How Bridge Financing Works.

In life, things don’t always go as planned. This is especially true when it comes to real estate! When it comes to buying a new home, in a perfect world, most of us would like to take possession of their new residence before having to move out of the old one. This makes moving a lot easier and allows you time for painting or renovations prior to moving into your new home. Unfortunately, this is where things get complicated.

Most people need the money from the sale of their existing property to come up with the down payment for their new one. This is where bridge financing comes in. Essentially, bridge financing allows you to ‘bridge’ the financial gap between the firm sale of your current home and the firm commitment to purchasing your new home.

WHAT ARE BRIDGE LOANS?

Bridge loans are short-term solutions that range from 90 days to 12 months. This type of financing allows you to access some of the equity in your existing property to put towards the down payment of your new home. To be eligible for a bridge loan from a typical bank or mortgage lender, a firm sale agreement must be in place on your existing home, meaning all subjects have been removed. You will also require a purchase agreement for the new home to verify the amount required.  Without a firm sale agreement, there are borrowing solutions available but at a higher cost through private lenders. 

If you are currently looking to sell one property and buy another, it is important to consider whether you can qualify and pay for two mortgages at once if necessary.  There are a number of reasons for this including:

• Property values are constantly changing. You won’t know how much money you have until you sell your home as a home is only worth what someone is willing to pay for it. Past sales and future guesses are not reliable means of arriving at a current property value.
• If the proceeds from your existing home are required to help pay for the down payment on your new home, as well as renovations and moving costs bridge financing is not always straightforward and does not address every situation equally

Securing bridge financing

If you have sold your existing home but the closing date comes after the closing date of the new property you just purchased, then bridge financing can sometimes address the issue. 

If you have firm sale and purchase agreements and want to move forward with bridge financing, you will need to ensure your lender can accommodate this type of transaction.

COSTS OF BRIDGE FINANCING

Bridge financing typically costs more than a traditional mortgage and can cost between Prime plus 2 to 5 percent, and can also come with an administration fee.

In some cases, if you require a loan over $200,000 or a loan for more than 120 days, your lender may register a lien on the property until the loan is repaid. To remove this lien, you will need to consider the added costs of paying for a real estate lawyer.

PRIVATE FINANCING

If you are moving ahead on the purchase of your new property without selling your existing one first, and the proceeds of the sale of your current home are required for your down payment, you would have to proceed with a higher cost private loan vs. being able to work with a bank or regular mortgage lender.

Private financing is expensive, but it is generally a more affordable option than lowering the sale price of your current home and greatly reducing it in price just to sell it quickly.

COSTS OF PRIVATE FINANCING

Private loans have a much higher interest rate than traditional mortgages and come with lender fees in addition to brokerage fees. These amounts will vary based on your specific situation considering the timing and duration of the loan, the loan amount, the amount of the loan relative to the value of the new property and the equity in the current one, your credit, property details, and other potential factors and terms.

When it comes to bridge financing and selling and buying of your home, there can be a number of hoops and not all lenders will address the situation equally.  All financing is always ultimately subject to lender approval and I’m always here to help determine your best options. 

The Governing Council of the Bank of Canada raised its target for the overnight policy rate by a full percentage point to 2-1/2%. The Bank is also continuing its policy of quantitative tightening (QT), reducing its holdings of Government of Canada bonds, which puts additional upward pressure on longer-term interest rates. In its press release this morning, the Bank said that “inflation in Canada is higher and more persistent than the Bank expected in its April Monetary Policy Report (MPR), and will likely remain around 8% in the next few months… While global factors such as the war in Ukraine and ongoing supply disruptions have been the biggest drivers, domestic price pressures from excess demand are becoming more prominent. More than half of the components that make up the CPI are now rising by more than 5%.” The Bank is particularly concerned that inflation pressures will become entrenched. Consumer and business surveys have recently suggested that inflation expectations are rising and are expected to be higher for longer. Wage inflation has accelerated to 5.2% in the June Labour Force Survey. The unemployment rate has fallen to a record-low 4.9%, with job vacancy rates hitting a record high in Ontario and Alberta. Central banks worldwide are aggressively hiking interest rates, and growth is slowing. “In the United States, high inflation and rising interest rates contribute to a slowdown in domestic demand. China’s economy is being held back by waves of restrictive measures to contain COVID-19 outbreaks. Oil prices remain high and volatile. The Bank expects global economic growth to slow to about 3½% this year and 2% in 2023 before strengthening to 3% in 2024.” Further excess demand is evident in the Canadian economy. “With strong demand, businesses are passing on higher input and labour costs by raising prices. Consumption is robust, led by a rebound in spending on hard-to-distance services. Business investment is solid, and exports are being boosted by elevated commodity prices. The Bank estimates that GDP grew by about 4% in the second quarter. Growth is expected to slow to about 2% in the third quarter as consumption growth moderates and housing market activity pulls back following unsustainable strength during the pandemic.” In the July Monetary Policy Report, released today, the Bank published its forecasts for Canada’s economy to grow by 3.5% in 2022–in line with consensus expectations–1.75% in 2023 and 2.5% in 2024. Some economists are already forecasting weaker growth next year, in line with a moderate recession. The Bank has not gone that far yet. According to the Bank of Canada, “economic activity will slow as global growth moderates, and tighter monetary policy works its way through the economy. This, combined with the resolution of supply disruptions, will bring demand and supply back into balance and alleviate inflationary pressures. Global energy prices are also projected to decline. The July outlook has inflation starting to come back down later this year, easing to about 3% by the end of next year and returning to the 2% target by the end of 2024.”

Bank of Canada Overnight Rate   Bottom Line Today’s Bank of Canada reports confirmed that the Governing Council continues to judge that interest rates will need to rise further, and “the pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation.” Once again, the Bank asserted it is “resolute in its commitment to price stability and will continue to take action as required to achieve the 2% inflation target.” At 2.5%, the policy rate is at the midpoint of its ‘neutral’ range. This is the level at which monetary policy is deemed to be neither expansionary nor restrictive. Governor Macklem said he expects the Bank to hike the target to 3% or slightly higher. Before today’s actions, markets had expected the yearend overnight rate at 3.5%.

Article courtesy of Dr. Sherry Cooper

Calculating Income.  Part Two

In our last post, part one of our two part article on calculating income, we looked at full- and part-time employment income requirements when applying for a mortgage.  In part two, we’re reviewing what self-employment income verification may entail as lenders calculate your income in their review of your mortgage application.

self-employed

If you are self-employed, the requirements for income documentation are quite different than verifying income as an employee. Self-employed applicants will likely need to provide:

1. Last Two or Three Years’ T1 Generals: This is your income tax return. The full document is typically 25 pages or more, and you’ll need to include all its schedules.  One of the schedules is the Statement of Business Activities, which is used to illustrate business income versus expenses for some self-employed individuals, but not all.
2. Notices of Assessment (NOA) from Canada Revenue Agency: You will also need to provide the previous two or three years’ NOAs as a self-employed mortgage applicant. CRA sends this as your verification taxes have been filed.  They show whether you have a balance owing, and if so you’ll need to verify outstanding balances have been paid.
3. If Incorporated: Articles of Incorporation and your last two year’s financial statements
4. Sole Proprietor: a business license is sometimes a requirement.
5. More recently lenders have begun to request recent contracts, bank statements, or GST returns to verify ongoing business activities.

As mentioned in part one, not all mortgage applicants look the same.  Lenders may ask for more or less than what we’ve covered here.  If you don’t meet some of the criteria we’ve covered, there are often exceptions to the rule.  Connect with your trusted Mortgage Consultant to review your options and to ensure you take advantage of opportunities you might not otherwise have realized may apply to you.

Calculating Income.  Part One

Being prepared to apply for a mortgage to purchase or refinance property can save you time and may make things easier when the time comes to verify your income.  In part one of this two-part series, we’ll look at what lenders need when calculating your income for a mortgage approval.

full-time employee

1. Letter of Employment: One of the key aspects for financing approval is employment stability. Lenders need a letter from your employer (on company letterhead) detailing your title, your start date, your hourly wage and guaranteed hours per week if hourly, or your annual salary, bonus income details, and any other items relating to your compensation. The letter can be written by your direct manager or the company HR department.  The lender will call the author to verify the contents of the letter by phone.
2. Previous Two Pay Stubs: In addition to the employment letter, the lender will also need your previous two pay stubs. These must indicate the company name, your name, tax deductions, current period income and year-to-date income as well. Should your year-to-date income not match the figures stated on your employment letter, the lender will need the background on the discrepancy.
3. Your Previous Two or Three Years’ T4s:Having these on hand is strongly advised, especially if your year-to-date income does not match your employment letter.  Lenders may take a 2-year average of your income to verify your earning potential.  If the last of the two years is lower than the prior year, only the last year’s income level will be used in the calculation in most cases.
4. Notices of Assessment (NOA) from Canada Revenue Agency:You may also need to provide the previous two or three years’ NOAs as a self-employed mortgage applicant.  CRA sends this as your verification taxes have been filed.  They show whether you have a balance owing, and if so, you’ll need to verify outstanding balances have been paid.

part-time employee

For part-time employees, the above documents are required, as well as possibly up to three years’ worth of NOAs.  In most cases, lenders require part-time employees to have been working in the same role for at least two years for their income to be used to qualify.  However, a lack of time with the same employer can sometimes be addressed if you’ve been in a similar or complementary role at another company within the timeframe.

Not all mortgage applicants look the same.  Lenders may ask for more or less than what we’ve covered here.  If you don’t meet some of the criteria we’ve covered, there are often exceptions to the rule.  Connect with your trusted Mortgage Consultant to review your options in any case.  In the meantime, look out for part two of calculating income in next Wednesday’s post.

https://dominionlending.ca/mortgage-tips/process-in-the-paperwork

9 Reasons Borrowers Break Their Mortgage Term Early.

Did you know approximately 60 percent of mortgages are broken before the term expires? While this is not necessarily avoidable, most homeowners are blissfully unaware of the penalties that can be incurred when they break their mortgage contract. Unfortunately, these penalties can be painfully expensive at times, but with some advance planning, they might be minimized or avoided.

Variable rate mortgage penalties are typically a fraction of the cost of a fixed rate penalty and are calculated at about .5% of the outstanding mortgage balance.

With a Fixed Rate mortgage, your penalty can range from around 2.75% to 4.5% or more of the mortgage balance, depending on where rates are at the time you break the term.  By those numbers, on a $500,000 mortgage, the penalty would range from approximately $13,750 to $22,500, and can sometimes add up to more.

To say the least, penalties can constitute a painful surprise upon the sale of property.  Many clients gravitate toward fixed rate mortgages due to the certainty of the rate, but it’s the certainty of the lower penalty on a variable rate mortgage that gives them pause.

Still, many borrowers opt for fixed rate mortgages, certain they won’t break their mortgage.  But with 6 out of 10 mortgages being broken before the end of the term, it’s important to keep in mind that life happens, and having a flexible mortgage can often yield unexpected dividends.

Below are some of the most common and sometimes unexpected reasons borrowers break their mortgage term early.  Being aware of these might help you plan ahead.

sale and purchase of a new home

If you already know that you will be looking at moving within the next 5 years, it is important to consider a portable mortgage. Not all mortgages are portable, so if this is a possibility in your near future, it is best to seek out a mortgage product that allows for this.

Important Note: Whenever a mortgage is ported, the borrower will need to re-qualify to ensure they can afford the “ported” mortgage based on their income and other lending criteria.

to utilize equity

Another reason to break your mortgage is to gain access to the equity in your property. In some areas, such as Toronto and Vancouver, homeowners have seen huge increases in home values. Taking out equity can help them pay off debt, expand their investment portfolio, buy a second home, help elderly parents, send kids to college, or to help them buy real estate.

to pay off debt

Credit card balances and other debt (car loans, personal loans, etc.) can be repaid at a much lower interest rate in some cases. In addition, it is much easier to manage a single monthly payment than half a dozen! When you are no longer paying the high interest rates on credit cards, you have an opportunity to get ahead on payments.  Your cash flow position may also be vastly improved by lowering the applicable interest rate and minimum payment due by paying debt off with an increase to your mortgage balance.

cohabitation, marriage and/or children

Partners moving in together who need to sell one of their existing homes, sometimes causes borrowers to break existing mortgage terms.

divorce or separation

Unfortunately, as some marriages end in divorce, it can mean breaking the mortgage to divide the equity in the home.  And in cases where one partner wants to buy the other out, penalties may also be incurred before one partner pays the other depending on the structure of the new mortgage.  Sometimes the remaining partner does not qualify for a mortgage with their current lender and are forced to refinance with another lender to be able to stay in the home.  Luckily there are many options in the market worth reviewing before making a final decision on how to proceed.

major life events

In some cases, other things happen unexpectedly including: illnesses, disability, unemployment, the death of a partner, or someone else on the title of the property.   These circumstances may result in property having to be refinanced, or even sold, which can sometimes come with penalties for breaking the mortgage.

removing someone from title

Roughly 20% of parents help their children purchase a home. Often in these situations, parents go on title as well. Once their son or daughter is financially stable, secure and can qualify on their own, the parents can be removed from title.

Some lenders will allow parents to be removed from title with an administration and legal fees. However, other lenders consider changing borrowers equates to a break in the mortgage term.  If you are buying a home with your child and will be on title, be mindful of the mortgage terms and how removing someone from title can potentially incur future costs.

to get a lower interest rate

Another reason for breaking your mortgage can be to obtain a lower interest rate. If interest rates go down and you want to be able to put more down on the principle, have your Mortgage Consultant review the numbers to see if it’s worthwhile to break your mortgage for the lower interest rate, considering penalties and other costs in doing so.

pay off the mortgage

You’ve won the lottery, got an inheritance, scored the world’s best job or had some other windfall of cash leaving you with the ability to pay off your mortgage early. While it may be tempting to use a windfall for an expensive trip, paying off your mortgage early can save you thousands in the long run – enough for 10 vacations. Some mortgages can be paid off in 5 years without penalties, which may be worth the wait.  Your Mortgage Consultant can do a quick calculation in this respect as well.

Some of these reasons are avoidable, others are not. Contact your Mortgage Consultant today if you are planning on a purchase or if you have an existing mortgage and you’d like to see how your current or future plans may impact your mortgage.  Having a plan in place in advance might just make all the difference.

Source Article: https://dominionlending.ca/mortgage-tips/9-reasons-people-break-their-mortgage

The BC Home Owner Grant reduces the amount of property tax you pay for your principal residence. You must apply for the grant each year to be eligible.  Applying online is usually quick and easy.  Please see below for the link.

If your lender is collecting a tax installment each month together with your mortgage payment and your mortgage is less than one year old, you will need to send your lender confirmation the grant has been claimed, along with your 2022 property tax notice.  The lender will pay the tax amount due.  No confirmation is typically required in subsequent years, but if you have any questions or concerns, please confirm with your lender.  If you need assistance contacting them, please let your Mortgage Consultant know.

How to claim your Home Owner Grant 

All grant applications are claimed through the province and not individual municipalities. They can be claimed online, or over the phone through an automated self-service system (for Regular and Seniors grants only), or over the phone with the help of an agent. You will need your social insurance number ready when you apply.

If your property is located in a rural area, you can apply online through the Rural Home Owner Grant Application using your eTax account. You’ll need the rural folio number on your 2022 property tax notice.

You can also contact the province directly for assistance; contact details should be provided on your tax notice.

Online

Applying online is quick and easy, and is done through this link.
https://www.etax.gov.bc.ca/btp/HOG/_/
By Phone (Automated Self-Serve System)
Call 1-888-355-2700 and choose option 3
By Phone (With an agent)
Call 1-888-355-2700
More information on the Home Owner Grant can be found on the Government of BC website.

Although the process may be simple, simply renewing with your current lender may cost you.  Renewing your mortgage with another lender requires a new approval and can take time to process.  However, renewing with another lender may save you thousands of dollars over your next term.  Should you qualify, you may even save tens of thousands by reviewing your options.  Switching lenders or refinancing before the end of your term may also make sense via interest savings, reducing interest rates on other debts, or by accessing the equity in your property to cover make investments or cover other costs.

To inquire on opportunities via a renewal or a refinance of your mortgage, contact your Mortgage Consultant to start the conversation.

Your credit score indicates to lenders whether or not you are a “good investment” by relaying how long you’ve had credit, your habits in paying back that credit, and how much you currently owe in total. Your credit score is affected by how much debt you’re carrying in relation to the limit of each account, how many loans and credit accounts you have, the number of inquiries by creditors, and your history of repayment.

If you are considering getting your first mortgage, keep in mind that a credit score above 680 puts you in a good position to get financing, while a score below that may affect the rate of interest you’ll pay, or your ability to secure credit, and improvement is needed generally.

CREDIT REPORTS

To ensure your credit score remains in good standing, it is important to take a look at your credit report for any old or incorrect information. If you find any errors, contact Equifax to have them corrected or removed. Another important step would be to pay any outstanding collections listed on your report such as parking tickets or overdue bills.

CONSIDER THE 2-2-2 RULE

If you’re a young person and new to the world of credit, consider the 2-2-2 rule to help build up your credit. Lenders typically like to see 2 forms of revolving credit (i.e. credit cards) with a limit of no less than $2,000 and a clean history of payment for 2 years.

Achieving a great credit score entails using your credit accounts, paying the balance off monthly if possible, and keeping balances below 30 percent of the overall limit at any time.  For a card with a limit of $2,000, this means having no more than $600 of it in use. Please note, if you carry a balance beyond one month, and you only make only the minimum required payment, you may be paying a high amount of interest.  Be sure to know what rate of interest you’re being charged.  It is also a good idea to check if your credit card has an annual fee and making sure you are up to date on that payment too.

The goal is not just to have credit, but to show potential lenders you use it responsibly.

REFINANCING

If you already own a home and you have other debts, consider refinancing your mortgage to help pay down your other credit obligations. If you compare the rate of interest on a mortgage with high-interest consumer debt, it sometimes makes sense to refinance depending on the new rate of your next mortgage.  Using the equity in your home can sometimes be a way to consolidate debt to keep more money in your pocket at the end of the day.  See your Mortgage Consultant to see if this option would be right for you.

Adapted from DLC Marketing

What’s involved in replacing the windows of a home? And what are the indications that you might need to replace yours?  Let’s take a look at some questions you might have.

new home, old windows

When you purchase a home, you receive a seller’s declaration. This is a document that contains all the information about your home that the previous owners are aware of. Hopefully, it will tell you when the windows were last replaced.

In my case, the declaration did not.

We knew going into the home that the windows would need to be changed sometime in the future, as they are outdated (probably from the 80s) and not very energy efficient.  We didn’t anticipate that they could possibly leak, as there was no indication from the previous owner that they had leaked.

It’s a good idea to pay specific attention to the windows of the home when you make an offer to buy.  It’s one of those things that you usually take as-is, but can be a costly expense to change.

According to moving.com, new windows can increase the sale value of a home, but in order for a return on investment to be made, you need to really upgrade the type of windows and frames you have. This can be a costly and time-consuming endeavour, as with the current COVID situation, there are significant manufacturing delays in the production of windows. While we’ll be putting in more energy-efficient windows at my home, the return on investment will be minimal, as it’s definitely a more functional renovation.

If we had known that the windows had needed replacing before purchasing the house, there’s a good chance we could have negotiated the price down slightly.

signs your windows might need replacing

There are a number of signs that indicate it’s time to replace your windows.  Let’s take a look at some of them, as highlighted by Mike Holmes:

1. Your windows are weeping: Not that they’re sad, mind you. Rather there’s a buildup of moisture on the inside brought about by poor sealing. This results in air from the inside of your home mixing with air from the outside, and moisture manifesting itself.
2. Your frames are rotten: Older window frames might not have the proper insulation, and they might have rotted as a result. This can lead to air and moisture leaking into your home, which leads to the costly repair of having your windows replaced.
3. Air drafts: Does it feel colder around your windows? Do you get a cool breeze coming in when you don’t want one? These are signs of air drafts, and could indicate your windows need replacing. While you might be able to re-caulk your windows and add weather stripping, this might only be a temporary solution.
4. Single panes: If your windows are older, they might only have single pane glass. These aren’t energy efficient, and also let in a lot of unwanted sound. Replacing your windows will make heating your home cheaper, and give you more peace and quiet.

the cost of replacing windows

 As with most renovations, the cost of replacing your windows can vary greatly.  Factors like the type of window you’re looking to replace, the materials you want your new windows to be made of, and how many layers of panes you want to have all affect the total cost.

In Ontario, the average cost of replacing a window is somewhere between $800-1200, and about $2,500-4,000 for bay or bow windows, plus tax. So for an average house of about 10 regular windows, you’re looking at around $8,000-12,000.

Is there siding on your house where the windows have been leaking? If so, there’s a chance there could be mould or other damage behind it. If this is the case, you’ll want to replace the siding as well. While significantly less than the cost of windows, it’s still an added expense.

You’ll definitely want to get a few quotes from different companies when you’re looking at replacing your windows, as the experience each company has can also affect the price and quality of installation. If you pay top dollar for high quality windows, and have a company install them that doesn’t have a lot of experience, you can end up having an even more expensive problem to deal with in the future, or find that for all the money you spent, the problems persist.

When you’re looking at replacing your windows, really consider all the factors.  While you might love to have a fancy aluminum or beautiful wood frame, these fixtures cost more than your basic white PVC frame. And a well-installed PVC frame can provide just as much protection from the elements as these other options.

saving money with window replacement

 As mentioned above, if you have old windows, changing them to more energy efficient ones can end up saving you on your monthly bills. By converting old windows, you can potentially save up to 25% on your heating bills.

And while the cost of installing energy efficient windows may seem prohibitive at the start, the good news is that there may be incentives available. It’s worth digging around to see what the active rebates are before starting renovations, and if you have any questions, talk to your renovator to see if they are aware of any incentives you might not be.

home inspectors can’t see everything

In a competitive housing market, you won’t always have the opportunity to get a home inspection done before you buy a home. This is unfortunate, as a good home inspector can help point out potentially problematic areas in your home-to-be, elements that might help you get a reduction in price. If you are unable to get an inspector in before buying your home, it’s a worthwhile investment to have one come in after the fact, as they can still help identify areas that might be problematic.

But even if you get a home inspector to check out your place, they may not be able to catch everything, and unfortunately, potentially leaky windows are something that can be missed.

If you are able to get a home inspector into your space, request that they check the seals around the windows and ensure that there are the appropriate sills at the base of the frames outside of the house. They can also check for various signs of water damage around the windows of your house.

Similarly, if you’ve had renovations done on your home, or if you’ve had the whole place painted, ask the people who’ve done the work if they noticed any indications of water damage. Damage can be anything from watermarks, rippled paint, or mould growing in the insulation. If signs have been present, you should be prepared to tackle the potentially costly affair of having your windows replaced.

anticipate the seasons

With the delays in supply chains and manufacturing, it’s important to think ahead. With spring just around the corner, now is the time to take action if you want to change your windows.  Seeing as the delay can be two to three months, it’s going to be summer before they’re installed, which is a perfect time of year to get them replaced.  If you wait, you could find yourself dealing with cold-winds drafting through your windows and possibly moisture creeping in.

Remember to get a few quotes, and take the time to really consider what your window needs are. While you’ll save some money on heating, the price you pay to replace your windows won’t have a profound impact on the resale value of your home.