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.

What's Your Lowest Mortgage Rate?

If I had a dollar everytime someone asked "What's your lowest rate?".....Ok, you get how often people ask this question.  You probably have heard mortgage brokers state there is more to mortgages than rates and the fine print is important.  As a mortgage broker who provides detailed analysis, here is a scenario for you to contemplate: A lender came out with a new mortgage product with ultra low rate with following features:

• Mortgage Rate: 2.89% (conventional and insured mortgages)
• Mortgage Term: 5 year fixed
• Prepayment features: 20/20 (20% lump sum pre-payments & 20% increased payments)
• Portable but not assumable
• No increase and blend (I will explain what this means)
• Early penalty payout: IRD or 3% of remaining balance

I liked the mortgage product till I read the last 2 features for the following 2 reasons:

• If the homeowner moves prior to mortgage maturity, they can transfer the mortgage balance but can NOT add to the mortgage amount which will force them to break the mortgage
• Typical penalty is IRD or 3 month interest. In the latter stages of the mortgage as it get closer to maturity date, 3 month interest is the typical penalty to break the mortgage not 3% of mortgage balance

I did the following comparison between 2 mortgage products to see if this product is beneficial to the homeowner:

• Mortgage 1: 3.04% 5 year fixed, has same features as low rate product with the addition of being assumable, borrower can increase and blend and penalty is IRD or 3 month interest
• Mortgage 2: 2.89% product as described above
• Assume homeowner decides to sell their home and move 4 years into the 5 year mortgage term

As you can see in the above chart, after 4 years of mortgage payment, the difference between the 2 mortgage balances is $789 and the payment savings is $1,488 ($1690-$1659 x 48 months) for a total savings of $2,277.

Increase And Blend

Allows the borrower to increase the mortgage balance without paying a penalty and maintaining the interest rate on the existing balance. Example: The homeowner wants to increase the existing mortgage (assume current balance is $300,000, mortgage rate 2.99%) to $400,000. Utilizing this feature, the homeowner would add $100,000 at current market rate and blends the 2 rates together. The 2.99% interest rate would not be lost on the $300,000 and no penalty would be paid.

Lowest Mortgage Rate Fine Print

The low rate mortgage product does NOT allow the homeowner to increase and blend therefore they would have to break the mortgage and pay a penalty. In this case, since the penalty is 3% of the balance and not 3 month interest penalty, the penalty would be $10,930 (3% of $364,362) as opposed to $2,632 (3 month interest penalty)!  As you can see the original savings of $2,277 are wiped out by the penalty and the howeowners would have to take on a new mortgage at a higher interest rate (assuming rates will be higher in 2017 than 2013).

Now, the lender does state they would "rebate a portion of the penalty if clients return within 90 days of payout". Personally, I would not want to be tied to one lender and who knows if the offered rates would be competitive relative to other lenders.

This mortgage product can be beneficial if the homeowner knows they will be in their home for at least 5 years and do not anticipate any changes in lifestyle prior to mortgage maturity.

You can see from the above analysis, there is more to mortgages than rates.  So, the next time someone asks "what's your lowest rate?".......

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

Bank Of Canada Rate Announcement

As expected, the Bank of Canada rate left its benchmark rate unchanged at 1% on December 4, 2012. Here are 2 things you need to know from the Bank of Canada rate announcement:

Global Economy

US economy grew gradually but is held back by the looming fiscal cliff which could push it back into a recession dragging Canada with it. China's economy is soft landing which is a good thing for Canada's resource economy (oil & minerals) whereas Europe is in recession. The global economic situation is negative which puts less pressure on increasing interest rates in the near future.

Canada's Economy

Canada's economy grew below expectations in the third quarter, housing market is cooling and household credit has slowed. The Canadian dollar continues to be strong and inflation is as expected. These indicators point to a slowing economy and the lack of need to raise interest rates in the near future.

The surprising statement was:"Over time, some modest withdrawal of monetary policy stimulus will likely be required". Based on the current economic situation around the world and Canada, there doesn't seem to be any requirement to increase interest rates, if anything, additional stimulus might be required.

For now, enjoy the variable mortgages and take advantage of the decreasing fixed mortgage rates.

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

Business Owners Mortgage

With round 4 of the mortgage rules taking effect on November 1, 2012, mortgage qualification for business owners got tougher.  Don't despair, since there is still hope for a business owner to get their last mortgage....ever. As you are aware, the new mortgage rules reduce the maximum mortgage to 65% of home value for business owners who use a stated income (income that is not verified by Canada Revenue Agency documents). However, as previously explained in a blog post regarding business owners mortgage options, a mortgage up to 90% for a purchase or 80% for a refinance can be obtained.

Business Owners Mortgage....The Last One

Many homeowners choose a 5 year mortgage term over other terms, however in today's economy the difference between 5 year and 10 year fixed mortgage has never been this small (2.99% vs 3.79% at the time of writing this blog post).  The 10 year fixed mortgage provides the following to a business owner:

• Stability and security of fixed cost of borrowing over a 10 year period
• Not worrying about qualifying for a mortgage in 5 years time frame and providing pages and pages of financial statements
• Protection from rising interest at renewal time
• Freedom to focus on growing the business, being profitable and tax reduction strategies

The chart below compares 2 options for a $350,000 mortgage: 2 5 year fixed mortgage terms and a 10 year fixed mortgage term

To summarize, the above chart shows if one believes mortgage interest rates in early 2018 will be higher than 4.75%, the 10 year fixed mortgage is a viable option. As difficult as it is to predict where mortgage rates will be in the future, why would anyone want to renew at higher than 3.79%-3.89% interest rate in 5 years time?

This mortgage option powered by the inflation hedge mortgage strategy (explained in this video) provide a solid plan to achieve mortgage freedom.

To discuss your mortgage options whether you are buying a home, an investment property or renewing your mortgage, please contact me.

Business Owners Mortgage Options

More and more Canadians are working for themselves which is a growing sector of the Canadian economy. For mortgage financing, business owners mortgage options have been limited as the government has introduced 4 rounds of changes over the last few years. In this post, I will discuss the prime (triple A) lending options and in a future post will discuss the alternative lending options which are more costly.

Business Owners Mortgage Options

Before we get into the bread and butter of mortgage options, I want to elaborate on who is considered a business owner by the lenders and insurers:

• Sole Proprietor
• Partnership
• Corporation

Commissioned salespeople such as mortgage brokers and real estate agents are not considered business owners unless they are incorporated.

The insurers (CMHC, Genworth and Canada Guaranty) look at business owners depending on length of owning a business:

• Less than 2 years: None will finance a mortgage (note there are the odd exceptions depending on applicant's scenario). This type of applicant is best served by alternative lenders.
• 2-3 years: All 3 insurers will consider providing a mortgage up to 90% loan to value for a purchase (all refinances regardless of employment status have been reduced to 80% loan to value in Canada)
• More than 3 years: Genworth and Canada Guaranty will consider providing a mortgage up to 90% loan to value

A business owner can obtain 90% loan to value mortgage using a "reasonable" stated income as per the above pending credit score and history.  The insurance premium for a stated income applicant can be as high as 4.95% of the mortgage amount.

Business Owners Mortgage Downpayment

There are cases where the business owner has access to a large downpayment and wants to avoid the mortgage insurance premium which can be costly.  If the business owner can:

• Put 35% downpayment
• Provide proof of operating business for 2 years or more (article of incorporation)
• Provide proof of not owing taxes to Revenue Canada (notice of assessment)

The borrower can obtain a mortgage up to 65% loan to value using a stated income without paying an insurance premium. The stated income option is not available when the borrower is buying an investment property, the actual income income per Notice of Assessment is used which complicates the mortgage approval process.

Overwhelming? Here is a flowchart summarizing the above options:

Confused? No problem, this is what I do for a living; finding the right mortgage option for my clients. If you are buying a home, an investment property or renewing your mortgage, please contact me.

 

The End Of Variable Mortgages!

As of November 1, 2012, OSFI (Office of Superintendent of Financial Institutions) requires lenders to qualify conventional and insured variable mortgages using Bank of Canada's benchmark rate.  Will this lead to the end of variable mortgages? Prior to November 1, 2012, all insured mortgages were required to qualify based on Bank of Canada's benchmark rate.  The new rules will restrict Canadians' ability to qualify for conventional variable mortgages and conventional shorter term (1-4 year) mortgages.

Here is an example:

Annual Income: $100,000 Mortgage Amount: $450,000 (assuming 20% downpayment) Annual Property Tax: $4,500 Annual Heating: $1,200 Monthly Car Lease & Personal Debt: $750

Prior to the new mortgage rules, the borrowers would have qualified for a variable mortgage using a 3 year rate which have put the GDS/TDS ratios at 28.67/37.67.  As of November 1, 2012, the GDS/TDS is 35.3/44.29 since the Bank of Canada benchmark rate (currently 5.24%) is used to qualify.

Is This The End Of Variable Mortgages?

As you can see, the borrowers will be forced to take a fixed mortgage for 5 year term or longer since they can't qualify for a variable mortgage.  My issue with the new mortgage rules is how will anyone qualify for a variable mortgage or fixed mortgage of 1-4 year term when the benchmark rate is at 7-8% as rates normalize in the future? Having borrowers lock into longer terms than they need to might result in paying IRD (interest rate differential) penalty to get out of the mortgage which can be exorbitant.

The solution to this issue is putting more downpayment if possible to get the mortgage qualification ratios in line.

To discuss your downpayment options and how to qualify for short term fixed mortgage or variable mortgage, please contact me.

 

Sell Or Refinance Your Condo?

A large number of condo buyers in downtown Toronto are first time buyers who enter the journey of homeownership with the intent of moving up to a larger home after a few years to start a family. The data is loud and clear about Toronto's condo market; it has shifted into buyers territory and now buyers have the upper hand in the condo market.  The days of bidding wars seem to be long gone.  Condo sellers are having a hard time getting the price they thought they could have gotten earlier in 2012.  Should one sell or refinance the condo and rent it?

Opportunity in Toronto Condos

I recently had a number of clients who had their condos for sale, but didn't get the price they wanted. They had 2 options to entertain:

1. Sell at a price lower than expected and take a loss 2. Refinance condo, pull the equity out and rent the unit

I choose to look at situations with a glass half full perspective.  I showed the clients by taking advantage of today's low rates and the shortage of rental units in downtown Toronto, there is an opportunity to generate positive cash flow, have someone else pay down their mortgage and wait for a few years till the market balances itself out.

In all cases, the clients had multiple offers on their condos for rent, got higher rent what they listed the condo for and rented the condos to professionals who are easier to manage.  Here are examples of what some of the condos were listed and rented for:

List: $1800, Rent: $1900 (Bathurst & King) List: $1600, Rent: $1700 (Cityplace) List: $2300, Rent: $2350 (King & Sherbourne) List: $1450, Rent: $1500 (King & Portland)

Investing In Toronto Condos

If you own a condo in downtown Toronto, this is a great time to consider locking into the historic low mortgage rates and take advantage of the high rental demand.

Now is the best time to consider restructuring the condo's mortgage due to the following 2 reasons:

1. Condo values have not dropped significantly 2. Mortgage rates at historic lows

Waiting for the "right time" can be costly especially if condo values drop there will be less equity to take out and when interest rates rise (even slightly), the monthly carrying costs will increase and might result in negative cash flow.

There is a lot of doom and gloom in the media and blogosphere, but there is always an opportunity if you have a long term approach to real estate investment.

To find out if you can refinance and rent your condo, please email Nawar or call at 416.637.3308.

Mortgage Rules Restrict Qualification

Mortgage Qualification

As of November 1, 2012, the Office of Superintendent of Financial Services (OSFI), has brought new mortgage rules to restrict qualification and curb Canadians' household debt to protect the Canadian economy from a US style housing correction. Here is what you need to know:

1. Cashback Mortgage

Cashback cannot be used for downpayment, only for closing costs. Downpayment must be from own resources or gifted from family (parents or siblings) only.

2. Home Equity Line of Credit (HELOC)

Restricted to 65% of home value. One can have a mortgage of 15% of home value bringing the total to 80% (65% HELOC + 15% mortgage) as long as HELOC does not exceed 65%.

3. Mortgage Qualifying Rate

1-4 year fixed mortgages and variable mortgages to qualify at Bank of Canada benchmark rate (in other words 5 year posted rate). This will make it very difficult for Canadians to qualify for shorter term mortgages and variable mortgages. How will anyone qualify for a variable mortgage when when the 5 year posted rate is at 6-7% range? I hope OSFI would revisit this rule in the future.

4. Self Employed Mortgage

The maximum allowed loan to value (mortgage and HELOC) for stated income applicants is reduced to 65%. Stated income programs are for business owners who maximize their tax write offs to reduce taxable declared income.  Commissioned applicants such as real estate agents and mortgage brokers do not fall under the self employed program unless they have an incorporated business.

5. GDS/TDS

For applicants with 680+ beacon credit score, the maximum GDS/TDS is 39/44.  For applicants with less than 680 beacon credit score, the maximum GDS/TDS is 35/42.

As you can see the new mortgage rules restrict qualification and might not be popular with various groups of Canadians, however they are designed to protect the economy since a significant real estate correction would have a major impact on employment numbers.  In my opinion, the new rules unfairly penalize self employed Canadians since they will be forced to access funding through secondary more expensive channels; alternative and private lenders.

To discuss how the new mortgage rules impact your qualification whether you are a first time home buyer or self employed, please email Nawar. 

What Is Bridge Financing?

When Is Bridge Financing Required?

When homeowners move from one home to another, sometimes the closing date for the purchase of the new home and the sale of the existing home do not fall on the same day.

For example, if the purchase of the new home closes on July 1 and the sale of the existing home closes on September 1 where the proceeds from the sale are needed for the downpayment, a bridge loan is provided by the lender to cover the shortfall in downpayment for the two months period.

Bridge Financing Conditions

The bridge financing loan is provided based on the following conditions:

1. There must be a firm sale agreement on the existing home
2. Bridge financing loan is provided for up to 120 days

Bridge Financing Costs

The bridge financing loan is provided at prime plus 2% to 5% depending on the lender.  Some lenders have a bridge finance loan set up fee of a few hundred dollars.  There are some additional legal fees to account for since the lawyer has to do additional work.

It is important to review your options with a mortgage professional and run worst case scenarios if:

1. The existing home is sold for a less than expected price
2. The existing home sale closing date is past 120 days
3. The existing home is not sold

To review your personal mortgage situation and plan your next move, please contact me.

Risks Of 5% Downpayment When Buying A Home

With the new mortgage rules introduced in the summer of 2012, it has become more challenging for first time home buyers to get into the housing market.  The remaining few who can afford to get in with the minimum 5% downpayment have to ensure they qualify based on 25 year amortization which the maximum allowed for insured mortgages.

Home Equity

For a first time home buyer, putting down 5%, the default mortgage insurance premium is 2.75% which added to the mortgage amount. This leaves the first time home buyer with 2.25% equity in their home. Here is an example:

• Mortgage amount $341,644 (Condo purchase price: $350,000, 5% downpayment)
• Interest rate: 3.04%
• Mortgage amortization: 25 years
• Mortgage term: 5 years
• Accelerated bi-weekly payment: $811.92

The mortgage balance after 5 years would be $283,413. Assuming Toronto condo prices remain flat (data is showing downward pressure on Toronto condo prices since market is in buyer's territory), home equity would be $66,587 ($350,000 less $283,413 or 19% of condo value).

Move Up Buyer

First time home buyers might live up to 5 years in their condos as they prepare for their next home.  In the above example, the homeowner will have difficulty in buying their next home due to the following factors:

Real Estate Transaction Costs

1. Real estate selling fees: 5% + HST
2. Home purchase Toronto land transfer tax
3. Home purchase Ontario land transfer tax
4. Legal fees to sell and buy a home + HST
5. Moving costs
6. Miscellaneous (home renovations and touchup, furniture and accessories)

The above would approximately account for 10% of the home price. Here is a link to a National Post article on the effect of moving. This would leave the homeowner with 5% after deducting real estate and moving fees.

Higher Mortgage Interest Rates

Mortgage rates have been historically low and they have nowhere to go but up. There are differences in opinions on how high mortgage rates will be in 5 years but all can agree they will be higher than they are today. Historically, mortgage rates normalize at 5%-6%. Assuming the condo owner will be looking to buy their next home in 5 years time when rates are higher, their affordability will be reduced due to limited downpayment and higher interest rates.

It is crucial for first time home buyers to discuss their goals with a mortgage professional to choose a mortgage product that will serve their long term goals.

To find out how to adjust the mortgage for inflation and build your home equity faster, please visit www.iMortgageToronto.ca

To compare 5 year versus 10 year mortgage, please visit: www.10YearFixedMortgages.com

How To Access Your Home Equity

There are a few possible reasons to access your home equity, some are:

• Investment purposes: to buy an investment property or invest in the market (stocks, mutual funds...)
• Consolidate debt: move high interest debt into low interest debt
• Home purchase: buying a home that requires a larger mortgage amount

Canadians are taking advantage of today's low rates and locking into 5 and 10 year fixed mortgages. What happens if the homeowner needs to access additional equity prior to mortgage maturity?  The options are:

Increase And Blend Mortgage

I believe this option will be very popular as more homeowners lock into historically low rates and for most, it won't make sense to break the mortgage in the future.  An example would be: current mortgage amount & interest rates are $300,000 and 3.09%. The homeowner requires to access an additional $150,000 of their home equity.  They would add $150,000 to their existing mortgage balance of $300,000 at current market rate for the remaining term. In this case if the homeowner is 3 years into the 5 year term, the $150,000 would be lent at the 2 year term mortgage rate. The costs associated with an increase and blend option are completing an appraisal on the home and legal fees to register the new mortgage addition.

HELOC: Home Equity Line Of Credit

Secured lines of credit are a great way to access your home equity. The borrower only pays for what they borrow and the funds can be accessed again since this is a revolving credit (you can access whatever is paid back). The costs associated with this option are appraisal and legal fees which are sometimes covered or subsidized by the lender.

Refinance Mortgage

This requires breaking the mortgage, paying a penalty, appraisal and legal fees. It is the most expensive option upfront, however it might be the best option if the homeowner is coming from a higher interest rate mortgage and locking into a lower interest rate mortgage.

It is important to sit with a mortgage professional to discuss your needs and run through the numbers to see which option makes more financial sense.

To discuss your personal options and complete the numerical analysis, please contact me.

Can I Afford That Home & How To Qualify For A Mortgage?

How do you determine how much you can afford?  I will provide you with insight on how banks and lenders determine affordability.  There are 2 important ratios to consider:

• Gross Debt Service (GDS)
• Total Debt Service (TDS)

GDS = (Mortgage principal + mortgage interest + 50% of condo fees (if applicable) + property tax + heat )/Gross income

TDS = (GDS + other debts such as car payment, lines of credit, credit cards and investment loans) / Gross income

Expenses such daycare, home insurance, cable, internet and cell phone are not included in the above ratios.  The GDS/TDS ratios vary from one lender to another due to their internal underwriting guidelines.  Furthermore, the ratios are more stringent for borrowers with less than 680 credit score. Generally speaking, a GDS/TDS ratio of 32/40 would increase the likelihood of getting a mortgage approved. For borrowers with a credit score of 680 credit score or higher, the TDS requirement can go up to 44.

In summary, lenders have various levels of credit risk and they look at unsecured debt (credit cards & unsecured lines of credit) differently.  Another point to take away is strong credit score applicants have a better opportunity of getting approved for a larger mortgage amount.

It is best to consult with a mortgage professional prior to starting the home buying process to ensure one is qualified. To determine your affordability and financial goals, please click contact me.

Variable Mortgage Holders Celebrate!

The US Federal Reserve announced on September 13, 2012 that it will embark on a third round of stimulus (QE3) to improve the employment numbers in the US.  What does this announcement have to do with Canadian mortgage rates? Mr. Carney, the governor of the Bank of Canada, has to keep the benchmark rate which sets prime rate relatively close the US Federal Reserve benchmark rate, otherwise the Canadian dollar would appreciate and have downward pressure on Canadian exports due to the higher cost of Canadian goods.  This would be bad for the Canadian economy and force the Bank of Canada to hold its benchmark rate at or close to its current level to late 2015 along with its US counterpart.

If you are variable mortgage holder who has a prime minus mortgage, this announcement is great news since prime would probably not move dramatically in the next while.  However, the risk is as central bankers "print" money to stimulate the economy, inflation will become an issue sometime in the future.  The message here is to take advantage of your current variable mortgage but plan and prepare for the future.

To discuss how you can shave 3 years off your mortgage amortization, please click here. To contact me, please click here.

Apple, RIM And Your Mortgage Freedom

June 29th is a special day for the following reasons:

• 5 years ago, Apple's iPhone was launched. It was the birth of Blackberry's nemesis
• Today is the first day after RIM announced major losses, delays in launching Blackberry 10 operating system and 5000 additional layoffs
• It is also the busiest day for lenders in Canada as the highest number of mortgages close today

You might be wondering what's the connection between the above 3 points.  Last year, I was meeting with a few investment banker friends who, at that time, said RIM's stock was a buy since it's price of $16 was undervalued and the company had lots of cash.  Fast forward 9 months, RIM's stock is at $7.4 (June 29, 2012 stock price). It has lost half of its value.  It is important when buying a stock, mutual fund or investment property to buy based on economics: how much revenue is generated (sales of company, rental income a property demands), profits (net profit, cash flow after all expenses are taken into account) and potential appreciation (R&D and innovation for a company, solid area that will experience growth due to jobs, infrastructure or immigration).  Buying (stock or investment property) because someone said it is good to buy is speculation and could result in disaster. Do your own due diligence.

As for the Apple connection, emulating their drive to innovate and improve by continuously reviewing the mortgage, adjusting it and understanding the opportunities leads to financial freedom. Being complacent by getting a mortgage, setting a payment and forgetting about it would be following RIM's path.  There is more to mortgage than rates.

Having a vision (building a portfolio of positive cash flow properties or being mortgage free) and executing a plan would result in financial freedom and not arranging a mortgage on the busiest day for lenders.

To discuss how to achieve mortgage freedom or build your real estate investment portfolio, please contact me.

Numbers Tell The Truth!

There is never a dull moment in the Canadian mortgage landscape with new rules introduced by the Minister of Finance and OSFI, Office of Superintendent of Financial Institutions.  I want to state upfront that I support these changes with the exception of reducing secured lines of credit (HELOCs) from 80% to 65% of home values.  Canada's housing market has been very hot since the credit crunch of late 2008 and the house prices to income ratio gap has grown significantly due to stimulus low mortgage rates. I want to clarify what families will be facing in 2016, 2017 and beyond.  Today's 5 year fixed rates are in the low 3's (3.09%-3.19%) which are fantastic.  However, the extended period of low interest rates will be followed by periods of high interest rates due to the following:

• Focus will turn from stimulus in the global economy to combating inflation due to excessive stimulus (money printing and quantitative easing) since 2008
• Cost of borrowing will increase due the European credit crisis which will only intensify as Italy & Spain (3rd & 4th largest economies in Europe) deal with their debt issues. As you recall, in late 2008 when Lehman Brothers collapsed, money (capital) disappeared from the market, creating a supply issue and variable mortgages went from primes less 0.75% to prime plus 1% in a short period of time

I want to share the following numbers to help you see where I am going:

Family household income (pre-tax): $100,000 Income tax bracket: 45% Mortgage amount: $400,000 Interest rate: 3.09% Mortgage amortization: 30 years Monthly payment: $1912 Renewal Rate in 2017: 5.5% (an increase of 2-2.5% over 5 years is very reasonable based on historical data and the above stated issues) Mortgage payment at renewal: $2103 (increase of $416 per month)

Some would assume taking on an additional $416 per month in 5 years is doable.  Let's dissect a little further:

In order to absorb $416 of additional mortgage payment, the family's pre-tax income has to increase by $9,000.  That might sound reasonable , however, it's equivalent to getting 2.5% raise every year for the next 5 years.  The economy is not in the greatest condition: not many companies are hiring, some are cutting back and the reality is keeping a job nowadays is great news. Furthermore, the increased cost of living (property taxes as municipalities deal with their debt and deficit issues, gasoline which affects goods prices, higher hydro rates....) will eat away into a family's affordability. I didn't mention that children cost more as they grow up!

This blog post is a reality check.  We have been drunk for too long on cheap money.  Plan for the long term and understand how future events should play into your decisions today.  This is a golden opportunity to consider long term mortgages such as a 10 year fixed.

To get more information please visit: www.10YearFixedMortgages.com

Whether you agree or disagree with me, I would love to hear from you.

What You Need To Know About The New Mortgage Rules

The Minister of Finance, Mr. Flaherty, announced today the following regarding insured mortgages which will take effect on July 9, 2012:

• Refinances will be limited to 80% of home value from 85%
• Maximum amortization will be lowered to 25 years from 30 years
• GDS limited to 39% (currently no GDS requirement for 680+ credit scores) and TDS to 44%
• Mortgages over $1 million will no longer be insured

Here is how these changes will impact the following groups:

First Time Buyers

• They will be squeezed out of the market if they don't have the 20% downpayment.  Qualifying at 25 years, especially in Toronto, is difficult due to home prices in the city (condo fees are taken into account when qualifying for a mortgage as well)
• More potential first time home buyers will turn into longer term tenants which is good news for real estate investors
• Parents, get ready to co-sign for your children if they want to buy their first home

Real Estate Investors

• Since more first time buyers will have to wait for their first home, the tenant pool will increase.  This is good news since more demand results in higher rental income
• Qualifying for additional investment properties should not change since government requires minimum 20% downpayment. This is pending conventional mortgage amortization is not lowered to 25 years.  Please note there are lenders offering 35 year amortization for investment properties.

 Homeowners

• If one has 20% equity or more in their home, 30 & 35 year amortized mortgages are available for now.  The changes are not impacting this group, but we will have to wait and see if lenders will reduce mortgage amortization to 25 years

This announcement came out of nowhere and it surprised many.  If this announcement is intended to cool off investors buying condos in downtown Toronto, I'm not sure it will achieve that since the changes are targeted towards insured mortgages only.  Furthermore, this change gives the Bank of Canada room to hold its benchmark rate steady for a longer period of time due to a slowing global economy.  I believe since the Bank of Canada's hands were tied, Minister of Finance came in to help control the high household debt level.

There will be more clarifications coming out in the next few days from the lenders which I will elaborate on. To discuss how these changes will impact your mortgage financing, please contact me.

Is It Time To For 10 Year Mortgages?

As a mortgage professional who enjoys numerical analyses and economic discussions, I have had numerous conversations with financial planners, colleagues and clients of mine regarding the direction of interest rates in the future. What's happening in Europe? What if Greece pulls out of the Euro zone? Impact of US dollar on Canadian dollar? Inflation? Mr. Carney and Mr. Flaherty warnings regarding increased household debt?

The above video captures the compelling argument that now more then ever is a golden opportunity to lock into a 10 year fixed mortgage.

I really hope that as many people as possible see this post. I think there is a small window of opportunity since rates may rise at anytime.  Please share this post via social media. Afterall knowledge is power and making decisions based on data is powerful.

Please feel free to contact me to discuss your questions or comments regarding the 10 year mortgage.

Double Your Money By Renting Your Home

Lately, I have been dealing with an increasing number of clients who are deciding not to sell their home.  They are choosing to keep their existing property by turning in it into an investment property and using the proceeds of the refinance to buy a home.  Since the financial credit crunch in late 2008, more Canadians are skeptical about the markets, are worried about having enough to retire and are looking for alternative ways to diversify their investments. A greater number of homeowners, after reviewing the numbers, are deciding to refinance their existing home up to 80% of its current market value, take advantage of today's historic low interest rates and rent the property.  Here is real example that I did for a client who owns a condo in downtown Toronto.

Condo value: $350,000 Mortgage amount: $280,000 (80% loan to value) Mortgage amortization: 30 years Mortgage interest rate: 3.29% Mortgage term: 5 years Annual appreciation: 2%

There are two items to pay attention to in the above chart: 1/ initial equity is $70,000 and after 5 years based on 2% capital appreciation and utilizing the inflation hedge mortgage strategy, 2/home equity is at $135,771.  By having the tenant paydown the mortgage and adjusting the mortgage payment gradually for higher interest rate environment, the home owner almost doubles their money in 5 years.  Imagine the financial freedom a fully paid off investment property would create.

If you are interested in finding out how to turn your current home into an investment property and use your home equity to buy a home, please contact me.