Implications of new mortgage-lending guidelines...

With little surprise in Canada, the Minister of Finance has finally made a formal announcement that there will be significant changes to mortgage lending. The main changes are a decrease in maximum amortizations from 30 to 25 years and a maximum loan-to-value refinance amount for your primary residence to 80% of the home's value (down from 85%).

What are some of the practical implications?

1. For first-time home buyers (especially in Guelph or the surrounding area), it's difficult to find a detached, suitable home for under $260,000. The shorter amortizations will decrease a person's borrowing capacity and purchase price by approximately $40,000. The exact date of the changes is unknown yet; however, if someone has been pre-approved for a mortgage 4 months ago, be sure they call their mortgage broker and speak to them about their maximum purchase price.

2. Qualifying to purchase a rental property has tightened in the last 6 months.  We have seen most lenders go to sticker uses of how rental income is used in qualifying someone for a new mortgage loan. The shorter amortizations will also limit one's ability to purchase rental homes.  In Guelph, we've seen a surge in prices for rental properties.  The change in shorter amortizations may cool rental property prices.

3. Refinancing to only 80% of the value of your primary residence will limit one's ability to take equity out of their home to pay-off debt, or to purchase other properties.  For example if a home is worth $350,000, under the new guidelines, the individual will have access to $17,500 less equity.

Kelly and Jan almost didn't get their home...

Kelly and Jan (like most people) rely and trust their bank. They've owned a home before, had a mortgage with their bank (TD) and all went well.  They only had a $60,000 mortgage left on their main house, and with a growing family, where ready to move into a bigger home. They wanted to keep their main house as a rental because it was close to the university and offered great rental potential. So they went back to their bank to get pre-approved for a mortgage before looking to buy their next house.  Their bank said yes to the financing and away they went!

After spending hours with their realtor, they finally found a great home, put an offer on the home, and went back to their bank to finalize the mortgage. Here's where the story gets bad...

The bank came back and rejected their mortgage approval.  Kelly and Jan where stunned...how could this be possible?  What I've learned through my clients' experiences, are that banks don't pre-approve people for mortgages they only pre-qualify.  The missing piece in Kelly and Jan's original pre-approval was a credit check that their bank didn't do.  Kelly's credit history was weak because of a job loss she experienced a year ago.  Although she was now back to work, a few missed bill payments from the previous year appeared on her credit history. 

Here's where the story gets better...

Their realtor referred them to The Mortgage Centre, and with the skill of a trained, mortgage agent where still able to get a decent mortgage and they where still able to buy their dream house.  The great part of this story is that the mortgage payments where in-line with their monthly budget.

The lesson from this story is to ensure that whomever helps you with your mortgage financing, ensure they do a thorough job for you so that there are no surprises once you find a home.

Here's one way to pay-off your mortgage if you have rental properties

This week I met Sam who has been an astute real estate investor over the last 7 years. He's been strategic about his real estate purchases, focusing on good locations and positive cash flow.

Although he's retired, Sam still has a significant mortgage of $250,000 on his primary residence and carries a secured-line-of credit (SLOC) of $70,000.  Don't be surprised at this debt level, because more and more baby boomers are not paying-off their mortgages before they retire.  In this case, Sam went through a divorce almost 10 years ago where his assets where divided, which is the main reason he still carries a mortgage.

The great thing about Sam's situation is that he has a stable teacher's pension and he's done a good job at managing his real estate investments.  He has enough equity in his real estate investments to pay-off his secured line-of-credit. This SLOC could be an issue in the future, given that rates on SLOC's show a 10-year historic average rate of about 6%.

Sam's meeting with his accountant this week to determine how to minimize the tax implications of this restructuring.  But I'm a big believer of using the equity in your real estate to help your personal finances, while still maintaining a positive cash flow on the properties.

Here's a good link from a recent story in the Financial Post on how to manage SLOC debt.

No problem? Get it in writing...

This past week I've worked with two separate clients and in each case things where tight with their mortgage approvals. And both of these borrowers owned homes and where not first time home buyers.

In both cases each client was told that their financing would be "no problem" but weren't given anything in writing.  In both cases neither client understood how much equity they had available in their house.  This is always the first step in looking at home-financing, especially if you already own a house. 

Here's one scenario:

These borrowers where selling their home for $275,000 and wanted to move up to a $420,000 house.  They had two good incomes but last year they refinanced their home to consolidate debt so their current mortgage on their home was about $225,000.  When I took into account the real estate commission plus the legal and land transfer tax on the purchase of their new home of $420,000 there was barely 5% to put down on the purchase of $420,000. 

Up until now they had worked with their own bank and I recommended that they get something in writing from their bank regarding their pre-approval.  Their banker had previously recommended paying out some more debt from the equity in their home, but it was obvious through the first calculations that there would not be enough equity to pay out any debt.

When they finally did get an answer from their banker the bank told them they couldn't guarantee the pre-approval because "CMHC doesn't do pre-approvals".  This is absolutely true, but CMHC (the company that insures mortgages against default for banks - this is normally required if you have less than 20% as a down payment), their guidelines are clear.  They're even posted on the CMHC web site!  It was obvious after pulling their credit history that they wouldn't fall under some of the requirements of CMHC. Nonetheless through a little maneuvering I was able to get them a pre-approval, but this was not a mortgage pre-approval that was "no problem".

The moral of the story - work with someone who has the experience to help you.  Get it in writing.