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Buying a home in BC – A guide for Albertans

It will be no surprise to the average Albertan that we contribute a lot to BC’s tourism industry each year. In fact Albertans are third in spending in BC, only behind people from BC themselves and Americans. I am sure many of you have spent time in BC and thought that it would be nice to own real estate here. I recently purchased a 2nd home in Kelowna and while the process of engaging a Realtor, getting preapproved for a mortgage and searching for a property is the same, it was the process afterwards that differed as follows:

1) Property Disclosure Statement (PDS) – this is a very informative document draw up by the seller which has several pages of questions about the property in question. The seller has to be truthful in his responses and covers many items such as any issues with the land, the building, the strata etc. This document is required in BC and I have no idea why not required in Alberta. A very useful document

2) Real Estate Deposit – In Alberta, when buying a property, you put down an initial deposit as a sign of good faith a few days after the signing of the purchase agreement. In BC, you only put down this initial deposit after all conditions have been met.

3) Completion date and date of possession – On the BC purchase agreement there are two dates – the Completion Date and the Date of Possession. The completion date is the date that title and ownership is transferred to the new buyer as well as the funds are transferred from the buyer’s lawyer to the seller’s lawyer. The date of possession date is the date the buyer is allowed to take physical possession and is typically at 12 noon on the day following the completion date. In Alberta, there is just a date of possession. So, when you are planning on reserving that moving van, may sure it is on the possession date

4) Taxes – Property Transfer Tax – BC has what is called a property transfer tax. This is a tax that all buyers in BC pay and is calculated as 1% on the first $200,000.00 of the property’s fair market value, 2% on the amount between $200,000.00 and $2,000,000.00 and 3% on the amount between $2,000,000.00 and $3,000,000.00 and 5% of the rest. Lenders will not allow you to finance this cost as it is a tax and adds no value of any kind to the property. Alberta doesn’t have such a tax.

5) Taxes – Speculation and Vacancy Tax – The speculation and vacancy tax is an annual tax paid by some owners of residential properties in designated taxable regions of B.C. The tax is designed to discourage housing speculation and people from leaving homes vacant in B.C.’s major urban centres. This tax is .05% of the property’s fair market value each year. This tax doesn’t exist in Alberta.

6) Mortgage foreclosure – In Alberta if you stop making your mortgage payments, the lender and/or CMHC can only go after the sale proceeds of the property in default. In BC, they go after the property and your other personal assets

7) Review of Condo Documents – In Alberta, it is a common practice to have an outside third party review the condo documents to determine if there are any potential issues. In BC, this isn’t a common practice and I had to search around to find a company that would. This company was started by an Albertan who recognized a need.

I am always surprised when a similar process in one province (buying a home) is so different in another. Having said that, I am able to provide mortgage financing on properties anywhere in Canada that lenders will fund, including BC.

If you have any questions or would like to inquire about buying a house in BC please let me know!

Buying a home in BC – A guide for Albertans2021-08-20T12:44:20-06:00

Financing for Self Employed – there are Options!

Are you considering becoming self-employed? You are not alone as Intuit Canada recently found out in their 2018 survey entitled “Vision 2020: Empowered and self-employed in Canada.” Based on their survey, they predict that 45% of Canada’s workforce will be self-employed by 2020! In a similar article from 2018, CBC found that people working for themselves account for 86% of Alberta’s net job growth since the recession ended. (I wasn’t aware that it had ended but maybe that is just me).

Lenders have paid attention to this and have developed new programs to help self-employed individuals obtain mortgages.

Back in 2005 to 2007, it was incredibly easy to get a mortgage if you worked for yourself. However, CMHC and Genworth experienced a large number of mortgage foreclosures starting in 2008 so they tightened up the qualifying rules. This has been the case for years but lenders are becoming more creative in how they determine a self-employed person’s income for qualifying purposes as follows:

1)      Confirm Income – by taking a two-year average of Line 150 from client’s T1 general – under this program, lender takes a 2-year average and uses the result as income. Normal interest rates, insurance premiums and qualifying percentages apply.

2)      Stated Income – lenders understand that the self-employed make more money than they might declare on their tax returns (by leaving the excess in their company). This program allows the client to state an income to be used for qualifying. Income stated must be reasonable for the industry the client works in. Under this program a 10% down payment is required and the insurance premium is higher. Normal interest rates apply.

3)      Average corporate deposits – a number of lenders will ask for 3 months of corporate bank statements, add up the deposits and use this as income. With this program you will need a minimum of 20% down payment and interest rates are higher and most lenders will also charge a lender fee.

4)      High qualifying ratios – lenders will take earnings from Line 150 for business for self-clients and increase it by 15%. They then use the result as confirmed income but qualify using very high ratios. Interest rates are higher, fees apply and a minimum of 20% down payment is required

5)      Net Equity Analysis – here lenders review a company’s financial statements and determine how much a self-employed client could withdraw from their corporation. Based on this estimated withdrawal, the lender runs the numbers and determines how much the client would qualify for. Normal interest rates apply but the down payment requirements are much higher.

As a result of these programs, self-employed clients shouldn’t feel that they can never afford a house!

Please note that I have summarized these programs and if you would like to discuss them in further detail, please feel free to contact me!

Financing for Self Employed – there are Options!2021-07-15T14:56:12-06:00

Is Your Variable Rate Mortgage Adjustable?

For the past several years both fixed and variable rates have done nothing but fall. With such historically low fixed interest rates (and the spread between fixed and variable being close) I have, until recently, been recommending to my clients that they select the fixed rate option. This changed with the Bank of Canada reducing the Prime lending rate again (two rate reductions in eight months). This indicates to me that the Bank is still concerned about how poorly the Canadian economy is performing. As a result, I feel that the variable rate option will save the most amount of interest and have been recommending it to my clients. However, please understand not all variable rate mortgages are the same!

There are actually two kinds of “variable rate mortgages” – Variable and Adjustable.

1. Variable Rate Mortgage – these are typically offered by the big 5 banks. Here the monthly mortgage payment is set to be a certain amount and never changes even when interest rates move. So if interest rates go up, less of the monthly payment goes to principal and more to interest. If rates go high enough and the required monthly mortgage payment is now entirely interest only, no principal reduction takes place. If rates go even higher, the monthly mortgage payment no longer covers the interest portion. The portion not covered is added back to the mortgage balance – this is known as reverse amortization. This is what happened in the US in 2008. The client was making his mortgage payment but his mortgage balance kept increasing. Eventually the mortgage was worth more than the value of the house with the result the client walked away from the house. Some lenders in Canada even have a “trigger point” which they will trigger if they feel that the house value is not as high as they like compared to the mortgage balance. If this trigger point is reached, the lender then can call the mortgage unless the client can supply an appraisal to confirm the house has a certain value.

2. Adjustable Rate Mortgage – The monthly mortgage payment is set initially based on the rate but if interest rates climb, the portion paid to principal always stays the same. Since the interest component has now increased (with the rate increase) the monthly mortgage payment is also increased. This way the portion going to principal is maintained and the needed interest is paid. No risk of reverse amortization or reaching a trigger point.

Conversion Rates – Both variable and adjustable rate mortgages allow you to convert to a fixed rate mortgage at any time without cost. The key here is to ask what fixed rates the lender will offer you upon conversion. The big 5 have both posted and discounted rates. They will usually offer you something like one percent below posted rate. If you take the time to do the math, you will usually find that this reduced rate is still higher than their discounted rate offered to new clients – nice game. Monoline lenders (non big 5 banks) only have discounted rates and therefore only offer you the same rates they offer their new clients.

So, if you are now considering something other than a fixed rate mortgage, you need to consider the points above and determine which is best for you. Eight times a year I send out a Variable Rate Mortgage Watch to help you decide when the time has come to convert from a variable rate to a fixed rate mortgage. If you have any questions on this discussion or any other mortgage related matters, please feel free contact me and any time!

Is Your Variable Rate Mortgage Adjustable?2021-07-15T14:56:12-06:00

How to Win in Today’s Low Interest Market

A number of years ago lenders were offering 2.99% for a five year fixed rate mortgage and we thought “ Wow what a low interest rate!” Rates couldn’t possibly get lower. Well, they did with many lenders now offering 2.64%. These are the lowest rates in history and while I believe they will remain low for a while longer, they must eventually go up. Here are a few strategies to keep these low rates even longer.

1) Refinance early to preserve low fixed rate for five more years

With this strategy, you would payout your existing fixed rate mortgage, incur a payout penalty and renew into a new five year mortgage at a lower rate. This is partly a numerical exercise as we compare the interest savings with a new lower rate to the payout penalty incurred. Even in cases where the savings do not offset the penalty, you need to consider the possible future interest savings as a result of extending your term and possible higher interest rates in the future. I can calculate all this for you as well as let you know what interest rates would need to be in the future just to break even.

2) Refinance early for increased cash flow

This strategy is not as concerned with the interest savings by refinancing into a lower rate as it is in reducing the monthly mortgage payment. A lower monthly mortgage payment could free up cash flow which can then be used to invest in products that earn a higher rate of return than the current low mortgage interest rate. So you use the extra cash to invest, earn a higher rate of return and use this extra profit to offset the payout penalty as well as pay off your mortgage faster. This strategy typically works best when consulting with your financial planner.

3) Refinance your variable rate to a lower one.

At one time, lenders were offering Prime less .90% and that went away as lenders were not making any money with such a low Prime lending rate. Lenders started offering Prime plus 1 and over many years have now come back to offering Prime less .70%. It may be time to refinance your higher variable rate mortgage into a lower one. The nice thing with Variable rate mortgages (versus fixed) is the payout penalty is only three months interest. There is no Interest Rate Differential payout penalty for variable rate mortgages. You get a lower payout and better interest rate!

Please feel free to call me to further discuss and determine which of these strategies work best for you. As I mentioned previously, I can do all of the calculations for you.

How to Win in Today’s Low Interest Market2017-01-30T22:09:25-07:00

A Real Estate Strategy

We have all heard the doom and gloom reports from the media about how the drop in the price of oil and the possible negative impact of the NDP government will affect the Calgary real estate market.

Is this in fact the case?

The answer depends on what price range of home you are looking for. The Calgary Real Estate Board (CREB) released its sales numbers for May showing that while activity is 25 per cent lower for the overall market, the average price of $478,790 is only lower by 1.5 per cent from May 2014.

The numbers show that the average price for detached bungalows increased 3.8 per cent to $498,400 compared to last year while standard two-story homes increased 1.7 per cent to $480,656. Standard condominiums recorded moderate growth of 2.9 per cent to $286,913. Nearly 70 per cent of the homes sold in the Calgary region in May went for
less than $500,000.So no sign of a price drop here; in fact, houses located in high demand neighborhoods are seeing multiple offers!

However, where we are seeing a price drop and a slowing is in the luxury home market. In May, there were more than 600 homes for sale in the city listed at more than $1 million. Only 65 of them sold last month, which suggests there’s nine months of inventory on the market. For every 10 new listings, there were two sales.

How can you take advantage of this current market? Here is a strategy that I have put into play for a number of my clients. These clients have been looking at buying a luxury home for a few years now and always felt the prices were too high. So now is their chance. The approach we used was to keep their existing home as a rental and have the rental income to help them qualify for an underpriced luxury home. Calgary’s rental market is still strong and demanding good rents.

The theory being to buy the high end house while its prices are lower than before and hold on to the existing mid value house until the prices in that sector climb. Then sell it. I even have lenders that will use a Market rents report to determine what the rental income will be. This removes the need to have a tenancy agreement in place. Some lenders allow me to use a rental worksheet that can, depending on the rental income, completely offset the cost of owning the house. The end result is my clients really end up qualifying with full income just to buy the new home!

I am aware that this strategy only works for a few prospective buyers. However, now that the May numbers are out (May is the busiest month for real estate) maybe consumer confidence will improve as we are not seeing a massive price fall in the majority of house sectors. This market is similar in price to previous markets where people where buying.

Now you have more inventory and time within which to buy! If you would like to discuss this approach or have any other mortgage needs, please let me know!

A Real Estate Strategy2021-07-15T14:56:12-06:00

Myths of Lending

When you have been in any industry long enough, you hear all sorts of comments about the industry. Some are factual and then there are the urban myths. I thought I would highlight a few of the more common ones. Mortgage lending is typically misunderstood as it is so myths don’t help.

Myth 1) Mortgage Brokers will issue pre-approvals higher than banks

The client that told me this was concerned that I would give him a higher preapproval amount than his bank would so I would get paid more. This would result in him being house rich and cash poor and more likely to go into foreclosure. All lenders use the same funding ratios when determining how much a client can afford. These ratios apply equally to brokers as they do to banks so this is a complete myth and probably a scare tactic put forward by the Big Five banks to dissuade clients using mortgage brokers.

Myth 2) Mortgage Brokers charge fees

I have been in this industry for 14 years and never charged a client a fee. Brokers are paid a finder’s fee by the financial institution where the mortgage is placed. This finder’s fee is based on the size of the mortgage and has nothing to do with the interest rate. Employees at the Big Banks are also paid a commission – however, their commission is based on the interest rate that they can negotiate you to pay!

Myth 3) Lenders want you to go into foreclosure

Not true at all. Lenders are in the business of lending money, not owning real estate. As highlighted in number 1 above, lenders have two funding ratio percentages that have been developed over years of lending money. These are specifically designed to prevent clients from becoming house rich and cash poor. Should a client still go into foreclosure, the house is sold, the lender mortgage paid out and any remaining proceeds given to the former home owner. The lender isn’t making money of these types of transactions.

Myth 4) Preapprovals are rock solid

Preapprovals are only as good as the person who issued them. I can’t tell you how many home purchases I have had to save over the years that were originally based on a poor preapproval. I have seen situations where the bank issuing the preapproval never even pulled the clients credit history! Ask questions, get the preapproval in writing and confirm that your credit history has been pulled at a minimum!

Hopefully I have managed to shed some light on my world and if you have any questions or mortgage needs, please feel free to contact me!

Myths of Lending2021-07-15T14:56:12-06:00

The Sky is NOT Falling

Back in late 2008 I also wrote an article with the same name. With the recent economic news in Alberta I felt the time was now to write a similar article. In the first few months of 2015, if you picked up a newspaper or listened to the radio, it was all doom and gloom.

As written in 2008, keep in mind that the media makes money by selling newspapers and not by educating you. As a result, the headlines are written to grab your attention and have a tendency to over exaggerate the situation. I am not saying there isn’t a downturn. Today, the world is facing an economic downturn as a result of an oversupply of oil and the effects of oil selling below $50.00 a barrel. In 2009, the world was facing a major worldwide recession with far greater impact.

In addition, as a recent article in the Calgary Herald (Saturday March 7 2015) points out, the effect on housing in Calgary isn’t as bad as in 2009.

Housing data for January and February of 2009 show a larger drop in year over year MLS transactions than during the same period in 2015. The annual sales drop in January 2009 was 50 percent and 35 percent the following month. Compare this to January 2015 – year over year sales drop of 39 percent and 34 percent for February.

House prices also dropped further in 2009. In 2009 the average house price fell by 10 percent in January and 12 percent in February. Similar data for January 2015 shows a drop of only 0.5 percent and 4 percent in February.

The difference today is that there are a lot more buyers available than in 2009. House prices in Calgary had been on the rise from 2012 to 2014. Inventory levels during the same time period were also low. This lead to a shortage of reasonable priced available housing. As a result a number of people held off buying and continued to rent. I saw this in my own business where I had clients pre-approved and never bought. When I called them to see why they hadn’t used their pre-approval, they told me “prices are too high and
we couldn’t find a suitable house”.

These same people are now out buying houses. Prices have come down and there is a lot more inventory available. In February 2009 the month end inventory of homes available for sale was 5,959 as compared to 5,474 in 2015.

Real estate experts feel that Calgary is now entering a more balanced market and moving away from the earlier seller’s one. A balanced market is better for all of us and should further motivate those buyers who waited to buy now!

The Sky is NOT Falling