Interest rates are only one of many features that should be looked at when you are applying for a mortgage. But all things being equal, the interest rate may be more important than you think.

I was reviewing mortgage options with a client and the only thing they were interested in was the mortgage rate. There was no concern about all the other conditions that could end up being quite costly and since I could only offer him what he considered a small reduction, the client said “the bank’s rate was only a little higher and I feel more comfortable leaving everything I have with my bank for such a small difference.” What was the difference? I will get to that in a minute.

The mortgage renewal form you get in the mail is another cautionary note. I have had clients send me a copy of their renewal form. So far, in every case the renewal rate was higher than what I was currently able to get them. The last one I saw was .25% higher than what I could offer.

ACCORDING TO A RECENT MARITZ/CAAMP SURVEY, CLIENTS WHO USED THE SERVICES OF A MORTGAGE BROKER BENEFITED WITH AN INTEREST RATE .045% LOWER THAN THOSE THAT DEALT DIRECTLY WITH THEIR LENDERS.

So what does this fraction of a percentage mean for you? Let’s look at a $500,000 mortgage at 2.64% compared to 2.84%. That is only .2% or, to look at it a different way, it is about $50 a month or $600 a year savings by taking the 2.64% mortgage.

Here are a few options to increase net worth.

1. You take the 2.64% rate and you invest the $600 a year into a growth mutual fund that averages 10%. Even though over the years, as your mortgage goes down, the savings may not be as great, you make up the difference and keep investing that $600 a year for the next 30 years. That is a small difference, but in 30 years it has added up to over $100,000 in your tax free savings account.

2. You take out the 2.84% and say I like my bank and I am comfortable with the bank making the extra money and increasing their bottom line off my mortgage.

3. With interest rates being so low, you could look at increasing your cash flow by stretching out your amortization and lowering your payment. Then you take the extra cash flow and invest it with your financial adviser in your tax free savings account.

4. If you have extra equity in your home and have not contributed to your Tax Free Savings Account, consider refinancing and topping up your TFSA. As of 2016, the accumulative amount you can contribute is $51,000 per person 19 years or old in BC. So that would be $102,000 per couple. Invest that $102,000 and get an 8% return, you end up with $698,544 tax free money after 25 years and you paid back the mortgage and interest payments. If rates stayed the same throughout the 25 years at 2.69%, the whole $139,906 would be paid back. So you make a tax free profit of $558,638 by freeing up some capital to invest. Your total cost is $37,906 in interest.

There are many details to a mortgage and the rate is just one of them. Any of us here at Dominion Lending Centres would be happy to review your future mortgage needs to make sure you are maximizing your mortgage to your benefit.

KEVIN BAY
Dominion Lending Centres – Accredited Mortgage Professional
https://dominionlending.ca/news/how-to-maximize-your-cash-flow-while-increasing-your-net-worth-by-having-a-mortgage-plan/

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.

PAULINE TONKIN
Dominion Lending Centres – Accredited Mortgage Professional
https://dominionlending.ca/news/new-to-canada-and-establishing-credit/ 

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!

Mark Alltree
Dominion Lending Centres – Accredited Mortgage Professional
https://dominionlending.ca/news/the-shocking-impact-of-consumer-debt-payments-and-how-to-overcome-this-significant-home-ownership-barrier/