Pre-Approvals...More Important & Less Concrete than Ever!

Going through the pre-approval process is more important than ever to both you and your Realtor, but the actual term 'pre-approval' is potentially misleading.

You may be pre-approved for a certain mortgage amount, however there are still a number of variables that can enter the picture once an offer is accepted.  That's why it is imperative that one always include a clause in the offer along the lines of 'subject to receiving and approving financing'.  (There are variations to be discussed around the specific wording.)

Often clients are reluctant to write the initial offer on a property without feeling like they are 100% pre-approved.

An understandable desire.  The risk, though, is that some may falsely believe that they have a guarantee of financing.  They don't.

A lender must review all related documents - not just those of the clients. but also those from the appraiser and the Realtor - as the property itself must meet certain standards and guidelines.

The pre-approval process should be considered a pre-screening - a first step only.

It does involve an analysis of the client's current credit report; it should also include a list for the client of all documents that will be required in the event that an offer is accepted.  Clients should also come away from this initial process with a  clear understanding of the maximum mortgage amount they qualify for, along with various related costs involved in their specific real estate transaction.  Equally important; with the completed application your Broker is able to lock in rates for up to 120 days,

Why won't a lender fully review and underwrite a pre-approval?

• Lenders do not have the staff resources to review 'maybe' applications - they have a hard enough time keeping up with 'live' transactions.
• The job you have today may well not be the job you have by the time you write an offer.
• If more than for weeks pass, all of the documents are out of date - by lender standards - and a fresh batch needs to be ordered and reviewed.
• The conversion rate of pre-approvals to 'live transactions' is less than 10%.

It is this last point that makes it so difficult to get an underwriter to completely review a pre-approval application as a special exception.

The bottom line is that a client's best bet for confidence is the educated and experienced opinion of the front-line individual with whom they are directly speaking - and that's their Mortgage Broker. This individual will not be the same person who underwrites and formally approves the live transaction when the time comes.

This disconnect between intake of application and actual underwriting of a live file makes having a ‘subject to receiving and approving financing’ clause in the purchase sale agreement so very important.

Perhaps the most significant factor in undermining the solidity of a client's pre-approval is the relentless pace of change of lending guidelines and policies – changes implemented not only by the Federal Government but also by the lenders themselves. It is very easy to have a pre-approval for a certain mortgage amount rendered meaningless just a few days later through changes to internal underwriting guidelines. Often these changes arrive with no warning and existing pre-approvals are not grandfathered.

It is absolutely worthwhile going through the pre-approval process before writing offers, and in particular before listing your current property for sale or accepting offers. This will give you a good idea of your maximum mortgage amount as well as securing a rate for you. It is a worthwhile endeavor.

Just be aware that aside from the key advantage of catching small issues early and securing rates, a pre-approval is not a 100% guarantee of financing.

But the good thing is, I can help you with this process!

Give me a call and we can discuss options (604) 290-4835 or lizreid362@gmail.com

Prime Rate Reduction...What Does This All Mean?

Shock & Awe! 

Yesterday turned out to be a pretty spectacular day for many reasons in the financial world for Canada! I hope you enjoy the read – I've tried to ensure that it is not too technical, but if you have any questions on what is outlined below, I’ll be happy to break it down further!

In a stunning announcement yesterday, the Bank of Canada (BOC) issued a statement that they were cutting their Key Interest rate by 1/4 point - down from 1.00% to 0.75%. This is the first change to the overnight rate since Sept 2010, and a decision that none of the 22 economists in a Bloomberg News survey predicted. 

Note: I was planning on sending this update out immediately after the announcement yesterday, but I wanted to wait to hear if the chartered banks (RBC, BMO, TD, etc) would be following suit in cutting their consumer Prime Rate down accordingly by 1/4 point, to 2.75% (from it’s current level of 3.00%); however there has been very little in the way of updates that this will happen. In fact, there is speculation in the opposite direction that banks may not pass along the rate cut to consumers, thus pocketing the difference for themselves. A tweet from Rate Spy suggested: “Just got official word (direct from TD) that it is not changing it’s prime rate 'at this time’.” -https://twitter.com/RateSpy/status/558298960629366784 

Obviously there are a lot of factors that would go into a decision like that from the banks, but as is the nature of a free market all we would need is one lender to make the call to adjust their consumer Prime Rate downwards, and it’s likely that the rest would follow suit - and thus mortgage rate wars could ensue. 

An interesting point to note for those of you that remember, is that if the banks choose not to pass on this rate cut to consumers, it wouldn't be the first time. The spread between consumer prime rate and the overnight rate was 175 bps (1.75%) back in November 2008, but then grew to 200 bps in December 2008 when banks chose not to pass on a rate cut then. So if they do it again this time, the spread would grow to 225 bps. 

If the banks do choose to pass the rate cut on to consumers, then that would be good news for those of you holding a variable rate mortgage or LOC product as you will see your rate drop - and thus your payment to follow suit as well. Less interest costs would mean it continues to be a great time to pay down your mortgage faster! I would suggest you keep your payments at the same level and enjoy the additional benefits of becoming mortgage free faster! 

It’s tough to predict what the future may bring, because as you all know from reading my updates in the past – 2015 was supposed to be a year that the BOC started to increase the overnight rate, not cut it. But interestingly now, Bloomberg financial markets are now pricing in a 100% change of another rate cut by April. "Source: https://twitter.com/RateSpy/status/557929467151400962 "

There could be a downside to all of this of course. It’s very likely that banks would reduce the spread on their variable rate mortgage discounts. That means that we could potentially see variable rate mortgages reduce from their current level of Prime -.60% (the current average variable mortgage discount). The last time we had a big drop in prime rate, we did see the spreads on mortgage rates change from as low as Prime -.90%, to Prime +.60% within a few short months. It’s all very early on at this point, but there is a very real possibility of this as it would be harder for banks to hit their profit margins. So if you have any interest in securing a variable rate mortgage, it would be a good time to discuss this.

Lastly - one of the most interesting things to happen yesterday, is that it was completely overshadowed by the news of the BOC rate cut, but the Canada 5-year government bond yield dropped below 1.00% for the first time ever in history. At it’s lowest point during the day, it hit 0.799%! Bonds are what our fixed rate mortgages are priced off of, and if these continue to drop (or even stay at the deflated levels they are at) then we can expect further rate drops on the 5-year fixed mortgage rates. Currently the lowest unencumbered 5-year fixed is 2.89%, but it’s worth watching what the next few weeks bring - as I could see this dropping lower should things continue on the path we are on. 

So is it time to start talking about locking in, or is it time to start looking at going variable? I would love the opportunity to discuss this further with any of you!

Some great articles to read on what happened yesterday, and what to expect moving forward:

#1)  Canadian Mortgage Trends 

#2) Rate Spy

As always, I am available at anytime to discuss, plan, help, and listen to your questions, concerns, and feedback. And please forward any of my blogs to anyone who you know would be interested in receiving it, because your referrals of friends, family, and co-workers are the life blood of my business!  

Affordable Housing?

Recently I was reading a blog posting on "Comparing Home Costs by City" from one of my favorite Canadian women bloggers Fabulously Broke in the City and it occurred to me that one of the common mistakes that people make is getting in over their heads with a large mortgage, because they may perceive the home purchase cost as cheaper in comparison to others in their city. 

DO NOT get caught up in the real estate web if you haven't done your homework first!  The biggest mistake that most home buyers make, is basing a purchase decision on the market conditions and not on their own personal situation.

By your personal situation I mean that if you are making $30,000/year and are expecting a raise soon, don't count on the raise until you see it.  Also, consider any updates or immediate repairs you may want/need to do on the property you are buying...where will that $$ come from?  Another thought is kids...are you wanting to have them in the next 5 years OR are they teens headed for university soon and are you thinking about helping out with tuition?

As a Mortgage Broker, I generally always ask the client if the rent or mortgage payments that they make monthly are working for them, or could they foreseeably budget more without it turning into a large sacrifice.  You see, you may be "pre-approved" for a certain $$ figure mortgage based on your annual income, but if you don't check the monthly mortgage payment cost, you may setting yourself up for disaster!  ALWAYS check to see what mortgage payments are on a pre-approval BEFORE going house hunting and committing to a purchase on a property, only to find out that the payment may be more than double what your current rent payment is now.  YIKES!

There is nothing worse than the reality that you are house poor, and strapped into a mortgage that is for a 3 or 5 year term (so there is usually a penalty involved to get out of it before the term expires).

Think about what your lifestyle right now is like...consider where you spend most of your $$, and then ponder the thought of if things were to change with your income or spending habits, could you still manage?  Only you know the answer to this question.

 Liz

Should You Skip A Mortgage Payment?

Lenders are advertising the option of skipping a mortgage payment more often these days – with one major bank even creating a TV ad!

But unless this is your only option, it’s not recommended that you skip a payment because, like most ads that sounds too good to be true, this option is as well.

The banks want you to think they’re advertising the option to skip a payment to do you a favour. But it’s important to realize that lenders are in the business of making money. They’re not going to create an ad that doesn’t benefit them in the long run.

And it’s not like you can simply choose to skip any payment at will when you need it most. You actually have to prepay your mortgage in order to take advantage of this mortgage vacation option.

You can miss a regular mortgage payment as long as you have already prepaid that amount by doubling up any mortgage payment, increasing your mortgage payments or making lump sum payments. It’s important to know how much you can prepay each year before making extra payments – this varies from lender to lender.

And if you’re going through the trouble of prepaying your mortgage, you want to make the savings work to your advantage by actually paying your mortgage off quicker – not diminishing those savings by taking a mortgage vacation.

The number of eligible payments covered by your payment vacation will be based on a combination of your prepaid amount and your current regular monthly mortgage payment. There is also typically a maximum payment vacation permitted per mortgage term, regardless of how much you have prepaid your mortgage.

Other considerations to think about when looking at the mortgage vacation option include:

·  Interest is capitalized (ie, interest is added to your outstanding principal balance)
 

·  Borrowers lose the benefit and interest cost savings of prepaying their mortgage once they use the mortgage vacation option

If you happen to already be in arrears on your mortgage, you can’t take advantage of this option.

It’s always important to read the fine print and ask questions when using a tool advertised by your lender. Better yet, speak to your mortgage professional – we know the ins and outs of all the bank offerings and can help advise you on your best options.

As independent, unbiased mortgage professionals, it’s our job to show transparency to ensure you have the right security, product, term and rate for your mortgage needs at the lowest overall cost, and with the most control in homeownership for the security you deserve.

As always, if you have any questions about the information above or your mortgage in general, I’m here to help!

~ Liz  604-290-4835 ~

Pre-Approval or Rate Hold...what is the difference?

Due to the sheer size of content in this blog I have also created a vlog that you can watch on my channel on YouTube.

Everyday I speak to people about a mortgage and usually many are confused as to the different financial terms used within the banking industry.  A perfect example of this confusion is prior to purchasing a new property, the difference between getting a "pre-approval vs a rate hold".  Everyone tells new home buyers that they should "get pre-approved", but what does that mean, and how are you really to do this?

The difference in terms is vast and hence why I feel it an important topic to discuss.

Here is what typically happens...you wander into your bank to do some banking activities and you remember about that "pre-approval thingy" your friends/family have told you to get.  You ask the bank teller non-nonchalantly "what are your mortgage rates right now"?  Immediately you are told that it would be best to speak to a bank Mortgage Specialist and well, look at that, they can see you in the next few minutes!  You are escorted into an office and asked a series of questions about your income and debts (which many times most people cannot pull exact #'s from memory, or for that matter, remember their spouse's income & debts?)   From the information provided, they do up a quick "rate-hold" for you so that you don't miss out on that special deal they are offering.

You think you are "pre-approved" and this is where I say to you...Uh Uh Uh, MISTAKE, you only have a rate hold!

Rate hold's essentially are a guaranteed interest rate, for a typical owner-occupied property, that the bank is willing to hold for you for anywhere between 90 and 120 days.  The lender usually bases the rate hold on your total income, less your basic debts you have disclosed to the bank.  Problem is, there really has been no due diligence done to ensure that you actually qualify for this rate, or that it is for applicable the type of the property you are wanting to buy.  This could potentially be a real eye opener at crunch time, when you have an offer on a property and the bank is telling you, sorry, you actually you don't qualify for this low rate.   WHAT? 

There are many things that can cause a bank to deny your maximum mortgage amount that you thought you qualified for with a "rate hold".  Some examples are:

1. Your debt load has increased since you last spoke to someone regarding financing
2.  The property you want to buy does not qualify for the rate they held for you (i.e. rental property, mobile home, condo that has building envelope "issues", etc.)
3. The bank's lending criteria has changed and they no longer provide the type of mortgage you need (i.e. low down/0% down financing, self-employed stated income mortgages, etc.)

This is where people are shocked by the process and sometimes feel trapped into just taking whatever will work in order to not lose the house they have fallen in love with.

Now a true "pre-approval" is one where you sit down with a Mortgage Broker or bank Mortgage Specialist, with all your income paperwork proof (i.e. 2 year's recent tax returns or notice of assessment summaries, all your current debt information - car payments, credit card bills, etc) and you sign a consent form allowing the Broker to pull your credit report.

From this total package that is made up for you, the Broker can determine your credit worthiness.  This is so much more advanced for serious buyers, so that if you are actively looking to buy in the next 3 to 6 months, you know where you stand with your financing.

Many Brokers will also provide you with a written letter for your Realtor to see so that they know exactly what you can afford.  These pre-approval letters are time-sensitive (rates change all the time so the letter will typically have an expiration date on it).

Now some people ask, "why should I allow the Broker to pull your credit now"?   Well this is simple, really you don't want any surprises when it comes time to having the financing go through and it also offers you the ability to know if you need to clean up some of your debts before purchasing. 

I have many times pulled people's credit reports to find that there are things on there that they were not aware of on their credit report (i.e. outstanding child support payments, utility bills from 4 years prior, etc).  I have found that if you face things head on as soon as you are aware of them, you have a far better chance of improving your credit score to qualify for the best rate possible.

A BIG side note I would like to offer you regarding credit...if you go to the bank and have them pull your credit report it is called a "hard pull" or, in effect, will lower your credit score by as much as 5 points for up to 6 months.  If you go to multiple banks yourself to shop rates, and give each bank the permission to pull your credit score, you can substantially reduce your credit score and therefore mess up your good credit.  Many people do not realize this.  

If you go to a Mortgage Broker we do what is called a "soft pull" or a basic credit check that does not affect your score.  We can then use this credit score to share with multiple lenders OR to coach you on the best way to improve your rating.  In effect, a Mortgage Broker does offer you a far better way to shop for the best rates, without ruining your score and potentially your interest rate savings.

There are so many things to think about when buying, but having the proper information from the start with little to no surprises during the purchase process, can make everyone's life so much easier.

Let's face it, no one wants to have a last minute fiasco happen on one of the largest purchases you will ever make.  Spend the time to make sure you are prepared when the time comes and you find the perfect home!

Happy house hunting!

Liz
    

Sexy, Smart Mortgage Advice

Bet you never thought the words "smart", "sexy" and "mortgages" would ever be used in the same article, but in my blog I am going for it :-).

Every day I converse with people regarding their mortgages and whenever I bring up the subject of extra payments most people's eyes glaze over.

As a Mortgage Professional I see how people "manage" their $$ and it is not always a pretty picture.  So many people have been there...credit cards are building up because they are paid at their minimum and then a new car is bought...YIKES!  Not the best way to get ahead.

Smart, sexy money advice to you is live within your means and try to pay off your larger debt purchases (like a mortgage) faster!  

"How" you may ask?

It is easier than you think, but it does take some work.  Nothing good comes for free.

Start with an accurate household budget. Mint is a great way to start a budget with help and be realistic and include such things as "entertainment" and "coffee/snacks", etc.

Now, look at where you could possibly save $$ by cutting back.  Do you really need a designer coffee everyday...could you instead just buy a regular brew or better yet, make it at home?  

With this new "found money" you can apply it to your mortgage in a way that will save you hundreds, if not thousands of $$ over the length of your term. 

Also, consider another income source that you may have but not factored in, such as your yearly bonus or tax return $$ as a way to come up with the extra payment.  It is well worth it as shown below...

Here is an example based on a mortgage amount of $300,000 & a monthly mortgage payment $1,426.56* (*based on a 5 year fixed mortgage rate of 4.00% & a 30 year amortization).

• Total interest paid in 5 years = $56,791.31
• Total principal paid in 5 years = $28,802.29
• Balance at maturity of mortgage rate = $271,197.71

Here is the switch, for starters, consider taking a bi-weekly payment instead of a monthly payment.  It is slightly more $$ commitment to be paid, but once you get used to the payment it is easy.  Now the money savings starts...


Comparing the above mortgage amount of $300,000 & an accelerated bi-weekly mortgage payment of $713.28* - which would have you automatically make 2 extra payments/year...BONUS! (*based on a 5 year fixed mortgage rate of 4.00% & a 30 year amortization)

• Total interest paid in 5 years = $55,958.05 (difference of $833.26)
  
• Total principal paid in 5 years = $36,768.35 (difference of $7,966.06)
  
• Balance at maturity of mortgage rate - $263,231.65 (difference of $7,966.06)
• Reducing your mortgage amortization to 25 years and 9 months from 30 years!
  

Where the numbers really get interesting is when you add an extra payment of $100/month or $1,200/year, every year, to your regular payment.  The savings is not immediate but in the long term scheme of things it is HUGE. 

Over the 30 year amortization of the mortgage with just making those $1,200/year payments in the first 5 years, you would save an additional $7,164.30 in interest AND would reduce your mortgage to 20 years and 4 months!  Pretty interesting stuff.   

This is how people pay off their mortgage faster and save $$ in the process.  


The only down side (if you even want to call it that) is that during the original 5 year mortgage term, the extra payments cannot be used as a "emergency" payment if needed.  That extra payment money is applied directly to your principal and the benefit comes after the first 5 year term is up.  This is when the bank calculates your new mortgage payment (with new interest rate) for the new term, on the lower principal mortgage amount.  This lower mortgage $$ needed will keep your new payment down because as rates rise (which we all know they will) things should still be affordable for you to make ends meet.  

Food for thought and certainly smart money management!

Remember, as old Ben Franklin says..."If you want to know the value of money, try to borrow some".



Liz