The new changes to the mortgage insurance rules came into effect on April 19,2010. The new rules are meant to cut down on speculation and encourage Canadians to use their homes as a savings tool rather than as collateral for home equity loans to pay down credit card debt.

There are three basic rule changes

1) The minimum down payment for a non owner lived in home is now 20% rather than 5% and the way future rental income may be considered has been scaled back as well. This rule change will have the most impact of all the rule changes but only to Real Estate speculators. It requires speculators to put more money down up front and being able to use less potential rental income for qualifying purposes will take many new speculators out of the market.

2) All borrowers with less than 20% down will have to meet meet qualification standards for a five year posted fix rate mortgage. This is in effect even if you want a different type of mortgage or a shorter term mortgage.

Current standards  for mortgage qualifying are typically based on the lenders three year fixed rate. this qualifying standard in the past been sufficient to protect consumers fr4om rates increasing over the term . Essentially , the government is forcing people to prepare for the likely rate hike over the next five years.

Mortgages with terms of fic=ve years or more will use the contract intersest rate. This is key because it suggests lenders will still be able to qualify insured five year fixed rate borrowers using hevavily discounted contract rates (IE 3.79% instead of 5.39% as of today.) the important thing to remember is that this rule changes only apply to mortgages over 80% loan to value. So if your putting 20% down it basically will not affect you.

3) The maximum Canadians can withdraw when refinancing their mortgages will be reduced from 95% to 90% of the value of their homes. This will affect borrowers who would like to reduce some of their high interest loans and consolidate them and use th eequity from their homes to pay them off.

When you make that decision to purchase that first home you tend to think that all you have to do is go out and find the perfect home and the rest is easy. Nothing could be further from the truth. There are many decisions to make after you make the decision to buy THE home. One of the biggest and most important is wheather to go with a fixed or variable rate mortgage. First let me explain what the difference is. A fixed rate is locked in for the entire term of the mortgage and usually for  specific period i.e. 3 years, 5 years, etc. For the variable rate the payments stay the same but the interest rate can vary from month to month based on the market. The adjustable rate mortgage both the interest rate and the payments vary based on the present market conditions.

It is a tough  decision, which way to go, but you should make it based on all the information you can gather when you buy that home.

To give you an example of the math you do , I will give you a recent scenario. A client some time ago purchased a home for $465,000.00 and was in a quandary as to what to do about the mortgage. I suggested they at least think about a variable rate for the following reasons. At the time the variable rate was prime -.5 % or 1.75%. The fixed rate was 4.09% for 5 years. They were worried that the prime rate would start to rise which would mean the fixed rate would go up as well. It has been over a year now and the prime has not gone up and as a result their financial situation is as follows. They took the variable rate at 1.75 % at the time and their rate actually went down below prime to 1.65%. Their payments were based on the 5 year mortgage rate of 4.09% and were $1865.00 per month. However, their actual interest rate was 1.65% so it worked out this way for the year. They paid $1865 a month based on the 4.09 % and at the end of 1 year they had paid$15,822 off the principal and paid $6557 in interest and the balance was $425,927.00. If they had locked it in at the fixed rate for the same year they would have paid $5953 off the principal and paid $16,422 in interest and had a  a of $435,796.00.  So even if the market started up and they had to lock in, they have already saved a lot of money up front. For example if they wanted to keep the same payments and lock the rate in at 4.09 % they would  have knocked 3 years off the amortization period. So as you can see you have to sit down and to the math on what is best for you.

Many clients ask me what the difference between a conventional and high ratio mortgage are. They hear it talked about a lot, but don’t understand the difference. Basically, the difference is the amount of down payment you’re going to put down. If you put 20% or more down you qualify for conventional mortgage. One benefit of a conventional mortgage is that mortgage insurance is not normally required, which saves you money. If you are unable to put at least 20% down then you will need a high ratio mortgage. The down side of this is that high ratio mortgages have to be ensured against default and quess who pays the premium for this insurance. The premium is based on how much you put down. The bottom line is the more you put down the less the premium. The premium is usually just added to your loan. This is convenient but it also has the effect of raising your payments and could increase the amortization period. This mortgage insurance premium is usually a surprise to buyers when they go in to look at the final figure they owe for the home they purchased. That’s why it is so important to not spend all the money you saved up when you buy that first home. Give yourself a little “wiggle” room as there is always  a little more cost than you thought. (more…)

Clients are sometimes  confused between  the Land Transfer Tax and the municipal property tax. Unfortunately they are two separate taxes that are part of your closing costs. They can be an unexpected shock when you get a call from your lawyer outlining the final amount of money you need to come up with for your mortgage. As I mentioned in a previous BLOG the Land Transfer Tax is a tax the government has put on when residential properties change hands and it is a flat percentage of the sale. 1% of the first $200,000.00  and 2% of the remainder. So this in itself can be a sizable amount. The Municipal Property tax is the yearly tax the local governments impose on the property to pay for local costs such as garbage pick up schools, fire protection, libraries , etc. This tax is based on a “mill rate” that your local council decides on. This mill rate is then applied to the assessed value of your home and that’s the tax you pay. Your taxes are affected by both the mill rate and the assessed value. There is nothing you can do about the mill rate but you can appeal the assessed value of your property.
I advise my clients about the municipal tax situation both for selling and buying a home. I don’t want any surprises for my clients.
The municipal taxes are usually due on July 01 of the tax year. So in other words, up until July 01 of the year you have been accruing a tax deficit of sorts. When you pay your taxes on July 01 you pay them for the whole year so now you have a credit, right!!. So lets assume you sell your home with an adjustment date of May 30. This means you are responsible for the municipal taxes for the time you lived in the home or 119 days. When the lawyers sit down and decide on the adjustment figures they find out how much the taxes are probably to be( if not already issued) and they then prorate the amount. So for example if your taxes due were $3344.00, that works out to 3344/365 or $9.16 per day. You lived in the home for 119 days so you will owe the new owners 119x$9.16 or $1,090.04 which your lawyer will credit to the new owner from the proceeds of the sale.
OK, now lets say you sell your home after the taxes are paid. Then you get the credit instead of the buyer. Lets assume the same home sold in September with an adjustment date of Sept 23. You have paid taxes for 365 days but only lived in the home for 235 days. Let us use the same taxe figures of $3344.00 that means you owe $9.16×235 =$2152.60 but you paid $3344.00 so you get the adjustment credit of $1191.40.
As you can see this could be a nasty surprise if a buyer or seller was unaware of how their tax situation was calculated. If you need any more information please call me at the office 604 530 0231

The new HST is officially coming in effect July 1, 2010, but the federally administered tax may already have implications in the Real Estate market.  As we all know Real Estate fees will be subject to the new HST, but what many don’t know is that they may already be subject to a partial HST payment.  It all depends on how much work was done for the client before July 1,2010. If 100% of the work was done for the client then only 5% GST is payable. if 100% is performed after July 01 2010 then 100% is paid as HST. If 90% of the work is done before July 01,2010 then only GST is paid. If 75% is done before July 01 2010 then GST is paid on 75% of the fee and HST is paid on the remaining 25%. The HST on new and substantially renovated homes ( where more than 90% of the property is involved in the reno). is the same as the present GST.  New homes priced up to $525,000.00 will be eligible for a new rebate of 71.43 % on the provincial portion of the HST paid.  New homes above $525,000 will be eligible for a flat rebate of $26,250.00 These rebate are in addition to the rebates already available under the GST.

As you can see the new HST rules are somewhat complicated and not easily understood. I for one, just don’t understand how our government can see this a s a good thing for British Colombians when it is going to keep many people from purchasing a new home. I also think it is going to have a devastating effect on the new home industry and may well push our economy backwards rather than forwards.

Thanks for reading. If anyone would like to get on my mailing list for my monthly newsletter please drop me an e mail at “keith@iamlangley.com” with your name and address and I will be happy to add your name to my list.

As I discussed in one of my earlier blogs the new rules governing mortgages in Canada come into affect April 19,2010. These new mortgage rules could affect many first time buyers in that it will be harder to qualify for that first mortgage. The new mortgage rules force borrowers to qualify for a five year fixed term rate. At the present time many borrowers are qualifying based on the variable rate mortgage which is as low as 1.85% in some areas.

This past week all five major banks raised their five year fixed term rates to 5.85%.

However, one question that has been out there since the new mortgage rules were announced, was how the five year term would be calculated in qualifying a borrower. If the banks used the posted rate of 5.85% it would be much tougher to qualify for your new mortgage . If the banks on the other hand used the used the actual rate consumers get , which in some cases is as low as 3.75% it would be a lot easier to qualify.

Ottawa has made no comment on what interest rates should actually be used.

An internal document recently distributed by CMHC to mortgage brokers shows consumers will be able to use their  actual rate to qualify for a mortgage if they go for the five year term or longer. So even if buyers want the variable rate they must qualify for the higher five year benchmark rate. This unfortunately may force some first time buyers into the longer term rate as they can not qualify for the variable rate because of the higher qualifications.

This may sound onerous but I think in the long run it may save some borrowers some problems down the line. If you qualify for the higher posted rate and are making payments on the higher rate but are actually paying the lower variable rate your principal will be reduced much faster. Mortgages are notoriously bad for the amount of interest you pay in the beginning. Very little actually goes toward the principal., however if your payments are higher and the interest is lower the difference comes right off your principal.

For example: if you had a $400,000.00 mortgage amortized over 35 years based on the posted rate of 5.85% you monthly payments would be approx.$2229.00 per month. Over the first five years you would pay $22,040.00 off the principal and pay $111,743 in interest and your balance after five years would be $377,9560. However, if you paid the same per month $2229,00 but the interest rate was 3.75% ( the payments on 3.75% would normally be $1706 per month.) you would pay off $31,563 in principal, pay $70,813 in interest and have a balance of $368,436. The best part is, if you continued this practice of paying higher payments than required by your actual interest rate,  you would have this mortgage paid off in 11.86 years not 35. BIG difference for an extra $523 per month.

This is a fairly large and sometimes unexpected cost for unsuspecting buyers. This tax is calculated by the Lawyer or Notary Public who is doing your conveyancing and is considered part of the closing costs.The Land Transfer Tax is a Provincial tax the government levies on all residential Real Estate transactions in B.C. The tax is 1% of the first $200,000.00 of the value of the Real Estate transaction and 2% of the remainder above $200,000.00. For example if you  purchased a home for $525,000.00 the Land Transfer Tax would be 1 % of the first $200,000.00 or $2000.00 and 2% of the remainder which is $325,000.00 or $6,500.00. The total tax being $8,500.00. As you can see this can come as a big shock to first times buyers who have budgeted to the limit and didn’t expect an extra $6,500.00 to be tacked onto their closing costs.

Fortunately there are exceptions to the tax but they are somewhat complicated and better suited for a phone conversation or a discussion over a Starbucks coffee. If you would like more information give me a call on my cell at 604 897 4798.

Thanks for reading

I have received some calls from clients worried about how the new mortgage rules coming in on April 19 will affect them.

First let me explain what the changes are. The rule changes only affect government backed insured loans.

Under the new rules, buyers will have to qualify for a 5 year loan, which is at a higher interest rate than a shorter variable or shorter fixed term loan even if they don’t want the longer term. Being that it is at a higher interest rate the qualifications are more difficult to meet. ie your income, credit rating etc will have to be higher.

So the bottom line is if you “just” qualify now for a short term variable rate mortgage you better find a new home before April 19 or you just might not qualify any more.

The best thing to do is check with your financial institution now and see how the rule changes affect you.

Since my last posting I’ve received some calls asking me for examples of the math for calculating if it’s a good idea to refinance. Here is a recent example of one I did for a client.

Outstanding mortgage is $244,000 @ 4.9 % amortized over 40 years. Over the 5 year term of the loan the buyer would have paid $1155.72 per month and after 5 years would have paid $12,079 off the principal and paid $57,264.37 in interest. They were advised by the bank the penalty would be $13,000.00.

At first glance it is a no brainer it’s not worth it right! Wrong, if the client remortgaged at 3.65% over 40 years. The would pay $964.37 a month payments on the loan and  paid $15,490.20 off the principal paid $42,372.36 interest or $14,892.01 less in interest minus the $13,000 penalty you still save $1,892.01.

Now if you kept your payment the same at the new rate, you would really save money. First you would reduce your payment period (amortization) by TWELVE  years to 28 years. You would pay $41,272 (or $2,992 less than the original even with the penalty) in interest and $28,141 off your principal in the first 5 years.

I get a lot of calls from clients wondering if they should refinance their homes at the new lower interest rates. They look at the penalty and just assume it is not worth it, but thats’ not always true. The quick answer is “it depends”.

I know it sounds like a cop-out but the truth is it does depend on the individuals situation. The best way to find out is sit down and do the math. You have to calculate how much the penalty is and how much it will cost you in actual dollars to re-finance. this  may be a lot but don’t stop here. Now calculate how much you will save over the term of your new financing deal at the new interest rate. You may be surprised at the savings.

If this all seems like a lot, give me a call and I will help you calculate the numbers.