Canadian Finance BlogMortgage – Canadian Finance Blog

Mortgage Broker or Banker?

Nelson Smith — Thu, 13 Oct 2011 09:00:18 +0000

So you’ve just gone out and looked at approximately 285 houses, finally deciding on that perfect place. Now comes what’s arguably the hardest part of the home buying process, which is getting financing for the thing. Of course, you can just avoid this whole process completely by paying cash for the house, but who has a quarter million dollars just hanging around? And that’s just for a cheap place. Unless you’re planning on saving for a long time before buying that house, you’ll have to get a mortgage on it.

When it comes to getting a mortgage, there are two choices. You can either go to your local loans officer, who represents just the bank they work for. Or, alternatively, you can go with a mortgage broker, which is a liaison between you and a finance company. Which should you choose? It’s not such an easy question.

Advantages of Using a Banker

The big advantage to using your local banker is the fact that they have most of your info on file already, which speeds up the whole application process. When you go to a mortgage broker, they have to create a whole new application for your mortgage, since the lender they’ll submit to doesn’t know you from a hole in the ground.

Also, often your bank will have additional stuff on record. If your down payment is coming from your savings account, just a few taps on a keyboard can verify the money is there and has been there long enough to satisfy CMHC requirements. The bank can also take a quick look into your account to make sure your income is steady. A mortgage broker will ask a borrower to supply copies of these records, so a borrower saves time by sticking with his bank.

Also, if you’ve been a customer of that particular bank for a while, you might have fostered a relationship with the loans officer. Perhaps this is your 2nd or 3rd mortgage, and you’ve used the same girl for all of them, and she’s treated you well the whole time. You’re certain the rate being offered is as low as the bank will go, because you trust the loans officer. A good relationship with whoever handles your mortgage is essential.

Many mortgage brokers will tout the number of lenders they work with as a major advantage. The fact is, most brokers send all their AAA business to just one or two lenders, since they know those lenders so well. It kind of ruins the whole mantra of shopping your mortgage hard to get the best deal, doesn’t it?

Advantages of Using A Broker

Saying what I just said, the big advantage of using a mortgage broker is the ability to shop your deal to the best lender for your situation.

If you know you’re going to make large lump sum payments, then a lender who will let you do that without an interest penalty is ideal. Or, maybe you know you’re not going to pay down a nickel more than absolutely necessary, since you’re in no hurry to pay down your mortgage. If that’s the case, then you’ll want to go with a mortgage that has sacrifices prepayment privileges in exchange for a low rate. A good broker will ask these questions and find you a lender that fits your needs.

Another advantage to using a broker is flexibility. One of the reasons online banking has become popular is that people just don’t have time to go to the bank when it’s open. And it’s the same thing with arranging their mortgage. So, the broker comes to them, maybe after dinner or on a weekend, and starts the ball rolling on their deal then. What a great deal for those people who have to work during normal banker’s hours.

Banks are starting to eat away at this advantage though, introducing mobile mortgage people who will come to your house.

Which Should You Use

Well, that’s a tough call.

Using both a broker or a banker has merit. If you’re a disorganized person who hates a lot of paperwork, maybe using a broker isn’t the answer. Or, if you really have no idea about the whole process, maybe a mortgage broker is the route to go. Ultimately, the choice is up to you.

But, if you’re relatively astute financially, you might want to weigh out the options yourself and just approach the lender you like the most on your own. Mortgages aren’t that complicated, most everyone can understand the terms by educating themselves. Doing a little research beforehand will make either route easier.

Mortgage Broker or Banker? originally appeared on Canadian Finance Blog on October 13, 2011.

I’m In No Hurry To Pay Down My Mortgage

Nelson Smith — Thu, 29 Sep 2011 09:00:34 +0000

The personal finance community has some kind of love on for paying down your mortgage early. I can understand why too. Not having a mortgage payment is attractive, since you’re no longer paying interest to an evil, evil bank. You get to live practically for free, excluding utilities and property taxes, but you’d have to pay them anyway. And, usually the most important reason given is the flexibility someone gets once they pay the thing off. Suddenly you can have $1000 or $1500 a month to save towards retirement, or just to blow on golf and cheeseburgers. I can see why that appeals to people.

I bought my current residence back in August 2008. Now, 3 years later, I owe approximately $150,000 on the place. My mortgage is a variable rate of prime minus 0.3%, meaning I’m currently paying 2.70%. I originally signed up for a 25 year amortization, but increased my mortgage payments the maximum 20% when rates collapsed in 2009. The remaining amortization is approximately 17 years.

I’ve had extra cash over the past two years that I could have easily contributed towards my mortgage, paying down some principle. Instead, I took that money and invested it, mostly into the stock market, but also in some high yield bonds as well. What’s wrong with me? Shouldn’t I be taking the guaranteed return of paying off my mortgage?

Nope, and here’s why.

Compounding Is Your Friend

Let’s look at two hypothetical borrowers. One absolutely hates his mortgage, so he takes a 15 year amortization to make the thing go away quickly. The other one isn’t so opposed to the thing, so he signs up for a 30 year amortization. Each imaginary person borrows $200,000, and for the interest of simplicity they pay 4% interest for the life of their loan.

Borrower A has mortgage payments of $1476. Borrower B cuts down his payments considerably, paying $951 per month. That means borrower B has an extra $525 to invest each month, for the whole 30 years. Meanwhile, borrower A doesn’t have anything extra for 15 years, but can invest quite aggressively after he pays off his mortgage, so he can invest $1476 each month from year 15 to 30. Which person comes out ahead, assuming they can both earn an average of 8% on their investments?

Borrower A: $1476*180 months*8% = $519,391

Borrower B: $591*360 months*8%= $867,676

Hopefully this results of my hypothetical situation don’t come as a surprise to most of you. The magic of compound interest is that the earlier you get started, the better off you’ll end up.

Borrower B is using leverage to his advantage as well. If he can borrow at 4% and get an 8% return on his investments, he should do this all day long. This is how wealthy people end up the way they do. As is the nature of investments, they just won’t go up in a straight line, but that’s okay for the long term investor. Besides, he’s built himself in some flexibility by not maxing out his mortgage payments.

Record Low Mortgage Rates

Like I explained above, I’m paying 2.7% on my mortgage. Since most of the globe is in such poor economic shape, I don’t envision that rate going up any time soon. Mortgage rates are touching record lows in the United States. Variable rates have gone up some in Canada, but are pretty darn close to the record low rates seen in 2009.

If interest rates are at record low rates, why would I choose to pay off those really low rates? Take advantage of the situation to borrow money at a great rate, and then plow all your excess money into other investments.

I recently wrote a post over at my own blog highlighting 10 Canadian stocks that have a dividend yield over 5%. I can invest in a nice diversified basket of stocks like these ones and get dividends that are twice the return I pay on my mortgage. Knowing that most of the companies who pay out these dividends will also have stock prices that will slowly go up in value, I can easily invest in something that will beat the pants off paying down my mortgage, even after factoring in taxes.

Security

I haven’t even touched on the main reason why people choose to pay down their mortgage early- security.

And hey, I get that. People would rather take the risk free return of paying down their mortgage than risk their hard earned capital in the stock market. Maybe they’ve been burned by a falling market or a mutual fund with a sky high fee. If you’re the kind of investor who can barely sleep at night when taking on the risk of investing in the stock market, then you probably should pay down that mortgage. It’ll usually get you better returns than the other risk free alternatives like government debt or bank GICs.

For the rest of us though, maybe we shouldn’t be in such a hurry to get rid of an opportunity to borrow money so cheaply.

I’m In No Hurry To Pay Down My Mortgage originally appeared on Canadian Finance Blog on September 29, 2011.

Acquiring an Affordable Mortgage

Guest — Mon, 25 Jul 2011 09:00:00 +0000

The trick to staying in a home is being able to afford its mortgage to start with. Here are a few tips that you can use to acquire an affordable mortgage for you and your family.

Buy a Home that you can Afford

According to Realtor, one of the mistakes that a lot of people made during the housing crisis was to buy way more home than they could easily afford. Banks allowed customers to take out home loans that were well beyond their means. Homeowners quickly fell behind on their payments because those amounts far surpassed their monthly incomes. You can avoid making this mistake by keeping your mortgage payment to no more than 25% of your monthly income. That way, your mortgage payment will be something you can easily make without throwing the rest of your finances into disarray.

Base your Purchase on the Home’s Current Value

Way too many people bought homes expecting them to appreciate year after year forever. They depended on the equity in their home to give them the money that they needed to pay their other bills. Although a home may increase in price, you should never count on using your equity for bill management. The equity in your home is much nicer if its a bonus instead of a necessity.

Refinance your Existing Mortgage

If you are already in your home and have a high interest rate, there are steps that you can take to make things easier for you. If you aren’t upside down, you can take advantage of the currently low interest rates and refinance your existing home loan. Reducing the interest rate of a mortgage leads to lower payments plus you will be paying more towards principle and less towards interest.

Build Up Savings

The current economy demonstrates just how important it is for every homeowner to have an emergency savings account. You never know when your own employment situation will get rocky. You can protect your finances by saving up at least 6 months worth of monthly expenses in a savings account. This way you can keep paying the mortgage and protect your most expensive investment no matter what happens in the short term.

What other ways can you think of to acquire an affordable mortgage?

Author Bio: John Anderton is an avid personal finance writer & observer. He writes regularly about personal finance, real estate and home financing in particular.

Acquiring an Affordable Mortgage originally appeared on Canadian Finance Blog on July 25, 2011.

How Much Mortgage Can I Afford?

Tom Drake — Tue, 18 Jan 2011 10:00:08 +0000

With yesterday’s announcement changing the maximum mortgage length from 35 to 30 years, you might be asking how much mortgage can I afford? As The Globe and Mail pointed out, if someone bought a home at the average Canadian resale price of $344,551 at a 4% interest rate and a 5% down payment, a 35-year mortgage would have monthly payments of $1,441. However, the new maximum amortization period of 30 years increases the monthly payment by 8%, which would now be $1,555 a month.

So while the 5 year difference in the maximum amortization length shouldn’t be a deal breaker, it will force people to pay off their house sooner. Some fringe buyers will be forced out of the market though, since this will increase their debt service ratio and could be the difference between qualifying for the mortgage or not. If your concerned that these changes will effect how much mortgage you can afford, consider these two ideas to increase your down payment and reduce the amount you’ll need to borrow:

Home Buyers Plan

One way to make your home more affordable is through the Home Buyers’ Plan, which allows you to borrow $25,000 from your RRSP to put towards your down payment. Your spouse can also withdraw $25,000 from their RRSP as well. So if you both have saved up enough in your RRSPs, this can be a great way to come up with $50,000 to add to your down payment and reduce your mortgage.

TFSA

Another great way to save up a down payment is to use your TFSA, which now provides $15,000 in contribution room, $30,000 if you have a spouse that’s also saving up towards your new house.

The new mortgage rules that the CMHC announced will certainly make it more difficult for some to set a mortgage, but if you put together a decent down payment with one (or both) of the ideas above, you can qualify for a mortgage and pay it off sooner!

How Much Mortgage Can I Afford? originally appeared on Canadian Finance Blog on January 18, 2011.

Six Benefits of Taking a Reverse Mortgage in Canada

Guest — Thu, 22 Jul 2010 09:00:01 +0000

While Tom has pointed out that reverse mortgages are controversial, they are becoming increasingly popular in Canada. It’s a plan that gives older Canadians greater financial security. A reverse mortgage is a type of home loan that allows homeowners to convert a part of the equity in their home into cash. Through this mortgage, the homeowners in Canada can obtain cash, without having to sell their home. However, one can qualify for this loan if they are at least 60 years old and owns their home or condo.

Benefits of taking a reverse mortgage in Canada

No monthly payments: A reverse mortgage can provide a regular source of income to the seniors rich in home equity in Canada. Rather than consumer paying the lender, here the lender pays the consumers.
It is easy to qualify: Almost all the senior homeowners in Canada have a considerable amount of equity in their home. Due to this reason, the eligibility criteria don’t include credit scores or income in the qualification process. Homeowners who are at least 60 years old can qualify for this mortgage.
Tax-free income: The seniors are not required to pay any tax on the revenue received on this mortgage. It’s their home, their money, and they have already paid tax on it. Technically, this is not income at all – it is merely changing their non-cash equity into cash.
One cannot be kicked out of his home: The homeowners cannot be evicted from their homes under the terms of a reverse equity mortgage. A homeowner has the legal right to stay in his home until he passes away or until he decides to sell his home and move out.
One can use the money for anything: The money that the homeowners receive from this type of mortgage can be used for any purpose. This means that the homeowners can use this money for paying the maintenance and utility bills or going on a dream vacation.
Allow you to remain in your home: It often happens that the homeowners find it difficult to pay their maintenance and utility bills in Canada. This kind of a mortgage lets them to convert the value of their home into cash – thereby allowing them to stay in their home.

The demand for reverse mortgage in Canada is increasing because of the above mentioned benefits. If you are planning to take this mortgage, then you can consult a mortgage specialist for further information and advice.

Bio: This guest post was written by Neil, who writes about mortgages at MortgageFit.com.

Six Benefits of Taking a Reverse Mortgage in Canada originally appeared on Canadian Finance Blog on July 22, 2010.

Fixed or Variable, Why Not Both?

Guest — Thu, 03 Jun 2010 09:00:39 +0000

For many Canadians it can be difficult deciding whether they should chose the security and predictable payments that fixed rate mortgages offer or go with a variable rate mortgage which typically offer lower interest rate margins and outperform fixed rates about 80% of the time. The decision often divides couples who are looking for a mortgage, as one spouse may have a higher risk tolerance than the other. Combination mortgages offer exposure to both sides and can be a terrific solution for many mortgage dilemmas.

What is a Combination Mortgage?

The hybrid or combination mortgage is split 50/50, with half the mortgage being a fixed rate and the other half variable. Those who select a combination mortgage enjoy tremendous diversity, with less interest rate risk than a straight variable and a chance to save money and pay less interest should rates fall or remain fairly stable. The term of the mortgage can also be split up allowing for half the mortgage to be short and the other half long if desired. Having different terms could however put your lender in the drivers seat when you have to renew the shorter of the two terms and the lender knows the other half of the mortgage is locked up long term. Like all mortgage options there is generally a small premium paid which can be in the neighborhood of 10 basis points.

Popularity of Combination Mortgages

It seems that hybrid or 50/50 mortgages are catching on with many Canadians. According to RBC’s 17th Annual Homeowners Survey, 40% of people surveyed who are likely to buy a home within the next 2 years plan on taking out a combination mortgage. It’s important to keep in mind the keyword is planning and we all know what people plan to do versus what they actually do often varies greatly. Currently combination mortgages hold less than 10% of the market place with most Canadians still opting for a fixed rate mortgage. With increased promotion by lenders and uncertainty over Canadian mortgage rates if properly promoted and explained to clients we could see them easily top 20% over the next 2 years.

Who Offers Combination Mortgages

Not all lenders offer these types of mortgages but with more Canadians considering them, you can expect more will be offering the product in the near future. Some of the lenders that do currently offer 50/50 mortgages include; National Bank, Scotia, Merix Financial, RBC and HSBC.

Conclusion

Combination mortgages can be an excellent choice for those who are looking to hedge their bets in an uncertain interest rate environment. They could also be the right choice for anyone who wants a variable rate mortgage because of the potential interest saving, but may not have a strong enough balance sheet or safety net to go with a 100% variable rate mortgage.

Try out this compound interest calculator to see what might work best for you.

Bio: Scott Ferguson is a licensed mortgage professional living and working in Toronto. For more information on mortgage products or to contact Scott visit Ontario Mortgage Loan.

Fixed or Variable, Why Not Both? originally appeared on Canadian Finance Blog on June 3, 2010.

Avoid The Financial Trap Of A Reverse Mortgage

Tom Drake — Thu, 03 Dec 2009 10:00:08 +0000

If you and your spouse are both over 60 and your house is completely paid off, you may have considered getting a reverse mortgage to take advantage of the equity you’ve built up in your home. A reverse mortgage is a product that allows you to borrow a lump sum amount based on your house value. You do not need to make any payments, the loan and the interest is applied to the lien against your property and it’s only due when you leave the house, either through a sale or with your death.

Image by woodleywonderworks

Once the house is sold and the debt is paid, there could likely be no additional money left. With the accumulating interest, a $250,000 reverse mortgage could cost you $750,000 after 15 years. While this might work well if you have no one that you want to leave an estate to, there are better options to borrow for the equity in your property.

A Home Equity Line Of Credit (HELOC) would give you a cheaper interest rate and allow you to keep ownership of the remaining value of your house. A HELOC is simply a regular line of credit that secured by your house. You would need to make a regular interest payment, though if you absolutely needed to, you could get around that by borrowing a larger amount than what you need, and using that additional credit to pay the interest.

Even if you assume that you will live in the house until you die and you have no beneficiaries, there could be a time that you need to move. If your health forces you into a care facility, the sale of your home could leave you with no money left when you might need it the most.

Think of these scenarios if you’re contemplating a reverse mortgage. While it sounds good to get your equity paid out and not have to make regular payments, for many it could be the worst financial mistake they make.

Avoid The Financial Trap Of A Reverse Mortgage originally appeared on Canadian Finance Blog on December 3, 2009.

Keep Line Of Credit Or Switch To Fixed Rate Mortgage?

Tom Drake — Thu, 27 Aug 2009 09:00:11 +0000

I received a question by email from Judy, who’s considering switching her line of credit over to a fixed rate mortgage to lock in the current low rates. I wanted to share it here for two reasons, I’d like to see what other reader’s opinions are on this and thought it might help other readers that may have similar questions about what the future might hold for interest rates.

Which is safer today, hanging onto a line of credit at prime or locking into a 3.85% five year fixed rate? Does there appear to be an inflationary trend on the horizon or will interest rates remain low in the next three years?

Looking at 5 years I would personally lean towards the 3.85% since that’s only 1.6% higher than the historically low prime rate of 2.25%. The average prime rate over the last five years is a little over 5% so there’s a reasonable expectation that it could just as easily be 5% for the next 5 years. Here’s a handy link from CanEquity that shows variable prime rates and 5 year fixed rates.

The other side of it is that the Bank of Canada said they do not plan to raise rates until June. While that sounds good for the next few months, even if they can stick to that plan the rates could easily jump 0.5% three times in a row after that. One thing for sure is that interest rates only have one direction they can go at this point, and that’s up.

That’s my opinion, of course we can’t tell the future but the odds are that the next 5 years could be 5% on average, possibly more. What does everyone else think? I’d like to hear some other thoughts on which choice you would make and why.

Keep Line Of Credit Or Switch To Fixed Rate Mortgage? originally appeared on Canadian Finance Blog on August 27, 2009.

What is CMHC Mortgage Insurance?

Tom Drake — Mon, 24 Aug 2009 09:00:28 +0000

The Canada Mortgage Housing Corporation (CMHC) provides mortgage loan insurance to lenders for home buyers with a down payment of less than 20%, to as low as 5%. However, this is not to protect the buyer, it is used to protect the lender. CMHC insurance guarantees the bank or credit union that it will not lose money on this high ratio mortgage.

It is the lender that technically pays this insurance premium, though they will pass the cost on to you. Many lenders will add this amount into the mortgage, so that you will not need to pay it immediately. so how much will CMHC insurance cost you? Here are the three tiers for employed people with verifiable income:

15% to less than 20% down payment requires a standard insurance premium of 1.75%
10% to less than 15% down payment requires a standard insurance premium of 2.00%
5% to less than 10% down payment requires a standard insurance premium of 2.75%

There is also a premium paid on mortgages that are amortized over more than 25 years.

Over 25 years, up to and including 30 years has an extended amortization surcharge of 0.2%
Over 30 years, up to and including 35 years has an extended amortization surcharge of 0.4%

The CMHC has a program where you can recieve a 10% refund on your premiums and no surcharge on extended amortizations by purchasing an energy eficient home or renovating to make it more energy efficent.

While you would benefit from having a 20% down payment, in both interest and premiums saved, CMHC mortgage loan insurance serves a purpose by allowing people to buy a house with a smaller down payment. Being insured against loss, the bank is less concerned about the higher risk they take on, which allows the buyer to stop renting and start building equity in a home of their own.

What is CMHC Mortgage Insurance? originally appeared on Canadian Finance Blog on August 24, 2009.

The Basics Of The Smith Manoeuvre

Tom Drake — Tue, 09 Jun 2009 11:00:39 +0000

The Smith Manoeuvre is a strategy that Fraser Smith developed as a financial planner and then wrote a book about it in 2002. Its basic premise is to make your mortgage tax deductible, but it can do so much more for your personal finances than just that.

To properly execute a Smith Manoeuvre, you need to have a readvanceable mortgage such as Scotiabank’s STEP or BMO’s Readiline. With this form of mortgage, your Home Equity Line Of Credit (HELOC) increases with every dollar paid down on your mortgage principle. With a Smith Manoeuvre, you then use this credit line to invest in income producing stocks, preferably in the form of Canadian dividend-paying companies. For this loan to be tax deductible, you must invest in a non-registered account. RRSPs, RESPs, and TFSAs do not qualify. You also cannot make any non-investing purchases with the HELOC. This is to keep a clean paper trail for the CRA and to show that the entire loan is for investment purposes.

On top of your regular mortgage payment, you also make additional payments from the dividends paid out as well as the tax credit received from your investment loan’s interest paid. All these payments to your mortgage will provide new room in your HELOC to borrow for investing.

By continuing this cycle, your mortgage will be paid off sooner and you’ll have a much bigger portfolio than if you waited until the mortgage was paid off to invest. And of course, the debt you now have is tax deductible, where your mortgage was not.

This strategy does leave you with a large credit line debt, but once the mortgage is paid off you’ll have some options:

You could sell a portion of your stocks, equal to the debt, to pay it off.
If the dividends are more than covering the interest, you may be better off never paying off the debt.
My favorite is a bit of both. Leave the portfolio untouched. Continue paying an amount equal to what your mortgage payment was, but use it to pay down the HELOC. This could be further accelerated by also using dividend proceeds remaining after covering the interest payment.

If you’re interested in doing a Smith Manoeuvre, it’s recommended that you speak to a financial planner. This can be a complex strategy and you need to be comfortable with a large amount of leverage, even as the prices of your stocks jump up and down in value.

I have a readvanceable mortgage and will likely be starting my Smith Manoeuvre in August. If the Smith Manoeuvre is right for you, it just may be the best financial move you make, allowing you to pay off your mortgage and start an investment portfolio at the same time.

The Basics Of The Smith Manoeuvre originally appeared on Canadian Finance Blog on June 9, 2009.