To Stay or Not to Stay

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To Stay or Not to Stay!

To Stay or Not to Stay is the question many home owners ask themselves when trying to decide whether to stay or not to stay with their current lender or to go to a new lender when its mortgage renewal time.

With mortgage interest rates at all time lows it makes more sense than not to consider switching your mortgage to a new lender who has a better rate than the rate your current lender can offer you at renewal time.

However most consumers do not consider this fact and do not know that it is not as cumbersome and even pretty well free to switch your mortgage from one lender to another. Many Banks and mono-line lenders have promotions that cover the cost of the client switching their mortgage to the new lender.

It is for this reason that you should consult with your trusted mortgage broker or agent, when considering to stay or not to stay with your current lender, so that he or she can assess your current situation and figure out if it is worth it for you to either stay or move your mortgage. Sometimes after doing the calculations the mortgage professional will advise you that it is not worth your time and money to switch and better to just stick with your current lender, and other times the mortgage professional will advise you that it is in fact beneficial for you to switch your mortgage to a new lender due to their lower rates and other promotions.

to stay or not to stay

The most obvious reason to switch

The most obvious reason to switch your mortgage would be for many the lower mortgage interest rate that the other lender is offering. But there are other reasons why people switch their mortgage, such as not being happy with the service levels of the current lender, and wanting to take advantage of the mortgage products the other lender has to offer that the existing lender does not have.

The most obvious reason to stay

Perhaps the most obvious reason to stay with your current mortgage lender at renewal time is because of the relationship that you have developed with them throughout the years of your mortgage with the lender. Some home owners who have mortgages with the big banks want to stay with them at renewal time to take advantage of the other bank products that they may potentially be able to get approved for and receive discounts on for staying with the bank.

At Trusterra Mortgage we are here to answer your questions and help you make the right decisions when it comes to your mortgage. Don’t hesitate to Contact Us!

 

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What is mortgage loan insurance

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Mortgage Loan Insurance

Source: Government of Canada Department of Finance

Mortgage loan insurance (which is sometimes called mortgage default insurance) is a credit risk management tool that protects lenders from losses on mortgage loans. If a borrower defaults on a mortgage, and the proceeds from the foreclosure of the property are insufficient to cover the resulting loss, the lender submits a claim to the mortgage insurer to recover its losses.

The law requires federally regulated lenders to obtain mortgage insurance on loans in which the homebuyer has made a down payment of less than 20 per cent of the purchase price (also called high loan-to-value mortgages). The homebuyer pays the premiums for this insurance, which protects the lender if the homebuyer defaults.

The Government backs insured residential mortgages in Canada. It is responsible for the obligations of Canada Mortgage and Housing Corporation (CMHC) as it is an agent Crown corporation. In order for private mortgage insurers to compete with CMHC, the Government backs private mortgage insurers’ obligations to lenders, subject to a deductible equal to 10 per cent of the original principal amount of the loan.

Since 2008, the Government has taken measured steps to strengthen the minimum standards for government-backed insured mortgages, including:

  • Requiring a minimum down payment of five per cent for owner-occupied properties and 20 per cent for speculative properties.
  • Limiting the maximum amortization period to 30 years.
  • Lowering the maximum amount Canadians can withdraw in refinancing to 85 per cent of the value of their homes.
  • Requiring that borrowers meet the standards for a five-year fixed-rate mortgage even if they choose a mortgage with a lower interest rate and shorter term.
  • Withdrawing Government insurance backing on lines of credit secured by homes.

These standards apply for mortgages on residential property with four units or less. They do not affect multi-unit buildings with five units or more.

 

Further Measures have been initiated by the Federal Government

The Government announced further changes to the standards for government-backed insured mortgages. These measures would apply to new high loan-to-value mortgages backed by the Government.

Limit the Maximum Amortization Period to 25 Years

The amortization period is the length of time it will take to pay off the entire mortgage loan. It is usually much longer than the term of the mortgage. A typical mortgage in Canada may have a term of five years or less during which a specific fixed or variable interest rate will apply, and the mortgage can be renewed at the end of the term.

The measure announced today will reduce the maximum amortization period from 30 years to 25 years for high loan-to-value mortgages, which are backed by government insurance. (Banks will still be able to offer 30-year amortization periods on low ratio—20 per cent or more down payment—mortgages, if they so choose.). For any given mortgage loan, a lower amortization period would result in a moderate increase in the monthly payment along with a significant reduction in the total interest paid over the amortization period. The following table illustrates the benefit of reducing the amortization period from 30 years to 25 years for a mortgage loan of $350,000.1

Interest Rate 30-Year Amortization—Monthly Payment 25-Year Amortization—Monthly Payment Difference in Monthly Payment—
25-Year vs. 30-Year Amortization
Interest Savings—25-Year vs. 30-Year Amortization
3 per cent $1,472 $1,656 $184 $33,052
4 per cent $1,664 $1,841 $177 $46,832
5 per cent $1,868 $2,036 $168 $61,765

 

Lower the Maximum Refinancing Amount to 80 Per Cent of the Loan-to-Value Ratio

Borrowers can refinance their mortgage and increase the amount of the loan secured against their home. The measure announced today will reduce the limit on refinancing from 85 per cent to 80 per cent of the value of the home. Reducing the maximum refinancing amount to 80 per cent follows the change from 90 per cent to 85 per cent in March 2011. Reducing the maximum loan-to-value ratio on refinancing will encourage Canadians to keep equity in their home and save through home ownership.

As an illustration, for a home valued at $350,000, refinancing at 85 per cent would allow the homeowner to access up to $297,500, whereas refinancing at 80 per cent would allow the homeowner to access up to $280,000. The lower refinancing limit means homeowners will keep an additional $17,500 in the equity of their home and at the same time save up to $5,200 in insurance premiums.

Limit the Gross Debt Service Ratio to 39 Per Cent and Total Debt Service Ratio to 44 Per Cent

There are two ratios commonly used to measure the risk associated with household debt: the gross debt service (GDS) ratio and the total debt service (TDS) ratio. The GDS ratio is the share of the borrower’s gross household income that is needed to pay for home-related expenses, such as mortgage payments, property taxes and heating expenses. The TDS ratio is the share of the borrower’s gross income that is needed to pay for home-related expenses and all other debt obligations.

Lenders must review a borrower’s debt service ratios before granting a mortgage loan. In 2008, the Government announced a 45 per cent TDS limit as part of the adjustments to the rules for government-backed insured mortgages. The measure announced today will limit the GDS ratio to 39 per cent and lower the maximum TDS ratio to 44 per cent. Setting a GDS limit and lowering the TDS limit will help prevent Canadian households from overextending themselves and reduce the number of financially vulnerable households.

Limit the Availability of Government-Backed Insured Mortgages to Homes With a Purchase Price of Less Than $1 Million

The measure announced today will establish that government-backed mortgage insurance is only available for a new high loan-to-value mortgage if the home purchase price is under $1 million.

Establishing a maximum allowable price will ensure that government-backed mortgage insurance operates the way it was originally intended: to help working families and first-time homebuyers. According to the Canadian Real Estate Association, the national average price (based on Multiple Listing Service sales activity) for a home sold in May 2012 was $375,605. This measure is expected to have a negligible impact on working families and first-time homebuyers as the vast majority of these borrowers purchase properties priced below the threshold. Borrowers purchasing homes priced at or above the maximum allowable price would require a down payment of at least 20 per cent.

Implementation of the New Framework started on July 9, 2012.

 


1 The mortgage loan amount used in the illustrative example represents approximately the size of the mortgage loan needed for an average house in Canada. According to the Canadian Real Estate Association, the national average price (based on Multiple Listing Service sales activity) for a home sold in May 2012 was $375,605.

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Second Mortgage – what is it, and how does it work?

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What is a Second Mortgage?

A mortgage, whether a first mortgage or second mortgage is an interest in land created as a security for a loan that the lender would give to the borrower for purchasing real estate. Majority of the people who purchase real estate, are in fact buying a residential property to live in and get what we call a 1st Mortgage. The borrower completes a mortgage application in order that they can be approved for getting a loan to buy their home.

There are instances where due to different factors, an applicant cannot come up with the entire amount of the down payment to buy a house (real estate) and the lender would only give up to a certain percentage of the appraised value of the property to the borrower. To come up with the difference, the applicant looks for another lender who is willing to give a Second Mortgage (loan) in place of the missing down payment amount in order to allow the applicant to get the first mortgage.

The steps and qualifications of getting a second mortgage are in line with, and similar to getting approved for a first mortgage, except that the application process will be somewhat more strenuous on the applicant due to the fact that there is a higher risk involved. Therefore the lender, who most likely will be a ‘Private Lender will want to make sure that the applicant is capable of handling an increased debt load.

There could be several reasons as to why one would apply for a second mortgage, but two obvious and common ones are because of debt consolidation and maxing out on the exiting property’s equity for investment purposes.
If your first mortgage is with one of the large chartered banks, they will most likely not allow you to get a second mortgage behind them from anyone else. The alternative option would be to go back to the same bank that your first mortgage is with and see if there is enough room to refinance the property to get more money out of it, or to get approved for a HELOC (Home Equity Line of Credit). In either case, once approved, you will have access to extra cash that you can use for the purposes you need it for.

If going to your bank for refinancing or getting a HELOC is not an option, then the next thing you can consider to do is to refinance the mortgage with other lender types that will allow a second to come behind their first mortgage, which in most cases would be that you get your first mortgage with a Trust company sort of a lender and they usually allow you to get a second mortgage behind them through a private lender. Sometimes the first lender will offer their own second mortgage solution.

— Process & Qualification —

– If you have an existing mortgage, check with your current lender if they allow a second mortgage behind their first.

– In both cases, whether the answer to the above is a yes or a no, you must complete the mortgage application in order that it can be evaluated and analyzed to make sure your income to debt ratio is strong enough to handle both mortgages.

– An appraisal needs to be done on the property that the mortgages will be registered to, for the purpose of confirming its current market value.

– The first lender will then make the decision on whether to allow a second mortgage to come in behind it and what the total loan to value of the combined mortgages can be. For example, they would say that the first mortgage will be 70% of the appraised value, and they will allow a second to be set up to 15%, making the total loan amount 85% of the appraised property value.

The reason that the application process can be more strenuous and harder to get approved for the second mortgage is because usually the second mortgage comes with a high ‘price tag’, meaning a very high mortgage interest rate plus lender and broker fees. So when your debt ratio levels are being calculated not only is your first mortgage considered in the calculation but also the second mortgage must be added, which will have a much higher interest rate, plus all your existing debts. What is happening now is that your total debt level has increased by a whole lot, but most likely your income has still remained the same; so the total second mortgage that you could get approved for might not be as much as you would think you could get.

— Cons of getting a Second Mortgage —

– Very high interest rate

– Expensive lender and broker fees

– Short term solution

– You can be taken advantage of and need to be careful who you work with.
Another matter that you should consider is that most second mortgage lenders want to get their money back by the end of the year. You need to plan for the future and make sure that you would be able to pay them back, otherwise known as a exit strategy. The second mortgage lender could consider extending the loan to you, but again it will be at an expensive cost, or they may stick to their guns and demand that you pay them back, and if you can’t then things can start to get ugly legally and financially.

— Conclusion —

Whenever clients approach us about the idea of getting a second mortgage we try to guide them away from it, and only go that route if necessary and when there is absolutely no other option available.

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