Farm Mortgages – Farm Financing – How to Borrow On Your Farm

I get many calls from people in rural areas wanting financing on their farm, and they’ve often been to every bank in town and cannot get any financing beyond 50% of the value of their property.

This is normal in the current economic environment.

Alternatively, a farm owner sees my residential real estate ads for great low rates and calls me only to get angry at me when I tell them they aren’t eligible for this program due to their house being a farm.

In this article, I’m going to cover out why farms are hard to finance, why banks won’t usually get involved in financing farms, and what alternative programs are available for borrowers (including some details of the government backed CALA loan program).

WHY LENDERS ARE HESITANT TO LEND ON A FARM:

The primary reason that banks and private lenders don’t lend on farms is that they nearly impossible to foreclose on. As a lender, if a borrower doesn’t make payments, you can issue a notice of demand, and start the foreclosure process whereby you take over the property in 6 months time, or force a sale to recover the money you loaned to the borrower. In BC, it is around 6-9 months from start to finish, and this is assuming it is a CLEAN foreclosure with no loop-hole jumping, obfuscation by the borrower, and funny business. However, when you try and take someone’s home, you can expect all of the above.

There are special laws in Canada protecting farmers and their rights. If someone is a mechanic, and you foreclose on him and take away his land, he is still a mechanic. If someone is a farmer and you take away his land, you’ve left him destitute with no means of earning an income AND no home. Clearly the courts don’t want to deprive someone of their ability to live AND work, so there are special provisions whereby if a person is raising ANY crops: even just one sheep, or growing one stalk of corn for resale, they can apply for protection under these laws and prevent foreclosure or court ordered sale (or at the very least, make the process drag out forever…)

For this reason, banks are “out” of the farm financing game for the time being. A couple of years ago (basically from 2001 through 2006) getting mortgages on farms (and anything else, for that matter) was far easier. Money was loose, lenders were flush with cash, and times were good. Since the capital markets dried up in late 2008, it’s a new paradigm of lending, and the properties that are tough to finance now are: farms, fractional interest, and limited time use properties. These three types of property represent the greatest challenge for brokers, and many don’t have a clue how to get them done, or what programs even exist.

The second reason that farms are hard to finance is that farms, like most tax payers, write off as many things as possible so as to minimize their tax payments to government. While this makes great sense to the individual at tax time, it makes financing hard. Banks have “debt servicing requirements” which is a fancy way of saying, “proof of income sufficient to make the payments.” They only use net taxable income (line 150 of your Notice of Assessment or T1 General). If you’ve written off all your income so that you have no tax bill, good luck getting financing. You either win at tax office (by paying less tax) or you win at the bank (by getting the lowest rate in town) but you rarely win at both – and if financing a farm, you likely will NOT win at both.

 

ALTERNATIVE PROGRAMS AVAILABLE FOR FARM MORTGAGES

So, if not the banks, where do you go? If you’ve been to the banks (and ESPECIALLY if you write down your taxable income) you’ve been told “NO” more times than you can count, and they’ve likely made you feel like crap in the process: as if you’re trying to finance something illegal or financially dangerous!

There are three primary sources of financing:

1. Farm Credit

2. CALA Financing

3. Private Lenders

Let’s look at each in turn.

FARM CREDIT

There is a division of the Federal Government, Farm Credit Canada (http://www.fcc-fac.ca/) that assists farms and agricultural business with financing. This program is government run and backed, and provides loans, mortgages, and venture capital. Check out their website if you’d like more information on them. They are NOT available through brokers, and the client has to deal direct.

You can expect a lot of highly specialized and detailed questions about your farm’s output in terms of bushels, bundles, crops, livestock counts, and everything else. If you don’t know these numbers, or are too new to have them in a cohesive business plan, then Farm Credit Canada is not for you. This organization, it’s loans and programs, are more suited to large scale farming enterprises with accurate record keeping and a history and track record of success who are either a.) Looking to expand their product, or b.) Looking for working capital during off seasons.

I personally have had very little success working these programs with borrowers. I, as a broker, have had to stand aside and let the client and Farm Credit deal directly and they cut me out of the process. Therefore, my details regarding Farm Credit are slim. Check out their website and do an application if you think you qualify.

If you are a small single man operation, this isn’t the program for you.

CALA FINANCING

CALA is an acronym for Canadian Agricultural Loans Act. This is a government backed financial program that provides a guarantee to lenders for up to 90% of the loan. This way, if the lender makes a loan, they are 90% covered should the loan go into default and the lender end up in a situation to lose money.

A couple of points regarding these loans:

1. They are available for new and existing farmers (new farmers are those in the business for 6 years or less)

2. They are available for land purchases, livestock purchases, equipment, storage, or just about anything else the farm will require

3. The rate maximum the banks can charge is prime + 1% on a variable and their residential rates + 1% on a fixed rate meaning this is very cheap money!

4. The maximum percentage financing of the farm they can offer (loan to value) is 80% of appraised value or purchase price

5. $500,000 loan maximum for property purchases and $350,000 maximum for everything else

There are a number of exclusions for which these loans cannot be made. For example, “operating lines,” permits, personal vehicles, or construction and improvements to a family dwelling. It must be FARM financing.

These loans are theoretically available through any bank, trust company, credit union, or other financial institution. However, experience has shown that most institutions don’t get involved in this type of lending. I have calls out to Agriculture Canada as well as several institutions and will update this post as soon as I get a firm answer on who is lending under this program. I know CIBC and RBC do so, but I have had tremendous difficulty in getting in touch with the people who administer the program for their respective institutions.

Also, you will not be getting residential mortgage repayment plans. So, you can say goodbye to the 35 year amortized mortgage. Land loans under this program can only be 15 year repayment period, and 10 years for all non land loans. So, you will face some larger payments than you likely expected. There are also some other fees that add up to around 1% that the borrower can be expected to pay to register the loan and get it administered by the government.

For a detailed list of lender guidelines, go to http://www4.agr.gc.ca/resources/prod/doc/prog/cala-lcpa/pdf/cala-lcpa_info_e.pdf and you can read all the fine print about the program.

 

PRIVATE LENDERS

Private lenders are often overlooked as a source of financing because of their higher rates. Private lenders will typically lend as a 1st mortgage at 6.25% up to 13% (or higher) depending on the level of risk, percentage of the farm’s value borrowed, location of the farm, and credit worthiness of the borrowers. 2nd mortgages are available at rates of 9% to 16% (or higher) depending on the same factors.

Most people read those rates and say, “Well that is just ridiculous. Who would pay those rates?” The answer: a LOT Of people. If the CALA loans are low interest rate, but must be repaid over 10 years versus a higher rate repayable over 25 years, let’s see how it works out assuming a $100,000 1st mortgage.

CALA loans used for plant and equipment (10 year repayment) would have a payment of $1,070 based on a 5.25% interest rate. Also, the money would have to be accounted for, proven to be used for eligible expenses, and all the other rules followed “t’s” crossed and “i’s” dotted.

Private loans at 12% for the same amount over 25 years is $1,054 per month. So, from a cashflow standpoint, it’s basically the same amount, and in this case, slightly less to take the private money. Also, with private money, you simply get a cheque and go spend it on what you want, you likely won’t have to account for it, file expenses, or all that nonesense.

Some private loans are available on interest only terms meaning only the interest has to be paid and the who amount paid some time in the future (perhaps after you’ve built and expanded production and have the higher revenue).

So, there are three different avenues for you to investigate if you are a farmer (or hobby farmer) looking for financing. If you want details specific to your situation, don’t hesitate to give me a call at 604-657-6775 (my direct cell) and I’ll see what we can work out for you.

Thanks again for reading!

Fixed or Variable Rate Mortgages – The Unending Debate

I get calls and questions on this topic almost every week. Given the changing market, it’s time for an update as of November 15th, 2009.

In fact, I recently took a call from a real estate lawyer who was buying a place and wanted my opinion on this topic, and I went into great length as to what I thought. In the end, she ended up taking variable, and in this market, I think this is the right move, for her. Here is why:

I have written several strong articles in favour of fixed mortgages in the past. For me, personally, I just like them. Period. It’s the way I work. I want to know what my payment is going to be for the next 5 years and I don’t want anyone telling me otherwise.

Could I save money if I took a variable. Probably, but I don’t care. If you are considering fixed or variable rate mortgages there are three things you need to think about three specific questions:

1. What are the current rate offerings ?
2. What is your income and employment situation?
3. What is the reason you are buying the property?

WHAT ARE THE CURRENT RATE OFFERINGS?

Previously, when I was arguing for fixed rates for most clients it was at a time when the 5 year variable and 5 year fixed were nearly on par. This was because the capital markets were forcing banks to set their variable at prime rate PLUS 1.5% or prime rate PLUS 1.0% for a rates that were equal to (or even higher!) than fixed mortgages. In this situation, with prime rate sitting at all time lows, it made no sense to take a variable rate when there was only one way for rates to go (up) and no savings, even on day one, by taking a variable rate mortgage.

If there is no savings by taking a variable rate, why absorb the risk of the rising payment?

Well, capital markets have changed, and there are a few banks offering prime MINUS 0.10% for a net rate of 2.15% versus my best rate on a 5 year fixed of 3.85%. This is a full 1.7% difference, and this market, that is substantial. In other words, prime rate would have to rise from 2.25% up to 3.95% before you break even. With the Bank of Canada pledging to hold rates low until mid 2010 that is about 9 months of a significant savings before we see prime start to move up. If you want to save some money, this is a compelling time to take a variable rate as you can transfer to a fixed rate mortgage at any time, with no penalty.

Based on current offerings from banks, and depending on your own answers to my next two questions, variable looks like the way to go.

WHAT IS YOUR INCOME AND EMPLOYMENT SITUATION?

With a variable rate, you face a variable payment (or a variable amount that goes towards principle – which CAN result in a negatively amortizing mortgage where you owe more at the end of the term than at the beginning, if you don’t pay attention).

So, how are you paid? How often? Are you paid a salary that is set? Do you get bonuses or commissions? Are you self employed with the option of more work if you want it? These are all important things to think about.

If you are paid a salary, and especially if you need to take a variable rate to comfortably afford the property, you need to be very careful if you take a variable. You’ll need to watch interest rates and lock in at the first sniff of rising rates. This is true unless you have a mortgage payment that is very modest when compared to your salary.

If you get bonuses and commissions, do you NEED to earn those bonuses in order to make your payments? What happens if the rates rise (and your payment) and you don’t get the bonus? Will you be ok? Do you have enough “wiggle room” in your budget to absorb a higher payment, or a higher payment along with lower income?

If you are self employed, how seasoned is your client base? How confident that you can repeat last year’s success? If you are a realtor, chances are you have done very well the last five months, but what about last december through march? If your income is seasonal, or varies dramatically, do you also want a variable payment?

The bottom line is to look hard and dispassionately at your income pattern. If you have a lot of  “wiggle room” to absorb a rising payment, or if your budget is sufficiently comfortable, then you can take a variable and enjoy the savings.

However, if you NEED that variable rate to afford your payment, you should not be taking it and not buying the property. People are, by their nature, myopic, and they only look at the recent past. If rates rise, are you going to be ok?

WHAT IS THE REASON YOU ARE BUYING THE PROPERTY?

This is often overlooked. People get so hung up on fixed versus variable discussions that they forget why they are buying the property. If you are buying a rental / investment property, then you likely are thinking all about cash flow. If this is the case, variable may be the way to go. If you are buying your own home, and you intend to live in it for a while (5+ years, for example) then you may want a fixed rate so you can rest assured your housing payment won’t increase.

Or maybe not.

There are lots of other reasons, and here are a few: Maybe you’d prefer to buy your house and you want to save every penny, so you plan on taking variable and watching rates like a hawk to try and capture the most savings possible. Personally, as someone IN the industry, I think this is madness unless you happen to enjoy watching interest rate and bond moves (perversely, I do, and you should take advantage of this).

Or maybe not.

Maybe you are buying a property that is a “holding property” and you simply want to minimize your carrying costs until you subdivide it, or until the subdivision or city plan reaches your property and you sell. Variable might be a good choice here as your exit plan is relatively assured and timeline clear. With savings available on variable in the short term, this might be the way to go.

Or maybe not.

Maybe you have a lot of “wiggle room” in your budget, but are so busy you don’t feel like watching rates all the time, and heck, if rates rise a point or two it won’t be the end of your financial world. Variable might be the way to go here.

Or maybe not.

Maybe you are doing an equity take out to invest, and with rates so low you want to lock in now at the fixed rates because you don’t believe they’ll be back any time soon. You plan on investing the money, and you want to know what your “cost of capital” is so you can monitor if your investments are outperforming your debt to buy them. In this case, fixed rates are likely for you.

Or maybe not…

IN SUMMARY

As you can see, a lot of the decision is very personal, and based entirely on features of your own unique financial situation and personality makeup.

There is no rule of thumb. Brokers that drone on and on that “variable is always best” are likely getting angry calls from their clients they put in variable mortgages 6 months ago when rates were prime + 1% and are now Prime – 0.10%. Good. That’s the way it should be. Advice is only as good as the person giving it, and if they don’t take the time to look at your unique situation of income, risk tolerance, budget, and property type, then they aren’t doing their job and you should be speaking to someone like me instead.

Until next time, happy house hunting!

Appraisal versus Building Inspection – What are they?

During the process of getting a mortgage approval, you broker may require you to get an appraisal. Many times, clients respond with, “but I already did a building inspection. Does the bank want that report?”

NO.

Appraisal and building inspection are two different things.

An Appraisal is the process whereby the bank sends in a qualified thirty party appraiser (usually with an AACI or CRA designation) in order to determine the LENDING VALUE of the property for the bank (at the buyer’s cost in most cases).

A building inspection is a third party inspector, hired and selected by the buyer, who goes in to look at the house’s structure, electrical, plumbing, drainage, etc… to determine how SOUND the house is.

Appraisal is for the bank. Inspection is for the buyer.

The bank will only ever want a building inspection if there are some comments in the MLS listing that makes it sound suspicious such as comments about structural issues, asbestos, vermiculite insulation, or some other chemical or mould issues. In my 10 years as a bank employee / broker, I’ve only had to show inspection reports to banks three times, and all three were for asbestos and vermiculite insulation.

Here is an example of when an appraisal will be required: if you are buying a house from a private seller for $450,000 the bank will want an appraisal done to make sure you are paying a fair market value. As a general rule, any time you borrow more than 50% of the purchase price, an appraisal will be required. However, there are “electronic appraisals” that get done when you put less than 20% down and involved CMHC. CMHC is the government organization that guarantees the bank will not lose money in the event you get foreclosed on. They have an internal system called “Emili” that does an electronic appraisal based on recent sales of houses in the area with similar criteria.

Times that an official (non-electronic) appraiser will generally be required (some exceptions apply, but check with me to determine what exceptions they are):

1. Private sales (not sold on the MLS with realtors involved)
2. Any mortgage requiring private financing
3. Any mortgage where you are financing more than 50% but less than 80% of the purchase price or value
4. Any “unique” or “oddball properties” for which the value is higher (or less)

The bank will indicate whether or not they want an appraisal conducted. Most lenders have an “approved list” of appraisers that they do business with and trust. Your broker will generally order appraisals from firms widely accepted so they can send it to multiple lenders if needed.

CONSOLIDATORS

There is a very disturbing trend in the industry right now: the insistence of lenders that brokers order their appraisals through a consolidator. By this, I mean a company that acts as a middle man between the appraiser and the broker. Here is why the banks want them to be used:

As a broker, I have to log into the consolidator’s online system and request an appraisal. Then, the appraisal is assigned to a firm, and as the broker I am unable to know what firm is conducting the appraisal. This is done so that I, as the broker, am unable to talk to the appraiser and affect their estimation of value. Once the appraisal is completed, it is sent to me through the online system.

Sounds fine and sounds safe (f0r lenders), right?

Sure…

It’s a colossal pain. The reason is that many times, getting an appointment set is difficult with sellers often elderly, foreigners, or what have you. Here is something that happened to me last week that was REALLY frustrating, and totally unnecessary, but is a common occurance when these consolidators are used:

I had a client whose bank needed an appraisal. I called up my preferred appraiser, and requested him to go and conduct the appraisal. The seller is an elderly man who is very very ill and bedridden. The appraiser called and called and couldn’t get an answer. Eventually a family member called him back and said the man was in the hospital, but if he wanted to come by, the son would make sure the appraiser got access. The appraiser went by the next morning and met the son (who didn’t live there) who provided access. The appraiser then did a walk through, took his photos, and left.

I then took a call from the bank telling me that they were declining the deal. I quickly switched gears to a lender that was willing to do it, but they wanted the appraiser ordered through NAS (the most painful of all consolidators to use). I called NAS and told them the situation with the seller unable to provide access, and that an appraiser (approved by NAS) had done a walk through and inspection but had not yet provided a report. I requested that they please send the appraisal to that appraiser (or at the very least to his firm – whether or not that specific appraiser does the report or not I don’t care). Their response? No. The reason? I am not allowed to know who is doing the appraisal. This is total B.S. because as soon as the appraiser calls the seller for access I can call the seller and ask him who it is. It’s such a load of garbage. When my client heard of this rule he told me to cancel the file with the new lender and find yet another – making me do the deal a third time…

When I try to cancel the appraisal with NAS? Already charged it on my credit card, and will take weeks to get it back. Then, even when cancelled, the new appraiser didn’t get notified by NAS and kept harassing the elderly seller until I found out about it and called him to get him to knock it off. If I had gotten the report through them and needed any adjustments it’s $75 per change even if it takes them 20 seconds.

Bottom line: I hate these companies. I dislike consolidators in general. All they are is a company that gets a cut of the appraisal fee for standing in the middle and clogging up the process for both buyer and seller. I understand why the lenders are starting to like them, but rather than making life difficult for everyone else (and getting the consolidator paid) lenders should just be choosier about what appraisers they deal with. One of my preferred lenders, Westminster Savings, only uses 8 appraisers (out of 200+), and thus doesn’t need to use a consolidator because they know and trust the judgment of the appraisers on their list.

Ok, this blog has taken me a little farther afield than I intended, but that’s what happens when I get fired up about these things (consolidators…)

Until next time, happy house hunting!

Bank of Canada Hold Prime Rate – Outlook for the Future?

The Bank of Canada announced yesterday that they were holding their overnight rate steady. This means prime rate will remain at the ultra low level of 2.25% for a while yet.

What is more important is the bank’s commentary. They reiterated their commitment to hold rates at the current level until the end of the 2nd quarter in 2010 (July 2010 approximately). This is good news for anyone that opted for a variable rate mortgage in the past few months as they can be assured that their rate will remain at current levels, but will also allow them the right to convert to fixed rates if the fixed rates remain low or fall lower.

I’d like to share with my readers some of the “off the record” commentary I hear from lenders and market insiders.

One of my lenders was in SHOCK at what people were paying for houses in East Vancouver. Almost on cue, the local paper published an article saying that the East Vancouver market was the hottest in BC. While this sounds great, history has shown that by the time the mass media gets hold of what market is “hottest” it’s far too late to consider getting into that market. We’ve seen a massive run up in prices in East Vancouver in the past 4 months, and I would be very conscious of this fact if I were considering buying in this market.

My top realtor referral source and I were having a discussion a few days ago and I was saying that I couldn’t see the market continuing at this meteoric pace upward pace for long because EVENTUALLY there won’t be anyone else willing to pay more than the past buyer. This is the “greater fool” theory of markets, and Garth Turner does a great job blogging about the troubles that are becoming evident in our market. Look him up online. He has an amazing following and I agree with darned near everything he says.

Is this hard evidence that the market is slowing down or turning? No.

It’s purely anecdotal. However, I started hearing these rumblings in May of 2008, and that was just before a MAJOR pullback in the market. This isn’t conclusive evidence that would hold up in court, but it’s just an example of what market insiders are thinking. Again, by the time you hear it on the front page of the Vancouver Sun, you are about 6 months behind the market.

There are several people out there that claim I avoid talking about the “supply side” of the real estate market, and that it is just as important as rate and demand in the market. They are correct in this assumption, and I feel this way because I find that demand is far more prevalent right now in terms of what is determining sale prices of homes. Supply of homes for sale hasn’t vacillated as much as people like to think. The number of prices of sale rises at roughly the rate of population increase. It’s close enough to say that people aren’t RUSHING to sell their homes to get the maximum sale price.

Can deals still be found? Of course.

Will they be in North Vancouver, Coquitlam, Port Moody, or especially, East Vancouver?

My personal opinion is “No.”

If you think buying and flipping (even if you renovate a LOT) is a good financial move, you are assuming a VERY high amount of risk in thismarket. This isn’t a buy and flip market. It is likely a buy and hold market. I’m putting my money where my mouth is, and I’ve bought a property myself (in Langley) that I consider my “dream home.” In other words, I intend to live there for 20+ years, and for this reason, I don’t care what the market does or if I a paying a bit too much because ultimately, I need to have a home, and with the current historically low rates, I can do so and own the home I’ve always wanted.

If you feel similar about a home you are considering buying for your family, then you SHOULD buy and hold on, as real estate prices will always go up in the long term. If you are buying and thinking you’ll upgrade in next 1-2 years, then you should reconsider your purchase.

This is my opinion, and I’m sticking to it.

Please, I beg, someone post a comment.

No Money Down Mortgage / Zero Down Mortgage

Most of the public is unaware that no down payment or zero down mortgages still exist. On October 15, 2008 the rules passed by Canada’s finance minister took effect, and the existing no money down program was canceled. However, only that one program was canceled.

There IS another way…

There are a few banks that will “give” you 5% of the purchase price allowing you to get 95% financing. This program is called “flex down” and here is how it works:

1. You pay posted rates instead of discounted

2. The cash is given to you at closing allowing you to put it as the 5% down payment

3. You need to show cash assets of 1.5% of the purchase price of the home to prove you can afford to close on the transaction

4. Still need a deposit!

5. You pay higher CMHC fees

POSTED RATES:

In mortgages, as in all other elements of business there is no such thing as a free lunch. The 5 year posted rate is 5.49% as of today, with discounted rates in the 3.89% range. You will need to pay the higher 5.49% rate. This way, the bank recoups it’s 5% gift of money that it gave to you over the 5 year term. And yes, you MUST take a 5 year fixed term. It doesn’t matter if you only want a 3 year, or a variable rate, you MUST take a 5 year fixed term at posted rates. In this way, the bank is getting the 5% back from you spread out over the 5 years.

Think of it as forced savings of the 5%, but you get to live in the home while you save!
CASH GIVEN AT CLOSING

The 5% cash gets sent to the lawyer’s office handling the transaction. Then, the mortgage money shows up for the other 95% and the house is yours!
NEED TO SHOW 1.5% CASH ASSETS

The bank needs to know that if they give you the 5% that you can still put up some money to cover property transfer tax (if applicable), move in costs, utility transfers, etc… WITHOUT borrowing the money. You’ll need to show 1.5% of the purchase price of the home in an account in your name. How it got there isn’t an issue. It just has to be in your account.
STILL NEED A DEPOSIT

When you write an offer, you will still need to have money to give as a deposit. This is generally considered “good faith money” as it is non-refundable. Typically, it is customary for the deposit to be 5% of the purchase price. However, this is just CUSTOMARY. You need to tell your realtor that you need the deposit loan as low as possible ($1,000 or $5,000) and you need to be able to write this cheque! You can get it on a visa cash advance, borrow it from friends or family, or what have you.

Remember, you will get it back at the closing date when the bank’s 5% shows up but you still need it in the interim and this is an often forgotten element to no money down purchases.
HIGHER CMHC FEES

Whenever you put less than 20% down on a purchase you face CMHC fees. They are government mandated fees, and you can find out more about them and what they are by doing a search on my blog for “CMHC fees” as I’ve written several articles explaining them.

When you do a “flex down” purchase or no money down, the CMHC fees are 2.90% base instead of 2.75% base and they are BUILT INTO THE MORTGAGE – meaning you don’t have to write a cheque for them up front.

THAT’S IT!

I’m working on two of these deals for clients as I type this blog entry, and both are getting approved. So, if someone says zero down or no money down mortgage isn’t available, give them my contact info and I’ll get them set up!

Thanks again, and happy house hunting!

Audio Blog – Mortgage Penalties and How They Are Calculated

I have been doing some audio advertisements on the radio lately, and given the number of questions that I field about penalties.

Here is the audio file for your listening pleasure, and a copy of the script I used to record it:

AUDIO BLOG – Mortgage Penalty Calculation

HERE IS THE SCRIPT

Many clients have been calling me looking to sell in this market and upgrade their home find themselves faced with massive mortgage penalties. In many cases, the penalty may have risen in the past month by over 100% from a prior quote from their lender.

Most fixed rate mortgages have two types of penalties that can be invoked by the banks. Penalties on fixed rate mortgages are generally the GREATER OF a three month interest penalty or the Interest Rate Differential. The interest rate differential penalty is only invoked when interest rates fall by a significant amount putting the bank in a position to lose a lot of profit. Remember, you got a guarantee from the bank that you would not face an interest rate increase regardless of what the market does. In exchange for that promise, the bank has the right to charge you for their lost profit in the event you break the contract.

At the Mortgage Centre, we have lots of options to help reduce the effects of your bank’s penalties. Some of those methods include blended rates, cash back mortgages, and even porting your existing mortgage to your new home… penalty free.

If you face a large penalty to get out of your mortgage, and you want to look at your options, contact me at the Mortgage Centre.

This is Rowan Smith for Radio Real Estate.

But My Credit Score is Over 700!! I Thought That Was Good Credit!

This is a complaint that I hear from people from time to time. They pull their own credit score, see a number over 700 and assume that they have good credit. Then, when they talk to me, I tell them they likely won’t qualify for a mortgage due to credit history and they nearly fall off their chair.

The media has done a good job of getting out there what a good credit score is. 700 as a “beacon score” is, by all accounts, a very good score. However, there are two other elements to credit that need to be looked at other than the score:

1. Credit Depth

2. Credit Breadth

CREDIT DEPTH:
This is where a lender looks at an account and sees how long you have had a credit record. If you only have 4 months history with your only credit card, your score may be 750 but that is meaningless. We call this a “forced beacon,” and lenders want to see a long track record of good payment, not just a high number.

CREDIT BREADTH:
This refers to the number of credit accounts you actively hold. Having multiple accounts doesn’t hurt you! In fact, look at it this way: if you have 1 visa account, and you go on vacation and miss a payment, you are delinquent on 100% of your available credit facilities. However, if you have a visa, mastercard, and car loan, and you slip up on one payment, you still have other unblemished accounts to bolster your score. So, having multiple types of credit is also helpful: car loan, visa, mastercard, etc… Now, there is a limit here: too many, and you may screw up as management of the accounts becomes difficult, but too few, and one slip up will have that 700 score down to 530 before you even realize you are late.

Just having a high score isn’t enough, and people often get hung up on the number rather than the underlying credit, and you can be sure, the lenders look at more than just the number.

What Happens If You Walk Away From Your Mortgage?

lot of people operate on the assumption that real estate loans are like car loans: if you walk away, and the lender takes the car (or house), then you are clear.

In real estate, this is WRONG!

Case in point: a former client of mine bought a place and subsequently lost his job and fell deathly ill. He owed around $275,000 on a property worth around $300,000. However, he was many months in arrears, and there was over $20,000 of legal bills mounting for foreclosure.

He wanted to know what would happen if he walked away? The bank had required him to have CMHC Mortgage Default Insurance when he bought the place so if the foreclosed, and took a loss, CMHC would cover the bank’s loss. He felt that his bank would not sue him for the shortfall as they wouldn’t have one!

However, I explained to him that if he walks away, yes, the bank takes no loss due to the CMHC insurance, but CMHC takes a loss, and they have the right to sue him for the difference. He felt this was very unlikely given that the shortfall was only going to be $20,000 when the dust cleared and CMHC was a government backed organization whose mandate was to put Canadians in homes, not sue them.

I wasn’t so sure. I counseled him NOT to walk away, and try and rent the unit out and take care of a small amount of the negative cashflow. I called CMHC and the confirmed that yes, they retained the right to pursue him, but didn’t always do it depending on the situation.

Well, he didn’t like my advice. He opted to walk away, and end the phone call, and our business relationship quickly after I told him to try and tuff it out.

I heard updates through the lender that they DID foreclose, and CMHC DID pay them out the loss.

So… the question becomes… will CMHC pursue him?

The answer after 9 months, is “Yes.”

The client called me up and gave me a copy of his letter he received from CMHC’s National Recovery Agency. The shortfall was around $25,000 and they are putting a hold on all future Revenue Canada tax returns as well as likely going after any wages he receives.

As proof of this, I’ve attached a copy of the letter he received (I’ve blanked out all identifying information to preserve his confidentiality).

So, will the lender, or CMHC come to get you if you walk away. The answer is “yes.” Just handing them the keys, and walking away does NOT guarantee you are off the hook.

Until next time, happy house hunting!

Here is a copy of the letter…

CMHC Collection Letter

How Are Mortgage Brokers Compensated in Canada?

I read an article today that really made my blood boil. It was an article that talked about the difference between buying a home through your bank, and buying a home through a mortgage broker.

If you want the direct link it is:

http://homebuying.about.com/cs/mortgagearticles/a/home_lenders.htm

Here is the quote that upset me as it talks about Mortgage Broker Compensation:

Mortgage brokers are professionals who are paid a fee to bring together lenders and borrowers. They usually work with dozens or even hundreds of lenders, not as employees, but as freelance agents.

Think of mortgage brokers as scouts. They find and evaluate home buyers, analyzing each person’s credit situation to determine which lender is the best fit for that person’s needs. The broker submits the home buyer’s application to one or more lenders in order to sell it, and works with the chosen lender until the loan closes. A good mortgage broker can find a lender for just about any type of credit.

The mortgage broker working to secure your loan is earning a fee for the transaction and the better deal they achieve for a lender, the more they are paid. Don’t be too anxious to disclose to a broker the interest rate you are willing to accept–let them tell you what terms they can secure. Shop around to make sure the terms are reasonable.

It’s the line that I have highlighted, bolded, and underlined that has me upset. It says, “the better deal they achieve for a lender, the more they are paid.”

This is completely FALSE!

In Canada, if a mortgage broker is working with a client, they have a fiduciary duty (duty to protect the financial best interests) to their client. Offering a higher rate, and getting paid more, would be a direct contravention of this rule.

In fact, the banks don’t allow it! If you are paying a higher rate, we don’t get paid more, as a general rule.

As a mortgage broker, I try to find the best mortgage rate for my clients. There are four reasons for this:

1. The lower the rate, the more affordable the payments, the better it is for the clients
2. I have a fiduciary duty to protect the financial interests of my client
3. If I don’t get them a great rate, they won’t be happy and refer future clients to me
4. I am paid the SAME at most financial institutions!!!!

As a Canadian mortgage broker, I am paid almost the exact amount from lender to lender regardless of the terms my clients accept. If they get a deal for 4.09% at one bank, I am likely getting paid the same (or damned close to it) at most other lenders for a similar rate and product. The difference isn’t substantial enough for us, as brokers, to go running around for an extra $50 here or there. In fact, we are more “service” driven that compensation driven. It profits a mortgage broker nothing to get 20% higher commission at lender A over lender B if lender A is unable to deliver fast approval and fast review of documents.

I am very open with my clients. If you want to know how I’m paid on a mortgage deal, I’m happy to tell you, and compare that to what I’d get paid at other institutions so you can rest assured you are getting a fair deal.

Until next time, happy house hunting!

Multiple Offers, Lowest Inflation in 56 Years, What is Going On???

I read an article today talking about the fact that Canada is facing the lowest inflation in 56 years, but analysts did nothing but yawn at the news. They claimed that energy costs were artificially driving the inflation numbers low. At the same time, every realtor I deal with calls me with a new set of clients that are going into an offer where there are multiple offers, and they are asking if the clients can write “subject free offers” without the financing clause so that their offer is more attractive to the seller.

What is going on? This type of crazy manic behaviour by buyers hasn’t been seen since the summer of 2007 (the height of the real estate peak), and it’s scaring me.

I think buyers are getting caught up in the “real estate never goes down” mentality that gripped the city of Vancouver from 2003 – 2007, and I think those same buyers should talk to people that bought from 2007-2008 and see if these 20% over asking price offers make any sense.

A couple of examples:

One of my well-to-do clients was looking at a fantastic house at $995,000 in Vancouver. It contained two suites that generated $1,950 of rental income in addition to the main floor that he intended to occupy. $995,000 seemed like a reasonable price, but he got word of multiple offers, and asked if he was pre-approved to $1.1M in the event that the bidding went higher. With that amount of rental income potential in addition to living space, it was likely it would go beyond asking price. So, what do you figure it went for?

He backed out at $1.1M and the place eventually sold for $1.2M… a full 20% over asking price.

TWENTY PERCENT!

Think about that for a second: 20% over asking price is downright silly, in my opinion.

“But with the rental income, it’s so much more affordable!” people yell at me.

Sure it is. With today’s interest rates a LOT of properties look affordable. However, if the borrowers would do the math at 5.50% and 6.50% (rates that were here only 1 year ago) they would see that when their term expires, this property might not be so affordable, and hence, not so valuable.

Now, I’ve been criticized by other brokers for being to “demand” focused. The truth is, I AM demand focused. While supply always plays a roll, it is NOT supply that is driving this market. It is crazed, manic, emotional buying by borrowers that are being egged on by the media which keeps saying that the “Canadian House Market is Back!” and no one pays attention to the fact that the stats used by the media are WAY out of date. By the time the mass media hears that the market is heating up, it’s usually WAY too late to get into that growth sate. Otherwise, wouldn’t everyone be doing it? Of course…

So, costs of living (aside from housing) are falling, interest rates are low, costs of all goods are falling, interest rates are low, energy prices are falling, and interests rates are low… anything sound odd about this? The Bank of Canada has their foot on the monetary pedal, and STILL prices of everything in the country seem to be falling EXCEPT real estate.

We are faced with two possible scenarios:

1. Real estate is somehow still undervalued (despite record low interest rates, and a meteoric rise in prices in the past 3 months)

2. Real estate is overvalued, but that historically low interest rates are making it appear cheaper than it is (or cheaper than it will be in in 5 years when most mortgage terms expire)

What appears most likely to you? That $1,000,000 for a house in Vancouver is “fair market value?” or that things are starting to get away from reality again?

“When the average family cannot afford the average home, trouble will follow!” I’ve been screaming this for 2 years, and no one listened until January-December when the pain was being felt. Now, all signs point to over-valuation again, and buyers are lining up.

If I could find a way to “short” the Vancouver real estate market, I’d do it in a heartbeat. Unfortunately, it’s not that easy.

Until next time, happy investing!

p.s. I’m getting out of this city for a week to get my bearings and see if the real estate market looks any better up in Alaska, and there will be no updates during that time. In the interim, read Garth Turner’s blog at http://www.greaterfool.ca Garth is a communicator, author, lecturer, columnist, TV personality, entrepreneur, MP and populist. Better yet, read his book “After the Crash.” Another source of great info that I read is the Daily Reckoning at http://dailyreckoning.com and these authors pretty much called the great collapse in 2008 and were crying for it for the prior 2 years during the run up in their book “Financial Reckoning Day.” Enjoy!