Hybrid mortgages can work to offset rising rates

Use of hybrid mortgages

A fixed mortgage? A variable mortgage? Why not both?

If you are looking at renewing your mortgage this year, you will definitely be facing some payment shock with higher interest rates. If you are looking to purchase a new home, locking in at today’s higher interest rates may not feel prudent at this time.

With interest rates on both fixed rate mortgages and variable or adjustable rate mortgages on the rise, a hybrid mortgage could offer some flexibility and reduce the impact of rising rates. You can diversify your mortgage risk similar to how you can diversify your investments.

A Home Equity Line of Credit could also be included as some lenders allow the mortgage to be broken into multiple components. You can mix and match terms in a multitude of combinations.

A hybrid mortgage allows you to manage the risk of interest rate fluctuations effectively in times of economic uncertainty with a fixed rate component and, at the same time, possibly take advantage of the lower rates on the variable rate portion of the mortgage particularly if rates start to decline during the term of the mortgage.

It can also diversify your mortgage’s conditions, including terms, amortization, payment frequency, etc. and spread out your payments so they are not all due at the same time.

The best option is to match the terms – five-year fixed with a five-year variable so if you don’t like the lender’s renewal offer you are free to easily move to another lender with a better offer instead of possibly paying a penalty on a portion of the mortgage that has a different renewal date.

Hybrid mortgages are collateral mortgages. If your mortgage is divided into different terms that mature on different dates, you could be faced with a penalty should you decide to break the mortgage early.

This type of mortgage is also more difficult to transfer to a new lender so fees could be charged to make a switch.

If you can’t decide between a fixed rate and variable rate mortgage then a hybrid mortgage could be a good option to limit your interest rate risk. It could be a great option if one party wants to go fixed and the other leans towards variable.

A hybrid mortgage is a more complicated product to consider but depending on your specific needs it may be the right choice for you. Benefits include the potential for interest savings, flexibility in payments and amortization schedules, and the savings of a variable mortgage mixed with the reduced risk of fixed rates.

As always, my best recommendation is to speak with a mortgage professional to review your possible options. Please give me a call to discuss at 1-888-561-2679 or email [email protected].

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Alternative lender mortgages can help in some instances

Alternative lender mortgages

Everyone likes to believe that they will qualify for the very best rates and terms when they start shopping for a mortgage but this isn’t always a reality.

Most residential mortgages will fit into three categories:

• “A” lenders – Chartered banks, credit unions and monoline mortgage companies. These lenders offer the best rates and terms including insured mortgage products.

• Alternative lenders – These are regulated mortgage lenders. They are banks, trust companies and monoline mortgage companies. Rates are slightly higher and there may be fees to set up the mortgage. Many of these companies also offer “A” products to their clients.

• Private lenders – Investment companies and private individuals who are willing to lend their funds and typically have higher rates and fees while offering shorter terms.

An increasing number of homeowners are now turning to alternative lending solutions for a variety of reasons including it being more difficult to qualify for mortgage with the tougher qualifying rules and today’s higher interest rates.

Here are a few situations where an alternative lender can provide solutions.

You are self-employed

Writing off expenses to minimize tax implications is great for tax planning but it will leave you reporting minimal income on your tax returns. Conventional lenders want to see verifiable income while alternative lenders understand this strategy and can offer competitive products. The rates with many of these lenders aren’t much higher than the “A” lenders.

Alternative lenders have now become the lenders of choice for many business owners. The higher rates may be offset by the structuring of the corporation.

Bruised or damaged credit

We aren’t always in control and life happens—marriage breakdowns, health issues. There can be many reasons why credit can be damaged.

Alternative lenders will look at the overall picture and if there is strong income and employment history, they can offer a temporary solution while you work on repairing your credit with the intention of moving back to an “A” lender.

Non-typical income sources

With this new economy many people now have alternative sources of income – part-time employment, an online business or side gig, Air BnB, or tips. “A” lenders will want to see a two year history of this income being declared on your tax returns before they will include it in your qualifying income.

Some alternative lenders may consider this income based on the overall strength of your application.

New stress test implications

The stress test has definitely made it harder to qualify for a mortgage. You now have to qualify at a rate two per cent higher than the contract rate. Today the best rate on a five-year uninsured fixed term mortgage is in the 4.94% range, so you now have to qualify at 6.94%.

“A” lenders are restricted to working within certain debt service ratios. Depending on your down payment and credit history alternative lenders may consider extending these ratios for qualifying.

Alternative lenders have a very important role in Canada’s lending market assisting clients that don’t fit with “A” lenders.

It’s important you engage a mortgage broker that is experienced in private and alternative lending to ensure you are receiving the best options and advice including a plan for the future.

If you would like to have a conversation about possible alternative mortgage solutions please give me a call at 1-888-561-2679 or email [email protected].

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

New mortgage product helps unlock value of your home

No payment mortgage

Reverse mortgages have been available in Canada for several years.

This mortgage product allows you to get money from your home equity without having to sell your home. You can borrow up to 55% of the current value of your home.

The maximum amount you’re able to borrow will depends on:

• Your age

• Your home’s appraised value

• The type of property and it’s location

The mortgage is paid back when you move out of your home, sell it or the last borrower dies. There are no payments required on a reverse mortgage and the interest charges accumulate over the term.

To be eligible for a reverse mortgage, you must be a homeowner and at least 55 years old.

There is now a new mortgage product that helps homeowners unlock up to 45% (five-year term) and 35% (10-year term) of their home equity with no monthly payments required. Unlike a reverse mortgage there are no age restrictions although a minimum credit score is required by the lender.

Another big difference that sets this mortgage product apart from a reverse mortgage is the variable interest rate that’s tied to the mortgage. The interest rate is entirely dependent on the appreciation of your home and protects you in cases of high and low appreciation.

There are no monthly payments and no penalties for breaking the mortgage early although partial payments are not allowed, so the full amount owing must be paid. Two terms are available – five years and 10 years. The maximum mortgage amount is $1.5 million.

What happens if your home does not increase in value? Over the course of your term, if the value of your home only increases by a small amount or even decreases, the lender will automatically drop your interest rate to their current lowest rate to protect your home equity.

What if your home increases in value drastically? Over the course of your term, if the value of your home appreciates beyond the lender’s threshold for a five-year term, they will cap your interest rate so you hold onto more of your home’s equity.

Who is the typical customer for this product according to the lender?

• They own the majority of their home which represents a plurality of their net worth

• Want to diversify their asset holdings into alternate assets or investments

• Are looking for additional sources of income

• Have the primary goal to have enough money to live comfortably without jeopardizing their family’s financial security

This product is only available for primary and non-primary residential freehold properties that are detached, semi-detached, townhomes or condos.

Like all mortgage products you need to ensure that it fits both your short-term and long-terms goals so it works for you.

Seeking the advice of a professional mortgage broker to review all possible mortgage options is always recommended.

If you would like to discuss further please email me at [email protected] or call 1-888-561-2679

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Self-employed mortgage solutions

Qualifying for a mortgage

It is no longer as easy as it once was for the self-employed to obtain mortgage financing. If you have tried to secure a mortgage recently with an institutional lender, you may have already found that out for yourself.

In the past, all you had to do was state your income to your lender without any third party verification. As long as you had a great credit rating, that was good enough, But not any longer. Now you have to provide documentation to prove you have the ability to make your mortgage payments.

There are still good options available with traditional lenders, such as banks or credit unions but you will have to prove that you are declaring a “reasonable income” for your profession on your tax returns and also have a great credit rating. These two factors combined could be a challenge for many who are self-employed as their accountants may be minimizing their income declared for tax purposes which is great unless you are planning to secure new mortgage financing.

With these standard mortgage programs you will either require a minimum 35% equity or if you have less than a 20% down payment, a lender will require a minimum of two years proof of income as self-employed.

The good news, there are many alternative lender options for self-employed clients who no longer qualify with a traditional lender. These lenders are the market’s response to consumer demand spurred on by the tighter mortgage regulations.

These are reputable companies who offer alternative mortgage products to consumers who can no longer qualify with conventional lenders. They fill an important role in fulfilling the dreams of home ownership for Canadians or have assisted with financing needs in other ways such as accessing equity or refinancing to pay off high interest debt.

Many of these lenders, who currently offer prime mortgages, are now expanding their offerings beyond traditional mortgages to fill this gap in the market and are generally only accessible through mortgage brokers.

My best piece of advice for someone who is self-employed and looking to obtain a mortgage whether it is to purchase a property for the first time or moving up, refinancing a mortgage or looking to purchase an investment property – be prepared! Meet with your mortgage broker well in advance to discuss what is required to obtain a pre-approval for your financing.

You may have to work a little harder and provide more documentation but there are still many options available to the self-employed so please give me a call 1-888-561-2679 to ensure that you are in the very best position when it comes time to arrange your mortgage financing.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

More Mortgage Matters articles

About the Author

April Dunn is the owner and a Mortgage Broker with The Red Door Mortgage Group – Mortgage Architects. She has been assisting clients to purchase, refinance or renew their mortgages for over 20 years.

April has experience as a Credit Union manager, a Residential Mortgage Manager with a large financial institution and as a licensed Mortgage Broker. By specializing in Strategic Mortgage Planning she has the tools available to build a customized mortgage plan, with the features and options that meet your needs.

April provides a full range of residential and commercial mortgage financing options for clients all over the province of British Columbia and across Canada through the Mortgage Architects network.

Contact e-mail address: [email protected] or by phone at: 888-561-2679.

Website:  www.reddoormortgage.com

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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