Retiree Mortgage Solves Downsizing Dilemma

A retired couple recently reached out to me for assistance in downsizing from their beautiful West Vancouver house to a stunning waterfront condo 3km away.

They owned the house outright and had only given casual thought to selling the empty nest – until the apartment suddenly became available as a private sale. Such opportunities in a market as buoyant as this don’t come around all that often.

Their plan of attack was to immediately purchase the condo; then while remodeling it, to prepare for a de-cluttered and downsized move out of the house, which would then be groomed and staged for listing.

The clients had almost enough value in their portfolio of marketable securities to buy and renovate the condo outright as well, but were loathe to suffer the tax consequences of liquidating those investments – particularly given the current marketability of their principal residence (the sale of which would not be a taxable event).

So, the couple approached their private-client-group representative at their Big Five Bank for a short-term mortgage – only to be told that the institution could not help them. The banker purportedly explained to the clients that in being retired, they would not meet the bank’s income requirements to service the debt – regardless of their assets or cash flow; also, imposed regulatory restrictions precluded the bank from doing home-equity lending any longer.

The husband then approached me with the mandate of coming up with something “inventive.” As it turns out he chose that adjective carefully, because as an ex-financial services executive, he was expecting inventiveness (ie. presumably a private mortgage lender) to be relatively costly with a high interest rate and fees – but still less costly overall than triggering those investment taxes.

The next business day, I had the couple approved by another institutional lender for the home-equity loan they required to buy the condo. This lender did not qualify my clients on their income per se, but adjudicated the mortgage on the clients’ liquid net worth; the reasonability of their investment income to make the interest-only payments; the appraised value of their house and the condo; and the relative brevity of the term of the mortgage (which was open and therefore penalty-free upon the ultimate sale of the house). The upshot? The pricing of the loan was a little over half of what the clients were expecting to pay.

In parting – a message to downsizing, retired homeowners and their Realtors: if “the right place” happens to pop up before you’re ready to sell yours, call me to discuss if and how a mortgage solution like this is applicable to you or your clients. Please seek the advice of your accounting professional on all of your taxation matters.

Happy hunting,

TS

Fixed-rate mortgages look attractive as advantage of variable rate shrinks

Oct 1, 2015 Craig Wong, The Canadian Press

Read the Article Here

OTTAWA – The difference between the interest on a variable-rate mortgage over a fixed-rate loan has shrunk compared to where it was just a few years ago, making fixed-rate offerings more tempting.

Mortgage adviser Toma Sojonky says a recent move by lenders to prune their discounts to the prime rate for new variable rate loans has borrowers pausing and considering their options.

Combined with fixed rates drifting lower, Sojonky also says some borrowers with variable rate mortgages are starting to make the switch and lock in their loans.

“Variable-rate clients who touched base in the spring and vacillated are now calling back with instructions,” said Sojonky, an adviser with Verico Paragon Mortgage Group in West Vancouver, B.C.

“We saw fixed rates begin to inch up in the summer, only to drift down again recently — and some clients are pouncing in reaction.”

According to RateSpy.com, the best five-year fixed rate in Ontario available this week was about 2.28 per cent, while the best five-year variable rate mortgage was 1.75 per cent.

That gives the variable-rate mortgage just a 0.53 percentage point advantage over the fixed-rate offering and if the Bank of Canada starts to boost its key interest rate next year, that advantage will shrink even smaller.

When the Bank of Canada cut its key interest rate twice this year, borrowers with loans or mortgages linked to the big bank prime rates benefited, seeing their interest rates move lower.

However, if the economic recovery remains on track, many economists expect the central bank’s next move on interest rates will be to hike its overnight rate target, which will likely result in higher rates for variable-rate loans and mortgages.

“If you’re only looking at the interest rate spread, then it probably makes sense to take a five-year fixed if you think there is any likelihood of the Bank of Canada increasing rates any time soon,” said Jason Scott, an Edmonton mortgage broker with TMG The Mortgage Group.

However, Scott says you need to consider more than just the rate, especially if you think you might have to sell your house or refinance your mortgage before your term is up.

Typically, the pre-payment penalty charged by the big banks for ending a fixed-rate mortgage early is the greater of three months interest or interest for the remainder of the term on the remaining balance calculated using the difference between your interest rate and the bank’s posted rate.

That compares with three months’ interest on the remaining balance for a variable-rate mortgage, which Scott says is generally less than the fixed-rate penalty.

“Do you really know you’re going to be there for five years?” he said. “The reality is most five-year mortgages don’t last five years. Something happens. Typically, it is three and a half to four years; people do something.”

OTTAWA — Bank of Canada left its key interest rate on hold Wednesday, saying it could still take “considerable time” to recover from the collapse of oil prices that has pushed the economy into a technical recession.

Governor Stephen Poloz and his policy council have already cut lending rates twice since the global plunge in crude costs — first in January with a 25-basis-point reduction to 0.75 per cent, and again in July with a similar cut to 0.5 per cent.

“The stimulative effects of previous monetary policy actions are working their way through the Canadian economy,” the central bank said in a statement accompanying its rate announcement.

“Canada’s resource sector continues to adjust to lower prices for oil and other commodities, with some spillover to the rest of the economy,” it said.

“These adjustments are complex and are expected to take considerable time. Economic activity continues to be underpinned by solid household spending and a firm recovery in the United States, with particular strength in the sectors of the U.S. economy that are important for Canadian exports.”

Despite that optimistic view of the U.S. — Canada’s biggest trading partner and the world’s No.1 economy overall — Poloz and his policy team remain concerned about uncertain growth prospects for China, the world’s No. 2 economy and another major market for companies in this country.

“This has contributed to heightened financial market volatility and lower commodity prices,” the bank said, although a weaker Canadian dollar is “helping to absorb some of the impact” of these movements.

“While the overall export picture is still uncertain, the latest data confirm that exchange-rate-sensitive exports are regaining momentum.”

Indeed, some improvement has can be seen in recent months.

BMO Capital Markets, in an investment note ahead of Wednesday’s rate decision, said that “after a string of five consecutive negative monthly GDP prints, June blew away expectations with a 0.5-per-cent surge.”

“With preliminary July figures looking decent — strong auto production and sales and solid exports — we’re pretty comfortable with our above-consensus forecast for 2.8-per-cent Q3 growth,” BMO said.

The BoC forecast a Q3 advance of 1.5 per cent in its Monetary Policy Report, released July 15. BMO said “it’s also notable that the bank was bang on with its Q2 forecast for a 0.5-per-cent contraction.”

The central bank’s policymakers will publish their next quarterly MPR on Oct. 21, along with their latest rate decision.

Before that, however, the U.S. Federal Reserve is expected to begin raising its trendsetting lending level from near-zero.

The Fed has not lifted its key rate since 2006. But with strong employment growth and an improving economy, many forecasters see a rate launch coming as soon as Sept. 17.

Credit: Gordon Isfeld, Financial Post, September 9, 2015

New CMHC rules make it easier for some homebuyers to include rental income in mortgage application

Changes to mortgage rules mean that some home buyers in Metro Vancouver’s hot housing market may soon get a break when it comes to their loan application.

Currently, home buyers with a deposit of less than 20 per cent are required to have their mortgage loan application approved and insured by Canada Mortgage and Housing Corporation (CMHC).

Starting this fall, CMHC plans to change the rules for those buyers to allow them to include projected income from secondary suites when they apply for a loan.

“CMHC will consider up to 100 per cent of gross rental income from a two-unit owner-occupied property that is the subject of a loan application submitted for insurance,” the new rules state.

Additional conditions when home buyers wish to use these new rules include:

• The income must have been sustained over at least two years.
• The income amount must not exceed the average of the past two years, to address income fluctuations, smooth out cyclical trends and unexpected events such as vacancies.
• Up to 100 per cent of gross rental income may be used only where prospective borrowers can demonstrate a strong history of managing credit generally considered to be a minimum credit score of 680.

The rule change is aimed at boosting affordability, although some experts say the new regulations could actually further heat up housing markets in Toronto and Metro Vancouver.

In the Vancouver area, the changes would most likely be felt in suburban areas, including the Fraser Valley, where single family homes are still within reach of average first-time buyers.

Can purchase bigger properties

Professor Tom Davidoff of the University of British Columbia’s Sauder School of Business said the changes will likely appeal to young families, allowing them to buy bigger properties with suites that can later be used by the owner.

“When the family is larger, they can toss out the renters and occupy the space themselves without having to move,” Davidoff said.

Tsur Sommerville, also with the UBC Sauder School of Business, said the CMHC change will have more impact than the Bank of Canada’s recent prime rate reduction.

“For someone who is looking to buy a house with a basement suite that was generating $1,200 in rent, they can borrow an additional $72,000 to purchase that unit because of that change,” Sommerville noted.

Real Estate analyst Don Campbell says this policy change will mean a bigger boost in suburban markets and predicted that the population in these regions could rise along with the demand.

Credit: CBC News, July 28, 2015