28 Jun

Calculating Mortgage Payout Penalties

General

Posted by: Maria Solverson

It is very common for people to believe that the rate is the most important consideration when selecting a mortgage product. In many cases, this is a reasonable assumption, many times customer are deciding between mortgage products that are very similar in rate. In this case, as in most, understanding the terms of the mortgage are more important than the interest rate. It is unfortunate that too many Canadians find themselves learning about one of the most important terms which have a very negative effect on their financial situation when it’s too late, Payout Penalties.

When calculating a mortgage payout penalty, banks and broker lenders use the greater of:

  • A 3-month interest penalty or
  • The interest rate differential (I.R.D)

This is where the similarities end. Banks calculate their I.R.D. based on the discount off the posted rate for the nearest term at the time of payout, while the broker lender uses a re-investment rate. The bank discount is the discount you received at the time of approval.

The example that I am using is a mortgage with a balance of $400,000.00 at 2.79% with 26 months left on the original 5-year term. The 2.79% rate from your bank was a 2% discount off the original 5-year posted rate of 4.79%. The broker lender does not deal in posted rates as such.
Interestingly enough, the bank posted rate for the nearest term of 2 years was 3.24%, and the reinvestment rate for the broker lender was also 3.24%.
For the broker lender, the reinvestment rate was higher than the rate on the mortgage paid out, so the 3-month interest penalty is charged. The penalty worked out to $2,790.00.
The bank penalty was calculated using the original 2% discount subtracted from the 3.24% posted rate for a 2-year term. This resulted in the penalty being charged as the difference of 2.79% minus the 1.24% or 1.55% differential for the remaining 26 months of the term. The result was a penalty in the amount of $13,433.33 or a difference of $10,643.33. The banks not only get to charge the higher penalty but also get to reinvest the money at the higher rate. Win, win for the banks but lose, lose for the borrowers.
In the past three years, many Albertans had to sell their homes due to unforeseen circumstances. Do you not think that the $10,000.00 plus in penalty differences would have been better in the hands of these Albertans or your hands versus going to the Ivory Towers on Toronto’s Bay Street?
For all your mortgage financing requirements, please contact Jencor Mortgage Corporation.

22 Jun

5 Things to Consider When Buying an Acreage or Country Property

General

Posted by: Maria Solverson

HOW MANY ACRES ARE YOU PURCHASING? 

For conventional mortgages, lenders will finance a certain number of acres, a house & a garage. The number of acres that they will consider can vary based on the property location and the norm for that area. The minimum down payment can also vary based on the size and location of the land.  For example, a property that is close to a major urban area and under 10 acres would most likely be approved with 20% down payment. If it is a larger acreage 30+ acres and not within an hour of a major urban area, the minimum down payment will likely increase. 

For high-ratio / CMHC insured mortgages with a minimum of 5% down, they will approve and ensure the value of the house, garage and the `residential component` of the land. If the norm / average acreage size for the area is 20 acres, this is what they will approve in land value. If it is 160k – then this is what they will approve. However, if you purchase a 160-acre acreage and all of the acreages surrounding it are only 20 acres – CMHC will likely only give value to the first 20 acres of land, and the buyers will have to pay out of pocket for the value of the remaining land as determined by an appraisal.

It is typically easier to secure financing on CMHC insured Mortgages, and it is not uncommon for lenders to require the mortgage is insured even if the buyers have a 20% down payment based on the purchase price. If it is a large acreage, has outbuildings of major value or is a mobile or modular home – these are all things that could result in either a larger down payment requirement and/or mortgage default insurance. 

If there is no home on the property a mortgage is not available, and one would require a land loan. Land loans typically start at a minimum of 25% down payment and go up from there based on the location, size and value of the property, they also often come at slightly higher interest rates.

WHAT ABOUT POTABILITY? No mortgage unless there is good water! Potability reports are needed for all well water and will be requested either upfront with the lender approval or at the lawyers before closing.

WHAT ABOUT ZONING? Country residential is the easiest to finance. However, if the land is zoned Agricultural, but used as residential (no farming or commercial component), the lenders and insurers will consider this as well. Agricultural & Farmland that derives income is more difficult to finance. Lenders are wary as it is difficult to foreclose on agricultural land and if the Agricultural land has a farming component or income lender options become much more limited, and down payment requirements increase.

WHAT IF THE PROPERTY HAS OUT BUILDINGS? Mortgages are for a house, garage and land – and that’s all.  If the property has an outbuilding of value, the lender or insurer will often reduce the effective value of the property, and this will affect the down payment requirements.

For example, if a client is purchasing a small acreage for 800k , and there are a brand new large heated shop, horse corrals and an arena on the property that the appraiser values in total at $160k, this would be deducted from the purchase price in the lenders eyes bringing the effective value down to 640k (800k-160k). The buyer would then need to have a minimum 5% down payment based on the 640k  effective value ($32k) PLUS 160k to make up the difference (value of outbuildings) for a total of $ 192,000.  Even though the buyer is technically putting more than 20% down based on the contract purchase price, the lender and insurer would consider this to be financed at 95% of the value of the home, garage and land and a CMHC premium would apply. 

OTHER FINANCING FACTORS TO CONSIDER: You may need to allow extra time for conditions to be removed on acreage purchases as  CMHC appraisals and well water testing can cause delays. 

As always with mortgage financing, the buyer plays an important role. For strong clients, the lender may make an exception to their policies. 

Originally Published by Cory Lewis, Mortgage Advisor, Jencor Mortgage Corporation

14 Jun

Turn the house you like into the home you will buy!

General

Posted by: Maria Solverson

Have you found that perfect home but it needs a little TLC? We have access to a program that allows you to make the home you like, to the home you love!
Step One– House hunting with your realtor
Step Two– Make an offer
Step Three– Get quotes from a contractor or a home building store
Step Four– Mortgage Approval based on improvement quotes
Step Five– Move in and start home renovations
Step Six– Complete renovations and an appraisal is done to confirm work has been completed
Step Seven– Improvement funds are released to contractor/purchaser

Below is a list of some of the improvements that can be done under the Purchase plus Improvements program:
Add a new or update kitchen
Add a new replace a bathroom
Develop the basement for more living space
Update or replace the flooring
Add a garage
Add a media room
Add an additional bathroom
A new roof
A more efficient central air or furnace system
Add new siding, eaves or fascia
Replace or updating doors and windows
Add major landscaping

There are some specific requirements for the purchase plus improvements program ie, maximum dollars for improvements. But it could be exactly what you need to get you the home of your dreams. Please call to learn more details.

6 Jun

Steps to Getting Pre-Approved for a Mortgage

General

Posted by: Maria Solverson

Getting pre-approved for a mortgage should always start with a phone call to your Mortgage Specialist. Knowing what you are pre-approved for will help your realtor narrow down your search on your new property and make sure it fits within your budget. It will also help speed up the approval process because your broker will have all the paperwork on file.
Calling us first will give you confidence when you do find that place that feels like home; you are in a position to write an offer.
Mortgage qualification process is different than being pre-approved. Some banks pre-approvals are just rate holds and not document qualified approvals. A 60-second application shouldn’t make you feel comfortable about placing an offer to purchase on your home. I have seen clients declined at the time of purchase because they weren’t fully qualified.
The pre-approval process is a rate hold anywhere from 90 to 120 days. Many lenders have higher rates for pre-approvals, but when an offer is written, you are given the rate drop at that time. Having a pre-approval in place protects you in an increasing rate environment.
For the qualification process, your mortgage specialist will ask for your income documents. Having the following will help give an accurate picture of your financing.

When meeting with your mortgage specialist, it is a good idea to have the following handy:
1) Employment Letters
2) Two current pay stubs
3) 2017 & 2016 T4’s
4) 2017 & 2016 Notice of Assessments
5) Down payment confirmation
6) Mortgage statements (if you currently own)
7) Property Tax statements (if you currently own)
8) Lease Agreements (if you currently own)
9) 2017 & 2016 T1 Generals (if self employed)
10) 2017 & 2016 Company Financials (if self-employed)

Feel free to call me anytime to discuss your financing. I will give an honest opinion of what options you have.