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For Rental Properties, Cash (Flow) is King

 

Ask pretty much anybody about mortgages and the first, sometimes only thing they want to talk about is the interest rate. As mortgage professionals, our job is to educate clients that while interest rate is definitely a cornerstone of your mortgage decision, it is not the only factor to consider when agreeing to sign a mortgage commitment. In many cases, the lowest interest rate does not represent an ideal fit, especially when the actual mortgage isn’t aligned with customer’s stage of life, priorities, or long-term outlook. Rental properties are a prime example of mortgage situations where basing a decision solely on the rate is often short-sighted and in some cases detrimental to the long term viability of one’s investment.

Rental properties can be a lucrative way to diversify investments, build passive income and long term net worth. They can also be costly, rigid and very problematic if you don’t choose the right property, area, tenants and MORTGAGE PRODUCT. Like any investment you are going to do your research before buying – RIGHT? And you are going to take your time and screen potential tenants vs taking the first Kijiji reply from @fraudster.com offering a cash deposit higher than you have specified – RIGHT? I’ll leave that part up to you. Where I come in is ensuring that the mortgage product you are using allows you the most flexibility on your payments and overall investment. The best way to ensure that your rental investment does not become a sucking vampire on your personal bank account is to minimize the cash outlays you are obligated to make.

Enter the Home Equity Line of Credit (HELOC).
In my 10-plus years of doing mortgages and owning investment property, the HELOC is far and away my favourite product for investment properties.

First & foremost – CASH-FLOW. HELOC’s allow you the option of making interest-only payments monthly. The monthly payments on a standard $200K mortgage using current 5 yr fixed rate of 3.39% for example are $987. Interest only payments would be about $650. That’s a cash flow difference of $340. Think of a vacancy – they happen. That’s $340 of your own money that you don’t have to pull out of personal savings to cover while your investment income is stalled.

Having the ability to scale back or minimize your cash outlays can be the difference between good and bad when it comes to an extended vacancy, renovation or unforeseen expense such as a repair or insurance claim. This feature will allowed you to take the time needed to properly screen potential tenants when you have a vacancy and not rush into leasing to the very first interested reply. We can tell you that one of the worst mistakes that can be made with a rental is to scramble to get tenants in so they can start paying rent only to find out you picked the wrong people.

HELOC’s also offer a number of additional features:

Fully open – imagine somebody comes along offering you top dollar for your investment property. A HELOC is fully open meaning it can be paid off immediately without restriction or early payout charges. You can accept the offer and cash out immediately without seeing profits eroded by penalty charges and fees. With a standard mortgage you may have a payout penalty ranging from 3 months interest into the tens of thousands depending on mortgage type & institution (cringe if you have a fixed mortgage with one of the Big 5 Canadian banks).

Revolving – so you’re an investment property wizard and the cash you are making has allowed you to pay down the HELOC we set-up dramatically. You can use the available space on your current HELOC towards the purchase of another property. Keep your personal savings and investments in tact and don’t have to ask permission to access the equity. That’s the benefit of revolving credit.

The main (only) drawback to a HELOC over a standard, amortizing mortgage is that the interest rate tends to be slightly higher (about .50%). In this situation this argument rings hollow. Since your rental property is essentially a business, the interest that you pay on a mortgage is eligible to be written off for tax purposes. Given the strict criteria involved in qualifying for mortgages these days, its a safe bet that most people with rental properties are already showing income that has them in an elevated tax bracket. That means that every extra dollar of profit reported on tax returns gets annihilated by CRA. Sometimes increasing an individual’s interest expense actually helps them bring their reported profits on rentals close to breaking even and honestly that’s why we have accountants (SIDE NOTE: please use an accountant if you are going to play in the investment game).

Finding lenders who offer HELOCs on rentals isn’t easy, especially if you are wanting only 20% down payment (80% LTV). Most lenders these days want more skin in the game (equity) for rental properties. There are definitely good lenders out there doing rental HELOCs at 80% LTV. That’s where a call to a mortgage professional and the proper strategy can really pay off!

 

8 Things You Can Do To Get The Best Renewal

With 47 per cent of homeowners scheduled to renew their mortgages this year, 2018 is a year of change for lots of Canadians.
Here are the top 8 things you can do to get the best renewal:

1. Pull out your mortgage renewal now, and start early. When you are proactive instead of reactive you can see if there is anything on your credit score or lifestyle that we can modify to ensure you are positioned for the best renewal. You are only in a position to do this when you start early- in the last year of your mortgage you will have the most amount of options available. For example, there can be an inaccuracy in your credit report or you may be considering an income/job change that would impact your options. We can look at timing accordingly for you.

2. Do not just sign the renewal offered. Lenders can change the terms of your mortgage, and the renewal you are signing can cost you up to four per cent of your equity if you are with the wrong lender for your current life stage.

3. Most people think the best rate is the best renewal – WRONG. The terms are most important and with all terms moving or selling is the only reason most people think they would ever break a mortgage- THIS is simply not the case, a change in the interest rate market, divorce, health, job change, investment opportunity and many other reasons would contribute to a future modification being beneficial for a consumer.

4. Take into consideration lender history. The lender can have a higher prime then anyone because they know the cost to leave outweighs staying the course. The lenders are very smart with their calculated risks- and this is not something they have an obligation to disclose.

5. Remember your lender has a bias – their job is to handcuff you so they can make as much profit off you as possible- don’t be a victim.

6. Do not shop each lender on your own, it takes points off of your credit score. All lenders have different rates based on your score and you want to position yourself to get the best. By using a mortgage professional, they can shop multiple lenders protecting your credit using only one application, while the rate variation can be on average a half a percent!

7. Don’t get sucked into the online rate shopping- any monkey can post a rate online and you can drive yourself crazy looking at something that does not exists. In today’s complex mortgage market there are significantly different rates based on – insured mortgage vs uninsured mortgage, switch vs refinance, purchase or renewal, principal residence vs rental, salary or self-employed, 600 credit score or 700 credit score, amortization of 20 years to 30 years, type of property condo vs house, and leased land or freehold. The variations can mean a difference in thousands of dollars. Like diagnosing a medical condition, you can’t go online, you do have to put in the appropriate application and supporting documents to verify which options are available to you that will result in the lowest cost in borrowing.

8. Remember your mortgage is the largest debt and investment most of us have, when you contact an independent mortgage professional, we are going to invest all the work and expertise and advise you in your best interest regardless if we get your business. We may after our review advise you to stick with your existing lender, or make another recommendation for you. We are only here to enhance your finances and save you money, and there is no cost for our service.

   

Get Ahead of the ‘Rate Train’


With approximately 47% of mortgages in Canada coming up for renewal in 2018 and in a rising rate climate, it would be wise to consider the impact on our personal mortgage. What will these increases mean for you?
70% of Canadians are in 5-year fixed rate mortgages and the rates these people secured in 2013 and are still similar to what is being offered in 2018, so a possible increase in payment that comes along with a slightly higher rate could be quite easy to handle.
However, in 2019/2020 rates could possibly be significantly higher than what consumers locked into in 2014/15. The payment shock could be substantial. Not to mention that increases in the Prime rate will also affect unsecured credit such as lines of credit and credit cards. And the Bank of Canada is certainly in an upward trend with the Prime.
Translation… as rates go up for mortgages and other credit accounts, so do payments.
What can you do? If your mortgage is maturing this year or in 2019/2020, it is highly advisable to contact an experienced Mortgage Broker to evaluate your position. You will likely have seen a healthy appreciation in value in your home in the past few years, so perhaps it’s time to get ahead of the “rate train” and consider consolidating your unsecured credit with your mortgage and lock in at today’s still low rates before you start to feel the pinch.
The latest rule changes that came into effect January 1, 2018 could also have an impact on your ability to qualify for what you need, so getting a free evaluation will be more valuable than ever.
As always, feel free to contact us for any questions you may have.

   

Mortgage Broker Value

Not surprisingly, borrowers often default to their own Banker. And why not? It’s an established and comfortable relationship. Perhaps it’s viewed as the path of least resistance. But is it the right lender for the borrower’s current specific needs? Perhaps not.

More sophisticated borrowers may be of a size or scale that they have their own internal resources in finance, quite capable of securing the required financing. They are likely only in the market infrequently however, and almost certainly not fully knowledgeable as to all of the financing sources available.

Aren’t all Lenders pretty much the same?
Borrower’s may think that all institutional lenders are pretty much the same. Offering comparable rates, and standardized borrowing terms. This is rarely the case. Lender’s often prefer one asset class over another. They may have a particular need for one type of loan. A specific length of loan term may be desirable, for funds matching purposes. Real Estate risk is a fact for real estate lenders. How they mitigate this risk differs however. It may be stress testing interest rates during the approval process. Sophisticated risk pricing models may be used, having regard to previous loss experiences. The lender may rely significantly on collateral value, or guarantees. The conditions precedent to funding will often differ from lender to lender.

A real world example
I had the pleasure last year in advising a client who had 3 sizable real estate assets, in 3 quite distinct asset classes. The borrower’s loan amount requirements were significant, however they were flexible on loan structure. Accordingly, I sought out competitive, but differing deal structures. My goal was to provide a competitive array of options. A number of “A” class lenders were approached, several/most of whom this particular borrower had no previous experience with. I shortened the list to 5 lenders, and received Term Sheets from each.

Each Offer was competitive on a stand alone basis, but they differed quite substantially, in the following ways:

  • Loans were either stand alone, or blanket loans, or some combination.
  • Length of terms offered, differed by asset class.
  • There was as much as a 75 bps rate difference, from highest to lowest Offer.
  • The amortization period depending upon asset class, ranged from 15 to 25 years.
  • Loan amounts on individual assets differed as much as 20%.
  • Third party reporting requirements differed between lenders.
  • There were a combination of fixed vs. floating rate loan structures.
  • Recourse was limited by some lenders, on select assets, or waived entirely, upon a higher rate structure.

Leverage Your Knowledge
These variances are striking, yet each of the 5 lenders were considering the precise same asset, at the same time, with common supporting information from which to base their analysis. How was the borrower to know which Offer to exercise? As a Broker, I can add value by helping the borrower to consider both their immediate and longer term strategic requirements, in the context of their overall real estate portfolio needs. This was precisely how this borrower landed on the most appropriate Offer for their particular circumstances. In this particular case we presented different, yet competitive, and uniquely structured options for the borrower’s consideration.

Consider a Mortgage Broker when next in the market for financing, leveraging a Broker’s knowledge is a tremendous value proposition.

   

9 Reasons Why People Break Their Mortgages

Did you know that 60 per cent of people break their mortgage before their mortgage term matures?

Most homeowners are blissfully unaware that when you break your mortgage with your lender, you will incur penalties and those penalties can be painfully expensive.

Many homeowners are so focused on the rate that they are ignorant about the terms of their mortgage.

Is it sensible to save $15/month on a lower interest rate only to find out that, two years down the road you need to break your mortgage and that “safe” 5-year fixed rate could cost you over $20,000 in penalties?

There are a variety of different mortgage choices available. Knowing my 9 reasons for a possible break in your mortgage might help you avoid them (and those troublesome penalties)!

9 reasons why people break their mortgages:

1. Sale and purchase of a home
• If you are considering moving within the next 5 years you need to consider a portable mortgage.
• Not all of mortgages are portable. Some lenders avoid portable mortgages by giving a slightly lower interest rate.
• Please note: when you port a mortgage, you will need to requalify to ensure you can afford the “ported” mortgage based on your current income and any the current mortgage rules.

2. To take equity out
• In the last 3 years many home owners (especially in Vancouver & Toronto) have seen a huge increase in their home values. Some home owners will want to take out the available equity from their homes for investment purposes, such as buying a rental property.

3. To pay off debt
• Life happens, and you may have accumulated some debt. By rolling your debts into your mortgage, you can pay off the debts over a long period of time at a much lower interest rate than credit cards. Now that you are no longer paying the high interest rates on credit cards, it gives you the opportunity to get your finances in order.

4. Cohabitation & marriage & children
• You and your partner decide it’s time to live together… you both have a home and can’t afford to keep both homes, or you both have a no rental clause. The reality is that you have one home too many and may need to sell one of the homes.
• You’re bursting at the seams in your 1-bedroom condo with baby #2 on the way.

5. Relationship/marriage break up
• 43% of Canadian marriages are now expected to end in divorce. When a couple separates, typically the equity in the home will be split between both parties.
• If one partner wants to buy out the other partner, they will need to refinance the home

6. Health challenges & life circumstances
• Major life events such as illness, unemployment, death of a partner (or someone on title), etc. may require the home to be refinanced or even sold.

7. Remove a person from Title
• 20% of parents help their children purchase a home. Once the kids are financially secure and can qualify on their own, many parents want to be removed from Title.
o Some lenders allow parents to be removed from Title with an administration fee & legal fees.
o Other lenders say that changing the people on Title equates to breaking your mortgage – yup… there will be penalties.

8. To save money, with a lower interest rate
• Mortgage interest rates may be lower now than when you originally got your mortgage.
• Work with your mortgage broker to crunch the numbers to see if it’s worthwhile to break your mortgage for the lower interest rate.

9. Pay the mortgage off before the maturity date
• YIPEE – you’ve won the lottery, got an inheritance, scored the world’s best job or some other windfall of cash!! Some people will have the funds to pay off their mortgage early.
• With a good mortgage, you should be able to pay off your mortgage in 5 years, there by avoiding penalties.

Some of these 9 reasons are avoidable, others are not…

Mortgages are complicated… Therefore, you need a mortgage expert!

Give a Dominion Lending Centres mortgage specialist a call and let’s discuss the best mortgage for you, not your bank!

   

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