If Canada's five chartered banks were the only institutions allowed to lend money in the form of mortgages in this country, rates would be sky-high, and the selection of mortgage products would be rather slim. Thankfully, we have non-bank lenders to keep the Big Banks on their toes.
While these lenders may not invest the same number of dollars in fancy advertising campaigns, they're nevertheless an excellent option for savvy consumers who are looking for a good mortgage deal.
Because non-bank lenders don't have to support the overhead costs of brick-and-mortar branches, and instead opt to go through the mortgage broker channel, they're able to offer better rates. In addition, because they're seeking to steal market share from the dominating big banks, they're much more likely to offer unique mortgage features - such as better prepayment options, flexible payment frequencies, and unique products such as cash-back mortgages - while at the same time offering a little more flexibility when it comes to clients with lower credit scores, or those that are self-employed or commission-based.
While non-bank lenders aren't considered "banks" in the traditional sense, they're still required to follow all the same regulations and underwriting guidelines as their bank counterparts. They also have access to the same default insurance options as the big banks - whether that's through CMHC, Genworth, or United Guaranty.
Not all non-bank lenders are "sub-prime" (in fact, there are very few of these lenders left in Canada), and while it's true that many of them are foreign-owned, there are many homegrown institutions here as well. Their models have seen success across the globe, and continue to thrive here in Canada.
If you're in the market for a new mortgage or a renewal, I invite you to head into your local bank branch to see what type of deal it can offer you. Then pop by my office and I'll scour the rest of the country's lenders - and likely save you a few percentage points off your mortgage.
Tuesday, June 22, 2010
Tuesday, June 15, 2010
Mortgage Misinformation
Ever since the Federal government announced a new set of mortgage rules in February, misinformation has been spreading like wildfire. Don't buy the hype - acquiring a mortgage is still possible!
Below are a few mortgage myths, debunked:
1. You can still purchase a property with 5% down.
While the government did change the rules regarding 5% down payments, the changes only affected property investors. If you're a first-time buyer - or if you're looking to move into another residence that you plan to occupy - you can still buy a home for 5% down. You can even buy a home with rental units in it for 5% down, as long as you plan to live there too.
2. You can still purchase a vacation or second property with 5% down.
If you have your eye on a new cottage or second home, those are also exempt from the new down payment changes. Unless you plan to rent it out when you're not living there, you can still purchase a second home for 5% down. The only situation that falls under the new rules - where you'll be required to put 20% down - is if you're purchasing a property solely for investment purposes. This is to prevent real estate speculators from artificially inflating the market.
3. You can still qualify for a mortgage.
While the government did implement a rule to reign in over-zealous first-time buyers, the intention was noble. To prevent first-time buyers from getting in over their heads, the government is now making it mandatory for lenders to qualify them on the five-year fixed rate - even if they're choosing a lower variable-rate mortgage. This is because, while variable rate mortgages may initially seem lower, they change according to the Bank of Canada's Prime lending rate - and in the coming year or two, the government has made it quite clear that this rate is going to increase. By qualifying borrowers at the higher rate, lenders are ensuring homebuyers can withstand the increases.
Below are a few mortgage myths, debunked:
1. You can still purchase a property with 5% down.
While the government did change the rules regarding 5% down payments, the changes only affected property investors. If you're a first-time buyer - or if you're looking to move into another residence that you plan to occupy - you can still buy a home for 5% down. You can even buy a home with rental units in it for 5% down, as long as you plan to live there too.
2. You can still purchase a vacation or second property with 5% down.
If you have your eye on a new cottage or second home, those are also exempt from the new down payment changes. Unless you plan to rent it out when you're not living there, you can still purchase a second home for 5% down. The only situation that falls under the new rules - where you'll be required to put 20% down - is if you're purchasing a property solely for investment purposes. This is to prevent real estate speculators from artificially inflating the market.
3. You can still qualify for a mortgage.
While the government did implement a rule to reign in over-zealous first-time buyers, the intention was noble. To prevent first-time buyers from getting in over their heads, the government is now making it mandatory for lenders to qualify them on the five-year fixed rate - even if they're choosing a lower variable-rate mortgage. This is because, while variable rate mortgages may initially seem lower, they change according to the Bank of Canada's Prime lending rate - and in the coming year or two, the government has made it quite clear that this rate is going to increase. By qualifying borrowers at the higher rate, lenders are ensuring homebuyers can withstand the increases.
Tuesday, June 8, 2010
Home overvalued? Local rental rates will tell
The topic of real estate overvaluation has been a hot one over the past week - pretty much ever since the big banks tweaked their real estate forecasts.
CIBC is the most recent bank to sing a different tune when it comes to real estate appreciation across the country, arguing that approximately 17% of homes are overvalued, and Canadians can expect a 5-10% price drop in the coming year or two.
Real estate markets across the country have been hot for over a decade, so this concept of overvaluation makes sense. To see if your home is one that 17%, you may want to employ a tool from the stock market.
When analyzing stock, investors look at its price-to-earnings ratio, which is a comparison of a company's share price with its annual profit. The higher the ratio, the more expensive a stock is relative to its underlying value.
Houses are similar in this regard - but instead of earnings, you have to look at the going rental rate in the area. Take the rental rate, multiply it by 12 (to get the annual cost) and divide your home's going price by that number. If you get a number that's higher than 20, your house is overvalued.
As an example, we employed this method to apply to a one-bedroom condo across three cities. To find the going purchase price, we visited www.mls.ca. To find the going rental rate, we visited www.craigslist.org. Where possible, we tried to find units in the same building or at least the same street. Keep in mind that just because one of the examples is overvalued doesn't mean every home in that city is. Prices can be escalating in a certain area of a certain city, but as long as rents are keeping up with them, chances are they're not overvalued.
Example 1: Toronto
Purchase Price: $325,000
Rental Rate: $1500/mo (x 12 = 18,000/yr)
Ratio: 18.05
Example 2: Edmonton
Purchase Price: $204,500
Rental Rate: $800
Ratio: 21.3
Example 3: Vancouver
Purchase Price: $369,800
Rental Rate: $1175/mo
Ratio: 26.22
CIBC is the most recent bank to sing a different tune when it comes to real estate appreciation across the country, arguing that approximately 17% of homes are overvalued, and Canadians can expect a 5-10% price drop in the coming year or two.
Real estate markets across the country have been hot for over a decade, so this concept of overvaluation makes sense. To see if your home is one that 17%, you may want to employ a tool from the stock market.
When analyzing stock, investors look at its price-to-earnings ratio, which is a comparison of a company's share price with its annual profit. The higher the ratio, the more expensive a stock is relative to its underlying value.
Houses are similar in this regard - but instead of earnings, you have to look at the going rental rate in the area. Take the rental rate, multiply it by 12 (to get the annual cost) and divide your home's going price by that number. If you get a number that's higher than 20, your house is overvalued.
As an example, we employed this method to apply to a one-bedroom condo across three cities. To find the going purchase price, we visited www.mls.ca. To find the going rental rate, we visited www.craigslist.org. Where possible, we tried to find units in the same building or at least the same street. Keep in mind that just because one of the examples is overvalued doesn't mean every home in that city is. Prices can be escalating in a certain area of a certain city, but as long as rents are keeping up with them, chances are they're not overvalued.
Example 1: Toronto
Purchase Price: $325,000
Rental Rate: $1500/mo (x 12 = 18,000/yr)
Ratio: 18.05
Example 2: Edmonton
Purchase Price: $204,500
Rental Rate: $800
Ratio: 21.3
Example 3: Vancouver
Purchase Price: $369,800
Rental Rate: $1175/mo
Ratio: 26.22
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