Archive Monthly Archives: April 2010

Recession Keeps The Squeeze On Ontario Construction Financing

“Lenders Continue To Take A Lower Risk Approach When Considering Ontario Construction Financing Opportunities”

Most of what we hear these days about the recession is that things are getting better. That may be the case for monthly production and consumer confidence, but it doesn’t necessarily apply to the still very fragile capital markets, especially when tools like mortgage insurance are not available to reduce risk.

For Ontario construction financing, which is mostly provided by private lenders, the general approach is one of greater conservatism and caution when it comes to considering all types of projects, especially if they’re located outside of the Greater Toronto Area.

As an example, in the not too distant past in some of the bigger centers outside of the GTA, private lenders as a group were not overly concerned with borrowers having a take out mortgage arranged prior to advancement of construction loan funds. But at the present time, even if you’re building in the middle of cottage country which tends to still have a pretty active resale market, a take out mortgage has become a requirement more often than not for private construction mortgage approvals.

The second challenge for home owners, builders, and developers is that even when construction financing can be secured, the loan to value in many areas is in the 60% to 65% range versus 75% to 80% as you get closer to Toronto.

And rates can be higher as well, making projects harder to cash flow as you get further away from the city center.

Things are not likely going to change any time soon either. So even though development projects are showing more signs of life than in the last two years across the province, the process for finding and securing construction financing has become more complex for anything that isn’t in a prime real estate market.

The adjustment that needs to be made by builders and developers is to start working on arranging their construction financing further in advance to make sure they are going to have funding in place for their projected start times. And if turns out what’s available in a given area is higher cost and lower leverage than what was expected, the project may have to either be adjusted in terms of size, or delayed all together until more suitable financing becomes available, which in some areas could be quite awhile.

If you have a construction project that requires capital, give me a call so I can quickly assess your requirements and provide you with relevant options for your consideration.

Click Here To Speak With Construction Mortgage Broker Joe Walsh

More Information on New CMHC Mortgage Insurance Program Changes

“Here Are A Few Additional Wrinkles To Now Consider When Budgeting For A New Home Purchase or Mortgage Refinance”

In March of 2010, Canada Mortgage and Housing Insurance announced some changes to their mortgage insurance program that were designed to reduce the potential of a housing market bubble developing in Canada through our own version of the sub prime market which falls under the category of insured mortgages.

The changes to take effect on April 19, 2010, in a nut shell, are 1) changes in debt servicing assessments for mortgage requests above 80% of the value of the property and mortgage terms less than 5 years; 2) a reduction in mortgage refinancing amounts from 95% of property value to 90%, and 3) a requirement that all CMHC insured rental properties have a 20% down payment at time of purchase.

The big question that existed after the initial announcement was how would the repayment assessment work going forward.

Today, we got some further clarification.

Basically, for a new mortgage application where the mortgage amount is over 80% of the property value, the repayment assessment must now be based on the Chartered Bank Conventional 5 year mortgage rate published every monday by the Bank of Canada.

And because this published 5 year rate is typically higher than what the actual 5 year rates being issued are at any given time, the bar for qualifying for variable rate mortgages, or mortgage terms under 5 years has now been raised.

Bottom line, its now going to be much harder to qualify for a high ratio home mortgage and even harder to take advantage of variable interest rates, which are still more than 2% below the best 5 year term options.

For those of you who already have a variable rate mortgage for a predefined term, there’s nothing indicating that these recent changes will impact you’re ability to continue on with a variable rate once the present term expires even if you wouldn’t otherwise qualify for a new mortgage under the changes to the CMHC mortgage insurance program listed above.

Keep checking back for more mortgage insurance information as I will be posting any further changes or explanations that get disclosed.

And if you have any questions related to getting a new mortgage or refinancing your existing mortgage, please give me a call so I can quickly assess your options and provide the most relevant options for your consideration.

Click Here To Speak With Mortgage Broker Joe Walsh

Institutional Construction Financing Quirks

“Understanding How Bank Construction Loans Work Will Allow You To Get The Most Benefit From Them”

Many times people are for lack of a better term obsessed with getting bank or institutional financing for all their requirements. And for the most part, cheaper money is always going to be preferred over the alternative.

But cheaper money is lower risk money, and banks structure their deals to minimize their risk, which can also restrict you in the process.

So to be clear, I am not stating in any way shape or form that there is anything wrong with seeking to finance your construction project through an institutional lender. What I am saying is that you should make sure you understand all the conditions that go with the funding in order to get the full benefit out of the lower cost financing you are seeking.

For instance, here are a few of the more common requirements that come with an institutional construction loan.

  • Construction mortgages are only issued by institutional lenders  in order for them to have the opportunity to add the longer term take out mortgage to their portfolio.  To make sure that happens, the lender will require that you qualify for both the construction loan and the take out mortgage at the same time.  If you can’t qualify for the take out mortgage, you won’t get the construction loan.
  • Second, the construction mortgage, while only short term in duration, is typically written up under a 5 year interest term.  If you utilize the bank’s take out mortgage, the pre-payment penalty associated with paying out the construction loan early will be waved.  And with a construction interest rate significantly higher than the long term mortgage rate, you’re going to want to pay it out as soon as possible.
  • Third, even though you can get approved for up to 75% of the appraised value of the completed project, the bank will only advance 60% to 65%, keeping the rest to fund the construction hold back.  But at the end of the hold back period, the held back funds will never be advanced …unless you utilize their approved take out mortgage to pay out the construction loan.

There are some other quirks to institutional construction mortgages that can come into play depending on your situation and the institution you’re dealing with.

To find out how to make sure you’re getting the most out of a institutional construction loan for a home build,  give me a call and we’ll work through all the requirements together.

Click Here To Speak With Construction Mortgage Broker Joe Walsh

Locking In Mortgage Rates Is a No Risk Option

“Let Me Show You A Simple But Potentially Highly Effective Strategy For Playing The Current Mortgage Interest Rate Market”

If you’ve got an existing mortgage, but want to either refinance it for a lower rate, or lock in the current rates for a longer period of time, here is a very simple strategy that will allow you to play the market for the next 4 months while keeping all your options open.

The biggest reason that people don’t refinance when interest rates are lower is due to the interest penalty they will have to pay to get out of their current higher interest rate mortgage term.

The prepayment penalty can be worth paying if the mortgage rates go up and stay up for the foreseeable future.

But how does anyone know what the mortgage rates are actually going to do? Even for the experts, their opinions are only educated guesses as there are too many global economic forces that can influence our capital markets at any one time.

So one way of being able to potentially have your cake and eat it too is to apply for a mortgage pre-approval right now and get a long term interest rate of your choosing locked in for 120 days.

The pre-approval doesn’t commit you to act in any way, and if rates go down, you can also take advantage of positive rate moves.

But if rates do go up during the 120 day period, two interesting things will happen. First, you have the old rate locked in for your use if you so choose and second, the prepayment penalty, which is likely going to be based on an interest differential calculation, will become lower as the rates go higher.

So by “playing the field” so to speak with a pre-approved mortgage that provides interest rate protection for 120 days, you can take more of a wait and see approach for the next 4 months to determine if any rate movements that may occur can work in your favor.

If you’re considering refinancing your existing mortgage to gain a lower interest rate, extend your interest term, consolidate debt, or all of the above, then I suggest that you give me a call so we can get you pre-approved for a new mortgage and get a current interest rate locked in for the next 120 days.

Click Here To Speak Directly With Mortgage Broker Joe Walsh.

CIBC Long Term Mortgage Rate Deal

“CIBC 7 Year Mortgage Rate Is Currently A Great Deal To Consider”

Most long term mortgage terms are for a max of 5 years. CIBC not only has a 7 year term, but right now, at the time of writing, it was still set close to 4.5%.

I’m not sure this is going to last very long and by the time you’re reading this, it may have already changed, but right now this is a great deal in the current market where long term mortgage rates are on the rise.

CIBC’s seven year product has perhaps been flying under the radar as there was a significant rate spread between it and the 3 year term rates on the market. Mortgage holders have been able to be short term focused for a long period of time and haven’t been paying a whole lot of attention to longer term rates.

But with the rate changes announced last week to longer term mortgage rates in Canada, its now time to start considering where rates are headed (which is up) and how to protect yourself for an extended period of time to longer term rate moves.

As I mentioned above, I’m not sure how long CIBC will keep the seven year rate where its at, but even a small move would still be worth considering if you believe in some of the economists predictions for more rate moves before the end of the year.

One thing to keep in mind as well is that you can always apply for a pre-approval and get the current rates held for you for the next 120 days, giving you ample time to see how things are going to unfold.  As an independent mortgage broker, this is something I can arrange for you at zero cost.

I know I’m biased toward mortgage broker services and the value we provide our customers, but this is another excellent example of a rate offering that many people (even mortgage brokers) may not be aware of.

We went through a period over the last couple of years where there wasn’t much new with rates for extended periods of time, but that isn’t likely going to be the case for the foreseeable future which is all the more reason to give me a call and get on my mailing list so that you can take advantage of the different rate opportunities and strategies I will be telling my readers about in the coming weeks.

Click Here To Speak With Mortgage Broker Joe Walsh

Don’t Leave The Process Of Arranging Construction Take Out Mortgages Too Long

“Just Because You Can Start a Construction Project Without a Take Out Mortgage in Place, Don’t Leave It Too Long”

While institutional lenders will require you to also qualify for a long term mortgage or take out loan with them before they will grant you a construction loan, the same is not typically the case with a private lender.

And because the vast majority of Ontario construction loans are granted annually by private mortgage lenders, the requirement to have a take out mortgage in place prior to draw advances on building loans for both residential and commercial projects are not always necessary.

At the same time, there are many private lenders that are closely aligned with long term institutional mortgage lenders in order to try and secure both the construction and take out mortgages. While the take out mortgage may not be a requirement at time of construction, you may still be obligated to accept one of their term out options to payout the construction financing loan.

For more independent private mortgage construction financing sources, they will only typically require a take out mortgage be in place prior to loan advance if they view the subject real estate to have a weak resale market and/or feel the location where the project is situated will not attract a lot of interest from term out lenders.

When a take out mortgage is not arranged from the outset of the project, there is also the risk that the process for trying to locate a construction take out loan during the project will end up being a distraction to the owner’s project management efforts, creating potential incremental cost and cash flow management problems in the process.

The other issue with applying later on for construction take out financing is that an approval may not be forth coming when expected, causing the payout process for the construction loan to be delayed, which will require the borrower to pay the higher cost of private lender construction financing for a longer period of time and potentially run the risk of the private lender taking foreclosure action to get the loan repaid.

When put under pressure to get a take out mortgage in place at the end of the project, the borrower may end up being forced to take a less than optimal long term mortgage alternative than could have been secured if more time was available.

If you’re in the process of planning out a construction project, or deep in the middle of one where a construction take out mortgage is required, I suggest that you give me a call so I can quickly assess your requirements and provide relevant long term take out mortgage options for your consideration.

Clock Here To Speak With Construction Mortgage Broker Joe Walsh

Institutional Self Employed Mortgage Programs

“Even If You’re Self Employed and Not Reporting Much Personal Income, There Are Still Excellent Institutional Self Employed Mortgage Programs To Consider”

Banks and other institutional lenders recognize that self employed individuals can take many different types of tax planning approaches to lower their overall level of taxation, but which can also reduce their personally declared income in the process.

And because one of the primary criteria for qualifying for an institutional mortgage is assessment of repayment ability via personally reported income to the Canada Revenue Agency, reliance strictly on reported income effectively ends up penalizing self employed individuals that otherwise are very credit worthy and have sufficient means to service the mortgage amount they’re trying to secure.

This is where the self employed mortgage programs come in. They are designed to address this segment of the market that may not be able to show what I’ll call traditional employment earnings for mortgage qualification. Instead, the bank or mortgage lender offering the program allows them to declare their income, often times with no additional verification.

The keys to being considered for this type of mortgage program is the ability to demonstration that you have been self employed for at least 3 years and can provide business registration and activity based documentation that supports your claim of being self employed.

Some programs may still want to see your annual notices of assessment from CRA for the last 3 years and may also require that you declare your income in front of a notary and provide a sworn affidavit to the bank to further support your application.

Another key criteria for mortgage approval that is consistent with all institutional mortgages is that the self employed applicant must have strong credit, typically at a credit score level of 650 or higher, depending on the bank.

The self employed mortgage programs will vary in terms of the amount of mortgage they are prepared to underwrite related to the value of the property. For refinancing scenarios, the borrower can potentially secure a mortgage of up to 60% of the value of the property and up to 65% for a purchase. These programs also tend to cap out at real estate property values of a million dollars.

There is a fair amount of variability among the programs in the market, so its best to employ the services of a mortgage broker to find one that best fits your needs and financing profile.

If you’re in need of a self employed mortgage or would like to better understand you potential options, please give me a call and we can review your situation and the different program requirements together.

Click Here To Speak With Mortgage Broker Joe Walsh