B Lender Mortgage: What Are the Pros and Cons?

First, let’s understand the difference between “classes” of mortgages:

As mortgage professionals, we refer to the 3 major tiers of lending as; A lender mortgage (or ‘A’ bank mortgage), B lender mortgage, and private lender mortgage. If this terminology sounds familiar, it’s because, over time, these terms have become quite mainstream, even beyond industry professionals. Over many years, the Mortgage landscape has transformed beyond the typical ‘A’ (“bank only”) lending solutions to include alternative options. These alternative mortgage financing solutions appeal to those homeowners that often require more flexible consideration to fulfill their mortgage financing needs, be it a purchase, a refinance or equity take out.

In simple terms:

A lender mortgage (or Bank mortgage): Refers to any mortgage funded through traditional lending sources (i.e. major banks or tier-A broker channel banks) – What comes to mind might be – ‘stricter approval guidelines’ and ‘best mortgage rates.’

B lender mortgage: Refers to any mortgage funded through non-traditional banks/lending sources, but still governed by B-20 guidelines (i.e. Trust companies, tier B banks, monoline institutions & credit unions) – What comes to mind might be – Common sense lending approach with much more flexibility in affordability and types of income used. Rates are reasonably priced in consideration of the flexibility that is offered.

 

Private lender mortgage: Refers to mortgages funded through sources not governed by B-20 (i.e. Mortgage Investment Corporation (MIC), numbered company/registered corporation, or individual lenders) – Private lenders are primarily interested in the equity available to secure their mortgage, and less interested in the qualification used by regulated banks. Rates are considerably higher but offer the greatest level of flexibility with the least amount of “red tape”. Private mortgage solutions can save when in a bind as they can become the path of least resistance with a very quick funding turnaround.

 

Pros and Cons of a ‘B lender mortgage’:

The benefits and “things to consider” can vary from the perspective of one client, so to keep things simple, we’ll limit the pros and cons of a B lender mortgage to 3 major points for each.

Pros:

  • A ‘B lender mortgage’ offers a clear solution for clients who need mortgage financing but do not qualify through traditional banks for reasons such as nature of income, high debt servicing ratios (affordability), previous mortgage arrears, poor/blemished credit, past bankruptcies or consumer proposals, non-traditional down payment sources, etc.
  • A “B lender mortgage” is typically funded on 1-to-3-year terms (rather than 5-year terms) offering the borrower future flexibility to improve their circumstances and easily transition back to traditional lending sources, without hefty penalties.
  • B lender mortgages are less stringent on qualification guidelines and allow much more leniency on; debt servicing ratios (thus allowing higher mortgage affordability), less than perfect credit scores, non-conforming sources of income (ex. Business-for-self, commission, bonus, part-time or contract employees) and varying down payment sources.

Cons:

  • It’s no secret that a B lender mortgage comes with a higher price tag in 2 ways: Interest rate and mortgage closing costs. Given that these options are often short-mid term solutions, that serve an immediate mortgage financing need, the trade-off can be considered “worth it”.
  • A ‘B lender mortgage’ often requires a property appraisal for all mortgages (regardless of purchase or refinance) whereas A lender mortgages do not (or at least do not 50-60% of the time). We wouldn’t refer to this explicitly as a con… but it is an added cost of closing. It’s worth mentioning that the cost of an appraisal is often towered by every other cost associated with closing on a home. As a bonus, Homeowners like to get reassured that the home they are buying is actually worth what they were willing to pay. (Note: Since home prices have grown so much in such a short period, we find that A lender mortgages are requiring appraisals more often than in previous years – making this less of a con than it once was).
  • A ‘B lender mortgage requires a minimum down payment of 20%. For refinances, this often isn’t a hurdle for borrowers. However, for purchases, it can easily affect buyers drastically if the buyers planned only for the minimum down payment requirements of 5%, 10%, or even 15%. Considering that average home prices in major cities across the province are approaching “uninsurable” territory…a 20% down payment might be necessary across all tiers sooner than later. This too makes this point less of a con than in the years prior.

 

You might have noticed that, unlike “A” lenders who advertise their insured mortgage rates, B lenders do not typically publish their mortgage rates to the public, and this is primarily done for the following reason: B lender mortgages take a tailored approach to your application. They consider unique situations surrounding the borrower’s circumstances to provide the most reasonable mortgage that they can offer.

If you’re worried about getting the best B lender mortgage rates – don’t worry – we’re incentivized to get you the best mortgage rates with the most reputable B lenders in the space.  We’ve been working with these lenders long enough to know exactly how they price your application, so let’s chat and we’ll walk through your options together – (905) 455-5005.

 

Should I choose a fixed or variable rate mortgage?

This is a never-ending debate and in my opinion, one that will continue forever. Which mortgage option should I go with, fixed or variable rate mortgage? Let’s get right to it:

 

Fixed Mortgage:

  • Interest rate & payment remains the same throughout the term
  • Penalty to break mortgage can greater than 3 months interest
  • Starting rate is typically higher than a variable rate

 

Variable Rate:

  • Interest rate can fluctuate throughout the term, causing principal and interest payments to adjust
  • Penalty to break mortgage is typically 3 months interest (max)
  • Starting rate is typically lower than a fixed rate

 

The answer to which one you should choose comes down to your circumstances, which may differ from somebody else’s. For example, if you plan on living in your home for the entire term of the mortgage and do not react well to payment fluctuations, then the fixed mortgage rate would be better for you. At the end of the day, it’s not all about dollars and cents because if it causes you distress to be in a variable mortgage, one that may cause you to pay more interest, then I’m sure you’d agree that peace of mind priceless.

 

However, if you are adaptable to change and are tolerant to the risk of rising rates, along with the initial spread between the variable rate and the fixed rate, then you may be more suited to take the variable option. For example, if the variable rate is Prime-1% = 1.85% and the fixed rates are 3.5%, then the variable rate would need to rise by 1.65% to reach this “breakeven” point during the term of the mortgage. If you believe this is unlikely or at least would not exceed the fixed rate over this period, then you would benefit from the variable rate. Of course, nobody has a crystal ball and can predict what will happen in the end, but the variable requires you to assess your financial and personal tolerance to these likely changes throughout the mortgage term.

 

In recent months, we’ve seen an uptick in people opting for Variable rate mortgages, but not necessarily from a risk assessment standpoint. The decision to go with the variable rate has been heavily determined by the rate “just being the lowest right now”. It seems many people that are behaving this way are doing so with a short-sighted approach in their decision-making process. Time will tell where things go from here but choosing between variable and fixed rates based on today alone, could end up being a costly decision. Although we’ve been used to this low-rate environment for the last decade or more, it doesn’t guarantee that this will continue moving forward…

 

If you would like to discuss your situation on this topic or would like further guidance on the different mortgage types, feel free to reach out today – at  905.455.5006

What is a Monoline Lender?

A monoline lender is one that only deals in one (mono) type of lending, which in this case is Mortgages. These lenders often do not have Branches you can visit, you can’t open up a chequing account, investment accounts, or sign up for a credit card. They just do mortgages and often offer rates that are better than your bank…

 

Due to their focused attention to mortgages, no physical locations, and dependence on mortgage brokers for clientele, their overhead costs are so low that they can afford to beat the banks. Most homeowners that seek mortgages from mortgage brokers often land at non-banking institutions because they offer better products than the banks.

 

In some cases, homeowners may not have even heard of some of these monoline lenders and often feel a misplaced sense of uncertainty with dealing with monoline lenders. They feel that there is some sort of risk that may exist because they don’t see branches in their community or know of anyone else in their circle that has a mortgage with these lenders. But they’re often surprised to learn that they are no more/less risky than their banks and many of these monoline lenders have hundreds of millions, if not billions of dollars in mortgages at any given time. They are also regulated by financial oversight administrations to ensure that the borrowers are protected. Here are a few more benefits to highlight:

  • Only deal in mortgages so you’ll never be haggled to get more products from them
  • They pass on their costs savings from the lack of storefronts, employees, etc.
  • Flexible approval guidelines – consider an application with some “grey areas”
  • Quicker turn around than banks
  • Access your account details online with dedicated customer service support by phone/email

 

I get it, our default setting is set to the bank we deal with, and we feel safe if they’re one of the 5 major banks we’ve known all our lives. But the truth is, those institutions know your default setting and they bank on (no pun intended) this notion to gain your business when the reality is that there are better lending options that exist….

 

Let’s recalibrate together, give us a call   905.455.5006

How to get out of a mortgage?

We never know where life will take us and although we do our best to plan out our lives, we often get it wrong. What happens if you thought you were going to live in your home for the next 5 years, but a year later you accepted a job offer in a different province? What happens if you need to break your mortgage for another reason, is that even possible? Here are a few more reasons you might need to do this:

 

  • Need a bigger home (sell your existing home)
  • Change ownership of your home (title refinance)
  • Try to get a better rate
  • Consolidate your debts
  • Equity take out
  • Payoff your mortgage

 

More often than not, you may come across one reason or another to break your mortgage for the reasons noted above or perhaps others. Luckily most mortgages do allow you to break your mortgage but there are some things you should consider before venturing down this path. Here are some things to consider:

 

  • Is your mortgage Open vs Closed?
    • Open mortgages have no penalties and Closed mortgages do have penalties
  • How are you breaking your mortgage?
    • Some mortgages have a “bonafide sales” clause which only allows for the repayment of the mortgage in the case of a sale. In other words, if you are trying to refinance, this may not be possible under the terms of your mortgage
  • How much are the potential penalties?
  • What are the legal fees?
  • Are there any other costs or restrictions

 

Because your mortgage may have specific terms and conditions, it’s always best to get in contact with your existing mortgage lender (mortgagee) to inform them of your intentions and to learn about any potential consequences of breaking your mortgage. It is also advisable to read through your original mortgage commitment to refresh your understanding of what it would mean to break your mortgage.

 

Once you have all of your facts, you would then decide if you still intended to proceed with breaking your mortgage to achieve a higher purpose/goal. In other words, is it still worth it for you, does it make sense? Sometimes you may want to switch mortgage lenders because the rates across the street are better than what you currently have but once you learn that it is going to cost you $5,000.00 (just an example), all of a sudden any savings you would get from the better rate, are wiped off the table when you tally up everything…

 

If you would like to learn more about this topic or would like to discuss your situation specifically, give us a shout at  905.455.5006

How the Blind Bid is Hurting the Canadian Housing Market?

When we are saying “hurting” the housing market, it’s not what you might think. We are using this phrase to describe how this tactic is contributing to the cause of making housing less and less affordable, especially in today’s “hot” housing market. I would also like to mention that many other things are contributing to this problem, but we’ll stick to blind bidding for now…

 

What is a blind bid?

A blind bidding structure is when a home listing is published with a specific, future offer acceptance date. In other words, any offers you would like to make on the property would need to be held until the desired date. When the day finally comes to make the offer, you as a buyer must “go in” with your best offer. You will not know how many other potentials buyers are also interested in making an offer and you will also not be pervy to know what other will be offering on the property. Essentially, you’re trying to place the lowest possible high offer, that will outbid the competition but not by too much. After all, you don’t want to overpay if you don’t have to. In either case, you’ll never know if you did…

 

In my opinion, this tactic is designed to favor the seller and hurt buyers because it creates a Fomo (fear of missing out) response from the potential buyers. It’s supposed to elicit a response that would cause the buyer to perhaps overspend on a home because “others are probably” looking to do the same…More often than not, it works and the buyers are the ones that ultimately suffer…

 

The truth is, this style of listing can cause housing prices to increase rapidly in a short period, at a rate that is not sustainable over a long period. Ironically, this tactic also works best in a hot housing market because the “Fomo Response” is validated by this vicious cycle of Houses constantly selling over asking, prices continuing to rise, and buyers who lost out on previous bids, willing to throw everything and the kitchen sink in their future offers.

 

Blind bidding is a practice that should be banned from the real estate market for its obvious lopsided benefit to sellers at the expense of the buyers. Transparency is always the fair ground on which both buyers and sellers should meet.

 

Whatever you decide to do with your real estate purchase, don’t forget that even your blind offer needs to be in your realm of affordability. In the end, most homeowners make their purchases with some form of mortgage financing and so, it’s always best to consult your mortgage broker to ensure you are well equipped to stand behind your offer. Otherwise, you’re just pulling a “Joey” with your Bid (Friends reference) ….

Give us a call – at – 905.455.5006

Which is better, a variable or fixed rate?

This is probably the most common conundrum that homeowners face when deciding on which path to choose. The simple answer is that it’s not that simple. If one were better than the other, then what good would there be for the other to exist?

The best way to approach these questions is to apply each scenario to your circumstances. You’ll soon learn that one option is more suitable for you vs the other and the same may not be true for your neighbor.

From a statistical standpoint, more homeowners tend to favor the fixed mortgage option when compared to the variable counterpart. The main reason for this is the “peace of mind” of knowing that your payment/amortization schedule will also remain “fixed” and unchanged over the term of the mortgage. This means that as a homeowner, you can easily budget your finances according to your lifestyle requirements. You’ve also probably noticed the term “5-year fixed” being used all that time in ad campaigns across various banks. This is because this particular mortgage offering also happens to be the product that most banks and lenders compete on. As a result, this competition can lead to better value (although that’s not always the case).

Variable mortgages on the other hand carry a risk of rising rates over a given period. In recent history, many more people have become accustomed to choosing the variable route because interest rates have been low for at least the past decade. You’ll also notice that at any given time, Variable rates happen to be lower than a fixed mortgage option. One reason that this is the case is that if the variable option were the same as the fixed-rate, then it would be a “no-brainer” to choose the Fixed option since it doesn’t carry the risk of increasing over time. Another reason Variable rates are growing in popularity right now is due to affordability. Since variable rates can be 1% less (or greater) than a 5-year fixed option, this can significantly affect the size of the scheduled mortgage payment. Although this can change over time if the prime rate increases, many homeowners look at the initial repayment obligation and go with the short-sighted option.

There are too many scenarios that could decide the winner of the fixed vs Variable debate and the key to understanding which one applies to you, is you. If you would like to learn more about Fixed and variable rates mortgages or would like us to help you settle this debate as it applies to you personally, feel free to reach out to us at any time  – 905.455.5006

How do government bond yields relate to mortgage rates?

Like many people, you might be wondering “how do they determine fixed mortgage rates, and what makes them move up or down?”. The answer to this question is quite simple à Government Bond rates/Yields and more specifically the 5-year government bond rates.

Unlike Variable mortgage rates which are positively correlated to the Prime Lending rates, Fixed rates are positively correlated with the bond market, and it wouldn’t surprise you why that is the case. If an investor is given a choice between investing in government bonds that are considered 100% risk-free vs Mortgages that carry a variety of different risks, at the same interest rate, which one do you think they would go with? Since Mortgages have underlying risks that the investor must consider, the rate of return needs to be more lucrative than other investment opportunities, especially those that are risk-free such as Government bond yields.

Now we won’t get into what makes the bond yields themselves move up or down, but the point is that fixed Mortgage rates are typically dependent on the 5-year government bond rates, especially when they rise, where the fixed mortgage rates will always outpace the Bond yields to mitigate the risks associated with mortgage lending. It’s worth noting that although this relationship exists, mortgage lenders seem to be inclined to increase rates faster when yields rise rather than decrease them when bond yields fall….Banks am I, right? And don’t worry they behave similarly when it comes to variable rates and their relationship to the Bank of Canada’s key interest rate, but that’s a topic for another time…

That’s it in a nutshell, but if you would like to learn more about Fixed mortgages and what might be most suitable for you, feel free to give us a call – 905.455.5006

What is a Reverse Mortgage?

We hear the term and we hear it often, but many of us have a hard time understanding exactly what it is. What is a reverse mortgage?

What is a reverse mortgage? A reverse mortgage is a mortgage product available to home owners 55+ years of age (all applicants on title would need to fit this age bracket in order to qualify). There must be sufficient equity in the home and not all banks will offer this product. The reverse mortgage allows you to use the equity in your home with no payment obligations.

What is a reverse mortgage used for? The uses are really endless. A reverse mortgage allows qualified home owners to cash out a portion of their equity (the debt free portion of their home) to a maximum of 55% of the current home value.  The home value is determined by the bank by way of an appraisal or assessment. Typically, no payments are due on the reverse mortgage until sale of the home or transfer of the title at which point the accumulated interest payments on the reverse mortgage will be due as a lump sum. You can choose to receive the money in either a lump sum, or installments.

What is a reverse mortgage benefit? The biggest benefit of a reverse mortgage is that you can get money in hand while keeping ownership of your home. Selling your home should not be the only way to use the equity you’ve worked hard for. Getting a regular amortized mortgage requires a significant amount of income, income in which your OAS, GIS or CPP may not cover. How else would one pull out the equity from their home without depending on the help of family and friends?  No payments are required on this mortgage and the income generated by this reverse mortgage is not taxed nor does it affect the benefits you may currently be receiving.

What is a reverse mortgage disadvantage? One of the major disadvantages of a reverse mortgage is that unlike a regular amortized mortgage, a reverse mortgage will decrease your equity over time rather than increase it. The reason for this is because even though there are no regular payments due on your reverse mortgage, there is an interest rate associated with borrowing the money and the interest will accumulate over the course of time you have it thus becoming due on the sale or transfer of title. On a positive note, you’ll still continue to gain natural appreciation in your home. The costs and interest rate on a reverse mortgage can be expectedly higher than your typical mortgage as well and may include costs such as (appraisal, independent legal advice, application fee, etc.).

Things to keep in mind and things to ask your broker:

Keep in mind – There are other options to obtain equity from your home, some more affordable than others. You may not be able to pull out as much equity as a reverse mortgage is willing to offer, but it doesn’t hurt to try. Other ways of obtaining equity could be; line of credit or regular mortgage, downsizing by selling and purchasing a less expensive home, selling your home to a family member with the right of living there continuously, etc.

Don’t forget to ask us about – What are the final costs associated with obtaining a reverse mortgage? What happens if you move or die? What are the penalties to break the reverse mortgage at the time of selling? How long do you have to repay the reverse mortgage loan once breaking and selling?

We have much more information to share, so make sure to speak with us before making a decision. Contact us today to learn more.

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