When signing your mortgage commitment letter you will have to choose your payment frequency. If your goal is to re-pay your mortgage as quickly as possible, then you need to understand how different payment options will affect your repayment schedule.

So what are your options?

In general, most lenders will offer the borrower the option to decide which repayment schedule fits best with their lifestyle. The options include monthly, semi-monthly, bi-weekly, accelerated bi-weekly, weekly and accelerated weekly payments. Let’s use some simple math to determine which payment frequency will assist you in paying back your mortgage in the shortest time possible.

For the purposes of this exercise and to keep things simple, let’s use $100,000 as our mortgage amount. We’ll use a 5 year fixed rate at 2.54% with a 25 year amortization period and interest being compounded semi-annually.

As you can see from the table above, choosing to pay your mortgage more frequently doesn’t result in reducing your amortization schedule. The key to reducing your amortization is to make sure you choose an accelerated re-payment schedule.

We are going to focus on Accelerated bi-weekly vs. bi-weekly payments but the same principle can be applied to accelerated weekly payments as well.

Okay, we’ve just determined that accelerating your mortgage payments will reduce your amortization and the interest you pay. How does accelerated bi-weekly vs bi-weekly result in more principle being repaid?

It’s important to think of your payments as a stream of income for the mortgage lender. Mortgage payments are comprised of principal and interest payments. The interest is calculated based on your outstanding principal balance, meaning once the interest has been paid, the remainder of your payment is used towards paying down your principal balance.

By choosing an accelerated repayment schedule, the monthly payment is divided by 2 (bi-weekly) or by 4 (weekly). There are 52 weeks in a calendar year so if you make 26 bi-weekly payments, you are in effect paying your Lender the equivalent of 13 months of payments per year compared to 12 months payments with all non-accelerated repayment schedules.

This accelerated repayment of principal is what shortens your amortization.

13 monthly payments ÷ 26 = accelerated bi-weekly payment

Example: ($449.96 per month x 13 months) ÷ 26 = $224.98 accelerated bi-weekly payment

With a non-accelerated or regular payment plan, the Lender takes 12 months worth of payments and divides this by either 26 or 52 to come up with the bi-weekly (or weekly) payment. With this adjusted payment, the Lender still receives a stream of income of 12 monthly payments per year, so there is no additional principal available to accelerate the amortization.

12 monthly payments ÷ 26 = regular bi-weekly payment

Example: ($449.96 per month x 12 months) ÷ 26 = $207.67 regular bi-weekly payment

So now you know why choosing accelerated bi-weekly vs. bi-weekly payments results in 1 extra month of payments per year, which in turn shortens your amortization.

I always recommend this to anyone who can afford the increase in payment but I understand this option isn’t right for everyone. Another option to help shorten your amortization is to increase your payments, meaning more principal paid.

When you’re choosing your next mortgage, make sure you discuss payment options with your Dominion Lending Centres mortgage professional that align with your overall goals for repaying your mortgage.

1. How the penalties are calculated if I break my mortgage early? Specifically, ask what rate they use to calculate the “interest rate differential”. Typically, if the lender has “posted rates” they use these to calculate the penalty. If this is the case, the penalty can be 3, 4 or even 5 times higher than a mortgage lender that does not have posted rates and uses them in their early payout penalty calculation. This one question can save you thousands of dollars!

2. Is this a “collateral” mortgage? Some lenders have recently started putting all of their mortgages into what is called a “collateral” charge. In the right situation, given significant equity in the home, this product can be very useful and advantageous. The disadvantage to this product however, is that you cannot “switch” it to another lender at maturity. You have to actually discharge this type of mortgage and re-register a new one with a new lender which will cost on average $1000 for legal fees and appraisal costs. Beware of lenders who do this, especially if your mortgage is high ratio because it is only useful if you have more than 20% equity.

3. Can I “blend and extend” my mortgage if I buy another house? Most variable rate mortgages cannot be “blended” however, typically the penalty to break a variable is 3 months interest. Some lenders have changed their policies (very quietly) – instead of allowing you to add new money to a mortgage in the event of a new purchase, they require you to pay the full penalty. Some clients have been caught off guard by sneaky lenders who don’t tell them this until only a few days before close, at which time it’s too late to switch lenders.

4. What happens to my life insurance if I switch lenders at the end of my term? This is a very commonly overlooked detail by those who take the insurance offered by their bank or lender. The challenge is that if you want to “switch” your mortgage to another lender at the end of your term, you have to re-apply for insurance. The downside to this is that you’ll be five years older, and if you have developed any health issues, you may not qualify for the insurance at all. Getting insurance that mortgage brokers offer stays in place for the whole time you have your mortgage, no matter who your mortgage lender is.

5. What happens at the end of the term (typically five years)? Will they offer you the best rate they offer their new clients, or will you have to negotiate for best rates at that time. Most banks know that clients likely won’t make the effort to negotiate the best rates. Working with an independent specialist will provide you with the most competitive rates, not only when you buy your home, but when it comes up for renewal. A qualified professional will make sure you have the best options available each time your mortgage comes due.

Courtesy of Brian Mill, AMP – DLC Neighbourhood 

Here is where you are currently sitting. You have successfully found your dream home. Negotiated like a true champion and kept your calm through the back and forth with the seller. Provided the endless supply of paperwork required by your lender to meet the financing condition. Set up all the things required for the big day, like scheduling the myriad of people to move your furniture, get your Internet set up and making sure your home is warm and toasty. Then you get a call from your mortgage specialist to the effect of “Houston, we have a problem.” Today we are going to look at the most common ways people unwittingly kill their mortgage approval and leave themselves in the lurch.

First thing to note is this, your financing approval is based on the information the lender was provided at the time of the application. Any, and I do mean any, changes to your financial picture are grounds for the cancellation of the approval. It’s actually in the commitment you have signed.

1. Employment – Not all employment is considered equal by the lender and insurers like CMHC. Self Employed, commissioned, part time, overtime, and bonus are all examples of income types where we must have a two year average to satisfy everyone involved, proving that you will have enough income to support the mortgage.

For example, Bob accepts a position with a new company after his financing condition is met. He has negotiated well and knows that the income will exceed what he made previously. The problem is that now Bob will be paid a base plus a bonus component where he was previously salaried. Until there is a 2 year history, the bonus income cannot be used and the mortgage approval is cancelled.

The other consideration is that most new employment comes with a probationary period which can be up to 1 year. Lenders will not use probationary employment which will likely lead to a cancellation as well.

A really important thing to note here is that lenders are calling at the time of approval and again just before funding to verify the employment information provided.

2. Debt – Again, the approval is based on the debt load you had on the day of the mortgage application. Any changes can cause a cancellation. The following are the most common:

* New vehicle – Often comes with a large monthly obligation

* Do not pay for 12 months – We know you are eager to fill your new home with furniture and that you don’t have to pay for 12 months, but this is a new debt obligation and the lenders have to include a payment for it

* Increase to credit card balances – this can change your affordability ratios too much

3. Down payment source – And yet again I reiterate that the approval is based on the initial information you have provided. You will be asked at the lawyer’s office to verify the source of the down payment and if it is different than what the lender has approved, then you may be in trouble. For example, there are lenders who will allow you to use a line of credit for the down payment. Not all of them do and even if yours is one of them then the lender is still obligated to inform the mortgage insurer and their investors of the change to the source. This leaves you at risk at the last minute of your mortgage being declined.

4. Credit – Even if you do not increase your debt load, you also need to make sure you keep your credit as strong as it was when you were approved. Make all payments on time. This includes cell phones. And be careful about allowing anyone to pull your credit. Too many inquires can be an indication of money troubles as you search for new credit facilities. You could see a substantial drop to your credit score which can…?? You know the answer, kill your mortgage approval.

There you have it. You are now fully aware that your mortgage approval is a delicate thing which requires proper care and keeping during that period between approval and funding. Make sure you take good care of yours. Have a great day everyone.

Courtesy of Pam Pikkert, AMP – DLC Regional Mortgage Group 

SHORT VERSION

• Emotion drives our real estate market, but should it go unchecked?
• There is no metric for emotion.
• Emotion does not always equal logic.
• Interest rates play a small role in Real Estate pricing.
• Foreign buyers play a small role in Real Estate pricing.
• Beware of ‘watercooler wisdom’
• Beware of media hype

I am the last person to call for more Government regulations generally speaking, but…

Would a mandatory seven day clause, much like the seven day rescission clause in new development contracts, be beneficial to the Vancouver and Toronto real estate markets?

Would such a fixed breathing period for inspection, appraisal, financing if required, not give far more clients a fair shake? Perhaps it might curtail frenzy of the moment bidding, and lower the blood pressure of many clients, Realtors, Brokers, and Underwriters alike.

LONG VERSION

More than a few clients have sat across from me over the years with their decades’ worth of market analysis logged into Excel spreadsheets, making the case for why the ‘market fundamentals’ make no sense, and in fact have not since 2002, 1992, 1982. Take your pick of the year.

These people have been locked in analysis paralysis.

No way they were going to pay $168,000 for a detached Port Coquitlam, BC house in 1995, $95,000 for a Gastown condo in 1997, or $455,000 for a home in Anmore, BC in 2004. All of those prices represented a point in the market where prices had risen to ‘unsustainable’ levels in too short a time.

The aforementioned $168,000.00 house was one my wife and I bought. We were cautioned against this aggressive move — after all the seller had paid just $42,000 for it eleven years earlier. Clearly a 400% gain in the market over 11 years represented a bubble about to pop. The seller was ‘cashing out’ at the top, and we were getting ‘suckered by the hype’.

Actually, the seller had recently divorced and was moving to be closer to her family. We were buyers why? We were engaged to be married, and what do you do once you fall in love and pair bond? You build (or buy) a nest of course.

Emotion drove the seller, emotion drove the buyers.

At this point in the story I usually look at the individual across from me and suggest that although their spreadsheets have always said not to buy, and likely always will, now there is a new variable in the mix — and this is why they are sitting across from me.

That new variable then usually smiles, reaches over and folds their new partner’s laptop closed, and makes it clear they will not be renting, the new variable wants the stability of ownership. Stability is often desired on the housing front when starting a new family. Again, more emotions driving the transaction.

So we review a plan for taking action, not a plan for sitting on the sidelines. Nobody has ever won in sport, business, or life by sitting on the sidelines.

In many cases the analytical person’s new partner had purchased one of the aforementioned condos years earlier, and their question is how to access the equity without selling in order to access down payment monies. They want to retain the original property as a long-term investment.

The analyst’s eyes bulge at the thought. Owning not one but two properties, in a market clearly about to collapse… at least according to their spreadsheet.

Disaster is imminent, it has been for decades… well at least on their spreadsheets – just not in reality.

In these instances two brains are better than one. They balance each other out into taking steps that, while perhaps lacking Spock-like analytical backing, are not exactly head-in-the-clouds either. The analyst is slow to adapt, calling the market crazy. Others are more able to quickly recognize that what seemed crazy yesterday is normal today, and what seems crazy today will feel normal to many tomorrow.

What is driving this new normal?

Quite simply, there are far more (emotional) people for whom there is no doubt they will buy at current market prices, than there are sellers willing to sell, even at current market prices.

Supply is short. (People are rightly afraid to sell and then not find something to buy)

Demand is high. (There is no shortage of prospective homeowners)

This will continue to be the story of Vancouver real estate for 2016, and many years beyond.

What might curtail todays emotional bidding wars and subject free offers, even just slightly?

Perhaps extending the mandatory 7 day rescission clause that exists on new builds to apply to all real estate contracts.

This is just a thought triggered in the brain of a Broker working 80hr weeks to keep up with a market full of highly stressed buyers, sellers, Realtors, and appraisers.

What do you think?

Courtesy of Dustan Woodhouse, AMP – DLC Canadian Mortgage Experts 

In Canada, Reverse Mortgages are often recommended to clients and customers who are of a certain age, have a home they want to stay living in, and are in need of cash for reasons such as emergencies, home renovations, improving their lifestyle and even to alleviate the stress of debt through debt consolidation. But in the Reverse Mortgage industry in Canada, people often question the product as to whether it makes sense for their situation. The truth is, not every client should get a Reverse Mortgage. At HomEquity Bank, the provider of CHIP Reverse Mortgages in Canada, clients are often asked the question “What is the purpose of your loan?” In other words, what do you need the money for? HomEquity Bank makes sure that a customer is well aware of the loan they are taking out and also that a Reverse Mortgage makes the most sense for their situation.

There can be situations where a Business Development Manager (BDM) meets with a client and after speaking with them, a reverse mortgage is not recommended. People often forget that Reverse Mortgages are a huge responsibility on a monetary standpoint and if it just doesn’t make sense for the customer, I would honestly tell them that I don’t recommend it. Recently, I met with a customer where a reverse mortgage didn’t make sense:

* Client is 65 years old, a recent widow, and owns a very nice $1.5M home in Oakville, ON

* Annual income of $34,000, $200,000 RSP, 4 children, 6 grandchildren

* She was approved for a $495,000 CHIP reverse mortgage based solely on her age & home value

* The purpose of the loan: “to lend to her son to support his failing restaurant business”

While it is nice to be able to help out your kids, does it really make sense to use a $495,000 reverse mortgage to “lend” to a family member and support a failing business? On one hand, the restaurant may need a capital injection and turn itself completely around (think Gordon Ramsey’s Kitchen Nightmares!). On the other hand, if it fails, how will the son repay the $495,000 that he’s borrowed? In this scenario, the mom is now stuck with a reverse mortgage that is eroding the equity in her home. Sure, future home appreciation may take care of the interest, but it’s not guaranteed to, especially if she downsizes during a down-turn in the housing market.

Any loan, line of credit, mortgage or reverse mortgage comes with risk. And the use of funds is critical to determine if borrowing money makes sense. In this case, it clearly did not. After advice from me, her financial planner and her lawyer, the mom decided not to lend her son the $495,000.

Mortgage professionals at Dominion Lending Centres are experienced and well trained to be able to decipher between a good or bad fit for a reverse mortgage – feel free to contact us anytime.

Courtesy of Roland Mackintosh, Business Development Manager with HomEquity Bank

When you are new to Canada and establishing credit, deciding on the best way to create a good credit history can be difficult.

You need a good credit rating in Canada if you are planning to rent or buy a home, buy a car or borrow money. By taking some important first steps to get your financial matters in order, you can establish a solid foundation for future credit worthiness.

The first steps when you are new to Canada and establishing credit are:

• Open a chequing and savings account with a local bank or credit union
• Get a cell phone through one of the local providers. Your payments on that account will report to the credit bureau.
• Apply for a secured credit card. Even if you start off with a limit of $500 you can always increase it at a later date. Pay some of your regular monthly bills (such as your cell phone or cable bill) through this credit card so you can start to show consistent repayment behaviour.
• Aim to establish a minimum of $2,000 credit limit with two credit cards or a loan and credit card. Lenders and the credit bureau consider two years of active credit use as a good foundation for credit worthiness.

I recommend you check your own credit report on an annual basis or within six months of making any major purchase. Visit www.Equifax.ca for more information.

For more information on establishing credit and managing your money visit www.mymoneycoach.ca.

Buyer Beware

There are many options available to people needing credit and some of them will get you into financial trouble if you are not careful. There are companies offering alternatives to credit cards. They often advertise online, by phone or flyers through the mail. They offer to provide loans that will help borrowers establish good credit. These programs all sound good until you look closely at the numbers. For more details, contact your local Dominion Lending Centres mortgage professional.

Courtesy of Pauliine Tonkin, AMP – DLC Innovative Mortgage Solutions 

Do you have a Mortgage Action Plan (MAP)? If not, it’s time to plan your road MAP to mortgage free living. Every lender provides options, but very few take advantage of them. These mortgage benefits are called PREPAYMENT OPTIONS. The three most common prepayment options are: adjust the frequency at which the payments are made (weekly, semi-monthly, bi-weekly, monthly and accelerated), increase the monthly payment amount (there is a maximum monthly percentage) and lump sum (or balloon, also a maximum percentage of the original mortgage balance) payment. Make sure you know how to utilize them to the fullest and what your maximum amounts are. Don’t feel obligated to maximize the prepayment options but at the very least make extra payments, your retirement savings will thank you later.

Only 32% of all mortgage borrowers exercise their contractual right to make significant efforts to accelerate repayment, including taking one or more of the following actions in the past year:

• 16% have voluntarily increased their monthly payments.
• 15% have made a lump sum (balloon payment) contribution to their mortgage.
• • 6% have adjust or increased their payment frequency.

  

  Monthly Increase Payment

  If choosing an accelerated bi-weekly repayment schedule does not work for your plan, then maybe you might be able to consider adding an extra principal payment to your regular monthly mortgage commitment. The graphic below illustrates how the principal amount is reduced when utilizing the monthly increase prepayment option. By adding $100 to your monthly mortgage you can save $10,729 in interest and reduce the life or the mortgage by 5.9 years.

  

  My Personal Scenario

  You are likely asking yourself right now, so what does Michael’s road MAP look like. Well, I’m happy to share that with you. My current lender allows me to increase my monthly payments by 15%, make a annual lump sum payment of 15% (of the original mortgage balance) and/or double up my contractual minimum monthly commitment. I have elected to exercise my contractual right to utilize the 15% monthly increase to the maximum. My monthly contractual payment is $2,074.98. By maximizing the 15% monthly increase my adjusted payment is $2,386.23 which is an extra $311.24 per month. If I had decided to only make the minimum monthly payments of $2,074.98 then the life of my mortgage would be 25 years remaining at the end of this current term (maturing July 2017). However, with the extra payment of $311.24 per month I’ve effectively reduced the life of my mortgage to (currently) 21 years 2 months, even less when it matures in 17 months. If I were to keep maintaining the same course of action as above for the entire life of the mortgage the revised amortization would be reduced from 30 years to 15 years 9 months saving me $114,827.94 in interest.

  Why not join the 32%ers elite club?! The contribution can be minimal and usually unnoticeable on a day-to-day basis, the pay-off is years sooner though. The power of making extra payments is overwhelming. Ask any mortgage professional at Dominion Lending Centres how to increase your equity position. Your bank account will thank us later.

It’s becoming increasingly apparent that a greater number of women are now taking the reigns when it comes to home purchases. There’s a growing trend among single women – and, more precisely, professional single women – who are becoming independent homeowners. While many of them may be putting off marriage, they’re not waiting around for Mr Right before taking the plunge into homeownership.

It’s believed that around 20% of homebuyers in North America are single women based on a 2011 report released by the US National Association of Realtors. Harvard University’s Joint Center for Housing Studies also released a report that said single women are buying in record numbers.

There’s no equivalent data for Canada, but an abundance of anecdotal information has led to the creation of shows like HGTV’s Buy Herself, which follows single women making their first real estate purchases.

Women are looking for ways to become financially independent, and investing in real estate and building equity for themselves are ways to invest in their future – building financial security.

Women are taking advantage of historically low interest rates and recognizing homeownership is often more affordable than renting.

Seeking expert advice

One of the amazing things about women looking to invest in real estate is that they’re getting more advice before they make the decision to enter the market. They’re seeking out mortgage experts and real estate agents, and building a plan for the perfect entry into the market. They’re making lists of areas in which they’re interested in purchasing, itemizing amenities they would need in their ideal neighbourhoods, ensuring they have all the facts around closing costs and fees associated with making the purchase, and securing a mortgage.

Buying a home is likely one of the largest purchases you’ll ever make in your lifetime, and can feel overwhelming. That’s why working with a professional mortgage agent, real estate agent, home inspector and so on is essential. You’ll be working with these professionals closely – possibly for months – so interactions should feel comfortable, and they should be knowledgeable and responsive even to the smallest question.

The more prepared you are, the smoother the experience will be so do a little research on your own over the Internet to get a good idea of what types of properties and areas are of interest to you. Make a list of questions to ask your mortgage agent or realtor – and keep it on hand so you can add to it as more questions arise.

Interest rates are the lowest they’ve been in history and they have nowhere to go but up. Industry professionals believe that as rates begin to rise, they’ll continue to rise for some time. There has never been a better time for women to make the decision to get into the real estate market to find the perfect place to call home and we here at Dominion Lending Centres can help!

Courtesy of Alim Charania, AMP – DLC Regional Mortgage Group 

Savings, market value and government guidelines are obvious obstacles but in my opinion, one topic that doesn’t get discussed in enough detail is consumer debt payments.

First a quick definition: Disposable income, is described as total personal income minus current income taxes. Essentially, your take-home-pay.

Here’s a “live” case study.

This consumer has $62,601 in non-mortgage debt or $0.86 for every dollar of disposable income. A model citizen by Canadian standards given StatCan’s most recent report reflected Canadians have $1.64 in debt for every dollar of disposable income.

The minimum payments currently required on this $62,000 debt is $1,878.03 per month. If this consumer chose to pay only the minimum payment requested on each monthly statement toward the repayment of this debt, it would take between 73 and 98 years to pay it all off. What will AMAZE you is by keeping unchanged the exact minimum payments required today, these debts could be totally paid in full between 39 and 50 months from now. Therefore, keeping the same payment every month from this point forward rather than paying the declining payment being requested on each statement is the key to paying the debt off faster. It’s remarkable to think you could pay it off this quickly given the average annual cost of borrowing of 16.794% which is actually even worse when annual credit card fees are added, making the effective annual cost of borrowing 21.054%. By the way, anybody getting this kind of return on your market investments at the moment? Hmmmm?

Now, watch this and take a deep breath. This same $1,878 per month would carry a mortgage principal of $410,513. Amazing buying capacity eh?…all tied up in a mere $62,600 in debt.

That’s right. If this consumer were debt free, it would be possible to save for a down payment with some simple strategies and a starter home (or condo more likely) is well within reach.

Now here’s a comparison for you.

Annual interest cost on this consumer’s debt is estimated at $8,975. Meanwhile the annual interest cost in the first year on a mortgage principal of $410,513 is $10,839. The difference is a mere $1,864 for the entire year. Wouldn’t you rather be a home owner paying interest on an appreciating asset?

Here’s my formula for eliminating the debt in this case study. My recommendations:

Stop using all cards, switch to cash only. Close all credit card accounts except two primary credit cards like a Visa or MasterCard. Write letters to all the other creditors requesting the accounts be closed and be sure to follow it up. Call the two credit card companies whose cards you are keeping and get them to give you their lowest rate available with no annual fee and no loyalty points. Nothing is for free! Use any savings remaining at the end of each month and apply it to the smallest debt owing until the debt is paid in full then use the freed up payment and apply it to the next smallest debt and so on.

There are a multitude of strategies that you can take here including paying highest interest debt off first, but I often find the former approach is usually more successful and you see the results faster. Every debt reduction plan should be designed specifically for the finances of the household and this is a good place to start.

The bottom line: don’t get distracted by the destructive effect of non-mortgage debt, get help to establish a plan with your mortgage broker and, as always…experience a strategy…not just a mortgage. We here at Dominion Lending Centres can help!

Courtesy of Mark Alltree, AMP – DLC Innovation Group 

In today’s economic climate of tighter credit requirements and increased unemployment rates taking their toll on some Canadians, there’s no doubt that many people may not fit into the traditional banks’ financing boxes as easily as they may have just a couple years ago.

Your best solution is to consult your Dominion Lending Centres mortgage professional to determine whether your situation can be quickly repaired or if you face a longer road to credit recovery. Either way, there are solutions to every problem.

Mortgage professionals who are experts in the credit repair niche can help credit challenged clients improve their situations via a number of routes. And if the situation is beyond the expertise of a mortgage professional, we can help you get in touch with other professionals, including credit counsellors and bankruptcy trustees.

If you have some equity built up in your home and still have a manageable credit score, for instance, you can often refinance your mortgage and use that money to pay off high-interest credit card debt. By clearing up this debt, you are freeing up more cash flow each month.

I can also offer you some top tips towards a quick credit score recovery – I’m here to help!

Courtesy of Marie-France Lavigne, AMP – DLC The Mortgage Source