Mortgage lending has become very complex, with constantly changing rates, terms and conditions. Each lending institution has its own criteria that apply to potential borrowers. Some insist on a particular type of property as security, while others require a certain type of applicant. In this latter case, factors such as type of employment, job stability, income and credit background are weighed. There is a broad range of philosophies and policies held by the various lending institutions on the issue of security and applicant qualifications in order for a lender to advance mortgage funds. These are subject to change from time to time.

Other factors such as the availability or shortage of funds, past experience in a specific area and perceived resale market for a particular property could also affect mortgage approval.

Mortgage brokers make it their business to know all the various plans and lending policies, as well as the lender’s attitude on various aspects of mortgage security and covenants. For this reason, a mortgage broker performs an invaluable service in the real estate financing process. Their role is that of matchmaker; attempting to introduce the appropriate lender to the purchaser. Mortgage brokers are governed by provincial legislation.

Mortgage brokers have access to numerous sources of funds, including the following:

• Conventional lenders such as banks, trust companies and credit unions;
• Canada Mortgage and Housing Corporation (CMHC);
• Private pension funds;
• Union pension funds;
• Real estate syndication funds;
  nsurance companies;
• Private lenders.

Knowing all the lender’s objectives, the broker is capable of matching the applicant and his or her property with the appropriate plan and lender. Alternatively, the broker can provide a series of mortgage plans from which the borrower may select the one that best suits his or her needs.

Basically, here is how the process works. The normal procedure is for you to complete an application form supplied by the mortgage broker, provide a copy of the agreement of purchase and sale, as well as provide proof of employment, the length of time employed and your annual salary. A letter from your employer is often also required. If you are self-employed, you are normally required to provide the last three years of financial statements of your business and/or copies of the last three income tax returns for your business.

In addition, you normally pay the mortgage broker the cost of obtaining an appraisal of your property. The broker also does a credit bureau search. The broker attempts to get you a good deal, by matching you up with a lender who will loan you money based on your financial needs, the terms you require and the information that you have supplied. Since brokers operate exclusively in the money market, they know at any point in time who is giving the best rates and most favorable terms. Tentative approvals are generally given within one to two business days from application.

Mortgage brokers basically offer two types of services:

• a simple mortgage that will get automatic approval in your particular circumstance, especially when the buyer is living in the home. Consequently, this saves you a lot of time and frustration spent searching. The broker generally receives a commission directly from the lender–a “finder” or “referral” fee. You don’t pay any extra money or higher interest. Lenders do this because the mortgage market is so competitive.
• a more complex mortgage that would not be automatically approved, or possibly was initially declined by prospective lenders. This takes more time, skill, and persuasion on the part of the broker to source out a lender or number of lenders who will provide the funds you need. For example, if you did not have the normal amount of money required for a down payment, had a negative credit rating, were highly leveraged already, did not have the normal income required or were recently self-employed, you would probably be turned down by a conventional lender such as a bank, credit union or trust company. Mortgage brokers also provide other services such as the financing of construction, recreational or revenue properties, debt consolidation and financing of equity.

If a mortgage broker succeeds in arranging your financing, given the above types of more difficult factors, you would pay a commission. The amount of the commission is based on the degree of difficulty in arranging financing and other related factors.

To find a mortgage broker, look in the Yellow Pages of your telephone directory, ask your real estate lawyer, or your realtor. Remember to “comparison shop” before deciding who to deal with. Most mortgage brokers are available by phone or pager seven days a week and will arrange to meet you at your home or office in the day or evening, depending on your needs. You can also use a mortgage broker to obtain a pre-approved mortgage commitment and mortgage term guarantee, generally good for 60 days, depending on the market. If the mortgage rates go down by the time you need the funds, you get the lower rate, and if the rate goes up, you are guaranteed the original commitment rate.

Some people wish to invest in real estate as part of their financial investment plans. It could end up being a profitable long-term investment or a losing one, depending on the strategies you apply.

Take the time to develop your investment program thoroughly. As with any plan, you will need to monitor and possibly modify it on a regular basis due to changing circumstances. The safest way to make money in real estate is through prudent and cautious investment.

Don’t look upon real estate as a get-rich-quick scheme. There are many who adopted that attitude–to their misfortune. Be wary of U.S.-oriented real estate investment programs. In many cases, they may not be directly applicable to the Canadian context, due to differences in legal and tax matters. Some others may be borderline on their ethics. Some real estate seminars and books promote the concept of becoming rich through property tax sales, foreclosure sales, quick property flips, and the selling (assigning) of the agreement of purchase and sale before closing. In Canada, extreme caution is advised, as these options are not always applicable, or they are applicable only with considerable difficulty and risk. Money can be made in real estate through informed and cautious application of basic principles, formulas, and systems.

The following is an outline of some key real estate investment strategies.

• Thoroughly research the market before any decision is made. Have at least three potential properties if possible.
• Give yourself a realistic timeframe in which to realize your investment objectives. For example, normal real estate cycles are five to eight years, and in some cases 10 to 12 years.
• Buy specific types of revenue property that are in demand and are easy to maintain and/or manage (for example, a single-family house–ideally with a basement suite for separate revenue, a condominium, duplex, triplex, or fourplex. Don’t buy an apartment building until you have experience as a landlord with several smaller properties, unless you are going in with experienced investors.
• Attempt to put down a low down payment (for example, 10 to 15 per cent). An exception of course would be if your comfort level was a maximum of 75 per cent financing. If you have a low down payment it frees up your available cash for other properties. Compensate for the low down payment by having a vendor take-back mortgage, high ratio of financing, or second mortgage.
• Strive to have a break-even cash flow. In other words, try to avoid debt-servicing the property because of a shortfall of rental income. Make sure you cover all expenses from cash flow such as mortgage payments, taxes, property management, condominium fees, insurance, repairs and maintenance and allowance for vacancies.
• Ensure you have competent management, whether you do it yourself or hire an expert.
• Be very cautious about going into group investments. If you do, get objective advice from a real estate lawyer and professional tax accountant before you commit any money. Ask about the risks and protections.
• Use professionals at all times. Tap into their expertise for your peace of mind, enhanced revenue potential, and reduced risk. This includes carefully selecting a lawyer, accountant, building inspector, appraiser, contractor, realtor and property manager. Professionals will also help you in establishing realistic projections.
• Never pay more than “fair market value”.
• Use tax laws to the maximum.
• Keep rents at market maximums and manage expenses to keep them at market minimum.
• Buy when no one else is buying, and sell when everyone else is buying. This is the so-called contrarian view of investment. It does the opposite of conventional wisdom or the “actions of the masses”.
• Always view and inspect before you buy. Verify all financial information. Obtain your advisors’ guidance.
• Have a minimum three-month contingency reserve fund for unexpected expenses such as repairs or a reduction in cash flow (vacancies).
• Consider applying the principle of “pyramiding”, or purchasing selected real estate on a systematic basis. For example, you may purchase one or two properties a year when the cycle is in your favor.

There are many risk areas that could affect your financial net worth, cash flow, quality of retirement, and lifestyle. In many cases, you can eliminate, minimize, or control each of these risk areas by knowing about them, doing research, and making prudent decisions. Statistically, if you retire at 55 years of age, you can expect to live to 85 and have 30 years of retirement–almost as long as your working life. Planning to have enough funds to meet your lifestyle needs is obviously very important. Some of the following potential risk areas are interrelated, but they are considered separately because they should be specifically identified as risks. They all have financial implications, directly or indirectly. By obtaining customized financial planning advice from objective and qualified tax professionals, you should be able to anticipate and neutralize many of the following risks.

Currency risk
This is a particularly important issue if you are a Snowbird or travel a lot. If the Canadian dollar drops in value relative to the U.S. dollar, you will obviously notice an increase in the cost of living due to the reduced purchasing power of your Canadian money when you convert it to U.S. currency. The value of the Canadian dollar is dependent on many variables, both national and international. If it goes down five per cent, you have lost five per cent of your purchasing power in the United States.

Inflation risk
This is one of the most serious financial risks to those in retirement. Although both Canada and the United States currently enjoy very low inflation rates, that can quickly change. As you are probably aware, inflation eats away at your purchasing power. Inflation at five per cent will reduce your purchasing power by 50 per cent in less than 15 years. If you have investments that have interest rates or value that changes with the rate of inflation, or if you have annuities or RRIFs indexed for inflation, then your purchasing power would at least remain constant. If you have a fixed income, the inflation issue is especially critical.

Many people are not aware of the various factors that can affect mortgage interest rates. Once you have a better understanding of these factors, it will improve your knowledge of the way the mortgage money system operates, and increase your confidence and skill when selecting and negotiating your mortgage.

Here are some of the key influencing factors:

Federal government policy
Through the Bank of Canada–the central bank–the federal government sets the prime bank rate. This is the rate that the Bank charges on short-term loans to financial institutions. The rate is set each week on Tuesday, at 25 basis points above the average yield (interest return) on three-month treasury bills. The government auctions these bills weekly. One hundred basis points represents one per cent interest, therefore 25 basis points would represent 0.25 per cent interest. Conventional lenders such as banks, trust companies and credit unions adjust their prime rates and mortgage rates using the federal bank rate as a guide. The central bank rate therefore sets a trend throughout the system. There are various factors, as well as political and economic dynamics, which influence the federal bank rate.

Excess or shortage of money
There is a natural connection between the general economic cycle and the real estate cycle. The willingness of people to place money in a savings account is where the pool of mortgage money is created. A situation where the inflow of deposit funds is high (at RRSP time for example), the interest rates are low, and the lender has funds to lend is referred to as a “loose money” market. This has a positive effect on the real estate market. In this situation, real estate activity can be expected to increase, as more people will be able to afford financing and purchase a home or other real estate investment. As there is more activity in the market-place, there is a dynamic of supply and demand, and real estate prices can be expected to rise.

On the other hand, if the public thinks it can get a better return on other forms of investment than deposit funds (in a low-interest situation, for example) then the lenders are left with a shortage of money to lend for mortgage or other loans. This is referred to as a “tight money” market. The lender may reduce lending mortgage funds in many cases and be selective about where the money is loaned.

Type of lender
Rates vary among lenders, depending on their policies and restrictions. A more conservative lender may charge a higher rate than another. In general terms, conventional lenders, such as banks, trust companies and credit unions, tend to be fairly competitive in the rates they charge for mortgages. A private mortgage lender generally wants a greater profit, and will therefore charge more.

Quality of borrower
Lenders assess the credit-worthiness of the borrower and the ability to pay back a loan. A borrower with fewer assets, recent employment or self-employment, or a spotty credit record will pay a higher rate of interest than a borrower that has the opposite profile. This is reflected in the case of loans to a business. The lowest-risk/no-risk customer could receive the prime (lowest) rate of interest for a loan, while higher risk businesses could pay from prime plus one to prime plus six per cent.

The following are mutually exclusive but frequently inter-related reasons:

1. Attractive Return on Investment ( ROI )

The potential for an attractive return on your investment is very high in real estate, especially taking into account an increase in property capital gain and positive revenue cash flow income.

Historically, real estate has increased in value greater than inflation and many other forms of investments. Depending on the geographic location and type of property investment, the gains are frequently double-digit and sometimes triple-digit. Through the application of financial leverage, the net returns in cash flow and property appreciation can be considerable.

Example: If the investor puts 10% down and borrows 90% of “other people’s money” eg lender financing, the return on investment (ROI) is calculated on the actual amount the investor contributes of their own money. Using this formula, the ROI can be immense. For example, if an investor buys a $200,000 house for investment with 10% down payment ($20,000) and a 90% ($180,000) mortgage, and the property doubles in value ($400,000) over 5 years, the equity increase would be $200,000, or $150,000 net after capital gains tax. This would represent a 750% return over 5 years or 150% ROI annual average over the original investment of your own money of $20,000. Also, the mortgage debt would have been reduced over the 5 years, providing even more equity.

In the example above, there would be no negative debt financing required by the investor, as there would be break-even of expenses over income. However, if the investor was astute and well informed, there should be positive cash flow. This would mean that the actual average annual net ROI (after tax) of the investor would be greater than 150% annually on the original investment of $20,000. In addition, the fact that there is a positive cash flow is one factor that automatically increases the value of income-producing real estate, sometimes very substantially.

2. Tax Advantages

There are numerous types of tax advantages to investing in real estate, whether you have a principal residence or investment income property. It would be difficult to find an investment that has as many financial benefits as real estate.

Example: All the interest you would receive from a bank account, term deposit or GIC is fully taxable as income. If you are obtaining interest of 4% on your deposit (the nominal rate) on your deposit, and the inflation rate is 3%, the effective or real rate of return is 1%. If you are paying tax at a 35% rate, then effectively you are breaking even, or possibly having a negative return on your money. In practical terms, taking inflation and taxes into account, you have lost on your bank deposit investment. Equity investments in the stock market have a degree of risk, depending on the nature of the investment, of eroding the principal and having no positive return.

By Douglas Gray
Published in Western Canadian Recreational, Resort, and Investment Properties Magazine

Everybody’s heard of Whistler, British Columbia. Fantastic skiing, great golfing, and soon a player on the world stage as host to several of the Vancouver Winter Olympics events. It’s a place lots of people visit, with many buying into the Whistler dream, purchasing a property, and becoming some of the resort’s best ambassadors.

WHISTLER HAS A long history of providing lifestyle pleasures.Whistler Mountain officially opened for skiing in 1966, and Blackcomb Mountain in 1980. In 1998, both mountains merged under Intrawest Corporation. Intrawest, based in Vancouver, is one of the World’s largest all-season resort developers and recreational lifestyle companies. Since its humble beginnings, Whistler has evolved into one of the premier all-season international resorts.

WIDE RANGE OF HOUSING OPTIONS Why is Whistler so hot? The spectacular scenery is one reason. The infinite variety of outdoor four-season recreational pursuits is another. The quality of lifestyle and proximity to Vancouver are other influencing factors. Investors find Whistler appealing due to its positive international reputation, activities and amenities, and the types of housing options available.Approximately 85 per cent of buyers are second or third time property homeowners. About a third come from the Greater Vancouver area, followed by the U.S., rest of Canada, rest of B.C., then the UK and Asia. Buying a property at Whistler is not just for the rich. According to Heather Clifford of The Whistler Real Estate Company, there is a wide price range, from the modest to the super luxury from $150,000 to over $5 million.