Elevate Your Game

The 2024 Federal budget was released on April 16, 2024 and included a number of noteworthy proposals that will impact the real estate industry once enacted into law. Here are a few of the proposals that caught our eye. 

• 30 year amortizations on insured (<20% down) mortgages for first time home buyers on newly built homes.
• Stress Test exemption for insured mortgage holders when qualifying to switch lenders at renewal. 
• Home Buyer's Plan RRSP withdrawal limit increase from $35,000 to $60,000. Payback grace period extended. 
• Foreign Buyer Ban extended another 2 years to January 2027.
• CMHC secondary suite loan program allowing up to $40,000 in low interest borrowing to add secondary suites and increase densification. 
• Income verification directly through the CRA to cut down on mortgage fraud. 

• An appraisal is used to estimate the market value of a property using recent comparable sales data.
• Lenders will always confirm the value of a property before agreeing to lend on it either via a full in-person appraisal or via a computerized appraisal known as an AVM (automatic valuation model).
• AVM appraisals are used for almost all insured (less than 20% down) mortgages and are becoming increasingly common for conventional (20% or more down) mortgages as well. Typically they occur behind the scenes before an approval is even issued and are thus much faster than a full appraisal.
• Full in-person appraisals are used when a more granular opinion of value is needed than what an AVM is able to provide. A licensed appraiser will have to visit the property, research comparables, make adjustments for dissimilarities, and produce a report which they send to the lender directly. As such, a full appraisal takes more time (on average 2 to 3 business days). Keep this in mind when setting a condition of financing. 
• Reasons why a full appraisal may be required over an AVM include: AVM value estimate didn't support purchase price, lack of recent comparable sales data (small market or unique property), potential for conflict of interest (private sale or Realtor is double ending), additional info is required, or simply because many lenders do not offer AVMs for non-insured purchases. 
• In a addition to market value, a full appraisal can be used to estimate: As-Is/ As-Improved value (for new builds and purchase plus improvement mortgages), market rents (when rental income is needed to qualify), and remaining economic life (when a property may be nearing the end of its useful life).

• In a rising market, properties often exceed list prices, leading to appraisal issues since appraisals depend on recent MLS sales data, which may not reflect current market values.
• If an appraisal comes in below the purchase price, it limits the loan amount, requiring buyers to either renegotiate or cover the difference, plus their down payment. For example, on a $500,000 home that appraises for $450,000, a buyer planning a 20% down payment must provide $90,000 plus an additional $50,000 to bridge the appraisal gap.
• Offers lacking financing or appraisal contingencies pose risks for buyers, especially when the buyer has limited down payment funds.

• The Government of Canada's Bank of Canada (BOC) policy rate, also known as the target or overnight lending rate, is the rate that major Canadian banks use when lending money to each other overnight to balance daily funds.

• Banks and mortgage lenders set their Prime Rates (used for consumer lending including variable rate mortgages (VRMs)) at the BOC rate plus a profit margin, currently +2.2%. For example, with a BOC rate at 4.5%, banks would set their Prime Rates at 6.7%.

• Adjustments in the BOC rate lead to parallel shifts in Prime Rates, maintaining banks' margins. Hence a BOC rate change will also correspondingly change VRM and HELOC base rates for mortgage consumers.

• Contrary to popular belief, the Bank of Canada does not set fixed mortgage rates, but BOC rate changes do influence fixed rates.

• Fixed interest rates are largely influenced by bond market dynamics. Bond yields fluctuate with economic growth expectations and shifts in the investment market, impacting fixed rates accordingly. High economic forecasts raise bond yields and interest rates to remain competitive with the returns from stocks and real estate, while low growth expectations reduce these rates.

• On behalf of the Government of Canada, the Bank of Canada uses its BOC policy rate to either stimulate or cool down the overall economy as necessary to maintain annual inflation within a 2-3% band.

• Bridge loans help buyers who want to move into their next home before they have fully moved out of their current home.
• A bridge loan allows buyers to borrow against the equity in their current home to fund their down payment on the new property. When their current home sales proceeds are on hand, the bridge loan is repaid.
• A firm sale agreement on the property being sold is required before a bridge loan can be approved.
• Bridge financing can be used to bridge the gap between buying and selling for possession dates up to 90 days apart. Some lenders are less. 

• Sellers are prohibited from offering incentives as part of purchase transactions, and mortgage lenders will simply reduce the purchase price by the incentive's value. However, lender-offered cash back programs can aid borrowers in different ways.

• For clients slightly over their debt ratio for qualification, cash back mortgages are a solution, offering 1% to 3% of the mortgage balance at closing to reduce debt and improve qualifying ratios.

• This cash back, repaid through a marginally higher interest rate, can also cover moving expenses or other needs related to their new home.

• The lender requires time to finalize the mortgage approval internally and then send mortgage instructions to the lawyer.
• The lawyer will need to review mortgage instructions, prepare a statement of adjustments, notify the borrower of their cash to close requirements, and schedule a signing appointment with the borrower.
• Meanwhile, the borrower must arrange insurance, set up utilities, and may need to move money around between accounts so they can bring a bank draft to their meeting with the lawyer. 
• Once the signing appointment is complete, the lawyer will return signed documents to the lender and request funds (usually one to two days prior to funding).
• Faster closings can and do happen, but requires cooperation and communication between all parties to keep things moving quickly.  

• To facilitate timely mortgage approval for buyers in a competitive market, there are steps the Realtor can take to meet tight condition deadlines and make offers more appealing.
• Busy lenders with the best interest rates often have longer wait times in the approval queue, especially during busy buying seasons. Choosing too tight of a financing condition can result in higher costs for the buyer if the mortgage broker must prioritize speed over rate.
• If making an offer with a short financing condition, inform the mortgage person in advance to prioritize the file and confirm the feasibility. Lender selection may be limited due to file nuances (e.g. rate hold, acreage).
• When an offer is accepted, the mortgage person needs the MLS listing, accepted contract, and all schedules immediately for approval. If you are still waiting for sign-backs, send the yet-to-be signed copies as timing is crucial to get into the lender's approval queue as soon as possible.
• Make sure your buyer's have gone through our thorough pre-approval process where we collect and review all qualification documents ahead of time so that we are organized and ready to submit as soon as an offer is accepted.  Sellers and their Agents may be more flexible when they know the Buyer is already fully engaged and prepared for approval with a quality mortgage pro, and that there will be no surprises.

• In Canada, Equifax and TransUnion are the primary credit bureaus used by mortgage lenders to assess borrower creditworthiness.
• While Equifax is more commonly used, some lenders also accept TransUnion scores, which might slightly vary between agencies.
• Additionally, certain lenders employ their own credit scoring models utilizing data from both bureaus.
• Choosing a lender that accepts TransUnion could be the difference between loan approval and denial. 
• Before making offers to purchase, ensure clients are properly pre-approved to transact, which means a comprehensive credit report review, in addition to their down payment and income verification.

• Many repeat home buyers think 5% down payment is only available as a first-time home buyer, which is not true. The minimum 5% down is available on any owner-occupied home purchase up to $500K, and increases to a max of 7.5% down at $999.9K. The down payment can be gifted from family, and even borrowed.
• For a $1M+ purchase price, down payment starts at 20%, rentals require 20% down regardless of price.

• Down payment documentation is a complex and time consuming part of the mortgage approval process due to anti-money laundering laws (FINTRAC).
• We're required to collect 90 days of bank statements to verify sufficient funds and trace all large deposits.
• Tracing deposits can get complicated when money moves between multiple accounts or comes from untraceable sources like ATM deposits, e-transfers from non-family, cryptocurrency sales, or unverifiable sales.
• Untraceable/unverified funds cannot be used in real estate transactions.
• To prevent surprises, ensure clients are pre-approved with a comprehensive review of their down payment sources, beyond just income and credit.

• For overseas down payments, borrowers must transfer funds to Canada 30 days before their purchase's possession date and provide a 90-day transaction history from their overseas accounts, including the transfer details and Canadian account deposits.
• Foreign exchange (FX) transfer receipts are required to verify exchange rates and matching deposits.
• Funds from countries considered high risk for illegal activities may be rejected by lenders.
• If funds have been in Canada for over 90 days, no tracing is needed.
• Best practice is for the buyer to transfer the money before or at the latest in coincidence with an accepted offer, such that their target lender can review and approve it as part of the mortgage approval.

• For most people, their ability to earn an income is their biggest asset in life, not their home. Owning a home is great, but if you can't pay for the mortgage and other expenses, a home quickly becomes a liability.
• 1 in 3 people will experience some form of physical or mental disability that results in them missing work for 90 days or more and unexpected death can strike at the unlikeliest of times.
• Almost 50% of Canadians are living paycheque to paycheque and the unexpected disability or death of a primary income earner could quickly lead to falling behind on mortgage payments and eventually foreclosure.  
• As mortgage brokers, our process and a fiduciary requirement is to have a conversation with every one of our clients about the importance of life & disability insurance and to offer the opportunity to obtain coverage.  If they decline, a signed waiver is required to confirm we had the conversation.

• The Loan-to-Value ratio is the maximum loan available for a property at a given price point. For example, a 95% LTV mortgage requires a minimum 5% down payment.
• The minimum down payment for a property varies with its purchase price, increasing as the price goes up.
• For insured mortgages on an owner-occupied property, the first $500k requires a 5% minimum down payment, with 10% needed for any portion above $500k and up to $1M. This is called a sliding scale.
• Once the purchase price exceeds $1M, the minimum down payment starts at a minimum 20%, with specific LTV requirements varying by lender and increasing based on the property's price and geographic location. For example, a lender may have a sliding scale such as 80% LTV on the first $1M and 50% LTV on the portion in excess of $1M.
• As most lenders may have a unique sliding scales for properties over $1M, a mortgage broker can often help down payment-constrained borrowers locate the lenders with more favourable sliding scales.

• For standard residential mortgages, brokers are paid by lenders, so there's no charge to the client, saving them time and money.
• Fees may apply, however, for non-standard situations like private mortgages, commercial loans, land loans, or when clients don’t qualify under standard rules.
• Fee-based service allows clients to access options they might not otherwise have, crucial for reaching financial goals
• Brokers must disclose to the client any potential fees upfront.

• Property inspections may reveal issues that lead to negotiating a lower purchase price.
• It is important to note that a price change always requires the mortgage be re-approved, and any prior approval is voided.
• Significant price reductions can prompt lenders to seek more details at a minimum (copy of the inspection report) or even revoke approval.
• To avoid complications for your buyer, do NOT agree to waive the financing condition when amending the price. 

• A mortgage professional can typically offer buyers protection against rising interest rates by reserving them an interest rate for up to 120 days.
• Not all lenders offer rate holds, and the ones that do often price them higher than the best available rates for a live offer as of today. They provide upper limit protection, but if better rates are available at the time of an accepted offer, we can help the client explore other options. 
• A rate hold is not the same thing as a pre-approval, though they often go hand in hand. 

• When interest rates are rising, the importance of lender rate hold policies is important. When rates are falling, the importance of lender rate drop policies is important.
• After approval and prior to funding, mortgage lenders won't typically alert the mortgage client or broker to an available lower rate, but a good mortgage broker will proactively monitor and advocate for those rate reductions to be passed on to the client.
• If the client is dealing directly with their bank, they'll probably never know there was a lower rate.
• The variance in lenders' float down policies, ranging from unlimited adjustments to none, is critical in our recommendations, especially for clients with long closing dates who may benefit from multiple rate reductions.

• Mortgages, property taxes, condo fees, and utilities on a currently-owned property can impact a borrower's ability to qualify for additional borrowing.
• A lender that provides a "rental offset calculation" can effectively reduce or eliminate this impact by utilizing the rental income generated by an existing property to offset the ownership expenses.
• These calculations can vary among lenders and not all lenders offer rental-offsets, so borrowers who don't qualify with one lender may still be eligible with others.
• Focusing on properties with strong cash flow is key to scaling a investment property portfolio and maximizing borrowing power.

• Lender rule books and qualification criteria aren't always cut and dried, especially when down payments are 20% or more.
• Skilled mortgage brokers excel by navigating the complex terrain of lender policy exceptions, which aren't listed in any policy manual but vary with each lender's flexibility based on a file's overall strength.
• Brokers with strong lender underwriter relationships often get exceptions  and the benefit of the doubt when others can't.
• Exceptions can cover a range of issues from rates to credit scores, and are more likely when a file otherwise demonstrates strong fundamentals.

• When purchasing a home with a secondary suite, the rental income can often be included in the borrower's qualifying ratios, thereby increasing their borrowing power.
• Different lenders have varying rental treatment calculations, but typically 50% to 100% of the potential rent can be used to help mortgage qualify.
• Certain lenders will even accept illegal/non-conforming suites if they have private, lockable entrances and their own kitchen and bathroom.
• All of the above can potentially increase borrowing power by 2 to 4 times the annual gross rental income. For example, $12,000 in potential rental income can add up to $48,000 in additional purchasing power.
• An excellent first-time buyer strategy is to buy a home with a secondary suite with as little as 5% down and turn it into a rental down the road.
• We are experienced landlords and are happy to help your potential buyers access these accommodating lenders.

• When a buyer wants to sell their current home and buy a new one at the same time, there are logistical issues regarding purchase and sale condition dates that need to be considered for mortgage financing.
• In most cases, it is essential that the client's current home is unconditionally sold prior to lifting conditions on their next purchase. 
• The lender will require a firm sale of the old home to verify sufficient down payment funds for the next purchase and to remove the payment liability that the old home represents from the client's qualifying ratios.
• If the buyer of the current home backs out, it could lead to financing falling through and prevent the client from closing on their next purchase.
• The mortgage approvals for both transactions should occur simultaneously, not sequentially.

• SPICE is an acronym we use to guide borrowers towards understanding the most suitable lending solutions for their unique needs. It stands for Strategy, Property, Income, Credit, and Equity/Down Payment.
• Each element plays a crucial role in determining eligibility and loan terms.
• For example, a rental property will have a different rate and different equity requirements than an owner-occupied property.
• When borrowers ask about the best rate, it's important that we first determine and consider all the SPICE factors to provide a comprehensive answer.
• This is what we call the Discovery Call, which is the first part of our pre-approval process.

• During a busy spring market, expect longer lender response times.
• Keep in mind: busy lenders with the best rates are in high demand and have the longest queue times.
• Alert your mortgage broker before making an offer to make sure they have the latest and freshest borrower documents, such as most recent pay stubs and updated down payment statements.
• Avoid unconditional offers; discuss any necessary ones with us first.
• We offer pre-approval letters to enhance your offer's appeal and provide regular process updates to ease the stress for all transaction partners

• Mortgage qualification hinges on debt-to-income ratios, using a Government of Canada prescribed "stress test" that adds 2% to the actual interest rate to ensure borrowers can handle higher payments. For example, a 5% rate would require qualifying at 7%.
• As interest rates fluctuate, so does borrowing capacity—,declining rates boost affordability and purchasing power, while rising rates have the opposite effect.
• There is also a bench-mark rate that kicks in when the stress test value is deemed too low.  If qualifying rates become too low, the government is concerned that buyers will overbid for housing and prices will artificially rise.

• All residential mortgage lenders in Canada require at a minimum 5% down payment. However, there is a way to synthesize zero-down purchase financing by borrowing 95% of the property price through a mortgage and borrowing the remaining 5% from an alternative source, like a Line of Credit (LOC).

• To qualify, the applicant must be AAA, meaning excellent credit, low other debts, and strong non-probationary employment. This works well for someone who has started a new high paying job, but hasn't had the chance to save up a down payment yet. 

• The applicant's debt-to-income calculation must take into account the monthly repayment of both the mortgage and the LOC, plus any other debt obligations.
• Generally at today's rates, the target house should not exceed ~3.5 times the applicant's annual income to make the numbers work.
• See our website for more information on the program https://www.richardsmortgagegroup.ca/borrowed-zero-down-mortgage-program
• PS - the Bank of Mom & Dad (aka a "gifted-down") is also another good option for down payment-constrained buyers!