Archive for July 2009

What if there was such a thing as a magic card that you could carry with you, which had the power to open doors for you all over the world? You show someone your magic card and ‘voila’, you can have what you wish for. You would want to protect that card very carefully, wouldn’t you? Your credit is a little like that. Your good credit is a passport to financial opportunities. A poor credit rating can be a terrible obstacle… and repairing your credit is often a slow and difficult process.

What you may not know is that you can actually use a mortgage to reestablish your credit. Canadians are carrying heavier loads of personal debt than ever before. For some, the cost of servicing those debts is itself an obstacle to correcting the problem. Each month can be a chase to make the interest payments to keep the debt afloat. But if debts are rolled into a new mortgage, your credit can improve rapidly, assuming of course that you don’t rack up any new debts! 

Here’s how it works:

Perhaps you have maximized your credit cards – and maybe even have a short term loan or line of credit that you are also trying to pay down in addition to your regular mortgage payments. You may be considered a “high risk” borrower under these circumstances, even if you are managing to squeeze out your payments each month. Your overall payment history is satisfactory, but your debt load is heavy. If you consolidate your debts into a new mortgage, you can better manage those debts while also restoring your credit rating.
You may not have considered using a mortgage to refinance and manage your debts, but there are a few significant advantages. Your status as a homeowner can give you access to a lower overall borrowing rate. A house is considered very reliable security, so mortgages often offer the best rates available anywhere. In addition, your credit history enjoys an almost immediate boost, as you begin to make your monthly payments. There are many innovative mortgage options available today, including a mortgage product that has been designed specifically as a credit repair tool.

This specialized mortgage is good news for clients who are trying to distance themselves from their past credit problems. Debt is controlled quickly – since the new mortgage offers an interest rate lower than credit cards that can dramatically reduce the interest charges on your debt – and your credit typically improves in only a few months.

You probably already know that it makes sense to consolidate your debt into one payment. You can generally enjoy substantial savings on interest charges; you have a more manageable monthly payment and better monthly cash flow. Consider how a new mortgage can help you manage your debts – and make it a goal this year to improve your credit rating.

In so many ways we’ve become a nation of investors. We’ve become accustomed to the idea that we’ll need to help provide for our own retirement.

Canadians certainly didn’t abandon the stock markets during the last downturn, but increasingly investors are considering new ways to diversify their portfolios. In fact, if you’re like most Canadian homeowners, your house was probably your bestperforming asset of the last few years. Many of us have now started reading the real estate news along with the stock charts!

For Canadians with good credit and good income, a rental property can be an outstanding investment. Approximately 25% of all new condos being built in Canada are expected to be rental apartments. And other multiunit properties – duplexes, triplexes and fourplexes – are also expected to provide housing for renters. Investors look to have the rent from these investments at least cover their costs and provide a reasonable investment return over the long term.

“But it’s impossible,” you think. Mortgage insurance is required when there is less than a 20% downpayment. And you are required you to have a relatively high net worth and prove that you can carry the mortgage payments on a rental property on your own – without factoring in any rental income. And if you do qualify for an insured mortgage on a rental property, you may find the cost of qualifying too high. Alternatively, you need to have a good amount of equity in your principal residence to take out in order to get a big enough downpayment that qualifies you for a regular first mortgage. This certainly doesn’t leave room for many Canadians who want an investment property.

It’s true that – not long ago – the rental business seemed to belong to a group of very affluent investors, but some innovative new mortgage options are putting rental properties within reach of more Canadians. Investors can now access up to $600,000 to purchase a rental property – without costly mortgage insurance premiums, and without leveraging the equity in their principal residence. The best mortgages will provide up to 100% financing for single family units or up to a fourplex in major urban centres. For a condo, 80% financing is available. In all cases, of course, the property is expected to generate a positive cash flow.

A rental property can be a great addition to an investment portfolio. And if you’re excited about the low rates on your home mortgage, consider that a mortgage on a rental property actually goes one better: like all investments, the interest on the loan to purchase a rental property is tax deductible.

Like any investment, rental property isn’t an investment that you should jump into without doing your homework first. Consider your own aptitude for managing a real estate investment, and then talk to an independent mortgage professional about your mortgage options!

When finances are tight, it’s good to plan ahead and have a clear idea of what your future expenditures will be. One of the standard ways to plan a budget is to base your monthly expenditures on your mortgage payment and fit other expenses around that. A fixed-rate mortgage gives you set monthly payments for anything from one to 10 years, allowing for a stable financial plan. There are currently five-year deals available at about 4%. On the other hand, if you are strictly looking for the lowest payment possible and feel you are able to tolerate the risk of a future rate rise, then you may choose a variable rate.

Currently the lowest variable is prime [2.25%] plus 0.3% and it goes up to prime plus 0.6%. It’s so low that it’s only going to eventually go up. What is most important is if clients want to take advantage of the prime plus, say, 0.5%, they need to be prepared that if prime goes up to 4%, their rate goes up to 4.5%

The Bank of Canada has signalled it is likely to keep rates unchanged until June 2010. This means an existing variable deal linked to prime is stable for the time being, but rates on new fixed-term deals (which are based on bond yields rather than prime) are rising.

This is where the rate decision becomes a little bit difficult … variable rates are apparently locked for at least another 11 months and fixed rates are slowly creeping up. The differential has become quite wide … so you are paying what would appear to be a pretty hefty insurance premium if you choose a fixed rate to guard against higher variable-rate mortgages. Confused yet?

Jim Murphy, president and CEO of the Canadian Association of Accredited Mortgage Professionals (caamp.org), recommend checking the fine print on a new variable mortgage to ensure it permits you to lock in at a fixed rate when variable rates start to rise.

For refinancing an existing mortgage, Mr. Murphy cautions that the penalty for an early payout will likely outweigh any gains in reduced interest.

“If you’re only in the first year or even the second year of a mortgage … generally speaking, the penalty is going to be much higher,” says Mr. Murphy. “You’ve really got to sharpen your pencil and do the math and make sure that you’re getting an advantage.” Penalties are generally three months’ worth of interest payments or the interest rate differential on the balance, but check the fine print.

And the decision to switch also depends on where in your current mortgage term you are. For example, clients who have less than $100,000 to pay off may be more tolerant of rate rises than a client who is at, say, the start of paying off a $400,000 loan and may want to lock into a predictable fixed rate.

One way to mitigate fluctuations if you do sign on to a new variable rate mortgage, you set your payments as if they were at a fixed rate of, say, 5%. More money is going to principal, and when you lock in at 4.5%, for example, it’s no shock to your payment. The last thing anybody wants is to have to sell their house because they can’t afford it.

As for deciding the best moment to lock in? There are no easy answers.

There’s been a lot of economic stimulus lately, and in the future, maybe we will have inflation problems, in which case central banks will have to raise rates quickly and aggressively to try to cool that. That is one risk you’ll face with certain variable rates. It’s definitely a hard choice for consumers.

You best solution? Talk to your mortgage professional to understand and weigh the options specifically for you.

Canadians wanting to get a new mortgage or renew / re-finance an existing mortgage can approach:

• a financial institution and select from their particular menu of mortgage options and rates 
• a mortgage representative who must sell a specific line of mortgage products 

-or-

• an independent mortgage broker, who can offer a full range of mortgage types and interest rate options, and who works only on his or her client’s behalf. 

By approaching one or two financial institutions and choosing from their in-house mortgage products, many consumers miss out on an array of mortgage options that could suit their needs better and save them a lot of money over the long term.  There are many mortgage options available to Canadians today from a variety of lenders: chartered banks, credit unions, and trust companies, as well as other sources of funds such as life insurance companies and pension funds.

Comparing different mortgage types and interest rates on your own is a time consuming and rather intimidating task.  And if you deal with a financial institution directly and your application is declined, you must start over from scratch with another institution. 

An independent mortgage professional has access to the full range of mortgage lenders and can guide you to a mortgage that suits your individual needs, at a very competitive rate.  Best of all, this objective expertise is available to you for free in most cases, because the selected lending institution pays Mortgage Intelligence to handle the paperwork for mortgage business. 

Contact your Calgary and Surrounding Area Independent MBN Mortgage Professional today at 1.866.955.9662 and book an appointment today.

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