What is bridge financing?

A bridge loan, also known as bridge financing, is a temporary loan that allows you to use the equity of your present home to pay the down payment of your next home even before your home sells. It is commonly used when closing dates are not aligned and you are in a competitive housing market with high demand. This loan is a quick and easy solution if you are financially stable.

These loans are usually between 3 to 6 months and can go up to 12 months, depending on your financial circumstances. A stable income and a good credit score are necessary to be eligible for this loan. The majority of lenders also need a minimum of 20% equity. However, some lenders will consider your income level and adjust the requirements accordingly. After those qualifications are met, you must make a sale agreement on your current home that contains the firm closing date and a purchase agreement on your new home in order to get a bridge loan.

The cost of bridge financing

While this loan is convenient and can provide comfort, there is a cost associated with this loan.

The cost mainly consists of three values:

1. Legal cost- Registering the loan requires your lawyer to do extra work so that they may charge more
2. Lender fee- Lenders need to set up the loan so that they can charge for the time it takes them to set it up
3. Interest rate- The bridge loan interest rate in Canada will approximately be Prime +2.00% or Prime +3.00%

To sum up the costs, a bridge loan usually costs between $1000 – $2000, but it also depends on a case-by-case basis and your circumstances.

Calculating your bridge loan

Now that we’ve looked at the cost of a bridge loan, how much can you get from a bridge loan?

To calculate your loan, take the amount of equity you have on your present home and subtract the down payment of your new home. Let’s take a look at a bridge loan example.

You have $150,000 equity on your present home, and your down payment for your new home is $50,000.

$150,000 – $50,000 = $100,000

Your bridge loan is $100,000 and is financed until the sale of your present home is over.

To get an accurate estimate of the sale amount available for your bridge loan and the approximate cost of your loan, be sure to use a bridge loan calculator.

Pros of bridge financing

Now that you know what a bridge loan is, let’s look at its advantages.

Buy your next home before the current one sells: The main advantage of this loan is that you get to buy your dream house even before your current home sells. This provides relief as you don’t have to stress over your home not being sold in time for purchasing your next home, especially if you are in a competitive area.

Financial Flexibility: A bridge loan also provides financial flexibility as it allows you to use the equity of your present home to pay for the down payment of your new home. If you find a house you love but can’t afford the down payment of it, this loan can be useful in covering the balance until the sale of your present home closes.

Find capital for renovations: if you want to make changes or renovations to your new home, this loan provides you with the funds and extra time that may be needed before you move in.

Cons of bridge financing

Despite how efficient bridge financing may sound, there are possible disadvantages that you should consider.

High-interest costs: Even though this is a short-term loan, the interest can get costly as the interest rates are generally higher than the interest rate you are paying for your mortgage. So evidently, the longer your loan is, the more interest you will have to pay your lender.

Need to qualify: Various factors, including income, credit score, and equity, determine the terms of your bridge loan. So, many aspects of a bridge loan may fluctuate, like the duration of the loan, interest rate, and requirements.

You must sell your home before the end of the bridge loan: This loan can lead to a higher risk because if your bridge loan exceeds the term and your present home is still not sold, you will have to pay for two mortgages until you can sell your home.

Who offers bridge loans?

Since more homeowners are using bridge loans, the well-known banks, including RBC, Scotiabank, BMO, CIBC, and TD, all provide their mortgage customers with the option to get a bridge loan. However, you can always reach out to your mortgage broker for more options if you’re unsure whether your bank offers bridge loans. A mortgage broker can help you find alternative lenders who may be more flexible towards home buyers with low credit scores or inconsistent incomes.

Alternatives to bridge loans

The most common alternative is the home equity line of credit (HELOC), also known as a second mortgage, which allows you to borrow against the equity in your house. The lender will then use your home as collateral to guarantee that you will pay back your loan. This is very similar to a bridge loan, except the repayment period can be as long as 10 years later.

If you have a stable job and a good credit score, another alternative is a personal loan which doesn’t require collateral and is usually funded more quickly. Certain lenders can give you a decent-sized loan with lower interest rates and fees. However, if your credit score is not superb, you can still qualify for a personal loan, but it may have higher interest rates and more fees.

Overall, bridge financing is a great resource if your closing dates don’t match up. However, you should contact your mortgage broker to find out the pros and cons that specifically apply to you.

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For many Canadians, owning real estate requires creativity – and House Hacking is a creative solution. Through House Hacking, you could reduce or eliminate your monthly housing costs entirely. In this article, we digest what House Hacking is and its advantages and drawbacks. If done right, you could be on the road to living in your home for free.

What is House Hacking?

The goal of House Hacking is to cut your living expenses while you build home equity. The premise is to purchase a larger home than you need so you can rent out the remaining space and act as a landlord. Your tenants’ rent should cover the full or a substantial amount of your mortgage payments. All the while, it’s you who builds equity in the property.

What goes into house hacking?

House Hacking starts as soon as you look for a property – you must find a home you can live in and rent out. Some House Hackers opt to purchase a duplex or triplex or a home with a basement apartment. But you can simplify it further. For example, you can rent out an extra room in your house to start your House Hacking journey. The tenant’s rent in that other room, basement or unit goes toward your mortgage payment. Thus, you’re effectively building equity in your home for free!

When buying a home, you’re not only looking for your primary residence but an investment property. Therefore, you want to consider your neighbourhood and how you can renovate the property. University towns are great areas to look at, as they consist of student renters who are often ideal tenants. You’ll also want renovations that aren’t specific to your taste and appeal to the general population.

What rental income can I plan for?

Of course, for house hacking to work, you need to plan how much you can earn in rental income. That is very dependent on where you House Hack. Vacancy rates are tightening after they fell during the pandemic’s peak, so conditions are becoming more favourable for landlords. In many Canadian markets, you can expect at least $1000 of rental income, and in peak metropolitan areas like Toronto or Ontario, you may be able to get $2000 monthly. To determine how much you can earn, but sure to do research localized to the region you are looking to buy in.

You have to put your investment before your comfort

House Hacking is time-consuming and full of upfront costs

Purchasing a home is hard. It’s even harder when you’re trying to buy a larger home so you can House Hack. There will be costs that you will have to pay upfront, including a down payment, lawyer fees and realtor commissions. Additionally, you’ll likely need to renovate the property to make it desirable to tenants. Renovations will further take time, and it can be a stressful process for some. If you don’t have the time or capital for these upfront costs, then House Hacking may not be suitable for you.

House Hacking means being a landlord is your new part- or full-time job

The idea of your mortgage payments being paid by a tenant seems amazing. However, you want to remember that you’re a landlord, which will take up a sizeable part of your week. Despite what some believe, being a landlord is a job and requires attending to particular duties. You must prepare to find tenants, draft leases, and manage ongoing tenant issues and maintenance requests.

Because you’re living with your tenant, a rigorous tenant selection process is more important than ever. You’re not just looking for someone to pay your mortgage; you’re looking for someone to cohabitate with.

Property management is much easier when you live there

On the flip side, property management can be challenging when you’re far away. Often landlords may live in a city but have investments across the province. If a toilet’s clogged at 2 AM, a landlord often can’t just get out of bed and drive over. Calling a plumber or other professional to remedy the situation may also be expensive or challenging. This issue doesn’t exist when you House Hack because you live with your tenant. If there’s an issue at 2 AM, it’s a matter of going downstairs or to the other unit.

Tax considerations have both pros and cons

There are both tax benefits and disadvantages to House Hacking. In terms of benefits, House Hacking lets you deduct the costs of being a property owner, such as property taxes, house maintenance, utilities, and interest payments.

In terms of disadvantages, the Canadian tax system will not allow you to claim the whole property for your principal residence exemption—only for the areas of the home you live in. This is easily calculated if you’re in a duplex, triplex, or renting a basement apartment. But more complex situations such as a tenant that shares a kitchen and bathroom can create confusion about your tax bill. In this case, it is best to talk to a tax professional to see how much you can deduct and how much you can owe.

Final thoughts

House Hacking is a way to buy property while minimizing your financial expenditures. However, it’s not as simple as getting a “Get a House for Free Card.” It will take time and money, and whether you have enough of both to reap the benefits of House Hacking is dependent on your situation.

The post How a House Hacking Strategy in 2022 can reduce your Housing Costs to Zero first appeared on RankMyAgent - Trusted resource about Buying, Selling and Renting.

Besides the stress test, Credit can disqualify you from a mortgage

In a more case-by-case scenario, a common factor for mortgage rejection is poor or no credit history. A credit score is a number on a scale of 350-900, where 350 is bad and 900 is stellar, which explains a person’s ability to pay off their debts or their debt utilization rate (let’s say you have $10 000 of credit available but have only used $1000. You have a 10% credit utilization ate – the lower the rate, the better the credit score). In addition to your history of paying off debt and credit utilization rate, the score looks at how long you have had a credit account, new inquiries for credit, and other factors.

Quite frequently, first-time homebuyers run into issues with their credit score. This could have been a mismanaged credit card or high student loan debts, which would have resulted in a terrible credit score. Another issue is if the person has never had credit. This would result in no credit history that the lender could rely on.

There is hope, however. Even with a bad or missing credit history, individuals can still get approved if they have a guarantor or co-signer. This is someone legally liable for your loan payments if you default. For many first-time homebuyers, a co-signor or guarantor is a family member.

Self-employment is another common way people find themselves unable to approve their mortgage applications. Due to the instability of their income, A lenders find self-employed people a greater risk. Thus, the bank may require a higher taxable income or a larger down payment to approve someone self-employed.

Lastly, life is full of twists and turns, and many people make financial mistakes; this can result in bankruptcy. People who have declared bankruptcy in the past few years won’t get approved by any major bank and will have to seek help from a B or private lender.

The alternatives

While A lenders consist of the major banks (RBC, TD, CIBC and Scotiabank) and the major credit unions (Meridian, Vancity and more), there are many more organizations willing to lend money. However, just because an A lender has declined you doesn’t mean your only option is to take a stroll to a dark alleyway and find a loan shark that charges a 50% interest rate. That’s where B and C Lenders come in: alternative lenders have a lower barrier to entry in exchange for a higher interest rate. They also commonly charge a processing fee of 1-2% of the mortgage and a brokerage fee, usually 0.5% of the mortgage.

It should be noted that using a B or C lender often is not a permanent fix. The mortgage terms tend to be shorter, up to 5 years. Many borrowers use an alternative lender to rebuild their credit and then switch to a mortgage with an A lender later on.

B Lenders

Contrary to what one might think, there are dozens of banks in Canada. Many of these smaller banks, such as Equitable Banks or B2B Bank, allow clients to miss one or more of the components that the big banks look for in a client. For example, they may approve someone even though they have a poor credit history if the applicant has a stable job and no recent bankruptcies. B lenders also more heavily consider the property being purchased in offsetting default risk.

B lenders can also be found at the Big Banks. With Canada’s housing industry roaring over the past couple of years, the major banks have diversified, and their mortgage departments often feature B level lending arrangements.

There is no need to fear B lenders. B lenders are still reliable organizations, commonly listed on the stock exchange, and have many clients worldwide. While banks dominate the mortgage market at approximately 71% of the market and credit unions at 15% of the market, the other 15% or so of the market are B or C lenders. The Canadian Mortgage and Housing Company also approve them as a mortgage lender.

C Lenders (Private lenders)

After both A and B lenders have turned you down, private lenders are usually the last resort. These lenders are often wealthy individuals or a group of individuals who lend out their own money for a better return, such as Mortgage Investment Entities (which can also be B lenders). However, as private lenders take on an even riskier clientele than their B-lending counterparts, they also charge a higher interest rate. As a result, you can expect interest rates anywhere between 10-to-18% and even more.

The barriers to entry for these mortgages are lower than that of B lenders. Instead of approving a mortgage only on credit scores and occupations, a private lender weighs more emphasis on the property type and value. If you are refinancing a home, they also consider the amount of equity you already have. This is not to say that other lenders don’t consider the property itself, but private lenders care more about it. It is the type of property that lenders seek to buy, and their high-interest rates that reduce the risk that C Lenders hold.

Lastly, because you may not be dealing with a massive and trustworthy corporation in the private lending landscape, it is best to have a lawyer thoroughly look over any documentation.

How to get a subprime mortgage: B and C Lenders

The term “subprime mortgage” should not give you a flashback to the 2008 recession. Subprime mortgages are realistically a part of everyday life and refer to any loan granted to those with a poor credit score. The mortgages provided by B and C lenders are usually subprime mortgages.

So if you’ve decided to get one, where should you start? Unlike A lenders, B and C lenders do not have a brick-and-mortar stores at the corners of every major intersection. And while you could scour the websites of every B-lender bank looking for the best rate, it may be more efficient to contact a mortgage specialist.

Mortgage brokerages or freelance mortgage specialists help homebuyers navigate the alternative lending market. They have access to multiple lenders and their mortgage rates, and they can even negotiate a lower rate for you. With their expertise, they can also find the most suitable lender for your situation. However, they take a percentage of your total mortgage as a commission, which can motivate them to approve you for a mortgage you shouldn’t be approved for.

Online mortgage brokers are now also a popular method to scour the B-and-C lender landscapes. These brokers cut margins by operating online and passing the savings onto their customers. Using technology, they can find out who the best lender is for you.

If a major bank has denied your dream mortgage, there’s still hope. Though it may cost a bit more in terms of interest, you can use B and C lenders as a temporary stepping stone you get your credit back on its feet. B and C lenders can help you get one step further to do what you thought was previously impossible.

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What are A Lenders?

A Lenders, for the most part, are the most prominent financial institutions in Canada that (as part of their many services) are in the business of giving people loans to buy houses. Even if you can’t define A Lenders, you know what they are. They are the largest banks in Canada: Bank of Montreal, CIBC, RBC, TD Bank, National Bank of Canada, and Scotiabank. They are also the largest credit unions in Canada: Vancity, Meridian Credit Union, Desjardins and more.

What makes these lenders rank A is their reputation and demand. When people are looking for a mortgage, the big banks, and to a lesser extent, the big credit unions, are who people go to. Part of that is a feedback loop, as people go to them because they have the capital to do business with a lot of people, partly in turn because so many people go to them.

What also makes them A Lenders is that they are also compliant with the federally mandated Mortgage Stress Test. Even if you don’t need mortgage loan insurance, you must pass the stress test to get a mortgage with an A Lender. To pass the stress test, you need to pass the minimum qualifying, which is the higher of 5.25%, or the rate offered by your lender plus 2%.

Banks are compliant with the stress test because the federal government regulates them. Credit Unions and Caisses Populaires technically do not have to comply with the stress test, as they are regulated by the provinces and not the federal government. However, the large credit unions, A lenders, comply with the stress test by choice. Aside from those seeking a mortgage, you also need to pass the stress test if you already have a mortgage but want to refinance your home, switch to a new lender or take out a home equity line of credit. The Mortgage Qualifier Tool is useful for those wondering whether they qualify for a mortgage from an A Lender.

In short, A Lenders get the rank of A because of their reputation, their capacity to give loans, and the fact they are compliant with the mortgage stress test. They have more red tape to get through – but less risk. If you get a mortgage from an A Lender, you are a “prime borrower.” Things are a bit different for B Lenders.

What are B Lenders?

B Lenders get the rank of B because they are often people’s second choice when they do not qualify for a mortgage from an A Lender. B Lenders typically provide mortgages to people who would not be eligible for an A Lender mortgage because of their income or credit score. B Lenders generally are Credit Unions of Caisse Populaires that do not follow the stress test and Mortgage Finance companies.

For many people, personal circumstances may make getting a mortgage from an A Lender difficult or even impossible. This doesn’t mean that those people are financially irresponsible: life is far more complicated than that. With the Canadian real estate market, those people may have the resources to afford a home, just not under the requirements from A Lenders. B Lenders are not giving out mortgages like free samples at Costco, but they have less stringent requirements than A lenders. For example, most banks, at a minimum, require a credit score of 600 (if not more) to approve people for a mortgage. B Lenders are more willing to give mortgages to those with credit scores below 650. Through the mortgage, they also allow borrowers to build their credit score. Asides from credit scores, B Lenders are more willing to provide mortgages to those with different types of income (A Lenders usually look for a steady, guaranteed income, making things more difficult for the self-employed), those with higher debt ratios or those who have been previously bankrupt.

Of course, because B Lenders are providing mortgages to those who would be considered higher risk (from a lender’s perspective), their interest rates tend to be higher, usually up to 2% compared to A Lenders. They also require a higher down payment than the typical 5%, generally at least 20%. Mortgages from B Lenders may also have higher closing costs. For many people, a B Lender may be an excellent option for those who are refinancing and want to switch from an A Lender to a B Lender.

How to find B Lenders?

Overall, the advantage of a mortgage from a B Lender is that they are more lenient to those who have a poor credit history or non-traditional sources of income. However, the disadvantages are higher down payments and interest rates. One other drawback to B Lenders is that because they are not as well-known as the banks, it can be harder to find more information. However, that’s where the right mortgage broker can provide immense value and find you a suitable B Lender for your situation.

However, beyond seeking a mortgage broker for help, B Lenders are also more common than you think. For instance, A Lenders may also have B Lender Divisions – so if you have a current mortgage at your bank or credit union, you may be able to find a B mortgage at the same institution. Banks dominate the market share of mortgages at 79% of the market, and Credit Unions and Caisses Populaires come in at second at 14% – a decent amount of those institutions have B Lender divisions. At 5%, the third-largest type of mortgage lender is Mortgage Finance Companies, Insurance and Trust Companies, followed by Mortgage Investment Entities at 2%. These institutions are the prototypical B Lender. So yes, B Lenders aren’t on every corner like a CIBC, but they exist, and depending on your situation, it might be worth a look.

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Although the test makes it harder for homebuyers to qualify for certain mortgages, it’s one of the many efforts that the Canadian government is taking to reduce the rapid appreciation of home prices in major Canadian cities.

This article answers some of the questions regarding the new mortgage stress test, such as what it is, how it has changed in 2021, what to expect as a result, and what first-time homebuyers can do to adjust to the mortgage stress test.

What is a mortgage stress test and how has it changed in 2021?

You may be hearing the term “mortgage stress test” for the first time, but it’s nothing new. A prior mortgage stress test came in 2018. The test requires that a borrower theoretically make mortgage payments at a substantially higher interest rate than what a bank had qualified them for. This protects borrowers by assuring that they can maintain mortgage payments if interest rates increase — a not unlikely scenario as Canadian rates sit at historic lows.

On June 1st, 2021, the Office of the Superintendent of Financial Institutions (OSFI) and the Department of Finance introduced a new mortgage stress test that impacts anyone applying for a mortgage starting June 2021.

If you already have a mortgage, you won’t have to worry about this new stress test. But any home refinances, homeowner line of credits, or a switch to a new lender require the revised test. OFSI also plans to review the mortgage stress test every December moving forward – whether that’s increasing or decreasing the requirements.

So, if you obtain a mortgage rate of 2%, the stress test focuses on whether you could qualify if the rate were 5.25%. If your mortgage rate is 6%, you’ll have to be eligible for a theoretical mortgage rate of 8% (6% +2%).

This stress test applies even if you fulfil credit score requirements and have a 20% down payment ready. Many believe that homebuyers of all income levels should see a 5% change in the amount of mortgage they can qualify for.

As an example, imagine you’re trying to purchase a $500,000 home with a 20.0% down payment. This means you’ll have a $400,000 mortgage. Let’s also assume the amortization period is 25 years. Without a mortgage stress test, a 2.0% mortgage interest rate would mean you’d have to be able to make a monthly mortgage payment of $1,694.

However, because of the mortgage stress test, it means being able to hit that 5.25% rate, or monthly payments of $2,384, to qualify for your mortgage. Before June 1st, 2021, the 4.79% mortgage stress test rate would require you to be able to make payments of $2,279 per month.

A bank then takes this mortgage payment rate and compares it to your income and other expense (and your partner’s if you’re purchasing the property together) to determine whether you could make such a monthly payment and qualify for your mortgage under the stress test.

Likely in anticipation of the stress test, the Canadian Real Estate Association reported that the number of homes sold in April fell 12.5% from the month prior. Although the market remains hot, this is the first sign of some unwinding.

An economist for RBC, Robert Hogue, states that the revised stress test is only a “partial” fix to the unbalanced Canadian housing market. Hogue believes that the stress test, along with a gradual rise in long-term interest rates, a resumption of office work, and other factors, will cool demand further. As well, high real estate prices could further entice some to cash out, meaning more supply.

Overall, although a cooling of the market may continue into the months to come, it’s not likely that this revised mortgage stress test was the trigger. The test is only one factor, among many, that’ll lead to a more balanced real estate market. Other policy decisions such as vacant property tax on non-resident homeowners will also factor into the market balancing.

Simultaneously, policies such as increased immigration could put upward pressure on home prices in Canadian cities.

What can first-time homebuyers do?

Although the mortgage stress tests aim to make housing more affordable, first-time homebuyers may find this as another obstacle to owning their first home. Here are a few tips on how first-time homebuyers can cope:

• There are many tools first-time homebuyers can take advantage of, such as the first-time homebuyer incentive or the ability to borrow from your RRSP.
• Because real estate prices are at record highs, some parents are either downsizing or taking out a loan against their home’s value to provide funds for their children’s first homes.
• The opportunity to work remotely means many are no longer bound to live close to an office. As a result, some can move to areas where real estate is more affordable.

The mortgage stress test is one-way policymakers hope to put downward pressure on the quickly appreciating real estate market. Overall, the recent revision will make it harder for all homebuyers to purchase a home. But, for those purchasing the first time, don’t forget the many tools available to you despite reducing what you can afford.

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