With the discount on variable rates being reduced and fixed rates coming down, both based on the bond market and the lender’s profit margins on each of these products, the differential between variable and fixed (four year term) has gotten as low as 0.50%.
And even though the vast majority of Canadian mortgage holders are holding tight to variable mortgage rates, its once again time to ponder whether or not you should be switching to a fixed mortgage rate.
The additional one half a percent you would be paying would effectively serve as insurance against short term rates rising over the next four years, focusing the decision making process on risk tolerance than anything else.
And no matter how compelling the argument is to move to a fixed rate right now, the counter argument is that you are still paying more out in interest under the lower fixed rates, which is money you could keep in your pocket.
The banks have created quite a dilemma for themselves in that they have collectively moved the masses to variable rates that are now not making them any money.
And mortgage holders have gotten comfortable with the variable rate risk in that variable rates have created large cash savings over the last decade without any retribution from the financial markets, and the near to mid term outlook is for more of the same for the next couple of years.
Even though we have this half percentage point spread, its unlikely mortgage holders are all of a sudden going to move back or over to fixed rates, even though for many it could very well be the right decision from a risk protection point of view.
And with mortgage refinancing down 40%, mostly to the changes in the mortgage insurance rules, banks want to find a way to increase their profits in their mortgage portfolios.
So now what?
One way to get the marketing moving towards more of a win win solution, is to expand on the available split rate or dual rate mortgage program in the market where the borrower can choose a mortgage product that is a combination of a variable and fixed rate, enjoying the benefits that both offer at the same time.
While these programs exist in the market, there can always be ways to expand on the benefits they provide and promote them more aggressively to start moving people away from a strictly variable rate mind set.
This can potentially be good for both borrower and lender, and also move the market in general away from the large variable rate risk we hold as a country.
It will be interesting to see what the major lenders will be promoting in the months to come and what type of split rate mortgage offerings will be on the table.
With a residential mortgage broker, the focus in most cases is on speed and interest rates as the market is very aggressive with not much of a difference between the best and worst offers in the upper end of the home mortgage market.
With a commercial mortgage broker, the focus is more on the total financing process and how to make it as efficient possible so that time doesn’t work against you.
The business financing market can be very difficult to figure out at times in terms of who is prepared to finance any particular borrowing request. Because of the portfolio constraints attached to larger scale mortgage lending, the landscape of the market can change on a regular basis, making it hard for any business or property owner to effectively figure out how to locate and secure the funding they are in search of.
Even with very straight forward deals, it can be difficult to get the commercial mortgage financing deal you’re looking for, even when every lender you talk to initially claims they can provide the funding required.
The real value of a commercial mortgage broker is the ability to clearly understand your requirements, and then get your commercial property financing request in front of the most relevant lenders at a given point in time.
From there, its all about managing the application process by proactively helping you assemble all the pertinent information the lender is going to be asking for, as well as supporting information that will strengthen the application.
Experienced commercial mortgage brokers have learned over time that its essential to follow a clear process for qualifying each and every deal and for putting together an application package that is less about hype and more about anticipating and then proactively answering the questions that a particular lender is going to ask.
Seasoned commercial mortgage brokers keep tabs on the market in terms of who is lending on what and if they’re requirements and lending criteria have changed.
This can mean the difference between shooting in the dark and drawing a straight line to someone who can actually help you.
Because a commercial mortgage broker is not the actual lender, there is always risk of getting an approval from any one particular lender in the time you have targeted to complete the funding process.
But if you commit to the process, the probability of success goes up dramatically which is the biggest single advantage of working with an experienced commercial mortgage broker.
When considering a mortgage refinancing, we first need to look at the reasons for a mortgage refinance action and the goals that you are trying to accomplish by doing so.
The primary reasons for refinancing an existing mortgage include 1) current mortgage holder wants to be paid out for some reason and you have to retire the existing mortgage as a result; 2) you want to increase the amount of borrowing against your home; 3) you want to secure a lower rate mortgage; 5) you want to adjust your payment schedule; 5) some combination of all these points.
The specific objectives for mortgage refinancing will allow you to more quickly focus on the lenders and mortgage programs capable of meeting your requirements.
Prepayment penalties can be significant and potentially make the exercise of refinancing non cost effective when you look at the cost of either getting more capital and/or getting the a lower interest rate.
If a prepayment penalty is going to be invoked by a potential mortgage refinance, then the next step is to do the math to see exactly what your cost for breaking the existing mortgage is versus the incremental benefit you will receive in lower rates, higher mortgage advance, etc.
There can be other costs that you need to consider, depending on the type of property you have and the type of new mortgage you are trying to secure.
For instance, a commercial mortgage can require a commercial appraisal, environmental report, and third party accountant prepared financial statements, which can significantly increase the outlay of costs necessary to get a new mortgage in place.
If the new mortgage is from a private mortgage lender, there are likely going to be lender and broker fees that will have to be paid out of the mortgage proceeds.
At the very least, there is going to be legal costs required to register a new mortgage if the lender or the mortgage amount changes.
So, before proceeding too far, make sure you clearly understand the cost/benefit equation related to your particular situation.
If the costs are in line with moving forward, then the focus shifts more to the rates and terms of competitive offerings available to you in the market.
The amount of financing required will also be a key consideration if you are looking at higher loan to value ratios.
In the spring of 2011, the mortgage regulations changed whereby mortgage refinancing through banks and other institutional lenders was reduced from 90% to 85%. This can become the key limiting factor in a mortgage refinancing decision when a high loan to value ratio is required.
With respect to rates, which may be the biggest single factor in your decision making process, there is the age old question of fixed versus variable.
More and more people have been moving to variable rates in the last few years, but with variable rate discounts being reduced and fixed mortgage rates expected to drop further in the near term, there still should be some serious consideration at any point in time as to which type of rate will work best for you.
Each mortgage refinancing scenario can having many, many variables to consider.
The best way to approach any mortgage refinancing exercise is to work with an experienced mortgage broker who can not only help identify the key areas of concern and focus, but get you working with the most relevant lending programs saving time, and potentially money by not missing deadlines or signing up for a mortgage that isn’t the best available fit for your needs.
This week marks a breaking in the ranks with RBC announcing that they will start to raise their VRM rate today, with the rest of the crowd to follow.
Here is an article that provides more details on RBC’s VRM rate change… http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2011/08/rbc-signals-that-vrms-too-costly.html
This was going to happen sooner or later as the banks were working off of very thin margins in order to attract business through their variable rate products.
And with the majority of mortgage holders either staying with or moving to variable rate mortgages, the profit margins were likely shrinking while the mortgage risk was on the rise.
So what might we read into this with respect to the overall movement in interest rates?
Not very much I would think.
Interest rates for fixed mortgages are more likely to go down than up in the near term and the global financial market uncertainly overall makes it next to impossible to predict any type of interest rate move.
No, this is more of a case of a lost leader starting to get pulled back from the market.
Its also a good example of how things can change with mortgage programs over time when competitive forces are at work.
If you’re looking to secure a variable rate, then you should look at getting a rate hold which most lenders offer, ranging from 90 days to 18o days. This is not going to hold the prime rate in place for you, but it will lock in the discount off on prime, which is likely going to get reduced across the board in the coming week or so.
Rate shopping for VRM products will also likely decline if everyone follows suit in the market and makes a similar adjustment to RBC.
If you have any questions regarding Variable Rate Mortgages, or any other mortgage financing question, please give me a call and I’ll make sure you get your questions answered right away.
On the surface, this is good news as everyone would prefer to pay less interest than more.
But there is a dark under belly that everyone needs to watch out for as well.
Because we have had low interest rates now for a prolonged period of time, both consumers and businesses have begun to accept this as the normal, go forward cost of debt.
Realistically, this is not going to be the case, so its all about what your personal debt load and ability to service debt is going to look like when rates do go up, which we all hope is years down the road.
The longer low interest rates stay in effect, the more debt people take on because they get lulled into a false sense that the good times are here to stay.
A different way of looking at lower interest is that it provides a great opportunity to reduce debt. With less of your available cash flow required to service debt, there is more money at your disposal to pay down principal which in the long run will provide the most protection against future interest rate rises than pretty much anything else you choose to do.
But with variable mortgage rates near 2%, and real estate markets still on the rise in most parts of the country, its hard to not want to purchase that larger home and live closer to the edge, even though it doesn’t feel right now that there is much risk of any significant change in interest rates.
And if you follow some of the economists, its pretty clear they have no idea where things are headed either.
So its a case of how you choose to utilize the money that gets freed up on a monthly basis and how close to the line you want to live.
Most mortgages now a days have generous prepayment privileges that allow you to pay down the principal without prepayment penalties up to a certain amount each year. This is certainly a sound strategy that can shave years off your mortgage and thousands of dollars off your interest payments.
Alternatively, if you have some flex in your cash flow and can take on more debt to invest more money in a growing real estate market, the return can be substantial to you over time as well.
The key point here is that regardless of how you want to utilize lower interest rates today, its important to think about what happens when rates go up in the future.
Once again, hopefully interest rate rises are a long way away, but they are inevitable, so plan accordingly and manage debt wisely.
The mortgage rates for bad credit type applications are going to be very similar between the sub prime institutional lenders and the private mortgage lenders.
In virtually all financing scenarios, interest rate is related to risk. While there can be instances where this doesn’t hold true, those cases are going to be few and far between…meaning that the next time someone with bad credit says they got some sort of prime plus mortgage rate, its likely an exaggeration of the facts or a made up story.
So what are the rates for a bad credit mortgage?
This will vary by the mortgage position that is offered by security as well as the quality of the real estate and the market where the property resides.
But for the most part for those that have bad credit, the rate on a first mortgage is going to be between 9% and 12% and the mortgage interest rate on a second mortgage is going to be between 11% and 15%.
This takes into account the interest rate written into the mortgage.
For most bad credit mortgages, you’re also going to be paying a lender fee from half of one percent to two percent and mortgage broker fees on top of that if a mortgage broker is being utilized.
Adding in all the potential costs, the net effective rate for a bad credit first mortgage will range from 10% to 16%, and the effective interest rate on a 2nd mortgage is going to then range from 12% to 19%.
While the available mortgage rates can be quite high in certain situations, the monthly payments, at least from private lenders, are primarily interest only.
So even though you end up moving into a higher interest rate bracket, the net cash flow payment every month may be very close to what you had paid previously for a similar amount of financing to a bank or institutional lender at a lower rate due to the fact that principal is not being repaid.
Once again, there can be anomalies in the market where better rates can be secured, but there typically is something in the deal that attracts a better rate.
For instance, you have an outstanding property within the city of Toronto, and only want a loan to value of 50%, the equity in the property and the quality of the security can still provide a bad credit mortgage in 6% to 7% range.
At the same time, the worse your credit is, the harder its going to be to find interested lenders, and those that are interested are going to charge rates at the higher end of the ranges listed above.
Taking into account your requirements and time lines is a very important aspect of commercial property financing due to the amount of time the process can take with any given lender, and the portfolio constraints that can be in place that can limit a commercial lenders ability to place incremental funds into the market.
So the key first step with with any commercial mortgage financing request is to accurately assess the needs of the borrower or property owner, and then identify relevant financing options that are available at time the funds will be required.
As an Ontario Commercial Mortgage Broker, the initial assessment step of the borrower’s needs is critical to set the process going in the right direct where the expectations of borrower, lender, and broker can all be aligned towards success.
And after performing an initial assessment of the financing request, there are times when I don’t have a lending solution that meets the requirements of the lender, and if that’s the case its better to determine that quickly so that neither borrower, broker, or lender are wasting any time on a financing request that cannot be completed.
This is arguably the biggest signal challenge with business mortgage financing … matching up commercial property financing requests with relevant lenders.
Unfortunately, large amounts of time can be wasted applying to lenders that have a low probability or even no probability of providing funding.
This can lead to missed funding timelines and deal collapse, which can be very costly to the potential borrower both in the short and long term.
As a Ontario commercial mortgage broker, my focus is on providing a proven process for locating and securing commercial mortgages that doesn’t guarantee success, but increases the probability of getting the financing you’re looking for in the time you have to work with.
By committing to the process, odds of not only getting funding, but funding that fits your requirements and needs will increase considerably.
There is always risk in the process as well as each commercial mortgage is really a customized lending solution as rarely are two scenarios ever exactly alike. Combine that with the number of people that are going to potentially be involved in providing input into the deal, including third party service providers such as lawyers, accountants, appraisers, environmental consultants, and so on, and potential complexity that you may have to manage through can be considerable.
But with the help of an experienced Ontario commercial mortgage broker, you will be able to navigate the market place and individual lender application processes more smoothly and efficiently.
If you have a commercial mortgage financing requirement in Ontario, I suggest that you give me a call so I can go through the initial assessment process with you and discuss different commercial property financing strategies that may be available to you.
And when we speak of alternative commercial mortgage options, we’re talking about pension funds, life insurance companies, hedge funds, U.S. banks, Foreign Banks, and so on.
These are alternative sources so to speak because they are out of the main stream retail marketing eye site of most people.
And while you may think that most of the business property lending in Canada is provided by the major banks and other name brand institutional lender, the alternative lending space can get close to half the market in some years.
And right now, the move is more on the rise for alternative commercial mortgage options due to the strength of the Canadian economy and for investors all over the world looking for some place to put their money where the risk of loss is more reasonable and predictable.
Commercial property financing always attracts a lot of attention, especially in the major centers due to the fact that most investors and financial institutions like land and want to hold a significant portion of their portfolio in land assets or commercial mortgage securities that are backed by land.
Compared to the residential mortgage market, there is also a greater opportunity to make money in some respects. With residential mortgages, the major banks can use home mortgages as more or less a lost leader to get greater control of the customer’s pocket book and allow them the opportunity to sell higher return items like investment securities, insurance, and so on.
Alternative commercial mortgage lenders can also have slightly different underwriting and lending criteria to what the usual suspects may offer, providing sources of funds that in some cases are easier to access and secure.
The challenge with commercial mortgage financing, as we have discussed before, is due to the large transaction size, its always going to be challenging to know who all the relevant commercial property lenders are at any give point in time. Commercial mortgage lenders must watch their portfolio’s very closely to keep them in balance, working to make sure there is never too much concentration in any one area of the market.
And because no commercial lender will ever outwardly advertise what they are currently interested, the process for finding the right lender fit can be a very hit and miss approach to say the least.
The best approach to finding alternative commercial mortgage options for a commercial property financing need you may have is to work with an experienced commercial mortgage broker who stays on top of different forms of both main stream and alternative commercial mortgage sources that are active in the market for different market segments.
Getting the assistance of a commercial mortgage professional can potentially save you considerable time and money compared with trying to figure the market out by yourself.
The good news is that at any given time, there can be several alternative commercial mortgage options for you to consider. The hard part is finding them and that’s where we come in.
As a result, there can be a considerable amount of analysis and information verification on the part of the lender before any type of commercial mortgage commitment is extended and money advanced, and the larger the deal, the more review and verification required.
One of the keys for dealing with this potentially complex and time consuming process is to provide the borrower with the key information they are going to require from the outset and have the main third party verifications in place.
This can cost you some money up front, but can also radically increase the speed of the process with the lender.
There are pros and cons to the preparation process and we can discuss a bit further.
Many of the time consuming elements of the commercial mortgage financing process relate to the time it takes to get what I call third party verifications in place. Items like accountant prepared financial statements, appraisals, and environmental assessments are going to be required on each and every deal. If you don’t commission these items until after the commercial mortgage application has been made, the time required to complete each can add months to the process.
So on the pro side of the equation, getting the core information pieces assembled ahead of time will make the process go faster and will attract greater lender interest from the outset.
From the con side, while getting documents completed before hand will always have a value, certain things may still not be to the lenders requirements and have to be updated or re-completed by another party.
For instance, most lenders will only use AACI appraisers that are on their pre approved list, and that will provide them with an appraisal for the purposes of mortgage financing strictly for the lender’s own use for a defined period of time which typically is 60 days.
If you have gone out and gotten a commercial appraisal on the property completed ahead of time, this once again can help accelerate the process, but it may not eliminate the need to have a second appraisal completed by a pre-approved appraiser (with the same credentials) which is going to cost more money and take more time.
With respect to financial statements, any accountant prepared financial statements over 6 months old will likely need to be further supported by interim financial statements for the period of time since the last year end of the business when financial statements were prepared by the third party accountant. Sometimes a lender will accept the interim statements from the applicant’s own accounting system, but may times they will not. Further, depending on the amount of the funding request, the level of accountant review will also come into play which again can take more time to complete and cost more money.
These are only some of the things to consider before applying for a commercial mortgage.
The best approach to getting the right commercial mortgage in place in the time you have to work with is to utilize the services of an experienced commercial mortgage broker who can help you more effectively manage the complexities around your application.
In situations where you are in need of additional funds and you have distressed or strained credit, paying out your existing mortgage or mortgages with a new private mortgage can be the best choice available to you.
Because a private lender is going to be more concerned about equity versus credit score, there is a much higher likelihood that refinancing can be done through a private money provider compared to a bank or institutional lender. This becomes more relevant if you are under any type of time pressure as a private mortgage can be put into place in less than two weeks while you can spend months trying to find a better institutional solution when your credit is not in good standing.
But being in a bad credit scenario isn’t the only time to consider a private mortgage refinancing.
In most situations, a private mortgage is a short term, or bridge financing facility that will need to be repaid in a period of one year.
Therefore, if you have circumstances where a short amount of time will allow you to be able to secure longer term financing from a bank or institutional lender, a private mortgage refinancing option can provide the time required to improve credit, cash flow, or search for better options.
In the case of commercial property financing, a bank or commercial mortgage can take two to three months or longer to arrange at times.
If you have a short term mortgage refinancing need either because your current bank does not want to renew your existing mortgage, or you require additional funds for your business, a private mortgage refinancing of your existing mortgage can stabilize your balance sheet and cash flow quickly, and provide the time necessary to work through not only the options available to you in the market, but the time it takes to pursue them.
The key with private mortgage refinancing is that it has the potential to provide capital in the short term to help you avoid costs or take advantage of opportunities that exceed the incremental cost of private money.
Not being able to repay your existing mortgage on a timely basis, or provide additional funds for debt consolidation or other short term funding needs can be costly and far exceed the incremental cost of financing between bank financing and private financing.
At the same time, not all mortgage refinancing situations will be well suited to private mortgage refinancing options. But for those that are, a private mortgage can end up helping you make or save money in the short term.
If you would like to better understand private mortgage refinancing, I suggest that you give me a call so I can quickly review your situation and provide private mortgage refinancing options for your immediate consideration.
This is a slice of the mortgage market where the self employed mortgage lives and provides financing to self employed individuals who may not be able to show their income or ability to service debt in the same manner as a employee or wage earner.
Even during the recent economic slow down and financial credit tightening, self employed mortgages have remained available, but the qualifying requirements were more stringent across the board as the major mortgage lenders moved away from prime and sub prime equity mortgage opportunities.
Because these are uninsured mortgage programs, the banks will always make sure there collective house is in order before taking on a higher risk lending opportunity such as more equity based lending.
And with the majority of Canadians now preferring variable interest rates, which provides greater profit margins for the banks and major financial institutions, there is now a greater desire to branch out further into the prime equity mortgage market even though there is greater financial risk associated with it.
This is great news for self employed individuals in general, but more specifically for those that were having a hard time qualifying for mortgage funding during the last two to three years.
More specifically, some main line lenders have already softened on income verification requirements including some no longer requiring a notice of assessment to prove income.
Another way in which qualifying criteria had been increased was through higher personal credit score requirements that have also come down with certain lenders, further increasing the ability for individuals to qualify under these prime equity programs.
Each program will have its own limitations with respect to lending amount and loan to value ratios, but all in all things are on the up swing for the self employed.
Because there are several different programs on the market, each with their own unique twist for this type of business, it can take some work to figure out which self employed mortgage offering is the best fit for your personal requirements.
The best approach to the self employed mortgage lending process is to work with an experienced mortgage broker who can quickly assess your situation and financing requirements, and get you working with
the most relevant mortgage financing options as soon as possible so no time is wasted or mistakes made trying to figure out the various mortgage offerings.
First of all, are you able to renew your mortgage with your existing lender or are you forced to refinance through a different lender?
In situations where you’re are heading into a mortgage renewal period where the term of your existing commercial mortgage is coming due, the most important thing you can focus on is starting the process of renewing or seeking refinancing options as soon as possible, even 6 months or more before the current mortgage term will expire.
The mortgage process followed by bank and institutional lenders can take a considerable amount of time so the sooner you start assessing your available options and potentially applying with other lenders, the better.
Its not unusual for a commercial mortgage refinance process to take sixty days or more and if you have not allowed enough time to explore your options, you may end up being resigned with the offering of your current lender.
While there may be nothing wrong with renewing your current commercial mortgage for a longer term, there is no incentive for your existing lender to offer you premium rates if there is no real treat of you refinancing with someone else. So starting early and exploring your more viable options is going to be important to getting the best result.
If you are in a situation where you are forced into a mortgage refinance scenario, then time may not be something that’s on your side.
If this is the case, you want to make sure that you get zeroed in on the most relevant commercial mortgage lenders as quickly as possible so you’re not wasting precious time in your mortgage refinancing process.
One of the watch outs with commercial mortgage applications is casting your net too wide by working with too many lenders or mortgage brokers. Because the process takes a considerable period of time, lenders are less open to working through an application if they know that you have applied to several other commercial lenders.
Excessive shopping can kill potentially otherwise viable options if a commercial mortgage lender believes they are just one of many looking at your deal.
Another consideration when time is short is to look at private mortgage options for your commercial property.
A private commercial mortgage refinance can be accomplished in most cases much faster than through a bank or institutional lender. If you have less than thirty days to complete a commercial mortgage refinancing, a private mortgage lender may be the best short term option.
Then, once financing is secured, you can take your time and go through a more exhaustive process to locate and secure the best possible deal available to you from a bank or institutional commercial mortgage lender.
Because of the sheer size of the market, and its strength both maintaining strong property values and market activity, commercial mortgage lenders are drawn to it like flies to honey.
That being said, commercial lenders can also be coming and going from the market, depending on where their other interests lie as well.
For instance, its not unusual for U.S. based lenders to come into the Ontario commercial mortgage market to further diversity their portfolio.
And for the private mortgage lending segment, the commercial mortgage requirements under $2.0M can be very popular, especially within Toronto and the Greater Toronto Area.
With respect to regions in the province, there can be considerable disparity in terms of interested lenders at any given time and the rates and terms being offered.
There is no question that a commercial property owner within, or close to, the Greater Toronto Area, has many more potential financing options than someone more remote.
Another challenge with any commercial lender is that they are all driven by their portfolios and how in balance or out of balance they can be at any given time.
And when there is too much of a portfolio concentration in one type of commercial property and/or industry in one or more regions, you will see commercial lenders pull out of the market for a period of time, reducing the amount of capital supply available within certain slices of the market.
While for many business owners their Ontario commercial mortgage options can be considerable, it still can take a fair bit of time to get the mortgage financing you’re looking for in place.
And if you don’t focus in on the most relevant sources of commercial mortgage financing at any given point in time, its easy to waste a lot of time and money trying to get the right deal in place.
The best way to sift through all the available commercial mortgage options, and quickly zero in on the specific lenders that are going to be interested in your deal today is to work with an experienced commercial mortgage broker who can provide his or her market knowledge and expertise towards your mortgage requirements.
If you’re in need of a commercial mortgage today, or are just planning ahead for a future requirement, I recommend that you give me a call so we can go over your situation together and discuss different commercial mortgage financing strategies that can meet your needs in the time you have to work with.