What is a mortgage broker?

You may have noticed that there are many different terms for those of us who work in the mortgage industry besides “broker”.
Mortgage: specialist, expert, advisor, associate, officer, etc. I just want to clear up some potential confusion with all these monikers.
There are 2 main categories that these fall in to. Those that work for a bank to sell mortgage products available from that bank.
The other is for those like myself that work within a mortgage brokerage that has no direct affiliation with any one bank.
Each mortgage brokerage has agreements in place with multiple banks and mortgage lenders to be able to submit mortgage applications for consideration.
There are of course obvious differences between these but some may not be quite so apparent.

Mortgage Brokerage
All those working in the mortgage brokerage industry must be licensed by a provincial government agency, in Saskatchewan it’s called the Financial & Consumer Affairs Authority (FCAA).
While every province has their own set of guidelines, there are 3 different types of licenses offered by FCAA: mortgage associate, mortgage broker & principal broker.
The mortgage associate and broker are very similar as both advertise themselves to obtain clientele, work directly with the clients, mortgage lenders, mortgage insurers, realtors and lawyers in the service of their clients. The key difference is that an associate must work under a supervising mortgage broker to ensure they remain in compliance with FCAA regulations.
Each mortgage brokerage will have a principal broker (aka: broker of record) that oversees the operations of the brokerage as well as all the associates and brokers within the brokerage.
Most all those working in the mortgage broker industry are commission based. Our income is derived from the mortgage lenders that we submit mortgage applications to.

In order to apply for a license as a mortgage associate, applicants must complete an approved mortgage associate education course and provide a current criminal record check along with the required application documents.

Application for a license as a mortgage broker are the same as for an associate with the addition of a previous experience requirement.
The applicant must have been licensed as a mortgage associate for at least 24 of the previous 36 months.

In addition to annual applications for renewal, licensees must also:

• Purchase and remain in good standing with professional errors and omissions insurance
• Complete FCAA approved annual continuing education courses
• Provide FCAA auditors access to mortgage files for review whenever requested
• Advise FCAA of any changes to brokerage or contact information
• Immediately advise FCAA of any offences under the criminal code (other that traffic offenses)

Bank Branch Mortgage
Those that work in mortgage lending for a bank are normally paid by the hour or are salaried and may have a performance bonus structure.
Entry level positions do not require any education beyond high school. Training is provided on the job by the employer with supervision by the branch manager and more experienced staff.
There are no licensing requirements by any provincial or federal governing body and errors and omissions insurance is not required.
Many banks have mobile mortgage staff that may or may not conduct business within the branch and are often paid on a commission basis rather than hourly or salary.

If you have any questions, contact your Dominion Lending Centres Mortgage Broker near you.

5 Reasons Why You Don’t Qualify for a Mortgage

It’s not just because of finances.

As a mortgage broker I receive calls from people who want to know how to qualify for a mortgage. Most of the time it comes down to finances but there are other reasons as well.
Here are the 5 most common reasons why your home mortgage loan application could be denied:

1. Too Much Debt

When home buyers seek a mortgage, the words “debt-to-income ratio” quickly enters into the vocabulary, and it’s not without reason. Too much debt is a red flag to lenders, signifying you may not be able to handle credit responsibly.
Lenders will analyze how much debt you carry and what percentage of your income it takes to pay your debt. Debt ration is just as important as your credit score and payment history.
Two affordability ratios you need to be aware of:
• Rule #1 – GROSS DEBT SERVICE (GDS) Your monthly housing costs are generally not supposed to exceed 32% of your gross monthly income.
• Rule #2 – TOTAL DEBT SERVICE (TDS) Your entire monthly debt payments should not exceed 42% of your gross monthly income.

If you don’t have a good debt to income ratio, don’t give up hope. You have options available including lowering your current debt levels and working with your Dominion Lending Centres Mortgage Broker.

2. Poor Credit History

Some people don’t realize if they are late on their credit card/loan/mortgage payments the lender sends that information to the credit bureaus.
• Late/non payments on your credit report will make your score drop like a rock
• Exceeding your credit card limit, applying for more credit cards/loans will lower your score.
• Bankruptcy or Consumer Proposal will significantly impact your score, and stay on your credit report for up to 7 years.
Your credit history is a great way for a lender to tell whether you’re a risky investment or not. Lenders look not only at your minimum credit score, but also at whether you have a significant amount of late payments on your credit report.
Your Mortgage Broker will run your credit bureau to see if there are any challenges you need to be aware of.

3. Insufficient Income and Assets

With the high price of homes in the Vancouver & Toronto area, sometimes people simply don’t earn enough money to afford: mortgage payments, property taxes and strata fees along with their existing debt (credit cards, loans, lines of credit etc.).
You need to prove your previous 2 years’ income on your taxes with your Notice of Assessments (NOA). This is the summary form that the Federal Government sends back to you after you file your taxes, showing how much you filed for income and if you either owe money or received a refund.
If you can’t provide documentation to prove your income, then you will likely get denied for a home mortgage loan.
Some home buyers will need to provide more money for a down payment (perhaps a gift from their family) or try to purchase a home with suite income. In some cases, home buyers will need to add someone else on title of the home, in order to add their income to the mortgage application.

4. Down Payment is Too Small

A lender looks at the down payment as how much of an investment a buyer will be putting in their future home. Therefore, bigger is always better when it comes a down payment to satisfy your home mortgage loan application. Start saving now.
To qualify for a mortgage in Canada the minimum down payment is 5% for the purchase of an owner-occupied home and 20% for a rental property.
In Canada if you have less than 20% down payment, the federal government dictates that the home buyer must purchase CMHC Mortgage Default Insurance which is calculated as a percentage of the loan and is based on the size of your down payment. The more you borrow the higher percentage you will pay in insurance premiums.
For those with less than 20% down payment, the maximum amortization is 25 years, with more than 20% down payment 30-35 years (depending on the lender).

5. Inadequate Employment History

Most lenders will want to see a consistent employment history of 2 years when applying for a mortgage, because they want to know you’re able to hold down a job long enough to pay back the money they’ve loaned you.
To prove your employment, you will need to prove a Job Letter with salary details.

If you’ve been denied a mortgage, chances are it was because of one of the above five reasons. Don’t be deterred, with a little patience and some work on your end, you can put yourself in a position to get approved the next time you apply.

How to Pick the Best Mortgage for YOUR Situation!

Most Canadians are conditioned to think that the lowest interest rate means the best mortgage product. Although sometimes that is true, a mortgage is much more than just an interest rate. You can save yourself a lot of money if you pay attention to the fine print for the total cost of your mortgage.

In order to pick the best mortgage, you need to understand your options. This comes with mortgage intelligence, understanding how mortgages work and the pros and cons of the various options.
Once you’ve selected the type of mortgage, then you’ll need to shop for the most competitive option available to you and that means making some decisions based on your specific situation including:

• Are you planning to move in the next 5 years
• Will your family be growing/shrinking?
• Will your employment change and if it does will you need to relocate?
• Would thousands of dollars in penalties impact you if you need to break your mortgage?
• What types of debts do you have? Credit cards? Car loan? Student loan? Line of Credit?

Why do all this work? Because it will have a direct impact on your bottom line. A mortgage is made up of two parts—the principal and interest—you need to pay attention to how and when these parts get paid down. Ideally, you want to minimize your interest payments and maximize the principal payments.

New Government Stress Test Jan. 1, 2018 – whichever is the highest is how you must qualify for a mortgage.
• Qualify at the Chartered Bank Benchmark Rate (Government Rate) which fluctuates (currently 5.34%)
• OR the contract rate your lender gives you PLUS 2% i.e. 3.69% + 2% = 5.69%
• Since 5.69% is the highest – that would be the stress tested rate.
What this means to you is… if you have to qualify for a mortgage at a rate about 2% higher than the lender is giving you, your buying power decreases by about 20%.
To pick the best formula for your situation, you’ll first need to understand some of the factors that impact how much interest you’ll pay for your mortgage loan.

Understanding these 6 mortgage terms will help you make the best decision for your situation

Amortization

Amortization is a fancy word that means the “life of your mortgage” OR how long it takes to pay off your mortgage if you paid your mortgage for “X” years. The amount of your mortgage loan repayment is calculated based on a length of time you agree to pay off that debt. In Canada, the standard amortization period is 25 years.

• For a 30-year amortization you need a 20% or higher down payment
Picking the best mortgage is not just about qualifying for the mortgage. The amortization period is integral in the best mortgage decision because it will decide how much or how little interest you will pay during the life of the mortgage loan.
• The longer the amortization period (25 years vs 30 years) the more interest you will pay.
• Therefore, a shorter amortization period will lower your overall cost of borrowing BUT you must be able to afford the higher payments.
Once you’ve decided on your amortization, you will need to decide how frequently you would like to make your mortgage payments. Every mortgage payment (consisting of both interest and principal) will help reduce your principal (the amount of money you borrowed) and eventually reduces the overall interest you pay on this loan.
• Monthly, bi-monthly, accelerated bi-weekly or weekly mortgage payments.

Term

In the 1980’s mortgage interest rates were as high as 22%. Interest rates can change over time therefore, lenders don’t want to negotiate a 25-year loan at 4% interest if the interest rates go up to 10% in 5 years. To avoid the risk, lenders break your mortgage amortization into smaller terms.

• The term is shorter than the amortization period and locks you into your pre-negotiated rates during that time.
• The length of term you choose (most Canadians choose 5 years) will depend partly on if you think interest rates will rise or fall. Typical terms are: 1, 2, 3, 4, 5, 7 & 10.

About 3-6 months before your current term matures, your current lender usually sends you a renewal notice with options on rates for the various terms they offer (typically 1 to 10 years).
Once you get your renewal notice, you need to contact your mortgage broker to ensure you’re choosing the best option for your situation.

Closed Mortgage

A closed mortgage usually offers the lowest interest rates available.
Closed mortgages cannot be paid off before the end of its term without triggering a penalty. Some lenders allow for a partial prepayment of a closed mortgage by increasing the mortgage payment or a lump sum prepayment.

• If you try and “break your mortgage” or if any prepayments are made above the stipulated allowance the lender allows, a penalty will be charged.

Open Mortgage
An open mortgage is a more flexible mortgage that allows you to pay off your mortgage in part or in full before the end of its term without penalty, because of the flexibility the interest rates are higher.

• The interest rates for an open mortgage are typically 3-4% higher than a closed rate mortgage.
• i.e. a home buyer could pay 6.99% for a 5-year open mortgage vs. 3.99% for a five-year closed mortgage.
If you plan to sell your home soon or expect a large sum of money, an open mortgage can be a great option. Most lenders will allow you to convert from an open to a closed mortgage at any time (and switch you to lower rates).
Fixed mortgage – you have the same payment for the term of the mortgage

Variable mortgage – the mortgage rate and your monthly payments will vary depending on the Bank of Canada rate (Prime)

Fixed rate:
• Pro – you would have the same mortgage payment for the entire term of the mortgage
• Your mortgage payments are not affected by Bank of Canada Rate or Canadian Bond Yield
• Think of fixed rate as an insurance policy – you pay a premium to guarantee “fixed” rates for the balance of the term

• Pro – can port a fixed mortgage
• Con – higher interest rates
• Con – MUCH higher penalties if you need to break your mortgage (can be 4-5% of outstanding balance with Banks/Credit Unions)
• 60% of home owners, break their mortgage before it matures!
• Conclusions: How much does it cost to break a mortgage?

Variable rate:
• Pro – lower rates than the Fixed Rate – you would pay less now that you would for a Fixed Rate mortgage
• Pro – Penalty for breaking is 3 months interest (about 0.5-1% of outstanding balance).
• Pro – you can lock into a fixed rate mortgage (assuming your mortgage is in good standing) at any time, based on the amount of time remaining on your mortgage and the current posted rates.
• i.e. If you have a 5-year variable mortgage and you want to move to Fixed after 2 years, you would lock into the lenders current 3 year fixed posted rate
• Con – Cannot port a variable mortgage
• Con – Mortgage payments will increase/decrease based on the Bank of Canada rate – currently 1.75% and the lenders prime rate = Prime is currently 3.95%
• Bank of Canada meets 8 times a year
• Every 0.25% increase with the lender Prime rate will cost you an extra $13/$100,000 borrowed. i.e. $300K mortgage = will be about $39/month more/less

The best way to decide on the best mortgage is to contact your friendly neighbourhood Dominion Lending Centres mortgage broker. Mortgages are complicated, but they don’t have to be… Engage an expert!