What happens when your mortgage is higher than your property assessment?

What happens when your mortgage is higher than your property assessment?

The excerpted article was written by Scott Hannah, Postmedia News

Q: My brother-in-law has been struggling to find his ideal career in the technology field. He mentioned a great job offer he got in another city, but my sister voiced her disappointment about him likely having to turn it down. She said when they got the assessment notice for their house, they realized they’re underwater with their mortgage. I don’t really know what that means but it seems kind of crazy to turn down a job you really want. Is there some way to help them? ~Ricardo

A: Buying a house is typically the single biggest purchase most of us make in our lifetimes. We work hard to come up with the money to buy it, and then we continue working hard to pay for it. During this time, however, the value of our home may change. We hope it increases in value, but there are no guarantees. It can also decrease in value, often due to factors beyond our control. It is when it decreases in value to below what we still owe against it that we find ourselves in an underwater — or negative-equity — mortgage.

Your equity is the value of your home minus whatever you owe against it. When your home loses value or there is a market correction that decreases the value of your home, you can end up owing more than what you could sell your home for. While this isn’t a situation you want to find yourself in, there are ways to deal with it, or to avoid it entirely in the first place. Here are some things to know:

A small down payment can cause negative equity

One way negative equity happens is when you buy a home with a small down payment. If you pay less than 20 per cent down, you must also have mandatory default insurance. The cost for this insurance is a percentage based on how much of a down payment you are making. The smaller the down payment, the higher the cost for the insurance.

For example, you may buy a condo for $450,000 with a five per cent down payment ($22,500). The default insurance can then be as much as four per cent of the amount of the mortgage, i.e., $450,000 less the $22,500 down payment is $427,500, times four per cent comes to an insurance premium of $17,100. Some people pay for this insurance from their savings but most add it to their mortgage. This means that on the day you receive the keys to your new home, in addition to your down payment, closing costs, legal fees and moving expenses — none of which are part of your mortgage amount — you owe 98.8 per cent of the price you paid for the condo.

If your condo drops in value at all within the first five or so years of buying it, you will likely end up in a negative-equity position, owing more than what you could sell it for.

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Can you end up underwater any other time?

Even if you have a lot of equity built up in your home, either through years of mortgage payments or buying with more than a 20 per cent down payment, a negative-equity situation could still happen. If you refinance a mortgage to borrow more money against your home, apply for a second mortgage, or take out a home equity line of credit (HELOC), you could end up owing more than what your home is worth, especially with private financing.

Alternatives to Expensive Home Refinancing Loans

Canadian lenders are heavily regulated to try and prevent negative-equity situations, especially with secondary financing arrangements; however, when big mortgage debts are paired with circumstances beyond your control (e.g. municipal rezoning, market challenges, economic factors or even natural disasters), it could still happen.

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How to avoid ending up underwater

When the real estate market is hot or interest rates are low, it can be tempting to buy a home, spend more on a home than you wanted to, or take advantage of additional secured credit to get a little extra cash.

Now after a period of cooling, many potential buyers are seeing a small window of opportunity to get into the real estate market. The fear of missing out is a strong motivator. However, the easiest way to avoid ending up underwater with your mortgage is to not allow yourself to get into that situation in the first place. Buy with more than a minimal down payment and/or buy and stay well below any financing amount your lender has approved you for.

What No One Tells You When Buying a Home

How does negative equity impact other decisions?

A negative equity situation can have consequences for other decisions in your life. For instance, you may not be able to sell your home because the money you’d get from the sale wouldn’t pay off your mortgage. You’d have to come up with the difference. Not being able to sell your home might mean that you can’t move to a different city to take advantage of a job offer or to be closer to loved ones.

When your mortgage comes up for renewal, your options are also more limited if you’re already underwater. It’s harder to negotiate with your existing lender for better rates or conditions. It can also be virtually impossible to switch lenders because no lender will lend you more than the value of your home. It is always nice to have the option to switch lenders to get a great rate or mortgage with other benefits (e.g. travel points or cash back).

What can you do if you find yourself underwater?

If you find yourself in an underwater situation with your mortgage, consider your overall situation carefully. Try to determine what has caused your negative equity and if there’s anything you can do personally to turn it around.

If you are underwater because your mortgage is new or market conditions are simply what they are, do what you can to tighten up your budget a little and increase your payments even a small amount. To generate a little extra income to balance an already tight budget, maybe you could rent out a part of your home, garage or yard. There are different strategies to accelerate mortgage payments , so choose one that works for you.

If you have a large balance owing on a HELOC, second mortgage or home-equity loan , consider how best to pay those off as quickly as possible. Maybe you can sell a vacation property or spare vehicle to generate a lump-sum payment. Making extra prepayments on your first mortgage whenever possible is also a good idea. They are applied straight to your principal and affect your equity immediately.

Don’t let feeling trapped cause you to make snap decisions; base your choices on a realistic budget. Even if you can’t sell and move, could you rent out your home and live elsewhere for a lesser amount? If you can’t accelerate your mortgage payments because your budget is too tight, maybe it’s all of your other bills and debts that need taking care of first. The sooner you start looking at your options, the more you likely have available to you.

Get Relief from Your Mortgage, How to Avoid Foreclosure

The bottom line on finding yourself in a negative-equity situation

The start of any new year generally brings with it real estate assessment notices. For the first time in several years many homeowners are becoming aware of a decrease in their home’s value and may find themselves in negative-equity circumstances. However, what the assessment notice says and what a home will actually sell for can be quite different. Your situation might not be as dire as you think, but if drowning in mortgage debt has flashed before your eyes, let that be your wake-up call to get your overall financial situation into better balance.

Source: Chronicle Harold News

Buying a home? Here’s how to decide how much to put down

The Star Vancouver

Housing prices are ticking up again, with the average price for homes sold in September in the GTA reaching $843,115, according to the latest report.

Rising prices present prospective home buyers with a dilemma when it comes to saving for a down payment. Putting down the minimum five per cent on a $500,000 home gets you into the housing market for a reasonable $25,000. Saving up a 20 per cent down payment, on the other hand, avoids costly mortgage default insurance premiums (mortgage loan insurance from Canada Mortgage and Housing Corporation).

Note that the minimum amount required for a down payment depends on the purchase price of your home. Homes valued at $500,000 or less need a down payment of five per cent, while homes valued between $500,000 and $999,999 require five per cent on the first $500,000 and 10 per cent for the portion above $500,000. Home buyers need to put down 20 per cent on homes valued at $1 million or more.

There are pros and cons putting down more or less on your home purchase. I reached out to Robert McLister, mortgage expert and founder of RateSpy.com, to discuss house down payment options.

Five Per Cent Down

Pros: The obvious advantage to making the minimum five per cent down payment is there’s less capital required to become a homeowner and reaching that threshold requires less time to save.

“So many young buyers stay on the sidelines scrimping for a bigger down payment only to see home prices run away from them,” says McLister.

He points to the past two decades of price growth as evidence that getting into the market quicker can pay off, “provided homebuyers don’t overextend themselves.”

Putting down less than 20 per cent requires the buyer to purchase mortgage loan insurance to protect the lender against default. While the borrower must pay those insurance premiums, McLister says an advantage to having an insured mortgage is that it gives purchasers access to the lowest interest rates available.

A five per cent down payment is also compatible with the First Time Home Buyers’ Incentive – the shared equity mortgage with the Government of Canada – and other governmental home subsidies.

A deliberately smaller down payment can leave a borrower with a larger cash cushion, saving for more immediate closing costs and furnishings, or simply retaining more money for emergencies and other needs.

Another advantage is that automatic monthly mortgage payments create a forced savings plan for those who might otherwise squander that money as a renter.

Cons: The financial impact of putting the minimum amount down on your home is that it comes with a four per cent default insurance premium. While this amount can be rolled into the mortgage, it creates a highly leveraged situation with risk of negative equity should home prices fall.

“On Day One you’re almost 99 per cent financed. It doesn’t take much of a home price selloff to trap you in your home, preventing a sale,” said McLister.

A five per cent down payment also means more interest expense over the life of your mortgage, compared to a larger down payment.

Note that the amortization for buyers with five per cent down is limited to 25 years. The property also cannot be a non-owner-occupied rental property.

Another caveat to consider: Prospective home buyers can borrow the five per cent down payment (even from a credit card) so long as they meet the lender’s debt limit ratio. The big red flag on this means, “they can essentially owe more than their home price on Day One,” said McLister.


Brookfield acquires mortgage insurer Genworth Canada in $2.4-billion deal

BANKING REPORTER | The Globe and Mail

Brookfield Asset Management Inc.’s private-equity arm is making a long-term bet on Canada’s mortgage market with a $2.4-billion deal to take control of Genworth MI Canada Inc., the country’s second-largest mortgage insurer.

Brookfield Business Partners LP, a publicly-traded subsidiary of the global asset manager, is acquiring a 57-per-cent stake in Genworth MI Canada from the mortgage insurer’s American parent company, Genworth Financial Inc.

Brookfield will pay $48.86 a share for nearly 49 million shares in Genworth MI Canada – a 5-per-cent discount to the price at Monday’s close on the Toronto Stock Exchange, but an 18-per-cent premium compared with the date when the company was formally put up for sale.

The deal appears to relieve a headache for Richmond, Va.-based Genworth, which has waited years for regulators to approve a separate deal that would see the American company acquired for US$2.7-billion by a privately held Chinese buyer, China Oceanwide Holdings Group Co. Ltd. That transaction, which was first announced in October, 2016, has stalled while awaiting approval from Canadian regulators and federal officials, who are required to consider the potential impact on Canada’s mortgage industry and have held the deal up over national-security concerns, even after U.S. regulators gave it a green light.

Earlier this summer, Genworth Financial announced it was considering “strategic alternatives” for Genworth MI Canada, seeking to break the deadlock. That raised the prospect that, absent a suitable buyer, Genworth Financial’s stake in its Canadian subsidiary might have to be sold into the public market at a discount. But Brookfield emerged with deep pockets and the industry expertise needed to take control.

“We are pleased to find such a high-calibre buyer for our interest in Genworth Canada,” said Genworth Financial president and chief executive Tom McInerney.

Genworth Financial’s share price shot up 15.8 per cent on Tuesday, and Brookfield Business Partners shares rose 2.7 per cent, but stock in Genworth MI Canada fell 1.7 per cent.

The Canadian arm of Genworth is a rare asset. It is Canada’s largest private-sector mortgage insurer, providing a backstop against defaults to residential mortgage lenders, and it trails only the government-owned Canada Mortgage and Housing Corporation (CMHC) in size. Its only privately owned competitor is Canada Guaranty Mortgage Insurance Company, which is jointly owned by Ontario Teachers’ Pension Plan and financier Stephen Smith.

Genworth Canada currently has a 33-per-cent share of the country’s mortgage-insurance market, while CMHC holds half and Canada Guaranty the remaining 17 per cent, according to data from RBC Dominion Securities Inc. But the federal housing agency has been ceding its share to the private insurers.

Genworth’s improving position in a highly consolidated market made it a logical target for Brookfield Business Partners, which seeks to acquire and manage companies in sectors where the barrier to entry is high. Brookfield also has extensive expertise in mortgages and housing: It is one of the largest residential real estate developers in North America, active in real estate financing, and owns the Royal LePage brokerage.

Brookfield Business Partners managing partner David Nowak described Genworth Canada as “a high-quality leader in the mortgage-insurance sector,” in a statement.

The total share of mortgages that are insured has been falling, from 57 per cent in 2015 to 41 per cent in 2019, according to a recent CMHC report. The shift toward uninsured mortgages comes as regulators have tightened rules on mortgage lending, requiring borrowers to meet stricter tests to qualify for mortgage insurance.

Even so, the housing sector as a whole has continued to grow, adding a steady stream of new demand for mortgage insurance, particularly from first-time home buyers. And Brookfield is betting that Genworth can grab a larger share of the market, making full use of Brookfield’s deep relationships with banks that do the lion’s share of Canada’s mortgage lending.

The deal is expected to close before then end of 2019, subject to approvals from Canada’s banking regulator and Minister of Finance.

Brookfield is not currently looking to acquire the 43 per cent of Genworth MI Canada’s shares that are owned by other investors. But Jaeme Gloyn, an analyst at National Bank Financial Inc., said that prospect “is not entirely off the table” and “would likely unfold at a premium” to the price Brookfield is paying for control.

Ratings agency DBRS Ltd. called the deal “positive for Genworth Canada,” which has been more stable than its U.S. parent.

Oceanwide Holdings consented to the transaction and extended the deadline to finalize its own deal with Genworth Financial until Dec. 31.

Source: The Globe and Mail

First your home is flooded – then you lose your mortgage?

By  | Global News

When flooding ravaged parts of southern Alberta in 2013, banks and other lenders took notice.

“We would be asked on every deal, ‘Is it in the flood zone?’” Mike Boyle, president of Calgary-based The Mortgage Group, told Global News.

Lenders didn’t want to get involved with addresses that turned out to be in the disaster areas, he recalled.

Six years later, with the flood a “distant memory,” that’s no longer an issue, according to Boyle. But he worries about homeowners in regions like southeastern Ontario and Quebec, where rivers seem to be overflowing with alarming regularity.

“You can’t get a mortgage if you can’t get insurance,” he said.

Speaking from the Ottawa-Gatineau area, which is experiencing its second major flood in the span of 24 months, licensed insolvency trustee John Haralovich shares the same concern.

“We have seen lenders not agree to renew the mortgage,” said Haralovich, a senior vice-president at debt consultancy firm MNP.

Those have been rare cases so far, he said, but that could change.

“In 2017, they said (the flood) was a once-in-100-year occurrence, and two years later, it’s happened again,” he said.

Homeowners who discover they can’t continue their insurance coverage may also hear from banks that they won’t keep servicing their mortgage once it comes up for renewal, he added. With no insurance to protect the collateral, mortgages on homes in flood-prone areas may become too risky for mainstream lenders, he said.

Several experts who spoke to Global News are concerned that a growing number of Canadians may find themselves facing this issue after the latest round of spring flooding.


Morneau taking close look at return to 30-year insured mortgages

By Bill Curry | Ottawa

The Globe and Mail

The federal government appears to be considering a budget announcement that would allow first-time homebuyers to obtain 30-year insured mortgages, up from the 25-year limit now, according to the Canadian Homebuilders’ Association.

Such a move would represent a change in direction after more than a decade of measures by federal Conservative and Liberal governments since the 2008 recession aimed at cooling housing markets and encouraging Canadians to take on smaller mortgages.

While the Bank of Canada continues to express concern about high household debt, politicians are also getting an earful from younger Canadians – a potentially key voting demographic – who can’t afford to enter the housing market.

Finance Minister Bill Morneau’s coming budget will be the government’s last before the scheduled October election. The minister recently said he is looking at home affordability issues for millennials, but he has not publicly speculated on potential policy options.

Over the past two weeks, top officials from the Prime Minister’s Office and Mr. Morneau’s office met with Kevin Lee, the chief executive of the Canadian Home Builders’ Association, to discuss potential budget measures.

Association spokesman David Foster said there is clear interest from government in the request put forward by housing industry groups to bring back 30-year insured mortgages.

“They keep wanting to talk with us about it, and it wouldn’t cost them a dime, so I’ve got to think those are somewhat positive signals,” Mr. Foster said on Wednesday.

The association discussed the matter earlier this week with Mr. Morneau’s chief of staff, Ben Chin. They also met last week with Sarah Hussaini, a policy adviser in the Prime Minister’s Office.

Pierre-Olivier Herbert, a spokesperson for Mr. Morneau, declined to comment, saying the office does not speculate on potential budget measures.

The association has had several meetings with officials and MPs over the past year in the run-up to the 2019 pre-election budget and recently narrowed down its wish list to just two items: a return to 30-year insured mortgages for first-time homebuyers and an easing of stress test measures that restrict access to non-insured mortgages.

Mr. Foster said officials are expressing interest in both options, but especially the 30-year mortgage proposal because it can be enacted unilaterally by the Finance Department. Changes to the stress test would require the co-operation of the Office of the Superintendent of Financial Institutions, an independent regulator that just this week defended the existing rules.

MP Francesco Sorbara, who chairs a Liberal caucus on housing affordability issues that formed last year and is a member of the House of Commons finance committee, did not dismiss the 30-year mortgage proposal as a way of helping first-time homebuyers.

“It is one idea of many that is worthy of consideration, with the caveat that we maintain a secure and healthy housing market and that individuals are not overextending themselves,” he said.

Paul Taylor, president and CEO of Mortgage Professionals Canada, is also advocating for the 30-year mortgage option and said he was “encouraged” by Mr. Morneau’s recent comments about addressing affordability for millennials. However, Mr. Taylor said he has not received any indication from federal officials that a decision has been made.

The date of the budget has not yet been announced. The House of Commons only sits for one week in March, which makes the week of the 18th a likely window for the minister to deliver the budget. However, there is also speculation in Ottawa that the budget could be released in the final week of February.

Homebuyers with a down payment of at least 5 per cent of the purchase price but less than 20 per cent must be backed by mortgage insurance. This is offered by the Canada Mortgage and Housing Corp. – a Crown corporation – as well as two private insurers.

In 2008, after briefly allowing insured mortgages with a 40-year amortization period, then-Conservative finance minister Jim Flaherty reduced the maximum period to 35 years. The Conservative government lowered the maximum to 30 years in 2011 and acted again in 2012 to bring it to 25 years, where it has stood since. The moves were promoted as a way to prevent high-risk borrowing.

Shortly after the Liberals formed government in 2015, Mr. Morneau announced further mortgage tightening rules that December by doubling the size of the required down payment for insured mortgages for the portion of a home’s value from $500,000 to $1-million.

Mr. Foster, of the home builders’ association, said restricting insured 30-year mortgages to first-time homebuyers should prevent consumers from getting in over their head.

Millennials have most of their working years ahead of them and would likely pay off the mortgage sooner than 30 years, he said.

“We don’t think it involves any additional risk,” he said. “These are prime borrowers.

Source: The Globe and Mail

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