Archive Monthly Archives: March 2011
Interest Rate Differential Prepayment Penalty
“Potentially One Of The Most Confusing, And Costly Elements Of A Fixed Term Mortgage Is The Prepayment Penalty”
When you have a fixed rate in place on your mortgage and your looking to do a mortgage refinancing either to acquire additional funds and/or get a better interest rate, you are likely going to be subject to some type of prepayment penalty.
A prepayment penalty exists in the first place to basically protect the lender against loss. For residential home mortgages or any commercial mortgage at say 5%, the lenders cost of funds may be 4% as an example (purely hypothetical to make the math simple), providing them with an operating margin of 1% (5% – 4%) to cover their operating costs and hopefully produce a profit.
Because your funds are locked in at 5% for a period of time, the lender also locks in their cost of funds for the same period of time. If the mortgage is prepaid and the lender is stuck at funds at a cost of borrowing that they can’t mark up due to current market rates, then they can potentially incur a loss on the overall mortgage transaction.
If you try to pay out the mortgage early, they have the right to charge a prepayment penalty which is typically the greater of three months interest penalty, or interest differential.
If rates are higher when you go to payout the mortgage, then isn’t likely going to be an interest differential penalty to consider.
Interest differential in simplest terms would represent the 5% interest rate on your old mortgage, minus the lenders current market rates for the time left on your mortgage, multiplied against the principal outstanding.
But that would be in simplest terms.
In reality, there can be considerable structural differences in how the interest differential is calculated by the lender. While all approaches fall under the governing body for bank and institutional lenders, there is a fair bit of room for them to manage the penalty into their favor if the right circumstances present themselves.
This can leave the borrower not only scratching their head trying to understand how it works, but also leave them facing a considerable prepayment penalty they did not count on or did not properly calculate based on their own understanding of the mortgage terms and conditions.
For a real life example of an IRD calculation that did not excite the borrower holding the mortgage, go to http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2011/03/ird-penalty-comparison-rates.html
The good news is that there are supposed to be federal government guidelines coming out in 2011 that will standardize the explanation of the interest rate differential prepayment penalty, or IRD, which should make it easier to borrowers to not only understand what they’re signing up for at the start of the mortgage, but also provide a more clear outline of how to calculate a potential IRD out at a given point in time if required.
Also keep in mind that his only relates to bank or institutional lenders. Private mortgage financing does not typically have any type of IRD written into the mortgage terms. For most private second mortgage loans, the most common prepayment penalty is 3 months interest, but some can also be fully open after a period of time.
If you are considering a mortgage refinancing action where a new mortgage at a lower rate is going to be paying out an old mortgage at a higher rate, then I would recommend that you give us a call so we can go through your prepayment calculation together and then come up with the best strategy to minimize it.
Private Mortgage Interest Rate Variation
“How Much Rate Variation Is There Among Private Mortgage Lenders For Similar Properties?”
There can be a considerable private mortgage interest rate variation among lenders from one lending situation to the next.
How much variation?
Well, some situations, different lenders can be as far apart as 6% on the annual stated interest rate.
There are a number of different reasons why this can occur. Here are some of the more common ones.
First, a private mortgage lender will potentially look at a very broad cross section of properties within a certain financial geography. Banks and institutional lenders in comparison only look at a slice of the market where there is considerable competition that leads to competitive pricing. As a result, a private lender may be able to price their mortgage rates at their own desired cost of financing versus what the is perceived to be the market price. Even if their may be other private lenders in the same area that would offer lower on the same property, the borrower may not be able to locate them at all or in time to complete their transaction.
Each private lender or private mortgage financing group will have their own financial return target assigned to their portfolio. This doesn’t really have to have anything to do with the market at large. Some individuals, using their own funds can provide private mortgages at excellent rates, many times close to bank rates. When we’re talking about a mortgage investment corporation, they have an internal cost of funds they need to achieve for their investors, so its going to be hard for them to do below their target rate, unless they are substantially ahead on their portfolio return for the year to date period.
What’s also hard is dealing with available rates at a given point in time. At one moment in time, there may be a private lender prepared to provide a 6% interest rate on a property when everyone else is closer to 10%. But if that particular lender does not have any available funds a month later, that rate is also not going to be available from them.
Further, because all private lenders do not exist on a some form of lending network, its impossible to access all relevant sources for a particular deal at a given point in time. But it is possible, based on what I have been saying, to get quotes back that are significantly different one to the other.
That being said, there is competitive factors in the private lending market like any other market. But because of the way privates individually operate, significant differences can exist in interest rates from one private lender to the next at certain times and on certain deals.
Bottom line is that the private mortgage lending market is very fluid and what is the best rate today can be an inferior rate tomorrow.
The key to getting the best available rates is to work with a mortgage broker that has excellent access to private lenders for the area and property type you are trying to finance.
Main Question Regarding New Canadian Mortgage Rules
“Can I Switch Lenders In The Future Even If My Original Mortgage Doesn’t Qualify Under The New Rules?”
Ok, first lets revisit the new rules.
Amortizations on bank and institutional mortgages can’t be higher than 30 years.
The loan to value offered under an insured mortgage loan or an uninsured residential home mortgage for a mortgage refinancing, cannot exceed 85%.
If you’ve already got a mortgage in place where the amortization is greater than 30 years and the loan to value is higher than 85%, how do the new rules apply to you if you want to move your mortgage from one lender to another.
From what I’ve been reading, you can still make the move to another lender and retain the higher amortization and loan to value, provide that…
- The amortization period does not increase
- The loan amount does not increase
- The loan to value amount does not increase
While on the one hand, that’s good news to those who are in this situation.
On the other hand, it could be harder than you think to find a lender that will take on your mortgage and assume the amortization and loan to value that comes with it.
Mortgage lenders have already changed their programs to adjust to the new rules and are only dealing with the exceptions related to property purchases that were closing prior to the rule change.
As a result, most lenders will likely not have the flexibility in their go forward programs to accommodate your requirements, and the ones that do may not be offering the rates you’re looking for.
If you find yourself in this situation, the best first step is work with an experienced mortgage broker who will be able to help you identify the best options available to you in the market and then help you get the new mortgage in place.
Give me a call and we can go through your situation together and discuss relevant options for mortgage refinancing.
Click Here To Speak With Toronto Mortgage Broker Joe Walsh
Mortgage Broker Pros And Cons
“Toronto Mortgage Brokers Provide The Best Value Most Of The Time”
As a Toronto mortgage broker, I believe you’re better off working with a mortgage broker than going it alone, trying to locate the best deal available on the market to you and then figuring out how to meet all the lender requirements in the time you have to work with.
And not only do mortgage brokers have broader access to the market, they also maintain a pulse on how different programs may be changing and which ones may be newly introduced to the market.
The one area where a broker may not always be working to your full benefit is when they are closely affiliated with one or only a few lending sources that reward them for volume and their goal is to place your business there because it may be more advantageous to them than it is to you.
But even in situations where a mortgage broker is aligned with only a handful of mortgage providers, this can still be of benefit to you as 1) they may be able to get you a lower interest rate due to the volume they can leverage and 2) because they work closely with a smaller number of lenders, the broker will likely have an excellent working knowledge of the programs as well as all the administrative requirements to not only get approved but get the deal funded.
Further, working with a smaller lender base will also tend to result in much closer working relationships with the key personnel in the lenders office which can help get problems resolved faster and deals closed more often without issue.
So regardless of how many lenders a Toronto mortgage broker represents or works with, its all about how well they are able to look after you needs and provide the best value in terms of rates, mortgage program options, and service.
The best way to know you’re getting the best representation is to discuss these issues with your Toronto mortgage broker up front and ask for references from other customers they have previously dealt with.
A good working relationship is based on trust and transparency so don’t be afraid to ask your broker of choice how they plan on getting you a good deal and then go through their recommendations with them in detail.
My goal is to create a win/win scenario as I want to have you for a customer for a long time to come and want you to be able to speak positively about your experience dealing with me and my team.
New Mortgage Rules Now In Effect
“Changes To Maximum Mortgage Amortization and Maximum Loan To Value Now In Effect”
I had previously written that the Canadian mortgage regulations for institutional mortgage lenders such as banks, credit unions, and trust companies, were changing on a few different fronts.
On March 18, 2011, the first of the proposed changes went into effect.
Mortgage amortization periods have now been reduced from a maximum of 35 years to maximum of 30 years. The only exception to this is if you had a legally binding purchase and sale agreement that was dated on or before March 18, 2011. In these cases, the maximum amortization period can still be 35 years. For every other situation, the new rule will apply. There is no distinction between an insured mortgage loan or an uninsured mortgage; residential home mortgage financing for a purchase or mortgage refinancing… All scenarios will fall under the new rules.
Mortgage refinancing rules for insured mortgages for single family units and any multi unit residential mortgage less than 5 total units, have reduced the maximum loan to value from 90% of the property value to 85% of the property value.
If you require any additional information about the rule changes or would like to discuss how they may impact a mortgage financing scenario you are trying to complete or are contemplating, I suggest that you give me a call and book a time where we can go through everything together and get all your questions answered.
CIBC Mortgage Products
“Additional CIBC Mortgage Products Are Now Available Through Your Mortgage Centre Broker”
Because CIBC branch mortgage products are available through our Mortgage Centre brokerage, I thought I’d share two new CIBC products that are on the market and available through out office.
New product #1 is the CIBC’s Wealth Builder option that provides up to 140 basis points off the posted fixed rates in addition to 0.25% cash back in your hands at the time of your residential home mortgage closing, and another $100 back each and every quarter.
New product #2 is CIBC’s Variable Flex Mortgage with cash back that provides a variable mortgage rate at prime minus 1/2 per cent plus 2% cash back. If you have a mortgage over $400,000, the cash back component goes up to 3%.
For another take on these programs, you can go to
http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2011/03/mortgage-centre-gets-cibc-cashback-variable.html#more
If you’d like to discuss any of these mortgage programs or others that be a potential fit for your financing needs, I suggest that you give me a call so we can arrange a time either on the phone or in person for a one on one discussion.
Click Here To Speak With Joe Walsh, Your Toronto Mortgage Broker
Lower Cost Construction Loans
“There Is A Recipe For Getting Lower Cost Construction Loans”
Lower Cost Construction Loans in Toronto or the rest of the Greater Toronto Area area always going to be a function of the quality of the project.
And when I speak of lower cost, I’m not potentially referring to the lowest interest rate you could secure. My reference here is more to cost within a category of construction financing.
For instance, the lowest cost category of construction mortgage loans is from a bank or institutional lender, but many property owners and builders will still not choose this source of financing and prefer a private mortgage financing option for a number of different reasons.
Regardless of what type of construction mortgage you select or prefer, there can still be a pricing range for the financing costs in that range, whether that is within the discretion of the individual lender or a function of competition.
And the better projects are going to get better or lower cost construction financing offers.
There are many things can be considered by a construction mortgage lender with respect to deeming that a project is worthy of a lower rate of interest. Lets go through a few of them.
Project Scope And Location: A project that is located in a well developed market area for similar projects where the market is very active and resale value fairly predictable is going to be more interesting to construction lenders in general than a project that does not have these location and scope characteristics.
Project Organization: The more detailed the project plans, budgets, and time lines as well as the compliance with regulatory requirements at the time of the construction financing application, the stronger the project is likely going to be in the eyes of the lender.
Builder Track Record: If you’re working with a builder or are a builder with an established track record that is documented and can be supported by third parties, then there is going to be more confidence in the overall building process.
Any type of financing is about eliminating or reducing the risk of loss. The stronger a construction project is in all the areas above as well as in other areas that could impact the positive completion of work, the more likely it will not only attract considerable lender interest, but construction mortgage lenders will be prepared to compete for the project which is ultimately what we’re looking for to secure the best potential financing costs in the construction loan category of interest.
Click Here To Speak Directly To Joe Walsh, Your Toronto Mortgage Broker
Commercial Mortgage Customization
“Because Each Commercial Mortgage Is Basically A Customized Lending Solution, Substantial Time And Money Can Be Lost Thinking Otherwise”
Other than the word mortgage, there is really nothing very similar about a commercial mortgage and a residential mortgage.
A residential mortgage is placed on mass volume through customized programs that are designed to deal with large volumes of similar application requests. Success in the residential home mortgage market is based on speed and efficiency. Competition is large and margins are small, so the faster you can assess a file and either decline it or move to funding, the more likely it is that you’re making a profit.
Whether you’re talking about uninsured or an insured mortgage loan, a reverse mortgage, or a home equity line of credit, all these different types of residential mortgages are basically commodities with other similar products on the market.
With commercial mortgages its a whole different game.
While lenders can advertise very similar offerings, rates, and terms for their commercial property lending programs, the reality is that each commercial mortgage is a customized solution, basically different from any other commercial or industrial mortgage.
The reason for this is the high variability of both commercial property types and revenue streams that can be generated by one property compared to the next. The closet commercial mortgages get to residential property financing is with large multi unit residential mortgage requirements, condo financing, and other investment properties where the income is from tenants and the properties are part of a larger market for similar real estate.
For just about everything else, there is a more customized approach to non residential mortgage financing where mortgage lenders will be very selective from day to day and month to month as to what they are prepared to finance and what they are not.
Another reason for constant changes in lender approach to commercial deals is the fact that many commercial buildings can be worth substantially more than the average residential property. Having too many commercial mortgages on similar properties in similar industries can create concentration problems in the lenders portfolio, causing them to basically stop lending on certain types of properties and/or industries for periods of time.
With all this being said, its very, very, very easy to waste a ton of time AND money chasing lenders who can’t help you.
And it may not be that they don’t the type of deal you are requiring.
They may even have some in their portfolio when you apply.
But for the reasons mentioned above and potentially others, its all about what they are prepared to do at the moment of time when you apply.
That’s all that really matters.
So the key to commercial financing, if there is one above all others, would be to make sure you’re hunting with a rifle and not a shot gun, only working with relevant lenders that are in a position, today, to consider and fund your particular requirements.
Everything else is a waste of time…which can easily stretch into 6 months+ wasted.
If you’ve in need of a commercial mortgage right now, I recommend that you give me a call so we can go through your requirements together and discuss different financing strategies as well as the sources that are currently funding similar requests.
Click Here To Speak With Joe Walsh, Your Toronto Mortgage Broker
Private Mortgage Options
“Unlike Regular Bank Commitments, Toronto Private Mortgage Options Can Have Very Short Shelf Lives”
Toronto Private mortgage options tend to only be available for short periods of time for a number of different reasons.
Unlike a bank or institutional residential home mortgage lender that are prepared to re-issue term sheets or commitments once an offer lapses, a private mortgage lender may or may not choose to reconsider a financing scenario once a financing offer of some sort has gone stale.
As I mentioned above, there can be several different reasons for this.
First, the private lender as an individual only may have a certain amount of funds available to place via private mortgage at any given point in time. If you don’t accept an offer for financing within the time period provided by the lender, they may be out of funds when you’ve chosen to reconsider.
Second, private lending has a lot to do with the personal feel and judgment of the private lender. If a deal does not close, they may sour on it all together and then not be prepared to revisit it at all in the future.
Third, if any of the application dynamics change or if there is a negative change in the local market for the type of property in question, then its less likely that a lender will be prepared to provide the exact same borrowing amount and conditions in the future for a private home equity mortgage.
And while there are lots of private lenders around, locating money when you need it for terms you are prepared to accept can sometimes be a hit and miss situation.
Especially when you’re trying to arrange a bad credit mortgage, the number of private lenders even interested in your request may be few and far between.
So if you’re going through the process to assess private mortgage financing options and you come across an offering that you feel you can live with, don’t expect the offer to last forever for one or more of the reasons given above.
And if you’re pressed for time but still want to try and hold out for a better deal, make sure you can afford the gamble in the time you have to work with other wise you could end up with no options and lose out on an investment opportunity or worse.
Click Here To Speak Direct To Joe Walsh, Your Toronto Mortgage Broker
Bad Credit Debt Consolidation Loan
“Toronto Bad Credit Debt Consolidation Loans Are Possible, But Only Through Particular Mortgage Financing Sources”
A Toronto bad credit debt consolidation loan is definitely something than can be secured, provided that you’re looking in the right place and making sure that you’re putting your best foot forward in the process.
If you truly have bad credit, then there is not likely going to be any, yes any, bank or institutional lender that will be able to help you. And if you’re in any type of a time crunch, its very easy to waste time with a conventional lender before they actually tell you “No” or decline your application.
And many times, individuals seeking debt consolidation will waste an inordinate amount of time trying to locate financing from a source that is not going to provide anything to them.
The main source (and many times only source) of bad credit debt consolidation loans is private mortgage lending sources. Private mortgage lenders take more of a home equity mortgage approach in that their target market is basically those individuals who cannot meet the credit and/or repayment requirements of the bank or institutional lender.
Most private mortgage for the purpose of debt consolidation are provided via a private second mortgage behind an existing bank or institutional residential home mortgage.
But even with private lenders, it can be hard to secure a bad credit debt consolidation loan if the applicant is viewed to not only have bad credit, but can only demonstrate very little if any responsible credit management practices.
Its one thing to have bad credit, but yet another to be making no positive steps to improving your credit.
As an example, a private lender is more likely to provide a mortgage to someone with bad credit that can show that they have been able to keep everything up to date for the last few months and have a plan towards improving their overall credit profile than to someone who has late payments every month and shows no regard whatsoever towards meeting their credit obligations.
Not too many people are prepared to take on a headache account, so even basic improvements to your near term story that leads up to the point where you’re applying for financing can be of benefit.
That being said, there are still private lenders that will take on some of the worst bad credit profiles. These lenders are basically expecting the mortgage to fall behind and are prepared to immediate take foreclosure action to get their money back if required.
In order to increase your chance of getting a Toronto bad credit debt consolidation loan at a reasonable rate, I suggest that you give me a call so I can quickly go through your situation and provide relevant private lending options from the extensive list of private mortgage lenders I work with.
Click Here To Speak With Joe Walsh, Your Toronto Mortgage Broker
Spring Home Mortgage Financing Season Is Upon Us
“Not To Early To Start Thinking About Your Residential Mortgage Interest Rate Strategy”
Ok, according to the calendar, I am a bit a head of the game here in the first week of March, 2011 to be talking about the start of the spring season with respect to home buying and the resulting mortgage financing requirements.
But here in Ontario, its certainly starting to look like spring more and more each day and all indications are that its going to be a very active spring market for home buyers.
What we’re also hearing in the news from the major banks is that they are starting to softly tell us little by little that interest rates are going to be on the rise by the end of May, 2011, or at least that’s what they are expecting based on the economic reports that are coming out of both Canada and the U.S.
So if you’re in the market for a new home, now’s the time to start thinking about your residential home mortgage financing requirements as well.
Did you know that you can apply for a mortgage prior to making an offer? This allows you to get a pre approval of mortgage financing in advance for a certain financing scenario. While the pre approval may not be completely binding on the lender depending on the exact property you choose to acquire, the process lets you lock in your interest rate for a period of 120 days.
This gives you 4 months to see where interest rates are headed, provide you with protection against an interest rate increase, but still allow you to take advantage of any drops in rates can may occur for short periods of time. For instance, there is market speculation that the two and three year mortgage rates may dip down in the next while despite the fact that the variable mortgage rate is expected to be on the rise.
Being prepared for spring home shopping includes getting your mortgage financing options in order.
This can greatly reduce the stress that can come with a home purchasing scenario when time lines can be short.
Doing some up front mortgage work can also save you some money potentially over both the short and long term, which is almost always viewed to be a good thing by home buyers.
Depending on your situation, there can be several different types of mortgage programs to work through such as an insured mortgage loan for higher ratio mortgages, a self employed mortgage program for those that work for themselves, and a home equity mortgage for individuals that have no reportable income available.
The best place to start the process is to select an experienced mortgage broker that you can guide you through your options and help you get everything ready so that when the time comes to buy, the financing part has
Click Here To Speak With Joe Walsh, Your Toronto Mortgage Broker
Industrial Mortgage Challenges
“Industrial Mortgage Challenges Will Increase With Tougher Lender Requirements”
The process of getting an industrial mortgage for a piece of real estate zoned and used for industrial purposes will continue to be faced with more and more challenges as environmental laws become more stringent and lenders become more concerned about their long term portfolio risk.
One of the main concerns facing owners of industrial properties with respect to commercial mortgages is a shrinking pool of bank and institutional lenders that will even consider many different types of industrial properties. And for those lenders that are interested in financing industrial buildings and real estate, the requirements for financing, on average, are increasing, while the amount of leverage that lenders are prepared to extend is decreasing.
More and more industrial properties that require mortgage financing are turning to private lenders in order to try and secure private mortgage financing. But even this is problematic in that for private money loans to work over the longer term, you have to have private lenders that are prepared to offer longer lending periods than the typical one or two year programs on the market today.
And even with private lenders, things such as environmental laws can provide a significant barrier to lending that were not as prevalent as in the past. In the summer of 2011, the standard of the day with respect to environmental liability laws is scheduled to go up, creating still more difficultly with financing properties that have had or still have an environmentally sensitive use.
In order to get proper financing, or any financing on industrial real estate, regardless if you’re talking about acquisition, mortgage refinancing, or a debt consolidation loan, here are some things to keep in mind.
First, allow yourself plenty of time to work through the process of locating and securing the best available financing options for a given property. With bank and institutional lenders, its going to take at least 60 days to get to positive answer with respect to a financing application and in many cases the time required is much longer.
Second, make sure that the property is in the best possible position for financing. Have any historical environmental issues been properly addressed? Is the property survey up to date and in order? Is the property in a good state of repair and appearance? Are financial statements up to date to support debt service? Is the balance sheet and cash flow of the business capable of taking on more debt or maintaining the debt that already exists.
Third, locate an experienced Toronto mortgage broker that placed industrial mortgages and utilize their expertise to not only locate the best available options, but to also assist you in properly applying for financing and closing the deal.
Click Here To Speak With Industrial Mortgage Broker Joe Walsh.