I thought it would be prudent to write my most recent blog about something that has reared its head several times of late.
As a Mortgage Broker who focuses a large portion of my business on first time and young homeowners I am often presented with some unique scenarios.
The most common concern that I have found from the underwriting side is when a parent is the guarantor on the mortgage. Many young people may be at a stage in their career where they can carry a mortgage and everything that goes along with it, however they narrowly miss qualifying for one for a variety of reasons. In these situations, parents will appear on the mortgage as a guarantor.
Unlike other types of loans like car loans for example, where the co-signor simply is on the loan as a security measure, with a mortgage the guarantor must be fully qualified along with the primary applicant.
Therefore, although the guarantor may not be involved in the process of finding a house or finding a mortgage when it comes time to verify their finances they will have to provide as much - and if they are the source of the down payment - more information than the primary applicant.
The comment I most often hear is, " I have never had to provide this information before."
That may very well be the case if you haven't obtained a high-ratio mortgage in the past year, however if you are interested in enterting the Canadian housing market NOW and don't have 20% to put down, then be prepared until a drastic change in the Canadian psyche appears, to go along with it.
When the housing market in the United States crashed in 2008 and consequently their entire economy toppled over, many looked at the mismanagement in the housing sector as a major cause.
The American mortgage market is much different than ours north of the border. Americans are able to deduct the tax from their mortgages and many use a huge mortgage as a tax planning strategy. There have been noted cases that have depicted transplanted Canadians with their inherently conservative Canadian financial mindset who bought homes within their price range and survived the meltdown in the US. Conversely, there have also been as many stories about Americans who like in 3000 sq ft homes who couldn’t afford to heat them.
I digress.
The Canadian financial system has always been relatively, if not substantially more conservative than those in many other countries. This is clearly evident when it comes to the mortgage market.
I have on several occasions met CMHC employees or contractors who have been hired by foreign governments to go teach their bankers how to implement the Canadian mortgage system into their markets.
This brings us to CMHC, the Canada Mortgage and Housing Corporation. CMHC is a Crown Corporation that among other things ensures Canadian mortgages that have less than a 20% down payment.
On July 9, 2008 the Department of Finance released a press release entitled “GOVERNMENT OF CANADA MOVES TO PROTECT, STRENGTHEN CANADIAN HOUSING MARKET”
Link
Even though the market was always strong in Canada – mortgage defaults in Canada are still only around .40% - with trouble on the horizon in the American market CMHC decided to bolster their mortgage requirements.
The new measures they announced included:
- Fixing the maximum amortization period for new government-backed mortgages to 35
years;
- Requiring a minimum down payment of five per cent for new government-backed
mortgages;
- Establishing a consistent minimum credit score requirement; and
- Introducing new loan documentation standards.
The issue that I am writing about in this blog is the last point; introducing new loan documentation standards.
If you are paying less than 20% down on a property, the Government is going to ask you for documentation to be fully satisfied that the mortgage they are guaranteeing is up to their standards, which as we now know is one of if not the highest in the World.
The days where you could walk into a bank and say, “here is $5000 in cash, I want to buy this house!” are long gone. These minimum documentation requirements mean that no matter how much money you have or how long you have been a homeowner for, if you are applying for a NEW government insured mortgage you will be required to undergo the government’s scrutiny.
These measures should not be misconstrued as something that the lender themselves are forcing you to do. It is a Canadian Government mandate to ensure the validity and strength of the mortgage holders and in order to have the mortgage ensured by the government the lenders must play ball.
Some people, understandably, may still disagree with asking for banking records and employment details, but the flip side as we have seen, is a housing market that freely lent money and consequently went belly up and will take many years to fully recover.
So next time your Bank asks you for what you may feel is too much information, keep in mind you could always be the American who has the McMansion but can’t afford to heat it.
Tuesday, October 27, 2009
Wednesday, October 7, 2009
The Globe Offers Sage Advice to Young Homeowners
Educating young home owners is something that I focus a large portion of my attention to.
The Globe and Mail have a series called "Building Blocks: A Financial Foundation for Young Families"
A recent edition features Doug Melville Canada's banking Ombudsman speaking about things to take into account when signing your first mortgage contract.
What I like all my young clients to take out of things like this is, first of all; realize that being pre approved for $350,000 does not mean that is what you can afford when you take into account living expenses. Don't make the mistake of being house poor because your Bank said they would lend you as much money as you wanted for your home.
Secondly, make sure you absolutely know your product. With so many mortgage options available in the marketplace its important you obtain one that is tailored to your specific circumstances.
Check out the video here.
The Globe and Mail have a series called "Building Blocks: A Financial Foundation for Young Families"
A recent edition features Doug Melville Canada's banking Ombudsman speaking about things to take into account when signing your first mortgage contract.
What I like all my young clients to take out of things like this is, first of all; realize that being pre approved for $350,000 does not mean that is what you can afford when you take into account living expenses. Don't make the mistake of being house poor because your Bank said they would lend you as much money as you wanted for your home.
Secondly, make sure you absolutely know your product. With so many mortgage options available in the marketplace its important you obtain one that is tailored to your specific circumstances.
Check out the video here.
Wednesday, September 23, 2009
TD Jacks up Secured LOC Rates
TD Bank just announced that they are increasing the Home Equity Line of Credit interest rate to Prime plus 1 %from the current Prime rate. Rob Carrick of the Globe and Mail wrote an article you can fine here about the issue.
What does this mean for your mortgage?
If you have a large balance on your Line of Credit and cannot pay it down, it may be worth looking into adding that balance to a variable rate mortgage.
There are two potential benefits to this. First of all the rise in the HELOC rates are acting in opposition to the downward trend of variable rates in the market. Just recently ResMor a broker only lender began offering a 4 year variable at Prime 2.25%. Some industry leaders suggest that we are maybe a month away from seeing a Prime minus variable product on the market.
By converting your HELOC into a variable you still get the variable product, but at a lower rate than the Prime plus 1% that was just announced.
A second consideration is that interest on mortgages is generally compounded semi-annually, whereas Lines of Credit are typically compounded monthly.
Thereforeyour savings are twofold - you get the benefit of a lower variable rate and save some added money by having your interest compounded semi-annually instead of monthly.
Something to consider.
John Shearer
What does this mean for your mortgage?
If you have a large balance on your Line of Credit and cannot pay it down, it may be worth looking into adding that balance to a variable rate mortgage.
There are two potential benefits to this. First of all the rise in the HELOC rates are acting in opposition to the downward trend of variable rates in the market. Just recently ResMor a broker only lender began offering a 4 year variable at Prime 2.25%. Some industry leaders suggest that we are maybe a month away from seeing a Prime minus variable product on the market.
By converting your HELOC into a variable you still get the variable product, but at a lower rate than the Prime plus 1% that was just announced.
A second consideration is that interest on mortgages is generally compounded semi-annually, whereas Lines of Credit are typically compounded monthly.
Thereforeyour savings are twofold - you get the benefit of a lower variable rate and save some added money by having your interest compounded semi-annually instead of monthly.
Something to consider.
John Shearer
Wednesday, September 9, 2009
A Real Life Debt Consolidation
Debt consolidation can be extremely beneficial for any homeowner who has debts that may be at high interest rates, an assortment of varying balances between debts or plain and simple , a lot of debt.
Often homeowners have equity in their home which is not being used and is sitting idle. Meanwhile homeowners are being burdened with heavy debt loads and high interest rates.
Below is an example of a couple who used the equity in their home to their advantage and as a result realized huge savings.
Jim and Nancy have a house they purchased 9 years ago. During this time they have taken out a line of credit to do renovations on the home. They also have two credit cards whose balances need to be paid monthly as well as a car loan.
Their monthly debts look something like this:
Mortgage:
(25 year amortization)
$200,000
Monthly Payment $1169
Credit Cards
(18% Interest)
$8000 Balance
Monthly Payments: $250
Line Of Credit
(8% Interest)
$20,000 Balance
Monthly Payment: $130
Car Loan
(5% Interest)
$14,000 Balance
Monthly Payment $540
Total Debt: $242,000
Total Monthly Payments: $2,089
In this scenario Jim and Nancy increased their mortgage from $200,000 to $242,000. They paid out their high interest debts and had only a single monthly debt to worry about.
By increasing their mortgage from $200,000 to $242,000 the monthly payment went from$1169 to $1,407 which is only an increase of $238 per month.
What are the Benefits to Jim and Nancy?
As a result of consolidating their debt their five monthly payments have been cut down to a single monthly obligation.
By paying out the high interest items Jim and Nancy’s interest cost has been reduced dramatically.
Most importantly for them though is that they now have an opportunity to save thousands of dollars.
The most interesting part of this scenario comes when we increase the mortgage payment. Jim and Nancy have a mortgage payment of $1,407. If we increase that payment to the $2,089 that they were already used to paying it would have a significant impact for them.
By simply increasing the mortgage payment to $2,089 the mortgage amortization falls from 25 years to 13 years.
This creates an interest savings of over $90,000!!
By decreasing the amortization from 25 years to 13 years the interest component on the mortgage is greatly decreased.
Now if Jack were to save $1,407 per month for the 12 years that he would have been paying his mortgage he would accumulate $278,846 at a rate of 5%.
To discuss how you can use the equity in your home please contact me.
Often homeowners have equity in their home which is not being used and is sitting idle. Meanwhile homeowners are being burdened with heavy debt loads and high interest rates.
Below is an example of a couple who used the equity in their home to their advantage and as a result realized huge savings.
Jim and Nancy have a house they purchased 9 years ago. During this time they have taken out a line of credit to do renovations on the home. They also have two credit cards whose balances need to be paid monthly as well as a car loan.
Their monthly debts look something like this:
Mortgage:
(25 year amortization)
$200,000
Monthly Payment $1169
Credit Cards
(18% Interest)
$8000 Balance
Monthly Payments: $250
Line Of Credit
(8% Interest)
$20,000 Balance
Monthly Payment: $130
Car Loan
(5% Interest)
$14,000 Balance
Monthly Payment $540
Total Debt: $242,000
Total Monthly Payments: $2,089
In this scenario Jim and Nancy increased their mortgage from $200,000 to $242,000. They paid out their high interest debts and had only a single monthly debt to worry about.
By increasing their mortgage from $200,000 to $242,000 the monthly payment went from$1169 to $1,407 which is only an increase of $238 per month.
What are the Benefits to Jim and Nancy?
As a result of consolidating their debt their five monthly payments have been cut down to a single monthly obligation.
By paying out the high interest items Jim and Nancy’s interest cost has been reduced dramatically.
Most importantly for them though is that they now have an opportunity to save thousands of dollars.
The most interesting part of this scenario comes when we increase the mortgage payment. Jim and Nancy have a mortgage payment of $1,407. If we increase that payment to the $2,089 that they were already used to paying it would have a significant impact for them.
By simply increasing the mortgage payment to $2,089 the mortgage amortization falls from 25 years to 13 years.
This creates an interest savings of over $90,000!!
By decreasing the amortization from 25 years to 13 years the interest component on the mortgage is greatly decreased.
Now if Jack were to save $1,407 per month for the 12 years that he would have been paying his mortgage he would accumulate $278,846 at a rate of 5%.
To discuss how you can use the equity in your home please contact me.
Monday, August 17, 2009
The Reality of Extended Amortizations
For any reader who is unfamiliar with the term, the amortization period of a mortgage is the time over which the mortgage is to be completely repaid, assuming equal payments. This means that when looking, for example, at a mortgage with a 25-year amortization period, it would take 25 years to reduce the balance to zero, if all regular payments were made on time and the terms (payment, interest rate) remained the same.
As anybody who has ever had a mortgage knows, the interest component of a mortgage is often much greater than the principle component at the outset of payments. By extending your amortization, for example, from 25 years which is a standard amortization to say a maximum amortization of 35 years, several things will happen. This will decrease the amount of monthly payment you actually have to pay, which is why people extend the amortization for affordability reasons. However, it also greatly increases the interest component versus principle reduction of the mortgage.
Let’s take a look at what point in the duration of a mortgage you actually begin paying off more principle than interest.
Assuming a $100,000 mortgage at 4.30%
As you can see by this chart, even with a typical 25 year amortization it still takes 8.8 years to before you begin paying off a greater proportion of principle than interest.
Note of course that this assumes a standard monthly payment. By undertaking strategies like making lump sum payments, increasing the payment amount or adopting payment frequencies such as accelerate bi-weekly payments, you will achieve principle reduction much sooner.
If you have any questions on amortizations or how to pay off your mortgage faster please contact me.
John Shearer BA (Hons)
Mortgage Agent FSCO Lic# M09000725
C: 905-320-33474
B: 289-337-9718
E: John.Shearer@verico.ca
Friday, August 7, 2009
Mortgages For The Self-Employed
Mortgage products are not one-size-fits-all. As a Mortgage Planner I strive to think outside the box in order to find my clients the best products to suit their needs. Unlike the banks who require the borrower to fit into their own narrow lending guidelines, I determine what my client’s goals are and fit those into the best product for my client.
One area where this is often the case is with self-employed borrowers. Today, approximately 1 in 5 Canadians are self-employed, and with the current economy the numbers are increasing. In June alone the number of self employed workers rose by 37,000.
To address this growing market, mortgage lenders are offering more products for the self-employed borrower. Traditionally the biggest problem with qualifying for a bank mortgage is that income is more difficult to prove for someone who is self-employed.
With self-employed borrowers, there are generally two different product stems that are available; proven income and stated income.
Proven income products utilize the individual’s income that was reported to Revenue Canada. The most common method of determining income is for the lender to determine the average of line 150 from the borrower’s three most recent years’ tax returns.
Here is one example of what this would look like.
First, the income is calculated by adding up the previous 3 years NOA’s (Notice Of Assessment) and averaging them.
2006 Income $50,000
2007 Income $75,000
+2008 Income $100,000
Total $225,000 divided by 3 = $75,000 average income used to qualify.
That is the basic income qualification for self employed programs, although there are exceptions. If applicants can demonstrate income increases year after year for four years then they may accept the most recent year’s income amount.
With proven income mortgages many lenders will perform what is called an “income gross up”, whereas they will add 15% to the average income to account for deductible expenses of the borrower.
This means that if $75,000 is used as the amount of income earned it is then multiplied by 15% to increase the actual amount to $86,250.
It is important to note that not all lenders will allow the “income gross up” or “add backs” with their products and it is highly dependent on the borrower’s net worth and credit score. For those who can utilize this however, it is a great benefit.
The other option for self-employed borrowers is the stated income mortgage. Basically, the stated income programs allow a borrower to qualify for the loan on the income they say they make, rather than what their tax return says. This product is ideal for borrowers who may not qualify based on the averaging method of the proven income method or just for those who do not want to provide income verification.
With this product most lenders will require at least two years of self-employment and strong credit ratings.
As the percentage of self-employed borrowers applying for mortgages increases so will the need for mortgage products to service these needs. A mortgage planner is able to ascertain which self-employed product, with which lender, will best meet your goals and needs. If you have any questions about mortgages for the self-employed or any other mortgage concerns feel free to contact me.
John Shearer BA (Hons)
Mortgage Agent FSCO Lic# M09000725
Cell: (905) 320-2247
Fax: (866) 442-6710
Bus: (289) 337-9718
Email: John.Shearer@verico.ca
One area where this is often the case is with self-employed borrowers. Today, approximately 1 in 5 Canadians are self-employed, and with the current economy the numbers are increasing. In June alone the number of self employed workers rose by 37,000.
To address this growing market, mortgage lenders are offering more products for the self-employed borrower. Traditionally the biggest problem with qualifying for a bank mortgage is that income is more difficult to prove for someone who is self-employed.
With self-employed borrowers, there are generally two different product stems that are available; proven income and stated income.
Proven income products utilize the individual’s income that was reported to Revenue Canada. The most common method of determining income is for the lender to determine the average of line 150 from the borrower’s three most recent years’ tax returns.
Here is one example of what this would look like.
First, the income is calculated by adding up the previous 3 years NOA’s (Notice Of Assessment) and averaging them.
2006 Income $50,000
2007 Income $75,000
+2008 Income $100,000
Total $225,000 divided by 3 = $75,000 average income used to qualify.
That is the basic income qualification for self employed programs, although there are exceptions. If applicants can demonstrate income increases year after year for four years then they may accept the most recent year’s income amount.
With proven income mortgages many lenders will perform what is called an “income gross up”, whereas they will add 15% to the average income to account for deductible expenses of the borrower.
This means that if $75,000 is used as the amount of income earned it is then multiplied by 15% to increase the actual amount to $86,250.
It is important to note that not all lenders will allow the “income gross up” or “add backs” with their products and it is highly dependent on the borrower’s net worth and credit score. For those who can utilize this however, it is a great benefit.
The other option for self-employed borrowers is the stated income mortgage. Basically, the stated income programs allow a borrower to qualify for the loan on the income they say they make, rather than what their tax return says. This product is ideal for borrowers who may not qualify based on the averaging method of the proven income method or just for those who do not want to provide income verification.
With this product most lenders will require at least two years of self-employment and strong credit ratings.
As the percentage of self-employed borrowers applying for mortgages increases so will the need for mortgage products to service these needs. A mortgage planner is able to ascertain which self-employed product, with which lender, will best meet your goals and needs. If you have any questions about mortgages for the self-employed or any other mortgage concerns feel free to contact me.
John Shearer BA (Hons)
Mortgage Agent FSCO Lic# M09000725
Cell: (905) 320-2247
Fax: (866) 442-6710
Bus: (289) 337-9718
Email: John.Shearer@verico.ca
Wednesday, July 29, 2009
Tax Deductible Mortgages
I recently had someone ask me what the deal was with tax deductible mortgages. Unlike with the Americans, in Canada it isn't easy for us to deduct mortgage interest from our income taxes.
In Canada the most known method of making a mortgage tax deductible is by utilizing the Smith Maneuver, popularized by its namesake Fraser Smith. The Smith Maneuver looks like this:
In Canada the most known method of making a mortgage tax deductible is by utilizing the Smith Maneuver, popularized by its namesake Fraser Smith. The Smith Maneuver looks like this:
- Acquire readvancable mortgage (these mortgages have LOC's attached to them so that you can reborrow the amount of principle you have paid off on each mortgage payment as a LOC)
- Sell your non-registered assets (stocks held outside an RRSP)
- Use the proceeds as a down payment on your mortgage
- Make your mortgage payments
- As you make payments, re-borrow the principle through your LOC component
- Invest this re-borrowed money at a higher Rate of Return than the LOC interest
- Deduct your LOC (investment loan) interest and use the tax savings to prepay your mortgage
- Repeat steps 3-7 until you are mortgage Free!
That is a brief summation of how the Smith Maneuver works.
Recently Jonathon Chevreau of the Financial Post write this article on the Tax Deductible Mortgage Plan, which has become one of Canada's fastest growing companies.
A tax deductible mortgage is a great way to pay your mortgage off faster and as the article illustrates is becoming a tool that many Canadians are now using.
Monday, July 13, 2009
Great Mortage Rates stimulate Real Estate Market
Check out this article from CTV.ca
Near record sales in June for Toronto. It speaks volumes for what affordable interest rates can do in hard times.
Near record sales in June for Toronto. It speaks volumes for what affordable interest rates can do in hard times.
Monday, July 6, 2009
Mortgage Term Review
Here is a great source for anyone curious about the different mortgage term options. It was created by the people over at Canadianmortgagetrends.com
Mortgage Term Review
Updated July 6, 2009
Picking a mortgage is like buying a diamond. It’s an expensive purchase; you don’t want to screw it up; and getting started is sometimes bewildering.
The first thing that most folks choose is their term. Here’s a bite-sized review of several different terms to give you a running start.
Popular Fixed Terms…
1-year fixed: Today’s 2.25% prime rate has many people craving a variable mortgage. Fight the craving. A 1-year fixed gives you the same low rate, or better. Plus, it doesn’t trap you for 3-5 years in today’s abnormally-high variable-rate premiums.
2-year fixed: Another solid alternative to a 5-year variable. You get an extra year of rate security for just ~0.20% more than a good one-year fixed. If the BoC hikes rates 1/2% every six months (starting June 2010 or sooner), a good 2-year will probably save you money over a 1-year.
3-year fixed: A solution for people who can’t choose between fixed or variable… You’ll save big interest over the first three years compared to a 5-year fixed. The tradeoff is more risk in years 4 and 5. If fixed rates go up 2% in the next few years, you’ll likely do better with a 5-year term.
4-year fixed: More people are considering 4-years since they’re still under 4% and are 1/4% to 1/2% cheaper than a 5-year fixed. If fixed rates go up less than 2% in four years, a 4-year may be more economical than a 5-year. If you’re risk adverse and prone to breaking your mortgage in four years, get a 4-year fixed to avoid the penalty.
5-year fixed: Still the most popular term. 5-years are just 3/4% above their all-time low. With most “experts” calling for rate hikes in 12 months, you’ll be sleeping easiest in a 5-year.
Longer Fixed Terms…
7-year fixed: 7-year mortgages cost 1% more than 5-year terms, for just two more years of rate assurance. As a result, they don’t sell very well. If you’re that concerned about risk, take a 10-year for the same price.
10-year fixed: The decade mortgage is still available under 5.35%. That’s not much above the recent record low. What’s more, you can get out after five years with a reasonable penalty (no dreaded IRD). The problem is, you may pay thousands more in interest than a 5-year.
Variable Terms…
5-year closed variable: They say prime isn’t going any lower. So why gamble with prime+ variables? If you want to float your rate, get a convertible 1- or 2-year fixed and wait for “prime-minus” to return.
5-year capped variable: You’ll get 3.25% today and never pay over 5.85%. Sounds okay, but if you’re that worried, why not pay a little more for a fixed rate now?
5-year open variable: Closed variables are portable and have just 3-month interest penalties. Unless you’re going to terminate early, save ~0.40% and go closed.
Other Terms and Features…
5-year $0 Down: Hate em. Lenders pillage borrowers with no-money-down products. If you can’t put down 5%, rent and bank a down payment.
5-year no-frills: If there’s any chance you’ll need over 5% pre-payment privileges, you’ll be sorry for choosing one. If not, you’ll save a smidgen (0.10% or so). As recently as May, discounts on no-frills made them worth considering. At the moment, don’t bother.
Readvanceables: Love’em. They’re the “must have” mortgage if you’ve got 20%+ equity. They make you liquid, and you can’t put a price on liquidity. More…
Open HELOC: : The All-in-One is our favourite at prime + 0.85%. It has interest offsetting and automatic everything. We just wish the LOC was at prime again, like last December.
Hybrids: A hybrid mortgage is part fixed rate and part variable rate (and/or part long term and part short term). Hybrids offer a nice amount of rate diversification. If you can’t decide between fixed and variable, check them out.
Mortgage Term Review
Updated July 6, 2009
Picking a mortgage is like buying a diamond. It’s an expensive purchase; you don’t want to screw it up; and getting started is sometimes bewildering.
The first thing that most folks choose is their term. Here’s a bite-sized review of several different terms to give you a running start.
Popular Fixed Terms…
1-year fixed: Today’s 2.25% prime rate has many people craving a variable mortgage. Fight the craving. A 1-year fixed gives you the same low rate, or better. Plus, it doesn’t trap you for 3-5 years in today’s abnormally-high variable-rate premiums.
2-year fixed: Another solid alternative to a 5-year variable. You get an extra year of rate security for just ~0.20% more than a good one-year fixed. If the BoC hikes rates 1/2% every six months (starting June 2010 or sooner), a good 2-year will probably save you money over a 1-year.
3-year fixed: A solution for people who can’t choose between fixed or variable… You’ll save big interest over the first three years compared to a 5-year fixed. The tradeoff is more risk in years 4 and 5. If fixed rates go up 2% in the next few years, you’ll likely do better with a 5-year term.
4-year fixed: More people are considering 4-years since they’re still under 4% and are 1/4% to 1/2% cheaper than a 5-year fixed. If fixed rates go up less than 2% in four years, a 4-year may be more economical than a 5-year. If you’re risk adverse and prone to breaking your mortgage in four years, get a 4-year fixed to avoid the penalty.
5-year fixed: Still the most popular term. 5-years are just 3/4% above their all-time low. With most “experts” calling for rate hikes in 12 months, you’ll be sleeping easiest in a 5-year.
Longer Fixed Terms…
7-year fixed: 7-year mortgages cost 1% more than 5-year terms, for just two more years of rate assurance. As a result, they don’t sell very well. If you’re that concerned about risk, take a 10-year for the same price.
10-year fixed: The decade mortgage is still available under 5.35%. That’s not much above the recent record low. What’s more, you can get out after five years with a reasonable penalty (no dreaded IRD). The problem is, you may pay thousands more in interest than a 5-year.
Variable Terms…
5-year closed variable: They say prime isn’t going any lower. So why gamble with prime+ variables? If you want to float your rate, get a convertible 1- or 2-year fixed and wait for “prime-minus” to return.
5-year capped variable: You’ll get 3.25% today and never pay over 5.85%. Sounds okay, but if you’re that worried, why not pay a little more for a fixed rate now?
5-year open variable: Closed variables are portable and have just 3-month interest penalties. Unless you’re going to terminate early, save ~0.40% and go closed.
Other Terms and Features…
5-year $0 Down: Hate em. Lenders pillage borrowers with no-money-down products. If you can’t put down 5%, rent and bank a down payment.
5-year no-frills: If there’s any chance you’ll need over 5% pre-payment privileges, you’ll be sorry for choosing one. If not, you’ll save a smidgen (0.10% or so). As recently as May, discounts on no-frills made them worth considering. At the moment, don’t bother.
Readvanceables: Love’em. They’re the “must have” mortgage if you’ve got 20%+ equity. They make you liquid, and you can’t put a price on liquidity. More…
Open HELOC: : The All-in-One is our favourite at prime + 0.85%. It has interest offsetting and automatic everything. We just wish the LOC was at prime again, like last December.
Hybrids: A hybrid mortgage is part fixed rate and part variable rate (and/or part long term and part short term). Hybrids offer a nice amount of rate diversification. If you can’t decide between fixed and variable, check them out.
Friday, May 29, 2009
Becoming a Strong Borrower
Lets face it, having bad credit WILL affect your credit score and reduce your ability to obtain credit cards, car loans, personal loans and mortgages. There are some easy ways to ensure that you are a strong borrower when you go to apply for any of these and these methods don’t require you to have a lot of money either.
Your credit history is recorded along with millions of others by at least one of the two major credit reporting agencies in Canada; TransUnion and Equifax.
Your Credit Report contains personal information including your name, date of birth, current and previous addresses, Social Insurance Number and current and previous employers.
It also contains your credit history which includes information about all your credit cards and loans as well as any bank accounts you have.
In addition, you will find that any bad debts – items which were referred to a collection agency – along with bankruptcies also show up on the report.
The credit report will show inquiries made on the credit report. So if you have applied for 5 credit cards and 2 lines of credit in the past year then those inquiries will appear.
Your Credit Score is like a snapshot of your financial health. It is an indication of the risk you pose to a lender who is deciding whether or not to lend you money. TransUnion and Equifax use a point scale of 300 to 900 to report your score and the higher your score on this scale the lower your risk to the lender.
As it applies to mortgages, your Credit Score will play a determining role in what interest rates you qualify for and the general ease at which you can obtain a mortgage.
Here is a list from the Financial Consumer Agency of Canada (FCAC) on improving your credit score:
Always pay your bills on time. Although the payment of your utility bills, such as phone, cable and electricity, is not recorded in your credit report, some cell phone companies may report late payments to the credit-reporting agencies, which could affect your score.
Try to pay your bills in full by the due date. If you aren't able to do this, pay at least the required minimum amount shown on your monthly credit card statement.
Try to pay your debts as quickly as possible.
Don't go over the credit limit on your credit card. Try to keep your balance well below the limit.
The higher your balance, the more impact it has on your credit score.
Reduce the number of credit applications you make. If too many potential lenders ask about your credit in a short period of time, this may have a negative effect on your score. However, your score does not change when you ask for information about your own credit report.
Make sure you have a credit history. You may have a low score because you do not have a record of owing money and paying it back. You can build a credit history by using a credit card. See the next section to find out how.
You can go onto either of the Credit Bureaus Websites and actually download your credit report. This is something you should do periodically to ensure that everything is being reported accurately and to pick up on any inaccuracies that may be evidence of identity theft.
If your credit rating is hindering you from obtaining loans then feel free to contact me to discuss available options.
Your credit history is recorded along with millions of others by at least one of the two major credit reporting agencies in Canada; TransUnion and Equifax.
Your Credit Report contains personal information including your name, date of birth, current and previous addresses, Social Insurance Number and current and previous employers.
It also contains your credit history which includes information about all your credit cards and loans as well as any bank accounts you have.
In addition, you will find that any bad debts – items which were referred to a collection agency – along with bankruptcies also show up on the report.
The credit report will show inquiries made on the credit report. So if you have applied for 5 credit cards and 2 lines of credit in the past year then those inquiries will appear.
Your Credit Score is like a snapshot of your financial health. It is an indication of the risk you pose to a lender who is deciding whether or not to lend you money. TransUnion and Equifax use a point scale of 300 to 900 to report your score and the higher your score on this scale the lower your risk to the lender.
As it applies to mortgages, your Credit Score will play a determining role in what interest rates you qualify for and the general ease at which you can obtain a mortgage.
Here is a list from the Financial Consumer Agency of Canada (FCAC) on improving your credit score:
Always pay your bills on time. Although the payment of your utility bills, such as phone, cable and electricity, is not recorded in your credit report, some cell phone companies may report late payments to the credit-reporting agencies, which could affect your score.
Try to pay your bills in full by the due date. If you aren't able to do this, pay at least the required minimum amount shown on your monthly credit card statement.
Try to pay your debts as quickly as possible.
Don't go over the credit limit on your credit card. Try to keep your balance well below the limit.
The higher your balance, the more impact it has on your credit score.
Reduce the number of credit applications you make. If too many potential lenders ask about your credit in a short period of time, this may have a negative effect on your score. However, your score does not change when you ask for information about your own credit report.
Make sure you have a credit history. You may have a low score because you do not have a record of owing money and paying it back. You can build a credit history by using a credit card. See the next section to find out how.
You can go onto either of the Credit Bureaus Websites and actually download your credit report. This is something you should do periodically to ensure that everything is being reported accurately and to pick up on any inaccuracies that may be evidence of identity theft.
If your credit rating is hindering you from obtaining loans then feel free to contact me to discuss available options.
Thursday, May 21, 2009
Ontarios Upcoming Tax Harmonization
Anyone who will be buying a new home after July 2010 MUST make sure they are aware of the impending harmonization of GST and PST when it comes to new home purchases.
Below is a copy of Schulich Professor James McKellar's article in the Financial Post about the HST Tax.
Home is where the tax is
Ontario's impending tax harmonization scheme spells disaster for those building, buying or selling homes
James McKellar, Financial Post
Reuters
The recently announced harmonization of the GST and PST in Ontario is about to wreak havoc on the housing industry, one of the pillars of that province's economy. It is a textbook case of poor government policy that will distort the province's housing market over the long term, with a particularly devastating impact on the building industry.
Consider the following: When tax harmonization in Ontario takes effect in July, 2010, someone buying a new condo in Toronto costing $500,000 -- the current median price in that city -- will pay approximately $40,000 in additional taxes. If the same buyer considers moving up to a $600,000 purchase, the tax goes up another $17,000, for a total additional tax burden of close to $60,000. Total sales taxes on a new home purchase will exceed the 13% tax on an imported luxury car and the 15% sin tax levied on a glass of wine or pint of beer purchased at the local watering hole. But will new home purchasers be willing to pay these sky-high sales tax increases and, if not, what are the consequences?
The unintended short-term consequence is the likely delay or even cancellation of some "shovel-ready" housing projects that are in the pre-sale stage. This does not bode well for labour markets and particularly a construction industry that, according to Statistics Canada, is already suffering among the highest job losses of any industry in the country. Why is government intent on spending taxpayer money to create infrastructure jobs and bail out the auto industry, all in the name of job creation, and at the same time charting a course to bring much of the housing industry to its knees?
Hardest hit will be people living in the Greater Toronto Area (GTA). The provincial government indicates that 75% of new home purchases in Ontario fall below the $400,000 threshold. But in the GTA, 54% of new home purchases last year were predominately high-rise condominiums, and in Toronto, where the majority of new condominiums are being built, the average asking price is currently just over $500,000.
For the consumer, there is one way to dodge the tax: Buy on the resale market where PST and GST do not apply. For a $600,000 resale purchase, the tax savings would total $78,000. But the sheer magnitude of the difference in sales tax between new and resale product will distort housing markets in the long run.
How will builders respond to the new tax regime? They will pursue one or more of the following options: Get as much product below $400,000 as possible; use cheaper building materials and finishes; eliminate upgrades and even some standard finishes; eliminate sustainability and "green" features if they cost more; strip down landscaping, exterior finishes and features; and keep units small.
Ontario cities can all but forget the drive for new inner city family housing after July 1, 2010. And the province can forget its sustainability and "green" initiatives as well as its intensification targets when it comes to new higher-density housing. Builders will gravitate to projects that fall below the $400,000 threshold or jump to the luxury end where the sales tax bite will not be a disincentive to would-be buyers.
Ontario's home builders have delivered quality product at a cost that has ranked for decades among the lowest in the Western world. But if the government refuses to move from its current position, the long-term unintended consequences on the performance and efficiency of our housing markets will be significant and long-lasting.
When it comes to home owners, the real losers in the harmonization scheme are the middle-income households that are upwardly mobile; those contemplating an expanding family; and the elderly who are considering downsizing. For the ageing couple who might consider a new $600,000 condo in lieu of the family home they have occupied for the past 30 years, why pay $94,950 in sales taxes? They will probably opt to stay put. For the household contemplating children and needing an extra bedroom, a resale unit will be a far cheaper option than a new unit.
Bottom line: the harmonized tax regime will curtail new housing supply in key sectors of the new homes market and will redirect demand to the resale market. In the long run, this will put upward pressure on house prices.
Tax harmonization is being sold on the grounds that it will benefit the Ontario economy at large. In the case of housing, it will do the exact opposite. The crippling new tax regime, announced in the midst of what may be the largest economic contraction since the Great Depression, will undermine one of the essential foundations of a strong economy -- housing choices at affordable prices.
jmckellar@schulich.yorku.ca - James McKellar is professor of real estate and infrastructure at the Schulich School of Business, York University.
Below is a copy of Schulich Professor James McKellar's article in the Financial Post about the HST Tax.
Home is where the tax is
Ontario's impending tax harmonization scheme spells disaster for those building, buying or selling homes
James McKellar, Financial Post
Reuters
The recently announced harmonization of the GST and PST in Ontario is about to wreak havoc on the housing industry, one of the pillars of that province's economy. It is a textbook case of poor government policy that will distort the province's housing market over the long term, with a particularly devastating impact on the building industry.
Consider the following: When tax harmonization in Ontario takes effect in July, 2010, someone buying a new condo in Toronto costing $500,000 -- the current median price in that city -- will pay approximately $40,000 in additional taxes. If the same buyer considers moving up to a $600,000 purchase, the tax goes up another $17,000, for a total additional tax burden of close to $60,000. Total sales taxes on a new home purchase will exceed the 13% tax on an imported luxury car and the 15% sin tax levied on a glass of wine or pint of beer purchased at the local watering hole. But will new home purchasers be willing to pay these sky-high sales tax increases and, if not, what are the consequences?
The unintended short-term consequence is the likely delay or even cancellation of some "shovel-ready" housing projects that are in the pre-sale stage. This does not bode well for labour markets and particularly a construction industry that, according to Statistics Canada, is already suffering among the highest job losses of any industry in the country. Why is government intent on spending taxpayer money to create infrastructure jobs and bail out the auto industry, all in the name of job creation, and at the same time charting a course to bring much of the housing industry to its knees?
Hardest hit will be people living in the Greater Toronto Area (GTA). The provincial government indicates that 75% of new home purchases in Ontario fall below the $400,000 threshold. But in the GTA, 54% of new home purchases last year were predominately high-rise condominiums, and in Toronto, where the majority of new condominiums are being built, the average asking price is currently just over $500,000.
For the consumer, there is one way to dodge the tax: Buy on the resale market where PST and GST do not apply. For a $600,000 resale purchase, the tax savings would total $78,000. But the sheer magnitude of the difference in sales tax between new and resale product will distort housing markets in the long run.
How will builders respond to the new tax regime? They will pursue one or more of the following options: Get as much product below $400,000 as possible; use cheaper building materials and finishes; eliminate upgrades and even some standard finishes; eliminate sustainability and "green" features if they cost more; strip down landscaping, exterior finishes and features; and keep units small.
Ontario cities can all but forget the drive for new inner city family housing after July 1, 2010. And the province can forget its sustainability and "green" initiatives as well as its intensification targets when it comes to new higher-density housing. Builders will gravitate to projects that fall below the $400,000 threshold or jump to the luxury end where the sales tax bite will not be a disincentive to would-be buyers.
Ontario's home builders have delivered quality product at a cost that has ranked for decades among the lowest in the Western world. But if the government refuses to move from its current position, the long-term unintended consequences on the performance and efficiency of our housing markets will be significant and long-lasting.
When it comes to home owners, the real losers in the harmonization scheme are the middle-income households that are upwardly mobile; those contemplating an expanding family; and the elderly who are considering downsizing. For the ageing couple who might consider a new $600,000 condo in lieu of the family home they have occupied for the past 30 years, why pay $94,950 in sales taxes? They will probably opt to stay put. For the household contemplating children and needing an extra bedroom, a resale unit will be a far cheaper option than a new unit.
Bottom line: the harmonized tax regime will curtail new housing supply in key sectors of the new homes market and will redirect demand to the resale market. In the long run, this will put upward pressure on house prices.
Tax harmonization is being sold on the grounds that it will benefit the Ontario economy at large. In the case of housing, it will do the exact opposite. The crippling new tax regime, announced in the midst of what may be the largest economic contraction since the Great Depression, will undermine one of the essential foundations of a strong economy -- housing choices at affordable prices.
jmckellar@schulich.yorku.ca - James McKellar is professor of real estate and infrastructure at the Schulich School of Business, York University.
Thursday, May 14, 2009
Housing Market Showing Signs of Recovery
For anyone waiting to see what the market is going to do before making the decision to purchase, this article may offer some perspective.
http://www.thestar.com/article/634381
From a mortgage professionals standpoint the combination of low interest rates, mixed with affordability and increased supply makes the present a great time for first time buyers to enter the market. The barriers of inflated housing values and expensive mortgages have all but been dissolved in the turbulent economy presenting a great opportunity for many.
http://www.thestar.com/article/634381
From a mortgage professionals standpoint the combination of low interest rates, mixed with affordability and increased supply makes the present a great time for first time buyers to enter the market. The barriers of inflated housing values and expensive mortgages have all but been dissolved in the turbulent economy presenting a great opportunity for many.
Wednesday, May 13, 2009
Closing Costs
So you’ve have been saving for your first house or condo, and have a fairly strong grasp of what kind of downpayment you'd be looking at in your particular price range and are now ready to move forward.
One of the major aspects of purchasing a home that many people fail to take into consideration is their closing costs.
Closing costs are costs that are over and above the cost of the purchase incurred by the purchaser. While not all costs apply in every situation, and there are differences based on region and province, I am going to outline what you should be prepared for when deciding if you are able to purchase.
The rule of thumb is to have around 1.5% of the purchase price available on closing. I would always suggest having between 2% or even 2.5% as a comfortable buffer After all its better safe than sorry.
What this means is that if you are purchasing a house for $300,000 then aim to have between $6000 and $7500 that can be easily applied towards closing. This figure is in addition to the down payment on the property which is for arguments sake a minimum if $15,000 at 5% down.
Now is also a good time to mention that if necessary you can borrow your closing costs when in a bind. This is not something I would recommend though because it is an additional debt that lenders will use in determining your ability to carry a mortgage.
So we have established that you are going to need to have around 2% or so available on closing. Lets now take a look at some of these costs and what they are for. Again, this list covers things you may require and there may or may not be items on this lists that apply to your closing.
Provincial Sales Tax (PST)
On any purchase with less than a 20% downpayment in Canada, Mortgage Default Insurance is required. These premiums which are usually added to the amount of your mortgage – although you can pay them up front – require a PST charge to be paid on the premium at the time of closing. A Provincial Sales Tax rate of 8% will apply to your insurance premium. So if you had a premium of $2000 then you would be responsible for $160 at the time of closing.
Home Inspection Fee
So we have established that you are going to need to have around 2% or so available on closing. Lets now take a look at some of these costs and what they are for. Again, this list covers things you may require and there may or may not be items on this lists that apply to your closing.
Provincial Sales Tax (PST)
On any purchase with less than a 20% downpayment in Canada, Mortgage Default Insurance is required. These premiums which are usually added to the amount of your mortgage – although you can pay them up front – require a PST charge to be paid on the premium at the time of closing. A Provincial Sales Tax rate of 8% will apply to your insurance premium. So if you had a premium of $2000 then you would be responsible for $160 at the time of closing.
Home Inspection Fee
A home inspection carried out by a qualified and professional inspector is a cost that is of benefit you the purchaser, so you will be responsible for paying it. A thorough home inspection is something that should be done before purchasing the house and in my opinion is almost always worth the cost. A home inspection usually will cost somewhere in the range of $350 to $450 but larger homes or homes requiring more attention may be more costly.
Appraisal Fee
The lender will usually require that an appraisal is done on the property at your expense. This is done to determine the market value of the property as attained by the appraiser. An appraisal usually costs around $150 for a basic appraisal to $250 for a more thorough one, plus GST.
Property Insurance
All lenders will require that a certificate of insurance is available on the date of closing to ensure the property is adequately insured. This fee is dependent on the size of the property and what is being insured but the policy must usually be enough to cover at least the amount of the mortgage. The cost associated with this can vary between $200-$700.
Survey or Title Insurance Fee
The lender may require an updated survey of the land which can be costly. Most lenders will accept Title Insurance which offers protection from flaws in the title, and is only somewhere in the neighbourhood of $225.
The lender may require an updated survey of the land which can be costly. Most lenders will accept Title Insurance which offers protection from flaws in the title, and is only somewhere in the neighbourhood of $225.
Land Transfer Tax
Ontario requires a land transfer tax to be paid by the buyer on the transaction. The amount varies dependent on the purchase price of the land. Also, please note that if you are buying within Toronto, the City of Toronto has an additional Toronto Municipal Land Transfer Tax that is in addition to the Provincial tax. It is of note for the first time buyers that you qualify for a land transfer tax rebate up to a maximum of $2000.
Click the link for a tax calculator. http://www.torontorealestateboard.com/LTT_splash/ltt_calculator.htm
Click the link for a tax calculator. http://www.torontorealestateboard.com/LTT_splash/ltt_calculator.htm
Legal Fees and Disbursements
These are fees attributed to the lawyer or notary provided their services to you such as performing searches and processing the mortgage. You can expect at least $500 for these services plus applicable tax.
A note on GST – When you purchase a new construction home, GST is deemed payable. Make sure before you sign your agreement with the builder that you know who is going to pay it -you or the builder. Often the GST will be worked into the purchase price beforehand, but you should obtain confirmation of this. Also the Government offers a GST/HST New Home Rebate, so you will want to know who this will be payable to.
This list covers many of the costs associated with purchasing a home. Individual circumstances vary accordingly. One thing that I suggest to any new homeowner is to make sure they create a budget. I highly recommend you meet with your mortgage professional leading up to your home purchase to make sure you are planning appropriately.
This list covers many of the costs associated with purchasing a home. Individual circumstances vary accordingly. One thing that I suggest to any new homeowner is to make sure they create a budget. I highly recommend you meet with your mortgage professional leading up to your home purchase to make sure you are planning appropriately.
I will touch on budgeting and financial controls in a future post, so for now keep saving and happy house hunting.
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