December 13, 2015
Feds Tighten Mortgage Rules for Homes Over $500K
The federal government is expected to tighten mortgage rules in an effort to cool the red-hot housing markets in Toronto and Vancouver, CTV News has learned.
The new regulations will increase the minimum down payment required to buy a home for more than $500,000, with portions beyond that amount requiring a 10 per cent down payment. The down payment on the first $500,000 will remain at five per cent.
For example, a home costing $700,000 would require a $45,000 down payment – a five per cent down payment on the first $500,000, added to a 10 per cent down payment on the remaining $200,000.
The regulations are expected to take effect in early 2016.
Buyers shopping for homes below the $500,000 mark will be unaffected by the new rules.
The announcement is expected from finance minister Bill Morneau sometime Friday morning. The government is expected to stress that the new rules are designed to foster equity and dissuade cash-strapped buyers who may be seduced by low interest rates.
The decision is based off research by the C.D. Howe Institute, an independent think tank.
The move is expected to take pressure off the Canada Mortgage and Housing Corporation (CMHC), which offers mortgage loan insurance for properties valued below $1 million.
Since the 2008 recession, the federal government has made it more challenging for Canadians to obtain CMHC-insured mortgages.
For homebuyers with a down payment of less than 20 per cent, the government decreased the maximum amount of time allowed to pay off a mortgage to 25 years from 40 years.
The move was intended to dissuade borrowers from making riskier purchases and instead encourage them to invest in less expensive homes.
August 12, 2015
How Lenders Calculate Debt Ratios On Rental Properties
Not all your rental income is used to lower your debt service ratios...
From Ramona King, Senior Editor of MoneySense Magazine
In a previous post I talked about the basics of mortgage debt ratios—the calculations lenders use to determine if you qualify for a mortgage. This prompted this reader question:
Q: If I own a rental property, which debt ratio does that get included in? GDS or TDS or both? In other words, which debt ratio do you add the rental property mortgage payment, rental income, taxes and heat to?
A: Good question. While the short answer is TDS (the total debt service ratio), the mechanics of how a rental property is assessed when applying for a mortgage are important. As such, I thought it would be a good idea to provide a brief explanation of how lenders use rental property income and expenses when you apply for a mortgage.
In general, lenders will apply two calculations when examining a rental property:
Debt Service Coverage ratio
This is calculated by dividing the Net Operating Income (all rental income minus all reasonable operating expenses) by the Debt Service (cash required during a specified time period to cover the payment of interest and principal on a debt). For example, if your property’s rental income is $2,000 each month and it costs you $500 in expenses along with a $1,200 monthly mortgage payment, then your DSCR would equal 1.25 ($2,000 – $500 / $1,200).
Most lenders want to see a minimum 1.1% return on a rental property—so for every dollar you spend on the rental property, you earn at least $1.10 in income.
Rental offset rules
The lender will use 50% to 70% of the rental income to offset the principle, interest and tax mortgage payments (PIT) you make on the property. So if your property earns you $2,000 per month, the lender will only account for $1,000 to $1,400 in income to offset the PIT payment. To see how this works, let’s assume PIT payments equal $1,425. Since you earn $2,000 in income, and the lender uses a 70% rental offset rule, you deduct $1,400 from the $1,425 PIT payment. The remaining $25 shortfall will be added to your debt—thereby increasing the debt portion of your total debt service ratio.
Unfortunately, though, there is no standard. Some lenders use debt service coverage ratio while others use rental offset rules. The best approach is to talk to a mortgage professional to determine your best options.
March 5, 2013
BMO drops 5-year fixed mortgage rate
Over the weekend, BMO lowered the rate to 2.99 per cent from 3.09 per cent, which is the lowest published rate among Canada’s big five banks.
“What you do have is an environment where you’re starting to see evidence of lending growth slowingand so you have a couple of levers at your disposal. Bank of Montreal does appear to be looking at pricing as an option to stem the decline on their own volumes,” said John Aiken, a financial services analyst with Barclays.
In a release on Monday, the bank said the move was to lock in rates ahead of an anticipated interest hike by the Bank of Canada. The central bank has been hinting for months rates will eventually need to rise, even though its language turned slightly dovish in January.
Ernie Johannson, senior vice president of personal banking Canada at BMO Financial Group, said the bank's efforts to encourage Canadians to pay down debt and build equity in their homes “have been aligned with minister (Jim) Flaherty's timely and prudent actions to encourage moderation in the housing market." The mantra is to "go fixed, go five, lock-in now" and become mortgage-free faster with a shorter 25-year amortization, he said in a statement.
The move comes at a time when the housing market has showed signs of cooling. Flaherty has repeatedly expressed concerns about the housing market getting overheated and last summer put in place tighter lending rules to calm the once-hot real estate market.
The market is still divided on the extent of the housing market slowdown, though most experts expect a cooling off rather than a crash.
The Canadian Real Estate Association said last month that national home sales activity edged up on a month-over-month basis in January.
"Given that the most likely trend in interest rates is upward and that longer-term interest rates are likely to move first, we believe that locking in for five years is the superior choice," said Doug Porter, chief economist at BMO Capital Markets.
Longer-term rates, such as five-year mortgages, can start moving higher well in advance of any action by the Bank of Canada, added Porter, who noted current five-year interest rates remain exceptionally low.
“A five-year term gives borrowers ample protection against the possibility of rates returning to more typical levels in the next few years," Porter said.
While it’s possible other banks may follow suit, Aiken said he doesn’t expect “this is going to lead to hyper competition within mortgage pricing.”
In a statement to the Globe and Mail on Sunday, Flaherty warned of any practices that would lead to a race to the bottom.
“My expectation is that banks will engage in prudent lending – not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States,” Flaherty told the newspaper.
Lower rates could lure more buyers into the housing market this spring, and encourage some buyers to take out larger mortgages than they otherwise would, bolstering house prices, the Globe added.
March 27, 2012
How Leverage Can Help You Build Wealth
Borrowing to invest can magnify the returns on assets. Here’s how it works.
From MoneySense Magazine
Interested in using leverage to boost your returns? We have news for you: if you have a mortgage, then you’re already doing it. Buying a home is one of the best uses of leverage, says Al Feth, a fee-only adviser in Toronto. “Your gain will be tax-free and you won’t become as emotionally affected in times of market downturns.”
Let’s say you saved $50,000 and you want to buy a condo for $250,000. To make up the difference you borrow $200,000 in the form of a mortgage. If the value of your condo rises by 33% over the next five years, it will be worth $332,500. That’s a great return. But remember, you only put $50,000 down in cash. So, if you sold your condo for $332,500, you’d walk away with $82,500 in cash, for a gain of $32,500 on your original investment. That’s a 65% return. Of course, you’d still have all of the transactional costs involved in buying and selling your home, so you wouldn’t get the full 65% return, but it’s a good illustration of how leverage works.
“The best part is that the entire gain will be completely tax-free,” says Jason Heath, a fee-only certified financial planner with Objective Financial Partners in Toronto. “Other than perhaps investing in your education, you really couldn’t make a better leveraged investment than this.”
Borrowing to invest in stocks works in much the same way, but the risk you take on is far higher. If you want to use leverage to increase your investment returns, be sure to consult a tax expert as well as your adviser before borrowing any money.
January 12, 2012
Mortgage Rates Reduced to an ALL TIME LOW (for a limited time)
Lots of buzz today over the Bank of Montreal's reduction of their mortgage rate to 2.99% for a 5 year fixed term. The only catch - it's only available until January 25th.
Likewise, TD Canada Trust is offering teh same rate for a 4 year term.
Why is this important? Well, if you have been sitting on the fence regarding buying a house or remortgaging your current home, it won't get any cheaper than this.
To give you an example:
• Above rates are approximate and based on a 25 year ammortization. May be available as a 30 year ammortization period (resulting in smaller monthly payments) in the next week.
If you are renting and don't currently own your home, NOW is the time to buy. Owning is cheaper than renting! Especially if you are purchasing a property with a suite:
For example, there are many homes with suites in Nanaimo for $350,000. Your monthly financial committment with 5% down would be:
$1624.74 (Home payment )
- $850 (2 bedroom suite rental)
That is CONSIDERABLY CHEAPER than renting a property. Plus you are putting part of that money back in your pocket every month as you pay down the mortgage.
AND . . . properties in the area generally appreciate at about 3% per year. That's $10,500 a year on a $350,000 house. $10, 500 that you could be putting back into yourown pocket outside of your mortgage payments.
Watch for other banks to introduce low rates as well in the next few days. But keep in mind that you have to apply for and be approved for the mortgage at these special rates BEFORE JANUARY 25th. I can introduce you to mortgage brokers or account managers at any of these banks to get you started.
Contact me today to start looking for a house. firstname.lastname@example.org
or call me at 250-758-3700
Wes Smith, RE/MAX OCEAN POINTE
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