Credit and Debt Management

As the credit system continues to evolve in Canada, consumers are getting increasingly confused with a greater variety of credit products from financial institutions.

In fact, the average Canadian gets more correspondence from financial institutions than they do from family and friends combined.

Just to complicate matters, institutions are granting credit to consumers at a pace never seen before.

The combination of increasingly sophisticated marketing techniques to consumers coupled with more and more available credit truly becomes too much temptation for many people to bear.

Consumer debt is a major crisis in North America. The concept of keeping up with the Jones has destroyed both people’s financial health and their personal lives. What I am here to tell you is that you do not need to fall into this trap!

What I am going to show you are some simple guidelines that will prevent you from becoming yet another consumer credit victim.

1. Control spending by knowing exactly where every dollar spent goes.

Tracking your spending habits in detail periodically will enlighten you in ways that you never considered. While doing this on a monthly basis is not realistic, try to do this in detail for at least one month a year.

2. Watch your liquidity closely.

Liquidity refers to you and your family’s ability to pay its short-term debt obligations. Watching what available funds you have to pay upcoming debt obligations is fundamental to avoiding credit problems.

3. Plan, plan, plan – live and die by a budget.

Develop a realistic budget and live by it always.

A good budget must have specific financial goals with a clearly defined time horizon.

Be sure to take into account all of your payments including loans, utilities, dry cleaning and etc. If you pay for it monthly it should be allocated in your budget.

Most financially successful people are excellent financial planners. They have investment plans, loan repayment plans, and a clear idea of how much time they need before they can purchase big-ticket consumer items. Also be sure to budget for some kind of treat on a periodic basis. Budgets without a treat allowance often result in failure.

While these rules seem fairly simple, they are a little like a diet- easy to start but tough to follow through.EHelH

Despite popular opinion, material items will not bring you happiness.

Always be an informed client.

For more information contact your Toronto Mortgage Broker at 416-920-9931

Shopping For the Right Mortgage

Unfortunately, many consumers do not spend enough time exploring the many options made available by lenders who are eager for their business.

Here are some options to consider.

Open and Closed Mortgages: An open mortgage is a mortgage which allows you to pay off as much of the principal amount of the loan at any time without a penalty.

A closed mortgage does not offer this benefit. However, a closed mortgage usually offers a lower interest rate than an open mortgage.

Fixed or Variable Rate: A fixed rate mortgage allows you to budget precisely for whatever term you select because the interest rate is fixed for a certain time period. The rate on a variable rate mortgage will fluctuate with the prime rate.

Prepayment Privileges: Prepayment Privileges allow you to pay your mortgage faster. By making a lump sum payment, you can greatly reduce the amount of interest you will pay over the life of the loan, thus saving you money. Typically, annual prepayment privileges are allowed for as much as 10 to 20 percent of the original amount borrowed.

Portability: This is an extremely important feature for long-term mortgages because a portable mortgage will eliminate the financial penalty involved when you break the mortgage prior to maturity.

This is often the case when you have sold your home and are purchasing another property. If you have a portable mortgage, you will be able to move the mortgage with you to your new property without a penalty.

Weekly or Bi-Weekly Payments: Your goal should be to pay off your mortgage as early as possible. Many consumers are astounded to learn that they will have paid thousands of dollars in interest if they only make the regular monthly payments as called for in the mortgage.

Along with taking advantage of your prepayment privileges, you should consider making weekly or bi-weekly payments instead of monthly payments. By doing this, you will end up making extra payments each year which will go towards reducing the principle portion of the debt. You could end up saving thousands of dollars in interest payments by doing this.

Prior to committing to book your mortgage with one lender, you should shop around.

Lenders are very eager for your business and mortgage brokers will be able to provide you with the information that you need in order to make an informed decision.

Aside from receiving a discount on the posted rates, lenders may offer you a variety of incentives to obtain your business. You should compare lenders and negotiate the best deal possible.

Choosing a mortgage is really no different than shopping for any other product on the market. You should spend as much time negotiating the terms of your mortgage as you do looking for your dream house.

What type of mortgage is best for you?

Bottom line:  Not all mortgages are the same and having the right mortgage for you can make your house feel more like a home – more comfortable and secure. 

Let’s assume that your immediate need is a home purchase, or even renewing a mortgage; How do you decide what type of mortgage is best for you? 

Here are a few questions to start with: 

1. How knowledgeable are you about mortgages?
2. What are your borrowing goals?  Or the ability to pay down your mortgage as fast as possible?
3. Do you think you can make extra payments against your mortgage each year?
4. Are you someone who almost never follows interest rates, follows them occasionally, or very closely?
5. Do you know the impact of an interest rate increase on your payments?
6. How would you cope with high payments?
7. How long do you plan to stay in your home?  Less than two years?  Three to five years? Longer?

Depending upon how you answer each of these questions determines which type of mortgage and term may be best suited for you.  If you have a reasonable level of knowledge and you have some awareness of interest rates and room in your cash flow to cope with increasing (or fluctuating) interest rates, then you may want to consider a short-term or variable-rate mortgage solution.

If you think you have a lower risk tolerance, in that you could have difficulty with increasing rates and if you expect to live in your home over the long term, then a longer-term fixed-rate mortgage might let you sleep better at night.

There is one way to get the advantage of a variable-rate mortgage with an interest rate that moves with prime rate, but without all the exposure to a potentially risk rate environment:  ask you lender if their variable rate mortgage has protection from rate spikes with a cap that sets a maximum interest rate you’ll pay.  This type of mortgage allows you to get a mortgage rate float with the prime rate, but which protects you from big interest-rate increases, and the resulting higher payments.

Whatever you do, don’t let rate alone determine which mortgage you choose.

It really is in your best interest to assess mortgage features against price.

Make sure you get good value.

Always be an informed client.

For more information contact your Toronto Mortgage Broker at 416-920-9931

Property Taxes and your new home.

It is best not to let the thrill of buying a new home be dampened by not considering the impact of property taxes on your purchase.

Start off on the right track by deciding which method of payment is right for you and for you budget.

You have the option of paying property taxes directly to the municipality or by having your financial institution pay them on you behalf.

When choosing option two, your bank collects funds from each mortgage payment and saves them in a special property tax account.  To cover the first tax bill, banks usually do what is called a tax hold-back from the initial mortgage advance.  The bank calculates what it thinks the first tax bill will be and holds those funds back at time of closing the mortgage.

When buying a newly constructed home things can be a little more complicated because property taxes may not have been assessed yet for the area.  You may at first pay taxes based only on the value of the land.  A municipal assessment may take up to three years at which time your taxes will be based on the value of land and home and you many find yourself owing back taxes! 

If land value alone generated a tax bill of just $800 but three years later land and home value generated taxes of $2,400, you will find your self owing back taxes of $3,200 (the difference between $800 and $2,400 for two consecutive years.)  Add the tax bill for the current year and your total bill three years into owning your new home could be $5,600.

It’s a good idea to research property taxes in the area to better prepare you for the bill once the formal tax assessment has been completed.

Always be an informed client.

For more information contact your Toronto Mortgage Broker at 416-920-9931

What is a foreclosure?

What is a foreclosure?

A Foreclosure is a legal action that a lender takes if a person stops paying back the mortgage. Foreclosure allows the lender to take possession of and sell the property, by first getting a court’s permission to do so, in an attempt to satisfy the amount still owing on the mortgage.

Lenders don’t want to foreclose if they don’t have to because it is expensive and takes a lot of time. A lender will probably not start to foreclose until two or three months after you stop paying. Normally, a lender will first send letters demanding payment. Then, if you don’t reply, the lender will usually start to foreclose.


If your property is being foreclosed on, there are a few things you can do:

1. First Get legal advice right away
2. Borrow the funds short-term through family or friends so that you can put the mortgage in good standing so that it allows you time to decide on your next steps.
3. Try to negotiate with your bank a repayment structure
4. Try to refinance your mortgage with the current lender or a different bank
5. Try to get a second mortgage or line of credit
6. Sell your home before the bank does

Be an informed client.

For more information contact your Toronto Mortgage Broker at 
416-920-9931 or visit www.eddiemac.ca for more information.

Buying a rental property? How the financing game has changed

Just four short years ago, you could buy an investment property with nothing down and get the best interest rates in the market.

That was then. Today, rental financing is night-and-day different. To mortgage a small (a one-to-four unit, non-owner occupied) rental property now, you need to plop down one-fifth of the purchase price. And even then, you don’t always get the lowest rate.

With a tipsy housing market and the credit crisis still fresh in memory, regulators and lenders are putting higher-risk borrowers under a microscope. That includes real estate investors.

As a result, it’s now trickier to qualify for a rental property mortgage – especially compared to the days before April 19, 2010. (That’s when federal legislation put an end to insured rental mortgages with less than 20 per cent down.)

So if you are considering a small rental property and need a mortgage soon, here are some things to remember.

You’ll need an ample down payment
If you buy a rental home that you won’t live in, almost every lender in Canada will want at least 20 per cent down. That’s $72,000 on the average $360,000 residential property.

And if you’re purchasing a condo or buying in a “higher-risk” city (like Vancouver), many lenders will want an additional 5 per cent.

Picking the right lender matters more than ever
If you want to be approved, your “total debt ratio” must fall within lender limits. At the risk of oversimplifying, your “total debt ratio” is generally your total monthly expenses divided by total monthly income from all sources, including rentals.

That sounds simple, but it’s not. A borrower’s ability to qualify often depends on how much of her rental income the lender recognizes.

You’d think that if a tenant pays you $1,000 a month, you could add that $1,000 to your income when qualifying for a mortgage. But in many cases, lenders will credit you with only 50 per cent of the rental income you receive, making it harder for you to qualify.

In all, there are four ways that lenders calculate your debt ratios, which are beyond the scope of this column. Suffice it to say, any competent mortgage adviser can point out lenders with borrower-friendly methods.

And there’s one last thing to keep in mind about debt ratios. Different lenders have different limits. Some lenders let you have a 42 per cent total debt ratio. Most others permit just 40 per cent. That extra 2 per cent can make a big difference , especially for folks with mortgages on multiple properties.

The moral here is that the lender you pick can have a major impact on your approval chances. If your qualifications aren’t perfect, you’ll need a lender that is open to some common sense underwriting exceptions, and those are getting harder to find.

Multiple rental properties = headaches
Many lenders prohibit you from owning and/or financing an unlimited number of rental properties.

Even if they don’t explicitly forbid it, the inability to count all your rental income in debt ratio calculations can make approvals challenging, and sometimes impossible. In fact, it often forces people with big rental portfolios to renew mortgages with their existing lender at unfavourable rates and terms.

So if you plan to finance a small rental empire, find a broker that has several clients with 10 or more rental properties. They’ll need that experience to help you know which lenders to use, and in what order.

The key to remember is that lenders with the best rates often have the tightest rules. If you want the best terms, you’ll want to use the more restrictive lenders early in your empire building and save the flexible ones for last. That ensures you don’t run out of competitive lenders when your portfolio gets big.

More paperwork
A few years ago, it was easier to use an appraiser’s estimate of a property’s rental income in lieu of a signed lease. Today, more and more lenders want to see a signed written lease or other proof of rental income.

It also helps to have two years’ tax returns available. That’s because using tax returns to show your net gain or loss on a property can make it easier to qualify, as opposed to using other standard debt service calculations.

The rate is often secondary
Rental mortgages are higher risk so many lenders now charge rate premiums.

Fortunately, you can still find lenders that extend their best rates on investment financing. The question is, do they offer the other features you need?

In keeping with supply and demand, the most flexible mortgages usually cost more. That’s especially true for investment property financing. Be prepared to pay a little extra if you need a lender that satisfies more than a few of these criteria:

• has highly flexible rental income rules
• allows you to carry a greater debt ratio
• lets you put a property in a company name for liability protection
• lets you finance more than four or five properties
• doesn’t impose a minimum net worth requirement
• allows 30– to 35-year amortizations to maximize your cash flow
• lets you prove rental income with “market rent” appraisals
• allows a gifted or borrowed down payment
• allows you to add a second mortgage
• will lend on large mortgages (e.g., $750,000+)
• has a low minimum credit score (e.g. 600 versus 650)
• allows rental income from suites that don’t conform with current municipal bylaws
• provides cash back (sometimes handy for improvements and closing costs)
• allows you to add a vendor take-back mortgage (this is where part of your purchase is financed by the property seller)
• offers a line of credit with your rental mortgage
• pays for your switching fees (this is far less common with rental mortgages than it is for regular mortgages)

Choose your broker carefully
If you want the best rental rate and most flexibility, an experienced no-fee broker is the way to go.

Rental financing is truly a specialization and probably only one in 10 mortgage professionals are actually proficient at it.

Rick Robertson, founder of the lender comparison firm Mortgage Mentor, says one way to screen brokers is to ask how many properties they’ve financed in the last year. If the number is less than 10 or 15, find a more experienced broker.

And Mr. Robertson adds, “Deal with a broker that uses a lot of lenders. Each lender has its own niche and no two lenders in Canada have the same rental policy.”

Robert McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at VERICO intelliMortgage, a mortgage brokerage. You can also follow him on twitter at @CdnMortgageNews.

Courtesy of: http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/buying-a-rental-property-how-the-financing-game-has-changed/article6137071/

What are your financial Steps to Take If You're Getting Divorced?

If you're facing the emotional turmoil of an upcoming divorce, part of your worry is revolving around your personal finances. Divorce will affect your personal finances badly but, hopefully only in the short term. There are financial steps you should take during your divorce to shield yourself as much as possible.

1. Separate Your Credit Card Debts
Any debt (no matter in whose name) is open to a fifty-fifty split until the divorce is signed.

2. Remove Your Name from Your Spouse' Cards
Before you destroy any credit cards your spouse may have given you, call the creditor and remove yourself from the account. If you don't, the bank will continue to report the debt on your credit report, even if you are only a co-signee. This will increase your debt-to-income ratio by unfairly penalizing you for the debt of your spouse. Your credit score plummets if your spouse is late on their credit card payments.

3. Close Joint Bank Accounts
Separate your bank accounts while the divorce process is going on. If you still live in the same home, keep a bank account open for household expenses only and establish auto debits with payees, to prevent your spouse from withdrawing funds for his or her own ends.

 4. Decide if you want to sell the matrimonial house or buy the other spouse out.
Get a certified appraiser, and not a real estate agent to give you a letter of opinion, of what your house is worth. Pay the cost of the appraisal and get 2 or more reports (one from each party) to get an honest appraised value of your house.

5. Plan for the Future
You are about to become a one-income household. This may increase or reduce your lifestyle. To deal with the upcoming change to your personal finances, make plans for lowering your car payment, mortgage and any other large fixed payments and discover new ways to maximize your money.
Become an informed client.