Just Saved My Friend $19,000 In Penalties.

Ugh, Divorce. Big D. Terrible thing to happen to people, complicated, and tough. We all know someone who has gone through it, and we all know the costs involved. The last thing on anyone’s mind when buying a home with their spouse is the potential of divorce. The first thing on everyone’s mind when divorcing is “how much is this going to cost me”. Ok, maybe not the first thing, but eventually it’s a question we all ask.

I have a real-life story for you. I have a client who bought in January 2013 and took out a 5 year fixed 2.99% mortgage. He was a first-time buyer, recently married, and starting a new life with his young family. Unfortunately for one reason or another, things turned, and 2 years later they’re splitting up. They only put down 5% so they didn’t have much equity. However, housing has still remained buoyant and this lets them get out with a little extra in their pocket. One of the main reasons? Penalty.

My clients were tied at the hip with a big bank. I mean EVERYTHING: TFSA, RRSP, chequing accounts, investments etc etc. Everything was at this bank, and they wanted their mortgage there so they can “see their balance” and “make changes online”. We got quoted the same rate from Big Bank as we did from the monoline lender that did not have those online capabilities (but does now). My client listened to me and decided he wanted to go with the monoline.

Guess how much it saved him?

$19 554.00

His penalty on a 2.99% mortgage differs by that amount. That is insane. Same: Term, rate, payment, amortization, original balance, final balance. Reason being? The big bank uses “Discount off posted rate at the time of closing the mortgage”. First…


What You Need To Close The Deal

Recently I ran into a disagreement with a client over the most simplest detail. What was it? Would you believe me if I told you that the client was unwilling to provide their bank statements WITH their account number on them? So much so that the client simply walked away and went back to their home bank - the same bank that can literally tap into their entire financial picture and get their last twenty years of history in one fell swoop. But I digress.

This incident got me thinking: How can I best explain to clients what is generally needed for closing of a deal? Well, here’s a list that will prepare you for that time!

1. Employment Documentation

Often times the lender asks for an employment letter and paystub from the past 30 days. If the paystub isn’t by ADP or Ceridian, or any standard payroll processing company (usually third-party), then there may be a further request to see a T4 and/or 90-days banking history deposits to show payroll going into the account.


Understanding Your Credit Report.

Many times I’m asked how to improve credit, how to keep good credit, or how to build credit. This blog post will identify what your credit score is made up of, and offer suggestions on what to do to affect the score.

First of all, the biggest effect on your credit is your PAYMENT HISTORY. 35% of the credit score relies on your payment history, which includes such things as details, collections, unpaid credit, amount of delinquency, dates of past due items and amounts of past due items.

Obviously it is most important to keep collections off your report, and to pay everything on time. That’s rule #1 in maintaining good credit.

The second biggest impact on your credit is UTILIZATION. This affects 30% of the credit score. This is where being over the limit hurts your credit greatly. This is also how many accounts you have, what kind of accounts they are, and what balances you carry.

Rule to keep in mind: try to keep balances at 50% or below limits, always. Being over-utilized on credit will impact your future ability to borrow and your credit score itself.

LENGTH of credit makes up 15% of your score. I oftentimes see new credit with a very high score, but the lender will tell me the score is “too new”. Typically credit with at least 1 year of history is reviewed by lenders, anything less will require extra mitigating proof of good credit (landlord reference letter, utility bill repayment history etc).

TYPE of credit products makes up 10% of the score - this includes the number of accounts and prevalence and recent trade-related data. Example is you can have 20 accounts but none are being used, and have not been used for over a year, suddenly your credit isn’t as active!…


Standardizing Penalties

The best way to fix this mess that many borrowers are currently in is to standardize penalties across the board for fixed-term mortgages. What is the best way to do this, though?

Currently there are essentially two ways in which a lender will calculate your penalty:

1. The beneficial way.
2. The dreaded way.

If you fall under #1 then your lender will compare best rate available for term left to the rate on your current mortgage contract.

If you fall under #2 they will use a smorgasbord of excuses and arguments to justify comparing posted rates to your current rates, and/or an extension of some other evil scheme to try and exact maximum penalty from you when breaking the mortgage commitment.

Let’s look at a $450,000 mortgage that you hypothetically took out in September 2012, at a rate of 3.09%. This was about where rates were in 2012, and you took out a 5-year fixed term. If you got lucky and listened to my advice, your penalty today would be $3690. If you went with a bank that charged you the 2nd style penalty, it would be $18968.

(these calculations are from mortgage penalty calculators all using the same variables: term, rate, and balance left).

So how do I propose to bridge this gap?

Our mortgage penalties should be based on “percentage of balance” only and based on term left. Example:

If you break a 5-year contract after only a few months in, you would be expected to pay 3% of the mortgage balance.
If you broker it 1 year in, it would go down, and so forth.

What this would accomplish is simply transparency in mortgage penalties, something that is missing in our mortgage market today. It would also level the playing field, and reward people…


What To Do When Your House Doesn’t Appraise

I’m going to welcome myself back with a story that may happen to any buyer out there going without financing condition. What’s the likelihood of it happening? Well, since I can remember, this has only occured to me three times. In twelve years. And I’ve seen a LOT of deals come across my desk, so statistically speaking it’s not a common occurrence. That being said, here’s what to do if your house doesn’t appraise and you made a firm offer on a purchase:

First of all, one single appraisal does not a value make. There are many appraisers in the city that can give us another opinion, not to mention there are still “auto-valuation” lenders that don’t ask for appraisals. As a result one appraiser’s opinion needs to be verified if truly that appraisal number has been low-balled.

If you have 5% down - the bare minimum then you really have no other option other than to increase your down payment to come up with the difference.

Example; You bought a house for $525,000 but the appraiser is only going to give you $500,000. You are $25K short and are putting down 5% or $525 times 5% = $26250. Suddenly now you need a bit more - or $23 750 because your bonafide binding contract agreement states the price is $525K but the lender will only give you 95% of $500K (the appraised price). The only thing short of trying to gather up more funds is to use a credit line to cover the difference BUT only if you still qualify with that liability.

If you have more than 5% down then you can adjust your down payment and take on mortgage insurance. Using the above example here’s how the numbers work:

Let’s assume the buyer has 20% down…


Reading Between The Lines

I recently read an article advertising Scotiabank’s push into the 5-year fixed rate war by way of offering 2.97% to clients. I found some of the points in the article to be quite interesting, and have added my $0.02 below.

Bank of Nova Scotia is the latest lender to push the envelope on mortgage rates, offering a five-year fixed rate of 2.97 per cent.That’s the lowest five-year fixed rate among the big banks, and comes in slightly below the 2.99 per cent rate that Bank of Montreal has sparked controversy with in recent years (Bank of Montreal’s current five-year fixed rate is 3.29 per cent).

My Take: 2.95% 5-year fixed has been in the offing by a local credit union with 61 branches in the GTA and surrounding region. This offer has been available for the past three months, so I don’t see what the big deal is behind a 2.97% rate.

When Bank of Montreal and Manulife Bank dropped their five-year fixed rates below 3 per cent in the spring of 2013, they raised the ire of then-finance minister Jim Flaherty, who was trying to curb growing consumer debt levels. But current Finance Minister Joe Oliver has signalled that he wants to be less involved in the mortgage market than his predecessor was.

My Take: This is a good thing. Although lower rates will continue to punish many buyers by keeping prices high, at the rates the cost of borrowing is ultra-low. Therefore it’s a double-edged sword.

There are lower rates in the market. Earlier this month Investors Group had a 1.99 per cent promotion, but that was on three-year variable-rate mortgages. Five-year fixed rates are important because the government requires consumers who are taking out an insured mortgage of less than five years to…


The Curious Logic Of The Self-Employed Program Known As “Stated Income”

I have an excellent client who, 5 years ago, would have qualified with his eyes closed and in about 1 hour for his mortgage application. He’s a high-earning corporate recruiter who works on contract for a major Canadian company, and files his own taxes under his own corporation. Let’s say his income is $115,000 based on his contract. He makes $115,000 and then deducts basic expenses as: car, travel, gas, food, lodging, CPP, EI, etc., and pays himself a salary from the company that he is the sole owner of. Following me so far?

When submitting a file under the stated-income “self-employed” program, two questions come into consideration:

1. The “reasonability” of income?
2. Is there a cash component?

Here’s where it gets tricky. Who determines reasonability? The insurer. That’s it. The insurer tells me whether the client makes money that is ‘reasonable’ or not. How do they come up with it? Based on income matrixes that they have. For example - a dental hygienist will make a salary range of $x to $y.  Even though someone can make more than the “average” or what is “reasonable”, the insurer comes up with the number.

Here’s where it gets really tricky: A full-time corporate recruiter could be making a gross income of $115,000 less salary payroll deductions. His income is then used at the gross level to qualify. But a self-employed corporate recruiter who grossed $115,000? NO. Her income is scrutinized to the 9th degree. Why is that? Their net numbers are essentially the same (this being their take-home pay). Yet the full-time employee gets better rates, better insurance premiums and better underwriting because his job is “guaranteed”? Yeah, show me that job and I’ll show you line from here to Nepal of applicants.

The second part of…


Mortgage Rules Change Again (Slightly)

You know when you’re driving along and suddenly out of no where you get t-boned by a mack truck? That’s sort of how I felt when I read this headline:


However as I emerged from my dizzy state I then read further and realize “meh, nothing big here”

1. No More Self-Employed Without Income Under CMHC

This is the biggest change of the two. However in reality it’s not that major. Here’s why: CMHC requires a self-employed borrower who cannot prove income to be self-employed for more than 2 years and less than 3 years. It’s like fitting a locomotive through a mouse hole. I don’t recall the last CMHC self-employed approval I received due to this incredibly tight loophole.

Why this isn’t a big deal: It’s not a big deal because Genworth still carries a self-employed stated-income program with 10% down, and can be 3 or more years experience.

No More Secondary Homes With 5% Down

​The “Secondary Home Program” was quite popular amongst people who wanted to get around the 20%-rule for rental properties. Whether right or wrong it happened too frequently and now that this program has finished, investors will still need to have 20% down.

Why this isn’t a big deal: it’s not a big deal because without using rental income, most investors couldn’t qualify at 5% down anyways.

Now let me finish off by saying this: Working with a mortgage broker is going to be increasingly important for your business now more than ever. I can help you navigate each deal, place it, and sell it to the client. Your local bank does not have access to:

-credit unions (who can do rentals at 80% using gross income)
-alternative lenders (who can do up to 90% using…


How Do I Get Paid?

I met with two young first-time buyers who were eager to get the ball rolling on their home purchase. First things first was to get them pre-approved which meant we met at a local Starbucks to discuss the fine nuances of mortgage financing options. Towards the end they both asked me straight up “Ok, so how do you get paid? How much do we owe you for this?”. A great question - one that I’d like to explain here as I did to them.

I only get paid if and when I close a deal. I don’t get paid for my time to meet people before they buy something, nor to discuss a multiple-offer situation with them when it’s 7pm a rainy Tuesday, or to help them understand their options on an early morning Sunday. When the deal is closed is when I get paid by the lender. Depending on the term the client picks, I get paid more or less. The shorter the term, the less I get paid since the lender has the client for a shorter amount of time.

Why is this important? I believe that we have entered a new era of information flow. I experience it myself when surfing the web - our attention spans are very short, our patience is thin, but our lust and appetite for knowledge is growing. Did you know that there is a myth out there we only use 10% of our brain? It’s been de-bunked but surely we don’t use the full 100%. I find there is always more space to know more about something. Back on topic: I am finding that many people have commoditized the idea behind a mortgage. Because of the web, people believe it’s a simple process, a one-stop-shop, or something that shouldn’t take…


How I Saved My Client $19643

Recently a client we will call Jack called me in a panic. His multi-national company was offering him a glamorous opportunity to work in the far east, on a permanent full-time basis. This was just the opportunity he was working for and finally the call came, very unexpectedly.  Jack had bought a home with his wife less than 1 year ago and took a 5-year fixed mortgage at 2.84%, so obviously did not plan to be making a global move of this kind anytime soon. When I first met Jack he raved about his experience with one of the big banks, and wanted assurance that the lender or bank we picked for him would be as good, if not better. After a couple of meetings and many emails, we settled on a great lender, CMLS Financial, who offered us a fantastic rate and even better terms *& conditions.

Here is how we managed to save $19, 643 today, by picking the right lender:

Had Jack gone with one of the big banks who use a “Posted-Rate Penalty Calculation” method when assessing the Interest Rate Differential to break a fixed-term mortgage, his penalty would have been an astounding $22 675. Even though interest rates are only 25 basis points higher, or .25%, (2.84 to 3.09 today), his penalty would have still been this high since this bank uses a posted rate, which today is 4.99%. What is Jack’s actual penalty to break his much better mortgage?


That’s right. 3-months interest penalty. Since this lender uses a much more equitable way of calculating the true cost of breaking his term this early, they are only charging him what is in writing - 3 months interest. Why? Well simply put, they compare rate to rate, not posted rate to rate.…

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