All posts by Joe Walsh
Construction Financing Possibilities
“There Can Be Many Different Ways To Arrange Construction Financing
For Your Project”
As a property owner or builder seeking debt financing for their construction project, one should always keep in mind that there really is no such thing as a standardized construction loan and that construction financing can be arranged in a number of different ways.
Many times someone will call me up with a specific request for construction financing along with a predefined way to put the money in place, and after some discussion it becomes apparent that there are other approaches to consider in addition to their current thinking.
Basically most construction loans per say are for a specific amount of financing, secured by a mortgage registered against the property.
And while we can say this is the typical form of construction financing, there are lots of variations that can come into play.
For instance, if a builder or property owner has another property, it may be far cheaper and simpler to get a home equity loan against the available equity than getting a traditional construction loan in place.
Or, if the amount of funds required is small, a personal term loan or additional line of credit may provide enough capital at much cheaper rates and with more flexibility when it comes to utilizing the funds.
The same can be said in choosing between a bank or institutional construction loan and one provided by a private mortgage lender.
The listed cost of financing will always be cheaper through a bank, but in the end it may not be the best fit for the project and may not end up being the cheapest either once all the dust is settled.
For individuals trying to figure out how to finance a construction project they are planning or are in the middle of, it can be easy to self assess incorrectly the best approach to take to meet the requirements of the project for the lowest cost.
Because of the potential different approaches that may be taken, it makes a great deal of sense to be working with a construction mortgage broker who can review everything you have to work with as well as your construction project requirements, and then propose financing options that provide the most benefit and value to you.
Utilizing this type of expertise, especially if arranging your construction loan is an infrequent or one time exercise, can end up being a considerable time and money saver in the long run.
If you would like to discuss construction financing approaches for your next project or one you’re currently working on, please give me a call and we’ll go through everything together.
Click Here To Speak With Construction Mortgage Broker Joe Walsh
Trend To Faster Mortgage Repayment
“Canadian’s Apparently Want To Repay Mortgages Faster And Lenders Are Trying To Accommodate”
I was reading an article this week about a survey recently completed by Scotiabank that indicated Canadians, on average, want to repay their mortgages faster.
Here’s a link to the article http://www.newswire.ca/en/releases/archive/May2011/10/c2848.html
Typically, when a major brand commissions this type of survey they are either looking for support for a marketing angle they want to push, or they are actually trying to figure out what the public wants.
In any event, providing more mortgage options to consumers is more likely a good thing so good for Scotiabank for trying to fill (or create) a need that provides a real benefit to mortgage holders.
This is also very interesting stuff in that historically it would be basically taboo for a mortgage lender to even suggest such things due to the long term nature of the revenue stream they can generate from a long term mortgage, especially one with an maximum amortization period.
But with the expansion of services in the major banks, this could be a good strategy to try and move mortgage savings into long term investments which is still good for the borrower and good for the bank.
I’m not quite sure all mortgage lenders are going to be as quick to be teaching their customers how to get rid of their mortgages sooner, but I do believe that this is an area of the market that could use more education and more options from mortgage lenders.
This is not to say I completely agree with Scotiabank’s survey results, as all surveys these days are more prone to larger errors due to the fact that we are getting surveyed to death by telephone operators conducting these surveys.
I digress as that’s a whole nother ball of wax when it comes to having a healthy dose of skepticism any time big brands start firing around numbers.
At the same time, there will always be a percentage of the market that would respond to this type of marketing and mortgage program enhancement and as a result Scotiabank and others can use it to gain the wallet of consumers in the highly competitive “A” mortgage market.
In the end, this should all be good news to consumers.
A competitive market with more choice is one of the great things about being a mortgage borrower in Canada.
Better Mortgage Credit
“Having Better Credit Can Lead To Better Mortgage Rates”
Regardless of who you are, mortgage interest rates are going to be linked to your credit profile and credit score.
And while much is written about bad credit mortgages and credit repair to help those with poor credit secure a bank or institutional mortgage, there many be just as many or more people that qualify for an institutional mortgage, but could land an even better rate if their credit was improved.
If you surf around the internet, there are loads of credit repair courses and services available out there that make all kinds of promises to you as to what their product or service can do to increase your credit score. And while I’m sure there is some helpful advise found in these offerings, the process of credit management can be distilled down to a hand up of things that anyone can do with taking a course or hiring some sort of credit repair specialist.
Simple 4 Step Credit Building
Process To Follow
The first step in improving your credit is knowing what you have to improve upon.
So by accessing your own credit score and credit profile through equifax.ca or transunion.ca, for around $24, you gain a starting point or base line to work from.
Sometimes credit scores can be negatively impacted by reporting errors. The credit reporting system is far from perfect and if there are any errors in the information displayed, getting it corrected could potentially give you a score boost plus get rid of negative that lenders would otherwise be exposed to when processing your application.
Second, make sure you are avoiding the three credit score killers:
- making payments more than 30 days late
- continuously utilizing a high percentage of available credit
- excessive credit inquiries from credit applications you are making.
These three actions are the 80/20 of most credit score problems.
By avoiding them, you’re eliminating actions that can reduce your credit and over time, the absence or improvement of your management of each can increase your credit score.
Third, make sure that you have at least two sources of monthly reported credit that you are using and paying off each month. Credit reports predominantly show unsecured credit such as credit cards and lines of credit.
Even if you hate the thought a credit cards or have had problems managing them in the past, its almost essential to have at least two sources of active credit to maintain or build your credit score.
And this can be as simple as only using a credit card to purchase your gas every month and then paying it off at the end of the month.
If you work with all cash, then you are invisible from a credit reporting point of view which will impact your ability to qualify for credit.
If you’re credit is damaged to the point where you can’t qualify for a credit card, then the next best option is a prepaid credit card or a term loan secured by some sort of fixed investment vehicle like a GIC.
What is important with prepaid cards or secured term loans is that the lender is reporting the activity to the credit reporting agencies. If they aren’t then these types of actions aren’t going to yield any benefit to your credit.
Fourth, check your credit at least once a year. You have to purchase your credit score from the credit reporting agencies, but you have the write to request a free credit report from them once a year. This will not provide the score, but it will provide you with a summary of your credit activity and if there is nothing negative showing since the last report, chances are your credit score is the same or higher if you have been practicing all the other steps.
That’s about it.
If you are an adult in Canada, then you will have a credit score.
If you aren’t using credit cards, your score may very well be zero.
The path to better mortgage interest rates travels through better credit, so it is important to pay attention to how you’re managing your credit activities and how they are are being reported.
Click Here To Speak With Toronto Mortgage Broker Joe Walsh
Mortgage Rates Post Election
“How Does The Outcome Of The Federal Election Impact The Mortgage Market?”
Ok, its over.
The election is in the rear view mirror.
We have a conservative majority, so now what?
There is no question that a conservative majority spells greater economic and financial stability to the rest of the world, regardless of how you may have chosen to vote.
Right now the Canadian economy is on a growth path, and any change to the current approach to governance would have been an unknown that could have worked against the financial markets.
Its certainly not that change can’t be good, but change is also an unknown variable with respect to whether or not things improve from change or get worse.
So the short answer is that the results of the election are more positive than negative to the mortgage rates at this time.
That being said, there are certainly a lot of other factors to consider that impact the financial market and staying the course also leaves us with an economy that is starting to overheat a little bit as we narrow the production capacity gap and create inflation in the process.
Everything still points to the Bank of Canada raising their current 1% rate starting sometime in the next two months and then potentially continuing to increase it during the rest of the year to try and keep inflation in check.
The bond rate is trending down at the present time, which could actually create a short term reduction in mortgage rates, but it may not as well, especially if lenders view any reduction to be short lived.
So its hard to say exactly what rates are going to do for the rest of 2011, but on balance they are more likely to go up than down.
At the same time, with respect to mortgage rates in general, we are in about as good a shape we could expect to be in at this time of the year, all things considered.
Different election results could have easily lead to greater uncertainty going forward in the financial markets.
But in the end, the election results are returning us back into more of a “business as usual” mode which hopefully will bode well for mortgage rates going forward.
If you would like to discuss mortgage rates or have any questions on what types of options are available to you in the market, I recommend that you give me a call so we can book some time to get all your questions answered.
More Aggressive Conventional Mortgage Qualifying
“Lenders Reducing The Qualifying Requirements For Shorter Term Conventional Mortgages”
For the last year or so, most of the major banks have been using their 5 year posted rate when qualifying a borrower’s application for a conventional uninsured mortgage.
The 5 year posted rate impacted all debt servicing calculations for variable interest rate terms as well all fixed terms under 5 years.
The end result of using the 5 year posted rate was that the debt servicing was higher than what would be in affect at the time the mortgage was closed, making mortgage qualification more difficult for some individuals.
At the present time, CIBC/Firstline, Scotia Bank, and RBC have softened their criteria and are each using some combination of their three year posted rate and the contract rate to qualify short term conventional mortgages.
For more information, you can go to an article from this link http://bit.ly/jkpU5x
Because the conventional mortgage market is so competitive, it stands to reason that the rest of the majors will likely be following suit some time in the near future.
In the mean time, the different financing criteria now in place in the market can impact your borrowing application and should be taken into consideration if you are going to be tight on the debt servicing calculation.
At the same time, this change in practice is only going to be relevant to borrowers that have at least 20% equity in their homes as any mortgage amount above 80% loan to value requires mortgage insurance, which has different repayment assessment criteria.
If you would like to know more about how to take advantage the lower qualifying rates or learn more about it, please give me a call at your earliest convenience and we can set up a time to discuss it further.
Click Here To Speak With Toronto Mortgage Broker Joe Walsh
What Housing Bubble?
“Canadian Housing Bubble Fears Perhaps Lessened With Small Growth In Prices”
The housing pricing numbers in February, according to the Teranet–National Bank National Composite House Price Index, where up 0.1% with the increase representing the third monthly increase in a row following three consecutive months of decline.
The modest 0.1% pricing increase is a weighted average of all major Canadian centers, with a mixed bag of results across the board. Toronto showed a decline of 0.1% for the month.
Here is the rest of the numbers … http://www.mortgagebrokernews.ca/news/teranet-index-shows-small-increase-in-housing-prices/10662
While the collective numbers don’t light my world on fire with excitement, they do show a certain amount of near term stability in housing prices compared to what we are seeing in the U.S. and in other parts of the world.
When you read about the housing market failure in the states and consider all the sub prime mortgage financing that exists in this country through insured mortgage programs, it has been making everyone a little bit nervous as to how the Canadian housing market would respond in 2011.
Apparently, so far so good.
And while some of the recent changes to the mortgage lending rules may put a damper on housing prices somewhat in the coming months as everyone settles into the new lending rules, overall these changes more likely to strengthen the market than weaken it in the long run.
Pricing stability helps maintain lender activity in the market which provides consumers with access to capital and mortgage program choices.
Hopefully the outcome of the Federal election will be a positive influence on the house market, interest rates, and economic growth as well.
With respect to the election, make sure you get out and vote next week as its the only way we as individuals can influence the outcome.
Click Here To Speak To Toronto Mortgage Broker Joe Walsh
Secondary Mortgage Lenders More In Vogue
“Recent Changes To Canadian Mortgage Regulations Have Started To Moved Borrowers Down Market”
With all the changes coming into effect for mortgage lending from institutional lenders, more and more borrowers are considering alternative lending options from “B” lenders and private lenders.
More specifically, the changes to mortgage regulations cutting back insured mortgages to 85% of the property value for insured mortgages and the discontinuance of mortgage insurance on home equity lines of credit, have started moving lenders from “A” lending products to alternatives down market.
For instance, most private mortgage lending for second mortgages to provide incremental capital, primarily for debt consolidation of some sort.
Traditionally, an “A” profile lender would go to the bank and get an insured mortgage product to provide the additional capital required either in the form of a new first mortgage, a standard term second mortgage, or a home equity line of credit.
With the rule changes, individuals are not going to be able to secure the same level of financing and may turn to private mortgages instead to get funds in place faster, even at a slightly higher cost.
The same can be true to some of the lending products now being offered by secondary institutional lenders who are still governed by the recent rule changes, but are providing different lending products to generate greater overall leverage, which is the key issue for people looking for additional mortgage financing.
While most private lenders are reluctant to go beyond 75% to 80% loan to value on a first, there are those that will go as high as 90% on a smaller second, especially when the borrower has “A” credit and good cash flow.
Add to this the speed in which a private mortgage can be completed, and a case can easily be made to now consider these forms of “alternative mortgage financing” if you can’t otherwise qualify for enough financing from your bank or primary institutional lender.
Once again, this is not going to generate any type of mass shift in the market, but for those individuals who 1) what maximum leverage against their home equity, and/or 2) don’t have the time to go through the bank process which may see they qualify at a lower amount anyway, alternative financing options or the down market has now become more attractive to lower risk lenders.
If you would like to explore alternative financing options to maximize your home equity mortgage financing, I suggest that you give me a call so I can quickly assess your requirement and provide relevant mortgage options for your consideration.
Commercial Mortgage Keys
“Here Are Some Of The Key Factors For Getting A Commercial Mortgage In Place”
Commercial mortgage financing as well as other forms of business financing remain the most perplexing to business owners since the start of the 2008 recession.
The process for locating and securing a commercial mortgage has become more difficult in a lot of ways, which is catching business owners and property owners off guard as they try to adjust to the new order to things in the market.
Unfortunately, most of the changes in commercial property financing are only understood or internalized when someone is in the middle of trying to get a mortgage in place which may be too late if they are dealing with some sort of time line.
The new order of things in commercial mortgage financing has fewer lenders in the market, lenders in general taking on a more cautious approach, and the costs of completing all the mortgage requirements on the rise.
That all being said, the commercial property market is an enormous market that will always have available sources of financing.
The key is to understand how to approach the market to get the results you’re looking for.
To that end, I would like to provide some keys to commercial mortgage financing in 2011 and beyond.
First, regardless of how many times you have arranged or secured commercial mortgage financing in the past, accept that the world has changed since 2008 and that you’re going to have to up grade your knowledge a bit to properly navigate the market. I find this is a significant issue for many business owners I speak to. And because the commercial market has been so accessible for literally decades, individuals have a hard time believing that things have changed significantly. Unfortunately its not very comforting when I get a call months later saying, “you were right, I should have listened to what you were telling me.
Second, outside of market knowledge, the most important key to business property financing is time. You need to start the process earlier and basically assume it will take longer and be harder than you think. This is not to paint a gloom and doom view of the market. Its more about setting yourself up for success and acknowledging that most things in the commercial mortgage lending space are moving slower than what you likely have become accustom to from past experiences.
Third, get professional help to assist you with the process. An experienced mortgage broker who understands the commercial financing market can potentially save you considerable time and money versus trying to figure out the shifting sands yourself.
Lenders are in and out of the market.
Lenders requirements can add considerable time that you may not have which should be built into lender selection.
Coordination of the lender’s third party requirements can be considerable, costly, and time consuming.
Too often in the last 12 months I have had someone call me, explaining that they are 6 to 9 months into the commercial property financing process and are running out of time because of their lack of understanding of the market and the options they chose to pursue.
If you need a commercial mortgage for property acquisition, mortgage refinance, construction, bridge financing, or debt consolidation, give me a call and we’ll go through your requirements together and review potential financing strategies.
Click Here To Speak With Commercial Mortgage Broker Joe Walsh
Collateral Mortgage Versus Conventional Mortgage
What Is The Difference Between A Collateral Mortgage And A Conventional Mortgage?
There is a growing trend with the major banks and some credit unions to now register a collateral mortgage charge instead of a conventional mortgage charge when you enter into a new mortgage agreement with them.
Traditionally, a collateral mortgage charge was primarily used with line of credit accounts where there can be a considerable difference between the amount advanced and the amount outstanding at any point in time.
The basic workings of a collateral mortgage is that the mortgage lender actually has a promissory note and secondary security in the form of a first or second lien against the property for the total amount registered, which can be as high as 125% of the property value even though the borrower did not receive the amount registered.
A collateral mortgage allows the borrower to provide additional principal or re issue principal that has already been paid back similar to how a line of credit works.
With a conventional mortgage, the amount being borrowed, interest rate, and repayment schedule are all basically fixed and the lien registration reflects the amount advanced.
With a collateral mortgage, the big difference is in the terms and conditions.
In addition to the higher loan registration amount lenders also have the right to write in a higher interest rate that what is initially being offered and charged to the customer. For instance, the collateral mortgage may have a stated interest rate of 10%, but the customer is only being charged prime plus 1% initially.
What Is The Reason For Mortgage Lenders To Now Move To Collateral Mortgages?
From the lender’s point of view, they promote this as providing more options and convenience to the borrower. Because of the amount of security being pledged to the lender, the borrower can more easily qualify for additional borrowings with the bank. This could include any non mortgage form of borrowing as well.
The banks also explain that a borrower can more easily move from one lending product to another without incurring any new mortgage registration charges.
And while the consumer can receive value from signing off on a collateral charge, there are some things you should be aware of before accepting this type of mortgage option.
Things To Be Aware Of With Collateral Mortgages
First, by registering a collateral mortgage at 100% or high of the fair value of your property against your property, any future borrowings that you may want to leverage from your home will likely have to come from the collateral mortgage holder. For instance, if you wanted to secure a second mortgage where the total loans outstanding would be less than 80% of the value of the property, no second mortgage could be arranged from a different lender because they would have to register behind the collateral mortgage which may be listed at 125% of the property value, even though only a fraction of that amount may be outstanding.
This could also impact your ability to qualify for any type of lending program outside of what your primary mortgage lender is offering due to the fact that other lenders will likely consider the full amount of the mortgage registered in their debt service calculations. So even though you have good income and credit, you could still be viewed to have an excessive debt load, causing otherwise straight forward credit applications to be declined.
Second, the nature of the way the collateral mortgage will likely be written, will allow the lender to utilize it as security for any other loans, credit cards, and lines of credit you may have with them. Effectively, they may be able to become fully secured by real estate for any and all borrowings made to you once the collateral mortgage is put into place.
Third, if you do fall behind on your mortgage payments, the collateral mortgage provides the right for the lender to potentially start charging a higher rate of interest if a higher rate is written in compared to what you are initially paying. Because the lender has such a strong securing position, they can justify the increase to cover a higher risk of repayment default while not really having any real risk of potential loss. The end result is even if you get back on track, you now have a higher interest rate to pay, which can lead to higher prepayment penalties if you try to move your mortgage to another lender.
Should I Consider A Collateral Mortgage Or Just Stick To A Conventional Mortgage?
This is one of those depends answers.
Currently in the market place, some lenders are providing the customer with an option of taking a conventional mortgage or a collateral mortgage.
However, this is not true with all lenders and this fall, some mortgage providers are talking about only offering a collateral mortgage option.
Because banks offer a fast closing process which tends to be cheaper than going through your own lawyer, many borrowers are going to sign off on a collateral mortgage without really understanding the pros and cons.
So the key here is understanding what you’re signing up for.
If the benefits of a collateral mortgage fit your needs, then there is certainly nothing wrong with accepting this type of mortgage offer.
But if the terms and conditions are going to be too restrictive for your future financial planning and cash flow management requirements, then a conventional mortgage may make more sense.
Before signing off on any mortgage offering, make sure you are getting independent legal advise if you’re not completely sure as to how all the terms and conditions of mortgage work.
That way you can make an informed decision and have less chance of regretting it at some future date.
Click Here To Speak Directly To Toronto Mortgage Broker Joe Walsh
Moving With Your Mortgage
“More And More Canadians Are Moving Their Mortgage With Them When They Buy A New Home, But Does This Make Sense?”
According to a report from TD Canada Trust, about a third of buyers are transferring their old mortgage to their new home.
See details of report here http://www.montrealgazette.com/life/Pack+mortgage+when+move/3621053/story.html
I was surprised that the number of people doing this was this high, but not that transferring the mortgage wasn’t a fairly common practice.
I think this speak more to people paying more attention to the terms and conditions of their mortgage as well as where interest rates are likely headed.
The reason to transfer your mortgage is strictly economical. That is, are you going to be better off financially by doing this that it you don’t.
This type of strategy is going to be most effective and advantageous in a market where interest rates are rising or have risen since the time you entered into your mortgage.
Under these conditions, you would likely have a lower interest rate penalty compared to a time period when interest rates were falling, and you would be able to retain the interest rate remaining on your existing term which could be lower than what’s available to you in a rising rate market.
And depending on the terms and condition of your mortgage and the flexibility provided by the lender to keep your business, there can be other options as well.
For instance, say you are buying a more expensive house for $500,000, your old mortgage is $300,000, and you require a further $50,000 in financing to complete the transaction.
Some programs will allow you to increase the mortgage amount, but have the incremental borrowing amount based on the current rates, which are likely going to be higher if it’s making economic sense to transfer your mortgage. So say your old mortgage is at 4% and the new rates are 5%, some programs will blend the interest rates together and come up with a new payment.
Under this example, there is no prepayment penalty and you’re only paying a higher interest rate on the additional funds being borrowed.
In the end, this whole exercise comes down to what you plan to do in the future (for example, will you see the term on your old mortgage through to its completion?) and how the math works out. If there is a real financial benefit to transferring the old mortgage, then its something that should be considered. If it doesn’t make financial sense, pay off the old mortgage and get a new mortgage for the new property you are acquiring.
The best way to approach this decision making process is to work with an experienced mortgage broker who can work through all the relevant terms and conditions of your old mortgage with you and then help you do the math properly so you have the basis for making an informed decision.
Click Here To Speak With Toronto Mortgage Broker Joe Walsh
Mortgage Broker Put Down
“RBC Report From Internal Mortgage Specialist Throws Rocks At Mortgage Brokers”
As a Toronto mortgage broker, I am very proud of my profession and all the value I can add to my clients seeking assistance locating, securing, and administering mortgages for their residential, commercial, or industrial property.
I’m always quick to point out the many different ways mortgage brokers can add value to our customers in a manner in which they are financially better off or are put in a position to be able to make better financial decisions.
All that being said, while 35% to 40% of the annual mortgage applications are processed through a mortgage broker, the balance are completed directly by the mortgage lender.
Nothing wrong with that. There is competition and choice in the market, which is ultimately good for the customer.
It would be nice, although unrealistic, for mortgage brokers and the lender’s mortgage specialists to just get along and play nice.
Last week there was an example of what likely doesn’t help anyone in the market when an RBC mortgage specialist created a marketing piece to explain the differences between mortgage specialists and mortgage brokers.
In keeping with the rhetoric of the season provided daily by the federal election campaigns, this marketing piece basically says that mortgage specialists are superior to mortgage brokers and that customers should be aware of certain risks that come with working with a mortgage broker.
Here’s an article that gets into more detail as well as links that lead to the actual marketing piece I’m referencing to.
http://www.mortgagebrokernews.ca/news/controversial-document-infuriates-brokers/106537
Needless to say, I don’t agree with many of the comments made by this individual. And there are plenty of mortgage brokers weighing in online with their displeasure to provide the counter arguements.
My purpose in bringing this up today is more about providing some basic perspective to anyone that’s interested.
Like any industry, there are lots of slices to this market and there are individuals on both sides of the fence that are really good at what they do because of their acquired expertise and dedication to their craft.
As a property owner seeking a mortgage, depending on the specific nature of your situation, there may also be times when a mortgage broker is more relevant to you than a mortgage specialist and vise versa.
The best thing of all for consumers is that there is a lot of excellent help out there for you, regardless of what you’re potential needs may be. And with a little bit of work on your part qualifying those who can provide service, I’m pretty confident you will be able to find a mortgage expert that can give you the assistance you require.
Hopefully, all of us in this great industry can conduct ourselves as professionals and continue to make things better for all involved. Not sure how confusing the customer with stuff like this is good for anyone.
Competition is good. We just need to keep it clean.
Another Argument to Fixed Versus Variable
“For Residential Mortgage Interest Rates, Here’s Another Potential Plus To The Variable Side Of The Argument”
I don’t have the exact original source for the following statistic I’m going to lay on you, but the source that provided it to me is pretty reliable, so I still think its work putting forward.
Anyway, here it is.
73% of Canadians will not finish a 5 year Term
Whether if this is true for the whole population or not is basically irrelevant. The question is, does this relate to you?
If so, then it’s something that you need to build into your decision making process when looking at fixed or variable interest rates on your mortgage.
The reality of the statistic is that if you do fall into this category, then there’s a good chance that’s you’re paying significantly more in interest for your residential home mortgage.
The reason you’re more likely to be paying more over a period of time is 1) you are not going to the end of the mortgage term and thus will be paying some amount of prepayment penalty (this can be considerable if the interest rates in general have gone up at the time of prepayment compared to when the mortgage was issued), and 2) the variable interest rate has a high probability of averaging out at a lower rate than the 5 year rate over a period of time.
This is not to say you shouldn’t be signing up for a 5 year rate, because there are excellent rates available in this range. But if you are someone who is required to move a lot due to your job, or have a growing family that is going to need a larger home in the short term, then you may want to stick to the variable interest rate options.
The key here is that, on average, based on this statistic and the track record of interest rate trends in Canada over the last 10 years, there is greater opportunity to save money on your mortgage through a variable interest rate unless you know you are going to stay with a 5 year fixed rate to the end of the 5 year period. Then the decision making process may be different.
If you have any questions or concerns about variable versus fixed interest rates, please give me a call and I will be happy to make sure all your questions get answered.
Private Mortgage A Better Option?
“Is It Possible That Sometimes A Private Mortgage Is A Better Option Than A Bank or Institutional Mortgage?”
A private mortgage can most certainly be a better option in some situations.
One of the most common scenarios is with a commercial or industrial property that requires mortgage financing.
While a bank or institutional mortgage will certainly provide you with a lower interest rate, there can be considerable other costs that can be required by the lender before any commitment or funding is provided.
These days its a given that any commercial or industrial property will require a third party phase I environmental report from a recognized environmental consulting firm as well as a recently completed property appraisal from an AACI appraiser.
Depending on the property and its prior use or its location, a phase II environmental audit may be required right off the hop.
Then, if the borrower is self occupying the building, operating financial statements may need to be prepared by the accountant, perhaps to the level of review engagement.
All these things cost money, and in many cases quite a bit of money in addition to the time it takes to get everything completed and back to the lender for review.
While a private mortgage lender could also ask for all these things as well, in many cases there can be substantially less cost incurred to third party verifiers, making the private mortgage option less expensive if you calculate an effective interest cost for the transaction with all costs included.
At the same time, a private mortgage may also not be a long term commercial mortgage financing solution as most private lender do not provide funds for more than one year with the maximum time available no greater than 5 years. That being said, if you’re tight on cash flow right now, its going to be more cost effective and cash flow friendly to get all the bank or institutional requirements done over a period of time, when it makes sense to get everything done, versus being buried under all the costs at the outset of acquiring a property.
The other situation where a private mortgage is going to be a better option is when time is short for closing. While the bank may be able to provide a cheaper option, it doesn’t do you any good if its going to take longer than you have to close the deal.
And depending on the circumstances, not closing can be very expensive and significantly more expensive that getting a private mortgage in place quickly and getting the deal closed.
If you’d like to discuss private mortgage options for a residential or commercial property you need to finance, give me a call and I’ll quickly assess your requirements and provide relevant private mortgage funding options for your consideration.
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.