15. Mortgage Masterclass with Bud Jorgenson
Transcript:
Evan Neufeld: Hello, and welcome back to the Canadian Money Roadmap podcast. I'm your host, Evan Neufeld.
Today joining me is Bud Jorgensen, one of the partners at The Mortgage Group, a national mortgage brokerage, and he oversees operations in Saskatchewan and Manitoba. Throughout his career, Bud has been a part of $12 billion of mortgages issued and so he is my expert today on how to get a mortgage and some features that you should be looking for when you're looking to buy a house. So Bud, thanks so much for joining.
Bud Jorgenson: Thanks for having me.
Evan Neufeld: Okay, so first things first, maybe I'll get you to give me a kind of a “mortgages 101”, because whenever you see ads online or things like that, you see things like a variable mortgage, a fixed mortgage and open and close different term lengths, things like that.
So maybe just a quick overview of what is a mortgage and what are some of the options available to people?
Bud Jorgenson: Well, in the simplest terms, mortgage simply means a form of borrowing. Using a home as security. Then obviously within that, there's a number of different products that you can have, a number of different terms that you could have in that. So there's obviously a, one-year, two year, three year, four year, or five year in Canada. 95% of all mortgages fall into that five-year category and probably about 75% of those are what's referred to as a fixed rate mortgage, which means for that term of five years, you'll have that exact same rate and it won't go up or down. Traditionally with a variable rate mortgage it does go up and down as prime or the bank of Canada changes rates. The variable rate goes up and down and traditionally it has a discount below what you can get in a fixed rate. So there's some incentive to take that, but there's also some risk as prices could go up or down.
Evan Neufeld: I assume with the variable, there's a bit of a predicting factor too with the banks, they try to see like, okay, what are the chances of the interest rate going up or down?
And so they kind of adjust that spread between the fixed and variable. So, okay then open and closed, I've seen those terms before. What do those refer to.
Bud Jorgenson: An open mortgage, it basically just that means you can pay it out at any time and there's no penalty associated with that. Because of that, the banks charge a higher rate or the lenders for that product.
So it gives you the flexibility of moving out of the home. The only time anyone would use that, is if they plan on selling that home within the next six months or a year. The magic number is actually about seven months. It makes no sense for you to take an open if you're going to sell beyond seven months, because it's actually cheaper for you to take a variable rate mortgage and then pay a small penalty, than it is to pay a higher interest rate in an open mortgage. But open just means flexible to pay it off at any time.
Evan Neufeld: Okay. Perfect. So now assuming that there are very few home purchases that happen in Canada in cash and the vast majority of people buying a home need to get a mortgage, I'm going to assume there's lots of lenders looking for people to buy mortgages from them. So is that why a broker should be your first place to look for getting a mortgage, instead of just going to your branch? Maybe just give me a bit of a breakdown of why I should use a broker instead of going right to my bank.
Bud Jorgenson: Everyone asks me that question actually, but it's not that a broker isn't the same as going to a bank. So in some ways we're the same. If you came to us and said, I bank at this traditional bank and I want to do a mortgage, we can often help with that. So we can take you back to the bank. The difference is when you go to a bank. Most people, in Saskatchewan anyways, they go to the bank and say, I'm buying a $327,000 house and I need a $300,000 mortgage. So when we go to the bank, we say, Hey, we have 4 billion dollar’s worth of national business that we want to send your way. What's the discount that you're going to offer to us and our clients. And oftentimes the discount they give us is greater than the discount they'll give you for walking into that bank.
So just like any industry, a broker just simply has a number of different products. And as rates go up or down with each one of those lenders on any given day, we can always basically find you the best rate available. And sometimes it's with the bank and sometimes it's not it's with another lender.
Evan Neufeld: So when it comes to getting a mortgage, this could be your first home, second home, or anything like that. Walk me through the steps. When I had Kindra on the podcast a couple of weeks back, she talked about getting pre-approved for a mortgage before you kind of start shopping around and things like that. So speaking with a broker is one of the first steps to get pre-approved, or maybe walk me through that process of getting approved for a mortgage.
Bud Jorgenson: They used to be a number of different ways of doing this, but because of COVID and some of the changes we find that most people now are just doing those things online. So Kendra is exactly right that the first step is to be pre-approved, because there's no use looking at houses that you can't afford, or you just simply can't get it this time. What a mortgage broker does is look at the situation, find out exactly what that person's trying to accomplish and then lines them up with that, or informs them how to get ready for that.
There are times when, if somebody will apply for renting a house, the landlord slides the eviction notice under their door because he sold the property. Then they start looking at houses, but obviously that first step should have been that they call a mortgage broker. It doesn't always happen that way.
So we get lots of our referrals through the real estate agent because oftentimes they'll pull in the real estate agent like Kendra had said, but first step is just simply applying and providing us with your information. There's really only three things that you need in order to get a mortgage, which is good credit, a good job, and a down payment.
If you have those three things, then you get to buy a house in Canada. If you don't, then it's our job to coach you or show you how we can make that possible for you.
Evan Neufeld:. So a lot of the financial content that a lot of people will run into is very us centric. And if you've seen movies like “The Big Short”, or things like that, where people were buying five houses without a job. Has situations like that ever occurred in Canada or are there protections in place here where, you know, you mentioned having a good job and good credit, have those always been the baseline in Canada or if things changed in recent years that have made it a little bit more tricky or safe to get a mortgage.
Bud Jorgenson: For the consumer, it's become more difficult, but you're right. It's actually a positive thing and it's become more safe. There was a time where we were just in lockstep, basically with what was happening down in the States. But because they were ahead of us just slightly on some of those, we were able to adapt to those things and put in changes. So there's actually been about 50 rule changes in the mortgage industry over the last five years that have made it more difficult, but safer as an industry.
Most of them have been positive changes, but it is more difficult. The minimum credit score requirements have gone up. The forms of down payment that are allowable have been reduced down. So it's a little bit more tricky now to get that down payment in place, if you haven't had it saved, we have ways to make that happen, but that's more difficult.
And then the amount that you can qualify for a home has also been adjusted through the ratios that are used. Those have been adjusted as well. Also the qualifying rate has been increased. So even though the rates right now are 1.79 or 1.89, you actually have to qualify at 4.79 for your mortgage. So we're making sure that five years from now, if rates do go up that you can still afford that home. So lots of things are in place to protect the client.
Evan Neufeld:. Okay. So who is the governing body that actually puts that into place? Is that the federal government, is that another regulator? Is that the mortgage companies or the lenders themselves, or who's actually doing that?
Bud Jorgenson: It's actually all of those. The overseeing body is actually OSFI. That organization basically sets the rules or implements them, puts them forward, but they work with all of those organizations that you just talked about to find out what's the best path forward in order to make home ownership possible for people. But at the same time, make it safe for the economy and for all of Canada. So yeah. They all work together to make that happen.
Evan Neufeld: Well, that's good that there's some cooperation there between those bodies and less conflict than potentially. Okay. So CMHC, The Canadian Mortgage and Housing Corporation, I've seen them before. And the CMHC insurance is something that I've seen before. I work with insurance here and typically when I deal with insurance, it's protecting the consumer. CMHC insurance is slightly different. Can you talk about what their role is in a mortgage?
Bud Jorgenson: Yeah, It's actually a benefit to both the lender and the purchaser.
So CMHC was actually introduced into the market. As home prices began to escalate back in the day, there was 20% minimum down payment requirements on any house. Yeah. So, same idea. It's like to keep the market safe. The lenders didn't want to risk themselves too much. So then CMHC stepped in and said, okay, we're going to make the down payments smaller. So for the consumer, there's a benefit. Now you can buy a home with 5% down, but for the lender, it's also a benefit because there's literally zero risk associated with that. That mortgage is basically CMHC is the insurance company. The borrower pays for that insurance and it's capitalized into the mortgage. So you don't come out of pocket for it, but it's added to the mortgage. And that's basically CMHC, just telling that lender. We believe in this borrower; we're going to support this borrower. And if something does go wrong, we're going to take care of any losses for you. So the lender is secure. The borrower's able to buy a home where they otherwise couldn't because they didn't have the down payment and CMHC has that insurance premium that they set aside in case something does go south.
Evan Neufeld: So I imagine that some of these other factors that they've put into place have been to reduce CMHC is risk in a way, right? Because they don't want to take on ultra-risky mortgages all the time. And so they're saying, okay, we need to raise the baseline here for a minimum entry level into a mortgage.
Bud Jorgenson: That's exactly right. When OSFI, who I mentioned earlier, makes a rule change or they're worried about something or concerned about something, or even when CMHC is concerned about something, their first call, truthfully, that they call CMHC and they meet together and come up with policies that are to protect. In essence, it's to protect the Canadian consumer because CMHC is a government agency, but to protect the housing market and they worked together on that.
Evan Neufeld: So when we were talking about down payments, it used to be 20, but we can go as low as 5% and then anywhere in between. So the CMHC insurance premium fluctuates with your down payment. Is that correct? That's correct. Yeah. Okay. And so then is it gone at 20% because is that kind of the window there? Or how does that work?
Bud Jorgenson: Yeah, when you get to 20% down, it's a strange world right now, and this is a longer conversation, but when you get to 20% down it does two things.
One is it eliminates any CMHC premium and it sounds strange, but the more that you put down on a home today, the slightly higher that the rate will be. And the reason for that is I had mentioned earlier, when you have CMHC insurance, there is literally zero risk to the lender, none. So when you put 5% down the lenders completely on board with that, and they love that type of business because it provides zero risk for them. As a result of that, and as the investor in that product, the bank, they're really happy taking a lower rate of return. So when you get to 20% down, it sounds like that's less risk because you have more down, but the truth is CMHC now steps aside, and now there's no insurance on that. So now the lender is like, okay, I'll still lend you that money, but I'm going to charge you maybe like a 20 basis point premium for it. So oftentimes when we do the math for clients, it makes more financial sense for them to have that CMHC premium so that we will recommend just put 15% down on the house. Pay a smaller premium, have that insurance certificate for the next 25 years, the life of your mortgage. And every time you go revisit your bank every five years for a renewal, you're going there with your CMHC certificate and they're providing you that deeper discount and that deeper discount over 25 years sometimes makes more financial sense than getting to that 20%.
Evan Neufeld: Wow. Interesting. Okay. So that's a really good use case for using a broker. That they can actually shop around and find maybe something where there's a little bit more of an advantageous spread for you, depending on how much of a down payment you have. Very cool. Okay. So when I'm getting a mortgage, I've got a good job in my mind, I've got a good credit in my mind. How do you actually verify those things? What are some of the things that you would need to see as a broker to be able to verify those kinds of things?
Bud Jorgenson: Yeah. I always tell people that regardless on what you tell me right now, I have to provide proof to the lender of everything that we talk about.
So employment just requires that we are given an employment letter and the employment letter basically just spells out the terms of your employment with that particular employer. It also has a contact name at the bottom that the lenders then would call just to confirm that information. And then they often ask for your most recent pay stub, which also it should line up with the employment letters.
So those two things have to jive and then they'll also ask for something relating to tax return. Something as simple as your T4 from last year. And again, they're just looking that all of those things match up. So on a traditional employment, that's what they look for when somebody's business for self or self-employed, then they will look for actual tax returns is that they can dig into those a little bit.
Or if they have commission, then we'll go on a two year average of that income. So they'll ask for tax returns for the last two years, but it depends a little bit on the type of income. But for the most part, it's pretty straightforward. As far as the confirmation of that with credit, we just simply pull the credit and go off that credit report.
And then down payments are actually interesting. Because they can come from just about any source. So you can get a gift from parents. You can get a gift from a grandparent. You can get a bonus.
We've literally seen everything that you can imagine as far as down payments sale of cattle. But regardless on where it comes from, we just simply have to provide confirmation of that to the lender. So it's important that you came up with that down payment at some source. So regardless of what it is, we have to provide documentation to them.
Evan Neufeld: And do you have to have it in your possession for a certain amount of time, or maybe that does that vary with your type of income too?
Bud Jorgenson:. Yeah. It doesn't vary based on your income, but it varies based on the source. So you're exactly right. That it's 90 days traditionally, that we use to verify that.
So if it's somebody that saved up their down payment, then we'll get their 90 day bank statement and then it clearly shows that they've had that money for that period of time. If there's any large deposits within that 90 days, then we'll have to answer to that and explained to the lender, why there was a $7,000 deposit when we told them that that money was saved and it could be something like they sold a vehicle or sold cattle or whatever it is.
So it's 90 days, but if it's a gifted down payment, then we don't require that 90 days, we just need the gift letter and the proof of deposit of that gift. Right.
Evan Neufeld: So it all depends right, Classic answer. So say I've found a house, say I'm a completely different person than I literally am, and I find a fixer upper and I want to do some, some renovations and things like that. But I don't have the cash or credit to do the renovations on my own. Can I lump some renovation costs into a mortgage? Or how does that work?
Bud Jorgenson: Yeah it's actually, for two reasons, it's an incredible product it's called a purchase plus improvements. So the reason that it's more important than ever right now is because I'd mentioned earlier about the 50 rule changes that we've seen. One of those rule changes that would affect this would be that you can no longer refinance up to 95% of the value. So it used to be that people would buy, they put 5% down at home.
They'd live in it for four years and they'd pay down the mortgage slightly. And then the value of the home would go up as well. And it would create a little bit of equity and then they pull out that equity and say, okay, we've always wanted to redo this kitchen since we bought this house. And then they would do it.
That's no longer possible because you can only refinance to 80% of the value now. So when you put 5%, you're 15 years away from doing a refinance, but what you can do as a purchase plus improvements where we include the improvements in the purchase price. So if the improvements were 15,000 and the home price was 300,000, then actual purchase price becomes in essence becomes 315,000.
And that 15,000 is set aside and can be used to do those improvements for you immediately when you get into that home. So it’s a great product.
Evan Neufeld: No kidding. So what kind of verification would you need on that? Because, you know, I'm thinking I could maybe get a little bit extra on my mortgage at 1.79% and just dump it in the stock market or something like that instead.
So there has to be some sort of verification on that. To keep the risk in line with what the lender's looking for.
Bud Jorgenson: In the spirit of most of my answers so far, it would depend on the lender. It would depend on the amount of money that you have, if you have a larger amount than they ask for additional proof that it's complete.
But generally speaking, they would ask for an inspection report from an appraiser to go in. And when you said you were going to do the kitchen, they would confirm that the new cabinets were in place and they would check that box. Some lenders would ask for confirmation of paid receipts from the installer to make sure that it was done as well.
So you're right that the money actually is advanced on your possession day. But it sits at the lawyers waiting for that confirmation. It's the lawyer that has to stamp it and say, I know for a fact that this work was done, so it's pretty difficult to invest that money or do some something else with it or buy a hot tub, when you told them you were going to do the kitchen.
Evan Neufeld: So you have to be pretty careful when you're doing that, that it's actually based on a pretty set plan in advance. Okay. So you mentioned the word refinancing previously and that's kind of been a bit of a buzzword now as interest rates have dropped pretty significantly. Tell me about refinancing and some of the times that that might make sense for a client to consider.
Bud Jorgenson: Yeah, that's a great question because there's lots of times when somebody will say my rate's 3.69 right now and I got that rate at one of my favorite banks and I can see now that over at The Mortgage Group, you guys are offering 1.79.
So just simply do the math and that makes sense that we should do that, but there's this little trick in refinancing that you have to consider also the penalty to get out of your current mortgage and some of the lenders aren't as fair. Let's say, as far as the penalties that are associated with exiting, so they use an interest it's called interest rate differential calculation, and you get charged basically three months interest, or IRD, whichever is greater and then is ways that you can manipulate that IRD.
So it's more in the favor of the client and you can also manipulate it so it's more in favor of the lender and lots of the lenders that are out there have it in their favor and it makes it just about, yeah, it makes it just about impossible to get out of that mortgage and make financial sense of it.
You're basically prepaying all of the interests that you would have paid. So that's why it's important that you meet with, I'm biased I know, but a mortgage broker who will do that math for you and, look at the situation and just see if it does make sense for you. Oftentimes it doesn't, but there are times when we literally have changed people's lives by doing that refinance for them.
Evan Neufeld: Okay. And so it all depends on your lender and your specific mortgage, right?
Bud Jorgenson: Yeah. And the calculation that goes along with that penalty.
Evan Neufeld: So the penalty is the big one. So it's not the absolute, no brainer that people think it is. It's like, okay I can just not pay that penalty and now I can save thousands of thousands of dollars on interest for the next five years. Not necessarily.
Bud Jorgenson: Yeah. It's a matter of looking into the equity position that you have, the penalty that's associated with it and then just doing the math side by side, just like financial planning, all mortgages are just math.
Evan Neufeld: And so then once in a while we bumped into the situation of getting a second property. In Saskatchewan here, there was a period of time we're getting a rental property or flipping houses or things like that became really in vogue. Even things like buying a cabin, we're close to lake country here, but there's other places in Canada that have vacation properties are pretty common and things like that. So say I have a typical mortgage on my primary residence. If I want to get a second property, what are the factors that I need to consider? Or is that even possible to have two mortgages?
Bud Jorgenson: Yeah, it's actually exactly the same as having one mortgage. As far as the qualifying, all the numbers are exactly the same. Okay so just as an example, if you had a home worth 500,000, you qualified for that home under the traditional requirements, which everyone would. Then you buy a cabin for 300,000, you would qualify to carry both of them as if you purchased the home for 800,000.
Right? So the only difference would be in regards to the down payment because the qualifications are exactly the same. You need good credit and you need to have a down payment, and you need to have a good job to make sure you can support both payments. But in regard to the down payment, if it's a second home for you, it's actually just 5% down.
Most people don't know that they think they have to put a large down payment on a second home. So a cabin would be 5% down if somebody wants to retire in 10 years. So they want to buy a house out in Victoria now it's 5% down. And then if they want to buy a rental property, just because you had mentioned it, then the minimum down payment on that is actually 20%. So it depends on the use of the property would dictate the down payment requirement.
Evan Neufeld: Okay and is that self-reported then? Or how was that verified between, you know, so say my second property turns into an Airbnb halfway through it's and is that a rental property or maybe that's going into the weeds too far here.
Bud Jorgenson: It's actually not because that does happen. Like it happens for legitimate reasons where I'll give you another example, instead of that type of situation. But many times we meet with a young couple that buys a condo and they just love it. And then three years later she gets pregnant and now they want to move to a home.
So they turned that into a rental property, right. And they buy another house with 5% down, which all of that is completely legitimate and it's fine. There's no self-reporting you don't phone somebody and say, Hey, I turned this into a rental, I owe you 15% more down. None of that happens. That's completely fine.
So it really is the intent when you take possession of that home, what your intent is with that property. So the upside to it is I find if people aren't honest with it, oftentimes they don't have the income in that. They just don't have the character to develop the type of income and that associated with purchasing another home. So they can't qualify for it.
Evan Neufeld: Exactly, good situations create good situations and bad ones create bad ones.
Bud Jorgenson: Another opportunity for 5% down in relation to family or buying a second home would be what we actually call the family plan. So if you live in a smaller area and you're child is going to university. Like just an example, If you're in rural Saskatchewan, your kids are moving to Saskatoon to go to university, you can actually buy a home under the family plan with 5% down and the kids can live in it while they go to university rather than paying rent.
Evan Neufeld: So how does the family plan differ from just having a second mortgage at 5%?
Bud Jorgenson So with 5% down, it would be the parents that are actually moving to Saskatoon on a part-time basis. So they're buying a second home for themselves. But if they're not moving to town and they're like, Oh shoot, I got to put 20% down on at home for my daughter to go to university. But the truth is they don't, they can just put it under the family plan and put 5% down in that property. Instead of paying rent, because rent is so difficult in Saskatoon right now, a good rental it's expensive.
So it makes more sense financially to buy and you can do that with 5% down. Then after the child's done university, five or seven years later depending on what they study, that can be turned into a rental as well. The initial intent was to use that for the family and that's totally fine.
Evan Neufeld: Okay. Interesting. We covered a lot of ground here on a lot of the details and some more specific use cases here, but going back to using a broker off the mic here, you are talking to me about some changes that have been happening in terms of accreditation for mortgage brokers, and maybe some credentials that people should be looking for when they're looking for a mortgage broker, I'll maybe let you take it away from here.
Bud Jorgenson: Yeah, it's relatively new actually and it's an organization that we're all a part of in Saskatchewan as an industry is Mortgage Professionals Canada. They would be an advocate for our entire industry and there's 13,000 members across Canada. And the designations that they provide are basically confirmation that the person that you're working with has both experience and education to make wise decisions.
Every time that I talked to somebody about the mortgage industry. They're blown away at the intricacies and difficulties of being in this business and putting deals together and making all of that happen for our clients. And it really is a skill and an art, and it involves a lot of time. So the accreditations that are available, which are called accredited mortgage professionals that are earned in our industry are important that you look for those as a consumer.
And just confirm that the person that you're working with, if they don't have that, at least they have the experience to help you with what you're trying to accomplish.
Evan Neufeld: Great. Awesome.
Okay. Well, at that kind of brings us to the end of the episode here. Is there anything that you'd like to leave people with or some basic ideas or any other thoughts?
Bud Jorgenson: As an advocate for the mortgage broker channel, I would just like to tell the listeners, what I tell every client that comes across our desk is that the advantage to using a mortgage broker is that if it's possible for you to get a mortgage in Canada, we'll get it for you every single time and we'll always do that at the very best rate for you as well. So it takes out just like every broker In the mortgage industry, it provides you access to so many different lenders and just opens up so many avenues for people that I just highly recommend. I'm not talking about using me in general, but a mortgage broker and that channel is so valuable to the consumer. And I just encourage everyone to reach out and use a mortgage broker when they do their work.
Evan Neufeld: Awesome. Well, thanks so much for joining me today, Bud, I appreciate your insight here.
Thanks for joining me today on the Canadian Money Roadmap Podcast. If you enjoyed today's episode, I'd really appreciate if you left me a review on Apple podcasts with your biggest takeaway. If you have questions or ideas for topics you'd like me to discuss on future episodes, please reach out via my contact info in the show notes.
This podcast is intended to be educational in nature, and you should always consult your Financial, Tax and Legal advisors before making changes to your financial plan. Any rates of return discussed are historical or hypothetical and are to be used for educational purposes only. Evan Neufeld is a Qualified Associate Financial Planner and Registered Investment Fund advisor. Mutual funds are provided through Sterling Mutuals Inc.