29 Jul

Less Stress? More Opportunity? Bank of Canada Qualifying Rate Reduced


Posted by: Randell Toporowski

The Bank of Canada Qualifying Rate has been reduced to 5.19% from 5.34%.  This is commonly referred to as the “Benchmark Stress Test” that is used when assessing and qualifying a Borrower(s) for a mortgage in Canada.  This benchmark rate is based upon the Bank of Canada conventional five-year rate and is around 1.50% higher than most mortgage interest rates available through the broker channel.  With all factors being equal a reduction in the qualifying rate means that you can buy more home now than before the change in the rate.

The purpose of establishing a qualifying benchmark is to manage the risk the Borrower is exposed to when purchasing a home.  Namely, the erosion of future cash flows leaving less disposable income to apply towards their mortgage payments.  The monetary policy of the Federal Government and the Bank of Canada set interest rates, economic flow and manages inflation.  In addition to these factors life changing events can reduce available income and risk homeowner solvency.  Life changing events include:

  • Replacement of motor vehicle
  • Acute or Long Term Illness
  • Birth of a Child
  • Marriage and Divorce
  • Death of a Spouse
  • Job Loss, Change and/or Wage Reduction
  • Early Retirement
  • Move
  • Natural Disaster
  • College and/or Education
  • Income Tax
  • Credit Card Debt
  • et al

This reduction in the qualifying rate will allow you to purchase more home with your current income.  But I would ask you – will you be happier with 1.4% more home – if you already qualify for a mortgage at 5.34%.

Instead I invite you to challenge yourself and consider this as an opportunity.  An opportunity to set money aside for life changing events that may arise suddenly without forewarning.  Set yourself a plan to prepare for the unexpected events that will cause stress if you have not done so already.  Set the future cash outflows that you would normally have spent on the larger mortgage in an instrument that will generate any return and accessible when you need it, and talk to your Financial Planner for support in this area.

Preserve the cash in your wallet for a rainy day to address life events.

Take the “Stress Test” and turn it on it’s head!, and see it for what it is – a Great Opportunity!

Randell is an Accountant in Private practice and a Mortgage Broker with DLC Powerhouse Mortgages.  If you want to contact Randell he can be reached at 306-541-5438.

22 Jul

Risk and Commercial Mortgages : Informed Consent and its Authorization


Posted by: Randell Toporowski

Commercial mortgage origination is a process.  It is a multi-faceted process.  It is a detailed process.  The concept of Informed Consent defines a process in which an individual (Corporation) consents to or withholds consent to the various steps in the mortgage origination process.  Informed consent must have the following elements:

  • It must be Voluntary
  • the Risks, Benefits and alternatives of lending must be disclosed to the Borrower
  • the Individual granting consent must be competent, have the capacity to and be of legal age
  • Individual (Corporation) must be legally able to contract
  • The individual granting consent must be able to do so under the terms of the Corporations Shareholders Agreement and/or Articles of Incorporation
  • Borrower must be afforded the opportunity to ask questions
  • The questions asked by the borrower must be answered fully and understood by the borrower
  • Authorized in a document

The risk?  Poor communication that leads to consent that was not informed!

It is the responsibility of the Commercial Mortgage Broker to support both the lender and the borrower – and act in their best interest.  This means that every Commercial financing request that arrives on a Broker’s desk can be considered complete and substantial once the client has granted informed consent and authorizes such in an appropriate document.  In Saskatchewan, mortgage brokers must comply with both the Statute “The Mortgage Brokerages and Mortgage Administrators Act”, and the Regulations “The Mortgage Brokerages and Mortgage Administrators Regulations”.  These Laws and Regulations detail the items that a Broker must disclose to the client.  They include, but are not limited to:

  • The Broker will obtain Corporate, personal and financial information from various sources, including credit bureaus
  • Disclosure if a lender has an ownership in the Mortgage Brokerage
  • Disclose information to any lender, credit bureau, insurer or insurance agent
  • Client agrees to pay all insurance premiums, and that the broker is not responsible for lapse or failure of such
  • Client agrees to pay legal, appraisal, registration fees and expenses incurred in connection with this mortgage
  • To cooperate with local, Provincial and National authorities in the investigation unlawful or improper activities
  • et al

Subject to these disclosures the client should be afforded every opportunity to ask questions and receive answers.  Hence, the consent is informed! And, the client authorizes such by signing the consent and disclosure documents.

Following this, the Commercial Mortgage Broker performs the document review, analysis of the financial statements and determines if the application has commercial substance to support the lending that the borrower is requesting.  The application at this point then becomes a “Go or No Go”, based upon the quality analysis of the documents provided to the Broker.

The risks that exist in Commercial Mortgage Origination must be identified, investigated and explained.  If consent is not informed, it is not consent!

Randell Toporowski is an Accountant in private practice and an Associate Mortgage Broker with DLC Powerhouse Mortgages in Regina, SK.  He can be contacted at 306-541-5438.


15 Jul

Risk and Commercial Mortgages : The Corporate Structure and Share Capital

Mortgage Information

Posted by: Randell Toporowski

Risk, its existence and its management in Commercial Lending preoccupies the minds of both Lenders and Borrowers.  Both are risk averse.  However, each group sees risk through a different lens, or more appropriately different sides of the same coin.  Banking has become a process of employing polices and procedures to manage risk in a complex financial marketplace.  Banks manage liquidity, credit and exchange rate risks. Borrowers (Corporations) can see risk as an obstacle, real or imagined, to obtaining the funding they need to acquire a business asset and earn business cash flows; or refinance a corporate asset in order to liquidate equity for investment or the retirement of a high interest debt.  In this series of articles on risk I am going to discuss the four major areas of risk that must be identified, investigated and explained to all parties during the mortgage origination process.  This first article is dedicated to the “The Corporate Structure and Share Capital”.

It is the responsibility of the Commercial Mortgage Broker to support both the lender and the borrower by clearly telling the story of the risk associated with the mortgage application.  The mortgage origination process is the tool a mortgage broker uses to identify, investigate and explain the existing risk factors.  The process does not remove the risk – but once identified – it does eliminate the negative effect of undisclosed risk on the closing of the mortgage. The skeleton of the Corporation consists of the following:

  • Corporate Profile and the Articles of Incorporation
  • Shareholder’s Agreement
  • Corporate / Business Timeline

The corporate profile and the Articles of Incorporation are documents that defines:

  • the type of legal entity, it’s date of incorporation
  • registered office
  • Directors and Officers
  • Share Structure, Types (Classes) and Characteristics
  • and, Filing History

These documents define the share capital system of the corporation.  The corporation’s share capital is generally made up of shares (units).  These shares may be organized into groups or classes.  Within a class, each share is equal to every other share; the number of shares determines the owners interest in the company.  Each share has certain rights and privileges as outlined in the Articles of Incorporation.  Common shares represent residual ownership and Preferred shares have preferential rights such as a claim on earnings and assets (upon dissolution of the company).  The important point here is that common shareholders control the corporation management through voting rights attached to the common shares, and are the folks “in play” during the financing process.

When it comes to a mortgage origination this is important stuff.  The broker will review these documents  and determine if the company can legally enter into a lending agreement with the lender.  A company that does not have a current filing with ISC is not a registered entity does not have authority to do so.  Additionally, the broker will review the share structure.  This review will identify those shareholders that have residual ownership (common shares), define who must sign a proportional guarantee and be identified under Canadian Anti-Money Laundering Law.

THIS IS WHERE THE RISK MAY PRESENT for the borrower (Corporation), as all shareholders may not agree to sign a proportional guarantee.  It is important to note that there are a lot of good reasons for a shareholder not to do so; and each shareholder should be advised to seek quality, independent legal advice in these matters.  If a broker is aware that there are objections in this group the matter must be referred back to the Board of Directors and the Corporation’s Management for resolution.

Just one part of the story in the mortgage origination process!

My next article in this series will focus on Informed Consent and Commercial Mortgage Origination.

Randell Toporowski is an Accountant in private practice and an Associate Mortgage Broker with DLC Powerhouse Mortgages in Regina, SK.  He can be contacted at 306-541-5438.