10 Feb

Here’s what the new credit reporting says about you from @DLCCanadaInc’s Pauline Tonkin

General

Posted by: Rita Wagner

CreditScore

New credit reporting and what it says about you and your spending habits may make all the difference between you buying a home now or later.

When home buyers contact me to apply for a mortgage, I always review their credit report with them along with the rest of their application, before they start looking at homes with a Realtor. If there are any issues with the credit history we can determine the reason, the next course of action and how it will impact financing a purchase.

There is a lot of valuable information in a credit report which provides an overview for lenders about your ability to borrow money. Consistent late payments, collections and bankruptcy have the biggest impact on lowering your score. Running a high balance or over your limit on your credit cards will also drive your credit score down. Scores range from 300-900 and a difference in score by as little as 50 points says a lot to a lender about you as the borrower. For example, a score of 550-599 represents 21% of delinquencies while a score of 600-649 only 11%. Delinquency rates are defined as those who have late payments beyond 90 days. If your score falls from one bracket to the lower bracket with late payments or collections, the difference can affect the interest rate you can receive or, worse yet, if you can qualify for the mortgage amount you need.

The most recent software update for the credit bureau reporting system has added some features which could have a significant impact on reporting. The new reports, which were released in early 2015, show three credit scores and one overall score.

The first score ranks based on open credit and balance to limit ratio. So if you have lots of open credit and your balances are low or reasonable the score is higher. High balances or over limit on all credit cards will drop your score.

The second score ranks based on late payments and collections over $250. If your late payments are beyond 90 days, your score will drop dramatically.

The third score ranks based on the number of third party collections in the last 3 years and the oldest revolving credit. So if you have outstanding parking tickets or an unpaid gym membership that you forgot about — they will come back to haunt you.

These individual scores were created to show specific behaviour by a borrower and if the credit score is trending up or down. This can give the lender an indication of chronic issues with a potential borrower or if they are consistent with their credit usage.

With mortgage payments, lines of credit, auto loans, credit cards and even cell phone bills now reporting on the credit report, consumers have to be diligent with spending and paying bills on time.

I recommend to all my clients to keep your credit report clean — after all, it is your identity.

  • Establish at least two trade lines of a minimum of $2,000. One credit card and one personal line of credit for example.
  • Maintain lower balances (< 65%) on all lines of credit or credit cards.
  • Make payments a few days before they are due to ensure you are always on time
  • If you get a parking ticket, fight it and lose – pay the bill and don’t let it go to collection.
  • Look at your credit report annually and certainly 3-6 months before making any major purchase such as a car or home. To view your own credit report visit www.equifax.ca.
14 Jan

Have you done your Financial Check-up?

General

Posted by: Rita Wagner

Thanks to my DLC colleague Kristin Woolard, DLC National for this article.

Welcome to your free financial check-up, discussing 5 key factors to assist you in ensuring you are on the right track to a solid financial future.

Credit

Ensuring you are using credit wisely will pave the way to making sure you have options available to you if or when you need them. One thing we can all do is check our credit report on a regular basis – at least once each year – so you know where you stand and whether your credit score has been compromised in any way, especially through fraud. You can contact Equifax at 1-800-465-7166 or go to the website at www.equifax.ca for more information.

There are many people who believe that it is more responsible to not use credit at all but, in fact, if you don’t have any credit accounts reporting to the credit bureau, financial institutions have no way of knowing how responsible you are with credit and you will likely be turned down if you need a loan or credit card in the future.

Making payments on time is critical to maintaining a good credit score but also keeping your account balances below 75% of the maximum limit is another way of boosting your credit score. If you have multiple accounts, spreading the balances evenly among them using balance transfer methods can help to bring some accounts in line.

It’s wise to pay off your higher interest credit accounts first but that decision needs to be balanced with whether to pay down the higher-payment accounts.

Savings

The old adage, “10% of the money you earn should be tucked away into savings” is a good one. Although it may be difficult to be disciplined enough, if you “pay yourself” every month, the savings will start to build and you may find you don’t need to rely on credit to handle those unexpected expenses.

I personally have a monthly allotment that I transfer to my savings account the same day each month. I have a reminder in my phone to physically do the transfer and it is built into my budget as if it were another utility payment I have to make.

Taking advantage of a Tax Free Savings Account (TFSA) is a great way to earn higher interest on your savings as opposed to the low rate you are paid for a standard bank savings account. If your TFSA is managed by a Financial Planner you can see very good returns on your investments. Any money earned within your TFSA is tax-free and can be withdrawn at any time.

Retirement

Part of the savings picture is, of course, planning for retirement. If you can, work an RRSP contribution into your budget as soon as possible so you will be much further ahead when you want to put your feet up and enjoy.

I follow my Financial Planner’s recommendations when it comes to how much I contribute each year. As I am self-employed, the amount I contribute each year varies but I always make a contribution.

Contributing to an RRSP also gives you a tax break at the end of the year and you can use your tax return money to put towards paying down your mortgage or put it towards a vacation. Both of those are win-win scenarios.

Mortgage

Being the largest loan most Canadians will ever have, your mortgage deserves attention and regular check-ups. Choosing the right mortgage structure for you and taking advantage of today’s historically low rates, can put you on track to huge savings.

Take a look at your debt-structure. If you are making high monthly payments on high-interest loans and/or credit cards, you could easily restructure your circumstances by refinancing your credit accounts into your home. In most cases, this reduces the amount of interest you are paying overall and lowers your monthly payments. At the same time, if you take advantage of an accelerated payment structure (bi-weekly or weekly) and bump up your minimum required payment by the 15-25% that your institution allows, you can pay down your principal and be mortgage free much sooner!

In today’s mortgage climate, if you currently have a mortgage rate anywhere over 4% you should do yourself a favour and have me do a Free Mortgage Analysis for you so you can see apples to apples whether there are any financial advantages to breaking your existing mortgage for a better rate. When you can see the costs vs. benefits in black and white, the answer as to whether to refinance will be crystal clear.

Insurance

Making sure you have adequate insurance is essential in protecting yourself and your family in the event of a crisis or emergency. Whether it be home, health, life or disability insurance, it is always a good idea to review all of your insurance coverage at least once a year to make sure you are fully covered.

Mortgage insurance is a great idea but most clients benefit more from having independent mortgage insurance coverage as opposed to taking the insurance coverage offered by the institution that has your mortgage. The average Canadian makes a change to a mortgage every 38-42 months, you may have to re-apply for the same coverage at an older age and higher premiums. If your mortgage insurance is through a company that is independent of the bank, you would have the ability to keep the coverage and premium you initially had even if moving your mortgage to another institution at a better rate works better for you.

Another way to go is Term Life Insurance. Securing a policy that will cover all costs and pay out all obligations should anything happen to you will give your family peace of mind in the worst circumstance.

Critical Illness Insurance offers protection should you become affected by one of the approved conditions and is often paid in a lump sum amount once you have survived the specified waiting period. It gives you the assurance that the costs of a serious medical condition, as well as living expenses, will be covered.

Wrap Up

I recommend talking to your Dominion Lending Centres mortgage professional to make sure you make the best decision on all insurance needs.

I hope you have found some value in the information provided. As always, I recommend seeking out the experts and gaining knowledge before making any important decisions that will affect your future.

8 Oct

Interest Rates & Payment Increases: The Actual Math

General

Posted by: Rita Wagner

 For several years headlines have warned of ‘inevitable’ interest-rate hikes. But reality has seen interest rates drop steadily over the past several years, to new record lows. It is the opinion of most Brokers – the frontline workers – that any increases in interest rates will be small and they will be gradual.

A key component often lacking from stories about potential interest rate increases is the actual math or impact of said increases. So I offer for you a cheat sheet outlining what eventual increases would mean to you personally.

 

Are you in a variable rate mortgage?

If yes, the Bank of Canada meets eight times per year (with the next meeting scheduled on October 21st) in order to make a decision that will influence the prime interest rate on which variable rate mortgages are based. Very rarely does Prime move by more than 0.25%.

What 0.25% means to a variable rate mortgage:

Per $100,000 of mortgage money borrowed, a 0.25% interest rate increase for the typical mortgage holder would translate into a monthly payment increase of $13.00.

$13.00 per $100,000 of mortgage money.

Eventual increases are likely to come in 0.25% increments, gradually.

Tip of the day: Variable rate mortgage holders can utilize prepayment privileges to increase their payment by at least $13.00 per $100,000 owed each year. Every penny of the immediate increase will be going straight to principal owed and will in turn reduce the amount of interest on every future payment. More importantly, you’re getting out ahead of any future rate increases and your payment will already be increased.

Being one, two or three steps ahead makes sense, call your Broker about making a small increase today, to cushion you tomorrow.

Are you in a fixed rate mortgage?

On the upside, any immediate changes to interest rates will have no effect on your monthly payments or interest expense until your actual renewal date. Also on the upside, this gives you time to prepare for the potential of higher interest rates.

What 0.25% means to you will ultimately be much the same as the mathematics above. The risk is that instead of a slow, gradual rise, you may be in for a full 1% interest rate increase by the time your renewal rolls around. But that is OK, you have time on your side and your rate is fixed for now.

Key point; the mortgage balance you are renewing will be (in most cases significantly) lower than your original balance and thus the impact of an interest rate hike is that much less dramatic.

For example, a $300,000 mortgage on a 25 year amortization, taken at 2.59% today will have an ending balance five years from now of $254,373. (Increase or accelerate your payments and it will be lower still)

Renewing $254,373 at an interest rate 1% higher would increase the payment from $1,357.38 to $1,483.56.

Increasing your payment by 0.25% ($34.00 per month) each year would have you ahead of that curve.

Five years from now, odds are your household income will have risen by at least $126.18.

This is not to say an increase of 1% is not meaningful, but with five years to prepare, it need not be.

In the event that interest rates continue to defy journalists’ and various analysts’ expectations, as they have done for the past six years, and remain low – while you increase your payment incrementally each year, then come renewal, you will truly be sitting in a plum position. Your mortgage payment amplified the point that your effective amortization will have reduced by several years and your mortgage balance will be decreasing at a more rapid pace than any mortgage balance has in the past 50 years.

Call me and talk about ways to take advantage of 50 year record low interest rates.

19 Jun

Pre-approvals, more important and less concrete than ever

General

Posted by: Rita Wagner

Going through the pre-approval process is more important than ever to both you and your Realtor, but the actual term ‘pre-approval’ is potentially misleading.

You may be pre-approved for a certain mortgage amount; however there are still a number of variables that can enter the picture once an offer is accepted. That’s why it is imperative that one always include a clause in the offer along the lines of ‘subject to receiving and approving financing’. (There are variations to be discussed around the specific wording.)

Often clients are reluctant to write the initial offer on a property without feeling like they are 100% pre-approved.

An understandable desire. The risk, though, is that some may falsely believe that they have a guarantee of financing. They don’t.

A lender must review all related documents – not just those of the clients, but also those from the appraiser and the Realtor – as the property itself must meet certain standards and guidelines.

The pre-approval process should be considered a pre-screening – a first step only.

It does involve review and analysis of the client’s current credit report; it should also include a list for the client of all documents that will be required in the event that an offer is written and accepted. Clients should also come away from this initial process with a clear understanding of the maximum mortgage amount they qualify for, along with the various related costs involved in their specific real estate transaction. Equally important: with the completed application your broker is able to lock in rates for up to 120 days.

Why won’t a lender fully review and underwrite a pre-approval?

  • *Lenders do not have the staff resources to review ‘maybe’ applications – they have a hard enough time keeping up with ‘live’ transactions.
  • *The job you have today may well not be the job you have by the time you write your offer.
  • *If more than four weeks pass, all of the documents are out of date – by lender standards – and a fresh batch needs to be ordered and reviewed.
  • *The conversion rate of pre-approvals to ‘live transactions’ is less than 10%. 

It is this last point that makes it so difficult to get an underwriter to completely review a pre-approval application as a special exception.

The bottom line is that a client’s best bet for confidence is the educated and experienced opinion of the front-line individual with whom they are directly speaking – and that’s their Mortgage Broker. This individual will not be the same person who underwrites and formally approves the live transaction when the time comes.

This disconnect between intake of application and actual underwriting of a live file makes having a ‘subject to receiving and approving financing’ clause in the purchase sale agreement so very important.

Perhaps the most significant factor in undermining the solidity of a client’s preapproval is the relentless pace of change of lending guidelines and policies – changes implemented not only by the Federal Government but also by the lenders themselves. It is very easy to have a pre-approval for a certain mortgage amount rendered meaningless just a few days later through changes to internal underwriting guidelines. Often these changes arrive with no warning and existing pre-approvals are not grandfathered.

It is absolutely worthwhile going through the pre-approval process before writing offers, and in particular before listing your current property for sale or accepting offers. This will give you a good idea of your maximum mortgage amount as well as securing a rate for you. It is a worthwhile endeavour.

Just be aware that aside from the key advantage of catching small issues early and securing rates, a pre-approval is not a 100% guarantee of financing.

But the good thing is, I can help you with this process!

 

5 May

Test Drive a New Mortgage Payment Today

General

Posted by: Rita Wagner

In both rising markets and softer markets there will be many people contemplating making a move to a larger home and with that larger home often comes a larger mortgage. Last month’s newsletter offered technical tips to help prepare for the process of porting your mortgage to a new property, this month we will talk about preparing for a payment increase in advance.

We test drive cars before we buy, we try on clothes before we buy, we even sample wines or beers before we commit. Yet when it comes to taking on a mortgage payment, or increasing our mortgage size, and thus payment, few of us take the new monthly payment around the block. Instead, we are often so caught up on other aspects of the process that 30 days after moving in when that first payment is withdrawn, there can be a degree of post-closing payment shock.

Knowing your numbers in advance is one thing – living with the numbers in advance is another.

Here is a table for quick calculations of the possible increase in mortgage amount you may be considering:

Mortgage Amount            Monthly Payment

$10,000                                    $45.75

$25,000                                    $114.37

$50,000                                    $228.74

$100,000                                 $457.48

*Based on a 2.69% 5yr fixed rate amortised over 25yrs.

The key to this is not simply doing the math and knowing what your future payments will be for the next 25 years. The key is to actually increase your current mortgage (via your prepayment privleges) by the corresponding amount so that you are making that new payment for a few months prior to taking action. Alternatively, you might choose to withdraw an amount equal to the proposed increase from your account and stash it in a ‘safe‘ place like a savings account, an actual safe, or a parents care. The key is to start replicating that new payment and confirm you can live with it prior to actually taking it on.

15 Apr

Dominion Lending Centres Chief Economist Dr. Sherry Cooper Cautiously Optimistic After B of C Rate Policy Announcement

General

Posted by: Rita Wagner

April 15th 2015

Vancouver, BC – Following today’s Bank of Canada’s announcement that it will hold overnight rates steady at 0.75%, Dominion Lending Centres’ Chief Economist, Dr. Sherry Cooper, says the outlook is unclear for the Canadian economy and the prospects for a potential rebound in the second half of 2015 are still uncertain.

The Canadian economy has experienced a substantial slowdown in recent months due to drops in the price of oil, and Dr. Cooper expects that any changes to the nation’s economic performance will likely be a result of an improvement in non-energy sectors emanating from the weakness in the Canadian dollar.

“While March employment in Canada improved substantially, business investment remains disappointing,” added Dr. Cooper. “The Bank of Canada has suggested that we will see a transition towards positive growth in exports and capital spending by non-energy producers—both boosted by the depreciating Canadian dollar, but in the near-term, incoming data will likely confirm continued weakness in the manufacturing sector, particularly in autos, and only modest growth in retail sales.”

Dr. Cooper reiterated her confidence in the Bank of Canada’s monetary policy strategy for 2015, despite the current weakened status of the Canadian economy: “I am cautiously optimistic that the Bank has got it right, but I continue to believe that the risks are on the downside for the economy and inflation.  My forecast for Canadian growth this year is 1.5 percent–below the Bank’s 1.9 percent forecast. Much hinges on the U.S. economy.”

6 Apr

Moving House Means Moving Mortgage

General

Posted by: Rita Wagner

Do you have a mortgage on your existing home and you’re thinking of moving? There are some things you first need to consider..

The importance of accurate and detailed answers around questions of the portability of your existing mortgage is vital prior to taking the first step to listing your property in order to move to a new one. All too often a cursory phone call is made directly to the lender to inquire ‘is our mortgage portable’ and often the answer to that question is delivered in a simple ‘yes’. However there is more to this answer, and a detailed conversation with your Dominion Lending Centres Mortgage Broker is vital.

Although nearly all mortgages are portable, the key point often missing from the one word answer is that a borrower MUST re-qualify for that mortgage. It is treated like a brand new mortgage application and underwritten according to current lending guidelines. Guidelines which may have changed significantly since the original mortgage was approved.

A renewal is a simple process with limited paperwork required while porting a mortgage to a new property is essentially starting from square one. This said a conversation with your Dominion Lending Centres Mortgage Broker at renewal time is also prudent.

There are also variations around lender process which require greater clarity, few lenders will allow the porting of a variable rate discount, yet the prepayment penalty itself can still be recovered up to 12 months later in some instances. The key is that a mortgage of equal size or greater and an equal (net) rate or higher is registered. Should a mortgage of a lower size be taken then the penalty is pro-rated. There are many ways to avoid a penalty with the right assistance navigating policies.

Again this is where your Dominion Lending Centres Mortgage Broker can play an important role. Clarifying the widely varying polices around penalty recovery.

Thinking of selling your home? Your first call should be to your Dominion Lending Centres Mortgage Broker to confirm portability policies and potential strategies to minimize risk.

25 Mar

March Madness

General

Posted by: Rita Wagner

March Madness has begun. The annual spring real estate season is officially underway. The starting gun sounded with the latest round of posted mortgage rate cuts – in some cases to all time record lows.

But, of course, there is a catch. If you are shopping for a mortgage, you will have to take a very close look at the conditions attached to these deals. They can be very restrictive, designed more to tie you to the bank and build the bank’s market share, rather than offer a genuinely cheaper rate.

It has been noted by savvy market watchers that the new, posted rates are not really any lower than the unadvertised rates that have been out there recently.

The services of an independent mortgage broker can be very helpful as springtime temperatures rise and the market hype heats up. 

3 Mar

Are you making “Accelerated” Payments?

General

Posted by: Rita Wagner

DID YOU KNOW…

Most mortgage lenders offer you the option of increasing your regular payment by a certain percentage each year.  Many also allow for an automated lump sum payment in addition to your regular payment.  One consideration for adjusting your payment up – even slightly each year – is that at the end of the term if interest rates have risen, you will reduce or even eliminate any kind of payment shock come renewal time.  With the added bonus of the extra dollars having all gone straight to your mortgage balance in the meantime.

 

Over the past number of years banks have come up with a rather confusing set of payment frequency options that have left some mortgage clients a bit disappointed 5 years down the road.

Rather than the Amortization crushing ‘Accelerated bi-weekly’ plan which a quality Mortgage Broker will discuss with you, clients left to their own devices run the risk of opting for simply ‘bi-weekly’ payments.  Here is the math;

Let’s use a $100,000 mortgage amount (to make working out your own numbers simpler) with a 25 year amortization, a 2.74% interest rate and a 5 year term.

Monthly Payments: $460.01
Ending Balance 60 months later: $85,043.18

Now let’s calculate bi-weekly payments and the balance remaining at the end of the 5 year term.

Bi-Weekly Payments: $212.18
Ending balance 60 months later: $85,043.60

The balance is 42 cents higher.  This is because you did not effectively pay anything extra over the 60 months to the lender.  The sum of the annual payments is identical.  Now let’s insert the word ‘ACCELERATED’ (bi-weekly) into the equation.

Accelerated bi-weekly Payment: $230.00
Ending balance 60 months later: $82,563.13

Ah-ha, now you have a $2,480.47 lower balance, and you have paid $163.87 less interest over the 5 years.  Excellent!

How did this happen?  When one opts for ‘accelerated’ in the above scenario, the payment increases by $17.82 per payment, or $463.32 per year.  For a total of $2,316.60 in additional funds going straight to the mortgage balance.

The big picture is improved as well, as you have effectively lowered your amortization from 25 years to 22 years and 5 months.

Shaving 2.5 years off a 25 year mortgage might not seem huge, but in 22.5 years it surely will make you happy.  Imagine having $460.00 more per month (per $100,000 of mortgage balance) to play with for 2.5 years.

If you started with a $300,000 mortgage, then we are talking about $1380.02 per month X 30 which is a total of $41,400.60.  All from one word ‘accelerated’.