Shocked! Confused...I didn't think so, because most folks like yourself already realize that anybody can be a private lender. It's true; and you can even use your self directed RRSP as a mortgage lending fund.
As a mortgage broker I continuously interview many potential private lenders...some with experience and some are trying to start. I always complete a background check on them. Much like a mortgage applicant I need to know who's lending the money, not just who is borrowing it. Does the money come from traceable sources? Does the lender have any kind of public record? I need to know who I can stake my 30 year reputation on, because I will always be known by the deals I complete.
My favorite private lenders have a some of these unique qualities...They are not nervous, they are sworn to uphold the privacy act, they know what mortgage niche they like to lend in, they are there when I need them, they are fair (but not greedy), they use common sense and my customers always give positive feedback from the experience. Every private lender wants to know what the exit strategy is for their investment, it is critical to their decision.
As a mortgage broker I need to rely on a few different types of private lenders. Some specialize in the short term stuff (like bridge financing and interim/construction financing). Some are looking for long term boring stuff that that makes a better return than their current mutual or savings. Some are even asking for high risk, but their rates reflect the risk (be prepared if you need one of these loans). You often hear about "equity lenders". Equity lenders lend based on the value of your home. If there is enough equity then they will lend you the money. Be prepared to pay both a high fee and a high rate. Even if they offer a low rate for 6.85% at say 6 months to a year and they get a 6% lender's fee from you...do the math. That low rate just jumped to the mid teens, and the lender yielded what he wanted. Yes, I have private equity lenders in my lists too, but i make sure they are ethical and I also make sure the deal is a win-win for everybody. There must be a clear exit strategy.
If your mortgage broker specializes in private lending, like I do, they will have a complete mix of potential lenders they can call on. My only real challenge is that during the really cold snaps in Alberta, my private lending sources are all down south waiting out the sub zeroes. That being said, if you would like to have a coffee and talk about how you can be added to my list, just contact me at mike@RealMortgageSolutions.ca . I have a close circle of licensed leading mortgage professionals whom I consult with and when the right deal comes along, your RRSP can suddenly become your great performer.
Reviewing your credit is the VERY FIRST THING YOU NEED TO DO, before making a home offer
It happens to the best income earners and even somebody who believes they are very careful with their credit...devastating credit reports.
Be prepared! (A good motto borrowed from the scouts) You can never be too confident about what will show up on your credit bureau file.
I specialize in credit analysis and repair planning. Most of the items I see popping up on customer bureaus are total surprises to my customer. Items like unpaid collections for parking tickets or an old cell phone contract that was supposed to have been paid. I can't tell you how many times I hear "Hey! I paid that bill...On time!".
People make mistakes in understanding bills, people move and bills get misplaced, people make mistakes at the lending offices and people make mistakes at collection agencies. These mistakes become your problem to deal with. You need to work out a plan to correct inaccuracies, quickly. Then you need to ensure that these mistakes are properly removed from your credit report. I can help.
Sometimes bad things happen to good people and poor credit due to non-payment of debt will usually take a longer time to resolve, but errors on your bureau can be fixed. I have resources that I can refer you to that can help you review your credit and fix these mistakes. Try to find receipts and any other contractual documentation you have to support your claim. If a report of a collection absolutely does not belong to you, you can fight that too.
You do not want to place an offer on a property only to find out you need to fix your credit first.
I had an interesting conversation with a good friend of mine who is a very successful software developer.I was also his mortgage broker, so for part of our lunch hour we talked about the benefits well thought out programs like the Scotia STEP Plan, The Smith Manoeuvre or the ManuLife One Plan.
His candid response to these types of well-intentioned programs hit a truth.It all boils down to discipline.Some have it, most don’t.The fact that struck me as strange was this budding young software development star should have been the poster child of success in this type of program.We all know ourselves best and while all these proven mortgage strategizing plans can lead us to a comfortable retirement sooner.
He told me that having an available credit line and a young family made for a dangerous combination.Ambition, better lifestyle, wants vs needs were all part of his personal self-realization.Twenty years ago I could have saved myself a huge headache if I would have realized my own lack of disciple.I was offered a term life insurance plan, with massively lower monthly payments.The idea was to use the savings from the payments of the previous Universal life plan and roll them into RRSPs or other investments.Guess what…life happens and that extra money really isn’t extra money.Money set aside for a rainy day disappears quickly into new clothes, vacations, computers, cars.The whole idea was to remove the need for life insurance because you were supposed to have a HOCKEYSOCK FULL of money.Now I’m 20 years older and my term life premiums are outrageous and I have no tax efficient Universal Life plan.
My best intention was to save insurance premium money and invest, but I thought I had time and I thought I had discipline.Thankfully my friend who knows his own weakness regarding his personal lack of discipline and is to be commended.Some of the best theoretical savings programs need more than a plan they need a support system.
Make sure that when you look into your own strategy that you have a definite plan to lock in your investment savings.
My advice...if you know yourself well enough, don't willing do something you know will have dire consequences.
Refinancing your mortgage may not bring in as much as you think Andy Holloway, Financial Post
Refinancing your mortgage may seem like a tempting idea since interest rates are only expected to rise from their lowest levels in history, especially if you want to consolidate some other debts or are making another large purchase. But there are penalties and the savings may not be as great as you might think if all you're doing is comparing rates online.
The most obvious drawback in refinancing an existing mortgage is that the bank will charge a penalty for breaking what is, after all, a contract. In some cases, the penalty is a set amount agreed upon at the time the mortgage was signed, but banks typically charge either three months of interest or an interest rate deferential, whichever is higher, usually the latter. The interest rate differential is the difference between the existing rate and what was the posted rate-not your actual rate-for the term remaining, multiplied by the principal outstanding and the length of time left on the mortgage.
It's important to understand that the differential is calculated using the posted rate at the time the mortgage was signed, even though your rate may be lower because of a promotion or because you were considered a valued customer. Any possible savings also depend on the existing and new mortgage terms and conditions, the length of time left and the outstanding principal.
"Just taking rates off the Internet or from the newspaper and comparing them to your mortgage rate today doesn't work," says Kevin Moffatt, vice-president, retail products, residential secured lending, at TD Bank in Toronto. "It just doesn't work that way."
Consumers should also keep in mind that the going rate on a five-year fixed-rate mortgage has not changed too much, despite the quick drop-off in the prime rate during the last 18 months. Over the past decade, the five-year rate generally hovered somewhere between 5% and 7%, only dropping to just above 4% recently. That means refinancing today could take less than a point off your existing mortgage.
But taking advantage of lower rates is only one reason people consider refinancing their mortgages before they're due. "A lot of Canadians are refinancing their existing mortgages and paying off their high-interest credit cards, lines of credit and loose debt by consolidating them into a single low-interest mortgage payment," says Gary Mauris, president of Dominion Lending Centres, a broker network based in Vancouver. "This is easier to do today and is extremely prudent in many situations, because the low cost of borrowing makes it more feasible than ever before."
But if consumers don't need the extra cash to make a purchase or consolidate their debts, Mr. Moffatt says they may still want to renew their mortgage early to lock in today's low rate for the future. Some banks call this early renewal a "blend and extend" mortgage because it blends two mortgage rates together and extends the mortgage term. The new rate will be higher than the current rate, but likely lower than your existing rate.
"People aren't going to get that basement rate they see advertised, because, of course, there's an existing chunk of their term at the old rate," Mr. Moffatt says. "It's a blended rate coming into play, but it extends the mortgage out then for another five years."
George Small, co-founder of Kanetix, an online insurance and mortgage comparison service, says it only makes sense for consumers to take look at refinancing if there's a chance to save money. But he advises people to treat the process as seriously as they did when they obtained their first mortgage because they are making another large financial commitment.
"The first thing we recommend to consumers is to get some rates, see what their target instrument would look like in terms of costs at a high level and then work with a professional," Mr. Small says. "There's quite a bit involved with a refinancing in terms of costs. It's not that a consumer couldn't do that themselves, but having professional help, particularly with a refinancing because there is a penalty side to consider, is worthwhile." A quick look on the Kanetix.ca website shows five-year closed rates can range from 3.99% to 5.5%, so it will pay to shop around to compare rates as well as terms and conditions.
If you don't want to refinance, but still want to save some money, the banks typically offer a series of other tactics to lower interest-rate payments over the length of a mortgage. These include accelerated payment schedules, an increased payment amount, shorter amortization periods and making lump-sum payments. The benefit of paying more now is, of course, paying less later when interest rates are higher.
1. The qualifying rate to be used for variable rate mortgages, or terms shorter than 5 years will be a standard benchmark rate published by the Bank of Canada. In essence this is the 5 year posted rate.
2. TDS calculation for rental income has been changed to only include 50% of the gross rental income which is added back to income rather than offset.
3. CMHC’s self employed program will no longer be eligible for borrowers with more than 3 years in the same business. Instead they will need to rely on more traditional third party income proof.
Mortgages just became more difficult for self employed borrowers.
David Dodge Says Rates will stay low until 2015 (Nov 28th 2009)
Interesting revelation from the former Governor of the Bank of Canada. If you believe the latest article, it seems that it would be an easy decision to choose a variable rate over a fixed rate. Economists and forecasters, base their statements on historic trends and what they know about local and international economies. You should always make the best choice based on the best information available during your decision period. If deciding to go for a variable rate mortgage, have no regrets if David Dodge's forecast was out to lunch, because so many unknowns can trigger a different outcome. Simply be prepared to handle any contingencies. That being said, if you enter into a variable rate program, make certain that you have the financial resources to weather a change in the market, either today or 3 years from now. If you are buying a home and the current variable is very enticing, you really need to do the math...what happens if that rate doubles. A 2.25% rate increase would double the current rate and you would be faced with a payment twice the size of the one you started with. Ah, but I was told I could lock in a fixed rate if the prime starts to jump...too late to grab the low fixed rates offered earlier. You will often have an option of staying the course and hoping it doesn't go up any further or choosing a fixed rate that you simply would not have considered earlier. David Dodge is a smart man and he helped Canada maintain it's strong financial position in the world. You need to decide if David Dodge's prediction matches your financial ability.
Examples- On a $300,000 net mortgage, here are today's choices
Best variable 2% (3 year term .25 under bank prime) $1023.78/month (Principal and Interest) (lowest overall payment)
50/50 plan 3.2% (Half fixed and half variable, mitigating variable fluctuation risk, somewhat) $1222.02/month (P&I)
5 year fixed 3.99% (today's best limited time rate special) $1362.24/month (P&I) (lowest 5 year fixed rates payment)
10 year fixed 5.4% (Today's best 10 year rate special) $1629.54/month (P&I) (Fact: The average historic rate is 7.5%)
The Difference between being Pre-Qualified and getting Pre-Approved
There is a very important difference between being Pre-Qualified and Pre-Approved.
Pre-Qualified is a planning step where you get the mortgage broker and lender to look at your application and they will let you know what your maximum mortgage limits are. If you are not sure about what you can afford, it would be wise to see what types of mortgages you would be qualified for. It is at this stage where you discuss any shortcomings, like credit, down payment or income requirements. You may be required to take some planning steps. The process may take some time, but you really don't want to pay more than you have to for your mortgage. A poorly planned purchase can force you into taking a sub-prime mortgage, that is far worse than you expect. Even if you are pre-Qualified for your new mortgage you should always make your purchase "subject to financing", that way the bank can confirm the property falls into their lending guidelines.
A Pre-Approved mortgage means the bank is holding an interest rate for you. It does not mean you are guaranteed to get the mortgage, but they would have briefly looked at your application and decided that they would probably consider doing business with you. To take advantage of the rate they are holding, you must complete the closing of your mortgage within the time-line of the Pre-Approval.
The Lenders will always have the final say in whether or not a mortgage is finalized. One really big advantage to using a mortgage broker is when the bank you thought Pre-Approved or Pre-Qualified you fails to complete their commitment, your broker can quickly change gears and move your business to a more friendly lender (you don't have to lift a finger).
Earlier this month, single day house records fell nation-wide, as rates started to move up. Fence-sitters were sent into buyer mode and prices on homes started to look pretty solid. How long will it last and can it be sustained are great questions? If I knew the future, I would be retired by now.
There was one guy that I was sure knew the future, because he had an uncanny knack for being right. I learned a valuable lesson from my old boss Ray Murray, during my years at Beneficial Finance and that was..."There is no such thing as a guarantee in economic cycles".
It was about 18 years ago, during a period where Edmonton's economy was stagnant and everywhere else in the province was increasing in value. I was presenting him with a potential mortgage deal and was trying to convince him that the economy in Edmonton would suddenly catch up with the rest of Alberta, within a year. There was very little equity in the deal I was supporting, but if the economy did what I thought it would do, the deal would be just fine. Mr. Murray then put the challenge to me; He told me that if I would personally guarantee that the economy would increase by the following year, then I could do the deal. He wanted the guarantee in writing. I knew that I was in no position to start guarantee that, because I did not have deep pockets like Beneficial. Then he asked me why I would ask to risk the investment money of others on something that I could not be 100% sure of myself. I stewed about it for weeks and then forgot about it until one year later, when I was looking at the Edmonton housing prices. They were actually down by 10% from the time I had the conversation with Mr. Murray. I called him up and asked him if he was a soothsayer. He says he honestly did not know what was going to happen, but after his 30 years in the business he was smart enough to know that there are no guarantees in economic cycles.
"If I wouldn't invest my own money into it, why should I ask others to risk theirs". That suddenly became my cornerstone philosophy. My lending decisions became a bit more conservative, but I never knowingly made a deal that would loose the investor any money.
Ray Murray is retired now, but his down to earth business savy was not lost on me. He always saw me as an optimistic person and there is nothing wrong with that if you look at the deal from every possible angle. Ray was also a stickler for sharp pressed creases in your suits and shined shoes. I still prefer casual Fridays, but will always appreciate the valuable lessons from my own Yoda, Mr Murray.
Interest Rate Differentials and why they should concern you
IRDs are a pre-payment penalty tacked on your mortgage payout, if you pay it off early. They are generally meant to discourage a mortgage holder from breaking a higher rate mortgage in favour of moving it to a lower rate. The lender is trying to protect its investment portfolio.
I have included the formula for calculating IRDs and interest penalties below, however there have been some changes to some lender documents over the past couple of years that you should be aware of.
In the past couple of years, some lenders have included the expensive IRD penalty in ‘all’ early payout scenarios. That even includes a bonafied sale of a property. Your mortgage broker should be able to advise you if your new mortgage is affected with this change. Imagine the grief if your employer asked you to move and your mortgage restricted you from selling your property until the renewal date. So make sure your mortgage strategy matches your potential needs.
Most all mortgages in the past had a clause like. “your mortgage is open to early payout on payment of either an IRD or a 3 month interest penalty…whichever is greater; except on the proof of a bonafied sale of the property where the penalty would be 3 months interest”.
Interest Rate differentials generally only apply when interest rates are low, because by definition they become non-effective when the rates rise higher than your current mortgage rate.
Examples show readers how a complex concept or calculation works
Sometimes, the best way to communicate information is to explain it and then give an example to show how it works in practice. In the following example, the costs of paying off a mortgage debt early, before the mortgage maturity date, are explained; readers are offered a step-by-step formula to use; and then, an example illustrates a “typical” situation.
Costs of paying off all or some of your closed mortgage before the maturity date
Costs of making a pre-payment The cost of paying off all or some of the remaining principal amount of your closed mortgage before the maturity date is the higher of these two amounts: (1) three months’ interest costs on the amount you want to pay or (2) the interest rate differential amount. This amount is the difference between your existing mortgage interest rate and the interest rate currently charged for a mortgage similar to yours, calculated for the remaining term of the mortgage less any discount you received on your existing mortgage. A mortgage similar to yours has a term that is closest to the remaining term of your existing mortgage.
How to estimate pre-payment costs-
Here is how you can estimate the cost of paying all or some of the principal amount of your mortgage before the maturity date. The result you get will only be an estimate. We use a precise formula that credits you for the amount of principal you would have paid off each month.
3 months’ interest costs (1) To estimate the three months’ interest costs
Change your yearly interest rate from a percent to a decimal. For example, 6% = .06; 12% - .12. Multiply this number by the amount you want to pay. Then, divide the result by 4. The answer is the estimated three months’ interest costs.
Step 1: _______ (A) - amount you want to pay _______ (B) - mortgage interest rate written as a decimal _______ (C) - A x B = C
Step 2: _______ (D) - C ÷ 4 = D, estimated three months’ interest costs (2) To estimate the interest rate differential amount
Interest rate differential Follow these steps to estimate the interest rate differential amount.
interest rate differential Step 1: _______ (A) - annual interest rate on your mortgage _______ (B) - current annual interest rate for a new mortgage with a term that is closest to the remaining term in your existing mortgage (less any discount you received on your existing mortgage) _______ (C) - A - B = C, which is the difference between your existing interest rate and the current rate _______ (D) - amount you want to pay off
Step 2: _______ (E) – number of months left until your mortgage maturity date _______ (F) - (C x D x E) ÷ 12 = F, estimated interest rate differential amount
The estimate cost of paying off all, or some, of the principal amount remaining on your mortgage before the mortgage maturity date will be the larger number that results from the calculations in (1) and (2).
It is strongly suggested that you contact your lender for an exact payout. Their payout may be done through a computer calculator and numbers may vary slightly.
Example
Here is an example to illustrate the cost of paying off a mortgage before the maturity date.
Fiona and Henry have a mortgage for a 5-year term. The interest rate is 9 per cent. The original amortization period was 20 years and there are 18 years remaining. They still owe $100,000. They have inherited $100,000 and are thinking of using it to pay off their mortgage. They have used all the pre-payment options available to them this year. There are 36 months left before the mortgage maturity date. The current interest rate for a mortgage with a similar term is 6 per cent.
Three months’ interest costs
Step 1: $ 100,000 (A) - amount they want to pay . 09 (B) - mortgage interest rate written as a decimal $ 9,000 (C) - A x B = C (100,000(A) x .09(B) = $9,000(C) Step 2: $ 2,250 (D) - C ÷ 4 = D, ($9,000(C) ÷ 4 = $2,250(D) (estimated three months’ interest costs)
Interest rate differential amount Step 1: 9% (A) - annual interest rate on the mortgage 6% (B) - current annual interest rate for a new mortgage with a term that is closest to the remaining term in their existing mortgage (less the discount received on their existing mortgage) .03 (C) - A - B = C, the difference between their existing interest rate and the current rate, written as a decimal $ 100,000 (D) - amount they want to pay off Step 2: 36 months (E) - number of months left until the mortgage maturity date $ 9,000 (F) - (C x D x E) ÷ 12 = F (.03(C) x 100,000(D) x 36(E)) ÷ 12 = $9,000
estimated interest rate differential amount
In this example, Fiona and Henry estimate that it would cost them $9,000 to pay off their mortgage before the maturity date, since this amount is higher than the three months’ interest costs. When Fiona and Henry check with us, they would get the exact cost of paying off their mortgage early. In their case, the exact cost would be lower than their estimated cost.
Is your mortgage locked in...try a blend and extend
If you are locked into a long term fixed rate mortgage and would like to take advantage of rates that are currently much lower, you could ask your lender for a "blend and extend"? Refinancing your mortgage, well before your renewal date, is not an option, because the interest rate differential penalty would be staggering.
What I am talking about is a compromise solution that allows both borrower and lender to win...at least a little bit.
For example, if you took out a mortgage 2 years ago, with a 5 year term at 5 percent annual interest and today's rate is 4 percent, you could ask for an early renewal. If the bank is allowed to do this, they will certainly not purposely lose a guaranteed higher rate in favour of a lower rate. Instead, they will offer you an option to average the 2 rates together and then renew for a new 5 year term.
Why would the bank allow you to do this? Remember, currently they are lending the 5 year mortgages at 4% so by taking your existing rate and reducing your interest, they now extend their earnings from their investment with you and will benefit from a longer earning cycle.
You benefit by having a lower rate and a lower payment with the same principal reduction and schedule as before. If your strategy is a long term ownership of the property, this proposal works well.
Not all lenders will do this, because sometimes the way a mortgage is funded will dictate the lender's flexibility. You can get your broker's advice before you talk to your lender, but is usually fairly simple to approach your existing lender to discuss the option directly.
Have you experienced a Blend and Extend...share your stories
