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Ask the Expert: Should I prepare myself for higher interest rates?

Rates may be at historic lows however, with big banks raising fixed rates and reducing variable-rate discounts, you need to be ready to pay more. As seen in REW.ca

Q: I’m easily able to make payments on my mortgage at the moment as my rate is so low. I saw that the Bank of Canada didn’t cut its overnight rate last week, and that some banks are actually raising interest rates. Should I be prepared for higher interest rates, and if so, what is your advice?

A: Interest rates are still at historical lows, and we keep hearing for years that interest rates are going to rise. If anything, interest rates have dropped.

The Bank of Canada was considering dropping the overnight rate. However, on Wednesday’s announcement they have decided to maintain the overnight rate at 0.5 per cent. Since the Canadian dollar has already fallen sharply and a rate cut could have imprudently triggered a currency rout. There is a great deal of concern about household debt, and another rate cut would add to the risk by encouraging excessive borrowing.

So does this mean that we should stop thinking about rising interest rates? Not at all. It is important to be proactive and prepare yourself for higher interest rates.

The following are some tips that can help you.

  1. income-reportPay down your mortgage faster

To ensure that you don’t over-leverage yourself when interest rates do eventually increase, start by making larger or more frequent payments and make lump-sum prepayments when possible towards your mortgage. This will help you by lowering your principal so you will pay interest on a smaller amount in the future.

  • Consider making a lump-sum payment. Most lenders allow you to pay up to 10 to 20 per cent of your mortgage without a penalty annually. The prepayment amount is applied directly to the principal balance, which will help you save money.
  • Changing your payment frequency is a great way to pay off your mortgage faster. While most people might not have extra money to put a lump-sum payment every year, you can save money by paying the same amount per month and just simply splitting your mortgage payments throughout the month to semi-annual, bi-weekly or weekly payments.

Below is a chart showing how paying more often pays off.

table pay off mortgage faster

(Calculations based on a mortgage amount of $450,142 with a five-year fixed rate of 2.64% and a 25-year amortization.)
  1. Pay down other debt

pay-off-credit-cardsIf you are only making minimum payments on your credit card, it would be a good idea to start paying more. If you are unable to come up with the money to increase your payments, start a budget or see where you can tighten your existing one, cut spending and start paying down your credit card debt with the money you save.

If you are living beyond your means, it won’t get any easier later on. It is better to become proactive, instead of getting in a tighter situation later, especially when interest rates start rising. If you are looking at buying a home, calculate what the payments will be with a higher interest rate and see if you would be comfortable making those payments in the long run. If not, purchase a property of lesser value.

  1. Refinance

If your mortgage is coming up for renewal in the next two to three years, it is worth checking out if you are eligible to refinance now and take advantage of the lower interest rates. Also, if you have equity in your home, this is a great opportunity to pay off some debts and increase your monthly cash flow. Even if you have to pay a penalty for refinancing prior to the end of the term, it could help you save money in the long run. Talk to your mortgage expert to explore the options and see if it makes sense.

  1. Have a contingency fund

imagesQ8W8929HIf you are concerned about higher interest rates when your mortgage comes up for renewal, start working on it now. It’s a good idea to start a contingency fund that can be used to cover the increase in mortgage payments or use that fund to make a lump sum payment on your mortgage. If you are on a variable mortgage, figure out what would be your mortgage payments if you had a fixed rate and put that extra money aside. By making small changes in your daily spending you can save more money in the long run.

  1. Seek professional advice

Having a close relationship and working with your mortgage expert 83834073frequently can help offset some of the stress and confusion. Your mortgage expert can help educate you in areas you might not be familiar with and can help you be prepared for when interest rates do start increasing.

If you are worried if you will be able to afford your home when interest rates increase or if you want to find out how you can save money, give me a call at 778.893.0525 to speak about your options.

 

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What If I Don’t Have the Full Down Payment?

Raising a down payment can be the trickiest part of buying in Vancouver’s hot market – but some programs may help. As seen in REW.ca

Q: I really want to put in an offer on a condo, but I haven’t raised the full down payment amount yet? Do I have any options?

A: The minimum down payment required is 5 per cent of the purchase price of the home you are buying – if you are employed. For those who are self-employed, it will depend if you are qualifying based on what you are declaring on your income tax then it will be 5 per cent, and at least 10 per cent if you are self-employed and qualifying with an “estimated” gross income instead of the income showing on your tax return. And if you want to avoid paying mortgage default insurance, you need to have at least a 20 per cent down payment.

However, there are programs available that enable you to use other forms of down payment when you don’t have the full down payment.

  • RRSPs: If you are a first-time home buyer,income-report you can use up to $25,000 from your RRSP without paying any personal taxes. However, you will have to repay any amount withdrawn from your RRSP for down payment of a home purchase.
  • Gift from a family member: You can get money gifted from a parent, child or sibling to go towards the down payment. The lender will ask that the person that is giving you the gift signs a letter stating that the funds are a gift and are not to be repaid.
  • Borrowed down payment: You can borrow from a line of credit, get a loan or use your credit cards to complete your down payment. However, in order to qualify, you still have to be within the Total Debt Service (TDS) ratio. The TDS ratio measures your total debt obligations (including housing costs, loans, car payments and credit card bills). Generally speaking, your TDS ratio should be no more than 44 per cent of your gross monthly income.

Once you have raised the full down payment and made your offer, you will still need solid advice on which mortgage is best for you. By working with a mortgage expert, you have access to multiple lenders including banks, credit unions and other lenders that only work with brokers, which will ensure that they can find the best mortgage for your individual needs.


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Is the Rate the Most Important Factor in a Mortgage?

With ultra-low interest rates all over the news, it’s no wonder that’s what people focus on. But they shouldn’t. As seen in the REW.ca.

It is interesting that, time after time, when you ask someone “What is the most important thing about a mortgage?” they respond by saying “the rate”. This was exactly the answer we got at a networking event last week when we asked that question.

DiscountThe reason why people focus on “the rate” is because that is the only thing you hear on the news. Last week, it was all over the news that both BMO and TD announced that they have dropped their five-year rate. Then the talk around the watercooler is “What is the rate on your mortgage?” or “I just got 2.74 per cent for five years”. There are other lenders that mortgage experts work with that have being offering lower rates than that for weeks.

But it’s not about “the rate” – or it shouldn’t be. While the rate is an important component of a mortgage, it is not the main thing you should focus on. You should be focusing on what is the best mortgage for your individual needs that provides a great rate but most importantly the best terms and conditions.

By understanding mortgage terms and what they mean in dollars and cents, you can save the most money and choose the term that is best suited to your specific needs.

So What Should You Consider When Looking for a Mortgage?

  • Pre-payment penalties.

All closed mortgages have the pre-payment clause that says that is you pay off your mortgage before the end of the term, you would have to pay a penalty calculated based on the greater of the IRD (interest rate differential) or the three-month interest penalty. However, there are some lenders that they are offering lower rates and in addition to the above penalties they are also including a 2.5 per cent to 3 per cent penalty (depending on the lender), which ever one is greater. In addition, since there is no magic formula to determine the penalty, each bank has its own calculation formula. Most banks determine the rate you pay based on the posted rate minus the discount you receive. However, at the time to calculate the pre-payment penalty they use the posted rate.

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  • Pre-payment options.

The pre-payments without penalty clause is one of the conditions that can save you thousands of dollars over the life of your mortgage. This clause allows you to make payments on the principal of your loan, or increase the amount of your periodic payments (monthly, bi-monthly, etc.) without a penalty. Each lender has different programs for pre-payments, they usually vary from 10 per cent to 20 per cent. For example, you can pay any amount within the approved percentage of the original value of your mortgage, or increase your periodic payments once a year, without paying a penalty. Many people don’t take advantage of this clause because it is generally difficult to save the extra money to make additional lump sum payments, but they can certainly increase their payments up to 20 per cent. By doing this it will help you reduce your amortization period and pay more money toward principal than interest.

  • How your mortgage is registered – collateral or conventional mortgage.

o   With a conventional mortgage, the amount you are borrowing (property value minus down payment) is the amount that’s registered. But with a collateral mortgage, the amount that’s registered is 100-125 per cent of the property value, and the lender has both a promissory note and a lien registered against the property for the total registered amount. The advantage of a collateral mortgage is easy access to credit. Since the mortgage is already registered for a larger amount than you need to buy the house, you can access additional funds in the future without any extra steps or legal fees. However, there are also several downsides of collateral mortgages especially if you are putting less than 20 per cent down payment. The reason being is that with the current mortgage rules you are not able to refinance your mortgage unless you have more than 20 per cent of equity in your home. Therefore, unless your home dramatically increases in value in the next five years you will not be refinancing anytime soon.

o   Free transfers or switches to a new lender when your term is up aren’t usually available. Most other lenders don’t like the fine print and restrictions of collateral mortgages and won’t accept them unless they’re a refinance, which costs you legal, discharge fees and possible appraisal fees.

o    You could end up paying a higher interest rate at renewal. If your collateral mortgage makes it difficult to switch lenders at renewal, you don’t have the ability to shop around for the best rate. That could end up costing you up to 1 per cent more on your mortgage rate.

QAsignpost-wide386Therefore, before you sign on the dotted line, make sure that it is clearly explain to you what are the terms and conditions of the mortgage you are getting. If you are not comfortable with the answers you are getting or if they are not taking the time to explain the details of the mortgage take a step back.

That is why it is important that you work with someone that you trust, feel comfortable with and know that they are looking out for your best interest. Mortgage experts have access to multiple lenders – including banks, credit unions and other lenders that only work with brokers – which will ensure that we find the best mortgage for your individual needs. After all, we work for you and not for the banks.


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Do I Really Need Mortgage Pre-Approval Before House-Hunting? – conclusion

Mortgage pre-approvals are often recommended for would-be homebuyers – but there are exceptions to every rule. As seen in Rew.ca

Q: I’m beginning my search for a new home. Is it really necessary to get pre-approved for a mortgage first, especially with interest rates going down?

A: Last month we explained the difference between getting pre-qualified and pre-approved for a mortgage. We often recommend that buyers get pre-approved for a mortgage (not just pre-qualified) before they start house-hunting, to put them in the best possible position when that perfect home comes up. But of course, there are exceptions to every rule.

preapproved1Whether you get pre-approved or not, it’s very important to figure out how much you can afford to pay before you start looking. Most home buyers have a rough idea of how much they would feel comfortable paying every month on their mortgage. However, there is no quick and dirty way to translate that monthly payment into a specific maximum mortgage amount. Other factors have to be taken into consideration such as down payment amount, closing costs, mortgage default insurance, property taxes, strata fees (if applicable) and heating costs. And you might be qualified to borrow more or less than you think, depending on your income, debts and credit history.

As discussed last time, obtaining pre-approval on a mortgage can offer advantages, particularly in terms of locking in a great rate for up to 120 days. However, it isn’t always advantageous, depending on the situation.

For example, we recently had a client who had a considerable sum to put as a down payment on a new home. With the price range he was looking at, the loan to value (LTV) ratio would have been close to 50 per cent. As previously mentioned, the most important thing is what you are comfortable paying on a monthly basis, not what you qualify for. This client wanted to keep his payments only a little bit above what he had been paying in rent. He had a great job and income, so he would have been able to qualify for a lot more. He had no credit card debt, no loans or lines of credit but had an established credit history.

Therefore, in this case, we didn’t get him pre-approved, because we knew there would be no problem getting him a great mortgage when the right time came. But we did do an in-depth analysis of his financial situation so he would know what his mortgage payment would be on the price range he was looking at, and also the maximum amount he would qualify for so he would have a wider price range to work with if necessary.

In addition, as interest rates were going down, there was no need to lock in a rate from a lender. However, if we had noticed that interest rates would be moving up again during his house hunting, we would have obtained a pre-approval. As mortgage experts, we do a lot of work behind the scenes to ensure we have the best options for our clients and provide them with the best mortgage available.

It is also important to remember that getting pre-approved doesn’t mean that your mortgage has been fully approved. The final approval is given once you have an accepted offer, your application has been submitted to the lender, and the lender has received and approved all the outstanding financing conditions outlined in a commitment letter.

Purchasing a home can be an emotional and time-consuming process as you want to make sure you find the right home for your needs. Knowing what you qualify for is critical when you start working with your real estate agent, as it shows you are a well-qualified buyer who is serious about purchasing a home. In fact, some agents won’t even show properties to buyers who haven’t talked to a mortgage expert or bank.

Talk to a mortgage expert to find out how much you qualify for and get you started on the road to homeownership.


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Thirteen things you need to know BEFORE renewing your mortgage.

With mortgage rates still dropping and new products on the market, don’t sign that renewal letter, say experts Jorge and Alisa Aragon. As seen in REW.ca 

Is your mortgage coming up for renewal? Don’t be too quick to sign that mortgage renewal letter. More than 70 per cent of Canadian mortgage holders do just that, and what is the usual result? A higher rate and a mortgage product that might not be best suited to their interests.

Experience has shown that the “Big Banks” send their mortgage renewals out at a posted rate. Lenders are counting on the fact that most homeowners are too busy to ask questions or to inquire about getting a better rate. Don’t let this happen to you!

You should recognize that you are now negotiating from a position of strength as your renewalmortgage principal has dropped and in most cases your home value has increased. Lenders see you as a lower risk borrower and consequently you should be getting the best rates available. That may not happen if you simply sign the renewal document provided by your existing lender.

Rather, let the lenders compete for your business to be sure you do in fact get the best mortgage possible.

The following are some things you need to consider before you renew your mortgage.

  • Mark your calendar or digital organizer for four months before your renewal. On that date, start re-evaluating your needs to see what type of mortgage is likely to fit best this time. Start researching the market for products, features, interest rates, lenders and interest rate trends. If this sounds like too much work and you are leaning toward simply signing your bank’s offer when it arrives, ! Instead, take the  easy route and let a mortgage expert do all the work for you, for free. Start taking action on your renewal 120 days (four months) in advance.
  • If you do nothing else, simply pick up the phone when you receive your bank’s renewal notice, thank them for the interest rate they have offered and ask them if they can bring it down a little. In most cases, they will say yes. Of course, you should wonder, “If I can get a lower rate by simply asking for it, imagine how much better rate and features I could get if I had a mortgage expert playing hardball with several competing banks!” Ask for a lower rate.
  • See renewal as a time to start over. So much may have changed in your life since you first took out your mortgage. It would be foolhardy to lock yourself into exactly the same mortgage at an unnecessarily high rate just because your bank doesn’t want to take the time to provide a financial review and make a more current recommendation. And don’t think this has to take up a lot of your time. Mortgage experts can perform a full review in a few minutes, whenever and wherever is most convenient for you.
  • Attractive new mortgage products and features may be available that you’re not aware of. New mortgage products are being introduced all the time. Not only do some offer better rates, they may also offer better pre-payment options, cash backs, amortizations, accelerated payment schedules, investment opportunities and more. But you will never know if you simply sign up for more of the same.
  • The rate market may have changed dramatically. When you first took out your mortgage, you may have gone variable because rates seemed to be continually dropping. But what if the economy and interest rates have shifted in the meantime, as they have recently? Maybe it’s time to consider locking in so your payments don’t start creeping up month after month. But you will never know if you simply sign up for more of the same.
  • You are not obliged to renew into the same kind of mortgage, nor are you obliged to stay with the same bank. When your mortgage term is up, all bets are off. Nobody owns you. Sometimes people feel loyal to a lender since the lender was good enough to lend you the money, you owe them your business. In reality, it’s a business transaction like any other. If the lender isn’t giving you the best rate, product, features and service, you have every right to take your business elsewhere. Of course, shopping around for the best alternative can be confusing and time consuming, so go to a mortgage expert to do all the legwork, comparisons and negotiation for free.
  • You can negotiate and play one bank off another. Again, don’t feel you are being disloyal by asking for a better deal or shopping around. Of course, you won’t be able to negotiate very effectively if you try to fit it within the 30-day window your bank gives you. This is another reason to start early. And it’s also a another good reason to use a mortgage expert – seasoned negotiators who know exactly how far to push each bank to get you the best deal.
  • If you can, pay down the principal. Renewal is a great time to put a lump sum down on your mortgage. There are no limits to how much you can pay. And since it goes straight toward your principal, even a modest amount can dramatically reduce your amortization and total interest costs.
  • Renewal is the best time to refinance. If you are thinking about taking out equity from your home for renovations, investments, children’s education, debt consolidation, etc., do it at renewal time. Since your mortgage term has ended, there are no early payment penalties, which can save you thousands of dollars.
  • Rate isn’t everything, but it’s tremendously important. Accepting your bank’s first renewal offer is like leaving money on the table. You can do better by shopping around yourself, and you can do MUCH better by letting a mortgage expert shop for you. Shaving a point off your rate can save tens of thousands of dollars over the life of your mortgage.
  • Don’t be scared off by fees to switch lenders. Your existing lender may tell you there’s a discharge fee if you move your mortgage. But don’t worry. Most lenders let you include the discharge fee into the new mortgage and it’s a minimal cost considering how much you can save in interest.
  • Make sure switching lenders is worth it. In almost every case, it’s very much worth your while to switch lenders if that’s what it takes to get a mortgage and rate that fits your needs best. However, keep in mind that moving to a new lender involves some extra steps. Since it’s a new mortgage, you have to go through the application process again, proving your income and getting your credit checked. In some rare cases, the tiny amount you would save by switching lenders may not be worth all this extra work. But even in these cases, it’s definitely worthwhile to have a mortgage expert review your situation and shop the market for you. A reputable broker who is looking after your best interests will tell you if it is optimal to stay with your existing lender.
  • Even if you get a lower rate, keep your payments the same. Sure, with a lower rate, you could enjoy lower payments and increased cash flow. But if you keep your monthly payments the same as they were when your rate was higher, you will pay off your mortgage sooner and be well on your way to financial security.

So if your mortgage is up for renewal, talk to a mortgage expert, who will be happy to provide you with a free consultation by reviewing your current situation and ensure you get the best rate and terms available.


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How to Make Your Mortgage Tax Deductible and Increase Your Net Worth

If you have home equity, there’s a neat method to use it to make investments and write off the mortgage interest. As seen in Rew.ca.

For US homeowners, mortgage interest is automatically tax deductible, but for Canadians, the write-off is not so straightforward. However, there is a way for you to deduct your mortgage interest while increasing your wealth, an approach known as the “Smith Manoeuvre”.

In order to make your mortgage interest tax deductible, homeowners must be able to prove that the money is being reinvested and is not being used for personal expenses.

A properly structured mortgage-centric tax strategy has several key elements – the most important of which is a multi-component, mortgage or home equity line of credit (HELOC). You will need a readvanceable or line-of-credit mortgage that lets you continuously extract equity as you pay your mortgage down.

Every time you make a payment and reduce your principal, you then immediately extract that equity and add it to your investment account. Since you have been able to deduct your mortgage interest, at the end of the year you will generate a tax refund that you can use to make a lump-sum payment on your mortgage –which makes even more funds available for investment.

It’s best to have a single collateral charge with at least two components – usually a fixed-term mortgage and an open line of credit that can track and report interest independently. This is absolutely essential under Canada Revenue Agency (CRA) rules and guidelines. In addition, for the interest payment to be tax deductible on any money borrowed for investment purposes, it must have a reasonable expectation to be able to produce an income.

Second, the strategy must employ conservative leverage-investment techniques – which is why a financial advisor must be involved in order to comply with federal regulations. The financial advisor should be a Certified Financial Planner (CFP) who is experienced in leveraged investing and able to actively monitor a homeowner’s portfolio on an ongoing basis.

Homeowners who opt for a tax-deductible mortgage interest plan make their monthly or bi-monthly mortgage payments the same way they would when making any type of mortgage payment. The payments go towards reducing the principal amount of the mortgage, creating equity; which is subsequently available to be borrowed on the line of credit. From there, the equity available in the line of credit must then be transferred to an investment account, which can be done automatically by your Certified Financial Planner.

Essentially, the homeowner is borrowing from the paid portion of the mortgage for reinvestment purposes.

On average, a typical 25-year mortgage can become fully tax deductible in 22.5 years.

The Ideal Client

Ideal borrowers for an advanced mortgage and tax strategy are typically professionals or other high-income earners who have a conventional mortgage, and have at least 20 per cent of the cost of the home to put towards a down payment, or who have built up substantial equity.

As high-income earners, their total debt-servicing ratio will be quite low and they will have excellent credit (680+ Beacon scores). These borrowers are financially sophisticated homeowners that are keenly interested in establishing a secure financial future and comfortable retirement. They also have good investment knowledge.

The Risks

The financial benefits of tax-deductible mortgage interest are indisputable and justify the risks to the right borrower. That said, a problem can arise if a homeowner spends the funds as opposed to reinvesting them. As well, any tax refunds should be used to pay down the mortgage as quickly as possible – thus making as much of the interest payment as possible tax deductible.

The short-term financial risk is liquidity (sometimes referred to as cash flow risk). Cash flow risk addresses the possibility that interest rates will sharply drive up the cost of borrowing at the same time as markets falter, resulting in a negative client monthly cash flow for a brief period of time.

This short-term risk is typically only prevalent in the first two to four years because, after this period of time, the homeowner has stockpiled enough equity through annual tax refunds that other liquidity options exist and the risk is fully mitigated.

Liquidity risk varies widely based on the balance sheet strength of the homeowner. Highly qualified homeowners are easy to manage as these borrowers have no difficulty meeting the short-term cash flow demand should the need arise.

Combining this tax deductible mortgage with a sound investment strategy can significantly increase your net worth over the long term. Talk to a mortgage expert for a free analysis of how the Smith Manoeuvre can work for you.


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The Bank of Canada drops the key interest rate. How does this change will impact me?

It was a huge surprise to everyone when the Bank of Canada announced yesterday that it is cutting its key interest rate by 0.25% to 0.75% from 1.00%.  There hasn’t been a movement upwards on downwards in the key interest rate in over 4 years.

The big question is – What impact is this change going to have on me?

Cheaper mortgages for clients that have variable or adjustable mortgages:
Since variable and adjustable rate mortgages are determined by the prime interest rate and are linked to the overnight interest rate of the Bank of Canada. This will also be dependent on each individual lender if they reduce their own prime interest rate.  Current mortgage holders with fixed interest rates, will not see a change on your monthly payments. However, people that are taking a new fixed rate mortgage or renewing their old one right now could see the interest rates come down. The reason being that fixed mortgage rates are dependent on the bond market.  The bond market have already started to come down of the change in the interest rate by the Bank of Canada.

Unsecured and secured lines of credits:
Similar to the variable and adjustable mortgages, unsecured and secured lines of credit are normally linked to the bank’s prime interest rate which is linked to the Bank of Canada’s overnight rate. Which means that if you are borrowing money from a line of credit your cost of borrowing will come down. Again, this will be dependent whether or not the bank cuts their prime interest rate.

There was a huge drop on the loonie:
With yesterday’s announcement on the drop of the Bank of Canada’s overnight rate it affected the Canadian dollar as it had a huge drop.  This means that if you are looking a shopping in the States or planning an international trip it is going to cost more.

Saving accounts:
By the Bank of Canada changing the overnight rate it will affect the interest you will get from having money in a traditional savings account. There won’t be a huge change but if you are not earning much interest before you will be earning even less.  Perhaps it might be worth it to explore other options.
Is your mortgage coming up for renewal, you are thinking of refinancing or looking at purchasing a new home? We will be pleased to help you explore your options based on your individual needs.  After all, it is not about the mortgage, it’s about a strategy that is going to help you save time and money in the long run especially when interest rates start going up!