15 May

A smart way to put your tax refund to work

General

Posted by: Alisa Aragon

Many people have already submitted their tax return prior to the deadline and some have started planning on how they will be using it. In general, it can be a real challenge to spend our money wisely, especially tax refunds, which may seem like free money. With the average Canadian getting a tax refund of approximately $1,400 it is tempting to spend it on something fun. However, every astute financial planner, adviser, broker or financial journalist will tell you that you should not aim at getting a large refund.

By definition, a tax return means you are giving the government an interest-free loan. If you want to get less in a refund, you should reduce the amount of money the government withholds from your pay cheque. To do so, you can increase the number of exemptions you claim. It’s usually smarter to saver the extra money all your long and earn interest for yourself.

While it is very tempting to use your tax refund on things such as a vacation, put a down payment on a new car or a big screen TV, there are many other ways to generate future value and accelerate your progress to financial freedom.

  • Contribute to your RRSP’s. Not only will you make that money tax free, you can use up to $25,000 of your RRSP’s towards a down payment as a first time homebuyer. As long as you put back 1/15 of the funds that you withdraw back every year you will not pay taxes on that money.
  • Start saving for a down payment for an investment property. By choosing the right property, the rental revenue will cover your mortgage payments and your equity will increase month after month.
  • Make a lump sum payment on your mortgage. This is a great opportunity to pay down your mortgage fast by making a lump sum payment. By doing so you will reduce the amount you pay in interest as your payment will go directly towards the outstanding principal. While you mortgage payments will remain the same, you will be closer in paying off your mortgage faster.
  • Invest in your personal or professional development. Take a course or attend a conference that will help advance your career or yourself. YOU will always be your best investment.
  • Do a home renovation. Investing in strategic home improvements it can significantly boost the value of your home, build your net worth and transform your living space into the dream home you have always wanted.
  • Make a charitable contribution. Not only will you be helping a worthy cause, you will lower you tax bill next year.
  • Pay down debt. Pay down some of credit cards or loans in order to relieve some of that financial stress. While putting money in savings is important, high-interest debt can counteract those efforts. By using your refund to lower your debt you can start putting more money in savings.
  • Start a contingency fund. If you don’t have one start a contingency fund or add more money to the one you already have. Realistically, you should have at least 3 months of your pay cheque saved. It can take a while to save but your refund can help you get there. You will be glad to have that money available when the unexpected happens.
  • Start your own business. Have you been thinking of starting your own business? Your refund can help you jumpstart your business. A little extra cash is a great way to get your new venture moving in the right direction. As you generate more income you can claim some small business tax deductions on your next year’s tax return.
  • Don’t forget to treat yourself. Remember to treat yourself when you make smart financial decisions. It will help you develop a positive relationship with money. If you spend all your refunds on debt or savings you will leave yourself feeling hopeless. Use a reasonable amount to treat yourself after you have already allocated the rest of the funds wisely.

Whatever you decide to do with your refund, keep in mind how hard you worked for that money, and make sure it’s working just as hard for you.

10 Apr

Building your homeownership budget

General

Posted by: Alisa Aragon

Making the transition from renter to homeowner is likely one of the biggest decisions you’ll make throughout your lifetime. It can also be a stressful experience if you don’t plan ahead by building a budget and saving prior to embarking upon home ownership.

Budgeting is a core ingredient that helps alleviate the stress associated with money issues that can sometimes arise if you purchase a home without knowing all of the associated costs – including down payment, closing costs, ongoing maintenance, taxes and utilities.

The trouble is, many first-time homeowners fail to carefully think about their finances, plan a budget or set savings aside. And in this society of instant gratification, money problems can quickly escalate.

The key is to create a realistic budget based on your goals. Track your spending and make your dollars go further by sticking to your budget once it’s in place. Budgeting offers a step-by-step formula for figuring out how to best save your hard-earned money to invest in homeownership.

Following are three top tips to help you prepare for the purchase of your first home:

1. Set up a savings account
You can deposit a predetermined amount into this account each pay period that you won’t touch unless it’s absolutely necessary. This will enable you to put money aside for a down payment and cover closing costs, as well as address ongoing homeownership expenses such as maintenance, taxes and utilities.

2. Save up for big-ticket items
As you accumulate money in your savings account, you will be able to also save for specific purchases to help furnish your home – avoiding the buy now, pay later mentality, which can have a negative impact on your credit when you’re seeking mortgage financing.

3. Surround yourself with a team of professionals
When you’re getting ready to make your first home purchase, enlist the service of a Licensed Mortgage Expert such as myself  and find a trusted real estate agent. Experts are invaluable as you set out on the road to homeownership because we help first-time buyers through the home purchase and financing processes every day. Experts can answer all of your questions and set your mind at ease. We have access to multiple lenders, and can help you get pre-approved for a mortgage so you know exactly what you can afford to spend on a home before you head out house hunting, while a real estate agent will be able to match your needs with a house you can afford. Both parties will negotiate on your behalf to ensure you get the best bang for your buck. And, best of all, these services are typically free. Experts will also be able to refer you to other reputable professionals you may need for your home purchase, including a real estate lawyer, home appraiser and a home inspector.

27 Jan

How Much Does Mortgage Rate Really Matter?

General

Posted by: Alisa Aragon

A great discounted rate on your mortgage is worth nothing if it’s going to cost you thousands in penalties down the line. As seen in REW.ca.

More often than not, borrowers are fixated on their mortgage rate because it’s the one aspect of their home financing they know to ask about. But it’s important to look beyond the mere rates and look into the bigger picture surrounding what is significant when it comes to your specific mortgage needs. It is important to compare apples with apples.

If we dollarize the difference between 2.99 per cent and 3.04 per cent, for instance, it works out to an additional $2.66 in your monthly payment per $100,000 of your mortgage. Over the course of a five-year term, this culminates into just $159.60 per $100,000.

While “no-frills” mortgage products typically offer a lower – or more discounted – interest rate (like the 2.99 per cent used in the example above), when compared with many other available products, the lower rate is really their only perk.

The biggest problem with looking at rate alone is that you may end up paying thousands of dollars in early payout penalties if you opt for a five-year fixed-rate mortgage, for instance, and then decide to move before the five years is up.

No-frills mortgage products won’t let you take your mortgage with you if you purchase another property before your mortgage term is up – for example, portability is not an option with this product. Portability is an important option that could save you money over the long term if the home of your dreams is within your reach before your mortgage term is up and rates have risen, which they have a tendency to do over a five-year period.

This type of product is only plausible for those who have minimal plans to take advantage of benefits that will help pay off your mortgage faster – such as pre-payment privileges including lump-sum payments and increase your mortgage payments between 15 and 20 per cent without penalties.

Other things to consider is whether you are getting into a collateral mortgage or a conventional mortgage. Unfortunately, many people don’t realize they have a collateral mortgage until it comes time to renew and they don’t have the flexibility they need.

It’s understandable why these products may seem appealing. After all, not everyone feels they have the extra cash to put down a huge lump-sum payment. And who needs a portable mortgage if you’re not planning on moving any time soon?

But it’s important to remember that a lot can change over the course of five years – or whatever term you choose for your mortgage. You could get transferred, find a bigger house, have children, change careers, separate from your spouse, etc. Five years is a long time to be anchored to something.

Many people won’t sign a cell phone contract for longer than two years that they can’t get out of, so why would they then sign a mortgage for five years that they can’t get out of?

The thing is, you can still obtain great mortgage savings without giving up the perks of traditional mortgages. For starters, many lenders are willing to offer significant discounts if you opt for a 30-day “quick close.”

And there are many other ways to save money. For instance, by switching to weekly or bi-weekly mortgage payments, or by obtaining a variable-rate mortgage but increasing your payments to match those of the going five-year fixed rate, you will be ahead of the typical discount of a no-frills product before you know it and you won’t have to give up on options.

Banks don’t give anything away for free – they are there to make money. That’s why it is essential to discuss the full details surrounding the small print behind the low rates. It’s also important to take into account your longer-term goals and ensure your mortgage meets your unique needs now and into the future. As mortgage experts will help you find that balance by finding the best mortgage for you.

27 Dec

Thirteen things you need to know BEFORE renewing your mortgage

General

Posted by: Alisa Aragon

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.

As seen in REW.ca.

13 Sep

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

General

Posted by: Alisa Aragon

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.

16 Jul

Frequently asked questions when buying a home

General

Posted by: Alisa Aragon

As seen in the Metro Vancouver New Home Guide.

What do lenders look at when qualifying me for a mortgage?

Most lenders look at the following factors when determining whether you qualify for a mortgage:

  • Income
  • Debts
  • Employment History
  • Credit history
  • Value and marketability of the property you wish to purchase.
  • How much can I qualify for when buying a home?

In order to determine the amount for which you will qualify, there are two calculations that are used. The first is your Gross Debt Service (GDS) ratio. GDS looks at your proposed new housing costs (mortgage payments, taxes, heating costs and strata/condo fees, if applicable). Generally speaking, this amount should not be more than 35% – 39% of your gross monthly income. For example, if your gross monthly income is $4,400, you should not be spending more than $1,716 in monthly housing expenses. Second, your Total Debt Service (TDS) ratio is calculated. 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 42% – 44% of your gross monthly income. The GDS and TDS will depend on your credit. Keep in mind that these numbers are prescribed maximums and that you should strive for lower ratios for a more affordable lifestyle. Before falling in love with a potential new home, you may want to get pre-qualified by a Mortgage Expert. This will help you stay within your price range and spend your time looking at homes you can reasonably afford.

How much money do I need for a down payment?

The minimum down payment required is 5% of the purchase price of the home when you are an employee. When you 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% and at least 10% down payment when you are self-employed and qualifying with an “estimated” gross income instead of the incoming showing on your income tax return. In order to avoid paying mortgage default insurance, you need to have at least a 20% down payment.

If I don’t have the full down payment amount, what can I do?

There are programs available that enable you to use other forms of down payment, such as from your RRSPs, or a gift from a parent, child or siblings. Also, you can borrow the down payment from a line of credit, loan or credit cards. However, in order to qualify you still have to be within the TDS ratios as mentioned above.

What else do I have to pay to purchase a home?

You will have to pay for the closing costs. The lenders require you to have in your bank account at least 1.5% of the purchase price (in addition to the down payment) strictly to cover closing costs. You must have this amount but it doesn’t mean you are going to spend it. The following are some of the closing costs:

  • Legal costs
  • Property tax adjustments
  • Strata/ condo fee adjustments (if applicable)
  • Cost to register property in land title office, etc.
  • What would be my mortgage payments?

Monthly mortgage payments vary based on several factors, including: the size of your mortgage; whether you are paying mortgage default insurance; your mortgage amortization; your interest rate; and your frequency of making mortgage payments.

What is better a fixed or variable rate mortgage?

The answer to this question depends on your personal risk tolerance. For instance, you are a first-time homebuyer and/or you have a set budget that you can comfortably spend on your mortgage, it’s smart to lock into a fixed mortgage with predictable payments over a specific period of time. If your financial situation can handle the fluctuations of a variable rate mortgage, this may save you some money over the long run.

What is the best interest rate that I can get?

Your credit score plays a big part in the interest rate for which you will qualify,as the riskier you appear as a borrower, the higher your rate will be. Rate is definitely not the most important aspect of a mortgage, however, as many rock-bottom rates often come from no frills mortgage products. In other words, even if you qualify for the lowest rate, you often have to give up other things such as pre-payments and portability privileges when opting for the lowest-rate product. Remember not to focus on the lowest interest rate but on finding the best mortgage with the most favorable terms and rate. While you might end up having a lower rate, it can end up costing you thousands of dollars of unnecessary costs in the long run.

What credit score do I need to qualify?

Generally speaking, you are a prime candidate for a mortgage if your credit score is 680 and above. The higher you score the better, as you will have more options and advantages. These days almost anyone can obtain a mortgage, but the key for those with lower credit scores their options will be more limited and interest rates could be higher. But don’t worry consult a Mortgage Expert to see how they can help you in obtaining a mortgage.

What happens if my credit score isn’t great?

There are several things you can do to boost your credit fairly quickly. Following are five steps you can use to help attain a speedy credit score boost:

  1. Pay down credit cards. The number one way to increase your credit score is to pay down your credit cards so they are below 50% of your limits.
  2. Limit the use of credit cards. Racking up a large amount and then paying it off in monthly installments can hurt your credit score. If there is a balance at the end of the month, this affects your score.
  3. Check credit limits. If your creditor is slower at reporting monthly transactions, this can have a significant impact on how other lenders view your application.
  4. Keep old cards. Older credit is better credit. If you stop using older credit cards, the issuers may stop updating your accounts. Use these cards periodically and then pay them off.
  5. Don’t let mistakes build up. Always dispute any mistakes or situations that may harm your score. If, for instance, a cell phone bill is incorrect and the company will not amend it, you can dispute this by making the credit bureau aware of the situation.

To get more details about these and other questions you might have, give us a call and we will be able to analyze your personal situation and provide you with more information so you can make an informed decision on buying your home.

18 May

What Happens When Financing Falls Through?

General

Posted by: Alisa Aragon

If your mortgage approval is rescinded at the last minute, your purchase could be in jeopardy. Here’s how to fix it. As seen in REW.ca

Q: I’m buying an old house, and the offer subject to financing. But what happens if the bank doesn’t approve the house and my financing falls through at the last minute?

A: If your financing falls through at the last minute, we would advise to get an extension on your subject removal date and not remove subjects until your financing is in place.

When you put an offer to purchase a home, you are saying that you will be buying the home provided all the conditions are fulfilled prior to you giving a deposit. Those conditions are commonly refer to as “subject,” such as subject to inspection, review of the strata minutes, financing, etc. During this time you will do your due diligence along with your real estate agent and mortgage expert via the lender. Prior to putting an offer, you would have been pre-approved or pre-qualified. While the lender might have approved you, they have still not approved the property you are purchasing.

Once you have an accepted offer the lender will issue a commitment letter agreeing to approve your mortgage provided you can fulfill the financing conditions. Some of these conditions include income confirmation, source of down payment, appraisal (if required), and approval of property such as property disclosure statement, strata minutes, Form B, etc. It is critical that the lender reviews and approves all of these documents before removing subjects. There has been cases where the lender has no issues with the borrowers but has issues with the property and therefore will not approve the financing.

When you work with a bank you only have one option, but when you work with a mortgage expert because we have access to multiple lenders if one lender doesn’t approve the mortgage, then we are able to go to another lender. This will save time and stress to the client. We have seen many situation in which the lender is not comfortable with the property so, in order to get financing with other lenders, an extension of one or two days is required to ensure all financing conditions are fulfilled and the client feels comfortable in removing subjects.

15 Apr

Is the Rate the Most Important Factor in a Mortgage?

General

Posted by: Alisa Aragon

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.

The reason why people focus on “the rate” is because that is the only thing you hear on the news. Then the talk around the water cooler 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.

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.

  •  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.
  • 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.
  • 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.

Therefore, 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.

9 Mar

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

General

Posted by: Alisa Aragon

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.

Whether 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.

30 Jan

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

General

Posted by: Alisa Aragon

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.