April 19th, 2010 is the date, and the new mortgage rule changes go into effect today.
Our office did a presentation to 50 realtors and clients last week, and below are the three videos that came from it where the changes are discussed at much, much greater length than previously.
Transcription of Video Blogs (All 3)
Wayne: I want to take this opportunity to welcome all of you to this presentation. As you are all aware, there have been multiple changes that have taken place in the mortgage financing business over the last couple of weeks and most of it is taking place this Monday. Thus, the reason for this seminar. From my point of view, these are probably the most changes in a very short period of time since I’ve been brokering, which is over 15 years now. We hope that this presentation will give you a better understanding of the changes so that you can modify your business plans accordingly, if necessary.
We are doing this presentation in three segments, but we encourage you, if you have any questions during the presentation to just raise your hand. I’ll bring the microphone over and you can ask your questions, rather than waiting until the end of the presentation.
At this time, I would like, if you haven’t, maybe to turn your cell phones to silent mode so that we don’t get interrupted. We’re ready to get started, and first up will be Maury. So Maury, take it away.
Maury: OK. Can everybody hear me without this? That sounds all right. Yeah. OK, so what the hell’s going on? Well, hopefully today we’ll try and address these questions. Today, what we’re going to cover is a quick into and just making sure we understand the difference between high ratio and conventional because that is going to kind of set up explaining the changes and making sure when you know the changes apply and don’t.
There is a set of government mandated changes that we’re going to be going over. That will be followed by the insurers that have some changes that they will be setting up for some of their programs, specifically, self employed and rental programs. That’s pretty much going to wrap it up.
We’re going to have questions at the end, but also, as we’re going through to try and make sure that we’re covering each topic and it’s clear. If you have a question, please ask it when you have it.
So starting out here. The high ratio conventional, by definition, when a deal is defined as high ratio, whenever there is less than 20 percent down payment going into the deal.
This is the same definition at all banks.
When there is less than 20 percent, the deal has to be insured. It can be insured by any one of the three insurance companies we have in Canada. CMHC is by far the largest one used, but Genworth is second, and there is also AIG.
The bank typically decides. The bank usually develops a relationship with one or two of the insurance companies. They typically choose where the deal will best fit at the insurance company. They are all pretty much the same. The fees are the same. It’s pretty much lying to the client, for all intents and purposes, but there are three in Canada.
Then, conventional is when there is more than 20 percent in the deal. So just to do a broad category of high ratio and conventional.
We wanted to set that up because, the government mandated changes, these apply to all deals, at all banks, at all insurance companies when there is less than 20 percent down.
The first change is there is a new maximum amount someone can refinance their property to. So we’ll go over that more in a second here.
The second change is to help the banks. Insurance companies are going to determine the amount someone can qualify for, the amount of the mortgage, so this is changing.
The third change is there is a new minimum down payment requirement for a non owner occupied rental property.
There is one common misconception that is commonly asked about the changes is the new minimum down payment. If somebody is going to live on the property, there is no change to this. So if someone is going to buy a house and they’re going to live in it, there is no change. They can still buy with as little as five percent down.
The first change, the maximum refinance amount, it is, the limit now is 90 percent. So if someone has had a house, they’ve had it for a while. Maybe they’ve done rentals, they want to take equity out. They can now only go to 90 percent of the property’s value at the time that they want to do it. Before, it was 95 percent they could go up to.
This was more put in place to address some problems we’ve seen in the States, more than in Canada, where the market took property values up. People just refinancing every year and they weren’t really doing anything with the property, but kind of treating that house like a bank account. So it is to discourage this.
But in Canada, this product was not really used, they were never really taking, they might have been refinancing, but they were never taking it out to the max, for the most part, 95 percent. A change, but probably something that won’t affect most people.
This is a more significant change. This is the rate that is going to be used to determine how much people can qualify for a mortgage. There’s a couple of situations, so this is the first one.
If someone is going to be taking, or would like to take, a fixed rate mortgage of less than five years, a term of less than five years, or if they wanted any variable rate mortgage, this is what they have to do.
They have to qualify for the amount that they want using the Government of Canada benchmark posted rate.
Right now, it’s 5.85.? So I put “versus 3.85” there because before today, someone could qualify for a variable rate mortgage using a much lower rate than they’re going to be forced to now.
If they want to qualify for a $500,000 loan and they want a variable rate mortgage, they’re going to have to try to qualify for the mortgage using that higher rate.
We’ll go into an example in a second, and you can see some numbers. So that’s the second case.
If someone says “Well, just forget it, I’m just happy with a five year fixed term, ” or “I’m going to take any term longer than five years with a fixed rate.” Guess what? You can use the rate, that’s the contract rate, the discounted rate, the rate that they’re actually going to get for their mortgage.
So clearly, you can see here, the point of using this higher rate, even though someone might be using a product that gives a lower rate, the government really wants to make sure that someone is going to be able to afford their payment over a significant amount of time.
Everybody knows we had record low rates, variable rates, like bottom basement, right? They’re only going to go up and there kind of wants to be some assurances in place that people are going to be able to afford their mortgage if it goes up two percent on a variable or if they have to renew in a year and rates have gone up. That they have comfort that they know that they are going to be able to make their payments at time of renewal.
I’ll give you an example. In this example, what we’re going to use is that we’re going to use someone that has a gross annual income of $60,000 per year. I used average property taxes amount, and I’m assuming they have no other debts, car loans, student loans, stuff like that.
The old max, meaning that 3.85 rate, so if someone was taking a very low rate mortgage or something, yesterday this person, or these two people or whatever it is could have qualified for a mortgage amount, not just a purchase price, but a mortgage amount of $439,000.
So if this person today says, “I still want a variable rate mortgage but I have to qualify for this thing under the new guidelines of 5.85.” They’re only going to be able to qualify for a mortgage for $342,000.
They can still have a variable rate mortgage, but the amount that they can get if they want a variable or a term less than five years is much lower. But then, there is some saving grace there. That if you say, “Forget it, I’ll take a five year fixed because then I qualify for it at the rate I am going to get.” They can qualify for a mortgage of $396,000.
So clearly, especially in Vancouver, there’s going to be a pressure, a funnel, I would say, to more people maybe taking a five year fixed. In order to qualify for the amount they need. It may not be a huge deal for a lot of people, there is a clear preference in Canada for five year fixed, but we all know that everybody doesn’t take a five year fixed.
This has just been how the numbers line up with the qualifications, so any questions on this one? [pause] No?
OK, so the last…
Maury: So the last change is the minimum down payment for rental properties. The new minimum down payment is 20 percent, and it was previously five percent.
So someone, if they qualified, had enough income, had enough rental income coming from the property, they could buy it. There were programs available for as little as five percent down. They did have a hefty, hefty insurance premium because the deal, of course, was insured, but it could be done.
So if that property was $500,000 before, obviously $25,000 minimum, and there will be the insurance but now, obviously, 20 percent of 500 is 100, so if they’re going to rent it out, they are going to need a much larger down payment.
This does not apply to second homes. There is a category of non owner occupied properties which are deemed as second homes. So a true second home, meaning you cannot count any rental income coming from it, in order to qualify for the mortgage.
This is not affected by this, you can still buy those. You don’t need to put 20 percent down. But if you need the rental income generated to qualify then you will need 20 percent down.
That is it. So the next section here, I will just turn over to Rowan.
Rowan: All right, so Maury covered what a conventional mortgage is and all of these changes that apply, as we have been talking about high ratio so the government mandated changes apply to things, there are three different changes; the investments, refinance, and the amount of down payment that is required.
However, just because that only applies to 80 percent financing or more, that less than 20 percent down, there’s actually more banks that are going to follow that all the way down the road. It doesn’t matter if you have 35 or 40 or 50 percent down, a lot of banks are still going to follow these new guidelines.
The reason is kind of complicated and involves how the banks raise their money in the markets and whatnot. But if they’re going to be doing that, you can see that these changes and there’s a lot of lenders that are going to be following that. I would say half or more.
It’s going to have a lot of impact for any loans of value, even though the mandated change only applies to 20 percent down or less.
So rental income changes, in Vancouver, this is huge. As we’ve heard, the percentage of properties, especially the condo market, is rentals. It’s definitely the most dramatic change, and ironically, this one isn’t even mandated. This is simply something that come down through CMHC and then all the other insurers have jumped on board with similar policies, not identical.
We have three different insurers we talked about. We’re not going to get into the specifics of who does exactly what type of product. But I can say that the rental industry is treated far less valuably than it was in the past.
Now this includes rental income from multiple different sources. You’ve seen on purchases, you see mortgage helper, you see in-law suites, you see nanny suites, it doesn’t matter what you call it.
If it’s a secondary suite within the property, if there is a second kitchen and as a rate they are bringing in revenue for this property, than that income is going to be treated far less favorably than it was.
It used to be that you could take a certain percentage of that income, say 80 percent is the number. OK, and we would go “You have got $1,000 in rent, you’ve got $800 we’re allowed to use. How much mortgage does that support?” The answer was like $180,000 or something. So right away the person qualified for $180,000 more just by virtue of having that suite in the property.
Well in Vancouver, we’ve got the whole authorized/unauthorized suite issue, right? And if something is authorized, can we use it? If it is unauthorized, can we use it? And the answers vary from insurer to insurer, so that’s something where the brokers have to know every one of the guidelines and rules for the different institutions.
Let me give you an example of how the new rules are going to take effect. We’re going to take the same example, say $60,000 average cost, clean credit, et cetera. So this is assuming a $1,000 basement suite. 680 to 515, so the old approval amount. In Vancouver, if you can picture East Vancouver, almost every home has a basement suite.
Picture Surrey, all these different areas. All these basement suites that we were previously able to bring into the mix. We can, but at a much lesser and more constricted treatment. That’s a 24 percent decline or reduction in how much somebody can qualify for based on that income. 24 percent is going to translate into an effect on how many buyers can afford properties in a particular price.
Now rental income, I was just talking about suites there, but it comes from multiple sources including three different ways, the basement suite, then you’ve got your rental property.
You’re living in your home, maybe you have a rental condo and it’s rented out. This third one is really where the rules are murky. That is going to be interesting to see how that plays out. When someone owns a home, especially a first time home buyer, they own their property, they want to upgrade to a new property, but they don’t want to sell the first one.
Maybe they’ve been there five years, they’ve built up significant equity, maybe the property can rent for a specific amount. So they want to get out of that property and move into a home. In that circumstance, that is where the treatment of that income for the old property is not really clear, the reason being is that they don’t have it at this point in time.
So if somebody has a rental property and they’ve had it for an extended period of time, the new rules actually favor those, that treatment of that income over all else, as long as the people are declaring it to pay tax on it. Going forward it will be far, far harder to qualify.
So you should declare it anyway because then you can offset your interest with a possible mortgage, so it makes sense to declare it but a lot of people still aren’t doing it. Is there any questions on the rental income or how this affects suites being authorized or unauthorized? That’s the rental income section.
I’m going to pass it over to Leah who is going to cover self employed.
Leah: All right, so pretty much all of us in this room are self employed so you can probably relate to this section as to how this is going to affect you specifically. Definitely clients who I encounter in Vancouver, a lot of self employed people.
Up until now, there has been a program called the Stated Income Program. Now, it’s exactly that, you are stating your income. And the reason that they have this is because in businesses, if you are a mechanic, you’re getting a lot of cash jobs.
Like us, we write off our cars, our cell phones, even part of our homes, and our rents, and our mortgage amounts. So because of this, banks and lenders, the insurers, even they understand that there is bit of a grey area. What exactly are you making at the end of the day because you have all these write offs?
So what they’ve done is they invented a program called the Stated Income Program. They’ve had this for quite some time and with this, traditional income verification is not necessary. You don’t have to show your D4s, what you’re simply doing is “I make $60,000 a year,” or whatever sounds reasonable.
Now with this, it isn’t that good to be true because you are going to have higher premiums with this which of course is more costs. You can’t just say that you sell coins or you collect bottle caps and you make over $100,000 a year. It does have to be reasonable.
How do they deem reasonable? Well, there are various amounts of things that leads me into where the changes are. Before they were a lot more lenient on what was deemed reasonable. Now they’re really focusing on different websites and economic studies and they’re going to ask you first, “What do you think you make?”
And then they’re going to look at what their stats tell them. If that seems to fall within their realm, they will deem it reasonable and they will accept it. Now the other change, and again, this is only for the Stated Income Program, the down payment has changed.
It used to be you only have to put down five percent, but it is now going to be a minimum of 10 percent down payment. That’s not to say that if you are self employed that you automatically have to pay 10 percent. It’s only if you decide to use the Stated Income Program.
With that being said, proving your income is always going to obviously stand up stronger with the lenders. So if you are able to, if you are properly declaring how much you make, and you’re paying taxes on that, you might if you are self employed, whatever it shows on line 150 on your tax returns, you actually get to add 15 percent of that back, to account for write offs. So if you’re able to, use proven income rather than stated income. You’ll save on your premiums and you’ll be able to put down a lower down payment down if you like.
As well, like Rowan mentioned, each insurer is a little bit different and so their internal policies are varying based on the amount of years you’ve been in the industry and the amount of years that you’ve actually been in your own business.
So that again is where…
Leah: …two years and maybe they’ve done it in their own business for 25 years. That is going to depend, or we’re going to have to then look at different insurers and we can send it to one insurer, but we can’t send it to another. So they do have differences of opinions on that.
So, this is actually a really short and sweet presentation. So, again, at this point, I will actually stop. Does anyone have questions on the self-employed program or anything that we’ve covered up until now? Yes.
Audience Member: Can we get a list of incomes which they will use for assessment?
Leah: Oh, of what they’re going to use? I don’t know. Are there websites that they can go to?
Maury: You mean when they’re looking at the reasonability test? They don’t really disclose that info to us. They have their own internal guidelines.
Leah: Yeah, because they’re really just going to state something in that, right?
Man 1: Isn’t it public knowledge?
Maury: Not really. No, they use a number of different sites that they look at. Let’s say somebody is a contractor, there’s a “range of most contractors in Canada” file. They can look at that information.
If someone says $250,000, they can look at that site and go, “Well, you know, by this they only made $60,000 or $70,000” and that’s the number they’ll use. But I don’t believe that we have access to this.
Guest 1: For the States, it’s available free.
Leah: Yeah here it’s not so much.
Guest 1: If you guys want to know what a lot of business are making, we use labor market information. So you have an LMI or BC or for your province and you’ll find it probably, LMI.
Leah: LMI. It’s also important to know as well, one of the — which is on [inaudible 01:36] here — having a mortgage broker that you can go to and using as a resource. Because we deal with these, we can literally call up any one of our lenders right now and have a one-on-one conversation with them.
There is grey area. If you do have a contractor and maybe he really does make a crazy amount of income because he has so many people working for him or so many projects on the go, we’re able to have that relationship to somewhat tell the real truth of the situation.
If there is a good argument for it, there is always that possibility of things happening as well. So that’s really important to have a good relationship with your broker. Because you do speak to the lenders one-on-one every single day. So, leaving that into the to-do list-is there any other questions before we get on?
All right. So, first thing on your to-do list is definitely knowing your mortgage broker, especially for the Realtors in the room. You’re spending all of this time with your clients and to just say, “Go to your bank and take care of it on your own.” Not what I would encourage because with the banks, they have very tight regulations.
They also are out to make as much of an interest rate as possible. So, maybe your client won’t qualify for as much, or whatever the case may be. We’re actually able to handhold your client and insure that it’s getting done. Plus, we’re able to call you and we can tag team with you on the client to make sure that they’re getting us the paperwork that we need in the certain amount of time. Make sure that you get your approval deadlines on time.
Now, full disclosure of income and sources, this is more for clients. For those of you who are getting a mortgage yourself, you have to fully disclose not just what you make, but where the sources are coming from. There is, again, a lot of grey area in terms of income.
So, if you think you make $80,000 a year, because that’s what you made last year, it might not be. You may only make $60,000 because of a two-year average or based on your commissions and bonuses that aren’t going to qualify, or things of that nature. So, you need to not only disclose your income, but always your sources.
Prepare your documents early. If you go into the bank and ask for a pre-approval — which is actually the next point on here — if you’re approved, you’ll go into your bank and they’ll say, “Well, how much do you make? Do you have any payments?” So they’re taking things for face value and they’re basically saying, “Well, based on what you tell us, if all that is true, then you qualify for X amount.”
You go to a mortgage broker, then they’re not only going to ask you those question and take you for face value, but then they’re going to follow up on you and say, “OK, let’s start doing that paperwork together.”
And essentially what they’re doing is they’re going through the full approval process for you so that when you as a Realtor take your client or as a client you find that home of your dreams, and then you go to get approved and you realize, “Well, I thought I made this much.”
Or, “Oh, I thought I could get my paperwork together.” Or, “I thought I had this down payment. You mean I can’t use my credit card for my down payment?” Or whatever the case may be, you’re not going to have that disappointment of losing the property. So, get your documents before even looking at properties, get everything in order.
Then, again, confirming the pre-approval of the appropriate paperwork, a mortgage broker should go through all that for you. If you’re unsure what paperwork you are going to need, ask, and they will definitely let you know.
So, with that being said, are there any questions? Because we’re pretty much — we’re there. We’ve gone through all the requirements. Yes.
Woman 1: Are you still giving 120 days guarantee on the rate?
Leah: It depends on the lender. Some of them are 60, some are 90, some are 120; it’s all internal policy. So, yeah, depending on what the rate is, your broker can let you know at that time what the rate hold will be.
That’s something to note as well. If you want to get pre-approved, a lot of us brokers in the room here, we can do that on the phone for you, we can give you pre-approval of an amount. If you want to get an actual rate hold, you need to let us know because that actually takes a bit more of a process to go through.
We have to start actually choosing which lender you’re going to go with, and pre-approve you and give you that rate hold of 90 or 120 days. But, in general, for your pre-approval, we can tell you a number and to get going, but it’s different than a rate block.
Any other questions? You guys are all awesome! You know what you’re talking about now? All right. I guess we can — do you want to go ahead and close this up?
Wayne: Sure. The final thing I wanted to say, I guess, is for the Realtors out here or people who are sending their clients to the bank. I plug the mortgage brokerage industry with these new financing rules and things like that.
You really should have a broker as a first choice, but definitely a broker as a second choice. Just as a second opinion. The reason is, we didn’t want to make this too technical, but as we showed in an earlier slide, there were three insurance companies.
Realistically, not all the banks use all three. For example, very few lending institutions use AIG. They’re probably going to be disappearing off the map. So, when you need, say, a basement suite income or a self-employed program, there are variances from not only the institutional internal guidelines, but also with the insurance company.
I’ll give you a classic example — Scotiabank does use Genworth and Genworth does do illegal basement suites, which is great for Vancouver, but Scotiabank does not. So if you send your client to Scotiabank and that’s their home bank, and they want to purchase something — they’re going to qualify, basically, only on their income without any rental income.
If they want to buy something a little bit more expensive, you want a second opinion. And, as a broker, that’s where we come in and we can mix and match between the insurers and the lenders, we know what each one does.
We could, in a sense, get them a little bit more money to get into that dream home in Vancouver rather than, say, moving out to Burnaby — which is not a bad thing.
Wayne: So, I think that I would encourage you to use brokers to begin with because there’s 40, 50 different lenders and there’s all mix and match. But more importantly, if the client says, “Oh, I’ve been to see my bank, this is what they qualified me for,” but it doesn’t line up with what their expectations are, at least give one of the brokers in this room a call. Get a second opinion. We may be able to get them that little bit extra to get them into the home that they want. OK?
Other than that, we will be around if you have any further questions. Thank you all for coming and best of luck in the spring market.