Mortgage 101 – Alternative Ways To Get A Mortgage | August 7, 2023

In this edition of Mortgage 101, Clinton Wilkins and Todd Veinotte are discussing the various alternative ways to get a mortgage. They talk about the stress test, utilizing multiple borrowers and more.

Todd Veinotte 00:04
Let’s have a conversation. The stress test. This is something that is obviously very important in mortgage lending. And I would think now with mortgage rates where they’re at, it’s a good time to have a new conversation with the stress test.

How does the stress test work?

Clinton Wilkins 00:18
Yeah. 100%. So the way the stress test works is we qualify people on a rate that is 2% higher than their contract rate. Which you know what that means? Because the rates are higher, the rate that we have to qualify you on is even higher than what you had to qualify on before. So right now, the posted rate we’ll call it is 5.25. So that’s what we use to qualify people on. It was 5.25 or contract rate plus 2%, which is ever higher. So right now everything is plus 2%. So a good five year fix for a high ratio insured mortgage today is somewhere around 5.34. So we’re qualifying people on 7.34 or higher. If people want to get a HELOC, we’re qualifying them on a rate of 9.7%.

Todd Veinotte 01:06
Okay, so the fundamental reason for that is what?

Clinton Wilkins 01:10
You need to be able to sustain these higher rates. So the people that are experiencing higher rates today, likely qualified at a rate of around 5.25, so we’re rate up on that rate, or a little bit higher. So we know that even though the rates are higher, people should still be able to afford their mortgages. And by and large Tod, people are still affording it. Yes, people are feeling the pinch. But Canadians typically make their mortgage payments. So the people that are qualifying right now, we are basically deeming that they can afford their mortgages up to a rate at like 7 or 8 or 9%. And the reason that it’s so important, is basically the government thinks that we are protecting, you know, the borrower from themselves. People have an unsatiable taste for credit and access to credit and and, you know, buying a home or refinancing the most they possibly can. And it’s putting a constraint in place, saying, hey you can only afford up to this amount. Right. Yeah, so obviously, you’re you’re pushing more and more people out of the out of the housing market, though, because you’re looking at obviously – People don’t qualify or they qualify for less.

Average Income for buying a home in Halifax

Todd Veinotte 01:56
What’s kind of the average income that you’re seeing for somebody, when they’re coming in? Let’s say somebody but and they’re, they’re putting down, the say they’re single, well, how much money does somebody need really to be making in order to even start to be having a mortgage conversation?

Clinton Wilkins 02:35
I think if you’re buying an average home in Halifax, and it’s around $500,000, if you’re putting down 20%, that’s $100,000. And then your mortgage is $400,000, you need somewhere around $100,000 a year of annual income to make that work. So imagine if you are doing a high ratio purchase and only putting down 5%, you need to have a lot more income to make that work. And they the constraints on a high ratio mortgage are much more stringent than they are if you put down 20%. If you put down 20%, we’re a little more liberal with the ratios. Typically, sometimes we can get an exception, there’s lenders that will allow us to go up to a higher level of debt servicing. But if you’re putting down less than 20%, it needs to fall in the guidelines. Because it’s insured by really the government, it’s insured by the Canadian Mortgage Housing Corporation, Sagen and or Canada Guarantee. So I think, you know, obviously, if you’re planning on putting that down less than 20% Be prepared that the stress test is going to be even more important. And you really have to fall in line within those guidelines. And even like .01 over they’re like, nope, not doing not.

Todd Veinotte 03:35
So the dynamic of people and, coming in for that and let’s say they’re single, you were talking about friends or going in on mortgages together, or there’s a couple of plus somebody else.

Utilizing multiple borrowers help get you into the real estate market

Clinton Wilkins 03:47
Yeah like I’ve had a bunch of people where it’s been like three borrowers on a mortgage application. I had one actually, just recently it was a couple and a friend and they bought this property together and happen to be a two unit. I’m not giving anyone’s personal information, just general here. And we needed all three incomes to make this work. They all had a little bit of money, they were able to make up the downpayment, and we actually did a high ratio purchase, you know, they put down that minimum amount. I think the purchase price, maybe it was around $600,000. And they put about $30,000 down or so. And I think was $35,000 down that’s how much they put down and they were able to make it work. And they did a cohabitation agreement, everyone was happy. Everyone knew what was going to happen if one person wanted to exit the situation or if there was a breakup or whatever. But they were able to make it work. And they were able to get a two unit property and none of them could qualify on their own. But they could certainly qualify together. And it was their way to say, hey Clinton, this is not forever. We know this is not super conventional. But maybe it will be forever who knows. We want to get into the property market. We want to have our pride in homeownership. We want to build some equity. We want to improve this property and someday down the road we want to sell it, then potentially buy another property. But if we don’t get into the property market today, we may never get in. And you know what I agreed with them. I thought it was great. And they came to me with this situation, it wasn’t me, you know, giving a pre approval for one of them and say, now you need to go find a signer. They came to me all together and said, Clinton, this is what we want to do. Do you think this is possible? And do you think this makes sense?

Todd Veinotte 05:22
Do all three have to have the really great credit? Or could one perhaps not have as good a credit scenario as the others?

Does credit matter?

Clinton Wilkins 05:29
I mean, I think if you’re doing a high ratio mortgage, you want to have good credit, you know. I certainly see situations every day like I have a situation right now, where one borrower has perfect credit, and the other borrower honestly has terrible credit. And I say terrible, but it’s terrible, because they don’t have a lot. And you know what, I was able to get an exception, we were able to do it, but they have a big, big down payment. I think they’re putting down like more than 35% down and we were able to get a bank lender to approve it. They’re like, yeah, we’ll do it. Give us 6 months of their bank statement showing that they’re paying their rent on time. And cool, you can get your mortgage. And, you know, I think that’s what the power of going to an unbiased mortgage professional like us is really, you know, we can look at it. And I think if you want and you walked into another lender, there’d be like, No, you can’t be approved. You have a terrible credit score, like, go away.

Todd Veinotte 06:16
Yeah see, that’s something that I hadn’t really thought about. If somebody puts a large a big downpayment down, and they end up defaulting on that mortgage, they lose all that money, correct?

Missing mortgage payments

Clinton Wilkins 06:27
Well, not necessarily if they do default. But normally, when people put down a big down payment, and if they have a bad situation, or a challenging situation, you have to go to an alternative lender. Yeah, this was a situation I got approved with a bank lender. Prime, regular good rates, everything. But in a foreclosure situation, what happens if you stop paying, making your mortgage payment, it will go into a foreclosure lawyer will be hired by the bank, go through the process, get a foreclosure order, and then the house eventually would be sold? What will happen is whatever it’s sold at for auction, less how much you owe less your penalty, less the legal fees than you would be given. But magically, it just gets old enough for everyone to get paid, except the borrower.

Todd Veinotte 07:12
Is that how, do they do it that way?

Clinton Wilkins 07:14
People go to auction unless people are bidding it up bidding. They kind of know what the minimum is that they need. And they’ll take it. Yeah, all they want is a minimum. They’re not looking to make their borrowerthat defaulted on, you know, getting any money back. And I think that if you put down that much money, you’re probably going to make your mortgage payment, or things are going sideways, you’ll probably sell your home.

Todd Veinotte 07:37
And that’s why the, that’s obviously why the lender would –

Clinton Wilkins 07:41
Whatr birds did we reference our last show? That sticks their head in the sand?

Todd Veinotte 07:45
The ostrich?

Clinton Wilkins 07:45
The ostrich. Don’t ostrich people. Don’t ostrich.

Todd Veinotte 07:48
So that’s obviously why when lenders look at the risk tolerance, they say, okay you’re putting down a big chunk of change, obviously, you get a lot of skin in the game. And that’s why they’ll be more flexible with some of these other nuances that you just described.

Alternative solutions to getting a mortgage

Clinton Wilkins 08:01
Yeah, like this, this borrower, one had good credit, one had bad credit, I think they put down like 40% or 50% on their purchase price. And I’m like, I’m pretty sure I can get this done on the prime, in the prime world. And I think sometimes we just automatically as like mortgage lenders, mortgage brokers think like, okay, the customer’s situation, isn’t that good. We need to go with an alternative solution. I always like to think that if I can make this work, I want to give clients the best possible borrowing situation first. And then if it doesn’t work that way, sure sure, go to an alternative lender. But I think sometimes even clients are like, ah, this is going to be a challenging situation, I’m not going to get a very good deal. But it’s just about putting all those pieces together. And sometimes it’s a few steps in terms of getting a good deal. Maybe we need to go with an alt lender first, clean up your situation, and then get you into a more of a prime situation. But we deal with a variety of lenders, including bank lenders every day. You know I have customers that you know, have been in challenging situation before, we get them cleaned up, and they’re like, oh I’m gonna go back to my bank this time. Well, we deal with banks, and we probably deal with the bank that you bank with. So, you know, I think coming to us, we can really, you know, give the advice. And also make sure it’s in front of the right lender and get an approval. And typically, we don’t charge any of our clients fees, we get paid by the lenders, the only time that we have to charge a fee is if it’s like private lending or alternative lending, where maybe it’s more challenging file or commercial lending we get paid. But normal prime lending, we get paid by the bank. Mortgage brokers are one of the only things in life that’s that’s free. So I mean, seek the advice.

Todd Veinotte 09:35
Yeah for sure. On the down payment situation. You can get that, that can be gifted obviously we talked a lot about that right. And that happens. You mentioned that sometimes a parents elderly or older parents will sell their property or they’ll remortgage their property to leverage equity to give to their kids.

Clinton Wilkins 09:56
Happens all the time. I saw clients yesterday that are wanting to refinance their home, to give their their child enough money to make a down payment for a new property. Happens literally all the time. And the what the parents say to me, and I hear this over and over again, we have benefited from these increased property values. If we don’t do this for our kid now, our kid may never get into the real estate market. I hear this all the time. Yeah.

Todd Veinotte 10:25
Yeah, well that’s great. People can do it. But it’s obviously

Clinton Wilkins 10:29
Not everyone can.

Todd Veinotte 10:30
Not everybody can.

Clinton Wilkins 10:30
And not everybody’s willing, either.

Todd Veinotte 10:32
And I would add, I don’t think that it should be expected, either.

Clinton Wilkins 10:36
I agree. You know what, I bought my first home. And my parents have always helped me out. They put me through university, like they’ve they really went over and above. But they never gifted me any down payments to buy a property. You never ever, not once. And there’s certainly even been times where I’ve been in need. And I’d be like, I need a bailout. And they’re like, no you’re on your own child. And I was probably better for it, honestly.

Todd Veinotte 11:01
Yeah. But I mean, there are times when it’s appropriate, and it works. And I would add to that, I wouldn’t think that that people should put themselves in a bad financial position, when they’re heading into retirement either to do that.

Clinton Wilkins 11:13
One thing to really think about, and I even have people that are going into retirement that are thinking about their financial future, and some people own their homes free and clear. And they’re choosing to leverage it up before they go into retirement for a variety of reasons. And sometimes people have a mortgage going into retirement, and they’re changing the structure of their debt. So you know, we talk a lot about Home Equity Lines Of Credit. We’ve talked about CHIP before, which is the Canadian Home Income Plan.

Todd Veinotte 11:37
So home equity line, that’s a HELOC.

Clinton Wilkins 11:39
Home equity line of credit, obviously, very, very popular for people that are thinking about getting retired at some point, it’s good to get these things kind of set up before you retire.

Todd Veinotte 11:48
Yeah. Because I mean, if you run into repairs and this and that you want to be able to have access to that, to some cash.

Clinton Wilkins 11:53
Or access for financial reasons. Maybe you want to, you know, use some of the equity out of your home to supplement your income. Who knows, maybe you’re only gonna get CPP, and OAS, I don’t know what your situation is gonna be. And you could potentially have mobility issues. Maybe you need to do some repairs to the home or, you know, do some changes to the home to make it more accessible down the road. There’s a lot of reasons why people need to borrow money. And oftentimes the home is the biggest asset.

Todd Veinotte 12:17
Alright, we’ve got another segment to go and not sure what we’re going to talk about, but we’ll certainly figure it out. Mortgage 101 your guide to homeownership. We’ll be right back.

Clinton Wilkins 12:35
If you’ve liked what you’ve heard, and you want to learn more, feel free to visit us online at Tim clinton.ca