I received this email from Daryl Colin thru Facebook yesterday, and think it is valuable information for anyone considering a new mortgage.

Daryl Colin November 25 at 5:35pm

You may be attracted to a mortgage rate that’s 10 bps or more below the market, but that rate may signal a no-frills product that comes with significant limitations on what you can do within the contract terms.

No-frills mortgages are stripped-down to eliminate features that add costs. Typically, no-frills products are designed to appeal to purchasers who are highly cost-sensitive, such as those who might not qualify at higher rates, and first-time buyers with limited opportunities to make prepayments. No frills products are also suited to purchasers who want a re-advanceable mortgage with a low-rate fixed portion that they don’t plan to pre-pay, and for investors, for whom interest costs are deductible.

You generally give up the following:

• No frills is fully closed

This usually means you are committed to the full term of the mortgage. Restrictions to an early payout may be more than a traditional mortgage or have certain requirements that need to be met prior to doing so. Lenders may vary on their definition of fully closed so it’s important that the fine print is explained.

• Prepayment privileges are restricted

Most lenders offer at 10-20% annual prepayment privilege against your mortgage going directly against principle . A no frills product may not have this or offer a significantly reduced amount or in some cases have it eliminated.

• No top-up options

This means there may be restrictions if you decide to refinance or want to borrower more.. Additional penalties or fees may be charged.

• Quick closings/No pre-approvals and longer-than-average approval times

Your mortgage must close in a certain time period in order to qualify for the no frills (low rate) mortgage. In some cases you may not be able to have rate guarantee longer than 30 days.. It’s important to make sure you know the rate hold policy.

• Limited choice of lender from which you can transfer without legal fees

In today’s competitive market most lenders will absorb the legal fees to transfer a mortgage to their institution on the renewal date. Since no frill mortgages are set up with terms and conditions that are unique to the norm it may require additional legal work for the new lender to facilitate the transfer.

The bottom line: Mortgages differ from lender to lender so it’s important that you sit down with an accredited mortgage professional to understand all your options.

I received the information below from a mortgage broker I was not aware of until today, and thought it relevant to those of you who are interested in investing in real estate.

Residential and Commercial Multi-Unit (Underwriting Guidelines)

The following issue of Financial Report will concentrate on commercial and residential multi-unit underwriting. I will show you what banks, trusts and CMHC look for in clients and properties before recommending deals for approval. This info will be of particular interest to you, if you work with investor clients who are looking to diversify their investmet portfolios by adding some real estate to it as well as additional source of passive income.

Underwiting Residential Investments (1-4 units)

• 1-2 units as low as 5% down – purchase (refinance – 95%)

• 3-4 units as low as 10% down – purchase (refinance -90%)

• Conventional deals start at 20% down

• Must be zoned Residential

• Usually lenders ask Retrofit Certificate and Legal Zoning

• Can be owner occupied or pure rental

• 80% of the rental income is used to qualify the deal in addition to applicants income

• Minimum Beacon scores are 600 to 650 – depending on circumstances

• Down Payment can be gifted or borrowed as long as applicants qualify. Also Down Payment can come from proceeds of refinance of other properties, including principle residence.

• Income coming from other properties can be used as well

• Some lenders use Rental Offset, which helps a lot in qualifying new purchase or refinance.

• General rule is – Property should be self-supporting.

• Debt-To-Coverage should be between 1.25/1.00 (CMHC) to 1.10/1.00 (Convential)

• Some lenders require rental spread-sheets to be completed some only consider existing rental agreements.

• 2 year financial history on the property is preferred

• Maximum Amortization is 35 years (Important for cash-flow)

Underwriting Commercial Investments (5+ Units)

• CMHC will consider Multi-Unit Properties with as low as 15% Down Payment

• Down Payment can be gifted or borrowed as long as applicants qualify. Also Down Payment can come from proceeds of refinance of other properties, including principle residence.

• Ideally, investors should have some experience in running residential type of investments

• CMHC requires that the borrower have a net worth equal to at least 25% of the loan amount, with a minimum of $100,000.

• Minimum Debt Coverage Ratio (DCR) based upon agreed amortization period and the contract interest rate (minimum five-year term)

• Rental properties with five to six units: 1.10, 1.20 (for refinance)

• Rental properties more than six units: 1.30 (term less than 10 years) 1.20 (term 10 years or more)

• Loan-to-Value Ratio:
Up to and including 80% – 3.50%
Up to and including 85% – 4.50%

• Conventional deals start at 75% Financing

• Vendor-Take-Backs may be considered subject to qualifications.

• Financial History and Statements of the building are required for at least 2 years (Some times up to 3 years, depending on the lender)

• Amortization can be higher or lower then 25 years depending on the useful life of the building and general property condition.

• Appraisal by an AACI accredited appraiser and Phase 1 Environmental Assessment as usually required. (CMHC and Conventional)

• Commercial Insurance Specialist will prepare an Insurance Binder in accordance with lending institutions requirements.

Approval Process:

1. Application with all applicable docs is submitted to the lender.

2. Letter of Interest is Issued outlining various conditions.

3. Once signed and all applicable conditions are met, application gets sent to CMHC or internal department for final approval – if conventional.

4. Once approval is granted, internal credit sends the file to its treasury department to lock-in the rate.

5. Instructions issued to the lawyer to register upon closing.

This is great information, and very useful to keep bookmarked in your browser, so you can get a solid idea of cash requirements, lender requirements, etc. For an even better idea, let’s sit down and invest an hour in discussing your thoughts and plans for investing in real estate anywhere in Ontario.

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