Fixed vs. Variable Rate

Variable rates tend to be lower than fixed rates. There is a possibility that variable rates could increase during the term of your mortgage. Overall, you need to decide how comfortable you are with that uncertainty.

To see if a variable rate mortgage product is right for you, you should determine whether or not you can afford interest rate increases. Check if you can afford mortgage payments at a rate 2% higher than the variable rate you are considering. This should be a good indication of how you’ll do financially if rates increase.

What is your personality style? Do you prefer risker investments or safer ones? Do you prefer extra insurance or not? If you prefer more certainty, then fixed rates are for you.

Note that in open variable mortgages, one can switch from a variable rate to fixed rate at anytime. But double-check to see what fixed rate you will be getting. Is it the posted rate or best rate possible? The posted rate will obviously be higher.

Then you need to consider, how much lower is the variable rate vs. the fixed rate? If they aren’t too far apart, then perhaps, a fixed rate is better because you aren’t saving as much with a variable rate.

Forecasting interest rates isn’t a science. There are multiple factors involved in each person’s situation. That’s why it’s helpful to speak with a mortgage agent who is experienced in this field. Contact me today for a personalized recommendation on interest rates based on your unique situation.


New Stress-Test Rules for 20%+ Down Payments

A mortgage stress test has been implemented by Office of Superintendent of Financial Institutions (OSFI) that will be in effect as of January 1st, 2018 intended to effect buyers with “uninsured mortgages.” (Generally, when someone puts a down payment of more than 20%, they don’t require mortgage insurance. Therefore, these mortgages are uninsured.)

Buyers with uninsured mortgages will need to prove that they can afford payments based on the greater of:

  •  the Bank of Canada’s five-year benchmark rate (currently 4.89% as of Oct 19th 2017)
  • or their contract mortgage rate plus two percentage points

What does this mean to you? The properties that you can qualify for will now be lower in value. Take a look at this example:

Mortgage rate comparison website published a scenario looking at the impact of the stress test rule on a family earning $100,000 putting down a 20% down payment on a 3.09% 5-year fixed rate amortized over 25 year. Under the current rules, that family could qualify for a house worth $706,692, but after the new rules take effect in 2018, that family would only qualify for a house worth $559,896 based on a 4.89% stress test.

If you wish to get mortgage financing or are looking to refinance before these new stress test changes go into effect, please message me ASAP!

The additional changes, which are directed at federally regulated lenders, stipulate that:

  • Lenders will be required to enhance their loan-to-value measurement and adhere to appropriate LTV ratio limits “that are reflective of risk and are updated as housing markets and the economic environment evolve.”
  • Financial institutions will be prohibited from arranging a mortgage, or combination of a mortgage and other lending products, with another lender where the intent is to circumvent LTV ratio limits. But mortgage agents/brokers can still do it, so long as the borrower qualifies for both mortgages (i.e., their debt ratios meet both the first mortgage lender’s and second mortgage lender’s guidelines).

If you are looking to refinance leaving less than 20% equity in your property, you need to find a mortgage agent who will help you do that. I have access to numerous second mortgage lenders who are comfortable with high LTV ratios. This means you can access more money. Message me today for a personalized solution to your unique situation.

Financial Factors of a Mortgage

When looking for a mortgage there are a few financial factors one should keep in mind. Changes to these factors will drastically change the amount of interest paid, possibility of penalty charges and required monthly payment amounts.

The Face Value

The total amount of the mortgage that is registered against the property. This isn’t necessarily the amount the borrower received, but it is the amount for which the borrower is liable.

The Term

This is the time that the contract will be in force. After this time, the contract must either be paid in full or renewed with the current lender. However, one can refinance with or switch to another lender. This has the same effect as paying off the previous mortgage in full. Switching to another lender is often the better option for most people as you can ensure that your next mortgage is the best mortgage for you (best interest rate and terms) in today’s mortgage market. You are not blindly accepting whatever interest rate and terms your previous lender wants to renew at.

The Amortization

This is the total number of years that it will take to fully reply the amount borrowed. FYI, there are no amortization period for interest only payments.

The Interest Rate

The amount of interest charged to the borrower. Remember, slight changes in your interest rate will significantly increase the amount of interest you pay.

The Compounding Frequency

Legally, lenders can only compound annually or semi-annually. They must indicate this on the mortgage.

The Payment Amount

Based on the face value, interest rate, payment frequency and amortization, the contract will lay out the amount of each payment.

There are several financial components to a mortgage. Slight changes can lead to huge savings, so it is important to obtain the best interest rate and terms for you. To do this, find a mortgage agent with access to numerous lenders, so they can compete for your business. Contact me right now to get a personalized solution to your unique situation.

What is a second mortgage?

A second mortgage is a loan that uses a property, which already has a mortgage on it, as collateral. It is often used to pay off higher interest debt. And it is also used to fund higher return investments.

To understand this better, let’s understand mortgage ranking. A first mortgage means that the mortgage was registered first, or before any other mortgages on the property. A mortgage registered after the first mortgage is a second mortgage. The same with a third mortgage. If the borrower defaulted on the first mortgage, the first mortgage lender would begin the power of sale process to recover the money owing. After the property is sold, the remainder of the process go to the other mortgage holders, such as a second mortgage lender. There is a risk being the second lender since there might not be enough money left to pay the full second mortgage. To offset this risk, the second mortgage lender will typically charge a higher interest rate. Now that you understand the lender’s perspective. Look at how this concept could be used by you.

When is a second mortgage helpful? Well, let’s look at a typical scenario. Let’s say you own a property worth $500 000. And you have a mortgage (first mortgage) of $300 000 on it. This means you have $200 00 of equity in your property. Recently, you went through a terrible family emergency or job loss and have accumulated $50 000 of debt on your credit cards. The interest rate on those credit cards are around 20% per annum. So you talk to your mortgage agent, Angeline Fernandes. She explains how you can use the equity in your home to get a second mortgage and pay off your credit cards. You can do this even if you aren’t near your first mortgage renewal date. She gets you a second mortgage for $50 000 at 5% per annum. You use it to pay off your $50 000 credit card debt at 20% per annum. In just three years, this saves you about $22 500 in interest. This example is simplified, but it shows the very real benefits of lowering the interest you pay on debt. If you are looking for a second mortgage, talk to someone who has access to multiple second mortgage lenders. Contact me today to get a personalized solution to your unique situation.

Bridge Financing

Bridge financings is sometimes used when an owner needs extra financing between buying a new home and selling the previous home. 

Bridge financings is sometimes used when an owner needs extra financing between buying a new home and selling the previous home.

Let’s say that you are purchasing Home B and selling Home A. However, the closing date for Home B is October 1st and the closing date for Home A is October 15th. Between the two dates, you will be temporarily owning both houses at the same time. For a short period of time, you will have two mortgages – one on Home A and one on Home B. The biggest problem is that you need to use the proceeds from the sale of Home A as a down payment in order to purchase Home B. Remember that you still need a down payment to get a mortgage on Home B. Bridge financing is for the down payment during this time period.

When you obtain bridge financings, a second mortgage is placed on Home A while waiting for it to sell. This financing is used as a down payment for the Home B. Once Home A is sold, the mortgage on Home A is paid off and the bridge financing is paid off.

Are you selling your home, hoping to use its equity as a down payment on your next home? Just in case you end up with different closing dates, you should speak to someone who has knowledgeable. It’s important to know your options. Contact me now for a personalized solution to your unique situation.

First Time Home Buyers’ Tax Credit

You could get a Home Buyers’ Tax Credit (HBTC) when you purchase your first home.

You could get a Home Buyers’ Tax Credit (HBTC) when you purchase your first home.

The HBTC is calculated by multiplying the lowest personal income tax rate for the year (15% in 2009) by $5,000. For 2009, the credit will be $750.

You will qualify for the HBTC if all the below applies to you:

  • you did not live in another home owned by you or your spouse or common-law partner in the year of acquisition or in any of the four preceding years.
  • you intend to occupy the home as a principal place of residence no later than one year after it is acquired.

When you file your taxes, you’ll be able to claim your tax credit. No documentation is required, but it should be available if the Canada Revenue Agency requests it.

This is just one program that benefits first time home buyers. To make the most of your new purchase, you should speak to someone with experience in this field because you never know what extra benefits you can get. Contact me now to get a personalized solution to your unique situation.


Using RRSP for a Down Payment

If you are a first-time home buyer, you may use up to $25 000 ($50 000 for a couple) from your RRSP account towards the down payment of your home.

If you are a first-time home buyer, you may withdraw up to $25 000 ($50 000 for a couple) from your RRSP account. This means that my purchasing your first property, you can use $25 000 of pre-tax dollars (aka. your RRSPs)! Remember, your RRSP contributions must stay in the RRSP for at least 90 days before you can withdraw them. So you must plan ahead and ensure that your funds are deposited well before looking for a house. This is all done through a government program, called the Home Buyer’s Plan.

Do you meet all the withdrawal conditions?

  • You have to be a resident of Canada at the time of the withdrawal.
  • You have to received all withdrawals in the same calendar year (or by January the following year if withdrawing more than once).
  • You cannot withdraw more than $25,000 ($50 000 for a couple)
  • Only the person who is entitled to receive payments from the RRSP can withdraw funds from an RRSP. You can withdraw funds from more than one RRSP as long as you are the owner of each RRSP.
  • Normally, you will not be allowed to withdraw funds from a locked-in RRSP or a group RRSP.
  • Your RRSP contributions must stay in the RRSP for at least 90 days before you can withdraw them under the HBP. If this is not the case, the contributions may not be deductible for any year.
  • Withdrawal must be done latest 30 days after owning the home.
  • You have entered into a written agreement to buy or build a qualifying home
  • You must intend to live in the home within one year of purchase as your primary residence
  • If you have used the Home Buyers’ Plan before, you cannot have any outstanding balance due

You are also eligible if you haven’t occupied a home that you, your spouse or common law partner owned in the last four years. Note that even if your spouse or common law partner owned a home, as long as you didn’t live in it, you may still be eligible as a first-time home buyer.

Note that the Home Buyer’s Plan doesn’t say anything about the size of your down payment. All your RRSP withdrawals don’t necessarily have to go towards your down payment, although a portion of it definitely will. If your down payment is only $20 000, you can still remove up to $25 000. The remaining $5 000 can be used for repairs, furniture, moving costs or anything else.

To withdraw the funds, fill out the Form T1036, Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP and send it to your RRSP account holder for each eligible withdrawal.

Think of your RRSP withdrawal as an interest-free loan that must be repaid. Repayment must be made within 15 years. Every year, you’ll pay 1/15 of your RRSP withdrawal. For example, if you withdrew $15 000 for a down payment, you would pay $1 000 back into your RRSP account every year for 15 years. Of course, you can always pay it back earlier if you’d like. These repayments are not tax-deductible, since they are repayments, not new contributions.

This is just one program designed to help first-time home buyers. For more, check out my blog on Home Buyer’s Tax Credit. As you can see, working with someone knowledgeable is a huge benefit. Programs exist that are designed to help you, but they aren’t always general knowledge. Also, there are a lot of minute details for each program. So, it helps to speak with a professional. Contact me today to get a personalized solution to your unique situation.