What can your mortgage planner do for you?

Your investments and your mortgages are the two main tools for building wealth. For investments, you’d go to your investment broker for advise.  When it comes to mortgages, you need the services of a mortgage planner.

A mortgage planner will focus on helping individuals build wealth through their mortgage.  Besides having the expertise in securing a mortgage, this individual will have knowledge financial planning and analysis, real estate investments, taxation and credit.    Mortgage planners can assist you to become debt-free sooner, pay less tax, build a real estate portfolio, manage home equity and increase cash flow.

Mortgage Life Insurance - Should you take your bank’s offer?

Most mortgage lenders offer mortgage life insurance and often, many home owner’s are pressured by the lender to take the lender’s in-house product.

Before you sign on the dotted line, you should know that the insurance offered by most lenders are not portable.  After the term of your mortgage, you may wish to switch to another lender (say, your current lender’s rate is not competitive).  If you switch, you will not be able to take the same mortgage life insurance with you.  You will have to re-qualify with the new lender for a new policy.  Given the passage of time, it may happen that you no longer qualify for insurance or the premiums are higher (since you would be older).  Thus, you may be forced to stay with your current lender.

The second disadvantage of lender’s insurance is that their rates are higher.   Lenders will have only one rate for both non-smokers and smokers.  Since smokers have a higher risk, non-smokers are effectively subsidizing smokers.

As the country’s largest independent mortgage brokerage house, we have developed our own mortgage life insurance product that better suits the needs of home owners.  The insurance is portable and the premiums are lower.  Secondly, smokers and non-smokers do not pay the same premium.  Non-smokers will definitely benefit from Invis’ offering (although I’ve seen cases where smokers too obtain a better deal).

Capital gains tax rules for principal residences

Many home owners are aware that the gain on sale of a principal residence is tax free.  Many are not aware, however, of the tax implications of renting out the principal residence.  In this situation, the property would have deemed to be sold at market value.  If the property has increased in value, there would be a gain on sale which could be subject to tax.

It is useful to know, however, that there is a provision in the Income Tax act that allows the home owner to keep their principal residence status for a period of 4 years after renting out the property.  To apply for this, the home owner must include a letter in their tax return stating their intentions.

This information is provided as general information.  If you are planning to rent out your principal residence, you should consult your accountant or lawyer.

Tips on minimizing taxes on your investment property purchase?

1) Consider getting a cashback on your mortgage - We generally don’t encourage our customers to use cashback programs since they can be expensive.  However, there is one situation where you may want to consider obtaining a cashback.  This is when you are purchasing an rental property.  When you get a cashback mortgage, the interest rate on the mortgage is increased to compensate for the cashback.  A tax advantage is generated because the increased interest on the mortgage is tax deductible while the cashback is tax free.

2) Make your current mortgage tax deductible - Many individuals have some cash available for a down payment on an investment property.  While you may think it wise to use the funds as a down payment on an investment property, you would be better off to pay down your home mortgage.  You then re-borrow the funds (on your home mortgage) for the down payment on your rental property.  By doing this simple maneuver, you are able to make a portion of your home mortgage tax deductible.

We do not profess to be financial planners, lawyers or accountants. Before you do anything consult the appropriate professional.

The Cost of an Auto Loan

Purchasing a new car can be an exciting experience.  However, many of us thiink nothing about how to finance that purchase. The choice of financing options could add thousands to the cost of your purchase.  Should you lease the vehicle? Should you take out an auto loan from the dealer or your bank or refinance your mortgage?

Let’s examine the cost of taking an auto loan from your bank.  Looking at one of the major bank’s websites, the prevailing rate for an auto loan is around 8%.  If you took out a $40K loan for 7 years, you’d pay a total interest of $12.369 over the life of that loan.  If you took out equity from your home, you’d pay $7.632 over the same period (@5.09% interest).  That’s a difference of $4,737.

While taking out equity from your home will save you money, you’d have to consider the added set-up costs of amending your mortgage (i.e., appraisal and legal costs).

This is why planning ahead is a wise thing to do.  For this scenario, the best structure for your mortgage is an umbrella mortgage.  An umbrella mortgage will provide you with the flexibility to re-borrow from your home equity for much needed expenses (or for investment purposes) without any additional expense.   This type of mortgage is also the best for converting your mortgage to a tax deductible mortgage.

Can you benefit from a longer amortization?

There are many reasons why borrowers opt for longer amortization mortgages.  For one, this allows borrowers to qualify to purchase a larger home.  Secondly, with lower mortgage payments, makes the payments easier for borrowers.

There’s a BETTER reason why someone who could easily afford a 25 year amortization should consider a 40 year amortization mortgage.  This is to build an investment portfolio and take advantage of tax benefits from making RRSP contributions.

Let me illlustrate.  If you took out a $300K / 25 year amortization mortgage, your payments would be $1,796 per month (@5.3% interest).  The payments on the same mortgage on a 40 year amortization payment plan would be $1,495 per month.  What if. instead of taking the 25 year mortgage, you took the 40 year amortization mortgage and invested the difference of $301 ($1796 less $1,495) in a RRSP savings plan.  Assuming a 30% tax bracket and an 8% Return on Investments (ROI), your networth would be higher by $185K in 25 years.

If you took this plan further by taking out an Interest-Only mortgage, your networth would increase by $282K.

This strategy will only work for borrowers who have the discipline to invest the difference in monthly payments.  If you’re looking to achieve financial security and a larger net worth, this is a strategy you need to consider.  Talk to your financial advisor about this approach.  On the other hand, if you are the type to spend the difference, you’re better off to take the shortest payment plan and make bi-weekly payments.

Please call or email me to discuss how you can use your mortgage as a tool to build your wealth and financial security.

Umbrella Mortgages

Umbrella mortgages allow home owners to access the equity in their home for all borrowing requirements.  Lenders that offer this product will generally allow the home owner to borrow up to 75% (sometimes up to  90% with GE Mortgage insurance) of the value of the home.  If you have multiple borrowing needs, you’ll save money by using an umbrella mortgage.

Say for example,  your home is worth $400,000.  You also have a mortgage of $100,000, a auto loan for $20,000, personal loan of $30,000 and a boat loan of $40,000. All these loans can be rolled into one umbrella mortgage of $300,000 (75% of $400,000).  The benefit is lower interest rates and lower payments.   Please call for details.

Deferred closing costs

The process of buying a home is exciting but it can also be an overwhelming experience. Unexpected expenses often pop up such as moving costs, improvements on the home and furniture purchases. When looking at your financial picture, consider options that offer you flexibility at a time when you may need it most - Choose First Canadian Title’s Deferred Closing Cost Programme, offered exclusively through Invis.

With our programme, you can defer a number of closing costs, including: (1) Land transfer taxes; (2) Legal fees; (3) Title insurance premiums; (4) Registration or levies, if applicable; (5) Disbursements; (5) Applicable taxes

You pay no interest or principal for 6 months - There is a $199 administrative fee for amounts up to $3000 and $249 from $3001 to $10K.

US Subprime Meltdown and its effects on Canada

It may still be too early to tell but so far, the effects of the subprime meltdown in the US has not significantly affected Canada.   To date, only two mortgage lenders (MCAP and GMAC Residential Funding) have indicated that they were putting a hold on their subprime lending programmes.   Many of subprime lenders are still operating with business as usual.  Even the Canadian arm of US-based Accredited Home Lenders continues to look for new business in Canada.  Accredited US has shut down its retail mortgage business and laid off 1600 employees.

It is important to note that the subprime market is very different in Canada.  Subprime loans account for less than 5% of total mortgage originations while in the US, the subprime market accounts for 22% of total mortgage originations.  The US market is also very competitive and this has resulted in lenders lowering their credit standards to increase market share.  Lastly, mortgage brokers in BC are highly regulated and need to comply with higher ethical standards to meet industry association requirements.

Nevertheless, Canadian investors (who buy mortgages issued by subprime lenders) could be spooked.  They may require a higher yield before they invest in the subprime market. This could mean higher interest rates for subprime borrowers or some (more) tightening of credit standards.

Purchase Plus Improvement Mortgages

If you intend to buy a home that needs some immediate upgrades, a “purchase plus improvements” mortgage may be right for you.  This type of mortgage covers the purchase price of the home, plus any renovations that would increase the value of the property.  Finishing the basement, adding a deck, redoing the kitchen or bathrooms are all examples of improvements that can be financed with no need for a second mortgage.  For current homeowners, a “refinance with improvements” option may be available.

I can guide you through the process:

Step 1: Mortgage pre-approval
Arranging a pre-approved mortgage not only protects you if interest rates increase, it also gives you a clear price range for your new home.  At least a 5% down payment is required for a purchase plus improvements mortgage.

Step 2: Obtain cost estimates for upgrades
Once you have found a home, you need to get written quotes from licensed contractors on the renovations you plan.

Step 3: Mortgage application
For example, with a 5% down payment, your Invis Mortgage Consultant would apply to a lender for the lower of:

•     95% of the purchase price plus 95% of the cost to finish the renovations, or

•     95% of the “as improved” market value, determined by the institution which insures the mortgage after the renovations.

Step 4: Finalize purchase
Your Realtor and your mortgage broker will walk you through this part of the process.  The funds for renovations will be sent to your lawyer “in trust” when the mortgage closes.

Step 5: Complete upgrades
The lender will “hold back” funds for the renovations until the work has been completed and inspected, at which time the contractor can be paid.

Interested in learning more about this innovative mortgage option?  Call me and I am happy to explain the process to you.