One thing about the Christmas season and the financial markets is that not a lot of anything happens after the middle of December. Sure, people are still looking for financing and mortgage applications are being made, but there is little chance that anything is going to get completed before the first or second week of January.
Once the season kicks into gear, there is likely going to be someone key to a mortgage process that is going to go missing for a period of time, which will end up delaying the completion of the residential mortgage process. Either the lawyer is in Florida or the lender is working with a skeleton crew or everyone in general has geared down their efforts due to the many distractions of the season.
Hopefully you won’t have a critical closing date in the next couple of weeks and if you do you would be well advised to get an extension in place as soon as possible. While there is always the chance that everything will somehow get done on time, Christmas miracles in the mortgage business are likely going to be less common than in other parts of everyday life, or at least you would think so.
If at all possible, now is the time to take advantage of the spending time with loved ones and partaking in all the Christmas activities available to you at this time of year. Getting any type of business done between Christmas and New Years or even the first week of January is likely going to be a struggle until the majority of people return to their jobs and get settled back into their daily routes.
To all our clients, lender relationships, and business colleges, we wish you all the best of the season and look forward to working together with all of you in the coming year.
2011 appears to be full of promise on many fronts and the mortgage market is no different. But like I mentioned earlier, not a whole lot is going to get done between now (Christmas Eve) and the second week of January, so try your best to reduce any money related stress and find some time to enjoy the season and those closest to you.
In any event, I wish you all a Very Merry Christmas and a Happy New Year.
In this day and age, its all about immediacy… getting things done when you need them without a whole lot of wasted effort.
And typical of the times, when it comes to getting a mortgage in place, the average Canadian will tend to leave the process as long as possible, perhaps holding the belief that there is no real or potential benefit from planning ahead.
But when you consider the amount of money you’re going to shell out on a mortgage over time, even the smallest benefit incurred in the short run could add up considerably over time.
Let’s go over some specific reasons why planning further ahead can be beneficial when it comes to your future residential, commercial, or industrial mortgage.
First of all, there is knowledge. Taking the time to understand the different types of quotes interest rates, payment frequencies, amortization, repayment terms, mortgage insurance, etc. can help you make a more informed decision that will save money over time. None of these items are overly complex to understand, but collectively its still a lot of stuff to wade through.
Second, locking in an interest rate for at least 90 days provides you with more potential decision making flexibility with respect to rate when the day comes that the mortgage needs to be finalized. But this isn’t going to be much of an option if you’re not planning far enough out to take advantage of it.
Third, for certain types of applications like a construction mortgage, the process for applying, approving, and managing this type of mortgage can take some time to understand and apply knowledge. By being armed with what to expect and how to proceed prior to starting construction can make a cash saving difference when issues arise in the middle of your project.
Fourth, and perhaps most important is that the standard mortgage process always seems to take longer than anticipated. Stuff happens that causes delays or issues that need to be resolved before a closing can be completed. This can be a hairy time for the borrower if there is a time pressure involved in the closing process. Starting sooner can alleviate much or all of stress and help to get everything completed on time.
If you buy into this argument but are still not sure where to start, then the best first step is likely going to be selecting a mortgage broker (mortgage coach) to work with. The more time you give a good mortgage broker, the more likely they’re going to be able to deliver added value to you for no extra cost.
When seeking a residential or commercial mortgage over the internet, there are basically three different types of online strategies you’re going to come across.
The most common mortgage related web site strategy is for a lender or mortgage broker to put up a basic brochure site to provide very basic mortgage information, perhaps have a rate quote section, and offer contact information to you to contact the firm or individual. Most of these web sites are template driven and provided on mass volume to the companies or individuals in the business as a way for them to be found. Once built, the sites tend to become static sign posts for the business with very little if any additional information being added for months or even years.
The second type of mortgage web site is the online lead generation type site. These sites are growing in numbers as the technically savvy develop robust and interactive websites that are designed to capture your contact information and as much financial information you’re willing to provide and then selling or brokering the leads to mortgage brokers they work with. These sites tend to be nameless and faceless as the developers are not themselves mortgage brokers or have any type of significant financial expertise. They are predominantly marketers providing lead generation services to mortgage broker. While there is nothing wrong with this type of approach per say, it doesn’t let you select the mortgage broker and instead works off the premise that the mortgage industry is 100% commodity, that all brokers are the same, and there is not going to be any additional information required beyond what they collect from you to get you what you’re looking for.
The third type of site is one that more clearly promotes interactively with its visitors, provides solid educational information, adds new and relevant content on a regular basis, introduces you with the people you would be working with, invites communication in the way you prefer, and gives you the option of taking the conversation or inquiry off line if you so choose.
Needless to say, the last category is the ongoing focus of this website. We recognize that the web is a growing first choice for a lot of people to find information, do research, and conduct business. At the same time, we also know that most mortgages have unique considerations for the applicant and that there can be twists and turns in the process before you achieve the desired result.
We invite our visitors into a conversation about mortgages and their requirements and try to continually figure out the best way to interact with them so that the best result can be achieved. Getting a mortgage IS a big deal for most people and the process should not be over simplified regardless of how badly most people would like it to be.
Biased as we are, the first two approaches do not provide much value to the customer.
According to Bank of Canada Governor Mark Carney, Canadian consumers now hold more debt as a percentage of their income than Americans. With interest rates expected to rise in mid to late 2011, the possibility of a large scale debt servicing problem is rather high.
With more and more Canadian mortgage holders taking advantage of floating interest rates that remain at near all time lows, the prospects of even very small increases in the mortgage lending rate can have a big impact on home owners ability to make their monthly payments.
This is far from new information … the conservation has just died down a bit over the last 6 months and is now starting up again as Mr. Carney zeros in on the larger areas of concern he sees with respect to keeping his mandate in check, which is keeping inflation under control. While most people don’t see inflation as a problem at the moment, that could change in the near future and the main brake the Bank of Canada has to slow inflation down is increasing interest rates, at least for a period of time.
Due to the swelling level of household debt, the combination of high debt and rising interest rates is a major concern.
So what does all or any of this mean to you?
If you fall into the category of the high consumer debt holder, including very little equity in your home, you may want to start paying closer attention over the next 6 months to the longer term fixed interest rates. If there is short term movement down in fixed rates, you might want to consider taking advantage of the opportunity to lock in for a period of time and reduce the risk of not being able to cover off your monthly mortgage requirements.
The first step, however, is getting a strong hold on what amount of incremental monthly payment you can afford. Going to a fixed interest rate is going to cost more than what you’re paying on a variable rate today so you need to see if your cash flow can even handle it, or make some adjustments to your spending to make the numbers work.
Effectively, the slightly higher monthly payment is insurance against not having interest rates get away from you completely in the coming year or years.
This can be a hard choice to make, especially with rates staying so low for such a long period of time. But the economy always goes in cycles and this time around its likely no different.
The good news is that it appears you have some time to plan ahead and think about what makes sense for your personal situation.
Residential mortgages or home mortgages for post bankrupt applicants can be challenging, but not impossible to obtain.
In fact, depending on where you’re now at after bankruptcy, you may even be able to qualify for a home mortgage loan through a major bank for a real estate purchase. The trick is satisfying all the criteria they will have for someone that has had a bankruptcy in the past. Secondary banks and trust companies also consider these applications, all with their own requirements for getting an approval granted. In the event that you cannot qualify for an institutional mortgage of any type, there still remains private mortgages as an option until you are able to satisfy all the credit requirements associated with cheaper forms of money.
To give you a better idea of what it would take to get a home mortgage or bad credit mortgage from a bank after bankruptcy, here is a list of fairly standard requirements common to most front line mortgage lines.
Each lender will have different variations around these requirements, but the bottom line is that if an applicant has worked hard to re-establish earnings and credit after bankruptcy, there is a good chance that an institutional mortgage can still be secured at market rates and terms. One point to mention is that listed rules or requirements are for home purchases, not mortgage refinancing, with is another kettle of fish all together.
If you don’t quite meet these criteria today, within 6 months to a year you may, provided that you focus in on these basic requirements.
One the surface, it sounds great when you hear that a residential mortgage can be amortized for over 30 years, providing you with a means to reduce your monthly cash flow outlay.
But when you break down the numbers, is the decision to take on a longer term amortization a good one?
For instance, if you take any mortgage amount and compare 15, 20, and 25 year amortization periods, you will find that moving from 15 years to 20 years or 25 years will reduce your monthly payment by 20% and 31% respectively, versus what the payment would be for a 15 year amortization. But looking at the numbers further, the total interest cost paid over the life of the mortgage also increases by 36% and 74% respectively versus the 15 year am.
So the question is does the reduced cash flow benefit offset the total increase interest? If you plan to pay the minimum on your mortgage for the full amortization term, the longer amortization period does not make a great deal of economic sense for you if you have the ability to cash flow a higher payment. Obviously if you do not have the cash and that extra couple hundred dollars a month is the difference of making your cash flow work or not, then the longer amortization may become a necessary evil.
The other situation where a longer term amortization makes sense is where you know, or are pretty sure, that you’re going to be able to put incremental lump sum payments against your mortgage over time. Most residential mortgages now a days have some sort of annual prepayment you can make without penalty. Especially in situations of self employment where the income earned can be seasonal or more erratic, the longer amortization provides the least possible monthly payment and prepayment options allow you to pay down the mortgage faster so you aren’t paying all that additional interest associated with a longer amortization period.
Consider longer term amortizations as a tool and use them to maximize your cash flow. At the same time, make sure you understand the cash flow and interest trade offs as well as over time the longer amortization can cost you a significant amount of money.
As I’ve previously written, a private mortgage can actually be a primary lending option versus a loan of last resort for those with bad credit.
One of the situations where this can be the case is with the acquisition or purchase of commercial property. Depending on the property and related mortgage lender requirements, a commercial property loan from a bank or institutional lender can take 60 to 90 days to close. And while the seller may be more than accommodating with allowing a subject to financing clause in your purchase and sale offer, it can’t be assumed that the seller will also be prepared to have to wait two or three months for the condition to be waved and the sale finalized.
One alternative is to complete the purchase with a private mortgage. While the cost of financing is going to likely be higher and there will be more closing costs to get this type of commercial mortgage in place, the benefit is that the time it takes to get a commitment and get the deal funded is more likely to work with the time the seller is prepared to give you to arrange financing in the first place.
Then, once the property has been acquired, you should immediately start the process for looking for a long term institutional financing solution to pay out the private mortgage lender. Most private mortgages are for a one year term, so that should give you plenty of time to seek out the best available bank or institutional deal. It also affords you time to make property improvements that can add or strengthen the fair market value of the property, further strengthening your case for a bank commercial mortgage. If there is a business associated with the real estate, the added time can allow you to come and improve the operating results if these results are expected to cover all or part of the mortgage debt servicing.
And while 12 months can seem like a long way away, don’t put off looking for your long term commercial mortgage solution too long as you can end up running out of time a second time. With some private lenders, you may even be able to have the private mortgage open for prepayment after a certain period of time, say at least 6 months, giving you the opportunity to switch over to cheaper financing as soon as possible.
Commercial mortgage financing, like most everything else, is driven by supply and demand dynamics, most specifically in the commercial real restate market. And its not just the activity level of the market, its the size of it as well. For instance, major economic centers such as Toronto are large in size and maintains a very active market. As a result, there is a large volume of commercial lenders that set up shop or target this market.
Many of the very same lenders focused on the larger markets will also exist in regional markets or smaller markets across the country. But existence or presence in a market does not necessarily translate to a same or similar approach to financing commercial property. More remote markets will end up being serviced by fewer lenders due due once again to the supply and demand dynamics. And because there are fewer lenders servicing the market, the competition among lenders is much lower, resulting in less aggressive rates and terms being offered to applicants.
And when you take into account the impact that the recent recession has had on larger market lenders, the impact is more greatly magnified in the smaller markets with an even higher level of conservatism in place.
In several instances, specific commercial properties will garner to interest, or the interest that is identified may want considerably more equity to be retained in the property during the mortgage term. Small markets for commercial mortgages are for the most part buyers markets where the lenders are the buyers and maintain the power to do what’s in their best interest without worrying a great deal if at all about the local competition.
And when we speak of regional disparity, this can easily occur within different areas of a province and is not reserved only to areas outside of Toronto, Montreal, or Vancouver.
As a business owner, all this indicates that its going to be important to understand the commercial mortgage supply dynamics in your area or area of interest and not to assume whatever knowledge you have of a nearby market is going to transfer to your location of interest. Dealing with an experienced commercial broker is definitely one way to make sure you’re property financing assumptions are on track when you’re considering a commercial property transaction.
Ever since the April, 2010 changes to the mortgage insurance regulations, people wanting to purchase and finance mortgage properties are having to put more cash into the deals with the maximum insured mortgage now not to exceed 80% of the fair value of the property. But even greater potential impact is that most A lenders are now only looking at 50% of the rental income for debt repayment versus the 80% they were using in the past.
The main results of these two items is 1) more cash is required to close the deal in the first place if you want a higher leverage mortgage and 2) in order to get 80% of the rental income applied to your mortgage application, you’re going to have to apply to a “B” lender which will increase the rate of interest and reduce the overall profitability of the investment.
That being said, interest rates are still at a very low level so an added 1% to 1.5% in rate is likely not going to kill too many deals.
But the end result overall is that investors may end up holding fewer properties in the short run as we continue to work through the current financial cycle.
Unfortunately, many investors still believe there can be ways around these rules and revised lending standards and continually search the market for something that typically is not there. For mortgage brokers that specialize in rental property mortgages, the approach now is to be up front with the borrowers and layout the challenges right away versus being overly optimistic with securing a better deal that what is available in the market place. This can easily save a week of time shopping the deal around with “A” lenders that will not be able to provide what the client is looking for. By being focused and realistic of what can be done right off the bat, the investor is more likely to get the deal closed on time versus wasting valuable time seeing if there are any market anomalies they may be able to take advantage of.
On the flip side, mortgage brokers who don’t typically work with rental property mortgage requests are more likely to spend a lot of time spinning their wheels trying to get a positive answer from unlikely sources.
If you need a Toronto rental property mortgage, I suggest that you give me a call so I can quickly assess your requirements and provide rental property mortgage options that meet your needs, in the time you have to work with.
Believe it or not, most banks and other institutional lenders do not consider themselves to be mortgage lenders, although the majority of the dollars they put out into the market every year have mortgage backed security and in many cases the use of funds was to secure a real estate acquisition or refinance an existing commercial property mortgage.
Institutional lenders consider themselves to be cash flow lenders with an emphasis on the cash a business generates and the strength of the overall balance sheet as primary borrowing factors. This can work positively and negatively in your favor depending on a given scenario.
If you have a strong real estate property, but cash flow that only marginally meets the banks debt serving requirements, you may still be able to secure a commercial property loan, but the loan amount as a percentage of the overall property value may only be in the 50% to 60% range.
In situations where the cash flow of the business is very strong, there are institutional lenders that will go as high as 100% financing against the commercial property value where part of the lending commitment is based on cash flow, not just real estate value. Of course a higher loan to value will likely come with a slightly higher interest rate, but when you’re already working with prime plus rates as a starting point, a slightly higher cost of funds is more than made up for with higher mortgage leverage.
Not all conventional lenders will consider higher ratio commercial mortgages, regardless of the cash flow, so the potential benefit of getting a larger mortgage will depend on which commercial lending program you’re applying to. Commercial mortgage financing in general typically will average a loan to market value ratio of around 65%. This is because income producing properties tend to have the established cash flow built into the property value already, providing little opportunity for a larger mortgage to be secured.
Determining where your commercial mortgage then best fits can involve quite a bit more than just a stated interest rate or repayment term. And the different types of commercial mortgage programs that you’re property could potentially be suited for can be hard to figure out unless you regularly spend time keeping track of what different lenders are doing with their programs and portfolios. One of the best ways to zero in on the most relevant commercial mortgage options is to work with an experienced Toronto mortgage broker with a track record of placing similar commercial property financing deals.
If you require commercial mortgage financing, or have some questions on the subject, please give me a call so I can assess your situation and get all your questions answered.