JORDAN THOMSON

I recently had a client ask me what difference I could provide given that his bank’s website was offering the same interest rate I had quoted him the day before. Before responding to him, I went on his bank’s website to check it out for myself.

There are times when a client needs the best rate and lowest possible monthly payments, and this was definitely the case for this client. He was lucky enough to be able to afford a 20% down payment if he needed to, making it a conventional mortgage. Seeing as the bank was offering the same rate, he asked why bother if he could get away with putting only 15% down?

After checking out the bank’s website, I called him back and gave him these reasons why the bank rate was in fact NOT the same as the one that I had quoted for him.

Although there were MANY reasons that I provided, I want to touch on the top 5 that were the most important given his individual circumstances. Scenario is based on a purchase price of $430,000.

1) The bank rate was for an insured mortgage (meaning less than 20% down) which would require he pay mortgage default insurance of $6,579.00. This would increase his mortgage amount and be to the benefit of the lender. Of course, he would also be paying more interest as his mortgage balance would be higher. The rate I quoted him was for a conventional mortgage, so no mortgage insurance and no mortgage insurance rules! Also as a Dominion Lending Centres mortgage broker, I could most likely offer him a lower interest rate for an insured mortgage if he chose to go that way providing him more savings.

2) Just as important for him, an insured mortgage can only be amortized up to 25 years, while a conventional mortgage can be amortized up to 30 years (and in some cases 35 years). So when calculating his monthly cost, he would in fact be paying over $300 more per month if he was to put only 15% down.

3) At the end of the 5 year term, he will have paid $2,467.48 more in interest and $18,562.28 more in monthly payments with the bank rate on his insured mortgage. For this particular client, keeping more money in his pocket each month is crucial. To further reduce his interest payments and amortization period, I would encourage a bi-weekly accelerated payment.

4) As is all too common, if he chose to break his mortgage, say after 3 years, his bank’s penalty would be somewhere around the $6,400 price tag. With my chosen lender, he would pay approximately $2,000. This calculation is based on a 5 yr fixed term of 2.44% and a remaining mortgage balance of $319,737.95. ( With a purchase price of $430,000 minus a 20% downpayment of $86,000, the starting mortgage amount would have been $344,000.)

5) Should the need arise, my client would have a likelier chance of being able to refinance his mortgage if he required the extra funds because you can only refinance up to 80% Loan To Value of the home.

Finally, and perhaps one of the most important benefits, is the expertise, advice and ongoing service to him that a broker such as myself can offer, potnetially saving him thousands over the life of his mortgage. His bank rate will not give him that!

So, for any client, I would suggest looking beyond rate and speaking to a DLC mortgage professional to get a clearer understanding of how your banks rate may not in fact be the same before jumping to any conclusions!

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BRENT SHEPHEARD

As a first time home buyer, the process of purchasing a home can seem very daunting.  From a financing standpoint, here are 10 common questions I hear from first time home buyers.

1. What’s your best rate?

This is by far the most common question.  Rate is a small part of your mortgage contract but its often the most talked about.  People become “rate sensitive” when they hear their neighbour or co-worker got 2.49% and they want the same rate.

Some lenders will dangle these low rates to entice you but don’t be fooled.  The lowest rates almost always come with conditions such as high pre-payment penalties or quick 30 day closings.

Is saving $15/month on your mortgage payment worth paying a penalty up to 9 times higher when you sell or need to refinance in 3 years?  No broker or website can secure a rate without a full application and credit bureau.

2. What’s the maximum mortgage amount for which I can qualify?

My suggestion is set a budget your comfortable with and let your Dominion Lending Centres mortgage professional tell you how much mortgage your budget allows.

The two ratios used to determine how much mortgage you qualify for are the Gross Debt Service Ratio (GDS) & the Total Debt Service Ratio (TDS).  Your GDS is composed of your new housing cost such as your mortgage payment (principal & interest), property taxes, heating costs and any strata fees.  Your TDS includes your GDS as well as any other monthly liabilities such as car loans, credit card debts, lines of credit etc.

Depending on your credit score, the maximum GDS/TDS ratio is 39/44.  This means your GDS shouldn’t be more than 39% of your gross income.  Your TDS shouldn’t be more than 44% of your gross income.  If your gross income is $100,000/yr you could allocate $39,000/yr to GDS & $44,000/yr to TDS.

3. How much money do I need for a down payment?

For owner-occupied homes, the minimum down payment required is 5% of the purchase price for homes under $500,000. For homes over $500,000 10% down payment is required on the amount over $500,000 up to $1M.  Anything over $1M requires 20% down as a minimum.  If you want to avoid CMHC mortgage insurance then 20% down payment or greater is needed.

Any rental properties require a minimum of 20% down.

4. What happens if I don’t have the full down payment amount?

As a first time home buyer you are eligible to use your RRSP as a form of down payment to a maximum of $25,000. Your RRSPs can be used without being taxed if you pay back within 15 years.

Another popular option is a gifted down payment.  A gift can come from an immediate family member to form part or all of your down payment.

Some lenders will also allow a flex down program.  This means you borrow the money from a line of credit and this loan is factored into your debt service ratios.

5. What will a lender look at when approving me for a mortgage?

Generally speaking, the lender will want to look at your source of income, employment history, debt levels and repayment history and the actual property itself.

Lenders want stability.  By vetting and checking the above, the lenders feel confident you are able to make your mortgage payments and in the unlikely event you default, they know the property is marketable.

6. What’s better, fixed or variable rate?

Not everyone qualifies for a variable rate because the qualification rate is currently 4.74% vs the 5 year fixed of 2.54%.  That’s a big difference!

Assuming you qualify for a variable, it boils down to risk tolerance and your plan for the property.  Fixed rates give you stability over the term of your mortgage where a variable rate is tied to the prime rate, currently 2.70%.  This means your mortgage payment could decrease or increase depending on what the Bank of Canada decides.

Variable rates can save you thousands if you sell or refinance during your term.  The standard penalty on a variable rate is 3 months interest.  The penalty on a fixed rate is calculated using the interest rate differential and depending on your lender can sometimes be in the tens of thousands of dollars.

Your Dominion Lending Centres mortgage professional can discuss all the differences and benefits for you.

7. What credit score do I need to qualify?

Anything over 680 is considered AAA with most lenders.  A score above 680 gives you access to all the discounted rates.  If your score is below 680 there are options but often at higher interest rates.

8. What happens if my credit score isn’t great?

Take action immediately to increase your credit score.  If possible pay off all your debts on credit cards and lines of credit as this will increase your score substantially.  Its a good idea to always pay your balance in full each month as this creates a pattern of positive repayment.

Don’t take on anymore new debt such as car loans or new credit cards.  Make sure everything is up to date meaning no overdue collections or old Telus or Rogers bills outstanding.

9. How much are closing costs?

Closing costs vary but lenders typically want to see that you have 1.5% of the purchase price on hand for closing costs.  If you bought a condo for $500,000 you’d need $7,500 for closing costs.  This is only a guideline and costs vary.

Closing costs will cover things like, inspections, lawyer fees, property transfer tax, appraisals, and title insurance.

10. How much will my mortgage payments be?

Obviously this depends on your mortgage size, rate, amortization, repayment schedule, any CMHC insurance and if your lender is collecting your property taxes for you or not.  My suggestion is stick to your budget!

If you have any other questions, please feel free to contact Dominion Lending Centres – we are always happy to answer all your questions.

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Sep 26, 2016, 16:15 PM by Maria Broekhof