You Can Pay Your Mortgage Faster with “The Java Factor”
Great post by a fellow DLC Professional!
When you are searching for a mortgage, you shouldn’t only base your decision on rate. It is important to search for the “best mortgage”. A mortgage that not only provides the best interest rate, but also the one with the best terms and conditions. By understanding mortgage terms and what they mean in dollars and sense, you can save the most money and choose the term that is best suited to your specific needs.
With a closed term mortgage, you can’t pay off your mortgage before the end of the term without having to pay a penalty.
The pre-payments without penalty clause is one of the conditions that can save you a considerable amount of money in the long run. This clause allows you to make payments on the principal of your loan, or increase the amount of your periodic payments (monthly, bi-monthly, etc.) without a penalty. Each lender has different programs for pre-payments, they usually vary from 10% to 20%, i.e., you can pay any amount within the approved percentage of the original value of your mortgage or increase your periodic payments once a year without paying a penalty.
Many people don’t take advantage of this clause because it is generally difficult to save the extra money to make additional payments.
Here is an easy way to take advantage of this benefit – “The Java Factor”. This is something that is very easy to follow and can save you thousands of dollars by paying down your mortgage.
Usually everyone buys a cup of jo (coffee) or two during their work day. When you see the cost of a cup of coffee at Starbucks or any other establishment, you realize that maintaining this habit can be very costly.
Suppose that you spend at least $5 per day, 5 days a week in “coffee, donuts, chocolates, snacks, etc.”, this would amount to approximately $108 per month; if you apply them to your monthly mortgage payments, the savings can be considerable.
In a $100,000 mortgage at a rate of 3.39% and 25 years amortization, you would reduce the total payment of your mortgage by 5 years and 4 months with savings of $13,185 in interest. For this calculation, we considered that the interest rate did not change during the life of the mortgage.
This calculation would vary case by case but depending whether you have a pre-payment clause with your mortgage or not, it is important to emphasize that by making a small sacrifice you can have significant long-term savings.
So remember “The Java Factor” next time you are thinking of stopping by for a coffee on your way to work and take a cup of coffee brewed at home.
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.
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.
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.
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.
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.
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.
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.
U.S. Job Strength Vindicates Fed Rate Hike, But Canada Still Weak
Once again, the Canadian economy showed signs of struggle as the December jobs report showed gains only in Ontario, while jobs were flat or down in every other province. In marked contrast, payrolls in the U.S. rose more than projected as the unemployment rate remained at a low 5%. U.S. strength vindicated the Fed’s recent rate rise.
Canada added 22,800 jobs in December, rebounding from a loss of 36,00 in November, but the unemployment rate remained at 7.1%–posting a rise of 0.4 percentage points over the course of 2015. While today’s employment report surpassed expectations, most of the job gains were in part-time positions. December’s gains capped a rocky year for job growth as the natural resource sector shed thousands of jobs. Employment increased among people aged 55 and older last month and was little changed for the other demographic groups.
Provincially, Ontario was the lone province posting job gains, up 35,000, lowering the unemployment rate to 6.7%.The hard-hit resources sector took its toll again in Alberta, which lost 3,900 jobs and in Saskatchewan, where there were 4,600 fewer people working in December.
For 2015 as a whole, the fastest employment growth was in British Columbia, up 2.3% compared to just under 1% for the country as a whole. Despite this, the jobless rate in B.C. increased to 6.7% as more people looked for work. Job growth in Alberta was flat last year as declines in full-time jobs were offset by gains in part-time work, but the unemployment rate rose to 7%, its highest level in nearly six years. Employment declined in Newfoundland.
By sector, the biggest job losses last year were in natural resources–down 6.8%. Most of the decline was in Alberta, although there were smaller declines in Saskatchewan, Newfoundland and Nova Scotia. The service sector outperformed goods producers, led by employment in professional, scientific and technical services. There were also significant gains in health care and social assistance. Employment in manufacturing increased just over 2%–the first increase since 2012–mostly in British Columbia.
While the Canadian employment report in December surpassed Bay Street expectations, the underlying story is that the private sector remains weak, especially the energy and mining sectors. Given the recent global market rout and a deepening oil market slump, the Canadian economy is vulnerable to further weakness and Alberta, in particular, has yet to see the worst of it.
There is fresh pain for producers of the world’s cheapest crude as the Canadian heavy grade oil prices reached a record low, raising the prospect of more production coming offline. Northern Alberta’s vast oil sands hold the world’s third-largest crude reserves but carry some of the highest production costs globally — up to US$50 a barrel — because of the energy-intensive production process. The spot price for Western Canadian Select fell below US$20 a barrel earlier this week, its lowest level since tracking began in 2008, according to Bloomberg. The decline was precipitated by the report of a surge in U.S. gasoline inventories to its highest level in 22 years and the climb in crude supplies at the American storage hub in Oklahoma to a record high.
Canadian oil producers are cushioned somewhat by the weak loonie, as they are paid in U.S. dollars and most of their costs are in loonies. Most Canadian companies will likely keep producing to pay bills and loans, even if the crude price does not cover cash operating costs.
We are likely to suffer continued weakness in the Canadian dollar and the underperformance of the Canadian stock market. Mortgage rates are rising and government actions to cool the housing market will also contribute to downward pressure on the economy. However, the weak loonie will help to spur exports and to attract foreign capital. Tourism will no doubt rise. The New York Times today deemed Toronto the top tourist destination for 2016. Government fiscal stimulus will help and cannot come too soon and Governor Poloz is ready to use unconventional monetary policy tools if needed.
The United States is leading the global economy as weakness in China, Russia, Brazil and other emerging economies is driving down commodity prices and stock markets. The U.S. December jobs report confirmed the strength in the economy as payroll growth surged, capping the second-best year for American workers since 1999. While U.S. employers continue to add to the head count, wages have yet to show a sustainable pickup.
Hence, monetary policy will continue to diverge in Canada and the U.S.
Want a few do-it-yourself home projects that you can accomplish that add value to your home? Check out this list of 10 affordable home improvement projects from Cupolasnmore.com.
That Oh So Important Financing Condition
There you are, sitting down with your realtor and preparing an offer to purchase for that amazing home that you just looked at this afternoon. You get to the point in the conversation with your realtor about the need for a financing condition and you’re trying to remember what you talked about with your Mortgage Broker earlier in the week….were you approved? Pre-approved? Pre-qualified?
So here’s the thing, when it comes to placing an offer on a new property, the financing condition should always be there. The only reason for leaving the financing condition out of an offer is because you know that you could dip into your savings account right now and buy the house with cash if you had too.
If you cannot purchase the house with cash, then you really should have that pesky finance condition in the offer and here is why…
We know already that you’ve met with your Mortgage Broker, they have everything on file and they have told you that you’re pre-approved. It is important to understand that the pre-approval they issued is based on the information they have collected about you. However, they have no information about the house that you’re eventually going to purchase.
When your future lender reviews an application in full, there are two sides to your application. There’s you and then there’s the house. It’s important to note that the lender is investing in the whole package and at this point, no one knew what house you were going to buy. Your Mortgage Broker isn’t likely to receive any information on the specific property until you have an accepted offer. It is at that point when they will update your application and send in all of the details for a formal approval.
So you’re now wondering why all of this matters considering that during your pre-approval meeting your Mortgage Broker told you that you’re the perfect clients (great income, great credit, great down payment and just all around great people).
But what about the property? The lenders (and CMHC if you have less than 20% down) want to know that the same is true about the house you’re buying. Here are just a few questions that they are asking themselves about the house:
- Is it being purchased for fair market value?
- Is it located in a marketable neighborhood?
- Are there any major or obvious defects that could affect its value
- Is the house a previous grow op?
If something negative about the house comes back as part of the review, it could mean that the lender (or CMHC) could decline to finance the property. The financing condition gives you a way out of the agreement should something happen at this point. If you don’t have a financing condition, you could end up being legally tied to purchasing the home, with or without financing lined up. Definitely not a position you want to be in, so take the time to protect yourself by ensuring your offer to purchase includes a financing condition – and speak with us at Dominion Lending Centres.
Can’t qualify for a bank mortgage? How do private mortgages work?
There is almost ALWAYS a mortgage solution. New to Canada? Self Employed? Maybe a few credit glitches in your past? You just need to ask the right mortgage consultant. Not everyone can qualify for bank mortgages today. It doesn’t make you a bad person, it makes you a business savvy person getting the best mortgage for your situation! With the mortgage rules constantly changing, private or alternative mortgages are becoming the only way some people can refinance or buy.
Did you know that according to a Globe and Mail report “self-employed now represent about 15.6 per cent of all working Canadians”?
There is a misconception that alternative or private mortgages are only for bad people. Some folks call it “subprime”. Don’t let the word “subprime” scare you as our lending practices here in Canada are very strict and all federally regulated.
What is Private Mortgage Financing and who uses it?
Private mortgage financing can be an excellent alternative for those that are either:
1. Self-Employed and declare little or no income
2. Micro-condos that are less than 600sqft (banks generally won’t finance these)
3. Foreign investors
4. Non-residents of Canada
5. Credit Challenged
6. Owe CRA back taxes
7. Property Taxes that are in arrears
8. People going through a foreclosure
9. Construction financing and commercial loans
10. Equity takeouts for starting a business
11. Short term financing that has is open and no penalties
12. Don’t want to refinance their 1st bank mortgage as the penalties are to high.
13. Requiring funds up to $20 million dollars
Banks and many mortgage brokers don’t specialize in private financing. It’s vital to ensure these types of mortgage files are submitted and packaged differently than a traditional bank type mortgage (Also known as A financing).
If it’s submitted without care and due diligence, you may pay a higher rate and HEFTY fees!
When you are applying for a traditional mortgage (meaning you are a typical T4 employed client, good credit and saved down payment) the CLIENT is qualified based on the PERSON first, then the property.
When you apply for private financing, the PROPERTY is qualified for the mortgage first and then a few details about the client.
The property and location, location, location is what the lender is lending on. A property in a marketable area such as Vancouver Westside, North Vancouver and West Vancouver are PRIME marketable properties that private lenders like. The risk is lower, so they can offer better rates. Certainly properties anywhere in Canada are all options for private financing, even in small communities as well. Mortgages are also available for remediated, non-remediated and legal grow op properties as well.
What about the Rates?
Valuable and marketable properties can get financing with 15-20% down, but you can expect to pay 2-3% higher rates than if you have 25% down, as there is more risk taken by the lender. The rates for a 1st mortgage today (2015) are as low as 5.75% for a strong mortgage file to 10% for a less desirable property. 2nd mortgages can range 12-15%. The bonus of course, it is you can opt to pay “interest only” and it can be fully open so you don’t have to pay the penalty to break the mortgage.
I hear there are fees?
There are almost always fees for private mortgages. This is how the broker is paid for working on your deal. A traditional bank mortgage doesn’t have fees as the bank pays the broker. Fees depend on your broker. I have seen as low as $500 to as high as 5% of the amount you’re borrowing; the average is 1% (for example: $400k mortgage would have a $4,000 fee), so good to ask this upfront and ask a few brokers that SPECIALIZE in private financing.
Having an EXIT strategy
If you get short term (1-2 year) private financing, as your mortgage broker, I want to ensure we have an “exit strategy” plan in place it have to moved to a traditional low rate mortgage soon. This is especially true if the reason for the private financing is credit, income or back taxes. We will work together to ensure this plan happens and is followed through.
What might this look like?
You want to purchase a $500,000 home in Vancouver
You’re paying fees to CHMC or another insurer with less than 20% down, so let’s look at fees in this hypothetical scenario:
With a traditional mortgage:
Purchase: $500,000 home
Down payment: 15% down – $75,000
CMHC fee: $7650.00 (built into the mortgage)
Payments per month: $1979.30 based on 2.69%, 5 year fixed, 25 year amortization
and LOTS of personal and property documents required! Here you would need excellent credit, proof of income, good job, saved down payment and weeks to close the deal.
20% down or $100,000 down
$5,000 CMHC fee
Payments: $1852.81 per month.
Alternative mortgage, the simpler approach:
Purchase: $500,000 home
Down payment: 15% down – $75,000
Lender/broker fee: $8653.00 with 2% fee
Payments per month: $2271.51 per month, 6.5%, interest only, 25 year amortization.
20% down – $8,000 fee
Payments: $2679.30 per month, Interest Only payments.
Next to no personal documents required to qualify
These are just estimates and ideas, but you get the idea. You’re paying a fee…one way or another.
This is just a sample…and certainly not a black-and-white scenario. Traditional mortgages qualify on strict matrix type qualifying rules, where private mortgages allow us to “think outside the box” to get your mortgage approved at the best rate for the property you are buying or refinancing. It is KEY to work with a mortgage expert that specializes in private financing and has connections and a good relationship to lenders.
There are many private lenders and their rates, fees and what they will fund vary. Contact us a Dominion Lending Centres so we can help you problem solve and find a reasonable solution that your bank can’t offer you. It’s quick and not as costly as it may seem, if it meets your immediate needs.
October 21, just two days after the sweeping change brought in by the Federal Election, the Bank of Canada had their scheduled meeting and, as expected, once again determined to leave interest rates unchanged in an announcement that included language suggesting rates are going to remain stable through 2016 and into 2017. No kneejerk reactions for the level heads that dictate a large part of monetary policy. Good to see.
So what does the other news of the week mean for us and our mortgage?
The election results and subsequent media coverage have been more a story of Justin Trudeau the man, than the story of the sweeping win for the Liberal party. No doubt many home owners went to bed Monday Oct 19th wondering if, on collective spending promises exceeding ten billion dollars, they would be waking up to increased interest rates the very next day. Clearly, not so far.
One man, or even one political party, cannot claim complete responsibility for the steadily lower interest rates we have enjoyed over the past decade, which for most households has meant dollars in their pockets. Nor can one man or one political party be thought to have an immediate or even short-term impact on the economy such that interest rates rise by any significant amount in the immediate future.
Adjusting interest rates, along with the economy of Canada, is a bit more complicated process. It is contingent on many things which are well beyond the control of any one man, even one as calm, cool, and collected as Mr. Trudeau appears to be.
Maternity & Paternity Leave & Your Mortgage
Often the impending arrival of a new addition gives one pause to re-evaluate their current environment. We often decide that bigger cars and bigger living quarters are in order and ideally try to take care of these things prior to the big day, or very soon thereafter.
There are a few key points around mortgages and new additions.
- The monthly payment on a leased or financed car can have a limiting effect on mortgage qualifications. Housing first, vehicles second.
- Being on maternity or paternity leave while shopping for a home is not a showstopper. The key is a job letter that clearly defines a return to work date, i.e., you have a full-time income position to return to.
- Being on maternity or paternity leave, or even having a new car payment in your life will not affect your ability to renew your mortgage with your current lender, although it can make moving to a new lender more difficult.
Before adding a car payment, or before listing you current residence for sale, give us a call.
As always, I’m here to help!