Variable rate war…*YAWN*

Mortgage Tips Robert Ganzhorn 17 May

If you’ve been watching the news you’ll notice the big lenders are pulling out all the stops with a variable mortgage rate war to try to offset the lack of mortgages being funded this spring.

A few thoughts on this….

My brokerage has had these rates for weeks now. We can offer the big lender mortgages to you as well but those are likely more restrictive (fine print) than what we already have in our toolbox

For those of you that took a variable rate mortgage before this announcement and are stuck at a higher rate I feel badly for you. But you’re not really stuck – YOU SHOULD LOOK INTO BREAKING THAT MORTGAGE REGARDLESS OF HOW LONG YOU’VE HAD IT. Standard breakage for a variable mortgage is three months interest which may not be a huge penalty depending on the facts surrounding the mortgage. To top it all off there are lenders that offer no charge transfers and allow you to capitalize up to 1% of the mortgage balance to a maximum of $3,000 to cover those breakage fees. It’s almost found money in some situations.

Finally if you have a mortgage renewing within a 90/120 days hurry up and get a pre-approval or just break it now and execute on these offers.

Investing in a stress tested lending environment

General Robert Ganzhorn 17 May

investing sign

Has the stress test has resulted in funding declines for your investment portfolio? Whether a refinance or a purchase its definitely harder to get money in this environment.

Here are some items to consider which may make it easier to qualify under the stress test.

Property types

Consider purchasing  2 to 4 unit properties not just single family dwellings. These properties are still insurable and while a stress test still applies it’s the insurable stress test which is easier in some cases than it’s conventional counterpart. You’ll also get the benefit of better insured mortgage rates.

Multiplex properties (5+ units) are considered commercial and use a different underwriting framework – GDS/TDS ratios don’t apply and neither does the stress test. That being said they are individually underwritten and the underwriting framework is certainly no cakewalk but doesn’t include you personal income and obligations – the building is expected to carry itself.

If you’re a large market investor expand your horizons and look at smaller market properties that are less expensive. They may garner lower rents but the lower mortgage amount may make the purchase a possibility.

Income and obligations

Since you’re being qualified under the GDS/TDS framework manage the items affecting these:

  • For those of you that are business for self you may want to report higher income for the past year. Self employed income is typically taken as the average for the past two years so a higher income this year will boost the income on your mortgage application. And since self-employed tax returns aren’t due until June 15th you still have time to consider this option for this year
  • Consider reducing your rental expense claims to report more income
  • Your unsecured debt balances (credit cards and personal lines of credit primarily) are included in your applications as an obligation equal to 3% of the outstanding balance rather than the minimum payment. Consider moving those debts to fixed payment loans if it makes sense or even better pay them off if possible
  • Find ways to increase your down payment to reduce the mortgage amount. Liquidating under performing investments is an option as is partnering with another investor

Who are you borrowing from?

Use an alternative lender that allows for higher GDS/TDS ratios and/or allows for a higher percentage of rental revenue to be recognized in your application. Their rates are a little higher but for the right investment these lenders can provide a viable option.

Don’t always use a bank. There are still lenders out there with good rates that don’t stress test.

What property are you borrowing on?

A lenders that provide equity lending on principle residences still exist and typically these offerings allow for much higher ratio allowances. If your principle residence has a low LTV there are A lenders that provide good rates for these programs. Use the money borrowed to invest

Remember that each investors situation is different and needs to be assessed on a case by case basis.

A couple of notes on interest rates…

Interest rates Robert Ganzhorn 8 May

BNS increased its 5 year posted rate today, the last of the Big 6 banks to do so. I’d expect an increase to the qualifying rate as early as tomorrow to 5.34%, the statistical mode of the big 6 posted rates. Tomorrow you may actually qualify for less mortgage financing…..

To follow the Bank of Canada qualifying rate look here under series V80691335:

https://www.bankofcanada.ca/…/int…/canadian-interest-rates/…

Apparently almost half of all Canadian mortgages are renewing this year…in a rising rate environment at that. So the question for half of you is what term and what interest rate type will you decide on? The spread between fixed and variable rates right now is quite large making the variable attractive but also subject to Bank of Canada economic policy decisions (overnight rate can and go up or down affecting you directly). If you don’t mind the risk its certainly a cheaper option that the current fixed rates of equal terms. However there are some great fixed 7 and 10 year rates out there that would give you the predictability for an extended term on your largest expense and any fixed term over 5 years can be paid out on three months interest after the fifth year…the spread between these offerings and a 5 year fixed are not that large and eating a little more interest expense now may pay off over the term. The point here is to get your head out of the 5 year fixed mindset and think about other terms

If your mortgage is renewing in the next few months it may well be worth your while to consider breaking it to take advantage of what’s out there now.

Finally we’ve been in a cycle of unprecedented low rates for about 10 years now and we appear to be heading back to “normalcy”. To give you an idea of what that is exactly I’ve added a document to the files section that shows the conventional posted 5 year rate and the average lending rate for 5 year fixed mortgage (Thanks StasCan) since 1993.  Click on the link below to download it

25yrconvandavgratesV2