Great mortgages made simple
What is mortgage insurance (aka – “high-ratio” insurance)? Click the link below to view a simple video from Genworth Canada on what mortgage insurance is and why you’ll need the coverage if you have less than 20% down payment.
And as always, if you have any questions or need assistance with your mortgage, please give our team a call. We’re here to help you through every stage of the buying/mortgaging process. www.gibbardgroup.com.
Open houses are getting busy!Happy house-hunting and if you need a pre-approval, please contact us and we’ll be more than happy to get the process started.
CLAY GILLESPIE for The Globe and Mail
As part of our RRSP coverage, we asked Clay Gillespie, a Vancouver-based certified financial planner and chartered investment manager, to answer selected reader questions.
My wife and I recently withdrew funds from our RRSPs through the federal Home Buyers’ program. When we start to pay back the money we withdrew, how do we differentiate those contributions versus regular contributions? Currently our RRSP contributions are deducted from our paycheques through our employer (direct deposit). – Mark
The Home Buyers’ Plan (HBP) was designed to let first-time home buyers withdraw up to $25,000 from a registered retirement savings plan to buy a principal residence. This withdrawal is not taxed and must be paid back to your RRSP in 15 years.
For example, a $25,000 HBP withdrawal from your RRSP requires a repayment of $1,667 every year for 15 years ($25,000/15 years = $1,667). Any missed repayments are included in your income for that year. You do have some repayment flexibility, however, as you are not required to repay the funds to the same RRSP or institution from which you made your withdrawal.
In your case, you are making RRSP contributions through a work-sponsored plan and will receive an RRSP contribution receipt for deposits made during 2012. If you had withdrawn $25,000 under the HBP, you could use $1,667 of that receipt to repay your HBP requirement and the remainder of the receipt could be applied against your RRSP contribution room.
You will receive a Home Buyers’ Plan statement of account each year with your notice of assessment, allowing you to easily track your RRSP contribution room and the outstanding balance of your HBP withdrawal.
CLAY GILLESPIE
The Globe and Mail – Published Tuesday, Feb. 19 2013, 8:07 PM EST
Last updated Tuesday, Feb. 26 2013, 11:17 AM EST
Clay Gillespie, a certified financial planner and chartered investment manager, is a financial adviser and managing director at Rogers Group Financial in Vancouver.
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An interesting article from MoneySense.ca
With a little more than 25 centimetres of snow covering my hometown’s streets (I live in Toronto) and an even stronger snow storm that plowed into the Maritime provinces over the weekend, I was left wondering what kind of person braves this type of nasty weather to search for their dream home.
Typically, winter is not a popular time to sell or buy homes, but it could be a smart decision.
The single best reason to go shopping for your dream home when the snow hits the ground is that, historically, homes sell for less in December/January than at any other time of the year. Prices are typically 1% to 6% lower in the winter months than in the summer months of June and July, according to the statistics from the Canadian Real Estate Association (CREA).
It was a financial risk a couple we’ll call Doug and Tania took last year when they opted to put in an offer on a solidly built semi-detached in an up-and-coming neighbourhood just east of the Toronto Hunt Club. After bidding and losing a few homes in the Leslieville area, the young couple moved further east and quickly fell in love with the wood wainscoting of the two-bedroom home that was only a stone’s throw away from the lake. They put in an offer just a tad less than the $375,900 asking price and, with no other buyers nibbling, officially got the home of their dreams on Dec. 23, 2011. Less than six months later homes in the area were selling for more than $400,000.
Waiting to buy in June could cost you an extra $3,500 to $21,000 on a home listed for $350,000 in December, the CREA stats suggest.
Don’t assume, however, that as soon as the snow hits the streets of Halifax that prices will drop in White Rock, B.C. (a community south of the booming Vancouver metropolis). A price reduction based on weather really depends on how severe the weather hits a geographic area, explained Helen Hutton, a senior analyst with the Canada Mortgage and Home Corporation (CMHC), in an earlier interview.
Still, if you’re buying during the November/December/January months you can often see some sort of price reduction regardless of where you live.
There is another advantage to buying in the winter months: less competition. But this is a double-edged sword as there is also less selection during the lean days of winter.
Sellers can also take advantage of winter—particularly if they have a less than desirable or a unique property.
Sell in the winter and you may not have questions about the roof or foundation, simply because buyers and home inspectors can’t these features through all the snow. (That said, a good home inspector should be able to alert you to potential problems.) Also, less foliage can often mean more light, which can give your home a bigger, brighter feel to prospective buyers.
For the seller, then, it’s about understanding whether your home will stand up to the competition that usually comes in the spring and deciding whether to take your chances on the winter bargain hunters.
Robert McLister for the Globe & Mail, Published Monday, Feb. 11, 2013 05:00AM EST(Last updated Monday, Feb. 11, 2013 10:16AM EST)
Banks operate under the scrutiny of government watchdogs. But when it comes to mortgages, those watchdogs don’t watch everything they could.
“Individual (bank) mortgage reps operate outside of regulatory boundaries which commonly govern licensed professionals,” says Samantha Gale, a former mortgage regulator with B.C.’s Financial Institutions Commission and chief executive officer of the Mortgage Brokers Association of British Columbia. Rules pertaining to mortgage rep competency, the suitability of mortgage recommendations and compensation disclosure are largely left to the banks themselves.
That raises certain questions, like the procedure banks use when sending a mortgage applicant to another lender.
At Royal Bank of Canada (RBC), for example, mortgage reps route applicants that don’t meet normal guidelines to their Alternate Mortgage Solutions (AMS) team. RBC’s AMS employees then farm those customers out to other lenders and the bank’s mortgage rep gets paid when the mortgages close.
Some might easily mistake this practice for “dealing in mortgages,” an activity that normally requires a brokering license. But, because bank employees are the ones recommending the alternative lenders, and because banks are federally regulated, they aren’t bound by tough provincial rules that make it an offence to broker without a licence.
Consumer protections differ in bank and broker circles. In Ontario, for example, provincial penalties apply whenever a broker:
Suggests an unsuitable lender or mortgage – Ontario requires brokers to “take reasonable steps” to ensure that any mortgage presented to a borrower is suitable. Not only must the borrower be properly qualified, but recommendations should attempt to minimize the borrower’s current and future borrowing costs and provide the right mortgage flexibility given the customer’s needs. By contrast, while bank regulations encourage banks to “Know Your Client,” they don’t contain specific guidelines on ensuring suitability – apart from confirming the borrower is properly qualified.
Sells a higher mortgage rate to get paid more – Brokers must disclose this conflict of interest. Federal disclosure rules don’t hold banks to the same standard, even though many bank reps – like many brokers – get paid sales incentives and earn more for selling a higher interest rate.
Policing these things falls in the lap of provincial regulators. Provinces draft specific broker conduct rules, pro-actively monitor and audit brokers and sanction individual brokers publicly when they’re caught violating regulations.
With bank mortgage reps, there is no independent government watchdog that directly sets specific suitability and compensation disclosure rules, audits and monitors individual reps, and publicizes it when a bank rep breaks the rules. The banks themselves are responsible for “developing the policies and procedures to be followed” by their mortgage reps, says Rachel Swiednicki of the Canadian Bankers Association (CBA).
Many assume the Office of the Superintendent of Financial Institutions (OSFI), the primary bank regulator, supervises bank rep conduct. In fact, OSFI’s main role is to “monitor and examine institutions for solvency, liquidity, safety and soundness,” says a spokesperson. “OSFI does not have the authority to intervene in the day-to-day operations of the institutions it regulates for individual consumer-protection purposes.”
That’s actually the job of the Financial Consumer Agency of Canada (FCAC). It is tasked with ensuring that bankers comply with federal consumer protection rules.
FCAC is a fantastic mortgage educator and regulator when it comes to high-profile problems like mortgage penalty disclosure or failure to provide cost of credit disclosure. But “FCAC appears to regulate systemic institutional compliance problems only,” says Ms. Gale.
Julie Hauser, FCAC’s spokesperson, explains that “FCAC supervises federally regulated financial institutions, not individual employees.” Unlike provincial broker regulators, FCAC generally does not:
· Have its own set of rules, prohibitions and competency requirements to promote suitable mortgage recommendations (e.g., federal rules don’t deal with specifics about what constitutes a suitable alternative lender for a declined borrower, or when a secured line of credit, 1-year term or fully-closed mortgage are appropriate for a borrower)
· Impose specific educational standards and licensing for bank reps
· Pro-actively audit or monitor individual bank mortgage rep conduct
· Post online when a bank rep wrongs a mortgage customer (like this.)
That means it’s up to a bank to set and enforce its own specific competency, suitability and market conduct policies within general federal guidelines. In many ways, this makes banks their own overseer.
So, why aren’t the feds watching mortgage rep activity more closely? Apparently it’s a low priority issue for Ottawa. “We need the political will of regulators to get together and sort this problem out,” Ms. Gale adds. “There is real risk here for consumers.”
Ms. Gale says that mortgage brokers have a fiduciary-like relationship with customers – to recommend a suitable lender with suitable terms. But with banks, a similar fiduciary relationship doesn’t exist because they primarily push their own brand.
“Banks are kind of like a mortgage shop,” she says. “And when they pass you off to another lender, and you don’t know who you’re dealing with and why, that’s a consumer risk.” (Banks always get a customer’s consent to work with another lender, but a bank’s true reasons for choosing another lender are not always disclosed.)
Some banks refer customers that they can’t service to lenders or brokerages that the bank has a monetary interest with. “They’re not necessarily working for you to get you the best deal,” Ms. Gale says.
Rodney Mendes, a broker and former TD Canada Trust mortgage specialist of 15 years, says banks’ internal guidelines are “just as stringent” as provincial broker regulators.’ RBC, for example, states it has a “strict code of conduct,” “comprehensive training” and “pro-active monitoring and auditing practices for its entire mortgage business.”
That’s all good, but bank mortgage reps “don’t report to any governmental authority unless there is a complaint,” Mr. Mendes says. “Bank mortgage specialists report to their own internal compliance department” so it’s often up to management to discipline a mortgage rep. And, in a small number of cases, it’s possible that management “may not want to lose volume on their books” by coming down too hard on a big producer.
Banks have a “strong culture of compliance,” counters the CBA’s Maura Drew-Lytle. Banks make mortgage specialists attest to their compliance obligations and subject them to annual training and testing. Mortgage reps can also be fired, which is less of a threat for mortgage brokers. Ms. Drew-Lytle also notes that banks address most consumer complaints internally, using well-established complaint processes with a third-party ombudsman as an arbiter.
All of that is true. But when it comes specifically to suitability and compensation conflicts, the goal should be to fully disclose and avoid them, not address them when there’s a complaint.
As a side note, not all mortgage brokers have clean hands just because they’re monitored more directly by provincial regulators. Like the large majority of bankers, most brokers are honourable professionals who care about their clients. Yet, as a broker, I regularly witness biases, conflicts and competency issues in our industry. I’ll reveal examples in my next column.
That said, the takeaway here is that Canadians are forced to rely heavily on banks to police their own mortgage sales forces. There is no impartial government watchdog pro-actively targeting bank reps who make unsuitable mortgage recommendations or fail to disclose compensation-related conflicts. With more direction and better funding, the FCAC could assume that role.
We enjoy your feedback – how has your bank treated your last mortgage transaction? Did they even ask you any questions about your future goals?
A good article from the Globe & Mail: As a self-employed website developer who had recently restructured his business, Greg Schmidt knew that refinancing his mortgage wasn’t going to be a piece of cake.
“I had a little bit of a line of credit built up from shifting the focus of the business and my car lease had come up for being bought out, so I needed money to take care of that,” said Mr. Schmidt, a single 42-year-old who owns a home in Toronto that includes an apartment for income. “It turned out the best way to go was to do a new mortgage, increase the amount of the old one and take care of those costs.”
However, when he approached his bank, he was told “the numbers didn’t work for them.”
For salaried workers, “the numbers” would simply be printed out in black and white on a recent pay stub or a T4 slip, proving their income. But for someone like Mr. Schmidt, who has various clients and no guaranteed paycheque from week to week, the requirements are more complex.
When lenders work with self-employed people, they have to rely on what’s called stated income, rather than verified income. Stated income is the amount of income the borrower attests to having, and which can be supported with documents such as tax returns, notices of assessment, contracts and financial statements.
Meridian Credit Union, for example, requires that business owners applying for a mortgage provide two years of financial statements and their most recent notice of assessment.
“The two years of financials tell us the strength of the business and the ability of the business to pay the business owner a reasonable salary for that business owner to have cash flow to repay debt,” said Rick Arnds, senior manager, emerging markets at Meridian in St. Catharines, Ont. “The [notice of assessment] tells us how much this person is actually reporting out back to the government as their income. There’s a balance between those two.”
That’s because business owners often report relatively small income after they have accounted for all of their expenses. They’re usually not subject to the normal gross debt service and total debt service ratio formulas, but lenders do look for a reasonable reported income, according to Mr. Arnds. For example, he said, a notice of assessment indicating annual income of $5,000 and a request to borrow $60,000 would raise a red flag.
Lenders will also assess the borrower’s assets. If someone is applying for a $400,000 mortgage and his notice of assessment doesn’t show income that would normally support that but his business owns vehicles and expensive equipment, the credit union will have a closer look.
“We would look at the situation and say, this is a strong business, it has strong assets that have been accumulated over the years, there’s a solid credit report with good repayment history and there’s cash flow within the business to repay the $400,000 principal residence loan,” Mr. Arnds said. “So we would probably give them the mortgage.”
Essentially, the lender needs to understand the borrower’s ability to service the debt they’re asking to take on. And the best way to do that, according to Richard Goyder, vice-president of personal lending at Royal Bank of Canada in Toronto, is for the lender to get to know the business and the business owner as well as possible.
“The best advice that I can give to self-employed people looking to take out a loan is to make sure that you have a relationship with your bank,” Mr. Goyder said. “When the bank is making decisions around whether to lend them money, those decisions are all around: How well do we understand this person’s business? How well do we understand their finances? And how well do we understand their ability to pay back this loan?”
Even if a business owner has a long-standing relationship with a lender, she might be denied the loan or mortgage she has asked for. In that case, Mr. Goyder said, the lender’s credit adjudicators will come back to the account manager or mortgage specialist and ask for additional supporting information or suggest a different way of structuring the loan. Or the loan might be offered at a higher interest rate.
“There may be an increase in the rate if you are high risk but, obviously, part of the point in the process of establishing income is to try to demonstrate that you do not represent a higher risk than somebody who’s on salary,” Mr. Goyder said.
In the end, Mr. Schmidt went to a mortgage broker, who secured a new mortgage for him with Merix Financial. The weeks leading up to the approval were stressful, he said, but it’s a stress he’s willing to take on if it gives him the freedom of running his own business.
“This happens once every couple of years, and all the benefits easily outweigh the reduced level of stress I have the other 59 months of the five-year term,” Mr. Schmidt said.
What you’ll need:
As a self-employed person, here are some of the documents you will need to apply for a mortgage or loan:
1) Tax returns and notices of assessment for the past two or three years
2) Financial statements
3) Confirmation that HST/GST payments are up to date
4) Contracts showing ongoing expected revenue
5) Personal credit score
6) Business credit score
If the lender is reluctant, you can bolster your case with these:
1) Co-signer
2) Bigger down payment
3) Proof of assets, such as business equipment, vehicles, property
4) Proof of skills, in case you were required to find a salaried position
NANCY CARR – Globe & Mail
Published Monday, Oct. 01, 2012 12:10PM EDT
Last updated Monday, Oct. 01, 2012 12:10PM EDT
At the end of October (October 31st), most Banks have their fiscal year end. With the year-end comes new OSFI rules changes come into effect for Banks. These new rules B-20 underwriting guidelines, require federally regulated lenders to do the following by fiscal year end:
For now it’s just the federally regulated lenders (i.e., Chartered banks) who are required to change their lending guidelines. Credit Unions and private lenders at this point are still able to run “business as usual” although there will be upcoming pressure on these lenders to also tighten up their guidelines.
More to come at the end of October but for now we wanted to give you a quick, ‘heads-up’ on what’s coming down at the end of this month…
As always we appreciate your feedback.
Published Tuesday, Sep. 25, 2012 03:00PM EDT – Globe & Mail.
Ottawa believes Canadians might need a little help in how they spend and save.
The federal government has released a “Financial Toolkit” that it says can help Canadians make sense of everyday financial questions they face.
The toolkit, which is available online and in printed form, includes worksheets, quizzes, questionnaires, case studies and educational videos to educate Canadians on making rational, responsible money decisions.
The toolkit was created in partnership with the Financial Consumer Agency of Canada, the Investor Education Fund and l’Autorite des marches financiers.
The initiative is part the government’s efforts to promote financial literacy and follows months of warnings from the Bank of Canada as well as the finance minister about the record high levels of consumer debt.
On a national basis, the average household debt stands at 152 per cent of disposable income, just shy of the 160 per cent level that was reached in the U.S. and the United Kingdom prior to the housing market collapse in 2008.
Economists have said that the high levels of consumer debt are a consequence of low interest rates that have been in place since 2008 as part of efforts to stimulate the economy by making it less expensive to borrow and spend.
Junior finance minister Ted Menzies says the toolkit is another way Canadians can acquire life skills.
Globe & Mail
Figuring out the penalty on a fixed-rate mortgage is like solving a calculus equation. Homeowners who try often wind up hitting their head against hard objects in frustration.
It’s been that way for years, and as many unwittingly discover, mortgage penalties can be disturbingly expensive.
Historically, lenders have used cryptic penalty language that disguises just how expensive. As a result, folks trying to break their mortgage are routinely shocked and disappointed by four- or five-figure penalty quotes.
Interest rate differential (IRD) charges, commonly called “penalties,” have long been the biggest culprit. IRD charges compensate a lender for lost interest when you prepay large portions of a closed mortgage early. They’re basically the difference between the interest you promised to pay and what the lender can earn today on a mortgage of your size. Without a computer, even most lender reps cannot calculate IRD penalties with precision.
The biggest penalty I ever saw was $99,000 on a multimillion-dollar property. The average is far less than that – in the four-digit range – but for a homeowner with little discretionary income, it might as well be $99,000.
But things are changing for the better. As of this month, the Department of Finance has convinced banks to peel back a layer of opacity. Most banks now agree to a “voluntary” Code of Conduct that requires them to post plain-English explanations of prepayment charge calculations and provide website calculators so people can run their own penalty estimates.
That latter development is a colossal win for mortgage consumers.
Here, for example, are links to the top 10 banks’ penalty calculators: Bank of Montreal, CIBC, HSBC, ING Direct, Laurentian Bank, National Bank of Canada, Manulife Bank, Royal Bank, Scotiabank, and TD Canada Trust
As helpful as these calculators are, there’s one essential piece of the puzzle that most still don’t provide: the discount you received at the time you got your mortgage.
This discount is key for determining your IRD penalty with the major banks. They could easily permit estimation of discounts online (using their historical posted rates), but omitting this data forces you to call in and listen to their sales pitch to retain your business before you can switch lenders.
Another problem is that few non-bank lenders have taken the initiative to create online penalty calculators. That makes comparing penalties between banks and non-bank lenders unnecessarily difficult, which incidentally plays right into the big banks’ hands.
The majority of long-term fixed-rate mortgage holders terminate or change their mortgage before their term is up. In fact, the average five-year mortgage lasts only three to four years. Penalties apply in only a minority of these cases, but for those who are affected, they can substantially raise your overall borrowing costs
It therefore pays to guesstimate mortgage breakage costs in advance and avoid surprises later. In doing so, you’ll often find that a lender’s bargain interest rate is offset by its harsh penalty.
Before settling on a lender, try this. If you want a five-year fixed term, have your mortgage adviser estimate that lender’s penalty as if you planned to break the mortgage after 3.5 years (the average breakage), assuming rates stay the same. Then ask the adviser to give you a sense for how this penalty would compare to the “typical” lender.
While you’re at it, here are 10 more questions to ask a lender about its penalty:
1. Is your fixed-rate mortgage penalty based on posted rates, bond yields or discounted rates?
The logic: Some lenders – including the Big Six banks – base penalties on posted rates, which can drastically inflate your penalty. Other lenders use bond yields, which can also cost you a small fortune, depending on bond performance. A few are even bold enough to use posted rates when calculating simple “three-month interest” penalties.
2. If I break the mortgage and stay with you, will you forgive a percentage of my penalty or apply unused prepayment privileges, to reduce my penalty?
The logic: More lenders are doing this as competition grows.
3. If not, can I make a prepayment a few weeks before breaking my mortgage to lower the balance used to calculate my penalty?
The logic: When determining a penalty, some lenders refuse to consider prepayments 30-90 days before you request discharge.
4. What term do you use to calculate the nearest comparison rate for an IRD penalty?
The logic: Some lenders use a shorter term than the nearest term, which can significantly increase your prepayment costs.
5. Can I increase my mortgage without a penalty?
The logic: This is important if you ever upgrade your home or need additional funds.
6. If I sell my home and port my mortgage to a new property, how long can I take to close on that new property and still avoid a penalty?
The logic: Some lenders unreasonably require you to close your old and new home on the same day.
7. If I break the mortgage early, do I have to pay “reinvestment fees” on top of the penalty, or pay back any cash incentives that I’ve received?
The logic: Other things equal, why pay a reinvestment fee on top of your penalty? The latter answer is usually “yes.”
8. Can I get out of my fixed mortgage early if I pay a penalty?
The logic: Some “low frills” closed mortgages don’t let you out before maturity – no matter what – unless you sell your home.
9. Do you charge IRD penalties on your variable-rate mortgage, as opposed to the standard three-month interest?
The logic: Despite being highly unorthodox, a few lenders actually do this and it can cost you.
10. How long will you honour your IRD penalty quote?
The logic: This is relevant if you’re trying to discharge a fixed-rate mortgage while rates are dropping. Falling rates can increase your IRD penalty.
Penalties are a realm where borrowers need knowledgeable advice. Sadly, many advisers are inexperienced with penalty calculations and give you a blank stare when you ask too many questions. (That’s a good clue that you should deal with someone else.)
Fortunately, the Financial Consumer Agency of Canada is doing a noble job encouraging clarity with mortgage penalties. By March 5 of next year, it will go a step further by requiring banks to provide: annual information to help consumers calculate their penalty, written penalty statements upon request with clear calculation explanations, and access to exact prepayment penalty quotes by phone.
These initiatives will encourage fairer penalties and help homeowners minimize them, saving many individual Canadians thousands over time.
Robert McLister / Globe & Mail / Published Friday, Sep. 14, 2012 03:37PM EDT/ Last updated Tuesday, Sep. 18, 2012 12:57PM EDT
