How to Manage the New Bank of Canada Rate Hikes (Think Like a Champ!)

General Melanie Ward 20 Feb

Rates have already risen since December 2021 and are continuing to rise. Market experts are predicting rates rising up to between 3.40% and 4% by the end of 2022.

We all fear paying more interest, but if recent history is anything to go by, most Canadians with still come out ahead of their fixed and/or variable-rate mortage rates despite The Bank’s pattern of raising rates.

Canadians with variable-rate mortgages may be feeling more concerned than their fixed-rate counterparts at this time, so let’s look at some strategies to assuage some fears and lessen the rate-hike’s impact.

How do you best manage the coming rise in interest rates?

 

1) Roll with the punches

First, like any boxer willing to go the distance, be prepared to roll with the punches! By taking the variable-rate approach, you have chosen a “rocky” path that seems rough at times but generally pays off ahead of fixed-rates. Although there are times when this hasn’t always been the case, the trend remains that in the Bank of Canada’s last four rate-hikes, it has raised interest rates by approximately 144 points. Forecasters see the Bank of Canada hiking rates as many as five times by the end of 2022 (or 125 basis points). Taking into account the current average between fixed and variable rates, the worst case scenario is that you will break even.

2) Consider switching to a fixed rate

Second, consider switching to the fixed rate. If the “southpaw” variable-rate streategy is causing stress, it may be worth your peace of mind to switch over to a more “orthodox” fixed rate before the hikes begin. No one can know for certain when interest rates will move; and let’s not forget that fixed rates have also been increasing for a over a year now. In an attempt to feel more secure with your new fixed rate, the premium you may have to pay could, instead, simply start wearing down any savings you had expected to make. Talk to your expert advisor before making any flashy moves and make certain your penalty prepayment for switching won’t end up being higher than simply staying put. Do your research!

3) Prepay your mortgage as a hedge

Third, and finally, only use the aforementioned prepayments as a hedge. If you honestly see yourself as a “rate-hike Rocky” who is willing to take on all comers, and go the distance if necessary, then the variable rate is for you. Don’t forget, these prepayments are added to your regular mortgage payment schedule and are applied directly to your principal. Perhaps, use fixed rates as nothing more than a gauge and pay as though you were on a higher fixed-rate mortgage. This way, you could speed through your principal repayments.

Whichever plan you choose, make sure to get qualified advice from a trusted expert. Decisions are easier to make when you know you have a good coach in your corner.

Enjoy The Holiday Season, Free of Debt!

General Melanie Ward 21 Dec

The holiday season is upon us! It’s a time for festivities and feasting and family – and financial stress (well, it can be if you’re not careful). This year, as you eat, drink, and make merry, be sure to include a modicum of financial planning so you can start the new year debt free.

Be Realistic

Be honest about your spending patterns in past holiday seasons. Are you someone who, historically, has allowed credit-card debt to mount this time of year? Perhaps the way you feel you ‘should’ celebrate the season is not in line with your ‘actual’ financial profile. Don’t allow the ghost of Christmas debts past to ruin the fun this year. Let it be, “spending time with loved ones,” not “spending money with credit card companies.”

What Does The Holiday Season ‘Look Like’ For You?

Food? Family? Casual? Formal? At home? Away? Perhaps you’re not the only one in your social circle who is feeling a sense of looming financial stress this year. Ask around. Maybe you’ll feel better about planning a more modest holiday season this year if you find out you’re not the only one.

Establish Your Vision For The Holidays, Then Budget

Write down everything you’ll need to create your vision for the holiday season. Start with the things most important to you, Will it be: Gifts? Food? Drinks? Decorations? Invites? Colorful lights? Animatronic reindeer for your front lawn? Are there things on the list you could either limit or live without? Of those items you must have, try to find budget-friendly versions that will have the same effect. Second-hand lights often look as good as new ones out of the box. Talk to your guests and see if you can pool resources if you’re celebrating at the same location. It could be fun to establish a rule of BYOCC (bring your own Christmas crackers),

Don’t Wait

Start the process now and you’ll be in a stress-free state of mind before the festivities begin. Even if it’s too late this year, the pattern you establish now will carry you through future stress-free holidays and set you up for good habits in the New Year!

Celebrations Should Have Meaning

Remember the real reason you’re celebrating this time of year. Your friends and family are joining you because you are the one with whom they want to share this celebration. Remember the warmth you’ve felt in past holiday seasons and why it felt so good. It probably wasn’t the matching green-and-red dinner napkins or the perfectly-draped tinsel on the tree or any other specific detail that made those past holidays special. It was more likely those things you can’t put a price on: The expressions on children’s faces as they open their presents; the jokes your favourite uncle told at the table; the songs you sang together (however off-key). It was the moments money can’t buy. Let that joyful spirit of this season guide you as you plan your budget.

May peace and joy be yours this holiday season!

Renewing or Refinancing Your Mortgage? Assuming your lender has the best rates can be a costly mistake.

General Melanie Ward 9 Apr

Renewing your mortgage can be a good decision, but do it wisely. Even if you have a good relationship with your current lender, shopping around might protect you from overpaying.

Figures from the Bank of Canada in June of 1990 put bank rates on five-year fixed mortgages at an average of 14.25 per cent. They have been declining ever since.

Homeowners could renew or refinance at a lower rate and save money by shopping around, but most don’t. Instead, they renew their mortgages at the same or even higher rates thinking it’s the safest option.

Here’s why assuming your current lender’s offer is the best one is a mistake

Depending on your financial goals at the time of renewing your mortgage, you must decide whether you will be staying with your current lender, going with a new lender, or refinancing your home.

If your financial situation has changed during your current loan term, your next one should be prepared accordingly. Your current lender may not be taking this into account. If this is the case, it is unlikely that the renewal rate your lender is offering will be suitable for your current income or overall debt level.

Even if your current lender offers you a lower rate than before, there are often better rates being offered elsewhere. The more you shop around, the more leverage you will have when bargaining with a new lender. Ask if your lender will match or beat the lowest rate you’ve found. If they won’t you should consider you know it’s time to move on.

Don’t forget that your new lender will be less interested in how well you kept up with your previous loan’s payments, and more interested in your current income and credit score.

Are you refinancing to consolidate debt or get cash?

Paying off your current loan by taking out a new mortgage – refinancing – is one way to access money if your needs demand this; managing a debt or paying down a car loan, for example.

Your lender can refinance up to eighty percent of your home’s current value with an infusion of cash. This amount could end up being much more than the principal left on your mortgage, which makes sense if mortgage rates have fallen since the beginning of your last loan term. Of course, there’s not much point in refinancing if it will result in a higher rate and monthly payments, so it pays to shop around.

Whether you decide to renew or refinance you must allow for some time for this process. Start this conversation with your lender or mortgage adviser several months in advance so that you can plan your financial strategy effectively.

Renewing or Refinancing? An overview…

When to do it

Renew: At the end of your mortgage term.
Refinance: Any time during your mortgage term, but there may be fees.

How it works

Renew: You renew your current mortgage with the new terms and perhaps a new interest rate.
Refinance: You may have to requalify for a new mortgage that reflects your current financial situation.

Costs

Renew: None.
Refinance: Some legal and administrative fees.

Which to choose

Renew: Shop around. Ask about interest rates and ways to pay down your mortgage faster.
Refinance: What major aspect in life are you trying to find funds for? A vehicle? Education? Home renovations? Debt?

The Best Last Minute Gift! Give the Gift Of Financial Freedom This Christmas!

General Melanie Ward 16 Dec

Are you the kind of person who starts panicking every year  in the weeks leading up to Christmas because you haven’t started your Christmas shopping? Let me suggest a  fantastic last-minute holiday gift that will hold enormous value – and even increase in value – over time.

Which each passing year, the great Christmas shop holds less and less appeal for me, as I look around in dismay at the mountains of somewhat useless things I already own. That’s why I’m suggesting a gift that holds great value, as well as not adding to the over-accumulation of things.

Give The Gift of a One Time Mortgage Payment!

I don’t know how many times I’ve received gift certificates for pedicures I never have time to use, or purchased thoughtful but useless plastic “stuff” for friends, clients and family. For many of us a one time mortgage chunk can be miraculous over time! Especially in this low interest era. Interest rates will eventually have to rise, but a one time payment is directly applied to the principal.

How much can I put down?

It depends on the mortgage. Open mortgages usually have higher interest rates than closed mortgages, but they’re more flexible because you can usually prepay open mortgages, in part or in full, without a prepayment charge. Closed and convertible mortgages often let you make a 10% to 20% prepayment. Ask your bank or mortgage lender to help you find out.

How much difference does it really make?

Quite a bit, plus not only do you put that money towards your interest – preparing yourself for any higher rates in the future – you can also save the amount of the payment in interest over the amortization period!

If your mortgage is 350K mortgage @ 2.5% for a 5 year term, with a 25 year amortization

A $2000 lump sum payment =

Prepayment Savings

  • By the end of the amortization period, with your one-time prepayment of $2,000.00, you save $1,707.53 in interest and pay your mortgage off 2 months sooner than if you had the same mortgage with no prepayment.
  • By the end of the term, with your one-time prepayment of $2,000.00, you save $259.86 more in interest than if you had the same mortgage with no prepayment.

$1000 lump payment =

Prepayment Savings

  • By the end of the amortization period, with your one-time prepayment of $1,000.00, you save $855.98 in interest and pay your mortgage off 1 months sooner than if you had the same mortgage with no prepayment.
  • By the end of the term, with your one-time prepayment of $1,000.00, you save $129.94 more in interest than if you had the same mortgage with

$500 lump sum payment =

Prepayment Savings

  • By the end of the amortization period, with your one-time prepayment of $500.00, you save $426.67 in interest and pay your mortgage off 0 months sooner than if you had the same mortgage with no prepayment.

By the end of the term, with your one-time prepayment of $500.00, you save $64.96 more in interest than if you had the same mortgage with no prepayment.

 

Should You Sell? Not if you love your home.

General Melanie Ward 11 Nov

Real estate in Canada has been hot over the past six months, with many people looking ahead to potentially unstable times and wondering if they should get out.

But the thing is, real estate in Canada never had the same housing bubble the US did in 2008. Things here have been consistently more stable over time than in the United States.

While the Vancouver market has gone up and down, it’s overall trend has been up in the past 20 years. Nelson has seen historical highs, with endless predictions of the market dropping…but when we look at the stabilizing effects of the market I predict it will remain strong.

Canada’s basic elements keep our real estate market strong even during unprecedented times:

  • We have a historically stable Democratic Government, and have had for many decades.
  • Rule of Law with a strong population of rule followers that protect our stability.
  • Definitive property rights where you don’t have to worry about your investment if the government changes, (a real consideration in other areas of the world).
  • Stable Banks who did not need a government bail out in the 2008 Great Depression.
  • Near record low interest rates allowing for faster paydown of principal than ever before, with no signs of that changing any time soon.
  • Years of quantitative easing in our future that will likely end with inflation of hard assets (such as Real Estate).

 

It’s always essential to remember that ultimately your home is not an overnight, or market-based investment.

 

In my years as a mortgage broker I have seen that – in the long term – most people regret having sold their home.

And that, no matter when you buy, you will eventually be glad that you did.

Sure there are better and worse times to buy or sell real estate, but a home is not just “real estate”, it’s the place where you live, raise a family, and build dreams.

The fact remains that over the long haul a home in Canada will, in 99% of cases, prove to be the best investment 99% of people make in their lives. And that “investment” will pay out not only in years of stability, and having a place in a community, but also as you pay down any mortgage and your house’s worth slowly rises, as it has everywhere over the long term when you are speaking in decades and not years.

In my opinion, you shouldn’t worry about “cashing out” on your home. This is a time to get the right mortgage that you can afford, and hunker down into the home you love.

How to Read and Understand your Credit Report

General Melanie Ward 2 Sep

Last month we wrote about the impacts of a poor credit score and how to improve it, but how do you even know where to begin? In this blog post I will address how to read and understand your credit report, so you can then address areas of improvement.

What Credit Reports Should You Be Using In Canada?

As I discussed in my last post, there are many new “free credit check” apps and programs, but they won’t necessarily be what your bank sees. In Canada we have two main credit reports: Equifax, and Transunion. There can be discrepancies between the two reports however, as not all creditors report to both. 

A credit report is the primary tool that lenders use to decide if they will lend you money. Your credit report includes personal identification information as well as financial information like:  a record of payment history on all credit facilities and cell phones, and if there have been any collections or past bankruptcies. It also shows any outstanding balances and maximum credit limits, as well as how many times you have applied for new credit. 

Before you use one of the many widely available, but not necessarily useful “credit check apps” you can order yours from TransUnion or Equifax, and it’s free.

https://www.canada.ca/en/financial-consumer-agency/services/credit-reports-score/order-credit-report.html

So What Does Each Element Of My Credit Score Mean?

Your credit score breakdown includes five different areas: Credit Utilization, Payment History, Length Of Credit History, Inquiries, and Types Of Credit. Different institutions give each element a different percent of your overall score, but I’ve included approximations below. 

  1. Credit Utilization (Aprox 30% of your score):
    This is the measure of how much of your available credit – on credit cards and/or lines of credit – is being used. It also factors in the number of accounts with balances and the amount paid down on instalment loans. Generally, lower credit utilization demonstrates restraint and is viewed as positive. 
  2. Payment History (35%):
    It doesn’t matter whether you pay off your balances every month, what counts is that you don’t miss minimums. This score looks at any late payments, along with any past foreclosures, bankruptcies or credit bureau accounts. It’s important to know that if you were a co-signer on a card, or debt that didn’t get paid that will show up as well.
  3. Length of Credit History (15%):
    Creditors want to see a history of your borrowing actions to make a decision about what kind of borrower you are. Lenders typically want to see at least two open trades on a credit report, each being used for a minimum of two years. 
  4. Credit Inquiries (10%):
    Have you been applying for a lot of increases to credit limits, or trying to get a loan for a vehicle and had to go to numerous banks? Every time someone pulls your credit report it shows up on…your credit report. This can negatively impact your score if it looks like you are getting deeper and deeper into debt. An exception to this is borrowers who are rate shopping for a mortgage or auto-loan over a short period of time.
  5. Types Of Credit ( 10%):
    In general, lenders like it when you manage a variety of credit types. Your credit score can improve if you have demonstrated the ability (and discipline) to manage several different credit accounts rather than having only instalment loans or only revolving credit.

How long does information stay on your Equifax or TransUnion account?

So you had a bad patch a few years ago, but you’ve been really handling your finances since, just how long can financial black marks stay on your record? 

  • Any Legal Judgments: Equifax will report a judgment for 6 years. TransUnion will also report for 6 years, except in ON, QC, NB and NL where they will report for 7 years, and 10 years in PEI. 
  • Consumer Proposals: Consumer proposals are a legally binding agreement to pay creditors a portion of what is owed, or extend the time, or both.  Equifax removes a consumer proposal 3 years after all included debts have been paid. TransUnion removes it from the credit report either: – 3 years after all included debts have been paid; or – 6 years after the proposal is signed. 
  • Bankruptcy: Equifax will report for 6 years after discharge. TransUnion will report a bankruptcy for 6 years after discharge. Except in ON, QC, NB, NL, and PEI where it will remain for 7 years. 
  • Double Bankruptcy: Will stay on a credit report for 14 years. 

If you feel there are some errors on your report that are impacting you negatively, you have recourse. Did you know you can apply to have credit report errors fixed?

https://www.canada.ca/en/financial-consumer-agency/services/credit-reports-score/check-errors.html#toc3

Final Words on Your Credit Score

No one’s credit score is ruined forever. Even double bankruptcies can go away after 14 years, and you can start again. 

Sometimes we have to take drastic action to help our finances during a rough period. Before you make any drastic moves, it is very important to understand all options and alternatives available as your choice could limit your ability to purchase a home in the future. 

There are several alternatives to Bankruptcy, including Credit Counselling and a Consumer Proposal. If you are in this position, I strongly suggest seeking the advice of a lawyer and/ or accountant in addition to your mortgage professional.

The Impacts Of A Poor Credit Score, And How To Improve it.

General Melanie Ward 19 Jul

With lending rates at an all time low, and people running to remortgage or refinance during the pandemic, getting a handle on your credit score has never been more critical.

Your credit score is a test you don’t want to fail. A great credit score means you can access cheap money for your home, business or debts. A poor credit rating can seriously affect your ability to finance a house, project, consolidate debt, and affect your payments by hundreds of dollars per month. 

First, what is your credit score? And what is considered a good credit score?

A credit score is a three digit number ranging from 300-900 designed to represent the likelihood you will pay your bills on time. Generally speaking the higher the number, the “better” your score, and the better – lower risk – you are as an investment to a bank or lender. 

Banks and financial institutions look at a variety of different sources to determine your “score”. If you are behind on any debts, your debt to income ratio, and how close you are to your maximums on your cards etc…different institutions focus on different elements.

Credit score ratings are generally as follows:

  • 300-579: Poor
  • 580-669: Fair
  • 670-739: Good
  • 740-799: Very good
  • 800-850: Excellent

Any credit score above 670 is generally considered a good score.

Are credit scores important?

Yes, your credit rating is essential when it comes to mortgages or any kind of loans. Quite simply, the difference between being an “A” rated borrower (with an excellent credit score), and a “C” rated borrower can be the difference between getting a mortgage at 2.49% or one closer to 5%. Amortized over 25 years, that’s the difference of $125 per month on every hundred thousand. Your credit rating can also impact how much you can borrow, or if you can borrow at all.

I use Credit Karma, why is my score different than the one that my bank gave me?

There are loads of free credit rating apps out there these days, as well as some paid ones, but I guarantee your lender isn’t using them. While it’s excellent to be monitoring or even thinking about your credit rating, your lender is going to be using something far more intensive, and/or a custom blend just for their institution.

Any free credit app is normally going to give you a better score than what your bank or lender might give you. After all, the credit app has nothing to lose. The lender does, however, and has this measure in place specifically to protect their investment in you.

What’s the best way to find my credit score?

Well most banks and lenders in Canada use something called the Fico Score 8. Unfortunately you can’t get your own Fico Score 8, your best option is  to rely on your mortgage broker when you are applying for a mortgage.  You don’t want to be going to different lenders to check your score, your mortgage broker only has to pull your credit once and we can use it with any lender for up to 30 days. Why? Because every time your score is “pulled” by a lender, it can make your score go down…This is only one of the many advantages of a mortgage broker.

Does this mean you shouldn’t use any of the free credit score apps? 

Free credit score apps can be a good way to keep on top of your total credit on a month to month basis, and that’s never a bad thing. But instead of focusing on your credit score, my suggestion would be to think about your overall credit health instead.

How can I improve my Credit score / rating?

So you can’t get your exact credit score on your own, if you want to make sure your rating is high the next time you go to get a loan here’s what you need to do:

  1. Stay away from your limits.
    Pay down your cards as much as possible, and keep them there. You don’t need to pay them off each month, it can be better to slowly pay down a balance over time. It’s less important to pay off your card than to leave room. This proves you have the discipline not to use credit you have available to you, and shows restraint.
  2. Accept all offers of credit increases, and then don’t use them.
    Ok, this might sound crazy, but if you accept the increase – but don’t eat into it – it once again shows discipline and restraint. More importantly it balances out your credit vs debt ratio. 
  3. Do not close your older or unused cards.
    See #1. It’s all about your debt vs credit ratio, so showing that you have old cards with loads of room on them is good. It’s better to have cards sitting around with no debt, then to close them. But also see #4.
  4. Spread your debt around.
    If you have a credit card that you don’t use often, but you have other ones that are carrying a debt, spread it around. This is a great way to keep your overall debt away from it’s limits, it also ensures that your lender won’t close your card or line of credit from lack of use.
  5. If you want to close the card to avoid an annual fee, just ask the card issuer to downgrade your card to a free card.
    You will retain your valuable history, but avoid annual fees (and the spectre of forgetting to pay the fee).
  6. Do actually have some credit.
    This is for those magical people who save up and pay for things in cash and resist the urge to get into debt…you still need to. Yes even you. Everyone needs to develop some kind of credit history, because believe it or not having nothing is as bad for you as having a bad score. So even if you don’t need it, get a credit card, and buy things on it occasionally, and pay it off. 
  7. If you can pay off your statements each month, wait until a few days before they are due.
    Honestly it’s just as good for your credit rating to show slow diligence in paying off debt, over time, as long as you are away from your limits. Paying things off totally is nice for those people that can do it, but it’s not necessarily helping your credit limit.

Keep Calm and Carry On in the 2020 Housing Market

General Melanie Ward 15 Jun

Stay Away From Fear Based Market Decisions Until Real Data Has Come In.

It’s hard not to panic in these trying times. With the news constantly throwing out alarm bells about a depression, and the economy on pause, it would be easy to give in to the desire to dump your investments, sell your properties, and hole up until things turn around.

But the data out there is still coming in. This is a time to hold the line on your home. If you own your house right now, and can afford to keep it, this is a time to ignore the news, and stay on track, especially for the coming months.

No one has a crystal ball, and we are bombarded with speculation, but for now in Canada things are relatively stable.

Whether you are thinking of selling or not, the best place to get information is from a local realtor.

Local realtors will know the actual details of whether the real estate market in your area is healthy. The best idea? Talk to a few of them, get a broad range of opinions that are specific for the area that your home or property is located in, and then make decisions from there. You can also speak to your mortgage broker about whether there are better rates available for you to keep your home.

Not everyone is doing badly in this market, and downturns represent opportunities for some

Will there be a real estate market correction? Maybe, only time will tell. In the meantime there are buyers out there who may be waiting for just the right moment to buy. There will always be buyers out there; even during the Great Depression, there were people ready with money for opportunities. Eventually there will be pent up demand for these buyers, and they will be ready, with enough information on hand, to purchase. This might be you, or you might be the person on the other end ready to sell.

The best thing you can do to make sure you are making the best decision is to stay calm, get as much LOCAL information as possible from experts and informed people like realtors, financial advisors etc…and then make a decision from there. Many banks are offering rate breaks, or interest only payments on mortgages. A mortgage professional may have ideas to help you buy – or hold onto your house at this time.

Remember: humans are very good at adapting, and in the long term whatever downturn we are facing will eventually turn around.

Is it harder to get a mortgage now – since COVID 19?

The short answer is YES.

To obtain a mortgage, underwriters review everything to do with the client’s financial picture; credit, income, down payment, net worth, debts and they also look closely at the property to ensure the collateral is suitable to lend on.

In today’s crazy world the main question mark for lenders is income. Are you still working? At what capacity? Has COVID affected your work or business and if so, what are the changes your employer or business is making to adjust?

Like everyone in the world we have all experienced change and the changes are ongoing. Is getting a mortgage harder? Yes BUT the mortgage market is still active and there is still lots of money out there to lend!

As a Mortgage Broker, I have access to many lenders and we can move your file around if needed to do our best to satisfy your needs. More now than ever, you need to use a Mortgage Broker! Please do not hesitate to contact me with any questions. I am here to assist and my services are free.

Don’t have a pension plan? Here’s how to build a real estate portfolio

General Melanie Ward 7 Nov

Jobs that include a payout with pension are becoming increasingly rare in Canada. Gone are the days of slowly working your way to the top of a company and retiring with a secure pension. Most Canadians will change their careers at 5-7 times in their lifetimes, and the mega trends of technology and economics means that entire fields can disappear in the matter of a few years. 

What does this mean? It means that many Canadians are relying on their basic CPP and RRSP savings to face their retirement years. Financial markets can be more risk than some people can stomach, so what is another option? Welcome to the world of real estate.

While it can seem daunting to save up the 5% for your first home, using your home equity can be a great way to build up the downpayment for your next home. Rather than selling your first home outright, use the trick that many real-estate agents and property developers know well to get ahead.

Here’s how to build your real estate portfolio for long term economic stability

In order to purchase an investment property you need a whopping 20% investment. However you only need 5% for your first home, and that’s more easily attainable for many people.

When purchasing and moving into your second home and renting out your first home, you can not only use the added rental income, you can achieve the down payment of less than 20%.

Here’s how.

  1. Purchase your first home with 5% down. If possible try to find something within a price range that does not max out your monthly budget.
  2. Start saving any extra amounts you can to put towards an eventual second down payment on a second property.
  3. When you develop some equity in your home (either through paying down the mortgage, or a rise in home values or both), use that in conjunction with your down payment savings as a purchase on another home
  4. When you purchase your next home, make that new home your primary residence so you won’t have to come up with the 20% for an investment property
  5. Rent out your old home, and move into the new one.
  6. Rinse and repeat! If you can manage doing this every five years, you could build a portfolio of 3-4 houses before retirement.

This is an age-old recipe that most real estate investors have used for years to get around the larger down payments. 

Things to keep in mind about real estate investment as a retirement portfolio strategy

  • While you are living in your home, any growth in it’s investment is tax-free. 
  • If you sell one of your investment properties you will have to pay capital gains.
  • You will also be expected to pay tax on any rental income for homes you are not living in.
  • If you want to be able to put as little as 5% down, you need to buy a property for $500,000 or less. Anything above that amount will be 5% of the first $500,000 of the purchase price, and 10% for the portion of the purchase price above $500,000 up to $999,000. For properties of 1 million or more, you will be expected to have 20% down.
  • Owning several properties means having more things that can go wrong. If you aren’t handy, or don’t enjoy home upkeep, then maybe this route isn’t for you. Or, you could choose lower upkeep places like apartments or condos instead of freestanding houses. 
  • If you don’t enjoy running rental properties, find a good property management company and build that into your budget.

Building a real estate portfolio is not for everyone, but it can be a great way to create retirement income if more traditional avenues are not available. 

First-Time Home Buyer Incentive? Read the Fine Print Before You Sign

General Melanie Ward 7 Oct

The First-Time Home Buyer Incentive (FTHBI) just rolled out on Sept 2 2019, and already Trudeau is promising to expand it if he gets re-elected. But while the FTHBI is promising to make home buying more affordable for young – or first time home owner – Canadians, just what is it exactly?

What is the First Time Home Buyer Incentive?

It’s a Canada Mortgage Housing Corp. (CMHC) -financed, shared-equity mortgage program. This means that, while you don’t have to pay a monthly amount on the loan, the government will share in the gains and losses of your home’s value as it fluctuates over time. The incentive offers 10% toward the down payment for a new home, and 5% for resale homes, interest-free.

Who qualifies for the FTHBI?

  • You have to be a first time home buyer
  • Your household income must be less than $120,000: including investments and rental income.
  • You have at least the minimum down payment, which is 5% of the first $500,000 of the home’s purchase price, and 10% for any amount above that. 
  • The total amount you put down (including the FTHBI amount) must be less than 20% of the home’s purchase price (this insures that all these loans are CMHC insured)
  • Your total mortgage must be less than 4x  your qualifying income. Since the maximum qualifying income is $120,000, that means the largest amount any qualifier can  borrow is $480,000 — including the mortgage, mortgage insurance and the FTHBI amount. Considering the median range for houses in Canada recently topped 480,000 that keeps most houses still out of reach for first time buyers.

Is it really interest free?

Well, technically yes. It’s designed to “help first-time homebuyers without adding to their financial burdens”.You won’t pay any interest for the duration of the loan, and could potentially save $1-300 per month on mortgage payments on new and resale houses in the  $500,000 range, or about $25,000 or $50,000 respectively. However, there is a catch. When you sell the home, or after 25 years, you will be expected to pay back the loan….but…and here’s where things get complicated…not the dollar amount. 

What will I be expected to pay back?

Instead of paying back the dollar amount on the loan, the CMHC wants a profit share on the percentage that they loaned you for the house – either 5% or 10% depending on what they loaned you. That profit share will be based on the “fair market value” of your home at the time that you sell.

What does this mean? 

Well, if you own your house for 25 years, and real estate continues to climb the same way it has been, your 450,000 home could easily balloon to over a million dollars. If you make any renovations that improved your investment, then that could add to the cost. That initial loan of $25,000-$50,000 could suddenly be over $100,000. That might be ok if you’ve prepared for that, but what if you are entering retirement? 

Even if you sell before then, and your property has gone up, you might be in for some shock after your legal fees, closing fees etc…by the time you’ve closed your deal. 

So is it a bad deal?

Incentives are never a bad deal, but it’s important to go into this one with your eyes open, and be prepared with the number the government is going to take at whatever point you sell your home. If you are keeping your home, definitely include putting aside this money in your financial planning so it’s not a shock later on. 

My advice to buyers is to look at ALL the factors involved. If I was the government, I would have to say, what’s in it for me?  If we are going to lend out money, how can it benefit and serve both parties? Well, I guess this was their answer. 

I personally would not want to have to pay the government any more than they already take, but if I needed to take this route, because it was my only way to get the funds together to get into the market, then I would go for it. I think it is much better option than not getting in to the ever-growing real-estate market.   

 I would rather pay back a higher interest loan and own my property outright.  I’d probably pay less in the long run on a higher interest rate than lawyer fees, not to mention 5-10% of the sale proceeds.  

I think it’s always worth finding the exact rates and terms, and crunch real numbers. Mortgage professionals like myself ask all the questions to ensure you are educated and aware of your options. The FTHB may be for you, or there may be better options.  

 

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