Brampton Mortgage Source

Increase Your Credit Score and Save Thousands

Indeed for many, savings of thousands of dollars per year could be had easily by reducing interest rates on loan and mortgage payments. For others, the dream of attaining an affordable mortgage and a home becomes attainable. In knowing how the credit scoring system works and how your credit score can be raised, the money saved on interest can be used to pay off your mortgage faster, or in any other way besides making your lender richer.

 

The credit scoring system:

Your Equifax Beacon Score informs lenders about how much of a lending risk you are, and ranges between 500-850. The following chart tells us how these scores generally affect mortgage rates:

Beacon Score	Interest Rate
719-850	The best rate
700-719	+0.20%
675-699	+0.65%
620-674	+1.70%
560-619	+2.50%
500-559	+3.50%

So given that the average Canadian credit score is about 690, most people have some room left to save thousands of dollars on interest payments.

 

How to raise your score then? The following criteria lay out how the Beacon Score is calculated. For each criteria, we look at how to increase your score. Remember, the following speaks of a perfect situation. Although perhaps not immediately attainable for many, the closer you can get to these ideal situations, the better your credit score will be.

 

1. Payment History – 35% of Score Calculation: Factors in the number of debt payments over 30 days late, collections and any other matters resulting from late payments. A single payment over 30 days late removes 20 credit points instantly. Credit will begin to repair after only two months of on time payments, so use this rather short repair period for motivation to pay consistently.

2. Current Debts - 30% of Calculation: Looks at how much debt you have relative to your credit and debt limits. For example, a total credit limit of $10,000 which has $8,000 outstanding totals 80% of credit used. Any number above 30% of credit used will begin to diminish a credit score. If 30% can not be attained, a good goal is 50%. Attempting to increase your credit or a debt consolidation loan are possible ways to help lower your percentage of outstanding credit limit. Your variety of debt will also affect your credit. Try to keep two credit cards and hold one consolidated bank loan to maximize your score in this area.

3.  Account Age – 15% of Calculation: How long you have held a bank account with your financial institution affects your score slightly. The optimal number of accounts held is three and the longer they have been open the better.

4. Types of Credit – 10% of Calculation: Similar to two. Focuses on the mix of debt you have (credit cards, bank loans, lines of credit). The optimal mix is one store credit card (ex. the bay, Best Buy…), one or maximum two bank credit cards, and one installment bank loan. Again, this is an optimal position and any reasonably similar situation will not lower your credit much.

5. Number of Credit Inquiries – 10% of Calculation: Over the past 12 months, how many times has your credit score been looked at? Having too many credit or loan applications could deem you a ‘credit seeker’, so try to keep the number less than 5 per year.

 

Finally, have your credit bureau checked for mistakes. I have seen many individuals with mistakes on their credit score that resulted in higher interest payments. Check with Equifax regularly to ensure your credit score is accurate.   

 

Reasonable variation from this perfect situation will still give you a great credit score and obviously, the closer to it, the better it will be. Contact a credit professional or myself for further information on increasing your credit rating and save thousands of dollars on interest as a result.

Brent Richardson

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

Pay Off your Mortgage Faster

After attaining the lowest possible interest rate, the second most important thing to Canadians regarding their mortgage is paying it off as fast as possible. Fortunately there are numerous ways to accomplish this task, so lets take a look at some here.

 

Make bi-weekly accelerated payments: Since there are 52 weeks in a year, we can devise that by making a mortgage payment once every two weeks, we would make 26 payments in a year. On the other hand, there are 12 months in a year, so if we made two payments every month, that would only amount to 24 payments in a year. So we can see that by making bi-weekly accelerated payments instead of two payments per month, it is as if there are 13 months in a year (because of the 26 bi-weekly payments). Thus, we make an extra months payment per year. This has the effect of saving thousands in interest on a mortgage and will reduce a 40 year amortization mortgage to 35 years.

 

Make Lump Sum Payments: Most mortgage lenders will allow you to make a lump sum payment of at least 10 % of the principle amount owed, once per year. Utilize this feature, even modestly, to save thousands in interest and pay your mortgage off faster. For example: A $200,000, 25 year amortization mortgage at 5.75% with $1000 extra paid each year will save 5 years and 10 months and $63,463 interest off of the mortgage.

 

Increase mortgage payments: Even a slight increase in your monthly or bi-weekly payments can make a substantial difference in how fast your mortgage is paid down. For example: A $200,000, 25 year amortization mortgage at 5.75% with $100 additional paid on a monthly basis would save 3 years and 8 months and $30,038 in interest of the mortgage. This method is effectively the same as reducing your total mortgage amortization period if commenced at the beginning of mortgage amortization. However, by opting for a longer amortization period and the ability to increase payments, you get the option of paying less on a monthly basis should your financial situation tighten during a period.

 

Start a small business: While mortgage interest in the USA is tax deductible, it isn't in Canada. So we pay mortgage interest with after tax dollars. What we can do, however, is write off a portion of our mortgage interest if we conduct a business out of the home. Check out some small/part time business opportunity websites or franchise web sites for some ideas on what business would work best for you. Besides tax write offs, you could use any business profit to help make lump sum payments to pay your mortgage down faster and save thousands in interest.

 

Obviously the best way to pay off your mortgage in the fastest time possible would involve some combination of these strategies based on your unique situation. These techniques also help underscore the importance of proper mortgage planning, as opposed to simply finding the best interest rate. There are many more details to consider. So, whether you are looking for a new mortgage, refinancing or renewing a current one, the best thing to do is find an experienced and knowledgeable mortgage broker that will take the time to find you the right mortgage and mortgage plan, at the best possible rates. 

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.

Other Mortgage Costs

Figuring your optimal house price, best interest rate, mortgage and mortgage payments compose the majority of cost calculations regarding the purchase of your home. This said, there are a few other up front costs that a buyer must be aware of when taking into consideration the total cost of home purchase. This article will take care in describing the honest, yet brutal upfront home purchase costs, costs that you can help minimize by working with a knowledgeable and experienced mortgage broker, such as myselfJ. In most cases the services provided by a mortgage broker are completely free.

You will need to plan ahead to cover the many up front costs of buying a home. Here we go…

 

Mortgage Loan Insurance Premium: If yours is a high ratio mortgage (less than 20% down payment), your lender will probably need mortgage insurance. This could be upwards of 6% of the total cost of the mortgage and can be integrated into your mortgage aggregate to be paid off over years. Talk to your broker about lowering these fees.

Appraisal Fee: 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. Some lenders will refund these fees after the mortgage has officially closed.

Deposit: This can form part of your down payment and must be paid when you make an offer to purchase. The charge could be up to 5% of the purchase price. If you give a deposit of 5% and your down payment is 5%, then your down payment is considered to be made.

Down Payment: You can own your home with little or no down payment. If you have at least 20% down payment, you will not require any mortgage insurance as long as your mortgage is 25 years or less.

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

Home Inspection Fee: This may be a condition of your offer to purchase and can cost around $500, depending of the complexities of the inspection.

Land Registration Fees: This is a provincial and municipal. 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.

Legal Fees: This fee must be paid on closing and costs a minimum of $500 (plus GST and PST).

Property Insurance: Any lender will require to purchase home insurance to ensure security of the mortgage.

These are the most common fees encountered when purchasing a home. As mentioned, the more qualified your mortgage broker, the better you will fare when dealing with these fees. A knowledge mortgage broker will know who to refer you to, so you get the best service with the lowest fees. We all know that every dollar counts.

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

Feel free to leave a comment or question below!

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 a lot of 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 for the various lending adjudicators (persons who approve the mortgage).

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 42%.

• 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 th eGDS and TDS ratios, but the rates on these mortgages are usually 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, 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.

0% and Small Down Payment Mortgages

Ironically, for many new home buyers, these types of mortgages are not ‘specialty mortgages’, but the norm. First time home buyers, or any home buyer for that matter, are able to purchase mortgages at the lowest interest rates with as little as zero 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) or Genworth. These mortgage insurance companies operate separately from the mortgage lender through which your mortgage is held and charge a fee depending on the size of your down payment. As we can see, the less down, 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 97%	2.90
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 Ontario 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).

 

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

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 three months 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. These 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.

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 or non conforming lender. Specifically, non conforming lenders address the following situations:

• Poor credit
• 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 15% must be placed down on the property, although in some cases it can be as little as 10%. In tough credit situations, the down payment is the most important aspect 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 income source and rate.

 

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

 

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!