RRSP Home Buyers' Plan & A Free Downpayment!

It is that time of year, when many Canadians rush to make their RRSP contributions prior to the deadline for the previous tax year. The RRSP home buyers' plan for first time home buyers is a great program to access money tax free money for downpayment purposes.Contributing to your RRSP prior to the deadline will achieve the following:

• Increase downpayment from RRSPs up to $25,000 per person
• Reduce taxable income and possibly generate a tax refund (free money) which can be used for downpayment or closing costs

RRSP Home Buyers' Plan Fine Print

You are right, there is fine print to be aware of:

• One must not have owned a home in the last 5 years. Verify with a qualified real estate lawyer your situation in the cases where one borrower has owned a home and other has not.
• Money deposited into RRSPs has to stay in the account for 90 days prior it is taken out
• Money taken out of the RRSPs has to be used for a home purchase and you have to have an agreement of purchase & sale in place (form T1036 needs to be completed at time of withdrawal for declaration purposes to CRA)
• The purchased home is your primary residence and not an investment property
• The monies have to be paid back over 15 years. If you don't pay it back it is considered taxable income. Should you payback your RRSP home buyers plan?

You can find more details on the RRSP home buyers on Canada Revenue Agency's website.

To discuss your mortgage financing needs whether you are buying a home, an investment property or renewing your mortgage, please contact Nawar.

The End Of Mortgage Brokers?

In today's do it yourself world from DIY renovations, DIY buying & selling homes, DIY investing, DIY looking for the lowest mortgage rate....is this the end of mortgage brokers?

Recently there have been a few articles in the media regarding mortgage brokers and banks:

• Money Sense: The Future of Independent Mortgage Brokers
• Mortgage Broker News: Client Uses Twitter to Challenge TD Bank
• Globe & Mail: Your Bank Mortgage: Is It Fair Or Does It Suit Your Needs?

As a mortgage broker, believe it or not, I am arguing for the need of a mortgage professional arranging the financing for a homeowner for the following reasons:

Mortgage Options

A mortgage professional provides different mortgage products and options to suite homeowners' needs. Here are 3 examples:

1. Young Family

A couple are expecting children and their income will be reduced to one income, cash flow is important for them in the near future. Hence, a mortgage product with 35 year amortization would be beneficial with generous pre-payment and increased payment options to help them catch up once they go back to two incomes.

2. First Time Home Buyer & Real Estate Investor

First time home buyers buying with 5% downpayment but have the intention of renting their existing home in 4-5 years time frame once they move up the homeownership ladder.  A good option to consider is a 10 year fixed mortgage to set the cost of borrowing and eliminate the need for the first time home buyers to requalify their first home as a rental property in 5 years time frame at higher interest rates which would restrict their ability to qualify for their next home.

3. Business Owner

Self employed who wants to access their home equity as they pay down the mortgage without the hassle of qualifying. An option to consider is a re-advanceable mortgage where as the mortgage principal is paid down, the secured line of credit increases by the paid principal amount providing additional secured equity if needed by the homeowner

Clearly, one size does not fit all. 5 year mortgage term is the most recommended product, I wonder why?

Mortgage Terms & Fine Print

This is very important since I believe the majority of homeowners sign without really knowing what they are signing for. Per the article mentioned above (Client uses Twitter to Challenge TD Bank), it is probable the client didn't know what the mortgage restrictions (penalties) were. Either he didn't ask or the mortgage professional did not explain the details. Many homeowners focus on lowest rate (What's Your Lowest Rate?) without considering the mortgage product fine print which could cost them thousands of dollars on the back end.  This is a result of confusing lowest rate as saving money.

Mortgage Strategy

When choosing a financial planner or advisor, one wouldn't choose based on the price of mutual fund or stock on that specific day, they would choose based on the plan they provide and one's belief in the planner's ability to execute the plan. As for mortgages, a homeowner gets a quote, signs the paperwork and doesn't hear till mortgage renewal time or they might they get an offer for a credit card, mutual fund or chequing account in the mail. Why would a homeowner choose their asset advisor any different from their debt advisor?  What separates the true mortgage professional from the "application filler and rate quoter" is providing a sound strategy to help the homeowner achieve their financial goals. One wouldn't give a financial planner $50,000 and talk them after 5 years, so why would one borrow hundreds of thousands of dollars and not expect a proactive approach?

Professional Mortgage Brokers

I hope I have laid out the case why mortgage brokers are needed.  A word of caution: there are good and bad mortgage brokers. To find a mortgage professional ask lots of questions of the mortgage broker or banker regarding the mortgage options, terms, fine print and strategy.  To get a copy of the 4 questions one should ask when shopping around for a mortgage, go to: Shopping Around Questions 

If you are looking for a professional mortgage broker whether you are buying a home, an investment property or renewing a mortgage, please contact Nawar.

Don't Payback Your RRSP Home Buyer's Plan!

RRSP Home Buyer's Plan is a great tool for first time home buyers to access money for the downpayment of their first home. The maximum allowed withdrawal is $25,000 per person which has to be paid back over 15 years. I will save the details of the RRSP Home Buyer's Plan for another blog post.Here is a controversial idea: Don't payback your RRSP Home Buyer's Plan back! Let me explain.

RRSP Home Buyer's Plan Scenario

• Mortgage amount: $300,000
• Interest Rate: 5% (mortgage rates are much lower now, but I want to use a reasonable interest rate over the life of the mortgage)
• Amortization: 25 years
• Required RRSP Home Buyer's Plan Payback: $138.89 monthly ($25,000/15 years/12 months per year)

My suggestion is not to payback into the RRSP but rather put the $138.89 into the mortgage above and beyond the normal monthly payment. If one pays $138.89 extra into the mortgage, after 15 years the results would be:

• Mortgage balance would be at $127,929 vs $164,894 (savings of $36,965 in principal and mortgage amortization is reduced to 22 years & 4 months from 25 years)
• 47.86% Return on investment: $25,000 of RRSP Home Buyer's Plan generated mortgage principal savings of $36,965
• First time home buyers saving 32 months of mortgage payment (25 years less 22 years & 4 months): $1,744 x 32 months = $55,808 which could be invested into RRSPs then

Since the first time home buyer is not paying the RRSP Home Buyer's Plan back, their income tax would rise by $1,666.68 ($138.89 x 12) annually. Assuming they are in the 45% income tax bracket, their income tax would rise by $750.

I realize this concept might be controversial and some might disagree with, but I hope the above numbers present a case for consideration. Paying down or paying off debt is an important step in achieving financial freedom. I would love to hear from you whether you agree or disagree.

Disclaimer: I am not a licensed financial planner and you should consult with your own financial advisor/planner prior to making any investment decisions. This is article is my personal opinion.

To discuss your personal mortgage financing needs whether you are buying a home, an investment property or renewing your mortgage, please contact Nawar.

How To Increase Cash Flow In An Investment Property

In a hot Toronto real estate market where sellers are getting what they want (and sometime more), finding investment property opportunities requires a skill and having good team members.  In my search for a duplex or triplex, I focused on the Beach / Upper Beach area where the tenant profile is strong and potential for long term appreciation is in place.  We found a duplex that generated $2,500 monthly income, however it had potential for higher rents once the property was updated. Here is a video shot by my realtor, Andrei Angelkovski (www.BeachInvesting.com), who specializes in investment properties in the Beach area, walking through the property and explaining the work to be done.  I'll be posting updates over time showing the progress and explaining why certain things were done.http://youtu.be/1QUw_tvVwNc

Happy Investing!

To discuss your personal investment property goals and opportunities, please contact me.

How To Beat 2.99% 5 Year Mortgage Rate

Bank of Montreal's 2 week promotion of 2.99% 5 year fixed rate has initiated a flood of emails from lenders lowering their interest rates on various mortgage terms.  Yes, the gloves are off since we are back from the holidays and the real estate market is active again.Can this rate be beat?  The answer is yes if one looks at a longer term.  Here is a scenario I ran for clients today based on a $250,000 mortgage:

Option 1: 10 year fixed 3.89% amortized over 30 years.

Option 2: 2.99% 5 year fixed amortized over 25 years, renew at normal interest environment of 5.75% for 5 years (click here for historical chart).

For both options, the monthly payments are set exactly the same over the 10 year period.  Here is a screen print of the comparison chart:

Summary:

• Option 1 home equity after 10 years: $75,706  (10 year fixed results in additional equity)
• Option 2 home equity after 10 years: $69,576
• Payment shock with option 2: $310 per month when renewing from 2.99% to 5.75%
• With inflation hedge mortgage strategy, additional equity would be obtained with option 1

In conclusion,  mortgage rate is important, however looking at the long term picture and minimizing the cost of homeownership is key.

To discuss how you can be mortgage free sooner, please contact me.

Don't Get Hung Up On The Dollars When Investing In Real Estate!

I recently met with a client who wants to invest in real estate. In the initial meeting where I find out about the client's long term goals, desired mortgage freedom date, why they want to invest in real estate and how many properties they plan to acquire, the client stated their criteria is to have $400 or more in cash flow on a monthly basis.Cash flow is key in investing in real estate, however I was perplexed since they only wanted to invest $50k.  Based on my quick calculations (downpayment is 20% therefore total purchase price is $250k and using 8% gross rental income rule, the property would generate $20k annually or $1,667 monthly), it would be very difficult for a property to cash flow 20+% of gross rental income (in this case it's $400/$1,6667 = 23%).

Real estate investors want to maximize cash flow which is a great goal, however, it's important to consider ratios since an investor with $100k capital will generate more cash flow than someone with $50k capital, and an investor with $150k capital will generate more cash flow than someone with $100k capital.

Click here to see a comparison between 2 properties ($240k vs $500k) based on 2 actual investment property listings that I have recently come across illustrating the ratios (CAP rate, DCR, cash on cash...) are very similar to each other although the cash flow is double for $500k property.

Investing in real estate is about cash flow and ratios as well.

To discuss your real estate investment goals, please contact me.

Turn Down The Noise And Take Action

A new year is upon us and we are hearing the same things: "Real estate is overvalued by 10%, 25%...", "We are due for a correction".... I agree that real estate prices, and I'll only speak for Toronto since this is where I live and conduct my business, have appreciated over the last few years, however, one can't generalize since real estate is very local.  As per my previous posts "2 Factors That Can Affect Your Home Value", interest rates spike or unemployment spike are the 2 factors that can derail real estate prices. The other factor, is some major global disaster such as a country defaulting on its debt, would affect everyone and everywhere.There is lots of information on TV, radio, newspaper and on the internet. It can be overwhelming and paralyzing.

I am a firm believer in putting a plan together and taking action.  Since it's early in the year, it's a great time to put a financial plan (when you want to be mortgage free or think about buying an investment property to create long term wealth or topping up your RRSPs or consolidating debt to improve cash flow) then take action.  It's best to look back at year end and be grateful for taking action this year as opposed to wishing had done something 12 months earlier.

Please feel free to contact me to discuss your personal mortgage and financial goals.

How To Save on Your Land Transfer Tax

As mortgage lending rules have become more strict and real estate prices have appreciated over the last few years, it's becoming more challenging for some first time home buyers to qualify for a mortgage without a co-signer.

I was approached by a first time home buyer who was interested in buying her first home, a condo in downtown Toronto, and she needed her mother to co-apply in order to qualify for the mortgage.  As a first time home buyer in Ontario, she would qualify for up to $2,000 land transfer tax rebate and up to $3,725 from the City of Toronto depending on her purchase price.  Since her mother, who is a homeowner, is on title, the first time home buyer would have lost 50% of the rebates (since she's 50% owner in the property).

In order to save the buyer a few thousand dollars, with the lender's approval, the buyer was registered with 99% interest in the property and her mother with 1% interest.  This setup allowed the first time home buyer to maximize the land transfer rebates available from the Province of Ontario and the City of Toronto.

It's important to work with a professional who is experienced and understands how to reduce their clients homeownership costs.

To discuss your personal mortgage needs, please contact me.

How BAR Can Grow Your Real Estate Investment Portfolio

BAR??  Yes BAR, which stands for buy, add value and refinance.  The toronto real estate market is hot and finding good deals can be a challenge especially when supply is low and there are quite a few interested buyers (I wonder how many are frustrated with their stocks and have decided to invest into real estate).A property that shows well in a good area will probably go for over asking or very close to asking price.  I have come across listings where the sellers were disappointed for not getting multiple offers which resulted in increasing the listing price the next morning!

It can be frustrating since real estate investment is about numbers and not getting emotionally attached to a property. Working with a realtor who specializes in real estate investment is critical since they are knowledgeable in a local area, know local rents and understand how to add value to a property to create additional income.

Here is an example of a property I came across in Toronto: a 2 bedroom, 2 bathroom semi-detached with a finished basement in the "beach".  The potential was to separate the main floor from the basement (creating an additional income suite) and adding a powder room w/ laundry on the main floor.  The strategy is to create a second income suite up to code and refinance the property once the renos are complete to recover the renovation costs.  This accomplishes the following:

1. Increase property value
2. Increase rental income (2 incomes versus 1)
3. Create positive cash flow property

BAR (buy, add value & refinance) is one strategy for real estate investors to create long term wealth.  It's key to have a strong experienced team (realtor, mortgage broker, contractor and other trades) who understand what the objective are and have done work for real estate investors.

To discuss your personal real estate investment portfolio or questions regarding real estate investment, please contact me.

How I Ended Up With 2% Equity In My Home!

Over the last few years, real estate prices have appreciated considerably where some first time home buyers have had a hard time qualifying for a mortgage.  Nevertheless, some are able to scramble the minimum 5% downpayment (or have some of the downpayment gifted by a family member) to start their journey of home ownership.

When buying a home with 5% downpayment, the mortgage has to be insured per Government requirement.  The insurance premium is 2.75% (for 25 year amortization) or 2.95% (for 30 year amortization) which equates to the homeowner having 2.25% to 2.05% equity in their home at the day of closing.  In the first few years of homeownership, the majority of the mortgage payment pays for the interest portion and minimal mortgage principal is paid down.  It's important to keep in mind that if one is planning to move in 5 years (outgrow the 1 bedroom condo), once the costs (realtor fees, legal fees, downpayment requirement for new home & closing costs) are taken into account, the seller might find themselves to be short of funds which will mean they have to stay for a longer period of time in their current home.

It's important to have a plan to paydown the mortgage principal which fits a person's long term goals. Afterall, getting a mortgage, setting the payment and forgetting about it is not a sound approach to financial freedom.

To discuss your personal mortgage financing needs, please contact me.