Mortgages: Business for Self
With this article we will look at some common scenarios and solutions when looking for a mortgage as a self employed individual. You can also view the video here)
There are multiple ways and structures that self employed individuals use for paying themselves (salary, dividends, commissions, business income). First we will break down how the bank generally qualifies BFS income within these categories.
Salary (referring to a T4 from your owned corporation)-
Banks will look at the most recent 2 years of personal notice of assessments and T1 generals AND they will look at the last 2 years of corporate tax filings and financials to ensure that the corporation is able to sustain paying the salary (a healthy company).
Dividends (referring to dividends from your owned corporation)-
Banks will look at the most recent 2 years of personal notice of assessments and T1 generals AND they will look at the last 2 years corporate tax filings and financials to ensure that the corporation is able to sustain paying the salary (a healthy company).
Commissions-
Banks will look at your most recent 2 years of personal tax filings and notice of assessments to determine your average net earnings. In some cases the banks will look at "adding back" logical expenses that were deducted when applying your write offs.
Business income-
Banks will look at your most recent 2 years personal tax filings and notice of assessments to determine your average net earnings. In some cases the banks will look at "adding back" logical expenses that were deducted when applying your write offs.
With the above income structures, you must be able to show the bank that your income is stable AND that it will sustain payments for the amount of loan you are applying for. With this, you can still apply for a loan with as little as 5% down payment (assuming your credit is acceptable to the bank).
In the scenario where the income that you are showing does not qualify you for sustaining the amount of mortgage you are applying for you call under a category called Stated Income
With stated income, there are 2 options. Between 10% and 34.99% down OR 35% or more
If you are looking for a "stated income BFS mortgage" with as little as 10% down, you can do so if:
- Minimum 5% down is from own savings
- Other 5% can be gifted NOT BORROWED
- Over 680 beacon score
- Stated income is acceptable by the bank based on your industry (income must be logical)
- minimum 2 years self employed
- no bankruptcies, consumer proposals
- no missed payments in last 12 months
- no income tax arrears
- Loan will be subject to CMHC fees
If you are looking for a "stated income BFS mortgage" with 35% down or more, you can do so if:
- Down payment must be from own savings
- NOT BORROWED down payment
- Over 650 beacon score
- Stated income is acceptable by the bank based on your industry (income must be logical)
- minimum 2 years self employed
- no bankruptcies, consumer proposals
- no missed payments in last 12 months
- no income tax arrears
- must show 12 months savings in the bank (on top of down payment) to cover mortgage PIT (principle, interest and taxes)
Home Renovations That Pay Off
Homo Reno ROI: Renovations that pay off
Not all reno projects will hit the jackpot, but the right improvements can certainly help boost the value of your home. Even if you are renovating for personal reasons only, it makes good sense to understand how that investment might payback in the value of your home. Here are five renovations that consistently provide a good return on your investment:
Updated kitchen - From refreshed cabinet fronts and new hardware to a full-on renovation with new appliances and flooring, your kitchen renovation will be noticed by buyers.
A sparkly bathroom – Bathroom renovations are among the most reliable in terms of boosting the overall value of your home. Popular mid-range renovations could include modern showerheads and faucets, and an attractive new sink and counter top.
Fresh painting - Whether it's inside or outside, a fresh coat of paint can work wonders on the overall impression of your home. The experts consistently agree that painting pays. Light and mid-range neutrals tend to appeal to the widest range of prospective homebuyers.
The efficient basement - An unfinished basement is just an opportunity waiting to be exploited and a great way to increase the value and square footage of your home!
Energy efficiency - Upgraded heating and air systems are always good, and provide immediate savings on your energy bill. New energy-efficient doors and windows will spruce up the appearance of your home.
If you’re thinking renovation, let’s talk. We can help you finance your reno so you can maximize your ROI.
Bank of Canada Announcement April 12 2017
Bank of Canada interest rate announcement
As widely predicted, the Bank of Canada announced today that it is holding the key rate steady. While noting that “economic growth has been faster than expected”, the bank said it’s too early to determine if the economy is on a “sustainable growth path”, citing weakness in export growth, business investment and employment. The Bank’s three measures of core inflation, taken together, continue to point to material excess capacity in the economy. While there have been recent gains in employment, little growth in wages and hours worked continue to reflect economic slack in Canada, in contrast to the United States.
The bank also took into account uncertainties that include the potential impact of U.S. trade policies. The next rate-setting day is May 24.
This announcement means there should be no change to the prime rate. Great news if you have a variable-rate mortgage or line of credit, need a new mortgage, are renewing, or want to save thousands by consolidating debt at the lowest-cost funds. Or perhaps you are thinking of using home equity to invest in a rental property or second home, or cost effectively complete renovations.
Given the uncertain economic outlook, we continue to expect interest rates to stay low in Canada well into 2020, although the new mortgage rules have caused mortgage rates to be very complicated. Quick rate quotes are not very reliable! That’s why it’s so beneficial to work with an experienced mortgage broker who has access to a wide range of lenders and knows the right questions to ask to assess your situation and provide the best mortgage for your needs. Save yourself time and stress; don’t just ask what the rate is, have a conversation instead
Just bought a house? Pass on TFSAs and RRSPs to pay down your mortgage
Recent home buyers, your financial priority for the next few years is clear.
Pay down your mortgage. Give the tax-free savings account and registered retirement-savings plan a brief rest and pay down your mortgage.
I contradict myself here. In a June, 2014 column, I argued that people were obsessing over paying down their mortgages in a way that could cause them to neglect retirement savings. Now, particularly in high-priced cities such as Toronto and Vancouver, mortgages are the more serious worry.
High prices mean big mortgages and serious vulnerability to higher mortgage rates. Ease the financial strain of having to renew a mortgage at higher rates by paying down your mortgage as soon as you can after you buy.
Paying down your mortgage is usually thought of as a way of saving on interest costs. As you chip away at the principal on your mortgage through prepayments, you reduce the amount of interest charged over the life of the loan.
David Larock of Integrated Mortgage Planners says he sees the most eagerness to make mortgage prepayments from people who are close to the end of their mortgages and keen to be done. But from the perspective of saving on interest, there’s little gain from killing off a nearly finished mortgage because payments are almost entirely principal rather than interest. “Prepayments in the first few years have the most powerful effect on the interest you pay over time,” Mr. Larock said.
You can cut your long-term interest costs by making a prepayment early in a mortgage, and you protect yourself against rising rates. Mr. Larock was good enough to work through an example of how this works. We start with a $500,000 five-year fixed-rate mortgage with an interest rate of 2.5 per cent and a 25-year amortization. Your monthly payments with this mortgage are $2,240.
Let’s look at what might happen to this hypothetical mortgage if the best rate you could get on renewal was 3.5 per cent. Using a 20-year amortization (remember, you’ve paid off five years of your mortgage), your payments would rise by $209 a month to $2,449.
Want an affordable plan for limiting the payment shock on this mortgage, and reducing the amount of interest you pay over the life of the loan? Try making prepayments of $3,000 annually over each of the five years of the mortgage term. If you do this, your payments on renewal of your mortgage at 3.5 per cent would be just $118 higher at $2,358 a month.
A long-term benefit of your prepayments would be having the mortgage paid off a year sooner, Mr. Larock’s numbers show. You’d also save $6,908 in interest over the life of the mortgage. This estimate is based on paying 2.5 per cent for the first five years of the mortgage, and then 3.5 per cent for the remaining 20 years.
A lesson for home owners in the past six months or so is that there are two big drivers of mortgage-rate increases. One is what happens to rates in the bond market, which are influenced by what’s happening in the economy both here in Canada and in the United States. A stronger economy suggests higher mortgage rates.
The other driver of rates is mortgage regulation. We’ve recently seen changes that make it more expensive for mortgage lenders to do business, and these higher costs have been passed down to borrowers in the form of higher mortgage rates.
Both of these factors have combined to push mortgage rates a bit higher in the past several months, and we could see further increases in the months and years ahead. After eight years where rates were mostly flat or declining, this warning may sound like dismissible nagging.
Why bother paying attention now? Because, the prices people are paying for homes these days are stunningly high in some cities. People have to borrow more to afford these homes, and that means their mortgages are getting bigger. The more you owe, the harder the adjustment if your payments spike higher on renewal at a higher mortgage rate.
The usual test of whether it’s better to pay down your debt or invest is whether you can earn a rate of return that is higher than your cost of borrowing. It’s not hard to beat today’s mortgage rates as an investor, but never mind that. Paying down your mortgage today is about easing financial stress at your house when interest rates rise.
source: http://www.theglobeandmail.com/globe-investor/personal-finance/household-finances/protect-against-higher-rates-pay-down-your-mortgage/article34459847/
What is up with 0 down payment?
What’s up with zero downpayment? For some, it can make all the difference.
Many Canadians are not aware that zero down is alive and well and offered by a handful of excellent lenders to qualified borrowers. Of course, you have to wonder if zero-down can possibly make good financial sense. The answer, as ever, is both yes and no.
A zero-down mortgage is not for everyone – but for well qualified homebuyers, a zero-down plan can get them into their homes faster, saving potentially thousands in rent, and providing a jump start on building wealth.
If you have excellent income and credit, and the ability to manage your mortgage payment and ongoing housing expenses comfortably within your budget, then you could be a candidate for a zero-down mortgage. Consider that the money currently going to rent could be helping you build home equity right now, and that we continue to be in a period of historically low interest rates.
So how can you get around saving that critical minimum downpayment required to qualify for an insured mortgage? You can borrow the downpayment from a line of credit, personal loan or family member. With excellent credit and stable income, your interest rate will be fully discounted. The loan payment of course will be used in your qualifying calculation, and your mortgage insurance premium will be higher. You’ll also need to have funds set aside to cover your closing costs.
Want to learn if you qualify to purchase now without waiting, how to build your downpayment faster, or the steps you can take to improve your credit rating so you qualify for a great rate when the time comes? Let’s talk!
What lies ahead of Canada’s rental market?
The Canadian real estate market went through a rough stage in 2016 as housing prices reached record levels and with this year also expected to be sizzling hot, it is difficult to determine the future of Canada’s rental market. To bring to light the extent at which the housing market is growing, figures from the fourth quarter indicates the Canadian Real Estate Association Price Index rose from 184 to 208.9 with the overall number of sales increasing by 6.3%. Home buyers were definitely aware of the implication of this figure through the high home prices. But similarly to the beginning of every market year, experts are going all out to urge for measures to control the real estate market to return to normalcy. Additionally, predictions have also become a normal part of the real estate market with various projections being made every year.
From what we are expecting to see this year, it goes beyond doubt that the provincial and federal governments will be introducing more regulations to address the current housing situation. Toronto in particular will definitely see new mortgage rules but generally, there is no expectation of a market crash. However, compared to last year, there is an expected 3.3% decline in sales activity but this not take away the fact that home prices will remain high. An even if home prices are to decline, people should not expect to be a see a drop in rental prices but prices will remain stable and modest. Tightened mortgage rules is someone that is clearly expected in Toronto but tougher mortgage regulations in the real estate market will most likely be reflect in the rental cost.
Despite the hot real estate market in Ontario the demand to live in the city continues to rise with the current vacancy rate at 1.5%. The increase in job opportunities serves as an attractive for many to desire to live in the city. This has led to serious bidding wars for the available rental units in the growing population. Aside from other home types, condo home types have become a major hit amongst renters with the average condo rent rising by 12% by the end of 2016 with a 34% increase in condo sales of almost 30,000 new condos. The increase in interest on condo properties is because they are more affordable than other home types. This year is also going to see an increase in construction of new homes across the country as the demand for low-rise homes on the increase. But while many might think a higher level of supply will cut down on rental costs, but far from this the value of new units will be added as the worth of existing units fade away.
Interest rates in Canada is also expected to hike thanks to the influence of the U.S.as interest rates continues to increase in the U.S it implies higher costs for property owners in Canada. the demand for rental units in Canada is also expected to increase if the U.S maintains its immigration policies. This will have significant implications for renters. Finally, there is a high chance for those looking forward to a bubble burst to see prices return back to normal. To some extent, home prices are expected to slow down as there is little projection of a third consecutive record-breaking year.
Source: http://hibusiness.ca/2017/03/29/what-lies-ahead-of-canadas-rental-market/
What is an interest saving mortgage?
What is an interest-saving mortgage?
One of the problems in the mortgage industry is the way mortgages are advertised: usually by rate. If an online rate says 1.9%, chances are homebuyers are going to check it out.
What many don’t realize is that saving interest is what saves money over the long term, and that rate is only part of the story. On a $500,000 mortgage, a rate of 0.1% lower does not even equate to a savings of $500 a year. The right mortgage however can save you MUCH more than that.
Saving interest is the key to pounding down your debt and building your wealth. That means that – yes, we look at rate – but the real savings result from the little things you don’t see with an advertised rate: like finding the right combination of options, privileges and payment schedules to maximize your savings.
For example, drop a few hundred dollars against your mortgage principal once in a while and you could save thousands in interest and shave years off your mortgage. That’s because if you knock down the principal even a little, every dollar you pay after that will go further.
Mortgage contracts are full of devilish details that make winners and losers of Canadian homebuyers. Rates are just the lure. Generally, the lower the rate, the bigger the catch.
With more than 50 lenders – including most of the major banks – I can build you an interest-saving mortgage. Together we’ll look at:
- Prepayment privileges: those options that can help you slam down your debt by increasing your payments and/or putting down lump sums.
- Portability. Unless you’ll be there for good, you’ll want favourable rates and terms should you want to port your mortgage from one property to another.
- Fees for breaking the mortgage. This is a big one: there can be substantial differences between lenders. Remember life happens. If there’s even a chance you’ll need to break your mortgage, going with a lender that has reasonable fees can save you thousands.
- Minimizing all restrictions and fees as much as possible.
These key mortgage features don’t fit in a rate ad. But trust me… this is where the rubber hits the road in building the right mortgage.
Catch yourself looking at low online rates? Time to come in for a chat; let’s have a conversation about building your custom interest-saving mortgage!
Less Mortgage? Higher Rates? What Gives?
Less mortgage. Higher rate. What gives?
Think that mortgage rates are suddenly very confusing? It’s not your imagination. New Canadian mortgage rules have changed the way lenders operate in Canada. The good news is that you’re in good hands; I will help you understand what’s changed, and can get you a mortgage under those rules that is right for you.
Here’s a quick explanation of what’s going on with Canadian mortgages right now.
Firstly, understand that there are different kinds of lenders: big banks, small banks, and a wide range of non-bank lenders. As a mortgage broker, of course, I work with them all. But their business models are different, and that’s a clue to what’s going on in the market.
Think about where the money comes from when your lender gives you a mortgage. The banks – both big and small - get money from deposits. They have the ability to loan from their deposits, and hold the mortgage for the full term if they choose. They’ve got money coming in, so they can invest in money going out: like a mortgage. It’s called “balance sheet lending”. And it comprises some – but not all – of their mortgage business.
Non-bank lenders don’t take deposits so they get their money from investors in the financial marketplace. When they fund a mortgage, they will “securitize” it, and sell it off to an investor. That process gives them their supply of funds. It’s smart business. It’s so smart, that the banks do it too for some of their mortgages.
The new mortgage rules are designed to protect the housing market and the financial well being of Canadian homeowners. But they reflect a different approach to risk, which has resulted in pricing changes, even for the best clients.
Homebuyers who are looking to borrow less than 80% of the value of their home are dream clients for a lender. But an LTV of less than 80% is a magic threshold for clients because they no longer need to pay for “default insurance”. So lenders would purchase bulk insurance on these mortgages, which was inexpensive and kept investors happy. Last October, however, new rules made insuring these low LTV mortgages much more costly. And refinances and certain other mortgages are not even eligible for insurance anymore. Suddenly, mortgage lenders have more risk and/or higher costs.
For the mortgages that banks hold on their own balance sheets, the new rules had another wrinkle: the requirement to set aside more capital to use in case there are losses in the mortgage market. That’s money safely tucked away – and not available to invest. For a bank, that’s a lost opportunity that affects the bottom line.
You can guess the rest - any extra cost, risk or lost opportunity for the lender… are passed along to you through a higher rate.
That doesn’t mean that you are a less worthy borrower than you were a year ago. The lenders are still incredibly sound, and your perfect mortgage is still out there. Mortgage pricing is just more confusing and getting an expert working with you is now more important than ever!
Reminder: CMHC Fee Increase Tomorrow
CMHC to Increase Mortgage Insurance Premiums
OTTAWA, January 17, 2017 — CMHC is increasing its homeowner mortgage loan insurance premiums effective March 17, 2017. For the average CMHC-insured homebuyer, the higher premium will result in an increase of approximately $5 to their monthly mortgage payment.
“We do not expect the higher premiums to have a significant impact on the ability of Canadians to buy a home,” said Steven Mennill, Senior Vice-President, Insurance. “Overall, the changes will preserve competition in the mortgage loan insurance industry and contribute to financial stability.”
Capital requirements are an important factor in determining mortgage insurance premiums. The changes reflect OSFI's new capital requirements that came into effect on January 1st of this year that require mortgage insurers to hold additional capital. Capital holdings create a buffer against potential losses, helping to ensure the long term stability of the financial system.
During the first nine months of 2016:
- The average CMHC-insured loan was approximately $245,000.
- The average down payment was approximately 8%.
- The average gross debt service ratio (GDS) was 25.6%. To qualify for CMHC insurance, a homebuyer’s GDS should not exceed 32% of their total monthly household income.
| Loan Amount | $150,000 | $250,000 | $350,000 | $450,000 | $550,000 | $850,000 |
| Increase to Monthly Mortgage Payment | $2.82 | $4.70 | $6.59 | $8.47 | $10.35 | $15.98 |
Based on a 5 year term @ 2.94% and a 25 year amortization
*Premiums in Manitoba, Ontario and Quebec are subject to provincial sales tax — the sales tax cannot be added to the loan amount.
Premiums are calculated based on the loan-to-value ratio of the mortgage being insured. The premium can be paid in a single lump sum but more frequently is added to the mortgage principal and repaid over the life of the mortgage as part of regular mortgage payments. Additional details and scenarios are included in the backgrounder below.
CMHC regularly reviews its premiums and sets them at a level to cover related claims and expenses while also reflecting the regulatory capital requirements.
CMHC is Canada’s most experienced mortgage loan insurer. Our mortgage loan insurance enables Canadians to buy a home with a minimum down payment starting at 5%. As a Crown corporation, CMHC is the only mortgage insurer whose proceeds benefit all Canadians.
As Canada’s authority on housing, CMHC contributes to the stability of the housing market and financial system, provides support for Canadians in housing need and offers objective housing research and information to Canadian governments, consumers and the housing industry.
For additional highlights please see the attached backgrounder.
- CMHC’s standard mortgage loan insurance premiums will be changing as follows:
Loan-to-Value Ratio Standard Premium (Current) Standard Premium (Effective March 17, 2017) Up to and including 65% 0.60% 0.60% Up to and including 75% 0.75% 1.70% Up to and including 80% 1.25% 2.40% Up to and including 85% 1.80% 2.80% Up to and including 90% 2.40% 3.10% Up to and including 95% 3.60% 4.00% 90.01% to 95% - Non-Traditional Down Payment 3.85% 4.50%
Down payment between 10% and 14.99% Loan Amount $150,000 $250,000 $350,000 $450,000 $550,000 $850,000 Increase to Monthly Mortgage Payment $4.94 $8.23 $11.52 $14.81 $18.10 $27.98 Based on a 5 year term @ 2.94% and a 25 year amortization
Down payment between 15% and 19.99% Loan Amount $150,000 $250,000 $350,000 $450,000 $550,000 $850,000 Increase to Monthly Mortgage Payment $7.06 $11.75 $16.46 $21.16 $25.86 $39.96 Based on a 5 year term @ 2.94% and a 25 year amortization
- During the first nine months of 2016
- Nearly 50% of CMHC’s transactional mortgage loan business were for loans of less than $300,000
- Nearly 95% of CMHC’s transactional mortgage loan business were for loans of less than $600,000
- Less than 1% of CMHC’s transactional mortgage loan business were for loans of more than $850,000
- CMHC follows OSFI guidelines for federally regulated mortgage insurers in Canada.
- Calculating the gross debt service ratio (GDS) allows potential homebuyers to estimate the maximum home-related expenses they can afford to pay each month.
GDS = Principal + Interest* + Property Tax + Heat
Monthly Income
*Interest is calculated using the qualifying rate
- Mortgage loan insurance helps protect lenders against mortgage default and enables consumers to purchase homes with a minimum down payment of 5% with interest rates comparable to those with a 20% down payment. Mortgage loan insurance is typically required by lenders when homebuyers make a down payment of less than 20% of the purchase price.
- CMHC’s new premium rates will be effective for new mortgage loan insurance requests submitted on or after March 17, 2017. The current mortgage loan insurance premiums will apply for applications submitted to CMHC prior to this date, regardless of the closing date. As is normal practice, complete borrower and property details must be submitted to CMHC when requesting mortgage loan insurance.
- The changes do not impact mortgages currently insured by CMHC.
Source: https://www.cmhc-schl.gc.ca/en/corp/nero/nere/2017/2017-01-17-0830.cfm