Get up to speed on mortgage basics before buying a home

When you’re starting your home buying journey, it can be hard to know where to begin. For one thing, mortgages aren’t always easy to understand, especially with regulatory changes over the past two years. If you’re looking to buy a home, it’s important to get up to speed on these rules so you can select the right mortgage for you. To help you understand these changes, let’s look at some of the basic requirements for buying a home.

The mortgage basics

Down payment requirements

Home down payments are usually expressed in percentages. They’re calculated by dividing the dollar value of the down payment by the home price. In Canada, the minimum down payment depends on the purchase price of the home:

  • Purchase price of less than $500,000 needs a 5% minimum down payment
  • Purchase price of $500,000 – $999,999 needs a 5% minimum down payment on the first $500,000, and 10% on any amount over $500,000

If you make a down payment of at least 20% of the purchase price, you’ll hold a conventional or low-ratio mortgage. Mortgage Terms & RulesIf you put down less than 20%, your mortgage is considered a high-ratio mortgage. By law, high-ratio mortgages require you to buy mortgage default insurance.

Mortgage default insurance

This type of insurance protects mortgage lenders if homeowners can’t pay their mortgage. Your mortgage lender can arrange a default insurance policy through Canada Mortgage and Housing Corporation (CMHC), Genworth Canada or Canada Guaranty. In most cases, the additional cost is factored into your mortgage payment.

Financial stability requirements

Your lender will use two ratios – gross debt service (GDS) and total debt service (TDS) – to assess your ability to make monthly payments. These are used to determine how much you can spend on housing without risking your financial stability.

  • Gross debt service is an estimate of the maximum home-related expenses you can afford each month, including mortgage payments, electricity and gas costs, property taxes and condo fees. While an acceptable number varies between lenders and the type of mortgage you hold, your monthly housing costs should be less than 30% of your gross monthly income for a non-insured, conventional mortgage.
  • Total debt service is an estimate of the maximum debt load you can afford each month. In addition to your home-related expenses, this number includes things like car loan payments, credit cards and other loan expenses. This number also varies between lenders, but in general, your monthly debt obligations shouldn’t be more than 40% of your total monthly income for a non-insured, conventional mortgage.

Regardless of where you are in your home buying journey, brushing up on mortgage basics and the current rules is a good place to start when thinking about your next move.

Recent changes to borrowing

Changes to mortgage default insurance

What is it? In October 2016, the Department of Finance implemented new stress-testing requirements for all mortgages that need mortgage default insurance. In other words, if you need mortgage default insurance, you’ll have to be able to afford a higher mortgage rate than the promotional rate for the term you selected. This helps ensure Canadians aren’t taking on bigger mortgages than they can afford.

Who’s it for? Homebuyers applying for a high-ratio mortgage that requires mortgage default insurance, or where low-ratio mortgage insurance is required.

How does it affect me? All homebuyers applying for mortgage default insurance (high- or low-ratio) must qualify at the greater of their lender’s standard rate 5-year mortgage rate and the Bank of Canada’s 5-year conventional mortgage rate, regardless of the term chosen. For an insured mortgage, the GDS can’t exceed 39% and the TDS can’t be more than 44%.

How much mortgage default insurance costs

What is it? From time to time, Canada Mortgage and Housing Corporation (CMHC) changes the cost of insurance. Under new guidelines, CMHC increased the cost on March 17, 2017.

Who’s it for? Homebuyers applying for a high-ratio mortgage that requires mortgage default insurance, or where low-ratio mortgage insurance is required.

How does it affect me? The cost of mortgage default insurance is based on the loan-to-value (LTV) ratio of the mortgage you’re applying for – it’s calculated by dividing the size of the loan you’ll need by the purchase price of the home. The higher the LTV ratio, the more insurance will cost. The cost depends on the LTV ratio. For current rates, refer to the CMHC website.

With housing price fluctuations and changing mortgage rules, it can be overwhelming to navigate the housing market. If you need a little help to get started, I can assess your financial security plan to make sure you’re on track towards your home ownership goals.

I can also put you in touch with a mortgage planning specialist who can guide you through each step of the mortgage process. Regardless of where you are in your home buying journey, brushing up on mortgage basics and current rules is a good place to start when thinking about your next move.

Did your lender talk to you about Mortgage Insurance?

Protect what matters most, not just your house

When you buy a home, you need a way to help protect yourself and your family financially, no matter what happens.

Your bank/lending institution probably talked to you about mortgage insurance (also called creditor insurance) when you bought your house. It means if you die, your mortgage is paid off.

Mortgage Insurance vs. Individual Life Insurance:

But is mortgage insurance the best option for you?

If you want to protect more than just your home, individual insurance may better suit your needs. Individual insurance generally provides more control, options and benefits to help you financially protect what matters most.

By comparing mortgage and individual life insurance, you ensure you’re giving yourself and your family the type of insurance protection that meets your needs.

I’m a trusted professional who can help you build a financial security plan to help protect your mortgage and what matters most in your life.

A stronger, better you: Why it’s important to look after your financial health

We all know how important it is to take care of our physical health – it keeps us strong and helps ensure we’ll be around for years to come. But what about looking after our financial health? It’s just as important but often doesn’t receive the attention it deserves.

Even if it seems like you don’t have enough money to invest or buy insurance, it doesn’t take much. If you cut down on extra lattes or meals out, you could set yourself up with a plan for a successful financial future.

Build your personal road map

When it comes to financial security planning, it pays to start small. If you change your spending habits, even just a little bit, the long-term results could be big.

For example, let’s say you made your morning coffee at home instead of picking it up on the way to work. It may not seem like much but the amount you save could be enough for a $500,000 life insurance policy.1

If you cut down on your dining-out expenses by even $20 a week and invested that money, it could grow to almost $37,000 over a 20-year period.2

No matter what you’re saving for, you’re on the road to achieve your future goals.

Other savings ideas:

  • Leave the car at home, carpool, use public transit or ride your bike
  • Shop around for better auto and home insurance rates
  • Install LED light bulbs to reduce energy costs
  • Go to the movies on “cheap Tuesdays”
  • Clip coupons for groceries or buy in bulk
  • Cook at home instead of dining out

With those savings each month, you could:

Invest and watch it grow

A small but regular contribution into something like a tax-free savings account (TFSA) or registered retirement savings plan (RRSP) could grow substantially, if it’s invested wisely and given enough time to grow. Use this money to help fund your retirement or perhaps go on the dream vacation you’ve always wanted.

Protect your family

What would your family do if something happened to you? Insurance is a flexible and cost-effective way to protect yourself and your loved ones financially. It can help pay down your mortgage, cover outstanding debt or fund education or retirement plans.

How we can help

Spending money feels good, but knowing you’re not only protecting yourself and loved ones – but unlocking future potential – feels even better.

I can help you build a customized financial security plan to help you achieve your goals.

1Cost of coffee based on $1.70 per cup. Assumes 30 cups a month. This comparison is based on London Life term 10 life insurance, male and female, up to age 45, non-smokers, standard risk, monthly premium payments. Monthly premium depends on your age, amount of coverage and general health information. Life insurance coverage amounts represent the policy’s death benefit. Rates as of December 2015. Term 10 life insurance premiums increase on renewal after 10 years. The example provided is not complete without the London Life illustration, including the cover page, reduced example and product features pages all having the same date. Read each page carefully as they contain important information about the policy.

2Assumes $80 is invested in a balanced mutual fund portfolio on a monthly basis with a six per cent annual rate of return. Rates of return are hypothetical and provided for illustrative purposes only. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated. Unit values and investment returns will fluctuate.

Mortgage Insurance vs Personal Life Insurance

You’re finalizing your mortgage – a huge commitment that comes with a great deal of responsibility. It’s natural to be concerned that your family might lose their home if the income earner was no longer around to make the payments.

You have a couple of options, both involving affordable monthly payments. Lending institutions offer you mortgage insurance – also called creditor insurance – at the time you sign the mortgage. The other route is personal life insurance that you can buy through me.

  • It’s important to research the differences between mortgage insurance and personal life insurance.

Mortgage insurance is convenient. You can apply for insurance coverage at the same time you’re getting your mortgage. This insurance is used to cover the outstanding mortgage balance if you die. You can also include your spouse in the coverage.

Mortgage Life Insurance

However, it’s important to research the differences between mortgage insurance and personal life insurance to help ensure you’re giving yourself and your family the type of insurance protection that meets your needs.

You do have to qualify for personal life insurance, a process that may include verification that you and your spouse are in good health. Once you start paying the premiums, you’re covered for the term of the policy, with automatic renewals. And as long as premiums are paid as required, only you can cancel the policy.

The benefit payout

With mortgage insurance, your creditor is the named beneficiary and the proceeds are paid to the creditor, not your family. If you or your spouse dies, the outstanding amount is paid off. As the mortgage is paid down the benefit coverage decreases.

Personal life insurance allows you to choose your beneficiaries. And the lump-sum benefit payment is paid tax free on the death of the life insured even if the mortgage is paid off. This type of coverage provides added financial security beyond just the mortgage.

Monthly premiums

With mortgage insurance, the coverage decreases each month until the entire principal is paid off and the premiums stay the same. With personal life insurance, your coverage doesn’t decrease as the mortgage is paid down and you can choose a plan that will keep the premium you pay level for 10, 20 years or for your lifetime.

Flexibility

Generally, most lending institutions offer non-convertible term life insurance where the lending institution owns the mortgage insurance policy. If you switch mortgage lenders, your policy is void. Given that you’ll be older than when you originally signed your mortgage or your health may have changed, the premiums with a new lender could be higher or you may not qualify for new coverage.

If you already have a personal life insurance policy in place and you buy a bigger home, you may want to consider increasing the coverage. One option may be to leave the existing policy in place and take out a second one to increase overall coverage for your family.

Take time to compare and carefully weigh both options. I can provide expert guidance.

We All Have a Credit Score – What’s it Mean?

We all have a credit score – a number between 300 and 900 used by potential lenders, employers, landlords, and in some provinces insurance companies – to help judge our financial reliability. Yet, few Canadians know their credit number, or even understand how this rating is created and how their actions can change the score.

Unless you live in a mortgage-free cave with no Internet, two companies – Equifax Canada and TransUnion Canada – are tracking your every credit movement. Banks, utilities, former landlords and anyone else who issues credit and loans feed these two agencies the information that forms your credit history.

You typically need to provide consent for someone to see your report – check the small print in that lease application.

A good credit rating will not only help you secure loans, it will also help lower the interest rates you’re charged. There are many ways to improve and even rebuild your credit score.

Credit Score

They know what about me?

Canadians should regularly contact both Equifax and TransUnion to get a copy of their credit report for free. The agencies may charge fees for expedited service and to get your actual score. Mistakes happen so this is the time to fix them. Plus, in the age of identity theft, credit reports will show you if anyone has applied for a loan under your name. If you find an error on your report, you can request a correction from the reporting agency and, if needed, from the lender directly. If you are not satisfied, you are entitled to add a brief “consumer statement” to offer your side of a story.

The report includes basic personal information, including date of birth, current and former addresses, social insurance number, driver’s licence number and current and past employers. The credit history information lists your loans, bank accounts, credit cards and any other form of credit, including telecom bills. Late payments, liens, bankruptcy judgments, debt sent to collection agencies and repossessions are all included.

Where does it all begin?

A credit card is usually the first step in a credit history. Student loans and mobile phone plans are also tracked. Just like posting an ill-advised YouTube video, missing payments on that first credit card can haunt people for years. Credit issuers take many other factors into consideration. However, having no credit record could raise a warning flag in some instances.

Tips to score well

  • Pay your bills on time, ideally in full but always the minimum.
  • If you cannot make a loan payment, work with the lender to find a solution.
  • Don’t max out your credit. Regularly going beyond half of your credit card and personal lines of credit limits suggests you may have a spending problem.
  • Avoid looking desperate – don’t apply for too many credit cards and loans. If you are shopping for a car loan or mortgage, do it all within a short period of time, so those inquiries into your credit history are lumped together.
  • Read all your banking and utilities statements very carefully.
  • Stability matters so keep credit accounts open – even if they’re not used much.
  • When applying for a big loan or mortgage, consider decreasing the credit limits on your credit cards. A lender will consider unused credit a liability.
  • 1According to Equifax, about 57 per cent of Canadians have an excellent credit score of 760-plus.

Rebuilding credit takes time

It can take time to turn your credit rating around, but it’s possible. Black marks take up to seven years to be removed from your credit history. Bankruptcies are also removed after seven years but judgments can be renewed for up to 10 years.

There are ways to start turning things around. For example:

  • Apply for a secured credit card. Give the bank, say, $1,000 and ask them to issue you a card with a $500 or $1,000 limit.
  • Ask a relative with a strong credit score to add you to their approved user list on their credit card.
  • Ask a relative to co-sign for your credit card or loan.
  • Close credit cards or lines of credit you’re no longer using so they’re not part of your credit history review.

The majority of Canadians have earned an excellent credit score. Understanding how this all works can serve you well when negotiating loans and can help you achieve your future goals.

Are You Ready to Dive into a Mortgage?

All homeowners dream of burning their mortgage papers after making that final payment. Smart planning and prudent decisions will help make that day arrive sooner than you’d think.

However, before plunging into the real estate market, you should estimate how much you can afford. There are many online tools that can help you do this.

Lenders want to make sure your total monthly housing costs – including mortgage payments, taxes and utilities – do not exceed one-third of your household’s total gross income and that your total debt load (including car loans) is not above 40 per cent of your household’s total gross income. All lenders have software programs that can compute how much they’re willing to lend and how much house they expect you can afford to purchase.

That first big payment

A big down payment could be a great way to reduce the size of a mortgage. But people who don’t have a lot of money saved – and don’t want to wait to build a larger down payment – can take on a high-ratio mortgage. Borrowers in Canada with less than a 20 per cent down payment must purchase mortgage insurance, which protects the lender in case of default. This could cost up to 3.35 per cent of the value of the mortgage and typically gets tacked onto the principal.

Options to consider when choosing a mortgage

It’s important to consider these topics when choosing a mortgage:

  • Fixed or variable interest rate
  • Amortization period
  • Length of term
  • Open or closed

The fixed-versus-variable-rate decision has long been debated. A few years ago, Moshe Milevsky, a professor at York University, authored a report which suggested prospective homeowners go with a variable interest rate mortgage.1 But since variable rates could go up any time, many borrowers opt for the more stable fixed-rate mortgage.

Today, the advantage of variable rates is uncertain. Yes, they remain below fixed ones, but the gap has become razor thin – to the point where potential savings may not justify the risk of variable rates climbing.

Risks not so variable

For small increases in the variable rate, the payment size may remain the same. The only difference would be an increase in the amount going to pay the interest portion. However, if rates increase significantly, even by 1.5 per cent, the lender may increase the payments.

Before deciding on a variable rate, make sure the lender explains all of the possible scenarios. Specifically, find out what interest rate changes will trigger higher payments. You may be able to include the option to lock into a fixed-rate mortgage at any time, but keep in mind that by then the longer-term rates may have changed.

Fortunately, you can use a mortgage calculator to easily determine the savings of going variable versus fixed. You may decide that the upside isn’t enough to forgo the certainty provided by a fixed-rate mortgage.

Mortgage

Coming to terms

Mortgage terms can range from six months to 10 years. Generally, the interest rate rises with the length of the term.

The advantages of an open mortgage

Fixed-rate mortgages are generally closed. They typically allow for yearly lump-sum prepayments up to 20 per cent of the original mortgage, depending on the lender – a very important detail you ought to confirm before signing. You may also be able to increase your regular payments, as much as doubling them – perfect for people with steadily rising incomes.

Paying off the mortgage all at once or breaking it up to get a better rate often triggers financial penalties. Some lenders do offer open mortgages, which allow borrowers to pay off some, or all, of the loan at any time. However, there’s a catch: the interest rate may be significantly higher.

If there’s a chance you’ll come into some money or sell the mortgaged home before the term expires, an open mortgage could make more sense. If you plan to move before the term expires, a portable mortgage (one that can be transferred to your next home) may also be an option worth considering.

  • Of all the variables to choose from, a shorter amortization period offers the fastest route to a mortgage-burning party.

Which should you choose: A long or short amortization period?

Of all the variables to choose from, a shorter amortization period offers the fastest route to a mortgage-burning party. By law, Canadians can negotiate a mortgage that extends to 25 years. Long amortization periods are popular, especially with first-time homebuyers, since they could lower the amount of each mortgage payment. However, those lower payments could come with a price – higher interest rate costs.

Anyone taking out a mortgage ought to become very familiar with a mortgage calculator. Try plugging in shorter amortization periods and compare the increase in payments with the drop in interest costs. The sweet spot is often around 20 years, where the increase in payments isn’t so big but the savings in interest costs could be significant.

Accelerated payments could help you pay off your mortgage faster

You can pick weekly, bi-weekly and monthly payments, depending on the lender. More frequent payments will mean you’ll pay less interest over the life of the mortgage with the same interest rate.

You can also opt for “accelerated” payments that shave time off your total amortization period. While giving your lender payments a few days earlier doesn’t save much interest, accelerated payments can increase the total payments you make each year­ ­– helping you pay off your mortgage faster.

If you value simplicity, increase your total annual payments but add them up and divide by 12 to compute the equivalent monthly payment.

It’s time to get started

Once you’ve decided to purchase a home, consult with me, I can show you how and why you should build your mortgage into your financial security plan.