Mortgagesuccess’s Blog

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

By Angie Mohr
Investopedia.com
When purchasing a house, most buyers have to finance the majority of the purchase price with a mortgage. The amount of money you put down upfront determines the size of the mortgage. Knowing how much of a down payment to save up for can be a tough decision. The larger the down payment, the longer you’ll have to wait to own a home. However, there are several benefits to waiting to purchase until you have a substantial down payment.

1. Reduced Mortgage Payments

The more you put down on your home upfront, the smaller the monthly mortgage payments will be. That will help out with your monthly budget but, more importantly, you will save thousands of dollars of interest over the life of the mortgage. For example, on a 30-year mortgage at 5 per cent interest, putting an extra $10,000 into the down payment will save you a total of $9,325 in interest payments.

2. Lower Interest Rate

Banks and other mortgage lenders often offer better interest rates when your loan-to-value ratio is lower. An increase in your down payment lowers the ratio and also lowers the risk to the lender. Lower interest rates can also save you significant amounts of money over the life of the mortgage. The interest savings from going from 6 per cent to 4.5 per cent on a $200,000 mortgage over five years is $66,863.

3. No Mortgage Insurance Fees

A conventional mortgage usually requires a down payment of 20 per cent of the purchase price of the house. If you want to contribute a smaller down payment, lenders require that you take out mortgage insurance. This insurance protects the lender in case you become unable to pay your mortgage. Mortgage insurance can be expensive, up to 2.75 per cent of the house price.

4. Less Risk When Selling

The real estate market can move up or down after you purchase your house. If the market is in a downswing and you have to sell your house, you may find that your mortgage balance is higher than the value of your home (known as being “upside down” on your mortgage). This situation gives you less flexibility in accepting offers and may make it difficult to sell your home and pay out your mortgage. If you made a substantial down payment when you bought your house, you are less likely to be upside down on the mortgage.

5. Ability to Ride out Financial Crises

No one can ever predict with certainty what will happen in the future. You may encounter a personal financial crisis such as job loss or illness that can impair your ability to pay your bills, including your mortgage. If you have equity in your home due to making a large down payment, you can better weather a financial storm. The mortgage payment will be smaller and you may be able to borrow against the equity if you need to. If you borrowed the maximum possible based on two incomes, you leave yourself open for financial stress and perhaps even foreclosure.

The Bottom Line

Taking the time to save up money to use as a down payment on your home is a solid investment. It can save you thousands of dollars over the course of the mortgage and can put you on more solid financial footing.

As of September 1, Alberta will become the second province to ensure all home inspectors are licenced – and all homeowners who use them are protected. Home inspectors will be required to successfully complete a provincially-approved training program, as well as pass a test inspection.

If you’ve ever watched the show Holmes on Homes – a home renovation show where the majority of troubled homeowners run into problems due to the oversight of a less-than-stellar home inspector – it’s a wonder that Alberta is only the second province to enforce these measures. The majority of provinces have associations that offer their own certification and education, but participation is completely voluntary.

B.C. became the first province to licence home inspectors back in 2009. At that time, the government set out to better serve homeowners by assessing the qualifications of, and requiring mandatory licences for, home inspectors; receiving and responding to complaints; and monitoring compliance through inspections and enforcement, with penalties of up to $5,000.

Alberta will take its enforcement a step further by investigating all complaints, and fining businesses in violation of the new rules by as much as $100,000 and/or two years in jail.

There have been rumours that Quebec may be the next province to regulate home inspectors, but no word yet on when that will happen – or when other provinces might follow suit.

Angie Mohr
Investopedia.com
Saving money for a down payment on a home takes time, effort and patience. Having a large down payment can save thousands of dollars over time because the home owner will carry a smaller mortgage. A down payment over 20 per cent will also prevent a mortgage company requiring that you pay mortgage insurance premiums – an added expense that often gets amortized into the cost of the mortgage.

Some methods of saving for a down payment are faster than others. Here are five tried and true ways to get into a house faster:

1. Home Buyers’ Plan (HBP)

If you have money already saved in a Registered Retirement Savings Plan (RRSP), the Canada Revenue Agency allows you to borrow from those funds under certain conditions. You can borrow up to $25,000 from your RRSP if you are a first-time homebuyer, defined as someone who has not owned a home in four years. If you are purchasing the home with a spouse, he or she can also withdraw up to $25,000 from their own RRSPs.

In the second year after the withdrawal, you begin paying the funds back into your RRSP for a period of 15 years. If, in any year, you do not make the required repayment, the amount is included in your taxable income. Some financial planners recommend borrowing money to make RRSP contributions, then withdrawing them under the HBP. There are risks and rules surrounding this strategy and it should be discussed with a tax accountant before attempting. (Increasing your savings will provide tax benefits – and peace of mind. Check out Maxing Out Your RRSP.)

2. Mutual Funds

If you do not plan to purchase a house for three or more years, you may consider putting money away every month in an automatic investment plan. These funds can be invested in mutual funds, which mimic various sub-sets of the equity and bond markets. For example, if you invest in a mutual fund consisting of a portfolio of mining companies, the returns will follow the overall mining sector. For shorter time horizons, mutual funds are not a good choice as they can be volatile in down markets. To lessen the risk of market movements, you can invest in a real estate fund. If the real estate markets drop, your fund will be worth less, but so will the value of your new house and the amount you will need for a down payment.

3. GICs and Other Fixed-Term Investments

A safer – but more slowly growing – way to save for your future home purchase is through guaranteed investments such as GICs and bonds. These investments have fixed rates of return so that you know what to expect and when they will mature. There are two potential downsides of fixed-term investments. The first is that the interest rates are typically low. The second is that if you find your dream house while the investments are still locked in, you will likely pay penalties on early withdrawal.

4. Canada Savings Bonds (CSBs)

CSBs are a type of fixed-term investment offered by the federal government. They also offer a relatively low interest rate but have the advantage of being backed by the financial strength of the government. CSBs can be purchased for a minimum amount of $100 and are, therefore, useful in an automatic savings plans. When CSBs mature, you can instruct the bank or investment broker to automatically re-invest them. As the time for buying a house comes closer, you can begin to invest in shorter-term CSBs. (They may not be sexy, but bonds offer undeniable benefits to investors. See Savings Bonds For Income And Safety.)

5. High-Interest Savings Accounts

If your time frame for purchasing a house is short, it’s important to not leave your money locked in or leave it to the whims of the market. There are many options for high-interest savings accounts. Many of them are online institutions that you link to from your chequing account at your home bank. It is simple to set up an automatic savings plan to have set amounts of money transfer over every month or every pay day. The funds are easy to obtain when you are ready to buy as they take only a few days to transfer back to your chequing account. Another benefit is that by having to wait a few days for fund transfers and having no debit card attached to the account will prevent most impulse buying prior to the home purchase.

The Bottom Line

The most important consideration for a savings vehicle to buy a home is the length of time you have to save. In short time frames, the funds need to be available and have little or no risk of eroding. When the time frame is longer, investments with higher risks and higher rewards are more appropriate.