Have you considered refinancing to pay off debt?

With the high cost of holiday gift-buying and entertaining now behind you, this may be the perfect time to get the New Year off to a fresh start by refinancing your mortgage and freeing up some money to pay off that high-interest credit card debt.

By talking to mortgage professional, you may find that taking equity out of your home to pay off high-interest debt associated with credit card balances can put more money in your bank account each month.

And since interest rates are at a 40-year low, switching to a lower rate may save you a lot of money – possibly thousands of dollars per year.

There are penalties for paying your mortgage loan out prior to renewal, but these could be offset by the extra money you could acquire through a refinance.

With access to more money, you will be better able to manage your debt. Refinancing your first mortgage and taking some existing equity out could also enable you to make investments, go on vacation, do some renovations or even invest in your children’s education.

Keep in mind, however, that by refinancing you may extend the time it will take to pay off your mortgage. That said, there are many ways to pay down your mortgage sooner to save you thousands of dollars. Most mortgage products, for instance, include prepayment privileges that enable you to pay up to 20% of the principal (the true value of your mortgage minus the interest payments) per calendar year. This will also help reduce your amortization period (the length of your mortgage), which, in turn, saves you money.

If homeowners fail to take the time to thoroughly research their options through a mortgage professional and, instead, simply sign renewal offers received from their bank, credit union or other lender, they could end up paying thousands of dollars more per year in interest. Simply by shopping your mortgage with a qualified mortgage professional, you can access the banks as well as other lenders that you may not have considered, but which can often offer interest rate specials or other attractive terms.

In the current credit-crunched lending environment, now more than ever it’s important to take the time to contact a Dominion Lending Centres mortgage professional to find out your options.

By refinancing now and paying off your debt, you can put yourself and your family in a better financial position. It’s very important to not rack up your credit cards after refinancing, however, so set your goals and budgets, and stick to them!

Moving to Canada? Plan Ahead for Homeownership

If you have a job awaiting you on Canadian soil, it’s possible to also secure the purchase of a home if you plan ahead and connect with professionals before you even begin packing.

The main reason you’ll want to get in touch with the right professionals before you start to pack is to find out what important paperwork you’ll need to set aside to ensure smooth sailing through the home financing and purchasing processes.

Your first step should be to get in touch with an experienced mortgage professional. In doing so, you can set the home financing process in motion by securing a mortgage rate guarantee and pre-approval, and figuring out what supporting paperwork you need to provide to purchase a home in Canada.

The services of mortgage professionals are typically free – they are paid by lenders for bringing in new business. Mortgage professionals have access to multiple lenders – including banks, credit unions and trust companies – where they can compare products and rates, and find the ideal mortgage to meet your unique needs.

In most cases, Canadian mortgage lenders and insurers want to see employment letters that prove your offer of employment and salary in Canada. You must also have at least a 5% down payment for the home from your own resources – which means it has to be your own money, not borrowed or gifted. So, for instance, if you’re selling your home in another country and using some of the proceeds as a down payment on a home in Canada, you must be able to prove this.

Lenders and insurers also want to see that you have a solid credit history. Although requirements for this proof varies based on which insurer and lender your mortgage is funded through, your mortgage professional will be able to tell you exactly what documents you’ll need to provide. Often, an international credit bureau is sufficient to prove your credit history. If this is not available, you can also provide 12 months’ worth of bank statements, mortgage or rental payment receipts, utility or telephone bills, and so on. Again, there are several options from which to choose and your mortgage professional will be able to specifically tell you what a particular lender and insurer want to see.

You must also apply for landed immigrant status to get the ball rolling on securing your social insurance number (SIN), which is required before you begin working in Canada.

By securing mortgage financing prior to moving to Canada, all you have to do when you arrive is find a home. This will be an easier task when you already know exactly how much you can spend thanks to your pre-approval.

And since your mortgage professional can put you in touch with a trusted real estate agent prior to your move, you will also be able to research homes before you arrive in Canada. Again, real estate agents do not typically charge a fee to find you a home to purchase.

By planning ahead before making your move, you truly can save yourself a lot of hassle and stress when it comes to securing mortgage financing and purchasing a home.
And if you’re already living in Canada, many of the available New to Canada mortgage products apply to new immigrants who have been in the country for up to 36 months.

Paperwork to gather/set aside before packing:
•    Proof of employment and salary in Canada
•    Proof of at least 5% down payment from your own sources
•    Government proof of residency application
•    Copy of your immigration papers
•    Copy of your passport
•    Credit report
•    Mortgage or rental payment receipts for the past 12 months
•    Bank statements for the past 12 months
•    Utility and phone bill payments for the past 12 months

Is Your Mortgage Portable?

Selling your current home and moving into a new one can be stressful enough, let alone worrying about your current mortgage and whether you’re able to carry it over to your new home.

Porting enables you to move to another property without having to lose your existing interest rate, mortgage balance and term. And, better yet, the ability to port also saves you money by avoiding early discharge penalties.

It’s important to note, however, that not all mortgages are portable. When it comes to fixed-rate mortgage products, you usually have a portability option. Lenders often use a “blended” system where your current mortgage rate stays the same on the mortgage amount ported over to the new property and the new balance is calculated using the current interest rate.

With variable-rate mortgages, on the other hand, porting is usually not available. As such, upon breaking your existing mortgage, a three-month interest penalty will be charged. This charge – which can be a surprising $1,500-$4,000 penalty at closing – may or may not be reimbursed with your new mortgage.

Porting Conditions
While porting typically ensures no penalty will be charged when you sell your existing property and buy a new one, some conditions that may apply include:
•    Some lenders allow you to port your mortgage, but your sale and purchase have to happen on the same day. Other lenders offer a week to do this, some a month, and others up to three months.
•    Some lenders don’t allow a changed term or force you into a longer term as part of agreeing to port you mortgage.
•    Some lenders will, in fact, reimburse your entire penalty whether you are a fixed or variable borrower if you simply get a new mortgage with the same lender – replacing the one being discharged. Additionally, some lenders will even allow you to move into a brand new term of your choice and start fresh.
•    There are instances where it’s better to pay a penalty at the time of selling and get into a new term at a brand new rate that could save back your penalty over the course of the new term.

While this may sound like a complicated subject, your mortgage professional will be able to explain all of your options and help you select the right mortgage based on your own specific needs.

Mortgage options for the self-employed

If you’re self-employed, you may have a more difficult time obtaining financing for your real estate purchases than you encountered just 18 months ago thanks to the recent recession. And as of April 9th, 2010, Canada Mortgage and Housing Corporation (CMHC) raised the required down payment amount, as well as decreased the percentage at which you can refinance an existing mortgage if you’re self-employed.

To add to the confusion, there are also new rules for those who have been self-employed for more than three years.

Still, if you can prove your income, show you’re up-to-date on your taxes and you have solid credit, your chances of being approved for a mortgage are greatly improved.

There are essentially two types of self-employed or business-for-self (BFS) borrowers – those who can prove their income and those who cannot, and must instead use a stated-income mortgage product. But, if you have been self-employed for more than three years, you can no longer use a stated-income product.

By providing the required documentation, you’re much more likely to be approved for a mortgage if you qualify based on your income. The trouble is that if you cannot prove your income, you pose a higher risk in the eyes of lenders.

CMHC currently offers default mortgage insurance for people who have been self-employed less than three years through a stated-income mortgage product up to 90% loan to value (LTV) – meaning the down payment can be as low as 10% of the purchase price. But prior to April 9th, 2010, the maximum LTV for self-employed individuals was 95% for purchases – meaning the down payment would have only been 5% instead of the current 10%.

And if a BFS individual wishes to refinance an existing mortgage, the maximum loan amount was reduced to 85% from the previous 90% of the home’s value.

Regardless of the maximum LTV, however, the income amount you are stating has to make sense based on your occupation. This is important, because the chances of finding lenders to fund this type of deal are significantly boosted if the mortgage is insured.

Lenders and insurers are well aware of the tax write-offs that BFS borrowers can leverage, but these deals are accepted or declined based on average incomes for specific fields, as well as your credit rating. It pretty much goes without saying that those with credit blemishes will have a tough time obtaining mortgage financing if they’re self-employed.

Getting pre-approved
While BFS mortgage financing is viewed on a case-by-case basis, if you work with a licensed mortgage professional to obtain a pre-approval, you can be confident you have access to mortgage financing and you will know how much you can spend before you head out shopping for a property.

Mortgage brokers offer choice
The next time you’re looking for a mortgage for that new house or you’re up for renewal on your existing mortgage, think about using a mortgage broker – their services are free and they offer you an abundance of choices the banks simply can’t compete with.
 
Mortgage brokers have access to a vast array of lenders – up to 90+ institutions, including some of the big banks – which enables these professionals to negotiate the best possible mortgage products and rates on your behalf. In comparison, if you approach your bank with a mortgage request, they can only offer you a narrow choice – namely, their own products.
 
Mortgage brokers do their homework on available mortgage products and keep themselves abreast of any new products, or changes to existing products, to ensure they find the best mortgage to fit your specific needs.
 
Unlike the banks, mortgage brokers can also cater to self-employed borrowers as well as those who have suffered credit blemishes due to life experiences such as divorce or illness. Brokers will listen to your story, whereas the banks have a very narrow view of what fits into their financing box – and this is unnegotiable.

If you’re thinking of buying a home, Dominion Lending Centres mortgage professionals can find the best mortgage rate and term for your unique situation.
 
Top Reasons for Using a Broker:
1.    Choice – access to multiple financial institutions
2.    Costs – using a broker is free and they can negotiate lower rates for you
3.    Knowledge – brokers stay up-to-date on available products and services
4.    Flexibility – mortgage products are even available for the self-employed or those who have credit blemishes

Making Your Mortgage Interest Tax Deductible

For US homeowners, mortgage interest is automatically tax deductible. But for Canadians, the write-off is not so straightforward. In order to make your mortgage interest tax deductible, homeowners must be able to prove that the money is being reinvested and is not being used for personal expenses.

A properly structured mortgage-centric tax strategy has several key elements – the most important of which is a multi-component, readvanceable mortgage or line of credit.
 
It’s best to have a single collateral charge with at least two components – usually a fixed-term mortgage and an open line of credit – that can track and report interest independently. This is absolutely essential under Canada Revenue Agency (CRA) rules and guidelines.
 
Second, the strategy must employ conservative leverage-investment techniques – which is why a financial advisor must be involved in order to comply with federal regulations. The financial advisor should be a Certified Financial Planner (CFP) who is experienced in leveraged investing, and able to actively monitor a homeowner’s portfolio on an ongoing basis.

Homeowners who opt for a tax-deductible mortgage interest plan make their monthly or bimonthly mortgage payments the same way they would when making any type of mortgage payment. The payments go towards reducing the principal amount of the mortgage and are then moved over to the line of credit as the mortgage is paid down. But in order to be tax-deductible, the funds must then be transferred to an investment bank account, which can be done automatically by your CFP.

Once the money is in an investment bank account, it can be reinvested and the money becomes tax deductible. Essentially, the homeowner is borrowing from the paid portion of the mortgage for reinvestment purposes.

On average, a typical 25-year mortgage can become fully tax deductible in 22.5 years.

If you have a rental property, you can also use this tax-reduction strategy even further. When you receive your rent, you can then use the funds to help pay down your personal mortgage. Once paid, the rental funds move to the line of credit and are then transferred to the investment bank account. They are then used to pay down the mortgage on the rental property. Using this method, it is possible to have your mortgage interest become fully tax deductible in only 3.5 years.

The ideal client
Ideal borrowers for an advanced mortgage and tax strategy are typically professionals or other high-income earners who have a conventional mortgage (have at least 20% of the cost of the home to put towards a down payment) and have built up substantial equity.
 
As high-income earners, their total debt-servicing ratio will be quite low and they will have excellent credit (700+ Beacon scores). These borrowers are financially sophisticated homeowners that are keenly interested in establishing a secure financial future and comfortable retirement. They also have good investment knowledge.
 
The risks
The financial benefits of tax-deductible mortgage interest are indisputable and justify the risks to the right borrower. That said, a problem can arise if a homeowner spends the funds as opposed to reinvesting them. As well, any tax refunds have to flow through the investment cycle in order to realize the benefits of paying down the mortgage as quickly as possible – and making as much of the interest payment as possible tax deductible.

Short-term financial risk is liquidity risk (sometimes referred to as cash flow risk). Cash flow risk addresses the possibility that interest rates will sharply drive up the cost of borrowing at the same time as markets falter, resulting in a negative client monthly cash flow for a brief period of time.
 
This short-term risk is typically only prevalent in the first two to four years because, after this period of time, the homeowner has stockpiled enough equity through annual tax refunds that other liquidity options exist and the risk is fully mitigated.
 
Liquidity risk varies widely based on the balance sheet strength of the homeowner. Highly qualified homeowners are easy to manage as these borrowers have no difficulty meeting the short-term cash flow demand should the need arise.

Looking Beyond Mortgage Rates

It’s easy to get caught up in the idea that comparing mortgage rates will guarantee you get the best bang for your mortgage buck. While this may be true for particular situations, there are many scenarios where this strategy is not effective. Following are three reasons why it doesn’t always pay to make a decision based solely on rates.

Reason #1

Your long-term plan and risk tolerance should determine which mortgage product is right for you. This product may or may not have the lowest rate. 

For instance, there are cases where lenders will offer lower rates for insured mortgages. With insured mortgages, however, you’re charged an insurance premium, which is usually added to the mortgage amount. But if you’re not planning on keeping the property for a long enough time to offset that cost, it may be better to take an uninsured mortgage with a slightly higher rate. The cost difference you will pay with the higher interest rate may still be less than what you may pay in insurance premiums. 

As another example, if you prefer to budget for a consistent payment and can’t handle rate fluctuations, it may be better to go with a higher fixed-rate mortgage. If you think current rates are low enough and you will be living in your property for at least five years, it may be wise to also opt for a mortgage with a longer term.

Reason #2

One of the biggest mistakes people make when merely comparing mortgage rates is failing to consider important factors such as prepayment options to help pay off the mortgage faster, whether secondary financing options are allowed, early payout penalties, or what fees are involved. 

It’s not enough to simply compare mortgage rates because you have to know what “clauses” are contained within the mortgage deal. There may be cases where you will find a lender with the lowest rate and willing to pay for your closing costs, or even provide you with cash-backs after closing. 

Reason #3

Lenders can change their rates at any time. As such, if you’re shopping for rates with one lender and then approach another that gives you a lower rate, it’s quite possible that the first lender has also dropped its rates. This is why it’s important to get pre-approved with a lender once you a mortgage that fits your needs. In some cases, you can secure your rate and conditions for up to 120 days. 

These are just three reasons why it’s not enough to merely compare mortgage rates. The mortgage rate you may qualify for is also highly dependent on your credit score among other things. In order to get the best mortgage deals, you need to have solid credit.

Leasing or Buying a Vehicle Impacts Your Debt Ratios 

The question of whether it’s better to lease or buy a vehicle is a common dilemma. And do you buy or lease a new or used vehicle? The answer depends on the specifics of your situation. 

It’s important to realize that many consumers overburden themselves with car leases or loans they simply can’t afford. While most of us require a vehicle to get to and from many destinations throughout the course of any given week, we don’t need a high-end vehicle to serve this purpose. 

The key to remember when you’re looking to purchase a home and obtain a mortgage or refinance an existing mortgage is that, if you overspend on a vehicle, it affects your debt ratios and may restrict or negate your mortgage financing ability. 

Leases and purchase loans are simply two different methods of automobile financing. One finances the use of a vehicle while the other finances the purchase of a vehicle. Each has its own benefits and drawbacks. 

When making a lease-or-buy decision, you must, therefore, look at your financial abilities in terms of your debt ratios. And if you’re unsure about how leasing or purchasing a vehicle will affect your ratios, it’s best to speak to a Dominion Lending Centres Mortgage Professional prior to making your decision. 

When you buy, you pay for the entire cost of a vehicle, regardless of how many kilometres you drive. You typically make a down payment, pay sales taxes in cash or roll them into your loan, and pay an interest rate determined by your loan company based on your credit history. Later, you may decide to sell or trade the vehicle for its depreciated resale value. 

When you lease, you pay for only a portion of a vehicle’s cost, which is the part that you “use up” during the time you’re driving it. You have the option of not making a down payment, you pay sales tax only on your monthly payments, and you pay a financial rate, called a money factor, which is similar to the interest on a loan. You may also be required to pay fees and a security deposit. At lease-end, you may either return the vehicle or purchase it for its depreciated resale value. 

As an example, if you lease a $20,000 car that will have, say, an estimated resale value of $13,000 after 24  months, you pay for the $7,000 difference (this is called depreciation), plus finance charges and possible fees. 

When you buy, you pay the entire $20,000, plus finance charges and possible fees. This is fundamentally why leasing offers significantly lower monthly payments than buying. 

Lease payments are made up of two parts – a depreciation charge and a finance charge. The depreciation part of each monthly payment compensates the leasing company for the portion of the vehicle’s value that is lost during your lease. The finance part is interest on the money the lease company has tied up in the car while you’re driving it. 

Loan payments also have two parts – a principal charge and a finance charge. The principal pays off the full vehicle purchase price, while the finance charge is loan interest. Since all vehicles depreciate in value by the same amount regardless of whether they’re leased or purchased, however, part of the principal charge of each loan payment can be considered as a depreciation charge. Just like with leasing, it’s money you never get back, even if you sell the vehicle in the future. 

The remainder of each loan principal payment goes toward equity – or resale value – which is what remains of your car’s original value at the end of the loan after depreciation has taken its toll. The longer you own and drive a vehicle, the less equity you have. 

With leasing, you may have the option of putting your monthly payment savings into more productive investments, such as your mortgage, an investment property or a vacation home, which will increase in value. In fact, many experts encourage this practice as one of the benefits of leasing.

Examining No-Frills Mortgage Products 

While No-Frills mortgage products typically offer a lower – or more discounted – interest rate when compared with many other available products, the lower rate is really their only perk. 

This type of product will only seem ideal for you if you have no plans to take advantage of benefits that will help you pay off your mortgage faster – such as pre-payment privileges including lump-sum payments. 

Essentially, this product is only ideal for: first-time homebuyers who want fixed payments and have limited opportunities to make lump-sum payments during the first five years of their mortgage; and property investors who need a low fixed rate and are not concerned with making lump-sum payments. 

No-Frills products also won’t let you take your mortgage with you if you purchase another property before your mortgage term is up – ie, portability is not an option with this product. Portability is an important option that could save you money over the long term if the home of your dreams is within your reach before your mortgage term is up and rates have risen, which they have a tendency to do over a five-year period. 

It’s understanding why these products may seem appealing. After all, during tougher economic times who has the extra cash to put down a huge lump-sum payment? And who needs a portable mortgage if they’re not planning on moving until the market picks up? But it’s important to remember that a lot can change over the course of five years – or whatever term you choose for your mortgage. 

The thing is, you can still obtain great mortgage savings without giving up the perks of traditional mortgages. For starters, many lenders are willing to offer significant discounts if you opt for a 30-day “quick” close. 

There are, however, other ways in which to earn your own discounts. For instance, by switching to weekly or bi-weekly mortgage payments, and by obtaining a variable-rate mortgage but increasing your payments to match those of the going five-year fixed rate, you’ll be ahead of the typical 0.1% discount of a No-Frills product within approximately three years. 

No-Frills products represent a great example of why interest rates are not the only important factor to consider when deciding whether to opt for a particular mortgage product. Much like buying a car, you get what you pay for. If you don’t want a car with air conditioning, a stereo, a cup holder, and so on, then you can get the cheapest car going… but you’ll likely regret it later.

Collateral Versus Standard Charge Mortgages 

With some lenders moving towards collateral charge mortgages, it’s important to understand the differences between a collateral and a standard charge mortgage. 

The primary difference is that a collateral charge mortgage registers the mortgage for more money than you require at closing. For instance, up to 125% of the value of the home at closing with some banks or 100% through many credit unions, instead of the amount you need to close your transaction (as is the case with a standard charge mortgage). 

The major downside to a collateral mortgage becomes evident at your mortgage renewal date. For borrowers who want to keep their options open at maturity and have negotiating power with their lender, this isn’t the best product feature because collateral charge mortgages are difficult to transfer from one lender to another. 

In other words, if you want to change lenders in order to seek a better product or rate in the future, you have to start from the beginning and pay new legal fees, which range from $500 to $1,000. With a standard charge mortgage, in most cases, the new lender will cover the charges under a “straight switch” in order to earn your business. 

In addition, with a collateral charge, it could be difficult to obtain a second mortgage or a home equity line of credit (HELOC) unless your home significantly appreciates in value. 

Lenders offering collateral charge mortgages promote the benefit that it makes it easier and more cost effective to tap into your equity for such things as debt consolidation, renovations or property investment. There’s no need to visit a lawyer and pay legal fees – the money is available as your mortgage is paid down. Yet, if you read the fine print, you may still have to re-qualify at renewal. 

A standard charge mortgage gives you the ability to move to another lender at renewal should you want to without incurring legal fees, and many borrowers find it more beneficial to keep their options open. If you need to borrow more with a standard charge mortgage, you have the option of a second mortgage or a HELOC, which also enables you to take money out as your mortgage is paid down. 

Navigating through the mortgage process alone can be tricky. Working with a mortgage professional who has access to multiple lenders will help ensure you receive the product and rate catered to your specific needs.