AN INTERESTING MOVE REGARDING RENTAL PROPERTY FINANCING

For those looking to purchase rental properties, the minimum down payment has historically been at 20% for some time, and so it remains. In years gone by, this down payment money had to be proven to have originated from the buyers own resources, it could not be gifted.

In the case of an owner occupied purchase, the down payment can be (and often is) gifted from a directly related family member.

The big news from one of our key lenders at the start of July was an announcement that they would now allow gifted down payment (only from a related family member) to be applied to rental property purchases as well.

The credit score is a key focus with applicants scoring 740 and higher being eligible for 80% financing on investment properties with no mortgage insurance premium, no fees, and no higher than market rates.

For those with a credit score below 740, the down payment must be increased to 25% in order to avoid the mortgage insurance premium, although if the client opts to pay the mortgage insurance premium, then 80% financing is possible.

The 740 credit score relates only to the down payment amount, even for clients with a score under 740 the gifted option remains available.

This is a program designed to enable the smaller investor to pool resources with other family members and get into the Real Estate market. It opens the door of opportunity for many who have otherwise been locked out of buying additional properties.

WHY BANKS WANT YOU TO SIGN THE RENEWAL AGREEMENT THAT THEY MAIL OUT TO YOU

Most banks boast a higher than 90% renewal rate on their mortgages (some even higher than 95%). Since it costs them a lot more money to acquire a new client vs. keeping an existing one, banks love the savings of a simple renewal. So you would think that they would offer you the best rate up front on your renewal as it’ll save them money in the long run? Well…not necessarily.

With renewal rates being as high as they are, there is not much incentive for banks to give their clients the best rates up front. They know that most people will stay as they know it’s easier to just sign a form as opposed to applying for a mortgage at another bank. Hence the dreaded renewal letter that gets mailed out automatically prior to your renewal date.

The banks would love nothing more than for you to just pick the term, sign the document, and send it back to them. It costs them relatively little to process it and they don’t have to follow up with you after that (other than sending you a new copy of the agreement).

Since the renewal documents are printed automatically (and yes they may include a “preferred rate” which makes it even more tempting to sign) they don’t factor in any rate specials that may occur after they’re printed.

Recently a client’s mortgage was coming up for renewal and they received the automatic renewal letter. Just calling the 1-800 number saved them an extra .10%, which on a $500,000 mortgage was an extra $500 per year in interest. Not bad for a 5 min phone call.

There are also some important questions to answer:

-are you planning on selling your home anytime over the next 5 years?

-do you need to access any equity from your home for renovations, children’s education, etc.

-what are your long term goals with the property?

These are important questions to ask as they help us suggest the right product for you.

So it’s important to treat your renewal as if you’re obtaining a new mortgage and spend some time researching your options. When I worked at the bank I was always shocked at the number of people that just signed the form and sent it back.

That’s why (in addition to the financial institution where your mortgage is now) you need to contact your Dominion Lending Centres Mortgage Broker and have them give you an unbiased view of which mortgage product is right for you, as they have access to hundreds of different financial institutions.

A Pre-Approval Is Not Really a Pre-Approval

There is a misconception out there that once you’re pre-approved, you’re good to go. A pre-approval simply means that based on your CURRENT income, expenses, down payment and credit you SHOULD be able to get fully approved once you find the right property (this is the first half of the equation). Many places won’t even pull a credit check (which is extremely important) and will just run a basic mortgage calculator and say “everything looks good” but that doesn’t mean anything. You leave thinking great, I’m pre-approved!

I always recommend that people put in a “subject to financing” clause with their realtor when they are putting in an offer to protect them each and every time. Here’s why:

You could be pre-approved but the lender still doesn’t know which property you’re purchasing (that’s the other half of the equation). Let’s say you find the house of your dreams (well within the maximum price that the mortgage broker went over with you) but we find out that the house was a former grow op. In this case, very few lenders will even look at this (even if it’s been fully remediated and there’s a stamp from the city saying it’s all good) and if they do, they’ll usually require a substantial down payment and further air quality testing that you must pay for as mould spores can grow behind walls and become airborne years later. Yes this is an extraordinary example but it can also happen where a bidding war has bid up the price and the best offer (yours) has been accepted. The lender sends in their appraiser to determine the value of the property and it may come in at a lower value than your accepted offer and so you’d have to come up with more money for a down payment (which you weren’t prepared for or don’t have).

If you have a “subject to financing” clause in your agreement, then you have a way out and can look for another property with no issue at all. If you don’t have a “subject to financing” clause at all and you’ve already given your deposit to the realtor (because you were under the impression that you were going to be approved), then you’re out of luck and will be stressed out and scrambling to find a lender that will help you out, even though you were technically “pre-approved”.

So in summary, always put in a “subject to financing clause” as that’s the only protection you have. This is much cheaper than forfeiting your deposit (and facing potential legal action from the seller) should you want to cancel your contract after the agreement has been made.

Better yet, contact your local Dominion Lending Centres Mortgage Professional and have them do a proper pre-approval and have you fully prepared for what most likely will be the largest purchase in your life!