This week, we wanted to hear the actual story of what a mortgage broker does for us. I went out to meet with Haynes Cheung from Dominion Lending to talk about the approval process and renewal process when you get a mortgage. He shares some great tips for home buyers to take note of.
Asking the basics
We asked the most essential questions when it comes to home-buying so you can fully understand what it means to have a mortgage.
What is a mortgage?
When people purchase a real estate property, if they need lending, they need financing on it, the bank will put a mortgage on the title. The bank uses the property as a security. If you were ever to sell the property, you’d have to pay them back.
They guarantee this loan for you in order for you to purchase this property.
Is it hard to get a mortgage?
There’s a lot of talk about mortgages and the stress test. It doesn’t mean that people cannot get it.
People require a lot more income before they can qualify for the amount of mortgage they used to be able to qualify for.
Knowing who’s who
We give a balanced and honest review of both parties. Whether or not to go to the bank or to a broker. It’s up to you. Here’s the question and Hayne’s answer.
If I were a buyer looking to buy my first condo, would I come to a bank or to an independent broker like yourself?
It’s always good to talk to a bank or a broker before you look to purchase your first home. They will give you an idea of what you can afford so that you’re not looking at things you cannot achieve.
In terms of talking to a broker or talking to a bank, I worked in a bank before for 7 years and I worked as a broker for the past 3 years.
Going to the bank is good because it’s your own bank and you’ve built a relationship with them. You are a loyal customer with them. Usually they might be able to give you an exception or leeway on your mortgage just because the manager or branch manager can make that call.
When you go into the bank, you are their customer. The person you are talking to, the mortgage broker or the banker is working for the bank. They are not working for you. They are not looking out for your best interest. Even if they are, they are limited to the product they can offer. They can only offer the product that the bank offers. So that limits the client’s ability to find the perfect mortgage.
On the other hand, when you work with a broker, the broker has 40 to 60 financial institutions that they can choose from. They are more likely to find you the most suited product based on your situation. In terms of interest-rate-wise, because the broker has more options, you can probably get a better interest rate from your mortgage broker.
We only look at a mortgage statement once a year or we talk to the bank if we want to make a lump sum payment or it’s time for renewal.
Another strong point about a mortgage broker is that they are able to go out and meet with clients wherever is convenient for them.
Exactly! So for us, we are mobile, we are able to meet the clients at a convenient location, a convenient time.
Haynes reminds us that banks are open during the standard working hours of 9-5.
Next, the process of meeting with a mortgage broker.
So we set up a meeting and what do we need to bring to the meeting with you?
That’s a good question especially for first-time home-buyers because for a lot of them they don’t know what to prepare.
The best thing to prepare when meeting with a broker is your most recent pay-stub,
If you can get a job letter, that would be great. You can prepare some bank statement of your savings account or your account balances. That shows the broker what your down-payment is. The pay-stub shows your income and what shows on paper is what we can use.
And if you’re self-employed than you can prepare two years of the T1 general, the full package. It will show every entry, how you report, your income, and what income you report in the last few years.
Also, it’s important to note that if you don’t know how to acquire this information, you can ask an accountant to help you.
How much down-payment do I need?
In Canada, in general, there’s two types of mortgages, one is called high ratio and the other is called conventional. The reason it’s called high-ratio is because it means the longer loan compared to property value is high, so it’s a high ratio loan. What determines a high ratio loan is if your down payment is less than 20%, it falls into the category of a high ratio mortgage. If your down payment is more than 20%, it falls into the category of conventional mortgage.
The minimum payment you need in Canada to buy a home is 5%. If you have anywhere from 5-20% down payment, you have to go through this high ratio mortgage process.
High ratio mortgage means that you have to get a default insurance from one of the insurance providers, such as CIBC. That means there’s an insurance premium that you have to pay. Your premium will be based on the percentage of the down payment you put down. If the minimum is 5%, you will have to pay about 4% premium on the insurance. And if you get to 15-20% you just pay 2.6% premium on the insurance.
Another thing about the high ratio mortgage is that the maximum amortization you can take is 25 years only, which means that your monthly payment will be higher than conventional mortgage which can allow you to pay up to 30 years.
The approval process for high ratio mortgage is also tougher because you need to be approved by the bank and also by the insurance company. The insurer has really tight guidelines and they don’t make exceptions.
The last restriction is that you can’t buy a home over 1 million dollars.
The good thing about high ratio mortgages is that you always get the best rate in the market because the loan is insured and the bank has no risk.
For the conventional mortgage the mortgage amount is usually slightly higher.
Haynes does a good job explaining the difference between a high-ratio mortgage and a convention mortgage. He then gives his recommendation on the “ideal” down payment amount.
The ideal down payment is about 20%. That way you can save the insurance premium (Watch the full interview to understand why.)
A gift of money
Sometimes family can help you make your first down payment. But in that case, what do you do?
Does the down payment have to come from me, or can it come from family or relatives?
Most banks accept the gift of down payment, but it has to come from immediate family.
What documentation will I need for gift of down payment?
Each bank will have its own template of the gift letter. They would ask you to give it to the donor to sign that it is a gift of fund and they are not looking for a repayment. So they sign the document as well as a bank statement showing that they have the funds. Some banks might ask the donor to do the transfer before closing so the money actually transferred into the clients account.
How early do you have to transfer the money from outside of Canada?
Normally the banks will look to 30 to 90 days down payment confirmation. They need the money to be in a Canadian institution for 30 days. Some ask for 90 days. But ultimately, all banks will ask for the source of the funds.
So if the money just comes into your account and shows up a month ago, they still want to know where the money is coming from. If it’s money outside the country, you have to prepare to show the documents from home. Show that the money was in your parents account and they transferred it over. If anything comes from outside of Canada, I would say get it three months before you apply for a mortgage.
The waiting game
Waiting is hard for everyone. We all want to know what’s going on sooner rather than later. The same is true for getting approval for a mortgage.
How long does the buyer need for approval?
From the day we input the application, assuming we have all the documents upfront, to approval usually takes 24 to 48 hours. One thing that takes a bit longer is the appraisal report because we need to order an appraisal from a third-party appraiser. They will have to schedule an appointment with the seller. Usually we both come back in one to two business days. So the whole process if everything goes smooth only takes about 3 days. 5 days is a good buffer.
What is the purpose of the appraiser?
An appraiser is a third-party company that confirms the value and condition of the home. When a bank lends you money, the biggest security to the bank is the piece of property. They need to make sure that the property is the value that you paid and also make sure that it’s in a livable and good condition so that if anything happens and they need to take over the property, that the property is marketable and they can resell it or at least recover the amount that the lent out.
When everything goes as planned
It’s important to know what’s up. Even when things are running smoothly, you want to know every step of the process.
If everything goes accordingly, what’s the next step the client needs to take with the bank or the broker?
Usually, once everything’s approved, we will meet with the client, go over all the terms and conditions, go over all the details of the mortgage, because every mortgage has different restrictions and conditions. When everything is good, the client will sign a commitment letter with us. Once that commitment letter is singed, we send it back to the bank, then the bank will prepare a mortgage instructions document for the lawyer and they will send the document to the lawyer. From that point on, they usually have one more thing to do before signing. The lawyer is to meet with a representative from the bank that we use so they know who they’re dealing with and so they know more detail about the bank.
If I have more questions, who do I go to?
Your mortgage broker should always be your first point of contact. If you have questions about your mortgage, you should always talk to your mortgage broker first because they are the ones to get you the loan and a lot of simple questions are usually already written in the mortgage agreement and the mortgage broker will have read that agreement. If it’s some task that you need to physically make changes to your mortgage or you need to further question something that is not so simple to answer, then the broker can refer you to the bank.
5 years later…
Five years fly way faster than any of us would like. And when the five years of your mortgage comes and goes, Haynes tells you what to do.
Who do I go to first about renewal in 5 years?
When you get a letter, the client should definitely talk to a broker. Because at the time of renewal, not just because they can shop for better options or a better interest rate, also, their life stages might change. They might need a different type of mortgage based on their plan for the next 3 or 5 years. Simply renewing into the same product with the same bank might not be the best solution to that. They usually receive the letter 3 months before the due date so that is actually a good time to talk to a mortgage broker.
Are there any other tips you can share with us about getting a renewal?
There’s one thing that a lot of people might not know, if your mortgage was approved before 2016 November, when you are doing a transfer or renewal, you can actually qualify based on the contract rate. So we talked about Stress Test and you have to qualify for the high interest rate which restricts the amount you can get approval, with this rule, you can actually qualify based on your contract rate.
What is the Stress Test?
The government wants to make sure the borrower can afford the payment if the interest rate were going up too high. It’s to protect the client and at the same time protecting the bank.