Demand Loan vs. Term Loan. What’s the Difference?

What’s the difference between a Demand Loan and a Term Loan? A recent commercial mortgage refinancing I was involved with resulted in a discussion around Demand Loans. What are they exactly, and how they might typically differ from a term loan?

A demand loan is a loan that a lender can require to be repaid in full at any time. This condition is understood by the lender and the borrower (or should be) from the outset. A term loan on the other hand is a loan which has a specific length of term. It has a set repayment schedule.

Normal loan default remedies are provided to the Lender in typical term loan documentation. Unless and until there is a default, the borrower generally continues making regular (often monthly) payments. Apart from having to typically report annually with updated rent rolls or financial statements, has little contact with the lender until loan maturity.

Robert D. Betteridge, a lawyer with Burnet, Duckworth & Palmer LLP, in a May 2008 article entitled Does Demand Always Mean Demand? indicated that in simple terms a Demand loan often has all its required terms in a few paragraphs. “The debt is acknowledged, an interest rate and payment mechanism is specified and a clear statement that the loan is payable on demand is included.” He goes on to state that “term loan documentation is necessarily more complex”. Of necessity the lender will typically need to cause repayment of the debt if certain elements of default occur, often a monetary (i.e. non-payment) event.

Increasingly however, Lenders are using hybrid loan documentation which seems to include both elements of Demand and Term loans. These hybrid loans may in fact be Demand loans in the sense that they provide the Lender “a right to demand repayment upon the occurrence of a specified event of default”.

Do Lenders really call loans?
A relatively sophisticated borrower I represented last year, secured an attractive rate from a Bank lender. However, the product was only offered as a Demand Loan. This borrower successfully negotiated a further provision. The lender’s security documentation was amended, to require the lender to specifically identify the item of default, and to set out a 10 day Notice period to cure the default, prior to being able to call the loan (i.e. Demand payment).

Was it necessary for this borrower to amend the loan security? This borrower, out of an abundance of caution, felt that it was. I have often thought it prudent to consider a commercial mortgage as a loan with a demand element. The practical reality is that many/most commercial mortgages include a borrower covenant to pay as well as security for the debt. The covenant to pay typically includes language which sets out that if default occurs, all mortgage money then owing to the lender will, if the lender so chooses, become due and payable.

My experience has been that Demand is a lever that Banks or other lenders could use if they feel that there overall investment is at risk. Its more likely to happen if the borrower’s financial situation is precarious, or if the loan security is in jeopardy. A well leased commercial real estate project provides excellent security for a lender. Lenders in these situations most often supplement their security with an Assignment of Rents to further protect themselves. This allows them to step into the shoes of the borrower/landlord, during a mortgage enforcement action, to secure rents directly from property tenants, to continue to service the mortgage payments.

What’s the take-away here?
In practical terms, if you make your monthly mortgage payments as agreed, your loan will likely not be “demanded” or “called”. It is important to understand that it’s the lender’s prerogative. Other factors come in to play of course. Consider the rate of interest. If your loan carries a rate of 6%, and market rates have fallen to 4%, your lender is not likely to call your loan anytime soon, unless they perceive undue risk. They cannot readily replace the loan they call, with a new investment opportunity paying the same rate.

Bear in mind your loan documentation may reflect a Demand/Term hybrid loan. If unclear, speak to your lawyer to understand under what specific circumstances, your loan is callable.

Allan Jensen

Dominion Lending Centres – Accredited Mortgage Professional
Allan is part of DLC The Mortgage Source based in Ottawa, ON.

7 things every self-employed individual should know — Before you apply for a mortgage

Self-employed individuals are quickly becoming one of the most common clients that we handle. Daily we have successful business owners come into our offices who enjoy the perks of being an entrepreneur. One of these includes fantastic write-offs that allow them to bring their income down to a low tax bracket.

However, this benefit can also mean that the same business owner may have a hard time qualifying for a mortgage all because their income is significantly reduced on paper… how frustrating ‘eh? But these savvy business owners know that there is advanced planning that is involved in being able to qualify for conventional financing. Back in 2015, Statistics Canada reported that there were about 2.7 million people self-employed in Canada… which is an astounding 14% of the total population of Canada! What does that stat mean? Two things:

1. That being self-employed is a more than viable way of earning income in today’s world.
2. That 14% may not fit into the conventional lending “box”

The Conventional Lending Box
To fit into this box, self-employed individuals must meet certain qualifications. For example, they must be able to provide:
>Two most recent years of personal tax returns
>Two most current years Notice of Assessments
>Two most current years financial statements
>Statement of Bank Account Activity
>Investment Income Statement
>Photo ID

Now, the one area that raises a red flag in the above is the tax returns. As we previously mentioned, their income claimed on the return itself might be significantly different than their actual income. Tax deductions related to business often reflect meals, rental spaces, credit card interest etc. The result is that the income the self-employed business owner shows on their tax return is a significantly lower figure than what their actual take home pay is. However, the conventional lending box requires income to justify the mortgage. So how do we pull this off?

The Unconventional Lending Box
Now please keep in mind that “unconventional” in this box just means that as a self-employed individua,l you are going to work with a Mortgage Broker to find an alternative to allow you to show that you can justify the mortgage. There are several well-known and consistently used pieces of advice that we would like to pass along to you:

1. If you are organized and planning (think 2 years out) you can plan to write off fewer expenses in the two years leading up to the property purchase. Yes, you will pay more personal taxes. However, your income will be higher, and it will be easier to qualify you for the mortgage amount you are seeking.
2. Set up your finances through a certified accountant. Many lenders want to see self-employed income submitted through a professional rather than doing it yourself. The truth is that the time you spend doing your own taxes will not be nearly as efficient both financially and time-wise as a professional. Make sure that you discuss with them what your goals are so that they can set up your taxes properly for you!
3. Choose your timing carefully. If you are leaving for an extended holiday within the two years before purchasing, your two-year average income may fluctuate. Plan your vacations and extended trips away with income in mind.
4. Consider using Stated Income. You have the option to state your income. This is based on you being in the same profession for 2+ years before being self-employed. The lender looks at the industry and researches the mean income of someone in that profession and with your experience. You will be required to provide additional documents such as bank statements, showing consistent deposits and other documentation may be asked of you to show your income.
5. Avoid Bankruptcy at all cost…. or if you do declare bankruptcy have all your discharge papers on hand to present to the lender and ensure you have two years of re-established your credit.
6. Mortgage Brokers can state income with lenders at the best discounted rates. But if you do not qualify with A lenders using stated income, then a broker will work with you to utilize a B Lender who are more lenient but may come with higher interest rates and applicable lending and broker fees.
7. Last but not least, if A or B lenders don’t fit, private financing can be looked at as an alternative option in order to get you into the market and offer a short-term solution to improve credit or top up your reporting income. Then you and your broker can refinance into an A or B lender at that time. Just keep in mind that private lending will have a higher rate associated with it , with lender and broker fees added on as well, if you choose to go with this option.

So, to all of our self-employed, hard-working, determined individuals, take heart! You can qualify for the mortgage you want, it just takes a little more planning to get everything in order. Keep in mind to that every lender has different guidelines as to how they view self-employment. Working with a Dominion Lending Centres broker leading up to your property purchase can help you ensure you get the mortgage you want.

Geoff Lee

Dominion Lending Centres – Accredited Mortgage Professional
Geoff is part of DLC GLM Mortgage Group based in Vancouver, BC.

A bride and a mortgage broker – Our House Magazine

Dominion Lending Centres’ leading lady in the new national commercial campaign has a few questions of her own. As a young Canadian looking to get into the housing market, Laura Steponchev has a candid Q&A with one of our pro’s.

You could say Laura Steponchev is a pretty typical Canadian millennial. The aspiring actress moved to Toronto from Regina five years ago to pursue her career. And over the years, she’s moved around quite a bit. Steponchev lived on her own for a while, and loved it, but paying the bills was tough and she needed to be more reasonable. She got a roommate, but he moved in with his fiancé, and she moved out of that condo and into an old house in Greektown with four other roommates. She eventually met her boyfriend, and they soon moved in together. The couple decided they wanted a place of their own, so they moved into his parents’ house in the ‘burbs.
“Living with your partner comes with its own troubles, but living together with your inlaws – that’s a whole new ballgame,” she said.
Steponchev wants to get into the market, but she’s got a lot of questions.

Our House Magazine teamed up with Dominion Lending Centres mortgage broker to answer some of those questions and help Steponchev on the path to homeownership.

Q. I understand that first-time homebuyers are granted a five-per-cent down payment – I am not a first-time buyer any more. What am I looking to save for a down payment now?
A. First-time homebuyers are not the only ones who can purchase a home with as little as five per cent down. As long as the home you are purchasing will be your residence, you can still put only five percent down. But all lenders and mortgage insurers (CMHC, Genworth and Canada Guaranty) will want you to have an additional 1.5 per cent of the purchase price to ensure you can cover closing costs such as legal fees, Property Transfer Tax, Land Title registration etc.

Q. What’s the minimum down payment you would recommend to have before looking?
A. As long as you have the minimum five per cent down and 1.5 per cent of the purchase price for closing costs, that’s all a lender and mortgage insurer will want you to have. However, I recommend having a bit more as a buffer against unexpected costs. Remember, with a move there are utility hook-up costs, moving costs, home inspection and so on. Having an additional $5,000 above your down payment and lender-required 1.5 per cent will help make it a smoother move.

Q. What kinds of interest rates are we looking at?
A. Rates will vary day-to-day, but we are still at almost historical lows right now, and they are on the rise. Rates are offered and guaranteed for a period of time called a term. Terms can vary from one to 10 years with some lenders and are priced according to each individual lender’s pricing structure.
The most popular are five-year fixed and five-year variable. Where right now we see five-year fixed rates as low as 3.04 per cent and five-year variable rates as low as 2.36 per cent for qualified applicants, be aware that it is not all about rate. Some of the more appealing lower rate offerings come with additional terms that may not work for you, such as higher penalty structures or bona fide sale clauses that could have you stuck if you want or need to pay out your mortgage mid term.
As always, it is advisable to speak with an experienced mortgage broker to find out more about the terms of any rate offering to make sure you know all the implications that could apply to your situation.

Q. Realistically, what should our budget be?
A. Conservatively, the government has said that 35 per cent of your combined annual gross income should be enough to cover property expenses (mortgage payment, property taxes, condo fees, heating costs), and 42 per cent of your gross annual income needs to be enough to cover the property expenses plus any other credit payments (loans, credit cards, lines of credit).
In reality, every person’s situation is different, so, before you decide to take the leap into home ownership, it is a good exercise to detail your current budget to get a starting point for what supports a comfortable lifestyle. Be sure to include a savings plan into that monthly budget, not only for retirement but you will likely have maintenance costs with your new home or you may want to do some updating.
Now replace your rent payment with property costs (detailed above) and see how your monthly cash flow will be. Is it comfortable, or would you be pinched? Ultimately, it is no fun to be house rich and cash poor, so, if you would feel pinched, it might be an idea to downsize your purchase price to a more realistic level.

Q. In this economy and as a millennial, we’re told that owning a home is a very distant reality (especially due to that darned avocado toast).
Are our dreams of owning our own place just that – dreams?
A. Not at all! In my experience, millennials are very determined when they set their sights on a goal and really just need enough information to formulate a realistic plan. If a home purchase is in your future, my recommendation is to get in touch with a mortgage broker and start building that plan – sooner rather than later.
You may already be qualified and just don’t know it, or there may be tips and tricks you are unaware of that could bring that dream closer sooner. Or it may be that it could take you a year or two to get into a really strong position to enter the market. You just won’t know until you try.
I can tell you personally, it is a very satisfying professional experience when I work with clients from dream to reality, not matter how long it takes. It’s an exciting experience every time!

Jeremy Deutsch

Communications Advisor

The Downsizing Dilemma

With almost 50% of homeowners ready to retire and wishing to stay in their home and 30% of those people with most of their money tied up in home equity, the downsizing dilemma is real. Can they afford to stay in their home or is downsizing the better option.

In the past, retired couples or a widow would keep their clear title home and use pension and investment income to live. They would only sell the family home and move into a retirement home when health issues forced the move or upon death of both people. Times have changed.

People are living longer and want to stay in their home. The cost of living has risen and, due to higher home values, the amount of equity in that home is greater than ever. Many home owners are being stretched with their budget and their retirement income is insufficient to maintain their lifestyle.

We have found that many retired people are unable to meet their budget each month and are using a line of credit and/or credit cards. This becomes a vicious cycle and the cost of interest pushes them to the wall and they reach their maximum limits. Then they are forced to sell their home or reduce their lifestyle to manage. Often family members are unaware till it becomes a serious matter. Planning ahead is essential to avoid this situation and lower stress levels for all family members including the aging parent.

In a recent Globe and Mail article, Scott Hannah of the Credit Counselling Society talks about the risks.

Some homeowners now recognize the need to look to their home as a source of income from home equity financing.

There are a growing number of programs designed specifically for homeowners over the age of 55. Each comes with different requirements, advantages and benefits. It is important for retiring or retired people to talk with their family and then in a group with their independent Dominion Lending Centres mortgage broker and financial planner.

For some family members, the next step is for the aging parent to downsize to a new home. For some, it is to stay in the family home and set up an equity plan to maintain a safe place and comfortable lifestyle. Consideration must be made for current income, current budget and future needs.

Pauline Tonkin

Dominion Lending Centres – Accredited Mortgage Professional
Pauline is part of DLC Innovative Mortgage Solutions based in Coquitlam, BC.

Mortgage Insurance 101

For a first-time home buyer, the types of insurance surrounding a mortgage can be confusing, so it’s important to know what insurance covers what.

There are 3 main types of insurance to know about when buying a home.

Mortgage Default Insurance – If you put less than 20% down on a home you are buying, Government rules are you must pay for Mortgage Default Insurance which covers the lender should you default on your mortgage payments.

There are three mortgage default insurers in Canada – Canadian Mortgage & Housing Corp. (CMHC), Genworth or Canada Guaranty) The purchase of this insurance solely benefits the bank/lender.

Mortgage Insurance and/or Life Insurance

You’ve just made the biggest purchase of your life: a new home for you and your family.
• What’s the best way to protect your investment if you die?

Insurance is the answer. But what kind: mortgage insurance or life insurance?

There are important differences between the two that we’ll examine.

Please note: Mortgage/Life Insurance is not mandatory to qualify for a mortgage.

You have made the biggest purchase of your life… how do you protect yourself and your family? Many people say they have life insurance through their work, but is it enough?
• The question you should be asking is – do you currently have enough life insurance in place right now, equal to your mortgage amount?

Top Benefits of purchasing Mortgage/Life Insurance

1. Peace of Mind – creates a sense of security that your loved ones will be taken care of if you pass on.
2. Mortgage Can be Paid Off – whereby any other policies that are held will be able to assist with other needs.
3. Family can Stay in their Home – if there is the unfortunate life event that is the death of the Mortgage/Life Insurance policy holder, the mortgage can be paid off which will allow the family to stay in their home and not become displaced, causing additional anguish.
4. The Younger you are, the Less Expensive – Which means that insurance is extremely affordable for a young, and likely, first time home buyer.
5. Good Health = Coverage for Unexpected Illness Later on – After illness strikes, it is more difficult to acquire life insurance.

Mortgage/Life Insurance is an option that anyone with a mortgage should consider. Ask me about a referral for reputable and credible insurance.

While we’re discussing insurance, there are other types of insurance you need to consider as well…
• Fire insurance – most lenders will want to see that you have fire insurance in place, prior to funding your mortgage to “protect” their investment.

Additional insurance options:
• Disability insurance
• Personal content insurance

Mortgages are complicated… BUT they don’t have to be! You need to protect your investment by engaging an expert.

Contact a Dominion Lending Centres mortgage professional to discuss a mortgage that works for you (not the bank)!

Kelly Hudson

Dominion Lending Centres – Accredited Mortgage Professional
Kelly is part of DLC Canadian Mortgage Experts based in Richmond, BC.

Some good information here…

The Pros and Cons of Co-Signing for a Mortgage

If you keep up on the news you know that qualifying for a mortgage is getting tougher and tougher. Someone who would have sailed through the application process 10 years ago could find themselves declined for a mortgage today.
Often I find applicants can afford the monthly payments but they can’t prove that their income is stable. If they waited another 6 months to a year, they could but they would miss out on a great opportunity to buy a home now. Buyers who have recently switched jobs, receive overtime or get a portion of their income from tips are the people who need co-signers to make the deal work. A strong co-signer can be more persuasive to a lender than offering to put more money down.

I also have found that people with “thin” credit are being asked for co-signers. These are applicants who have one credit card but no car loans or other credit facilities showing on their credit bureau report. Often they are recent university graduates who recently started work.
Rick Bossom, an accredited mortgage professional with Bayfield Mortgage Professionals in Courtenay, British Columbia, says that it’s an alternative to lenders just turning the deal down in cases where the borrowers are just on the edge of qualifying.

“They’re close but they just need a little bit more and that’s why the co-signing thing would come up. It’s not like they’re really, really bad, they’re just not quite there.”

What does a co-signer do? Their job is to continue payments in the event that the main applicant(s) default on the mortgage. In essence, they are saying that if you skip out on the payments, they will take up the slack.
As a result, lenders want to have co-signers on the application just as if they would be living in the home and making the mortgage payments. If they have mortgage payments of their own, they have to show that they can financially afford to pay both mortgages and any other monthly obligations that they may have like car payments.

One thing that surprises primary applicants as well as their co-signers is the amount of information required from the co-signers. They will have to provide an employment letter, recent pay stub, a credit bureau report at a minimum. If they are self-employed company income documents will also be required.
It’s always best for the primary applicant to have a conversation with the co-signer or co-signers to inform them of this in advance. The co-signers should also be aware that this will tie up their credit for the term of the mortgage. If they are planning on buying a vacation home or making a large purchase, they may be declined based on their financial obligation to your mortgage.

However, there is one feature that banks don’t tell you about but your Dominion Lending Centres mortgage professional will tell you. There’s the ability to remove the co-signer from the mortgage after 12 months of successful on time mortgage payments. Co-signers don’t have to stay on the mortgage for the whole term.

Make sure that you mention that you are interested in taking your co-signer off the mortgage in a year and your mortgage broker can pick a lender who will allow this. It’s really nice to be able to remove your co-signer and thank them for their help without tying up their credit capacity for 5 years.

David Cooke

Dominion Lending Centres – Accredited Mortgage Professional
David is part of DLC Clarity Mortgages in Calgary, AB.