London Ontario Mortgage Source

Fixed or Variable Rate?

One of the biggest decisions to make when purchasing a mortgage is whether to take a fixed or variable interest rate. Many articles and mortgage professionals tend to lean towards one or the other, however it could be dangerous for you to be persuaded towards fixed or variable products by someone who is trusted and biased. In my opinion, the best person to make the decision is an educated purchaser, him or her self.

 

So, the remainder of this article will objectively explain the pros and cons of variable and fixed rates, and then will provide short profiles of who generally fits which mortgage category respectively.

 

Fixed Rate Mortgage:

This refers to the fact that the interest rate is fixed and does not change for the entire mortgage term.

Pros:

• Security: The central benefit of choosing fixed is its security feature.
• The borrower knows that the payment is the same throughout the entire term of the mortgage and can budget accordingly.
• If interest rates increase, fixed interest and payments remains the same.
• Many first time home buyers are used to fixed costs every month (like rent payments) and are comforted by the continuation of this practice.
• If inflation continues to increase, perhaps even more substantially, your home value and income should rise, but your mortgage payment will remain the same.

Cons:

• The only downside to having a fixed mortgage is the potential lack of savings. I emphasize the word ‘potential’ because a variable rate mortgage could end up costing more than fixed if rates increase.

Variable Rate Mortgage:

The interest rate on variable mortgages fluctuates according to the prime rate as set by the Bank of Canada.

Pros:

• Over the last 60 years, mortgage studies show that variable rate mortgages have been less expensive, with lower overall interest rates than fixed rate mortgages. Specifically, on a $100,000 mortgage, the average savings was $22,210. On the flip side, a consumer would have lost money by borrowing at the prime rate, compared to the 5-year rate, only 11.4% of the time.
• Ability to switch to a fixed rate: Many variable rate mortgages have the option of switching to a fixed rate without penalty. This provides comfort if rates begin to rise.

Cons:

• Volatility: While the borrower can save on interest rates by going variable, rates could increase quickly and catch the borrower off guard. A close watch should be kept on interest rates to decide when to lock into a fixed term.
• Some borrowers may not be able to afford payments if interest rates rise.
• The mortgage studies mentioned above include periods of time where many individuals lost their homes during relatively brief periods of interest rate spikes.
• Professional assistance should be sought for timing a variable mortgage.

Given this information on fixed and variable rate mortgages, the following profiles may help clarify which product is right for you.

Variable mortgages are best suited for people who are:

• Higher risk takers (would invest in more risky Mutual Funds or stocks)
• Debt free or have little outside debt
• Able to afford increases to their monthly payment should the Prime Rate increase
• Budget disciplined
• Income stability is strong

Fixed rate mortgages are better suited for people who are:

• Lower risk takers (would purchase safer investments)
• In debt with high monthly payments on their credit cards monthly loan payments
• Not able to afford increases to their mortgage payments should the Prime Rate go up
• Not good budget keepers
• Income stability is not strong

So we can see that deciding whether to go fixed or variable can be tricky, but with the proper amount of consideration and a realistic analysis of your life situation and goals, securing the right type of mortgage is a very rewarding experience.

 

Have a question or comment? Feel free to post below!

CDN Government Homebuyers Plan

Saving for the down payment towards a mortgage can be a major process. This said, by utilizing the Canadian Home Buyers Plan, most first time (in some cases second time) home buyers can benefit by saving thousands in tax dollars.

 

Set up by the Government of Canada, the plan allows an individual to take up to $20,000 out of their RRSP to finance the purchase of their first home. The benefit is that YOU NEVER HAVE TO PAY TAX ON THAT MONEY. Traditionally, taxes must be paid when money is withdrawn from an RRSP (perhaps in retirement), but under the Homebuyers plan, this issue is completely avoided. If you are purchasing the home with a spouse, you can withdraw up to $20,000 each from your accounts tax free. In terms of repayment, you have up to 15 years to pay back your RRSP starting the second year after the year of withdrawal. At this time at least 1/15 of your borrowed amount must be paid back per year. There are a few more rules that must be considered:

• In terms of penalties, if you don’t repay at least 1/15 of the borrowed amount per year, you’ll have to add the amount as income and pay tax on it.
• You MUST purchase or build your home before Oct 1 after the year of withdrawal.
• RRSP contributions must be made 90 days before the withdrawal using the Home Buyers Plan.

Visit the Government of Canada Website for more information on the Home Buyers Plan: http://www.cra-arc.gc.ca/E/pub/tg/rc4135/rc4135-e.html

 

Some may argue that you’re missing out on growth of your RRSP if this plan is utilized. This said, I think that if you get a good price for your first home relative to others in the neighborhood, the appreciation of the home will hopefully make up for this. Also consider that you pay mortgage interest with after tax income. So if you pay 5.5% in mortgage interest per year and you are in a 40% tax bracket, you are effectively paying over 7.5% due to the effects of taxes.

 

Determining the right mortgage strategy that is custom to your situation is critical. The Home Buyers Plan is just one part of that strategy. Contact a knowledgeable and experienced mortgage professional to help you create a good mortgage plan, and then reap the rewards in thousands of dollars in savings over the years to come.

 

Have questions? Ask below and Ill answer it ASAP.

Mortgage Closing Costs

Figuring out your optimal house price, best interest rate, mortgage and mortgage payment plan compose the majority of cost calculations regarding the purchase of your home. This said, there are a few other up front closing costs that a buyer must be aware of when taking into consideration the total cost of home purchase. Closing costs will vary depending on the type of mortgage you are closing as well, weather it is a home purchase, renewal or refinance/debt consolidation.

This article will take care in reviewing the most common closing costs, costs that you can help minimize by working with a knowledgeable and experienced mortgage broker. Remember, in most cases the services provided by a mortgage broker are completely free.

Lawyers Fees and Other Legal Fees: This is the most common type of closing cost that one will encounter. Lawyers are paid to do many things including, inspecting the mortgage documents for your best interest, deal with the sellers lawyer, handle the transfer of funds and register the property deed with the government. Depending on the type of mortgage, lawyers fees can run between $0 (for a mortgage renewal) to over $1000 (for a home purchase). 

CMHC Tax:If your mortgage is insured with the CMHC or another mortgage insurer, HST must be paid upfront on the insurance premium total. Although the mortgage insurance premium itself, which can often amount to thousands of dollars, does not have to be paid upfront (it is included in the mortgage total), the tax on the CMHC amount does have to be paid up front. Usually this is a few hundred dollars.

Land Registration Tax: The rate is 0.5 percent on the first $55,000 of the price, 1 percent on the next $195,000, 1.5 percent on the next $150,000 and 2 percent on the balance. If you are a first time home buyer, the majority, if not the entire tax is paid for you. 

Appraisal Fee: Some lenders will refund these fees after the mortgage has officially closed. Your mortgage lender may require that the property be appraised at your expense. An appraisal is an estimate of the value of your home. The cost is usually between $250 and $350.  

Home Inspection Cost: If you are purchasing a home, an inspection can be a very good idea. The inspection usually costs around $400 but can give you a peace of mind that you are not going to incur major expenses down the road.  

Estoppel Certificate Fee: Only if you are buying a condo and can cost up to $100.

These are the most common fees encountered when purchasing a home. As mentioned, a more qualified mortgage broker will help you fare better when dealing with these fees. A knowledgeable mortgage broker will know what to look for and who to refer you to, so you get the best service with the lowest fees.  

See the CMHC ‘Homebuying Step by Step’ for a more comprehensive home buying guide.

Feel free to leave a comment or question below! Otherwise contact me at your convenience.

www.brentrichardson.ca - brent@brentrichardson.ca

How to Qualify for a Mortgage

Some of the most frequently asked questions I receive surround the process of qualifying for a mortgage. Questions range from, How much home can I buy? To, Have I worked for long enough?  … The answers to these questions can be clarified by looking at three central lending criteria: 

1.Your current employment and income position 2.Your current debts 3.Your credit history.

It is important to recognize in looking at these criteria that there is flexibility from some lenders, and that mortgages can be had for a wide range of financial situations, at good rates.  All lenders will also allow combined incomes and credit histories to help strengthen an application.

Current Employment

Most lenders require a steady income that is able to support the mortgage payments. Full time work is preferable but some lenders will consider part time or probationary workers. Moreover, lenders will look at your length of time (or stability) in an occupation as well as future income potential. A good mortgage broker will be able to frame your situation in the best possible way.

Current Debts

All lenders look at your Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS). These ratios determine how much house you can potentially afford and what your maximum mortgage payment could be, given your other living expenses.

GDS: The percentage of gross annual income required to cover payments associated with housing only. It must be less than 32%.

• GDS = monthly housing expenses/gross monthly income
• For example: Mortgage payment = $ 1000, taxes = $200, heat/light=$200, insurance=$50. Therefore, monthly housing expenses = $1,450. Gross monthly income = $5,000
• GDS = $1,450/5000 = 29%

TDS: The percentage of gross annual income required to cover payments associated with housing AND other debt. It must be less than 44%.

• TDS = (monthly housing expenses + other monthly debt servicing)/gross monthly income
• For example: housing expenses = $1,450/mo, car loan = $500/month
• TDS = $1,450+$500/$5,000=39%

So in both cases the person passes comfortably.

Try this calculator to determine your GDS and TDS scores:

Click HERE

Some lenders will allow exceptions to the GDS and TDS ratios, but the rates on these mortgages can be a bit higher.

Credit History

The final major component that lenders review is the way you have handled your debts in the past. If your credit score is good (above 640), you will be placed with a top lender with the absolute lowest rates. If your credit is not in such good shape, and you have a larger down payment, you can be placed with an alternative lender that will carry a slightly higher interest rate. In many cases, an alternative mortgage can be reset after one year and placed with a top lender if the credit situation has improved. See my article on improving your credit score for more information. A good mortgage agent will help you establish good credit if needed.

It is usually good to get in to a mortgage as soon as possible because it helps provide structure for saving (because you build equity in your home), and it provides for a better lifestyle to own your own home.

Feel free to leave a comment, ask any questions below, or contact me to discuss the pre approval process.

www.brentrichardson.ca

0% and Small Down Payment Mortgages

For many new home buyers, these types of mortgages are not ‘specialty mortgages’, but the norm. First time home buyers, or any home buyers for that matter, are able to attain mortgages at the lowest interest rates with as little as 0% down. This is done through the use of mortgage protection insurance that is provided by a number of companies such as Canada Mortgage and Housing Corporation (CMHC). Mortgage insurance companies operate separately from and protect the bank or mortgage lender through which your mortgage is held. The mortgage insurers charge a fee depending on the size of your down payment. this fee is included in the total aount of your mortgage and thus does not have to be paid up front. As we can see, the lower the down payment, the higher the % fee. Any mortgage with a down payment of 20% or less must be insured. 

Up to and including 80%	1.00
Up to and including 85%	1.75
Up to and including 90%	2.00
Up to and including 95%	2.75
Up to and including 100%	3.10

These fees are based on the total original value of the mortgage and are then included in the total sum of the mortgage. So a $100,000 mortgage, zero down, would now be a $103,100 mortgage. Although it is preferable to attempt at least a 5% down payment (and a resulting 2.75% fee), a 100% mortgage can make sense since the value of housing in the Kitchener Waterloo area is forecasted to increase at a rate greater than 3% per year over the long term (not to mention the quality of life associated with owning a home). This said, it is always important to remember additional costs (closing costs) associated with purchasing a house that average 2-3% extra. These costs can be seen in my article here. Down payments or closing costs can be borrowed as long as debt service ratios are not over their limits (See lending criteria here).

Finally it is important to note, that if you would like to apply for a 0% down payment mortgage, your credit score must be very good, and you will have to borrow 5% of the down payment. In other words, a mortgage company will lend you 95% of the value of the home, and we will have to find the other 5% as a loan, either through cash back from a mortgage lender, or from a regular bank.

 The details of such mortgage insurance should be discussed based with me, your local mortgage expert.

 I am always available to help answer your questions. 

 www.brentrichardson.ca - brent@brentrichardson.ca

Have a comment or question? Feel free to make a post!

New to Canada Mortgages

 Ontario presents excellent work and lifestyle opportunities for new immigrants to Canada. As exciting are the unique mortgage options that new Canadians to Ontario have.

Homes can be purchased with as little as 5% down (95% mortgage) and only three months full time work experience in Canada. But the New to Canada mortgage programs are especially valuable because traditional credit proof requirements are not necessary. This means that new Canadians can use other options to establish credit such as Canadian rental records, hydro payments or even a credit report from another country. The programs are available to those with three years or less in Canada.

There are some details that must be discussed regarding new to Canada mortgage opportunities, and a meeting with me should be scheduled to fully explain the various mortgage programs available.

Contact me at your convenience for questions:

brent@brentrichardson.ca - www.brentrichardson.ca

Credit Impaired Mortgages

Sometimes things happen in our lives that affect us financially, and the result can be an inability to keep up with payments and expenses. As such, credit scores are affected negatively and sometimes severely. If this has happened to you, there is still a good possibility of attaining a mortgage from an alternative lender. Specifically, alternative lenders address the following situations:

• Poor credit
• Little or no established credit
• Previous bankruptcy
• In consumer proposal
• In credit counselling
• Recently self employed and can't verify their income
• Foreigners investing in Canadian real estate

Mortgages can be provided to individuals in these situations but usually carry certain guidelines:

For example, in most cases at least 15% must be placed down on the property. In tough credit situations, the down payment is the most important lending criteria of the mortgage. In line with this, the mortgage lender will likely require a more thorough property inspection to ensure that the asset will hold (or increase) its value. Also, the larger the down payment, the more flexible lenders become regarding the rate.

In many cases I work with clients, so that once the mortgage comes up for renewal, your credit score will be high enough to enter into a lowest rate mortgage.

Alternatively, I can work with you over time to help improve your credit score before entering into any mortgage, and apply for a lowest market rate mortgage in time.

Contact me for a discussion on how I can best serve you. No matter what your financial situation, your satisfaction is my promise.    

www.brentrichardson.ca - brent@brentrichardson.ca

Questions? Feel free to ask below.

Make Your Mortgage Tax Deductable and Save Thousands

Although this is the longest article you will find on this site, the topic of making your mortgage tax deductible, commonly known as ‘The Smith Maneuver’, is one of great popularity. This article simply aims to explain how the Smith Maneuver Works, but entire books can be read on the subject, so it would be a good idea to contact me if you are interested in pursuing such a financial strategy.

 

A second, but less discussed method of making your mortgage tax deductible will also be reviewed. That is to start and operate a small home based business. We will see how this works in the later part of this article.

 

The Smith Maneuver in a Nutshell

Unlike our neighbors to the south, we are fully taxed on money we use to make our mortgage interest payments. In other words, you make money, it is taxed, then you make your mortgage payment. So hypothetically, a 5.5% mortgage could really feel like an 8% mortgage (because you have less available ‘mortgage payment income’ due to taxes). Our goal then is to make the system work more like this: You make money, you make your mortgage payment, then the remainder of your income is taxed. Here’s how this system works…

1. Sell all existing stocks or mutual funds from non RRSP investment accounts and use it towards a down payment for step 2.

2. Attain what is called a ‘readvanceable mortgage’. This mortgage is both a home equity line of credit and a regular mortgage at the same time. Importantly, as you pay off the mortgage component, your home equity line of credit available grows.  I offer some of these types of mortgages at great rates.

3. Use the home equity line of credit to purchase income producing investments, such as dividend paying stocks, mutual funds or possibly a rental property. Since with every mortgage payment your line of credit will increase, you would use this money (out of the now larger line of credit) to invest.

4. When tax season comes around, deduct the amount of interest paid on your home equity line of credit against your income. So for example, if you paid $7000 in interest and you are in a 40% tax bracket, you would get a cheque back from the government for $2800.

5. Apply the tax return and investment dividend income against the mortgage portion of your readvancable mortgage. This in turn will increase the line of credit portion of your mortgage, so now you can use that larger line of credit, again, to purchase more income producing investments.

6. Repeat steps 3-5 until the mortgage is totally paid off. You are now left with a large, tax deductible home equity line of credit and a much larger investment portfolio. (Yes, investments do go down over short term periods, but over the long term will rise).

This is a much faster way to pay down your mortgages and has some other very attractive advantages, but also carries some possible drawbacks. Contact me for more details on this subject.

 

Starting a Home Based Business to Make your Mortgage Tax Deductible

This method is more straightforward to explain. You would start by looking for a small home based business that you think you would have some fun with, or with a product or service you think that YOU would enjoy. This business could be as small as a Tupperware Salesperson or writing a book, but could also be a small home based franchise. Ultimately any way you could possibly make money out of the home counts!

You would then write off the mortgage interest on a reasonable portion of your home (not the entire home like the Smith Maneuver). For example, a kitchen used as a home office and the dining OR living room as a ‘meeting area’. You could then use the tax credit money, like the Smith Maneuver, to pay off more of your mortgage. Unlike the Smith Maneuver, there is no line of credit attached to the home. But there are some other benefits to owning a small business...

First you can write off other business related expenses, like a portion of your car and fuel, some dining expenses and more… For all business tax write-offs though, it is critical you know what you’re doing, because a government audit has the potential to get you into major trouble. This said, a good accountant or financial planner will help you maximize your tax benefits while keeping you safe. I know a few tax professionals myself. Contact me for their names.

Second, any profit you make from the business can be used to pay off your mortgage faster. Who knows? You could become very successful and start living much more comfortably. Even if you don’t make any profits though, you can still remain in business for a few years, and procure tax benefits until you will have to close up. These few years could mean thousands in tax and mortgage savings.

What do you think about making your mortgage tax deductible? Join the conversation and make a post below!

Mortgages for the Self Employed

If you are one of the more than 7 million Canadians who are either self employed or are paid on a 100% commission basis, then you may be wondering what mortgage options are available to you.

At one point in time, the CMHC and other mortgage insurers offered programmes that allowed the self employed to purchase a home with as little as 5% down, and prove income using alternative methods, as long as the credit score was reasonable. Unfortunately in late 2009, these programmes were cancelled, which leaves the self employed with 2 options:

1. Prove income using T4 and T1 General tax forms.

• In this case, you will receive the lowest market rate from almost any major lender.
• Your stated income from tax forms will be averaged over the last 2 years to determine your income going into the home purchase or mortgage refinance.
• There are a few things that can be done in order to show more income to banks if many tax write-offs are present.

2. Use alternative forms of proving income (with less or no reliance on tax forms)

• If 'low document' or alternative means of demonstrating income is the type of mortgage you wish to pursue, you will need at least 20% equity available in the home, or to put into the home.
• Rates will vary for low document mortgages from the lowest in the market to about 1.5% above the lowest market rates. There are several variables, including amount of down payment and credit, that will determine your rate.
• As long as you have 20%, and you can show some proof of business activities/ revenues, then you can get into a good mortgage at a very competitive rate - even if credit is not perfect.
• Mortgage refinancing and debt consolidation can still make good sense with low doc mortgages, even if the rate is not the absolute lowest in the market.

So although the mortgage market for the self employed wasn't what it once was given the removal of CMHC assistance, there is still plenty of opportunity for those that work for them selves to get into solid, low rate mortgages.

I am always more than happy to work with clients to help find their best possible solution on the market. Contact me, visit my site, or feel free to leave a post with a question or remark.

Brent Richardson

www.brentrichardson.ca

brent@brentrichardson.ca

How Mortgage Brokers are Benefiting Consumers

 Most Canadians still attain their mortgage from their local Bank. Although more individuals are shopping around for better terms and rates, the majority of Canadians do not receive their best possible mortgage. By using the services of a Mortgage Broker, consumers can be confident that their interest, not the Banks, is kept at the forefront, and that they will be provided the best possible rate and terms in the market, because the services of a Mortgage Broker represent all lenders in the mortgage market.

A Canadian Institute of Mortgage Brokers and Lenders (CIMBL) survey quantifies the value that mortgage brokers add with several interesting statistics. 

Some notable points include:

• Mortgage brokers, in part, have assisted Canadians negotiate roughly 1.38% off typical posted bank rates in the last year.
• The number of Canadians using mortgage brokers has jumped 24% since 2005.
• Among those who renewed or refinanced over the past 12 months, 84% remain with the same lender, most likely a mistake given the intense competition out there.
• 88% of Canadians say they are happy with their mortgage terms.   

So even if you are in talks with your Bank about attaining a mortgage, consider comparing the Bank’s service with that of a Broker. Mortgage Brokers focus on only one financial service, Mortgages, and this focus can help save you thousands of dollars over many years and lead to much a faster pay off.

Brent Richardson