Question regarding Mortgage from A-Lender

[mrembecki]

Hello,

What would you do in this situation:

my friend bought a home in Eastern Ontario for before the current slow down. his work transfered him to work in another city where he currently lives with his parents. He is leasing the house he purchased and is making a net loss of approx $200 monthly after principal, interest, insurance. His amortization is 20 yrs. The mortgage is open variable and I don`t think the bank knows that it is currently being leased as opposed to lived in by him. In your opinion is there potentially a problem if he were to try and re-amortize his mortgage to 25 or 30 yrs. in order to have positive cash flow. A real estate agent told him that if he were to go to the bank and tell them his situation, they would demand a sum of 25% of the mortgage value b/c this is the required downpayment for rentals. Any advice is greatly appreciated.

Thanks, Marty.

 

[kboughen]

QUOTE (mrembecki @ Jan 15 2009, 06:19 PM) they would demand a sum of 25% of the mortgage value b/c this is the required downpayment for rentals.
You do not need 25% down for rental mortgages; there are rental mortgages available with as little as 5% down; however the mortgage insurance (CMHC/GE) fee is higher than for owner-occupied units.


If the current mortgage is "open", there would be no penalty to move the mortgage to a different Lender if necessary. I would suggest your friend review the situation with a Mortgage Broker experienced with investors as a full financial review is required to determine eligibility and to make a proper recommendation.


Let me know if you need any assistance.

 

[RobMacdonald]

Your friend will not have any issue as things stand, as he bought the property with the intent of living in it as his principal residence. Circumstances changes and he was forced to move out, so neither the lender or CMHC will have any recourse.

If he is looking to increase the amortization, then he would effectively be refinancing the property and would have to requalify under CMHC guidelines. Since the property is now a rental, he would most likely have to pay an increased premium at this point.

If he still has a minimum of 5% equity, he may still qualify. The premium would go from 2.75% to 4.5% (if my memory serves me correctly).

 

[invst4profit]

Your friend may also want to consider the fact that he will have far greater expenses than debt repayment and insurance on this property. Expenses generally are 40-50% of the rental income and include legal, insurance, repairs, vacancies, evictions, utilities during vacancies, general upkeep, taxes, etc. He will be looking at far more than $200 per month negative cash flow as time goes forward.
Half of his income could go to expences before mortgage payments.

 

[terri]

QUOTE (mrembecki @ Jan 15 2009, 04:19 PM) Hello,

What would you do in this situation:

my friend bought a home in Eastern Ontario for before the current slow down. his work transfered him to work in another city where he currently lives with his parents. He is leasing the house he purchased and is making a net loss of approx $200 monthly after principal, interest, insurance. His amortization is 20 yrs. The mortgage is open variable and I don`t think the bank knows that it is currently being leased as opposed to lived in by him. In your opinion is there potentially a problem if he were to try and re-amortize his mortgage to 25 or 30 yrs. in order to have positive cash flow. A real estate agent told him that if he were to go to the bank and tell them his situation, they would demand a sum of 25% of the mortgage value b/c this is the required downpayment for rentals. Any advice is greatly appreciated.

Thanks, Marty.

what is his current variable rate? If he has a prime minus it may be worthwhile to try and keep the current mortgage for now even with a negative cash flow of $200/mo. I`m assuming that living with mom and dad is pretty cheap and he`s not planning on being an investor with many properties so I would try to keep the mortgage but see if the bank would be willing to extend his amortization period in order to bring his monthly expenses down. The other thing to consider is that if he has to pay cmhc fees or any other fees to get a new mortgage then the cost of that could be more than what he would be saving monthly. (ie. is it worth paying $5000 to save $200/mo). Because this was not bought with the intention of being a rental property, I wouldn`t stress the $200/mo unless it is leaving him cash strapped (mom and dad?). Another thing to take into consideration is that with the shorter amortization period perhaps his principal pay down every month is more than the $200 that it is costing him, so maybe he won`t be out of pocket anything in the long run.

What your friend needs to do is decide how long he plans on owning the home and do a cost analysis of various case senarios over that time period. If he were to sell in 5 yrs he may find that his current situation brings him out ahead thousands of $$ over the option of a higher monthly mortgage interest rate and longer amortization.

Does that make sense? Did I explain that clearly enough?

Terri

 

[mrembecki]

QUOTE (terri @ Jan 16 2009, 09:12 AM) what is his current variable rate? If he has a prime minus it may be worthwhile to try and keep the current mortgage for now even with a negative cash flow of $200/mo. I`m assuming that living with mom and dad is pretty cheap and he`s not planning on being an investor with many properties so I would try to keep the mortgage but see if the bank would be willing to extend his amortization period in order to bring his monthly expenses down. The other thing to consider is that if he has to pay cmhc fees or any other fees to get a new mortgage then the cost of that could be more than what he would be saving monthly. (ie. is it worth paying $5000 to save $200/mo). Because this was not bought with the intention of being a rental property, I wouldn`t stress the $200/mo unless it is leaving him cash strapped (mom and dad?). Another thing to take into consideration is that with the shorter amortization period perhaps his principal pay down every month is more than the $200 that it is costing him, so maybe he won`t be out of pocket anything in the long run.

What your friend needs to do is decide how long he plans on owning the home and do a cost analysis of various case senarios over that time period. If he were to sell in 5 yrs he may find that his current situation brings him out ahead thousands of $$ over the option of a higher monthly mortgage interest rate and longer amortization.

Does that make sense? Did I explain that clearly enough?

Terri


Thank you everyone for your input. You`ve all been great in your explanations and raised very important points that need to be considered. I will pass this information along and it will help him make a proper decision. Many Thanks, Martin.