable, meaning the client could still qualify at the insured qualifying rate of 4.79%.

 
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. 

​You may be seeing headlines talking about “rate hikes”, or “massive rate jumps”, and in my opinion those are over-reactions. However, several lenders have already increased their 5 year fixed rates this week (one went from 1.64% to 1.74% on Tuesday, and then last night to 1.94%). Other lenders went from 1.64% to 1.69% and stayed there. I still have several lenders that are at 1.59%-1.64% for an insured 5 year fixed term, however the writing is on the wall that the rates below 1.75% will likely rise a little bit. You may recall from some of my previous emails that I have said that 5 year fixed mortgages rates are tied closely to the 5 year Canada bond yields, and so prior to the pandemic if you asked me what would happen to rates, I would look at the bond yield activity and give you my prediction. Once Covid-19 hit, the relationship between the bond yields and fixed rates got a bit out of whack, but it is still good to look at when understanding rates, and get a rough idea of where rates are going.
 
The rough rule of thumb is that the “best rates” are typically 1.5% higher then the bond yields. This is because the lenders often buy the bonds for 5 years, and then use the bonds to fund 5 year mortgage terms. The lenders buy the bonds, and then typically tack on 1.5% (for their profit margins and risk), and that is roughly the interest rate they give the client. So if you look back at January 1, 2020, the bond yields were at roughly 1.5, and 5 year fixed rates were in the 2.89%-2.99% arena which would mathematically make sense based on their profit margins (1.5% plus 1.5% = 3%).

​If you look at the bond yields during 2020 (below) you will see that they hovered between 0.4% and 0.5% for most of the year. So add on the spread that the lender needs to bake in for risk and profits, then we would be roughly at 1.9% - 2% for 5 year fixed rates. Since summer that is exactly where rates have been, in that 1.74 – 2.14% range, and several weeks ago they dropped further to 1.59%-1.64%.
 
Now if you look at the bond activity in the last month, you will see that the cost to purchase bonds has doubled (if you want to know more about why this is happening, you can always call or email me, but I wont’ bore you with the details now), which would indicate the lenders need to increase their rates to keep their shareholders happy. With all this being said, I wouldn’t freak out. It seems to be a normal regression to the mean as there has been more and more positive news in North America lately (e.g.,  vaccines, political stability, and unemployment)
 
I think I’ve already shared enough, so I won’t go into details, but we don’t expect to see changes to variable rates (those are tied more closely to the BoC’s overnight lending rate, and the BoC has said they don’t intend on making significant changes until 2023).
​
Don’t hesitate to reach out with any questions,

Purchasing a home in Winnipeg has never been more challenging. In the early months of 2020 there was a lot of uncertainty regarding Covid-19 and the impact it would have on our lives. Many home owners didn't list their homes for sale that spring/summer, yet it became evident quite quickly that many Manitobans were still looking to buy homes; yet the inventory was very limited. Almost a year later the situation remains the same, and  prospective homebuyers are almost forced to compete in bidding wars.

Conditional Offer
One way that homebuyers attempt to have the most appealing offer is by having the fewest conditions, or the conditions with the shortest timelines. What this means is if your offer is accepted, you have a few days to satisfy a few conditions before you have completely purchased the home. For instance, many offers include an inspection condition or/and a financing condition, and will state how many days it will take to complete the inspection and financing. If the clients are not satisfied with the results of the inspection, or if they are not able to obtain financing,  they can back out of the deal during that window.

Financing Condition
It is still important to have a financing condition even if a client has been pre-approved. The pre-approval provides the buyers with a ballpark range of homes that their income and debt situation could support on paper. The property has not been evaluated, and with the current bidding war situation, homes are typically selling for well over list, and if the insurer or lender orders an appraisal, there is a chance that the appraised value doesn't support the purchase price (see my last blog post for more on this).. Once I have pre-approved clients, it isn't their income that is the issue, it is usually dependent on the property. The insurer (think CMHC) or the lender could ask for an appraisal, and if the appraised value is less than the purchase price, that is the number they will use for the approval, and the client would have to come up with difference between the appraised value and the purchase price in addition to their down payment based on the appraised value. If clients didn't have a financing condition then they would have to come up with the down payment and the additional money, otherwise they could lose their deposit and face legal consequences. 

Once an offer is accepted, this is what happens. We discuss the lender that is the best fit for the purchase, and then we send in the Offer to Purchase, MLS listing and Property Disclosure statement for the lender's review. We also send in a 90 day history of your down payment funds (government rules), a current letter of employment, most recent paystub, most recent T4, (or a two year tax history for self-employed individuals, commissioned sales, or individuals with fluctuating hours). The lender reviews the application (and sometimes documents) before sending off to the insurer if client is putting down less than 20% down. If the insurer approves, then the lender reviews the documents and lets me know if they need additional documents or clarification. If an appraisal is triggered, this can also add a few days, but as you can see there are a lot of moving parts, and having the bulk of documents gathered up front can speed up the process to hit a quick financing deadline. 

​Financing Conditions: I often get asked if financing conditions are necessary, and I will almost always say yes. I can pre-approve the client, but not the property. I can underwrite the file down to the dollar and pre-approve the clients, but mortgage brokers/bank employees can’t predict what the insurer or risk department at the bank will say regarding the home’s value, environmental concerns, or structural issues that the insurer might have record of.
 
With the bidding wars and purchase prices going significantly higher than City assessed value it is important to still include a financing condition, especially when clients are putting down less than 20%. When the client puts down less than 20% the insurer (CMHC, Sagen, or Canada Guaranty) will review the applicants and the property. If the insurer isn’t confident in the valuation of the home they could their own appraisal. If the appraisal came back short and the clients had a financing condition then at least they would be off the hook if they couldn’t get their mortgage in order. If the clients didn’t have a financing condition they would have to make up the difference between the insurer’s appraised value and the purchase price.
 
Example: Clients have 5% down payment

1. Purchase price: $400,000
2. Value determined by insurer: $370,000

In the eyes of the lender and insurer, the home’s value is $370,000 and everything would be set up at that value. The mortgage would be set up for 95% of the $370,000 value, meaning that the clients would have to put down 5% on the $370,000 and then make up the additional $30,000 out of pocket in order to purchase the house for $400,000. If they had the money then it could work out, but if they didn’t they would be in tough situation. When clients put down 20% then at least it is only the lender that has to review the deal, but in that case the lender may be ordering their own appraisal and the clients could still have to come up with more down payment then originally anticipated. 

Many landlords believe that they shouldn't report the income they generate from their rental properties in hopes of keeping more of the cash to themselves (and not the taxman). I am going to share a few reasons why it is necessary to disclose rental income to Canada Revenue Agency (CRA). Not only is claiming rental income necessary to satisfy tax law, but it can actually affect your qualifying ability when purchasing additional properties, and can benefit you in more ways than you might expect. 

1. Deductible Expenses and Taxable Income
Most landlords spend a large amount of money on expenses directly related to earning the rental income. Deductible expenses can reduce the taxable income and can have a significant impact on a tax return, but only if the landlord discloses their rental income to CRA. (I'm not an accountant, but here are some examples: advertising, insurance, interest on borrowed funds for the purchase, professional or management expenses, utilities, repairs, and maintenance).

2. Qualifying for Additional Mortgages
In some scenarios, not claiming rental income on your income tax returns can impact the approval amount when purchasing additional properties. To reiterate, in some scenarios not claiming rental income has no impact on qualifying for another purchase, but in a lot of scenarios it does. While there are many different lenders with their own unique lending guidelines and restrictions, I will speak to what I have seen, especially on insured purchases when a client with an existing rental property does not claim their rental income and is  looking to buy an additional property.

When qualifying for a mortgage, your debt service ratios need to be within a specific threshold (that varies on based on the lender, transaction, insurer, credit score, etc.). Basically, you can only have a  limited amount of monthly expenses compared to your monthly income. For example, the cost of all mortgage payments, property taxes, and condo fees (on all properties owned) have to be less than 35% (if insured through CMHC) of what the client grosses each month, or under 39% if insured through either of the other two insurers. Some clients with high incomes can qualify to hold all of their properties without factoring in any rent, and in those scenarios not claiming the rental income MIGHT NOT be a factor. However, if a client can't debt service holding their rental property (including property taxes and condo fees) and the new owner occupied purchase, then they need to show the rental income coming in to offset or reduce those costs. In order to use the rent most lenders will ask for a signed lease agreement and 3 months of bank statements showing rent deposits. In some cases the deposit history and lease agreement are sufficient, and other times the lender or insurer will want to see the previous year's tax return (sometimes two years) showing the rental income.

Claiming the rental income increases the lending options, and will give your client the most flexibility. Each lender has different policies, rates, and timelines, so having the most options available is ideal. Don't hesitate to reach out with any questions. 

The most common question I get asked from clients is, "what's the best rate". While rate does matter, choosing a mortgage product based solely on rate can be a costly mistake. All lenders calculate break penalties differently, and it is no wonder that big banks try to lure us in with 5 year fixed rates.  More than 2/3 of home owner's break their term early (average is 3.5 years) when they move and don't port, get divorced, refinance, or revert back back to renting. Fixed rates with mono-line lenders (dedicated mortgage lenders) are the safest fixed option, as they calculate the break penalty based on your actual interest rate, whereas big banks calculate the penalty using inflated "posted rates that are 2-3% higher than your actual rate. ​With all of the uncertainty in our current climate, now more than ever it is important to review lenders with more flexibility, smaller break penalties, and to review the flexibility that goes along with a variable mortgage. Click here to read about a client who lost her job and the bank charged her more than $30,000 to break her mortgage. 

After reviewing the questions below we can discuss the best rates available to the client. I hope you find this interesting!

1. Fixed or Variable?
2. If fixed, 1 Yr,, 2 Yr., 3 Yr., 4 Yr., 5 Yr., 7 Yr., or 10Yr.?
3. If variable, which lender? Each lender has different features and policies.
4. Do they want a line of credit now, or option in the future?
5. 20% down or less, can they reach 20% down? 
6. Portability between provinces?
7. Do they need the flexibility to put down large lump sums?
8. Who wants to be on title?
9. Will title be held in the name of a holding company?
10. Origin of the down payment (e.g., gift, investments, out of country, line of credit, etc.)
11. Are all applicants' income taxes filed and up-to-date?
12. Is there a commission, bonus or overtime component to the income?
13. Have they had a consumer proposal or bankruptcy filing?
14. If part-time, are hours guaranteed, do we have 2 years tax history?
15. Are there any debts that might not show up on one credit report but might on another?
16. Does the client own other real estate?
17. Was their previous mortgage insured (less than 20% down), how long have they owned it, is it a rental now, which insurer is it with?
18. Does it make sense to port the default insurance over to the new purchase if they are selling the other one? (there are top-up premiums on the new money)
19. Is the client aware of the legal fees and closing costs?
20. If a new build, does the builder need progress draws, if so, where is the property?
21. If a new build were there incentives included in the contract?
22. Was the property ever a grow-op or drug lab?
23. Are extensive upgrades planned?
24. Is this a fix and flip, rental, or long term hold?
25. Have any of the applicants been divorced, or ar in the process of separating? Do any of the applicants pay spousal or child support? Are they current with their payments?
26. Has the deal been sent in somewhere else? What did that lender say? What did the insurer say? Which insurer saw the deal?
27. Does the client have late payments showing on their credit bureau in the last year? How many? Why were they late? Which lender?
28. If the clients own rentals, are any of the condos? What are the condo fees? How much rent is coming in? Do they have deposit history and does the rent show on their tax returns?
29. Have any of the applicants had their employment affected by COVID-19?
30. Are any of the applicants on work visas or student visa? Have they been in Canada longer than 5 years?
31. Do they have established credit since coming to Canada?
32. How long do you see yourself living in at this home? 
33. Are any of the clients self-employed? Do they have two full tax years of self-employed income?
34. Do the clients own their own business? Do they T4 themselves?
35. Is the property an acreage? What town or area are they interested in?
36. Is this a refinance (equity take-out), switch/transfer, owner-occupied purchase, or rental purchase? How much equity do they have in the home?

As you can see, there are a lot of factors affecting a mortgage approval. Time and time again clients come to me after getting "pre-approved" elsewhere, and then having their deal declined when the deal goes live. If these questions aren't covered prior to a live deal, and if the documents aren't reviewed prior to a live deal, a mortgage pre-approval cannot be granted. Once I've covered these bases with the client they can rest easy know their approval is in stone. I hope this snapshot gives you a bit of insight into what goes on behind the scenes on a mortgage approval.




The majority of this list comes from a book called "Be the Better Broker V1" by Dustan Woodhouse (2015) who is the President of one of Canada's national mortgage brokerages. 

To be honest, I wasn't sure how the spring/summer would look when it came to my business. The spring started with a high volume of clients switching lenders to take advantage of low interest rates, and then the purchases started to pile up in June once some of the restrictions were changed in Manitoba. The summer and fall were both quite stressful due to the insane volume, but also due to several factors that made mortgage lending more difficult. 
 
Challenges in the industry:
1. Branches closed, or open with limited hours and limited staffing levels
2. Lawyers, appraisers, underwriters working remotely
3. Everything is slower with all of the above working remotely (lenders, lawyers, appraisers, insurers)
4. Limited listings has resulted in bidding wars and short financing deadlines, which increased the stress  levels based on points #2 and #3 

Positive changes in the industry:
1. virtual meetings that save clients drive time and often creates a more comfortable experience from the clients home
2. virtual signings for mortgage documents which has made it easier for clients with busy schedules and children
3. I am now using a secure portal for document collection where clients can drag and drop their documents which makes the experience more streamlined

With all that being said, things are different, but I am still able to provide the same tier of client support, just virtually. 

​Every several weeks I hear from a new client that had been pre-approved at their bank/credit union, but when they had an accepted offer, they were declined or told they needed to increase their down payment. This is usually because the pre-approval was based on discussions and not on documents (I may need to copyright that).
 
If a lender doesn’t underwrite the application up front, they wouldn’t know if the client is on probation, how they filed their taxes, or if they have outstanding collections. There are many types of documents that we review when underwriting a file: paystubs, letters of employment, T4’s, T1’s, NOA’s, 90 day history of down payment funds, and their credit application. We look at pay stubs, and make sure the year to date earnings are on track to hit what the job letter says. We review probationary periods, call the job letter to see what HR will say, and address any past collections or late payments.

How taxes are filed for commissioned employees, employees who work overtime, and the self-employed can have a significant impact on the pre-approval amount, so I ask the questions up front and review their tax documents before issuing a pre-approval. For example, a client may tell you that they make a $100,000 per year, but aren't aware that all of the write-offs and business expenses that reduce their taxable income to $55,000, means that their qualifying income for their mortgage application is now $55,000. The amount of house that you can buy with an income of $55,000 is drastically less than an income of $100,000 (e.g., 5% down and minimal debts lets say $240,000 compared to $420,000).
 
By reviewing everything up front ( make sure that we have taken out any of the guessing, and can confidently tell my client that they are pre-approved. I get all documents up front. I pull credit up front, I ask the “tough questions” up front. If they are paying spousal support/child support payments, I get those documents up front. I review the tax documents up front and coach clients on how to handle their current debts in order to maximize their purchasing potential. It may be more work up front,  but there will be no surprises, and the clients will have a concrete pre-approval. This will reduces the stress during the financing window because we will have the majority of the documents all ready to go.