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Revisiting the Vendor Take-Back Mortgage

Published September 17, 2019 by Real Estate Leads

Nearly every reputable realtor will have long since established ties with a mortgage broker to whom they’ll recommend clients who are going to need financing assistance from a lender in place before they’re able to purchase a home. In much the same way it’s beneficial for a mortgage broker to understand the workings of real estate investment and transactions, it’s helpful for realtors to understand mortgages AND the history of ways people have found the means of financing homes in Canada.

As we always insist, being knowledgeable makes you more appealing to prospective real estate clients and furthers your reputation as a ‘good’ realtor in your locale. Finding new clients for whom you can flex your muscles in this regard is a challenge, but here at Real Estate Leads our online real estate lead generation system for Canada is a proven effective way to be fast-tracked towards meeting real people who are genuinely considering buying or selling a home in the near future.

What Is It?

A vendor take-back mortgage is a unique kind of mortgage where the home’s seller extends a loan to the buyer to secure the property’s sale. They’re also called seller take-back mortgages, and it’s true that both the buyer and seller can benefit if the circumstances are right. It creates the possibility that the buyer might be able to purchase property above their financing limit, and conversely the seller is potentially able to sell the property at or above asking price more quickly.

Born in the Days of High Interest Rates

Vendor take-back mortgages were common in Canada some 25 to 30 years ago, and the reason they were so frequently taken was because interest rates were sky-high back then compared to today. Vendor take-back mortgages were very common in the ‘80s and ‘90s when interest rates were well over 10% and sometimes even moving up to as high as 20% in the early 80s.

Some have suggested that the new B-20 mortgage stress test that’s been in place for a few years now might make vendor take-back mortgages start to become a ‘thing’ again. That might be so, but industry and broker experts say that would only be the case if applications have other qualifications that extend beyond the 200 extra basis points as they’re detailed in the B-20.

It’s true that sellers could benefit by having a vendor take-back mortgage as it could earn interest on money in ways standard lenders wouldn’t offer and in a more secure environment due to the financials being leveraged against real estate.

Industry consensus is that vendor tack-back mortgages be something of a fix for those lacking purchasing power due to the B-20 stress test, but we’ve been warned not to expect them to be resurfacing in the residential real estate market anytime in the near future. This is primarily attributable to the growth of private lenders and mortgage investment corporations, and then there’s the fact that sellers usually redirect finances earned from the sale of homes to purchasing new ones.

This, of course, is true of both inhabitant homeowners and property investors.

Tempered Enthusiasm

We can understand that vendor take-back mortgages are not as commonplace in the market today because people need money to purchase their own homes, but these types of mortgages would really only work well if that homebuyer was planning to exit the market sometime shortly thereafter.

On this, one industry expert was recently quotes as saying “If you sell your property and you have this equity on hand and you’re then unsure of what to do with it, it’s pretty common to then look to invest it with a mortgage company or lender.”

We’ll conclude today by mentioning that despite all these forewarnings and the fact that vendor take-back mortgages represent less than 1% of the traditional residential real estate market, they can be more appropriate in the commercial real estate sector. On the commercial side – where the rate of return is a bit more attractive for the investor – an operating business may also be part of the transaction and this changes the assumption of risk factor for the buyer.

Will vendor take-back mortgages ever return to the residential market? They may, but it’s unlikely they’ll ever be as commonplace as they were 20-plus years ago.

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Decline in 5-Year Fixed Mortgage Rate a Big Plus for Prospective Buyers

Published July 29, 2019 by Real Estate Leads

As a realtor, one of the things you’ll encounter often is people who are adamant that variable-rate mortgages are always preferable when financing a home. There’s a lot to be said for them, no doubt, and it’s one of the many things a client may ask their realtor long before they talk to a mortgage broker for the first time. As we keep harping at here, an informed and knowledgeable realtor is one who tends to be well regarded – and referred – by his or her clients.

Which leads us to also say again that there’s so much to be said for making a strong first impression when meeting with would-be clients. Here at Real Estate Leads, our online real estate lead generation system is a proven-effective way of not only creating more of these opportunities, but creating more genuine ones – meaning with people who are genuinely considering buying or selling homes in the near future.

So, in the interest of building on your knowledge base, let’s discuss the ramifications of this reduced 5-year fixed mortgage rate in greater detail.

Dipping to 5.19%

There it is – the interest rate used for mortgage qualification has fallen to 5.19% from its previous spot at 5.34%. it’s especially noteworthy because it marks the first decline since September 2016. Back then the benchmark qualifying rate fell to 4.64% from 4.74%. It’s been rising ever since, and that’s based on the same reflection of what the BoC (Bank of Canada) sees as the economic outlook of the country.

This past week’s drop has much to do with global central banks deciding to loosen lending policies, but we should keep in mind that Canada’s five-year bond yield – which impacts five-year fixed mortgages – has been going down from January 1st onwards.

More Purchasing Power

The consensus seems to be that the interest rate decline will allow a homebuyer earning $50,000 a year to afford a home that’s some $4,000 more expensive than would have previously been the case. For someone earning $100,000 a year, they can be looking at something $8,300 or so more expensive.

How this will be beneficial for homebuyers – and investors – doesn’t need much explanation. In tandem with the Bank of Canada’s decision to hold the interest rate two weeks ago, we’re currently seeing the most auspicious period for prospective buyers in 19 months. Further, economists believe we’re unlikely to see the interest rate move on the variable side over the next few months.

Additional Considerations

It should be mentioned as well that there has been considerable speculation that the Bank of Canada will cut rates before the end of the year. While this would be even more beneficial considering a mortgage, those same economists say we shouldn’t hold our breath in that one. The belief is that unless we see those risks affect the domestic economy, it is unlikely rates will decline this year. In contrast to the US, real policy rate in Canada is still 1.75% and inflation was 2%. Long story short, the real interest rate here in Canada will be lower.

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Traditional Mortgages Riskier Than Ever According to BoC

Published June 19, 2017 by Real Estate Leads

Mortgage concept. Financial agent complete wooden model of the house with last piece with text mortgage. Wide banner composition with bokeh background.Home buying has never been a particularly inviting and reassuring process for most, but recently there’s been plenty of discussion in the media about the role high-risk borrowers play in making the financial lending pillars a little too shaky for the big banks’ (and the economy in the bigger picture considering the role housing plays in it) liking.

The question here is how are traditional borrowers doing across Canada? Not so long ago, the Bank of Canada updated Canadians on how low-ratio mortgage originations did in the previous year, 2016. In their quarterly report on vulnerabilities and risks, the growth of low-ratio mortgages was called out. It would seem that well-leveraged home buyers represent a significant portion of the purchasing whole, and that mitigates much of the risk for banks. However, these buyers are – not surprisingly – taking out significantly larger loans much more often, and the way that increases amortization terms is posing risks for real estate markets.

Here at RealEstateLeads, we offer a valuable tool that provides a way for realtors to get more listings, but we understand that sharing knowledge with those agents in order for them to make buyers ever more qualified for the life-altering purchase they’re about to make is definitely beneficial as well. So let’s discuss this recent concern regarding traditional mortgages.

Low-Ratio Mortgage Borrowers
A low-ratio mortgage borrower is a buyer who has a significant down payment when buying a home. Sometimes called a “traditional” mortgage, it will typically stipulate that a 20% down payment is required. According to the BoC, a low-ratio mortgage borrowers averages a 30% down payment at this time. These are the least risky types of mortgage holders. Or in theory at least.

These types of borrowers continue to be the client of choice, but the BoC has been taking notice of the risks associated with their borrowing preferences. First off, after a 35% down payment, income documentation rules become “less stringent”, as the bank puts it. Part of that means income verification is not undertaken. That’s not a particularly pressing issue since the likelihood of a home’s value dropping by 35% is fairly unlikely, but it’s a possibility nonetheless and some would say it’s more possible than ever before and particularly in specific locales.

The average loan-to-income rate across Canada for low-ratio mortgages saw minimal growth throughout 2016. A loan-to-income rate is exactly what it sounds like – the ratio of the amount borrowed on a mortgage in comparison to the amount of income generated by the household. 3 years ago this number was 271%. One year later, it had jumped to 292%, a 7.74% change. 2016 saw it increase to 296%, a 1.36% change. This should be regarded as a positive, but it should be noted this is across Canada. In-demand markets like Toronto and Vancouver are burdened by markets that many people would figure have no correlation.

Low-Ratio Average Loan-To-Income Above 450% Is Growing
One specific risk highlighted by the BoC is the number of low-ratio mortgages with a loan-to-income ratio that stands above 450% is growing. In 2014, the number of low-ratio mortgages had a loan-to-income above 450% was only 12%. By 2015, that number leapt to 15% of all mortgages. In 2016, the total of low-ratio mortgages above that 450% loan-to-income mark was sitting at 17%. It continues to grow, fuelled in large part no doubt that Canadians have shown themselves to have little to no fear of extreme housing debt, or being ‘house poor’ as the term goes.

The BoC is quite justified in their concern about this segment, and for a pair of reasons. The first is the sheer size of loan, while the second is the documentation of income. When your loan-to-ration tops 450%, there are inevitably going to be doubts about your ability to keep up with the payments. Further, when they’re low-ratio mortgages, it’s not unlikely that income wasn’t verified as stringently as perhaps it should have been. Should the borrower haves a significant change to their income or a change in ability to withdraw income from another country, there’s a real potential for big-time problems.
The risk to the lender isn’t all that prominent in such an instance, but the issue is that it threatens the equity of neighbouring homes when it happens repeatedly. Unfortunately, the nature of the market means the stage is very much set for that to happen in specific regions.

Low-Ratio Mortgages Are Taking Longer Terms
Another growing trend is low-ratio borrowers choosing longer amortization periods. In 2014, 42% of low-ratio mortgages had terms that stretched longer than 25 years. In 2015, that number jumped to 46%. Now, the number for low-ratio mortgages with amortizations longer than 25 years is 51%. It’s a growing trend, and one that obviously would be troubling to lenders.

It has the potential to be particularly problematic because of low interest rates. Mortgage rates are already at historic lows, but any type of significant uptick could be very tough for the borrower to absorb. One could increase the length of their mortgage, but that length of amortization may not be available in the future. Should that be the case, you would have to take a shorter amortization and increase your payments dramatically. Not difficult to see where this is going, and why it could be potentially devastating for borrowers.

Yes, the risk associated with these types of loans are likely exclusive to overheated markets like Toronto and Vancouver. They don’t present much of a concern to banks, on account of the cushion applied to down payments.

The concern should rest exclusively with the homeowners, and those prospective homeowners may be your clients. Be sure to have a reputable mortgage broker / advisor on tap to recommend to your clients, and do consider signing up for RealEstateLeads here to get qualified online-generated buyer and seller leads delivered to you exclusively for your specific region of the country.