Insured or Insurable?

As if it hasn't been crazy enough for lenders and mortgage brokers alike to understand the mortgage rule changes of the past two years. How are the frontline service people like Realtors supposed to answer questions presented to them from clients who are even more confused with the changes?

In Short:
Mortgages that are insured with "Mortgage Default Insurance" either through CMHC, Genworth or Canada Guaranty typically have one set of qualifying guidelines and competitive mortgage rates;

Mortgages that are not insured with "Mortgage Default Insurance" follow another set of guidelines and have corresponding mortgage rates.

In a nutshell home purchases and previously insured mortgage transfers are insured. Refinances Are Not . . . for the most part.

The Long
Most consumers and Realtors understand that regulated mortgage lenders in Canada can only lend up to 80% of a property's value. Any mortgage loan exceeding the 80% loan-to-value ratio must be insured against default through one of the 3 big insurers. This allows lenders to exceed the 80% threshold up to a maximum loan amount equal to 95% of a property's appraised value. This is also known as a High Ratio Mortgage (or high loan to value ratio).

Now what might not be common knowledge is many lenders insure their own mortgage portfolios against default and pay a required insurance premium for this service. This is true of many monoline, mortgage-only lenders, but even the banks, who use yours and my savings and deposits to securitize their mortgages need to default insure a portion of their mortgage book. What's happening now is these lenders not only have to pay their insurance premiums, they must also have more "Skin in the game" meaning more of their own capital to back (securitize) their mortgage loans according to regulators. Thus, what has evolved from the mortgage rule changes is the terms: Insured or Insurable which reference whether a mortgage is insured, i.e. high ratio mortgage insured against default through a borrower paid premium. Or Insurable, which describes a mortgage that qualifies for mortgage default insurance whether the premium is borrower paid or lender paid.

In either case, you can view both of these types of mortgages as before, High Ratio - Insured and Conventional - Insured. What does change, in addition to whether the insurance premium is lender or borrower paid is the mortgage rate that will be offered to a qualifying borrower. Believe it or not, High Ratio Insured mortgages are offered the best rates. But more so lately, borrowers with loan to value ratios of 65% or less have been offered comparable rates by the same lenders.

The big change has to do with the new term "Uninsurable" mortgage. Basically what this means is that a property that doesn't meet the guidelines as set out in the new mortgage rules does not qualify for mortgage default insurance. What does that mean? First of all, some lenders can't afford to insure and back their own mortgage portfolios so that means they can't take on any new mortgages that can not be insured. It also means a loan to value limitation of 80% of a property's appraised value.

Here's the kicker . . . the following circumstances do not qualify as an Insured or Insurable mortgage: 1) Refinances or Equity Take-out mortgages; 2) Non owner occupied rental units with only one rental; 3) Mortgages for Self Employed with non-traditional income; 4) Mortgages that don't qualify under the new "Stress Test Rate." and for all that, if you do find a lender who will lend in these cases, expect to pay a premium on the interest rate and perhaps even additional rate premiums on top of that for things like rentals, extended amortizations and non conforming income.

So what does this mean for Realtors? 

Gone are the days of traditional rate sheets or over-the-phone rate quotes. Now more than ever, Realtors need to enlist the services of a trusted mortgage professional to help them and their clients navigate the mortgage maze and provide information help focus their house hunting efforts.

by Steven Porter, Mortgage Agent - Mortgage Architects
Steven can be reached through his website at www.1800Mortgages.ca

Mortgage lenders are getting creative to keep rates low, but here’s why homebuyers should beware

Online comparison shopping is changing everything from how we buy a new television set to how we select a mortgage, and it’s causing some mortgage lenders to get creative in order to compete.

Lenders are stripping away features of mortgages to get their rates lower,” says Steve Pipkey, co-founder of Spin Mortgage.

Consumers have always been keen on scoring a low mortgage rate, but the ease with which they can comparison shop via their computers, smartphones and tablets has created an even greater fixation on the headline number, above all else.

“The majority of our phone calls are about rates these days, whereas before it might have been more about, ’How can I get my money out fast?’ or ’What’s the quickest way to refinance my home?”’ says Bob Aggarwal, president of Canadalend.com.

Brokers say the push for low rates is not a bad thing, but it has led to some confusion. While mortgage contracts used to be fairly standardized, many of them now contain various conditions and clauses, and in some cases it’s hard for consumers to decipher the difference between various products.

“If you’re online trying to figure out what the rates are and why, good luck to you,” says Pipkey. “Some banks and brokers are better at disclosing the fine print than others.”

In some instances, in exchange for a lower rate, lenders are adding steeper penalties for paying off a mortgage early. By chasing those five extra basis points, buyers put themselves at risk of having to pay thousands more in penalties later on down the road, says Pipkey.

Prepayment privileges also allow borrowers to pay more than their regular mortgage payments without penalty in order to get out of debt faster. But some lenders may reduce how much money borrowers can repay in exchange for a rate reduction.

Pipkey says it’s not surprising that lenders are lowering their rates given how competitive the mortgage market has become.

“Mortgage originations are down and lenders are fighting for market share in the face of compressing margins,” he said.

Bill Whyte, senior vice-president and chief of member services at Meridian Credit Union, says it’s hard to attract clients unless you offer a competitive rate that will grab the attention of borrowers.
The credit union recently offered, for a limited time, an 18-month mortgage for an eye-grabbing 1.49 per cent.

“To our knowledge, when we offered it, 1.49 was the lowest in Canadian history,” said Whyte.
“It drove a ton of traffic to our contact centre, our website and our branches.”

However, many borrowers who phoned to discuss the offer ended up going for a five-year mortgage at a slightly higher rate instead, he said.

“In a lot of cases the five-year rate fit them better, and some of that initial interest in 18-month was diverted to five-year,” he said, adding that many Canadian borrowers are looking to lock in at today’s rock-bottom interest rates before they climb higher.
Alexandra Posadzki, The Canadian Press

How to win a bidding war on a home

In many hot housing markets, bidding wars have been breaking out on a regular basis -- and some house hunters are getting beaten out time and again.

But it's not always about who has the most money. Sellers will accept lower offers if it means less hassle.

What sellers really don't want to do is waste time. That means getting pre-approved for a mortgage and having all your paperwork -- your pre-approval, proof of income, work history and bank statements -- in hand. It also helps to have your lender at the ready so you can act fast.

Related: Fast online mortgage preapproval

But first you have to beat out all of those other bidders.

Here's how you can win over a seller and get the house you want:

Pay with cash. The best way to get a seller's attention is with cold hard cash. That is, if you can afford it. In fact, all-cash sales have become extremely common, representing more than 40% of recent sales. Ever since the US housing meltdown, getting a mortgage has become a longer and more arduous process.

With all-cash offers, sellers are sure the buyer is qualified. And they won't have to wait through the loan approval process.

Depending on the market and the seller's situation, they may even accept a lower offer just because it's in all cash.

Get your mortgage ready in advance. Don't have a ton of cash to put on the table? Try pre-underwriting a mortgage instead.

With pre-underwriting, lenders take the pre-approval process a step further by reviewing all of the income and asset documentation that they would typically need to approve a mortgage.

Related: A foolproof plan to secure the best financing rates

Sellers look favorably on pre-underwritten offers because they don't have to worry that the buyer's mortgage application will be rejected. All that needs to be done after the contract is signed is to complete an appraisal.

Be flexible (but not foolish) with contingencies. Contingencies are clauses that allow buyers to back out of deals if specified conditions are not met. A bidder will sign a contract to buy a home contingent on the appraisal coming in at or over the selling price, for example.

Another common contingency clause is the right to back out if you can't find a buyer for your home. In hot markets, buyers often waive this right because they figure it should be easy to sell their old home quickly. In less heated markets, you could get stuck paying two mortgages.

Related: Housing Market Newbies BEWARE

One contingency you should think twice about before waiving is the home inspection. Should the inspector discover a major problem, such as widespread insect damage or a badly cracked foundation, it could cost far too much to fix. You want to know that before making a commitment you can't back out of.

Related: 11 Home Inspection Pitfalls

Be first. See the home as soon as it comes on the market. That way, you can get your bid in early and preempt later offers.

Real estate agent Steven Porter, has a new service that can help. Its a VIP House Hunter service that enables buyers to receive notification of new listings the moment signal that they're put up for sale allowing buyers to beat out the competition. Homebuyers can find these potential properties by neighbourhood, price, type or city.

Agree to outbid everyone. Do you really want the place? You can outmatch every other bidder by creating a contract with a so-called "escalation clause?"

The clause basically states that you will pay $1,000 or $10,000 more than whatever the highest bidder offers.

So if the seller gets an offer for $200,000, your bid will automatically jump to $201,000 if you have an escalation clause.

Related: How to negotiate a better price

The danger with escalation clauses is twofold. You never really know if the other offer is real. Sellers can ask someone to submit an offer just to get the buyer to raise their bid.

The second problem is that the final home price may be a lot higher than the appraised value of the home. That could jeopardize the mortgage or force you to come up with a lot of cash to make up for the shortfall.

One way to prevent that from happening is to place a cap on the bid, offering to pay no more than 10% or 20% above the original asking price.

Using a cap means, however, that you may not end up with the home in the end. 

Find homes for sale.

Based on a editorial by Les Christie, CNN Money

Steven Porter, Broker, Buyer Rep. - REMAX Aboutowne Realty Corp. Brokerage

Now is the time for home closing protection insurance

Due to the growing possibility of buyers being declined their financing at the last minute, sellers need some protection in the event their closing is delayed or cancelled and they are forced to carry 2 homes for an extended period of time.

One company that I have dealt with that provides this coverage is Canadian Home Shield. Their President, James Vlachos, who is an insurance broker, advises me that for as little as $99, sellers can purchase a $25,000 insurance policy that will cover all mortgage payments, real estate taxes, utilities and insurance premiums up to a total of $25,000 in the event that the deal does not close through no fault of the seller. I personally have had 2 seller clients recover over $9,000 in costs after a buyer failed to close their purchase agreement.

Buyers can also purchase breakdown insurance protection for their home systems and appliances. Since most real estate contracts provide that sellers only warrant their systems and appliances to the date of closing, this provides buyers with the opportunity to purchase additional insurance protection for a year after closing.

For further information, please see the attached website: http://www.canadianhomeshield.com/ 

by Mark Weisleder, Real Estate Lawyer, http://www.markweisleder.com

Canadian Real Estate Association Takes a SWAT at Foolish Homebuyers

A GOTTA-WATCH Video Clip . . .

The Canadian Real Estate Association (CREA) and creative agency Union have created a new TV spot to get potential buyers to understand the value of having a Realtor.

To do that, they brought out the heavy artillery.

“The goal is to get Canadians and homebuyers to understand some of the pitfalls that are unknown to us in buying and selling a home and some of the skills real-estate agents bring to the table,” says Subtej Nijjar, a partner at Union. “The goal was to show the value of what a real-estate agent brings to the process of buying and selling a home.”

The 60-second spot that’s airing online shows a SWAT team raiding a hose in the middle of the night – a misunderstanding that a realtor may have helped to avoid.

Posted by; Steven Porter, Broker -
REMAX Aboutowne Realty Corp., Brokerage
www.PorterRealEstateSystem.com