Mortgage Strategies to Control Your Consumer Debt

Consumer debt can come from many sources, such as credit cards, department store cards, car loans or other personal loans – with many Canadians paying much more in interest costs than they need to be.

Increasing equity in homes can offer a possible solution for homeowners burdened by high-interest consumer debt. While personal debt levels continue to rise, so too does the equity that many have in their homes, which opens a range of options to dramatically reduce one’s interest cost burden. Here are two common strategies for homeowners:

Home Equity Line of Credit

Another mortgage option for homeowners which offers greater flexibility is a Home Equity Line of Credit – or HELOC – which allows you withdraw funds as needed.

The advantage here is that you can put a HELOC in place and charge up when needed, then pay down the line of credit, never needing to re-qualify, provided payments are kept up-to-date.

Your payments fluctuate depending on current interest rates and the outstanding balance over the month, with interest-only payment options available. A HELOC can be convenient for paying off higher interest debts, as you withdraw and pay (relatively lower) interest on only what you need.

Mortgage Refinancing

Refinancing a mortgage can give you the opportunity to consolidate higher-cost borrowing with lower-cost mortgage financing – potentially allowing you to save significantly on overall borrowing costs.

With a lower interest rate on a refinanced mortgage, some borrowers decide on a lower monthly payment to improve their cash flow, while others choose to pay off the loan sooner, saving them money over the long term. What’s more, mortgage refinancing offers a plan to reduce your debt – after the elapsed amortization period, your balance is zero.

With Canadians now carrying increasing amounts of high-interest debt such as credit card balances and personal loans, how best to manage one’s borrowing costs is a concern for many. Talk to your Invis Mortgage Consultant – you may be surprised to learn how much you can save with the right debt management strategy.

Mortgage Solutions for Seniors: Reverse Mortgage vs. HELOC

What are the financing options for seniors?  It depends on the situation.   For those who still have income (pension income included), it may be possible to obtain a home equity line of credit (HELOC), irregardless of age.  With a HELOC, you can draw on the mortgage until you reach the limit approved by the financial institution.   If you are using this strategy to fund your living expenses, your final objective must be to sell and downsize within a few years.  Eventually, you will hit the limit of your HELOC and you will have no more funds to draw on for living expenses.  At this time, you will need to sell your home if you cannot afford to pay the interest on the HELOC.

If you don’t plan (or want) to sell and/or your income is not sufficient to qualify for a mortgage, you need to consider a reverse mortgage.   With a reverse mortgage, it is possible to obtain up to 50% of the value of the property.  The loan does not have to be repaid unless you sell the home.  The amount that is loaned does not depend on your income or credit rating.  It depends on the your age,  the type of property (e.g., single detached, townhouse, condo) and location of the home.  Of the three criteria, your age is the probably the most important factor.  For example, a person who is 60 years old can expect to be approved for a maximum of 15% of the home value while someone in their seventies may get 30% of the value of the home.

You should consider a reverse mortgage if:

1. You plan to stay in that home for a long time
2. You cannot qualify for a tradtional mortgage or HELOC
3. You don’t want to repay the debt

The downside to a reverse mortgage is the interest rate.  The interest rate starts at 8%.   You may also expect to pay a set up fee of approx. $2000 (legal and appraisal fees).  While the interest rate may be on the high side, you may be able to offset some of the costs by investing the proceeds of the mortgage and generating some tax deductible interest expenses.  A good financial planner can explain this strategy to you.

Lastly, you should also explore the option of downsizing.  Be aware that there are significant costs to downsizing such as realtor fees, transfer tax, moving costs to consider.

What Features To Look For in a Variable Rate Mortgage

With interest rates poised to drop over the next few months, variable rate mortgages have been gaining popularity. For individuals looking to purchase or refinance their mortgage, it is important to understand what features to look for. Here are the top three:

1) Ability to lock-in your mortgage and the lender’s best interest rate - Most lenders allow you to convert your variable rate mortgage to a fixed (i.e., locked-in) mortgage. However, not many lenders guarantee whether you will get their best interest rate or their posted rate when you convert. You need this guaranty. Rates can sometimes move quickly so you don’t want to have to haggle with your lender for their best rate (which could be up to 1.5% lower than the posted rate) when rates are moving up. At this point in time, your options are limited since it can be costly to switch to another lender.

2) Introductory rate - Some lenders offer mortgages with an introductory rate. There are pros and cons to taking a mortgage with an introductory interest rate. Your payments are lower initially, then increase after a few months. To some, this is a benefit. However, there is a cost to this. I’ve had the opportunity to review a major bank’s introductory rate offer. For this scenario, the borrower was offered an introductory rate of Prime less 1.01 for the first 90 days and Prime less 1/4 for the remainder of the term. My offer was a variable rate at Prime less 0.6%. I compared the total interest cost of each offer and it turns out that the mortgage with the introductory rate would cost the borrower approx. $3200 in interest over 5 years.

3) Interest Rate Compounding - Standard mortgages are compounded on a semi-annual basis (in simple terms, interest is charged on interest every 6 months). There are some variable rate mortgages where the compounding is monthly. Monthly compounding is more costly.

Getting the best mortgage is all about getting the best advice. This is advise you can only get from your mortgage broker.

With Rates Dropping, Should You Consider Switching To A Variable Rate Mortgage?

Year 2007 was a crazy year for interest rates. The economists just couldn’t get it right. During the first half of the year, economists were expecting rates to drop. However, by July 2007, the trend reversed quickly. Due to strong economic indicators and higher inflation rates, interest rates shot up by 1/2% in a span of 2 months and another 1/4% after another month. The best 5 year discounted mortgage rate reached 5.99% sometime in October 2007. Many home buyers sought the peace of mind of a fixed (locked-in) interest rate mortgage.

We now know that rates are on the decline as the full effects of the US subprime mortgage mess is now being felt. The Bank of Canada has already dropped their overnight rates twice (by 1/2 percent) during the past 60 days. There are expectations that interest rates may go down by another 3/4%. If this happens, you can expect the prime rate to drop to 5% and the variable mortgage rate to 4.5% (assuming a mortgage priced at prime less 1/2%). Does it make sense to consider switching to a variable rate? Let’s run the numbers.

Let’s assume you have a $350,000 mortgage at 5.99% and there is still 5 years to go on your mortgage. Over a 5 year term, you would pay total interest of $101,810.86. If you were in a variable and rates dropped to an average of 5.0%, your total interest paid over 5 years would be $84,761.94. This is a savings of $17,048.92. If rate dropped even lower to an average of 4.5%, your total interest savings will be even higher at $25,655.12. This savings have to be weighed against any prepayment penalty your lender will charge you.

If you need clarification, please do not hesitate to contact me.

Obtain a Tax Refund On Your Home Purchase Using Your RRSPs

The Federal Home Buyer’s Plan allows first time home buyers use up to $20,000 of their RRSPs for the purchase a home. For a couple, the amount is doubled to $40,000. If you are in the market today, making use of this privilege may allow you to obtain a significant tax deduction. The optimum time to make use of this benefit is before February 29, 2008. A contribution before this date will allow you to obtain the deduction on last year’s income resulting in a tax refund.

Say, for example, you make a $40K investment in an RRSP today and you are in the 30% marginal tax bracket. You would could obtain a tax refund cheque for $12000 (or 30% of $40K). This is nothing to scoff at.

Be sure to consult your financial adviser before proceeding with any investment. Please call me if you need more information or clarification.

4 Ways to Paydown Your Mortgage Quicker

1) Pay your mortgage bi-weekly or weekly – Most mortgage lenders allow you to make payments weekly or bi-weekly. By choosing either of these options, you’re effectively making one extra monthly payment each year. That’s because there are 26 bi-weekly payment periods, as opposed to 12 in a monthly payment plan. As a result, your 25 year mortgage is fully paid in 21 years.

2) Make extra payments – Making extra payments will also help you pay down your mortgage quicker. If you were to make one extra monthly payment each year on your 25-year mortgage, you would pay down your mortgage in 21.25 years.

3) Take a longer amortization programme and set-up an RRSP investment plan – This strategy requires a different mindset. Once your RRSP investments equal your mortgage, you could say that you’ve effectively paid off your mortgage.

a. Instead of taking our a 25 year amortization mortgage, you could take out a 40 year amortization mortgage. The payments on a 40 year mortgage will be lower than the 25 year mortgage. You then invest the difference in a savings plan to purchase RRSP investments. Assuming a modest rate of return of 8% p.a. on your investments, you would have enough RRSPs to pay off your mortgage in 20.5 years.

4) Make your mortgage tax deductible (i.e., The Smith Maneouvre) – You goal with this strategy is to convert your home mortgage to tax deductible debt. This will lower your taxes and generate perpetual tax refunds for you. You never pay off your mortgage since this will be a source of tax write-offs. However, once you have investments equal to your mortgage balance, you effectively have paid off your mortgage.

a. Assuming a modest return on investment of 8%, the Smith Maneouvre calculator shows that you would have paid your mortgage in approx. 20 years.  If you are able to achieve a 10% rate of return, you would pay off your mortgage in 18 years.

You could choose one strategy or a combination of the above strategies. To determine the right strategy, be sure to consult a professional.

Looking for a down payment on a home? Check your RRSPs

If you’re a first-time homebuyer, with the Home Buyer’s Plan you may be eligible to withdraw funds from your registered retirement savings plan (RRSP) for a down payment when buying or building a qualifying home.  Under the program you can withdraw up to $20,000 (or, up to a maximum of $40,000 per couple) without tax penalties.

Here is a basic overview of some of the rules:

• You must be considered a first time homebuyer, i.e. you cannot have owned an owner occupied home in the previous five years.
• You must be a Canadian resident.
• The property purchased must be for a principal residence.
• The RRSP must be repaid within 15 years, with minimum annual payments of 1/15th of the withdrawn amount.
• Funds must have remained in your RRSPs for a minimum of 90 days before they can be withdrawn under the Home Buyers Plan.
• You will have to complete Form T1036, “Home Buyers Plan (HBP) – Request to Withdraw Funds from an RRSP” available at the Canada Revenue Agency website www.cra-arc.gc.ca in the RRSP section.

No RRSPs?  We can show you how to establish an RRSP with borrowed funds, and use the resultant tax refund for a down payment

Mortgage Strategies to Control Your Consumer Debt

Consumer debt can come from many sources, such as credit cards, department store cards, car loans or other personal loans – with many Canadians paying much more in interest costs than they need to be.

Increasing equity in homes can offer a possible solution for homeowners burdened by high-interest consumer debt.  While personal debt levels continue to rise, so too does the equity that many have in their homes, which opens a range of options to dramatically reduce one’s interest cost burden.  Here are two common strategies for homeowners:

Home Equity Line of Credit

Another mortgage option for homeowners which offers greater flexibility is a Home Equity Line of Credit – or HELOC – which allows you withdraw funds as needed.

The advantage here is that you can put a HELOC in place and charge up when needed, then pay down the line of credit, never needing to re-qualify, provided payments are kept up-to-date.

Your payments fluctuate depending on current interest rates and the outstanding balance over the month, with interest-only payment options available.  A HELOC can be convenient for paying off higher interest debts, as you withdraw and pay (relatively lower) interest on only what you need.

Mortgage Refinancing

Refinancing a mortgage can give you the opportunity to consolidate higher-cost borrowing with lower-cost mortgage financing – potentially allowing you to save significantly on overall borrowing costs.

With a lower interest rate on a refinanced mortgage, some borrowers decide on a lower monthly payment to improve their cash flow, while others choose to pay off the loan sooner, saving them money over the long term. What’s more, mortgage refinancing offers a plan to reduce your debt – after the elapsed amortization period, your balance is zero.

With Canadians now carrying increasing amounts of high-interest debt such as credit card balances and personal loans, how best to manage one’s borrowing costs is a concern for many.  Talk to us – you may be surprised to learn how much you can save with the right debt management strategy.

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).