Mortgagesuccess’s Blog

So which mortgage should you go for? Well, as always, it’s incredibly important to read the fine print. BMO’s mortgage offer expires on January 25, and, because it’s closed, it doesn’t offer the flexibility to pay the mortgage off early. The 4-year options, in most cases, offer the same early payment flexibility as a typical open mortgage.

Remember, when shopping for a mortgage, you have to think about so much more than just the rate. If you might be moving before the mortgage term is up, you’re going to require something portable. If you’d like the flexibility to put down a lump sum and pay the mortgage off at some point, an open mortgage is more favourable than a closed. And when it comes to term length, most people move before a 5-year term is up anyway – so a 4-year term could be just perfect for you. Or, if you’re pretty sure you’re not going to move in the next 10 years, you may want to consider a 10-year mortgage which is currently sitting at record lows under 4%.

If you’re in doubt, feel free to drop me a line. I’d love to help you find the mortgage that is perfect for your needs, at a rate that you can afford.

Attendees of a real estate investment seminar wanted to pass on these helpful tips:

1. Before purchasing a property, always get a survey. That two-dimensional drawing might bring to light information that you may have missed otherwise – such as the actual property line of a residence.

2. Take your tape measure to every viewing. You never know when certain measurements will come in handy – especially when you’re trying to visualize the property later.

3. When obtaining a mortgage, don’t be afraid to go for the going 4-year rate instead of the traditional 5-year. The rates are often lower, and many times a 4-year rate is all you need.

4. Don’t believe the stats – always think regionally. While Canada’s real estate market may be heating up, the regional pocket your interested in may be a buyer’s market – and, resultantly, may offer some great deals.

If you have a variable rate mortgage, you’re not alone. A new Bank of America/Merrill Lynch report reveals that 66% of Canadians now have mortgages that are floating with prime – up from the typical 30%

There’s absolutely nothing wrong with having a variable rate mortgage, but the Merrill Lynch report reiterates that these mortgages would be affected by an increase in the Bank of Canada’s overnight lending rate – something not all mortgage holders are prepared for.

While the Federal government changed the mortgage rules so that anyone applying for a variable rate must now be qualified on the five-year fixed, let’s be realistic – not everyone ends up paying that higher rate. To free up monthly cash flow, most mortgage holders prefer the lowest rate possible so they can afford additional expenses more comfortably. Judging by the Bank of Canada’s most recent announcement, it doesn’t look like it’s going to be raising interest rates anytime soon – but that doesn’t mean you shouldn’t get your finances in order now.

At one point, your household was approved on the going five-year fixed rate – so it might be a wise move to take a look at your budget, trim frivolous spending and increase your mortgage payment. That move will lessen the blow when rates eventually rise. Because they will rise – and when they do, they may increase quicker than you currently expect. As little as a 2% increase in the lending rate will erase any savings variable rate holders are currently experiencing. If the Bank of Canada increases its lending rate by increments of 0.5%, you’ll only have four months to adjust.

When it comes time to choosing a mortgage, many homeowners opt for the lowest rate they can find, at the traditional five-year term, without paying attention to the fine print. In many cases, these no-frills mortgages – and even some that have frills -can make a huge dent in your wallet if you ever try to break them.

The concept of Interest Rate Differential (IRD) is one that often comes up in these situations – and is currently in the news thanks to a single mom’s lawsuit against CIBC. The woman, who recently went through a divorce and was forced to break her mortgage, is suing CIBC for using vague language in her mortgage contract that is forcing her to pay the IRD – the amount of money the financial institution will lose in interest payments as a result of the broken contract. In this situation, it’s around $45,000 because she had eight years left on her mortgage.

The formula that banks use to calculate the IRD are among life’s great mysteries, and often differ between bank to bank, and whether you have a fixed or variable rate mortgage. If you’re signing a mortgage, it’s best to find out what your bank’s policy is upfront, just in case you may have to break it at some point. You may also want to pay a few extra points to ensure your mortgage is portable (can be moved to another home, if you choose to move during the term of the mortgage) or, if you’re not quite sure what the future might bring, sign on for a shorter term. There’s no rule that says you have to sign on for five years – and, in many cases, a lesser term makes more sense, and might even save you money.

Among the slew of insurance options that come with purchasing a new home, you’ve likely come across the term “title insurance”. But what exactly is it – and is it worth forking over the extra money?

In a nutshell, “title” refers to your ownership of a property – so “title insurance” protects both you ( the owner) and the lender against loss resulting from title defects or fraud. While other types of insurance may protect your home from things that may happen in the future -such as fire or flooding – title insurance protects your home from things that may have already happened, but weren’t immediately evident upon the purchase of your home. Some examples, as cited by title insurance company, Stewart Title, include:

- someone else owns an interest in your title
- existing liens against the title
- violations of municipal zoning by-laws
- encroachments onto an adjoining property (other than fences and boundary walls)
- setback violations
- realty tax arrears
- outstanding municipal utility charges, provided such charges form a lien on title
- existing work orders
- lack of legal access to the property
- unmarketability of the land due to adverse matters that would have been revealed by an up-to-date survey / RPR/ Building Location Certificate

- fraud, forgery and false impersonation to the extent they affect the validity of title

Many homeowners find title insurance to be a worthwhile purchase because it’s a minimal one-time fee with no deductible, and stays in effect for the amount of time you own the home. While title insurance is typically acquired at the time a home is purchased, there are options available to those home owners who are refinancing. For more information, give us a call – or check out one of Canada’s title insurance companies, such as Stewart Title, First Canadian Title or Chicago Title Canada.

If you’re a first-time buyer with a home purchase in your near future, you might want to consider taking advantage of the Federal government’s Home Buyers’ Plan (HBP).

In a nutshell, the HBP allows each buyer (provided they’re both first-timers) to use up to $25,000 of their RRSPs as a down payment towards a home that is going to be their primary residence. This is a great opportunity for first-time buyers to accumulate a larger down payment than they would have been able to otherwise. That’s because any money you put into an RRSP is tax-deductible. If you sock money away in it – and then sock away your respective tax return – the amount will quickly add up. It’s also forcing you to save for retirement – something you may not be thinking about right now.

As for the details, the program is pretty straight-forward. Here’s how it works:

- You’re not required to pay taxes on the $25,000, as long as you pay the balance back within 15 years. You’re required to start making payments in the second year after you purchase the home. Minimum annual payments are 1/15 of the total amount borrowed.

- If you’re buying a home as a couple, and one person has already owned a home, then only one half of the couple is considered a “first-time homebuyer” and eligible for the program. The one exception is if the previous homebuyer sold their home a minimum of four years earlier and hasn’t owned another one since. In that case, they’re eligible again.

- The home has to be a primary residence, so you have to plan to live in the home yourself within one year of purchasing it or building it.

For more information on the HBP, visit the Canada Revenue Agency’s website at: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html or feel free to give me a call!

By Julie Green, The Windsor Star
Many people are surprised to learn that the costs of owning a home can be substantially lower or comparable to those of renting. A more moderate real estate market and interest rates that continue to hover at all-time lows are making now an ideal time for people to buy their first home.

The following information on buying your first home, courtesy of the The Windsor-Essex County Real Estate Board, and your local real estate agent, can help you prepare for one of the biggest investments of your life.

Before you start searching for a home, you will need to determine how much you can afford to pay for a house. For many people, the modest home they can afford is a far stretch from their “dream home,” but it is a start and will require far less cash as a down payment.

You can learn a lot about buying your first home by talking to a real estate agent.

An agent will help you to determine what you can afford, identify what you want and take you to homes and neighbourhoods that reflect your lifestyle, needs and budget.

He or she will also help you understand property financing, taxes, insurance and the steps you will have to take as a first-time buyer to complete a real estate transaction.

It’s very rare for a first-time buyer to purchase a home without assistance from a bank or other lender. Most people will need to arrange a special type of loan, known as a mortgage.

Before a lender will give you a mortgage, they will need to determine how much you can afford to pay.

A lender will look at how much you will need for the initial purchase of your home including your down payment and other costs such as legal fees, inspection fees and taxes.

They will also look at the ongoing costs of paying back the mortgage along with monthly costs for utilities, maintenance, insurance and annual property taxes.

Most lenders will not permit a borrower to take on a debt load the borrower can’t carry. That’s why reputable lenders “qualify” potential borrowers before lending mortgages.

Usually, lenders say that your monthly housing expenses (mortgage payment and taxes), plus condominium fee, if applicable, should not exceed 30 per cent of your monthly gross family income.

This is called your gross debt service ratio.

Lenders also use a second calculation called total debt service ratio. Generally speaking, no more than 40 per cent of your gross family income can be used when calculating the amount you can afford to pay for mortgage payments and taxes plus other fixed monthly expenses.

These other fixed costs are your ongoing commitments and can include auto, student or personal loans as well as credit card payments.

The hardest part about buying a home for most first time buyers is saving the down payment. You may have the ability to keep up with the monthly financial obligation (mortgage payment, insurance, utilities, property taxes, maintenance), but finding a down payment may be a problem.

Once you decide what you can afford and find the home you want in the right neighbourhood at the right price, here are some of the sources you can tap into for a down payment: Savings and investments, loans or gifts from your family or relatives and Registered Retirement Savings Plan – you can withdraw $20,000 per individual ($40,000 per couple) without any tax penalty as long as you pay the amount back within 15 years.

To qualify for a conventional mortgage, you will need at least 20 per cent of the purchase price.

To put down less than 20 per cent, a buyer has to qualify for a high-ratio mortgage.

By law, this type of mortgage must be insured against default in payment. The cost of this mortgage insurance depends on the value of the house and the size of the loan. Although mortgage insurance doesn’t help you come up with the down payment, it can certainly help you get into your own home faster.

When it comes to debt, it turns out that it’s not how much you have that affects your ability to repay it, but instead how comfortable you are with it and the overall concept of debt. That was one of the findings of the Genworth Financial International Mortgage Trends Report.

The report revealed that, among other things, members of developed countries are much more comfortable with accumulating debt (particularly mortgage debt), and as a result are more likely to pay it back. Case in point is Australia, where the country’s homeowners spend 45% of their after-tax income on servicing debts (compared to 38% average of other countries). At the same time, Aussies are much more likely than any other country to make extra payments on their home loans – with 45% making extra payments on their mortgages, compared to the average 26% of other countries (Canada, India, Ireland, Italy, Mexico, the UK and United States).

Canadians, on the other hand, are right up there when it comes to debt accumulation, spending 45% of their after-tax income on debt servicing. Positive attitudes regarding the country’s strong economy (32%) and housing market (47%) seemed to fuel the accumulation of mortgage debt and increase Canadians’ appetite for it. With costs of living increasing, 28% of Canadians said they were comfortable taking on an LTV greater than 80% compared to the 20% average.

The higher debt levels haven’t seemed to affect Canadians’ ability to repay, however, with 79% saying they either made prepayments or easily met their repayments, and 83% expecting to easily make repayments over the coming year. Canadians were the most optimistic about their ability to meet mortgage payments behind only India. Only 19% were actually exceeding their payments, however, compared to the eight-country average of 26%.

Low interest rates also seem to play a huge role in this sense of debt confidence. With Canada’s target overnight rate set at 1%, compared to an average of 2.4% of other countries, Canadians are experiencing very low mortgage rates. Of the 47% who believed that now is a good time to buy a home, two thirds said it was due to low interest rates. Of those who said now wasn’t a good time, 23% cited high property prices.

Remember all the work and research that went into finding the best rate for your first mortgage? Whether you spent months making sure your credit was as good as can be, or spent hours on the Internet searching for the best rate, it seems silly to waste that effort by blindly renewing with your existing lender when your first term is up.

The truth is, the best lender is only as good as the term that you sign with them. When it comes time to renew, many offer their clients an inflated rate hoping that you’ll be complacent enough to simply sign it back. Other clients particularly the new ones, or those that take the time to negotiate receive the lender preferred rate, which can sometimes be as much as half a percentage point lower.

While that may not seem like much now, it adds up over the life of the mortgage and almost certainly overrides any savings you experienced in that first term. For example, if you had a 25-year, $200,000 mortgage at the posted rate of 4.08% you would be paying approximately $1057 per month, compared to approximately $1,018 per month at the discounted rate of 3.72%. While this isn’t a lot if you look at it from a monthly perspective, if you look at the long-term, you’re paying $118,220 in interest on the higher rate mortgage, compared to $106,572 on the lower rate mortgage. That’s a difference of $11,672.

Obviously you’re likely not going to keep the entire rate for the life of a mortgage, but if the interest costs could be even greater if you merely renew at the going rate, term after term. That’s why it’s important to employ the services of a mortgage broker throughout your entire mortgage lifespan. Not only will this ensure you’re getting the best possible rate available, but it will also give you the opportunity to see if there are other mortgage products in the market that are better suited to your changing needs.

When it comes to managing your household finances, there’s nothing more useful than a regularly-updated budget. There’s also nothing more difficult to monitor – or stick to.

To help you out, here are a few online resources to peruse:

1. Simplifying your budgeting approach.

Part of the reason budgets don’t work is because they require too much effort. In this article on the website doughroller.net, the author – who admits to failing at attempts to use budgeting software and the envelope method – walks you through his simplified approach to budgeting. Basically, it involves focusing on your problem areas – something most of us are more than aware of – and finding ways to curb them.

http://www.doughroller.net/personal-finance/a-simple-approach-to-budgeting/

2. Track your spending.

If you’re not aware of your household’s problem areas, it’s time to track your spending. This can be relatively easy if you use debit as your primary form of payment, because most of your transactions should be available online. If you’re more of a cash person, you may want to download this simple (but convenient) weekly expense record and keep it in your wallet. Track your expenses for a month – or more, if you can manage it.

http://www.foxway.com/weekly_exp_record.html

3. Online budgeting tools.

If you have the patience to set up an online budgeting tool, they can be extremely helpful in helping you stick to your budget. Many of them link to your online bank accounts, so you can see exactly where your money is going. While Quicken is one of the most popular forms of accounting software out there, you may also what to try:

You Need a Budget

http://www.youneedabudget.com/

Mint

https://www.mint.com