Planning for retirement? Make the most of your biggest asset...

Did you know that Canada's first batch of Baby Boomers is hitting retirement age this year? And, according to Ipsos-Reid, almost a quarter of them worry whether they have enough for retirement. They're not alone. Almost 40% of Canadian adults haven't saved a penny for retirement.


If this is your situation, you may not realize that you might actually be living in your nest egg. If you expect to be mortgage-free by retirement, this opens up several options for your retirement plan. If at all possible, you should explore these options, with the help of a good financial advisor, well before you stop working.


Here are three options to consider:


1. Plan on selling your home and downsizing at retirement.


Selling your home and moving into a smaller home or condo should serve to minimize your living expenses. In addition, you can use the surplus cash from the sale of your home to invest in a nice diversified portfolio of investments that ensures safety and income, as well as some growth. Make sure you talk to a good financial planner and/or investment advisor to get the best mix of investments for your long term needs.


2. Leverage the value of your home by setting up a home equity line of credit.


If your home is, or soon will be, mortgage free, and if you still have a source of income to qualify, setting up a "HELOC" will enable you to access the funds tied up in your home. Although there are some initial setup costs, there is no ongoing cost for having an unused HELOC available to you. And once you have it set up, you can use it when needed, either by writing cheques, doing a transfer to your bank account, or sometimes even using an ATM. If you do carry a balance, the interest rate charged is much less than on an unsecured line of credit, and you only need to pay the interest monthly. So, if you're eventually on a limited income, the payments should not be burdensome. And if you’re able to periodically make extra payments, there is no penalty to pay off part or all of the outstanding balance whenever you choose. Talk to an experienced mortgage advisor to find out if you qualify and for what amount.


3. Arrange a reverse mortgage.


If you don't qualify for a HELOC, and you feel strongly about staying in your home, this is another option to investigate. The way a reverse mortgage works is that you determine a maximum amount that you will borrow - no more than 50% of the value of your home - based on your age. You can then receive the funds in one bulk payment, several payments, or installments, based on your requirements. No monthly payments are required; rather, your interest on the reverse mortgage accumulates over time. The mortgage is paid off when your home is sold or when you and your partner (if applicable) permanently move out of your home. While there are costs associated with the setup of the reverse mortgage, it is quick to arrange and the money received is not taxable (and therefore, does not impact OAS and GIS). As long as you continue paying your property taxes and property insurance, and keep up with any maintenance, you have the security of knowing that you can keep your home as long as you wish. If this is an option you wish to contemplate further, you'll need to get advice not only from a mortgage advisor, but also a good financial planner and legal advisor.


Whether you decide to downsize, set up a home equity line of credit, or arrange a reverse mortgage, make sure you get advice from the experts in considering your options. I can't emphasize enough that the earlier you explore which option is best for your unique situation, the less stress you will experience when it is time to implement your plan.
 
 
 

Buy your cottage and keep it, too

We just got back from our cottage on the Ottawa River.  It's wonderful there...  Wild windswept forest, water gently lapping onto the sandy beach (and mosquitoes the size of hummingbirds, but hopefully some long overdue hot dry weather will beat them into submission). 

I always know that summer's coming because the smaller members of our household start negotiating, "Can we go to the cottage tomorrow?  Why not?  Well, when can we go?"  And I find myself wondering, just how much school do those kids really need, anyway?

The reality of our situation however is that taxes, insurance, maintenance, and small renovations really tap into our cash flow.  In addition, with our busy jobs it's hard to get away as much as we would like.  So, like many people, we rent the cottage part of the summer.  It accomplishes two things: one, the rental income helps with our expenses, and two, we have wonderful renters who take care of the cottage as if it were their own, so that we don't have to worry that an empty cottage is just sitting there, vulnerable to thieves.

If you've been bitten by the cottage bug, or a vacation home is crowding in on your daydreams, you have probably realized another reality.  Nowadays, property prices have greatly increased in many of Canada's popular vacation destinations, making it a challenge to purchase the beach house of your dreams.

Some people choose to share these costs by renting, as we have, while others manage the cost through joint ownership with family or friends, or even some combination of the two.  However, before taking the plunge into co-ownership or renting, you need to be sure that you really understand what you're getting into.

Here are a few things to think about:

Does owning a vacation property fit your lifestyle?

In addition to the fun and leisure aspects of a vacation home it is important to factor in the time and cost involved in year-round upkeep. How will the property be used? If your dream is to own a ready-to-live-in relaxing hideaway while your co-owners dream of a northern DIY project, you may not see eye-to-eye when it comes to how you will be spending your weekends.

It’s important to think carefully about how much time you and your co-owners plan to spend at the vacation property. Will you be vacationing as a group, or do you want to trade off on weekends? Will one use the property more than the other? Will it be a 50/50 split?  

How will disagreements be resolved?  Can your relationship withstand potential friction regarding decisions involving money?

Have you thought about what’s involved before you put it up for rent?

While most Canadians buy a second home for recreational use, growing numbers are also buying for investment purposes. Determine in advance how you will split, and claim, the rental income. In the case of a vacation property that you intend to rent out most of the time, the lender may deduct the rental income from your total monthly debt payments when qualifying you for a mortgage. It is important to be aware that not all lenders will take rental income into account – a mortgage broker can advise you on this.   As well, if you do rent the property for the majority of the year, you may have additional expenses - insurance would be more expensive, and you may wish to consider using a property management company.  How do these fit into your spreadsheet?

Can you afford the financing?

While it certainly helps to go in with a co-purchaser, you want to be sure that your waterfront property isn't putting you underwater.  Seek independent advice on what size of mortgage you can reasonably handle - again, a mortgage broker can help you with this.  And as with any purchase, if you think you will need financing, make sure you get a pre-approval to ensure smooth sailing when you put in your offer to purchase.

Regardless of whether you are buying a cottage that you yourself will enjoy, or as an investment, some pre-planning will help make sure it is a relaxing and rewarding venture.  And don't forget your bug spray!

Image credit: [c] Daniel Steger for openphoto.net

Five Steps to Making Your Dream Renovation a Reality

The lure of a stunning gourmet kitchen or sparkling spa-style bathroom may have you chomping at the bit to begin a home renovation. But if you heed the advice of experienced renovators, pre-planning and advanced preparation are the secrets to renovation success.

Here’s a helpful checklist to get your renovation started on the right track:

1. DECIDE WHAT YOU WANT TO DO

For most people, this is the fun part – flipping through magazines and watching home decorating shows to get inspired. But it is also one of the most critical phases in any home renovation.

2. PREPARE A REALISTIC BUDGET

Determine how much you are prepared to spend on your renovation. Remember to boost your budget by at least 10% for unexpected costs.

3. ARRANGE FOR FINANCING

Get financing in place early so that you can plan your renovation with confidence. Leveraging the equity in your home is often a good option. With a secured loan, you can usually obtain an attractive interest rate with flexible repayments. Other alternatives include refinancing your existing mortgage or arranging for a second mortgage on your home.

An independent mortgage broker can help by negotiatiating competitive financing with a number of competing lending institutions.

4. SELECT THE RIGHT TEAM

You’ll want to entrust your project to people known for their quality of work. Ask for recommendations from friends and family, interview prospective candidates, and I strongly recommend that you check references.

5. STICK WITH YOUR PLAN

Your contractor, who does the construction or subcontracts it to other trades people, will work with you or your designer to implement your plan. With a sound plan, reasonable budget, financing in place and a team that you trust, your renovation can get off on the right track.

What renovations are on your wish list?

Top Homebuying Mistakes and How to Avoid Them

In the market for a new home in the next year or two?  Make sure you avoid these common homebuyer mistakes: 

Not getting a pre-approval.     The very first thing you should do before doing much more than glancing through the real estate section of the newspaper or online is to go to your mortgage broker or favourite lender and get preapproved for a mortgage.  For one thing, this tells you how much you can afford, so you don’t risk finding a house you fall in love with but can’t actually buy.  For another, it allows your mortgage professional to review your credit score and credit report.  If there are any problems with your credit, errors on the credit report (which happens more often than you might think), or your credit score is too low, you can then work together to develop a credit improvement plan.  This can take as long as two years, so the earlier you start, the better.  Your reward will be qualifying for the best possible interest rate on your mortgage and, therefore, saving money.

Not knowing where your down payment is coming from.     You will need anywhere from 5% to 20% of your home’s purchase price as a down payment.  Money in an RRSP (up to $25,000, for first time home buyers), money in bank accounts or brokerage accounts, or a gift from a family member are possible sources.  If you are putting down less than 20%, it’s called a “High Ratio” mortgage.  All this means is that the mortgage must be insured either through CMHC or Genworth, to protect your lender.  There are a few lenders that offer what they call a cash back mortgage, where you can get money on your closing date to help with closing costs, your down payment, or another purpose.  The bottom line, however, is that you will have to prove that you have a down payment.

Not budgeting for closing costs.     Don’t get caught forgetting about closing costs.  You will need  to demonstrate that you have at least 1.5% - 3% of the purchase price to cover costs including lawyer fees,  land transfer tax (including Toronto’s MLTT), home inspection, title insurance, interest adjustments, and other charges.   See my blog post about closing costs for more details.

Maxxing out on your home purchase.     We’ve all been there.  You’re out looking at homes, and you go see “the one” – the house with that perfect kitchen or the perfect yard for entertaining.  The catch is that it’s just a tad above your top price.  But if you tighten your belts, you could just about manage it, right?  Well, before you rush in, make sure you spend some time looking at something less exciting: the numbers.  If you have a pre-approval, you should know by now how much you qualify for.  Work through how each month’s budget would look like it you do max out.  Do you have any money left over for things like home maintenance?  Unexpected expenses such as a new roof or new car?  Fun things like travel?  And what happens if interest rates go up, or you or your partner don't get that expected bonus – will you still be able to afford the payments?

Hiding information about your financial situation from your advisors.     Often people will not disclose negative financial information because they are concerned that they will “look bad”, don’t feel it’s relevant, or don’t think it will come to light.  Unfortunately, surprises during the home financing process are usually not happy surprises!  It is better to be forthright about your situation.  There are very few circumstances we haven’t seen before, so we usually have a solution!

Changing something about your financial picture before closing on your home purchase.      Remember that you have been approved for your mortgage based on a certain set of financial circumstances – income amount, employer / self-employment information, current debt load.  Do not run out and sign for a new car lease, or quit your job to start a business, or anything else that impacts the set of numbers you provided when you applied for your mortgage!

Feel free to call me to discuss your options.   In the meantime, I wish you smooth and surprise-free home buying.

Photo credit: [c] ComputerHotline for openphoto.net

10 Tips for Obtaining a Mortgage After Bankruptcy

Sometimes bad financial situations happen to good people and bankruptcy is the only way out.  But there's hope – there are a number of strategies for putting your credit back on track and getting approved for a mortgage, even after bankruptcy. 

Here are some points to consider:

1.  Locate the right lender: Some lenders will not approve a mortgage if a bankruptcy shows up on a credit report.  However so-called "non-conforming" lenders may consider doing so, provided the borrower can demonstrate that he or she has the income to support the payments and is now a good credit risk. 

2.  Length of time since bankruptcy discharge: Different lenders have different criteria regarding the length of time since a bankruptcy after which they will grant a mortgage – often  two years along with proof of re-established credit.  Some lenders may consider applicants with a more recent bankruptcy – a mortgage broker can advise on the requirements of various lenders.  

3.  Reasons for bankruptcy: If a bankruptcy was due to factors beyond your control, this is more acceptable to the lender than if the bankruptcy was the result of poor money management and excessive debt, which can affect the terms of an applicant’s mortgage approval.   

4.  Size of down payment: With a past bankruptcy, most lenders like to see a minimum 10% down payment consisting of one’s own funds, and it can't be borrowed, or a gift.  A down payment of 5% or less may be permitted, in some circumstances.   

5.  The type of property: Some lenders will only lend on houses or row townhouses.  Very few will consider apartments or stacked townhouses, which may involve stringent criteria to qualify.

6.  Credit report: A credit report provides a picture of your financial health based on past behaviour.   Lenders are looking to see improvements over time.

7.  Credit score: A borrower’s credit score may determine the rate of the mortgage — the higher your credit score, the better the rate.  Some lenders have minimum credit score requirements for those with a bankruptcy.

8.  Rate considerations: Most lenders charge a higher interest rate and even some extra fees to those with a bankruptcy.  A lender may grant a better rate if certain lending criteria have been met, such as: two years since bankruptcy discharge, good re-established credit, minimum beacon scores, saved down payment, good debt servicing ratios, and a long-term history of job stability.

9.  Re-established credit: Re-established credit shows the lender that a prospective borrower has new credit and has managed it well since bankruptcy.  Typically, re-established credit should involve a recent record of on-time payments on major bank or credit cards.  If you are re-building your credit, you need to be aware that a missed payment at this stage could be mentioned on your credit report for the next six years, and could be grounds for some lenders to decline a mortgage application. 

10.  Don’t do it alone:  Consider asking a mortgage broker for help.  For those with bad credit and/or bankruptcy, a mortgage broker can coach you on how to improve your credit score over time.  While you work on bettering your score, a mortgage broker can advise you on how to get a mortgage despite bruised credit, and provide valuable expertise, both before, during, and after the mortgage financing process. 

10 Tips for First Time Homebuyers

If you're starting to think about buying your first home, there's lots to know.   This article from Moneyville.ca is a great starting point to help get you focused. 




Photo credit: [c] Miroslav Vajdic for openphoto.net

Rates bouncing down - then up - then down - so what should you do?

Should you lock in your mortgage rate or stay variable? 

An insightful article on the Canadian Mortgage Trends site discusses the pitfalls of trying to pin down market factors and interest rate changes over both the short and long-term.   The reality is that while we all wish we had that proverbial "crystal ball", it simply doesn't exist. 

As mortgage brokers, we are constantly being asked to predict the unpredictable.  Forecasts, especially long-term forecasts, should be taken into account, but with one caveat: the farther out the forecast, the less likely it is to be accurate. 

It is important to remember that, in any economic times, YOUR long-term financial goals are the most important factor.  From this, you can structure your mortgage term, and mortgage features, to best position yourself to achieve those goals.

Photo credit: [c] Adrian Van Leen for openphoto.net

Why use a mortgage broker?

You're ready to buy that home.  Your next step is to go to your local branch of one of the big banks, right?  Or do you just apply for a mortgage online to get the best deal?

The answer is: neither.  That is, unless you have lots of time and expertise to comparison shop and negotiate the best terms and rate for you.  For most of us, a mortgage is the single biggest debt we will ever take on.  Whether you're borrowing for the first time, or refinancing an existing mortgage, studies show that negotiating and shopping around can save thousands of dollars over the life of your mortgage.

So what can a mortgage broker do for you?

Here are seven ways we can help:

1.  We have negotiating power
Brokers deal with multiple competing lenders and can often access exclusive rates. We also have the power to negotiate rate discounts from lenders, which we pass on to our clients.

2.  We give you choices and knowledgeable advice
You don't need to become a mortgage expert.  Brokers offer consultative service, advice and solutions that are customized to each client’s needs. And unlike banks, we work for you.

3.  We save you time
We will work around your schedule to make the transaction as quick and easy as possible.

4.  We save you money
In most cases, our professional advice and assistance is free! We're paid by the lender for placing you with their products.

5.  We pre-qualify you
Whether you're shopping for a new home, or refinancing your existing mortgage, we can help you obtain a pre-approved mortgage, often with up to a 120-day interest rate guarantee, to protect you from rising rates.

6.  Preserve your credit rating
When you shop for a mortgage, there is an accumulation of lender inquiries on your credit bureau report, possibly affecting your credit rating and, ultimately, the rate and terms of your mortgage. This isn’t the case with a mortgage broker, who only does one inquiry yet can still get many competing lenders to quote on your business.

7.  Peace of mind

The Canadian Association of Accredited Mortgage Professionals has a stringent Code of Ethics that members are required to adhere to in order to retain membership.

If you have any questions or comments for me, I would love to hear from you! 


Photo credit: [c] Michael Jastremski for openphoto.net

How Good Are Your Negotiating Skills?

A recent paper published by the Bank of Canada found that there is a significant amount of variability in mortgage rates for customers, resulting in a difference of thousands of dollars over the life of the mortgage.  They state that "the burden of gathering multiple quotes lies on consumers", and "consumers also differ in their bargaining ability".  They compare shopping for a mortgage to shopping for a car, a house, or health insurance.


The study also shows that people who use a mortgage broker pay lower rates on their mortgage, since the mortgage broker takes on the legwork of searching for the best mortgage rate and terms.


So, how good are your bargaining skills?