Spruce Grove Mortgage Broker: Krista Lindstrom
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Will the housing market really drop 18%?

Last month Evan Siddall from CMHC (Canada Housing and Mortgage Corporation) made headlines over his bold predictions in his address to the standing committee. His most staggering points that I want to address are:

Oil driven provinces could experience home values to drop 9-18%

I like to quantify things, so what this means in real numbers is the average home of $300,000 has the potential to drop between $246,000-$ 273,000. Yikes. I am not sure how CMHC came up with these very specific percentages? We have never experienced a pandemic before so where do you model from? I fully agree we will see a drop in home values I, however, can’t personally quantify it.

1/5 mortgages will be in default (not voluntary deferral) come September

I again agree with what he is predicting. Currently Canada has 12% of mortgages in deferral (voluntary non payment due to Covid-19); CMHC is predicting two percent to move from deferral to default. Does that mean that ten percent of Canadians are back to work come September or perhaps were deferring even though they didn’t experience a loss of income?

If one in five mortgages goes into default, that is going to put a significant amount of homes into foreclosure. Those homes will hit the real estate market, and when you have a lot of supply with a lesser number of Canadians being able to qualify for a mortgage due to income loss, that equals price reductions. Adding to this crappy situation is the potential of the second round of Covid-19 that has the potential to rear its head as our weather starts to cool in September. It’s like the perfect storm.

It’s said that it takes approx. 60 days to form a new habit. If you have put your mortgage into deferral for 180 days, how have you been allocating the funds that would have gone towards your mortgage? Maybe the funds went towards necessities? Maybe you have re-allocated the funds and paid off a credit card or line of credit (smart thinking)? Or maybe you have been over-spending? I won’t name the automobile insurer – but there is an insurer that has written 6x more motor-bike policies this year than in years past? Is the Canadian Emergency Response Benefit $2000/m going towards a new motorbike or are the funds that were supposed to be allocated to the mortgage buying a new motorbike? I hope people are making good choices if they put their mortgage into deferral and can easily transition back to making the payment again despite potential new habits.

Although Mr. Siddall did not come right out and say it – he did elude to CMHC removing 95% financing from its portfolio of mortgage insurance. Let me give you a little background on CMHC. Typically, they are conservative in their statements to Canadians and they often allude to something months before they announce a change. Why would he say something so controversial if he didn’t think it was a reality in the future? Let me be clear – I don’t want 5% down payment to go away. It would have some impact on my mortgage brokering business but it would put some mortgage brokers and realtors out of business. The majority of first-time home buyers use this program. Did he predict the 9-18% price drop in housing based on knowing 5% down payment is going to be gone before the end of the year? Was this, his warning?

If we take a closer look at the deferral numbers, 69% of current mortgage loans that are in deferral are in the 90-95% loan to value category. Mr. Siddall spoke about the potential losses to this highly vulnerable category and an interest in protecting them. These are generally young adults who have been saving down payment funds for years. Let’s use our $300,000 purchase price model again. They have saved $15,000 for down payment and purchased a home. If the housing market drops by 10% these young people have the potential to lose $45,000 ($69,000 if 18% drop). Ouch. So, what do these young people do? If they don’t buy now there is a chance the 5% down will be gone and they will have to save 10% to get into the housing market. Or they buy now with 5% down and own their own home but could quickly be in a negative equity situation?

CMHC would insure this mortgage in the above paragraph. If there is a change in income for the individuals that chose to buy and they can no longer afford the payment and they can’t sell due to the negative equity that leaves CMHC holding the bag. Let’s make this personal. Let’s say your friend asks you to borrow $10,000 to buy something and they use the purchase as collateral for the loan you give them. There is a prediction that the purchase is only worth $8200 in the very near future. Would you lend your friend $10,000? I wouldn’t! And that’s the problem . . . how does Mr. Siddall not hurt the housing market but also protect first time home buyers?

In addition to that . .  . let’s remember that CMHC is funded by our tax dollars. If you don’t feel comfortable lending your friend $10K, should CMHC feel comfortable lending to first time home buyers at 95% loan to value? Maybe 90% loan to value is the answer? I don’t like, it but I would rather keep that money in my bank account, continue to save and rent and buy when I have 10% saved and the market is more stable. What is the correct answer: lose equity, or not be able to qualify if the rules change? Whether Mr. Siddall was or was not eluding to removing 95% financing, I think it’s fairly safe to say that we should anticipate policy tightening surrounding mortgages within the next year.

I mentioned in last month’s blog post that we were listing our house for sale . . . and guess what? It SOLD! Neil and I are renting and not buying. We have some upcoming circumstances in our future that aide in that decision but I am so afraid that if we buy a new home now, we lose $90K in equity . . . . Although it’s going to mean an extra move for us, we are going to rent. It gives me anxiety thinking about losing money when we don’t have to. Even if we pay $20,000 a year in rent, we are still ahead by $70,000 and we haven’t even taken into account property taxes and mortgage interest yet. There are not a lot of mortgage brokers who don’t like Mr. Siddall, but I may be one of the rare ones who think there may be an element of truth to what he said. I am a realist and although I don’t know where he got his numbers from, they must have come from some sort of predictive model.

Maybe the time has come that Canadians start doing some critical thinking about homeownership. I think moving forward we will see a housing market correction and a lower volume of homeowners but higher quality. In these times we see a lot of attention-grabbing ridiculous headlines and I encourage you to think critically and when in doubt, ask questions. I LOVE chatting about this stuff with anyone who wants to engage in a conversation with me. Don’t spread fear, but do act to protect your own finances and the finances of the young adults in your family.

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Should I be locking in my variable rate?

Times have changed in the mortgage industry. For the majority of my mortgage career my clients have been split about 50/50 between fixed and variable. Now, the vast majority of my clients are choosing fixed rates, and I get it. Never have I seen fixed rates lower than variable rates. For all of you sitting in variable rate mortgages, are you aware that you can convert to fixed mortgage with no penalty? The bigger question is, should you? Let’s discover whether this makes good sense for you.

PRO – Reduced Rate

If you timed the market just right you may have a prime minus one mortgage. Prime is 3.95 – 1.0 = 2.95%. Today the best discounted five-year rate is 2.69% so that’s a savings of about a quarter point. That’s not insignificant, and you can lock that in for the remainder of your term. That will equate to a couple of thousand bucks depending on the size of your mortgage. I’ll take reducing my mortgage by a couple grand! The savings will even be more significant if the Bank of Canada raises prime rate in the coming years. But what are the consequences?

CON – Penalty

If you had the experience of working with me you have likely heard me say, “what is your exit strategy?” If you are fortunate, and you actually make it to the end of your five-year term, then you won’t have to consider what your penalty is to break your mortgage. But statistically, six out of ten Canadians break their mortgage (usually around the three-year mark) and that triggers a penalty. I know, you’re not the one who gets transferred, or divorced, or loses a job, or has a spouse pass, or your port is declined– but it is happening to greater than 50% of Canadians.

If you convert to a fixed rate mortgage the penalty clause wording changes from three months interest to three months interest or IRD (interest rate differential), whichever is greater. And IRD is kind of like a swear word . . . it’s nasty. Every lender calculates IRD differently.

If your mortgage is with a big bank CIBC, BMO, RBC, Scotia, and TD then you need to be aware that those banks have the least favourable penalty calculation to the consumer. They calculate your penalty on the spread between benchmark (5.19% today) or posted rate and what your actual interest rate is. This can come up with some pretty nasty numbers (again depending on the size of your mortgage) but I have seen IRD penalties in excess of $20,000.

If you are with a monoline lender (only available thru a mortgage broker) they generally calculate the penalties based on prime rate (3.95% today) or contract rate and what your actual interest rate is. This is greater than three months interest but certainly less than the big five banks.

Why is this happening?

Let’s remember that fixed rates and variable rates are totally different markets. Fixed mortgage rates are driven by the bond yield – how much banks can borrow money for, and variable rate mortgages are driven by the overnight interest rate set by the Bank of Canada – economy based.

I (we) have a variable rate mortgage and we are not converting to fixed, and here’s why. We plan on moving within the term of our mortgage, and we like the flexibility, that if the timing does not work out perfect, the maximum penalty we will be charged is three months interest. So yes, it’s going to cost us some extra money in interest but it will cost us more if we convert and have to break a fixed rate mortgage and pay interest rate differential. Is this called opportunity cost?

Worth the risk?

Most people choose a variable rate because it’s typically priced half, to and entire percent less than a fixed rate mortgage. Combined with the maximum penalty of three months interest it’s often worth the risk of the fluctuating prime rate. I feel the upcoming Federal election has an impact on this unique situation and if I were betting this window is short lived. We are definitely in a quirky situation with fixed being lower than variable and that begs the question, is the risk-reward payoff enough to make the switch to fixed rate mortgage?

First Time Home Buyer Incentive

When the federal budget came out earlier this year and the First Time Home Buyer Incentive (FTHBI) was announced, “I thought what a piece of garbage – that’s not going to help anybody!” Now that September second is here, I have had the FTHBI at the back of my mind while I am working on client’s mortgage applications, and I think I am changing my tune a little bit?

FTHBI: Thanks for the job security, feds!

It appears that the FTHBI may assist a small number of individuals who would not have qualified in the past and now they are qualifying for a mortgage – or giving them a bit more buying power. It’s not as easy to qualify for a mortgage as it was prior to fed’s implementing the benchmark rate (when Canadian’s need to qualify for a mortgage two percent higher than what they are paying or the benchmark rate – whichever is greater) but it’s a small step in the right direction. And by small step, I mean baby step.

I attended a learning opportunity on the FTHBI last week, as there has been very little published on how Canadians actually qualify for this program. Turns out you have to go to the National Housing Strategy website and fill out the application, sign it, and sent it to your mortgage professional.  We have to do some things on our end, as your broker, as does the mortgage lender – but overall it does not seem to be overly difficult to apply. Maybe, still, a bit taxing for consumers to understand.

This follows suit with this government, as the last several changes to mortgage rules have made it extremely confusing, to both mortgage professionals and consumers. I guess I should say thank you to the feds for giving me a bit more job security? There are still a lot of unknowns that will have to fall out in the wash on the FTHBI but again it’s a start.

The Biggest Unknown

Probably the biggest unknown is whether they are going to allow the FTHBI to work in conjunction with the spousal buyout program? The rules say that if you have gone thru a divorce, despite owning a home in the past four years you still qualify for the FTHBI (providing you meet the other qualifying criteria). In addition, you are allowed to piggyback mortgage insurer programs with the FTHBI. Therefore, I am inclined to say you can do a spousal buyout and use the FTHBI as part of your down payment.

But . . . there is also some wording that says down payment must come from savings, RRSPs, or gift . . . the missing word here that I would like to see is EQUITY. When you are taking over the matrimonial home from your ex your down payment is equity, not the three listed in the FTHBI.

I have submitted my first mortgage application combing the FTHBI with equity as down payment and we will see how this throws down? It’s the grey area that is not addressed. I’m not one to not challenge rules, so I’m happy to be one of the broker’s who has a challenging application submitted to the lender for approval, ready to argue for my client on Tuesday morning, if required.

The Numbers

Despite the fact that the FTHBI may be helping some people qualify, there are some things that consumers need to consider once they are into the program. It’s likely best to explain this via an example. Molly buys a “new to her home” using the FTHBI and her purchase price is 400,000. Therefore, her FTHBI is $20,000 which comes in the form of an interest-free loan (in addition to her $20,000 in savings). This loan is registered to her title in second position. The FTHBI needs to be paid back on sale or prior to 25 years, whichever comes first.

Let’s assume Molly wants to sell her home in ten years and she sells for $480,000. This means she will payback five percent which is now $24,000 (($480,000 – $400,000) x 5% = $4000 plus the original $20,000). However, if she sells in a depressed market and she sells for $331,040 she only pays back $16,552 (($331,040 – $400,000) x 5% = -$3,448. $20,000-$3448 = $16,552) So, despite the feds calling it “interest-free” – it’s not technically “free” as they get their share of your market increase if the economy goes in the right direction.

Drawbacks

In addition, you will see increased legal costs for both your purchase and your sale, as an extra lien will need to be registered and discharged. The FTHBI will also limit your access to a home equity line of credit as it is unlikely that a lender will be interested in registering their security in third position.

My Final Thoughts

Overall, I am interested to see how much this helps Canadians? I anticipate it’s likely to help lower-income, lower price point buyers outside of Toronto and Vancouver . . . so I’ll keep it as a tool in my mortgage broker toolbox and hope I can use it to my client’s advantage.

What Is Collaborative Divorce?

What is Collaborative Divorce?

I am a Collaborative Divorce Alberta Association professional that works with people through the association is helping find collaborative ways to separate and divorce.

Not all separations are “nasty” and sometimes people find that they need to go their own ways from each other. Through the collaborative divorce process there are professionals that have the same goal as you. They want to help you and your spouse reach a fair divorce settlement, based on your priorities and without the potentially huge expenses and stress associated with a settlement reached in court.

How can I help?

In the process of separation and divorce I work with families and their finances to keep family homes through spousal buyout and/or find mortgages that suit them in their new homes. We work together to find what is the best options for everyone.

It’s imperative to examine your finances to determine if you can comfortably afford to buy out your spouse. If you’ve decided to remain in your matrimonial home, but the mortgage payments, taxes, monthly bills and upkeep push you to your financial limit, the stress that this will put you under may not be worth staying put – even for the sake of keeping something constant in your children’s lives.

As a mortgage specialist who works with divorcing couples, I’ve adopted three key priorities to ensure I serve every client to the best of my ability, including:

  1. Operating with integrity by always ensuring my clients receive the best mortgage product and rate to meet their unique needs – both now and over the long term.
  2. Providing solutions, support and answers while navigating unchartered territory such as separation/divorce, which ultimately leads to financial independence.
  3. Keeping a positive outlook regardless of the situation at hand to help keep clients in a positive frame of mind while they complete their separation/divorce and split the matrimonial home.

Please contact me if you have any questions and I also encourage you to check out Collaborative Divorce Alberta Association for further resources.

Mortgage Broker Spruce GroveMortgage Broker Spruce Grove

Retirement With A Mortgage

There’s a chance you read the title to this article and thought “I’m a long way off from retirement”. That’s okay, chances are you know someone (maybe parents or relatives) who could use this information, feel free to pass it along.

If you find yourself in the position thinking about retirement and what options you have with your mortgage, you’ve come to the right place. As an independent mortgage broker, I can provide you with many more options than a traditional bank. You might be closer to retirement than you think, and a good mortgage can certainly help you along the way.

Although it’s ideal to have your mortgage paid off by the time you retire, that isn’t always possible. Especially in today’s economy. More and more Canadians are carrying mortgage debt into retirement, how well they do it relies on the options they have!

Let me outline some options you have:

Standard Mortgage Financing

Standard mortgages work if you’ve got a steady income, decent credit, and equity in your home. There is no reason you shouldn’t qualify for standard mortgage financing. This usually comes at the lowest interest rate and best terms. Even if you’ve already retired, some lenders use pension and retirement income to support your mortgage application.

Reverse Mortgage Financing

A reverse mortgage allows Canadian homeowners 55 years and older to borrow money from their home with no proof of income, no credit check, and no health questions. A reverse mortgage is a fabulous mortgage solution that has helped thousands of older Canadians to enhance their lifestyle.

Home Equity Line of Credit (HELOC)

A line of credit secured to the equity you have in your home is an excellent tool to allow you to access money when you need it, but not pay interest if you don’t. A lot of Canadians like the idea of rolling all their expenses and income into one account.

To figure out which option is best suited to you, contact me directly. Together we can assess your financial situation, put together a mortgage plan, and then see it through.

Questions on your mortgage, or want to compare your mortgage to what is currently available? Please email me.

Mortgage Broker Spruce GroveMortgage Broker Spruce Grove

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