Don’t have a pension plan? Here’s how to build a real estate portfolio

General Melanie Ward 7 Nov

Jobs that include a payout with pension are becoming increasingly rare in Canada. Gone are the days of slowly working your way to the top of a company and retiring with a secure pension. Most Canadians will change their careers at 5-7 times in their lifetimes, and the mega trends of technology and economics means that entire fields can disappear in the matter of a few years. 

What does this mean? It means that many Canadians are relying on their basic CPP and RRSP savings to face their retirement years. Financial markets can be more risk than some people can stomach, so what is another option? Welcome to the world of real estate.

While it can seem daunting to save up the 5% for your first home, using your home equity can be a great way to build up the downpayment for your next home. Rather than selling your first home outright, use the trick that many real-estate agents and property developers know well to get ahead.

Here’s how to build your real estate portfolio for long term economic stability

In order to purchase an investment property you need a whopping 20% investment. However you only need 5% for your first home, and that’s more easily attainable for many people.

When purchasing and moving into your second home and renting out your first home, you can not only use the added rental income, you can achieve the down payment of less than 20%.

Here’s how.

  1. Purchase your first home with 5% down. If possible try to find something within a price range that does not max out your monthly budget.
  2. Start saving any extra amounts you can to put towards an eventual second down payment on a second property.
  3. When you develop some equity in your home (either through paying down the mortgage, or a rise in home values or both), use that in conjunction with your down payment savings as a purchase on another home
  4. When you purchase your next home, make that new home your primary residence so you won’t have to come up with the 20% for an investment property
  5. Rent out your old home, and move into the new one.
  6. Rinse and repeat! If you can manage doing this every five years, you could build a portfolio of 3-4 houses before retirement.

This is an age-old recipe that most real estate investors have used for years to get around the larger down payments. 

Things to keep in mind about real estate investment as a retirement portfolio strategy

  • While you are living in your home, any growth in it’s investment is tax-free. 
  • If you sell one of your investment properties you will have to pay capital gains.
  • You will also be expected to pay tax on any rental income for homes you are not living in.
  • If you want to be able to put as little as 5% down, you need to buy a property for $500,000 or less. Anything above that amount will be 5% of the first $500,000 of the purchase price, and 10% for the portion of the purchase price above $500,000 up to $999,000. For properties of 1 million or more, you will be expected to have 20% down.
  • Owning several properties means having more things that can go wrong. If you aren’t handy, or don’t enjoy home upkeep, then maybe this route isn’t for you. Or, you could choose lower upkeep places like apartments or condos instead of freestanding houses. 
  • If you don’t enjoy running rental properties, find a good property management company and build that into your budget.

Building a real estate portfolio is not for everyone, but it can be a great way to create retirement income if more traditional avenues are not available. 

First-Time Home Buyer Incentive? Read the Fine Print Before You Sign

General Melanie Ward 7 Oct

The First-Time Home Buyer Incentive (FTHBI) just rolled out on Sept 2 2019, and already Trudeau is promising to expand it if he gets re-elected. But while the FTHBI is promising to make home buying more affordable for young – or first time home owner – Canadians, just what is it exactly?

What is the First Time Home Buyer Incentive?

It’s a Canada Mortgage Housing Corp. (CMHC) -financed, shared-equity mortgage program. This means that, while you don’t have to pay a monthly amount on the loan, the government will share in the gains and losses of your home’s value as it fluctuates over time. The incentive offers 10% toward the down payment for a new home, and 5% for resale homes, interest-free.

Who qualifies for the FTHBI?

  • You have to be a first time home buyer
  • Your household income must be less than $120,000: including investments and rental income.
  • You have at least the minimum down payment, which is 5% of the first $500,000 of the home’s purchase price, and 10% for any amount above that. 
  • The total amount you put down (including the FTHBI amount) must be less than 20% of the home’s purchase price (this insures that all these loans are CMHC insured)
  • Your total mortgage must be less than 4x  your qualifying income. Since the maximum qualifying income is $120,000, that means the largest amount any qualifier can  borrow is $480,000 — including the mortgage, mortgage insurance and the FTHBI amount. Considering the median range for houses in Canada recently topped 480,000 that keeps most houses still out of reach for first time buyers.

Is it really interest free?

Well, technically yes. It’s designed to “help first-time homebuyers without adding to their financial burdens”.You won’t pay any interest for the duration of the loan, and could potentially save $1-300 per month on mortgage payments on new and resale houses in the  $500,000 range, or about $25,000 or $50,000 respectively. However, there is a catch. When you sell the home, or after 25 years, you will be expected to pay back the loan….but…and here’s where things get complicated…not the dollar amount. 

What will I be expected to pay back?

Instead of paying back the dollar amount on the loan, the CMHC wants a profit share on the percentage that they loaned you for the house – either 5% or 10% depending on what they loaned you. That profit share will be based on the “fair market value” of your home at the time that you sell.

What does this mean? 

Well, if you own your house for 25 years, and real estate continues to climb the same way it has been, your 450,000 home could easily balloon to over a million dollars. If you make any renovations that improved your investment, then that could add to the cost. That initial loan of $25,000-$50,000 could suddenly be over $100,000. That might be ok if you’ve prepared for that, but what if you are entering retirement? 

Even if you sell before then, and your property has gone up, you might be in for some shock after your legal fees, closing fees etc…by the time you’ve closed your deal. 

So is it a bad deal?

Incentives are never a bad deal, but it’s important to go into this one with your eyes open, and be prepared with the number the government is going to take at whatever point you sell your home. If you are keeping your home, definitely include putting aside this money in your financial planning so it’s not a shock later on. 

My advice to buyers is to look at ALL the factors involved. If I was the government, I would have to say, what’s in it for me?  If we are going to lend out money, how can it benefit and serve both parties? Well, I guess this was their answer. 

I personally would not want to have to pay the government any more than they already take, but if I needed to take this route, because it was my only way to get the funds together to get into the market, then I would go for it. I think it is much better option than not getting in to the ever-growing real-estate market.   

 I would rather pay back a higher interest loan and own my property outright.  I’d probably pay less in the long run on a higher interest rate than lawyer fees, not to mention 5-10% of the sale proceeds.  

I think it’s always worth finding the exact rates and terms, and crunch real numbers. Mortgage professionals like myself ask all the questions to ensure you are educated and aware of your options. The FTHB may be for you, or there may be better options.  

 

Mortgage Stress Tests: what are they, and will you pass?

General Melanie Ward 7 Aug

Things just got a little easier in Canada with new changes to our mortgage stress tests. The Bank Of Canada lowered the rates for Canadian mortgage stress tests in July, the first drop since 2016. The mortgage qualifying rate dropped to 5.19 per cent from 5.34 per cent, where it had been locked since May of 2018. This means that it’s a little bit easier to qualify for a mortgage than it has been for a few years.

What is a mortgage stress test?

The “stress test” is a set of rules banks must use to determine if you qualify for mortgage and, if so, how much you can borrow. Everyone, no matter how great their credit rating, has to qualify in order to get a mortgage. This test was implemented to protect Canadians from overborrowing. Interest rates have been at historic lows that can only go up, and our government wants to make sure you’ll still be able to afford your mortgage payments when rates eventually do rise. They want to make sure that when interest rates go up, you won’t have to default on your home.

How does the mortgage stress test work?

The Canadian government has determined that regardless of how low the current interest rates being offered, you have to be able to qualify for a mortgage at the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate of +2%, whichever is greater. What does this mean?

Affordability of higher mortgages is more difficult with the stress test. Before the stress tests were put into place, if you had 20% down you might have been able to afford a mortgage of over $700,000, with the mortgage stress test in place that amount can drop to the $500,000 range. It’s basically been implemented to curb spending and debt loads.

How did the stress test just get a little easier?

By lowering the qualifying rate from 5.34 to 5.19 it allows people to qualify for larger mortgages and more borrowing.

Does this apply to people renewing their mortgages?

No. If you are renewing your mortgage you can just renew it. However, if you are switching banks or lending institutions you will have to qualify for the stress test before you can qualify…even if it’s the same amount as what you were carrying before.

What’s the best way to pass the mortgage stress test?

  • Save up as much as you can for a down payment. The more money you have to put down, the easier it will be to qualify for a bigger mortgage.
  • Keep your Gross Debt Service Ratio healthy. Your housing ( mortgage, property taxes, heating bills etc…) must represent less than 32% of your monthly costs.
  • Keep your TDS (total debt service ratio) low, which represents any personal loans, car loans, mortgage etc…cannot be greater than 40% of pre-tax income.
  • Get a cosigner. For first time home buyers a co-signer can really help.

If your ratios are high, call your Mortgage Broker.  We will assist you through the process!

If you have any questions about this or any other mortgage related issues, please do not hesitate to contact me at Ward Mortgages.

What is a reverse mortgage? The pros and cons of home equity-based loans.

General Melanie Ward 3 Jul

The Pros and Cons of Reverse Mortgages. A house with an arrow going backwards

The reverse mortgage market has been increasing steadily in Canada over the past few years, and it’s no wonder. Canadians over the age of 65 have more than doubled in the last 30 years, and are set to double again in the next 20.  This growing population of “retirees” are healthier than they have ever been, and they are living longer than ever. With our demographics changing so rapidly, it’s no wonder many people are asking: how can I live the life I want to live, with the years I have left?

Enter the reverse mortgage.

What is a reverse mortgage? Quite simply, a reverse mortgage lets you take a loan based on the equity of your home. Where a traditional mortgage is lending you money based on your home’s value, which you then pay off, a reverse mortgage allows you to free up to 55% of the capital from your home. There are no monthly payments, but you are required to pay your property taxes and home insurance, and keep your property well-maintained.

Where can I get a reverse mortgage?

Currently HomeEquity Bank is the only bank in Canada that offers the CHIP Reverse Mortgage as well as a secondary product, Income Advantage. These two products are options for homeowners unlike anything else out there. Instead of borrowing money to purchase a house, they will lend you money if you already have purchased one (as long as you qualify).

What are the qualifications for getting a reverse mortgage?

  • You must be a homeowner, 55 or older
  • You must live in the home for 6 months of the year min(primary residence)
  • If the title of the property is registered to more than one person, you must be registered as joint tenants, not just as tenants in common.  If the property is joint tenants, the interest of a deceased owner automatically gets transferred to the remaining surviving owner. If it is tenant in common the deceased tenant’s property interest belongs to his or her estate.
  • Although you do not need to have an income to qualify for the borrowed amount as there are no payments required, you will have to stay up to date on paying the property taxes, fire insurance and strata fees (if applicable). The income you have coming in will have to be enough to adequately cover those associated fees.

Do I have to make monthly payments?

No. With this product there are no monthly payments, and you are not required to have an income. You can retain more of your income and never worry about default or foreclosure. but there are some costs still associated that you will need to budget for:

  • Annual property taxes and insurance
  • A home evaluation to qualify
  • One time legal fees


Sounds great! What’s the catch?

Pros

  • Get up to 55% of the value of your home
  • Access funds to pay for short term medical emergencies or home reno’s
  • No need to tap into savings/investments that may be costly or needed for future
  • Receive your money tax-free
  • Stay in your home – no need to sell in order to subsidize your retirement
  • Maintain full ownership and control
  • Free yourself from monthly mortgage payments until you choose to move or sell
  • Qualify for much more money than a traditional equity line of credit.  Approvals are based on age and property
  • Income buffered. Changes in interest rates don’t affect the client’s monthly cash flow since there are no payment required.
  • Prepayment penalties are waived upon death and reduced by 50% if the borrower(s) are moving into a care home.
  • Borrowers will never owe more than the fair market value of the home at the time it is sold

Cons

  • Fees can be higher than traditional Mortgages or Lines of Credit.
  • As home equity is used, there is less to leave your heirs.  You are still able to leave your home to your heirs but they would need to pay off the loan.  In most cases, the property is sold to pay off the loan.
  • There are some penalty fees involved if you need to break the mortgage.
  • If the housing market never goes up, and the client lives in the home long enough, there is a chance the client could exhaust all the equity in the home to fund their retirement.
  • If you do not fulfill your obligations of the loan including paying property taxes, home insurance, maintaining the property etc., the loan becomes due. 

Reverse mortgages can be a great way to pay off debt., healthcare related costs, income supplements, living expenses, travel expenses or helping out a family member.  Conservative house appreciation of just 2.5% to 3% per year over time will typically make up for the accruing interest on the reverse mortgage leaving clients with plenty of equity in the end.   Reverse Mortgages are offered by HomeEquity Bank, a Schedule 1 Canadian Bank that is regulated but the Federal Bank Act. 

Reverse mortgages are not for everyone but they can be an excellent option in many situations.  It is best to speak to a Mortgage Professional that can educate and assist you in making the best decisions for your retirement.

Cash Back Mortgages: 5 things you need to know before signing on the dotted line

General Melanie Ward 28 May

Cash back mortgages can be a quick and easy way to get lump sums of money loaned back to you to do small renovations, reduce credit card debt, or pay off a more expensive car loan. Sometimes people get cash back mortgages when they are purchasing, but it is often when they are refinancing that cash back is considered. But like any other money lending product, it pays to do some research before signing a cash back mortgage.

1.What is a cash back mortgage?

Any time you get a mortgage, and they lend you money as well as the amount for the house it’s considered a cash back mortgage. Many people use their principal amount for renovations or to pay down debt, and then borrow the remainder: that would be a traditional mortgage. With a cash back mortgage, the most common sum you receive is 5% of your mortgage amount but it’s possible to get between 1% and 7% depending on the lender you choose.

2.How long can I get my cash back mortgage for?

The most typical term for a cash back mortgage is 5 years, but some lenders have 1,3,5 and 10 year terms. It’s important to note that if you break the term of the mortgage, there can be high penalties. The stats show Canadians move every 30 months, so it is a good idea to keep this in mind on potential costs.

3.Who offers cash back mortgages?

Many different lenders including mainstream banks. It pays to shop around for the best price and terms. Don’t just take the first place that offers you cash back.

4.What are the risks of a cash back mortgage?

  • It’s important to note that cash back mortgages always come with a fixed interest rate, and almost always charge a higher rate than standard mortgages. This is because lenders compensate for the additional money paid out upfront by charging a higher interest rate.
  • Cash back mortgages are most often lent out at 5 years, but most Canadians move more often than that. You will not only pay a penalty to get out, but you may be asked to pay off 100% your cash loan as well on TOP of the penalty. If that money didn’t go into improving your residence, or if markets have softened, you could be facing a large loss.

5.When does it make sense to get a cash back mortgage?

  • To pay for closing costs, like legal fees or land transfer taxes
  • To pay down higher interest debts
  • To pay for renovations
  • To help with cash flow during the first few months of home ownership
  • To invest or put into savings

Before signing for a cash back mortgage it’s better to discuss your needs with your local mortgage professional. They can advise you on cash backs, line of credit, Purchase plus Improvements or Flex Down mortgages which may be better for your situation.

What’s My Home Really Worth? Understanding property assessment vs market value

General Melanie Ward 17 Apr

What is my home really worth? Understanding market vs assessed value of your home

When clients are thinking of refinancing, or selling their homes, one of the first questions they ask is: how much is my house worth? Homeowners look at their assessed value, and maybe the sale price of their home, or even a property assessment done by a bank, and often these numbers seem all over the map.

The answer is often taken from the sum of a variety of sources, rather than from any one spot. A quick survey of recent sales and their relation to assessed values will often demonstrate no clear relationship between sale price and assessed value. Some properties will sell well below assessment, and others well above.

So how do you find the value of your home?

Find an experienced and local Realtor to help you determine the selling price of your home. Successful, busy and local Realtors will have a far better handle on what is happening in your area for prices than your property assessment reads, and in many instances will save you from yourself.

In theory, a comprehensive current market review completed by a Realtor should be similar to the value determined by a professional appraiser. Professional appraisers spend all day every day appraising properties, and their reports are often seen as less biased.

Ultimately  your house is worth what someone is willing to pay for it

Imagine your reaction, as a buyer, to the following statements…

1. The seller says their house is worth $500,000.
2. The sellers’ Realtor says it’s worth $500,000.
3. This house is listed at $500,000 based on a professional appraisal.

Most buyers would consider #3 the most reliable of the above statements. And most buyers requiring financing will have the benefit of the lender ordering their own independent appraisal to confirm fair market value. Sellers rarely order an appraisal in advance, which can create some interesting situations.

In practice, Realtors are relied upon for listing price estimates. Most buyers don’t care much about what anybody else thinks the house is worth. Buyers care what they think it is worth. This is why we say that market value is ultimately determined by what a buyer is willing to pay for the home, aligned with what is acceptable to the seller.

A note on marketing appraisals vs financing appraisals

It is important to note that there are two kinds of professional appraisals. There is the marketing appraisal, such as one ordered by a seller. And there is the financing appraisal, which is done so the bank is satisfied the house is worth what the buyer and seller have agreed it’s worth.

The financing appraisal is a less in depth review and is essentially answering the question; is this property worth the agreed upon purchase/sale price. A marketing appraisal goes deeper (and costs more) but a lender is not concerned with the actual market value over and above the purchase/sale price.

A lender just wants the simple question answered: is this loan going to be something I can get back if the asset has to be sold?

The best way to get a clear picture of your home’s worth is to start with a successful working realtor, and then get an appraiser to back that up.


DO NOT

  • Do not rely on your BC assessment for a fair market value of your property. The value printed on that document was arrived at in July of the previous year, the market may have changed since then, and not in the direction you might think.
  • Do not rely entirely on the buyer’s opinion or the seller’s opinion in an unlisted private transaction for a fair market value.
  • Do not rely entirely on your neighbours, friends, or family members opinions for a fair market value of a property.

DO:

  • Do consider ordering a marketing appraisal, but do not rely on it 100%… maybe 98% though.
  • Do consider an evaluation by an experienced, active, local Realtor or two. This in combination with a marketing appraisal is the best indicator of current fair market value.
  • Gather professional opinions from Realtor(s) and an Appraiser – these are the people with their feet on the ground and their heads in the game.

Interest Rate Cut More Likely Than A Hike For 2019

General Melanie Ward 29 Mar

When the Bank of Canada decided this month to keep its benchmark interest rates stable at 1.75%, it signalled the weakening economy makes it unlikely a rate increase is anywhere on the horizon.

Inflation is not where it should be for a hike

We’re not in a deflation mode right now, but inflation is under control and there’s no real need for them to raise interest rates.

Because many of the economic indicators are pointing downward, this puts the bank in a position where it can’t raise rates. This makes refinancing a more attractive option for some homeowners this year.

A lot of economists are saying that Canada is heading back into another crisis, which is an indicator that rates may drop again. This new norm will probably stay around for a little while, but rates will eventually go up. And when it goes up, people have to be obviously prepared for it.

So, for now, homeowners shouldn’t worry too much about a sudden jump in rates.

While this may be a new normal, if the economy begins a turnaround, they should be ready or a bump in rates, but I don’t think it’s going to happen the next couple of years.

Usually, Canada’s economy runs almost parallel to that of our southern neighbour’s…

However, the two economies seem to have gone their separate ways lately.

There’s a divergence right now that is going to occur between the Canadian and U.S. economies. When people talk about the U.S. sneezing and Canada catches a cold—this is not what’s happening right now. There’s a divergence in the interest rates. Where in the States rates are going up, in Canada, rates cannot go up because of the way our economy is actually going.

The news isn’t all positive for Canadian homeowners though. Read our recent blogs on why too many Canadians are now ineligible for mortgages and why Montrealers in particular will see their municipal tax bills rise in the coming years. If you have any questions about mortgages, contact your nearest Dominion Lending Centres mortgage professional near you.

BY: TERRY KILAKOS

Dominion Lending Centres – Accredited Mortgage Professional
T

Growing cannabis at home? Let’s weed through those mortgage issues!

General Melanie Ward 28 Nov

Hey hot topic for sure in Canada right now…. great read from my colleague Chris… check it out

Growing cannabis at home? Let’s weed through those mortgage issues!

As many of you already know, Canada just became the second country in the world to legalize marijuana for medical and recreational purposes. Of course, this historic moment in Canadian history has cannabis activists jumping for joy while others are not s-toked on the idea.

With legalization comes the realities of growing your own pot at home which already has Global News giving Canadians a step-by-step guide on how to do so properly and legally — sorry Manitoba and Quebec!

We always have clients contacting us for restructuring advice on their current mortgages. However, through our initial discussions, we have found out that some have started growing pot plants within their homes. Since this legislation is new to everyone, including the mortgage community, we had to do some research.

Prior to September 17, growing cannabis at home was a legal grey area. Mortgage wise, it was a red flag. Any home that has previously or is currently being used in the growing of cannabis was treated as a “grow-op” and as a result is NOT financeable.

grow-op: a concealed facility used for marijuana plantation.

Since legalization day on October 17, the federal government officially set a limit of four pot plants per household — NOT by person. This information DOES NOT have to be disclosed on a property disclosure UNLESS damage has occurred within the household because of cannabis cultivation.

Just as a FYI — ALL property owners should consult their realtor or lawyer about how to properly disclose when selling their household.
After talking to our local Canada Mortgage and Housing Corporation representative (CMHC), she notified us that mortgage insurers are currently leaving lenders to create their own policies on how to deal with marijuana plants and their effect on existing mortgages. We contacted lenders about this ‘budding’ home-grown industry but were met with no answers.

This situation is certainly a waiting game and we’re all holding our breath waiting for the first move!

Let us share our advice.
If you are looking to sell your property or refinance your mortgage — get rid of those pot plants now!
Any home appraisal company can disclose in their report that cannabis is present within your home which could place your home on a list that DOES NOT foresee future sales or refinances.
It is your safest bet to keep your cannabis plant growth up to the licensed growers located across the country.
If you have any questions, contact your local Dominion Lending Centres mortgage professional.

Chris Cabel

Chris Cabel

Dominion Lending Centres – Accredited Mortgage Professional

Variable Rate? To Lock In Or Not?

General Melanie Ward 28 Nov

Variable Rate? To Lock In Or Not?

This post applies if you are taking a new mortgage, whether it’s for a purchase, refinance, or renewal. The variable remains the main contender.

Economists can be biased

But what about all the economists saying if you are currently in a variable rate mortgage then you should rush to ‘lock in’?

You mean the economists that are employed by profit driven shareholder owned institutions that directly benefit from your locking-in (banks) via instantly increased profit margins and massively higher (up to 900% higher) prepayment penalties that 2/3 mortgage holders will trigger?

A bit biased, that crowd.
Also they are generalists, they’re not specialists.

But what about independent real estate experts?

While these experts may have their finger on the pulse of many facets of the real estate market, many remain totally unaware of how exactly mortgage prepayment penalties are calculated, and just how likely you are to trigger them.

Also generalists, are unaware of many nuances of mortgage products.

So what’s my game?

I’ve never really had game, so to speak. And I don’t stand to profit from your locking in, or from your staying variable. In fact as I type this on a stunning day I’m wondering just what I’m doing in my office at all.

I’m just a Mortgage Broker offering an opinion. An opinion that reflects my personal policy, an opinion shaped through 25 years of experience with my own mortgages, an opinion based on 11 years of experience with 1,673 client’s mortgages.

I’ve seen a few things, mortgage specific things.

I’ve watched 2/3 of my clients break their mortgages and trigger penalties. Almost every single one of them a small and relatively painless penalty thanks to staying variable.

But what about these rising rates?

If you are currently in a Prime -.65% to Prime -1.00% variable then to lock-in would be to inflict an immediate rate hike on yourself that might take the government another 12-18 months to pull off… if they pull it off.

My recommendation is to stay variable

If you are in a Prime -.35 or shallower mortgage, we should discuss restructuring that into a Prime -1.00% mortgage and reducing your rate by .65% or more.

Staying variable.

My crystal ball says yes, perhaps another two or three 0.25% hikes through 2019, but at that point the odds favour (heavily) an economic contraction that will in turn trigger a corresponding reduction in interest rates.

It is my theory, and that of others smarter than I, that the fed is pushing rates up aggressively to beat said economic contraction, because they want to have the tool of ‘reducing interest rates’ back in their toolbox when the rainy days come. And we are overdue for stormy economic times. And when those times arrive it will not be prudent to be locked-in.

In short, life is variable – your mortgage should be as well. If you have any questions, contact your local Dominion Lending Centres mortgage professional today.

Dustan Woodhouse

Dominion Lending Centres – Accredited Mortgage Professional