As we all slowly make our way out of the holiday season, I would like to take this opportunity to welcome you back to my blog series. In my last post, we provided steps in understanding some of the “partner-factors” in purchasing and closing on a new home close to the holidays. While there are many factors, the biggest personal factor that we did not touch on, is your personal finance credit.

So, what exactly is credit? Most of us see our credit as a tool for what we have available for financial use. This tool or availability of monies can be used to buy big-ticket items such as houses, cars, and help to assist in financing renovations or other necessities we might see fit.

How we define personal finance credit, in reality, might mean two different things to two different people and what their perspective is with regards to the credit tools they have available.

My definition is that personal finance credit is credit, either in the form of a loan or mortgage from a certified lender, that is used with the understanding of paying those monies back with future income earned over a set period of time, or amortization rate.

Why is this important compared to other forms of credit, such as a credit card or even a line of credit? The number one reason is that this part of your “Credit Portfolio” is susceptible to large increases or decreases of buying power while being the largest form of credit that you can use towards those large-scale purchases such as a house. With the housing market being as robust as it has been in 2020 if you’re looking to purchase in March of this year, it’s more important than ever to understand what can affect your personal finance credit and how you can fix it in a relatively short time. In some cases, in less than 90 days.

Credit Score:

I always advise my clients, that it is to their disadvantage to go into a new lending situation with a credit score of less than 680. With a credit score of less than 680, the amount of credit (Mortgage) a lender is willing to lend, could be upwards of $60,000. Why is that?

• $60,000 is equivalent to four percent of your Gross Debt Service (GDS) over the lifetime of that loan.
• Your pre-approval could take longer and is not necessarily guaranteed (Pre-approval, what does it really mean?) when looking to secure a house in a seller’s market this is less than ideal.

CMHC Stress Test:

The “Stress Test” was new to the mortgage world regulation, introduced by the Canadian Mortgage and Housing Corporation in 2018. It put in place requirements that insured mortgage lenders check that applicants will, if required, still be able to make payments based on higher qualifying rates. This stress test is done by calculating the Gross Debt Service (GDS) and the Total Debt Service (TDS) of a client. However, as mentioned in my previous blog post (Making sense of the unsensical), this could have a detrimental effect on individuals and households trying to move up to a larger home.

Credit Cards

One of the biggest misnomers for personal finance credit is that having a lower limit credit card will not affect your ability to get a mortgage from your lender. This is one of the mistakes that I regularly advise clients to move away from. One of the main reasons is that lower limit credit cards are typically overutilized as a credit instrument. What do I mean by that?

Example #1: Client A, with a $500 limit credit card, purchases only groceries on the card. They use the full amount of credit and pays off the balance monthly. However, when it came time to make create their application, their credit check showed as having a balance and overutilization of their credit.

Example #2: Client B, with a $3,000 limit credit card, purchases roughly $500 worth of groceries on their cards as well. They pay the balance off monthly as well. When they came to me to start their application, their credit check showed as having a balance; however, it also showed that their credit card as a credit instrument was under-utilized.

These are the big three that contribute, in most cases, to a less than ideal situation for lending. They can impact you the greatest when it comes to your purchasing power. So how do we fix this? Prior to my work in the Real Estate and Mortgage Brokerage industry, I helped clients navigate these challenges as a finance industry expert for a major institution in Canada, and below are my recommendations that can help you navigate these pitfalls.

Credit Cards:

• I always advise my clients that you need to pay your balance off monthly, or at the time of the purchase. This will contribute to a better credit score and when making a new mortgage application will increase your chances of pre-approval.
• If you have a lower limit card that is overutilized ($500 limit but is used fully), call your lender or credit card provider and ask them for a higher limit. **Disclaimer: While I’m not advocating for spending more on these cards, this strategy will allow you, along with paying off purchases quickly, to show that you are underutilizing your credit cards as a credit instrument. In the short and long term, this will allow you to increase your buying power on numerous fronts: House, car, vacation property, etc. while allowing you to increase your credit score.

Credit Score:

• If your score is less than 680 there are two ways to increase that score in as little as 90 days to six months.
• If you regularly go to a gym or have a regular payment with a company (Cable or Cell Phone) that charges no interest on monthly payments, sign up for a monthly payment plan. This can help to impact your score positively, in some cases increasing your credit score by 100pts in 90 – 120 days.
• If you have student loans that are still in the process of being paid off, make sure those payments are made on time
• Lastly, the big one that has come up with past clients, if you’re looking to finance a new or new to you car within the same time that you are looking to apply for a new mortgage or renewal, WAIT! In almost all cases, this purchase will drive up your Total Debt Service (TDS) and will negatively impact the applications. However, having a mortgage that is serviceable and at a lower TDS will allow you to get that car in the future. We will touch on that in a future blog spot!

CMHC Stress Test:

• First check to see if your lender or bank works with the two other insurance lenders in Canada, Genworth Canada, or Canada Guaranty. They have slightly different qualification requirements, as well as not having imposed the restrictions on new lending. This might allow you more room to maneuver throughout the application process.
• Ensure that your TDS is lower than 42%, which includes your current mortgage, credit cards, and any payments being made to service your debt. This will provide you with the ability to have more buying power in a 2020 market that has been bullish.

As we move forward with 2021, thankfully and with a positive outlook, if there is one thing I can say it is that I will ABSOLUTELY continue to support you and provide the best possible advice, whether you are looking to purchase a new home or renew your existing mortgage. Let’s hope that 2021 can ring a little brighter for all of us.

Visit us virtually and let me help you navigate your journey through the process at Karigares.com.

All the best and Happy New Year.

Kari

It is hard to believe that we are about to launch our 4th Mortgage Mechanics Video since we
started this adventure back in June. It has been full throttle with Sproing Creative – which
has been a good thing because blogging about anything Mortgage related is not necessarily
the most entertaining of subjects. What we have discovered is that many have a relative
understanding of mortgage lending but when it comes to Mortgage Terminology or
understanding the process, this is where we see a disconnect.

So our video series is designed to fill in the missing pieces. To bring awareness to what
“Brokers” do and what they can offer to their Community and to their clients. In essence,
we are bringing an educated series designed to help those understand the “little” things
that typically end up being bigger problems if not disclosed properly. How do we, as Brokers,
ensure that our clients have a good understanding of what their mortgage can or cannot do
unless we ask the necessary questions?

Here’s the problem: how do we make anything about mortgages entertaining? Let alone
speaking about Default Insurers. It’s a fairly dry topic so I will do my best to touch on a few
aspects that are important. Third party default insurance is required when any borrower,
whether refinancing, buying, or building, has less than 20% down. Now, you may think that
this premium you pay on your mortgage provides you with the benefit – and why wouldn’t
you when this premium could be thousands of dollars added to your mortgage. It would only
make sense that this means your Mortgage is insured to protect you. Unfortunately, this
Insurance is designed strictly for Mortgage Lenders. In Canada, “mortgage insurance is
required federally on high-ratio mortgages – that is, mortgages with a down payment of 20
per cent or less. This insurance, which protects the lender in case of borrower default, gives
lenders the flexibility to offer borrowers with low down payments the same low interest
rates they would offer to homebuyers with more equity”.

In the world of technology, many utilize Mortgage Calculators present on the internet to
calculate their mortgage payments. And why not – Google is now in the Oxford dictionary so
anything you find on Google must be correct! Have you ever had a client that was shocked
because the payment they acquired themselves online is much less than the payment we
actually end up with? The chances are, “yes”. These online calculators do not offer the
Default Insurance premiums nor do they explain when they are needed. They are a simple
tool designed to give you a payment based on a total mortgage amount, interest rate and
amortization schedule. So if you are not aware that CMHC, Genworth, or Canada Guaranty is
required, then you will be given a number that is not reflective of the whole. To see what the
premiums are – go to http://www.cmhc-schl.gc.ca/en/co/buho/buho_023.cfm This is a
great calculator that can be used to determine CMHC costs based on your purchase price less
your down payment. No more hidden surprises. If you are wanting to see what the
premiums are based on your level of down payment visit Genworth’s website:
http://genworth.ca/en/lenders/premium-rate-table.aspx

Now, there are some cases that default insurance, which is offered through CMHC, Genworth
Financial, and Canada Guaranty, will be applied regardless of the size of down payment. So
just because you have 20% down doesn’t mean that you can avoid these additional
completely! Some of these situations could be the purchase of a mobile home in a park.
Mobile homes require CMHC even if 50% is put down. This is because of the type of home
being financed and where the home is located.

I’ve had clients purchase larger size properties, usually 10 acres or more, that require
insurance. This doesn’t apply in every instance but the reason we look at it as a possible
financing policy is that most lenders will ONLY consider the home and surrounding 10 acres.
And for some lenders, it could be no more than 5 acres. So what does this mean? If the
Lender only considers 10 acres of land value but you have 50 acres then we are not valuing
the remaining 40. Consequently, we would be excluding 40 acres of value against the
appraised value which would mean that A. The borrower would have to come up with a much
larger size down payment, or B. We try using CMHC to obtain the value that we require.

In our area, we do see a significant aging population. We are known for our sunny skies,
warmer weather, mild Winters, Golf, Skiing beaches – you name it! With this, Developers
have constructed many developments that cater to a specific age group. Normally, these
developments are “age restricted”. If you are below age “55” then you need not apply! Due
to the nature of the development, Lenders will require default insurance because these
developments are typically seen as less marketable to the Lender, and therefore, the lender
would prefer to have security attached to the property. And this is by demanding default
insurance. Keep in mind, that this insurance is designed to protect the Lender. The more
insurance they have the more inclined they would be to finance a property that isn’t available
to every buyer’s market.

As you can see, Mortgage Lending is a cornucopia of twists and turns. Every client is unique.
Their personal situation will ultimately determine how we approach financing. And the same
goes for the property. This is why our role as a Mortgage Broker is to educate or clients – to
help them understand why their file requires a slightly different policy or product then their
neighbors. And yes, we do talk to our neighbors. We talk to our friends and family and co-
workers. We all want to make sure we are getting what they have received or what they tell
us we should receive. Everyone has an opinion BUT a Mortgage Broker’s opinion is not just
opinion. It is based on experiences, fact, and credibility. We are Professionals working for
you and only your personal circumstances can determine the course of action we will take.

Build dreams, Open doors.

Kari Gares
Okanagan Power Broker

One of the most challenging things about writing a blog about Mortgage Lending and general

Mortgage Terms is trying to not only keep it informative but entertaining as well. I’m fairly certain

that most would say that Mortgages are far from entertaining and probably fall somewhere

between mind-­numbing and down right scary.

 

This is one of the reasons why I decided to create a video series that is, hopefully, both

entertaining and informative. The entertainiment coming from a Broker trying to be a YouTube

sensation! Well maybe not a sensation….

Over the last few months, we have enjoyed many aspects of our new venture ­ our Mortgage

Mechanics Series. Sproing Creative has been amazing at piecing the process together: from

choosing locations, finding that perfect shot and chatting up the locals. Even Vernon Businesses

have been getting in on the action. I would say I had the easy role ­ writing the script and relaying

that information to the camera for all to see. Well ok, that part isn’t so easy but I’m sure we got a

few bloopers from it and maybe one day I would be brave enough to post it.

For this week, we decided to ask locals a very specific question about a Provincial Tax ­ the

Property Land Transfer Tax. The name itself seems to give it away but you’d be surprised as to

how many really do not know what it is. Unless you do your own research, you’ll need to rely on

your Realtor and Mortgage Broker to provide detailed information. The reason why it’s important

to understand this tax and how it is applied is because it could add thousands of dollars to your

final closing costs when you buy your home.

 

No one like surprises! I know that I don’t and we have tried very hard to ensure that my clients

can rely on the information I provide so they too don’t have surprises. So you may ask, “What is

the Property Transfer Tax (PTT), and how is it calculated? And, am I exempt”? As stated on the

Provincial Government site, PTT is charged “when you purchase or gain an interest in

property that is registered at the Land Title Office, you’re responsible for paying property

transfer tax”. Here is a list of taxable transactions:

∙ transfer of fee simple

∙ right to purchase or agreement for sale

∙ lease or lease modification agreements

∙ life estate

∙ foreclosure

∙ Crown grant

∙ escheat, forfeiture or quit claim

∙ transfer as a result of corporate reorganization

This tax is based on the fair market value of the property at the date of registration, unless you

qualify for an exemption. In order to be exempt, you must be a First Time Home Buyer. And no,

this doesn’t mean just in British Columbia. You must have never owned a home any where in the

world. The First Time Home Buyers’ Program reduces or eliminates the amount of property

transfer tax you pay when you purchase your first home. If you qualify for the program, you may

be eligible for either a full or partial exemption from the tax.

To qualify for a full exemption, at the time the property is registered you must:

∙ be a Canadian citizen or permanent resident

∙ have lived in B.C. for 12 consecutive months immediately before the date you register the

property or filed at least 2 income tax returns as a B.C. resident in the last 6 years

∙ have never received a first time home buyers’ exemption or refund and the property must:

∙ be located in B.C.

∙ only be used as your principal residence

∙ have a fair market value of:

∙ $425,000 or less if registered on or before February 18, 2014, or

∙ $475,000 or less if registered on or after February 19, 2014

∙ be 0.5 hectares (1.24 acres) or smaller

Now, there are certain grey areas or loop holes that will allow us to take advantage of this program

(exemption) in hopes of saving you money. Now, let’s say you are a couple and one spouse has

already owned a home and the other hasn’t. Under a basic Mortgage set up of Joint Tenants (50/50

ownership of the property with right of survivorship), you would only have to pay 50% of the

PTT. Example, a couple is purchasing a $450,000 home. The basic calculation of this tax would

be 1% of the first $200,000 and 2% thereafter. So, a $450,000 home would cost $7,000 which

would be added to your overall legal costs. BUT, because one spouse is PTT exempt, they would

only have to pay 50% of the $7,000 so only adding $3,500 to their costs.

1st Loop Hole:

Instead of registering the mortgage with Joint Tenants, we can actually register the

mortgage as Tenants­in­Common. The difference now lies in how the ownership is divided.

Instead of registering it as 50/50, we can actually provide 99% ownership to the spouse who would

be PTT exempt and only 1% to the spouse who is not. In this example, this couple would

responsible for paying $70 as opposed to $3,500. Now, it is best to seek the advice of your

Lawyer or Notary because this structure may have other implications but overall many choose this

direction to save those funds. My one major recommendation is to ensure that a will has been

created because if one spouse passes those shares DO NOT pass to the surviving spouse.

2nd Loop Hole:

Another creative way of putting the mortgage together when both spouses are

exempt is to potentially ONLY place one spouse on the Mortgage and Title. Now, this is always

dependent upon the Lender and Insurer as to whether they will allow this. If they do, and yes there

are many Lender that will, then we save one spouse for future purchases. This comes in handy

when the 1st home purchased is an entry level home such as a condo, apartment, townhouse etc.

Typically these style of homes have much lower purchase prices. So instead of using 100% of the

exemption on both spouses for a home valued at $200,000 or less, we use it on one and save the

other for their future property upgrade. This means you can actually purchase 2 homes instead of

one under this program. Now, that is some creative financing.

 

So, as you can see, our role is to not only establish the mortgage, but we should be addressing

these issues to ensure that we are doing everything possible to help save our clients money. Our

philosophy and mission statement is to Open Doors, Build Dreams and the only way to do this is

to do our homework, help educate our clients, and hopefully our Community.

Thank you Andrew McWilliam from Ratio Ratio Coffee
Thank you Britney Powell from Noir Salon
Thank you Chris Schmidt from Art Schmidt Optical
Thank you Chris Bader from Axis Intervention