Wednesday, May 25, 2011

Self Employed Mortgages

You can view all my videos on You Tube at HamiltonBroker.

I should have made this post weeks ago, as many people are switching their careers to self-employment to gain more control of their life. Contrary to popular belief getting a mortgage while self-employed is not as hard as you may think. I have heard people thinking they need 20% down, they have to pay higher interest rates and even heard that “B” lending is their only option.

I will explain the easiest way for the self-employed to get a mortgage first. If you have been self-employed long enough to have two years’ worth of taxes completed, owe no taxes and have claimed sufficient income to qualify for what you want to purchase. You will fall into the same category as anyone who is employed with a regular job, you can buy with 5% down. The only difference is the document collection, instead of us asking you for a job letter and paystub, we will want two years NOA’s and your T1 Generals. We do add 15% to your income to offset the amount you have paid in taxes. The same mortgage insurance fees apply if you are putting down less than 20% and you can still get the best rates. Always ask a broker up front if there will be a fee, in this case there shouldn't be.

If you haven’t claimed enough income and do not qualify to purchase a home there is still an option for you. With less than 20% down the mortgage insurers have a self-declared income program. Basically you make up a number for your income, but don’t get too carried away we will have to provide your business financials to back it up. We will still need your NOA’s to show that no taxes are owed. With this program you need a credit score of at least 680 and a minimum of a 10% deposit. You do have to pay a higher CMHC premium, but I guess that offsets the amount of money you have saved in taxes. When clients complain about this premium we basically tell them to redo their taxes and show enough income to qualify without the self-declared program. They always pay the premium, which is just added to the balance of the mortgage. Again there should be no fee for this service.

The third way to get a mortgage as self-employed can have a book written about it. There are many variables that come into play. But basically it is a conventional mortgage or an equity mortgage which is a mortgage with 20% down or more and is uninsured. With these types of mortgages there is more risk to the bank because they are not insured by the default insurers; however, the larger the down payment the less risk there is for the lender. The rate you receive on these mortgages will depend on your credit score and size of deposit. With an equity mortgage almost anyone can qualify if the down payment is large enough, self-employed, bad credit, taxes owed, commission earnings and to be quite honest, you can have no income at all. If you do fall into this category don’t think you are alone, there is plenty of people here. There is an entire industry in the mortgage world based around this type of lending. This type of mortgage often requires a fee from a broker, make sure you ask up front what it will be, do not find out what it is the day you sit to sign the mortgage papers. "B" lenders often do not pay the brokers very well compared to the amount of work required to put one of these mortgages together.

I have just explained the basics, if your situation requires a little special attention feel free to contact me and we can send you in the right direction. If this has been a help to you, please let me know. Be the first to comment.

Ron Miller
Butler Mortgages
905-667-0699
ron.miller@butlermortgages.com

Sunday, May 15, 2011

Down Payment Requirement, Cash Back Mortgages



You can view all my videos on You Tube at HamiltonBroker.

This post is mainly aimed at explaining the cost associated with the size of the down payment you use to purchase a home. The ideal amount is 20% or more because then you can avoid default insurance premiums. You can buy a home with no money down, which is now referred to as a cash back mortgage, but it can be a risky way to get into home ownership, although it is sometimes the only choice. There is not longer 0% down payment in Canada, this was removed to help prevent a collapse in the Canadian mortgage market, such that happened in the States. You can still buy a home without a down payment it is just referred to as a cashback mortgage.

For the purpose of this post let's just look at a $200,000 purchase price for a owner occupied home, at 4% interest on a five year fixed with a 25 year amortization. If your down payment is 20% ($40,000) you will not have to pay any default insurance fees. There is a sliding scale for how much the default premium will be with less than 20% down. You can view this chart from CMHC "here". Not very many people have a 20% down payment when they are starting out so most do end up using mortgage default insurance.

Now for a 200k purchase with 5% ($10,000) down you are looking at an insurance premium of 2.75% or $5,225. This amount is added to your mortgage balance and works out to be $27.48 monthly integrated into your mortgage payment. You also have to pay $418 PST on this amount on closing as part of your closing costs. The total monthy mortgage payment would be $1,026.92.

Let's say you do opt for the 5% cash back. Your insurance premium will increase to 2.90% ($5,510) as well your interest rate will generally increase to the bank posted rate which is currently 5.69%. This higher interest rate is put into place so the bank can recoup the 5% cash back within 5 years. This increase in rate over 5 years works out to $188.17 monthly or $11290.20. Now remember you are paying back the bank your 5% ($10,000) down payment so it is actually costing you $1,290.20 ($21.50 monthly) to borrow the down payment. After 5 years you are free to switch lenders and return to normal interest rates.

One thing you want to keep in mind when considering this type of mortgage is your ability to break the mortgage. When you sign mortgage papers at a lawyers office you are entering into a contract. If you break this contract there is penalties either 3 months interest or interest rate diferential, whichever is greater. So lets say after two years you wish to sell the home and move to the islands. (P.S. I just added the link to be cute, they aren't paying me.)

Pretend current rates are around 4.5% you are still at 5.69%. The interest differential is basically the amount of money the bank is losing based on your interest rate compared to current interest rates. This is 1.19%, so the bank will calculate how much this is and charge you based on the remaining 3 years, basically about $6,700. Plus you will have to pay back the remainder of the down payment still outstanding, around $6,000, a total of $12,700. The average home increase in value about 4% a year which will give you an additional $16,320 of value but with a 5% Realtor fee and lawyer costs this adds up to aproximatley $25,700 to sell your home. This does not leave you with much left over.

Lets look at the numbers:

$200,000 Purchase
-10,000 Borrowed down payment
+ 5,510 Insurance premium
$195,510 Mortgage balance

Two years later you decide to sell your home is now worth approximately $216,320. From this amount you need to subtract all costs to see where you stand.

$188,000 Aprox. current balance
+12,000 Realty fees and taxes
+1,000 Lawyer costs
+6,700 Penalty
+6,000 Remainder of down payment
$213,700 To sell

You may if your lucky end up with $2,500 in your pocket and this is assuming the market does increase in value.

If you decide to sell and move up to a bigger home your bank may allow your to do so and give you a blended rate if you have enough equity in your home or additial funds for a large enough down payment.

Often people will recieve gifts from parents to use as the 5% down to avoid the extra costs. Not everyone has this option. There is 1-4% cash back options if you have some money.

I am a fan of the 5% cashback mortgage as long as people are aware what they are getting into and accept the reality and understand the big picture. It is a good way to get into home ownership especially if you are starting a family and do not have the time to save.

Feel free to reply or ask questions.

Thanks,

Ron Miller
Butler Mortgages
905-667-0699
ron.miller@butlermortgages.com

Wednesday, May 4, 2011

What is a Collateral Mortgage?

Let’s first look at a regular mortgage. You will know what your interest rate will be for the term you have chosen. As well you will know what your payments will be how much you will have paid off at the end of the term. At the end of the term you are free to switch to another lender at generally no cost or a very small cost ($200) usually covered by the new lender or your broker. Also should you need extra money you are free to apply for an additional secured line of credit on your home.

Now a collateral mortgage is basically a line of credit against your home for up to 125%. So there is a lein against your home and you can no longer apply for additional credit from anywhere else except the bank that gave you the collateral mortgage in the first place. At signing time the bank will not recommend you receive legal counselling nor will they fully explain the disadvantages of a collateral mortgage. Then, if and when you decide to borrow up to 125% on the home you may not qualify and signed into the mortgage for no reason. Now this is where banks lock you up and basically through away the key on your finances, and leave you with no choices. Additionally this is how the banks are getting around the stricter guide lines the government has set up to avoid having a mortgage meltdown in Canada like the US.

Most lenders will not accept a transfer of a collateral mortgage and in order to get out of it you have to pay hefty fees. If you owe more than the guidelines set out by the government on your home you are stuck and cannot transfer anyway. At which point the banks can increase your interest rate to whatever they want knowing you are stuck with them. Now let’s say you wish to move? Umm, maybe you owe more on the home and cannot sell it, will the bank allow you to transfer the collateral mortgage to a new home? What if you missed a payment? You could be stuck and have a bank dictating to you what you can and can’t do, even where you wish to live.

Basically I am saying do not get a collateral mortgage, you are giving away your freedom. If you would like to read a little more, and see another scenario "click here".

If you currently have this type of mortgage it may be in your best interest to speak with a lawyer or mortgage professional to see if you can return to a normal mortgage.

If you have any questions or concerns, feel free to contact me.

Ron Miller
Butler Mortgages
905-667-0699
ron.miller@butlermortgages.com