Archive Monthly Archives: June 2012
Mortgage Rule Tightening Continues
“Mortgage Rule Changes Zero In On Amortization And Equity”
Last week, the Federal Government was back at it with new changes to Canadian mortgage requirements that are scheduled to come into effect by July 9, 2012.
This will mark the third major or significant change to mortgage regulations since 2008 with the last changes occurring just last year in 2011.
This time around, the focus is on reducing the amortization period from 30 years down to 25 years on government insured mortgages as well as reducing the amount that you can borrow against your home equity from 85% down to 80%.
There are estimates out in the market that in 2011, 40% of new mortgages were amortized over 30 years so this type of reduction to the available amortization period is going to likely have a significant impact on the market.
The main reasons given for these new rule changes are the increasing levels of household debt and the overheating of housing prices in certain markets, most specifically in Toronto.
Staying on the insured mortgage theme, the rules governing Canada Mortgage And Housing Corporation or CMHC, were also tightened whereby a borrowers total mortgage payments, or gross debt servicing ratio, cannot exceed 39% of total gross income. And total debt payments, or total debt servicing as a percentage of gross income, cannot be higher than 44%.
Mortgage insurance will no longer be available on mortgage requirements for homes greater than $1,000,000, which means that for higher value properties, the buyers are going to have to come up with a down payment of at least 20% to be considered for mortgage financing.
In the long run, these changes will see mortgages paid off faster and consumers saving on interest costs.
But in the short term there is going to need to be considerable movement away from non mortgage debt otherwise its going to be difficult for individuals to qualify for the lower cost forms of financing and mortgage insurance products.
And with mortgage refinancing actions effectively capped now at 80% of the property value, there are fewer lower cost mortgage options for refinancing existing debt into a home equity loan as well.
With the rule changes coming into effect in just a few weeks from now, its going to be important to clearly understand how any of these changes may impact your own mortgage situation or one that you are considering entering into.
For more information on these changes and to get expert assistance in working through different potential mortgage scenarios, I recommend that you give me a call so we can go through your situation together and get all your questions answered right away.
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Purchase Financing For Self Storage Property
“Self Storage Financing Challenges When Trying To Complete A Purchase”
When trying to secure a commercial mortgage to complete the purchase of an existing self storage facility, there can be a number of different financing challenges that can become evident during the application process.
Our goal today is to discuss the three major challenges that are most typical to this type of deal.
Being aware of each of these challenges and why they occur in the first place can allow you to take a more proactive approach to eliminate them or reduce their impact
The first major challenge I find when trying to arrange commercial financing for self storage is meeting the historical financial information requirements of the lender.
For an “A” credit lender, most will require three years of accountant prepared financial statements as well as detailed occupancy statements for the same period of time.
Most bank or institutional commercial lender criteria will require that the historical financial statements show enough available cash flow to service the proposed mortgage.
If you are purchasing an under performing property with the intent of marketing it more aggressively to reduce vacancy and make it more profitable, the financing available to you will be limited in most cases to the historical cash flow, not the future cash flow.
And if you are unable to qualify with an “A” lender initially, it may make sense to secure a sub prime commercial loan or a private mortgage to complete the purchase and provide the time necessary to improve the financials and allow for a mortgage refinancing in a year or so.
A second major challenge is getting an appraisal completed with a valuation that optimizes your loan to value potential.
While this is an income producing property, an appraiser may lien more to a cost approach or comparable sale approach to establish value which may end up providing a market value that is lower than what you paid for the property.
Or, even if the appraiser comes in with the same value as you paid, he or she may provide other remarks about area competition as an example that may end causing the lender to be more conservative with respect to the amount of financing they are prepared to extend, which will increase the equity you’re going to have to put into the deal.
The third major challenge I see with self storage purchase financing is meeting the lender’s borrower covenant and experience requirements.
If you are looking at acquiring your first self storage property, there will be considerable scrutiny towards the management team you are proposing as well as the net worth you own outside of the operation being acquired that would support the guarantee for the loan.
Or if you have existing self storage assets, there may be considerable due diligence required to review past financial performance of those assets to provide lender comfort that both experience and guarantee are sufficient for further financing.
If you are looking to finance the purchase of an existing self storage property, I suggest that you give me a call so we can go through your situation together and discuss the different financing approaches available to you.
Click Here To Speak Directly To Commercial Mortgage Broker Joe Walsh
Financing Multi Use Buildings
“Mortgage Financing Challenges For Multi Use Buildings”
When trying to arrange mortgage financing for a multi use building or mixed use property where there is both a residential and commercial use present, there can be a number of different challenges you may have to deal with in order to secure the funding you’re looking for.
So when we’re talking about a mixed use building, this could be a store on the lower level of a two story building with one ore more apartments on the upper floor.
The key point here is that the property has more than one type of permitted use.
So one of the first challenges that come along with multi use building financing is that borrowers often times think that financing will be available through a residential mortgage financing program.
Almost without exception all lenders will consider a mixed use property as a commercial deal when they consider your application for financing.
That in of itself is not necessarily a road block to get financing, but can create a few issues.
First, even though a commercial mortgage program is going to be required, you may still end up wasting considerable time with a residential lender who will take your mortgage and even get part way through the process before they say they can’t help you out right or that they will need to direct you to their commercial lending department.
Second, commercial property financing is going to cost more than residential property financing, all other things in the comparison between the two being equal. So make sure you factor in a higher cost of financing from 0.5% to 1.5% above residential mortgage rates.
And a mortgage broker that knows commercial business will understand this and direct you accordingly to appropriate lending sources whereas a broker that strictly focuses on residential may not.
What I will call the second major challenge is to work with a commercial lender that is prepared to fund your particular deal.
Banks and institutional lenders for the most part are not interest in funding multi unit buildings, especially those under $500,000.
But if you were to go an apply to a bank or institutional lender for this type of commercial property loan, they would likely insert you into the standard application process which could end up costing you both time and dollars before they end up getting around to saying no. So once again, its important to be working with a commercial lender that can actually help you with your financing requirements.
And even if an “A” lender is prepared to do the deal, their application to funding process may take 60 to 90 days to complete so you’re going to need to sure you have enough time to go through their process.
The third biggest challenge I see most often when working on the financing requirements of a mixed use property is dealing with the quality and strength of the leases in place as well as the underlying cash flow.
The leases in place and who the tenants actually are can be very important to an “A” lender.
Lenders are interested in the lease term, rate, and the financial strength of the tenants.
If the lease terms outstanding do not match up with a requested financing term, then that can be a problem.
If the tenants are mom and pop type stores or small operations, there may not be a lot of Big bank confidence in the tenant’s ability to pay over time.
Being able to effectively deal with these three challenges will go along way to getting the commercial property financing in place that you require.
If you require financing for a multi unit building, I suggest that you give me a call so we can go over your situation together and discuss different potential commercial mortgage options.
Click Here To Speak With Commercial Mortgage Broker Joe Walsh
home mortgage refinance requirements
“Understanding Home Mortgage Refinancing Requirements”
Home mortgage refinancing requirements are going to vary according to your particular borrowing scenario so lets take a closer look at the starting point for looking into this type of mortgage financing action.
First of all, its going to be important to understand the loan to value that exists for your current mortgage.
If you have a loan to value amount of 80% or less, you have a lot more flexibility with respect to looking at the available programs and products available.
If you require a loan to value amount greater than 80%, then you will require an insured mortgage which can only be provided in a home mortgage refinance scenario up to 85% loan to value.
So its going to be important to understand if 1) you will be able to secure enough funds when restricted to 85% lending, and 2) if the cost of mortgage insurance will be worth the benefit of getting that extra 5% lending amount.
Second, while there tends to not be any restrictions on the reason for home mortgage refinancing, you need to understand the costs that will go into the process.
If you are looking to refinance an existing mortgage with a fixed interest rate, then you will likely incurring a prepayment penalty of the larger of three months interest or interest differential.
Its going to be important to calculate this properly so that the cost is well understood and built into the decision making process when considering different options.
This is also something we can help you with so that the math is done correctly and provides an accurate basis to work from.
Third, mortgage refinancing effectively provides you with a completely new mortgage where you can reconsider the payment structure, prepayment options available, amortization period, and so on.
So its going to be important that whatever type of refinancing action you take will support both your future financial objectives as well as your cash flow.
For instance, many times a mortgage refinance will be done to get a lower interest rate.
In this case, you need to consider whether you want a fixed or variable rate, and will the benefit of a lower rate offset the cost of completing a refinancing action? Further, with a lower rate, you may be able to lower your payment. But keeping your payment the same as it was before will potentially allow you to pay down your mortgage faster, saving interest cost over time.
In other cases, a mortgage refinance is performed to acquire additional capital for some reason such as home renovation, debt consolidation, or estate planning.
With a higher overall mortgage amount outstanding after the refinance, will your new mortgage payments fit into your cash flow, or are you going to have to make some lifestyle changes to more comfortably manage a higher monthly debt servicing requirement? Or do you look at increasing your amortization period to reduce your payment which will see you paying the mortgage over more years and increasing your interest costs over time.
There are also times when a home mortgage refinancing can be forced due to cash flow or credit distress which may require you to consider a private mortgage or a sub prime mortgage product in the near term. The selection of these types of products should depend on how you see your financing profile in the next year or two so that you can select the lowest cost option for moving back to an “A” credit mortgage in the future.
Because there can be a number of different things to consider for any particular situation, I recommend you seek out the assistance of an experience home mortgage broker do that all the different areas of consideration can be properly explored and understood before any mortgage refinancing decision is made.
Second Mortgage Financing Options
“Second Mortgage Financing Options Basically Come In Three Forms”
Second mortgage financing options represents a loan registered against real estate directly behind a first mortgage.
A second mortgage can be arranged on virtually any type of real estate property including land zoned as residential, commercial, and industrial.
There are basically three different potential 2nd mortgage options to consider…bank or institutional second mortgage, home equity line of credit, and private second mortgage.
Depending on your financial profile and credit profile, you may or may not be eligible for all three.
A second mortgage issued by a bank is going to be similar in structure to a first mortgage in that it will have an interest rate term and an amortization period for repayment. Rates for an institutional second are going to be similar to a first, but likely slightly higher due to second place mortgage security. That being said, the rates quoted will likely be better from the first mortgage holder than a competitor due to the fact that they already control the first mortgage position.
A very popular second mortgage financing option is a home equity line of credit, or HELOC.
With this type of facility, the approved amount of the line is registered in second position against the property, but the amount advanced will be at the control and discretion of the borrower.
Interest is charged only on principal outstanding with minimal monthly principle repayment required by most lenders on amounts outstanding.
The third type of second mortgage loan is from a private mortgage lender.
A private second is typically for a period of one year but can also be for a longer period of time, depending on the individual lender.
Private 2nd mortgages also tend to be interest only payments with the full amount of the advanced principal due and payable at the end of the interest term.
A private second mortgage is very common in situations where the borrower has some level of distressed credit or cash flow where it would not make sense to mortgage refinance the first mortgage and risk getting a higher interest rate based on a weaker borrowing profile, or apply for a bank second.
This is also the most popular form of private lending due to the fact that the rate of return is higher for private investors as mortgages registered in second position carry a higher risk of loss which translates into a higher interest rate charged.
Second mortgages can be used for just about any number of purposes including but not limited to debt consolidation, renovation, child eduction, family trip, estate planning, an so on.
Selecting a second mortgage financing option is about aligning your near and long term financing requirements with the features of each type of 2nd mortgage and each unique lender program in order to arrive at the best fit.
One of the best ways to determine this is to work with an experienced mortgage broker who can go through your requirements with you as well as work through all the different options that are potentially available to you so you can make a well informed decision.