Mortgage Refinancing and Home Equity

Mortgage refinancing offers many benefits, from getting a better interest rate to lowering your regular payment. One of the most popular reasons why people refinance is to access their home’s equity to serve as collateral for a home equity loan or line of credit.

Find out if mortgage refinancing is right for you by contacting your mortgage professional.

Home equity vs. mortgage?

When you start the process of refinancing, you might become confused by all the different terminology. Mortgages and home equity are directly related to each other, but aren’t the same.

Home mortgage: Loans secured by your house and paid in installment's based on the period of time as determined by yourself and the lender. The mortgage secures your promise to repay the home mortgage.

Home Equity is the difference between your home's fair market value and the outstanding balance of the mortgage. In other words, it’s the amount you have already paid against the value of your house. Therefore, your property's equity increases as you make more mortgage payments.

What are home equity loans and lines of credit?

Mortgage refinancing allows you to use the home equity you’ve established in the form of home equity loans and lines of credit, available for home improvements, college tuition, major purchases, etc.

Determine how much equity is available in your home with our home equity calculator.

A home equity loan is a secured loan paid in one lump sum based on the amount of equity you have in your home. Your home is used as collateral for such loans.

A home equity line of credit can be combined with a mortgage under a Home Power Plan. Rather than giving you the loan up front in a lump-sum, you’ll have ongoing access to funds through a line of credit. As you pay down your mortgage each month, you build equity in your home which automatically increases your line of credit amount up to your Home Power Plan limit.

It’s important to take into account factors such as interest rate and how long you plan to remain in your home before deciding if a home equity loan or Home Power Plan is right for you.

Making the Offer

Making the Offer

You thought this day would never come. You've found the perfect home. Now you're ready to make your offer.

Once accepted, an Offer to Purchase is a legally binding agreement between you and the vendor. Along with your mortgage agreement, this is one of the most important documents you'll sign.

It locks you into the conditions of the purchase, so make sure your interests are protected by discussing your Offer to Purchase with your lawyer or notary prior to signing.

Checklist: What to include in your home offer

Your proposed purchase price.
A list of items in the house (called chattels) to be included in the purchase price. For example, appliances, window coverings, and certain furniture items might be negotiated into the purchase price.
Amount of your deposit.
Financial details. For example, how the balance of the purchase price will be paid.
Closing date. This is the date you will take possession of the house (usually 30 or 60 days from the date of the agreement).
Time period for which the offer is valid.
Conditions of the offer. You might want to make your offer conditional on arranging for financing, a building inspection, or the results of a survey. Make sure the offer can be cancelled if any of your conditions are not met and always put a time limit on the conditions. Keep in mind that a firm offer – one with no conditions – is usually more attractive to the vendor. But remember that you need to feel comfortable with the offer yourself. Your Realtor will be able to advise and guide you through this important process.

Your home offer is accepted

Congratulations, once your Offer to Purchase is accepted, it's time to contact a mortgage advisor.

Reminder: You will need a cheque, bank draft, or money order to accompany your Offer to Purchase as a deposit.

Start Saving For Your Down Payment

For many first-time homebuyers, saving what's required for a down payment can seem overwhelming. However, sometimes saving for a down payment is as simple as managing your budget differently.

You can start saving for your down payment:

By setting aside money each month just as you would a regular mortgage payment

By opening an RRSP Regular Investment Plan to help you save tax free

With a cash gift from a parent or relative

I can help you with a strategy to reach your goal of buying your first home sooner.

Using your RRSPs to buy a home

If you qualify as a first-time homebuyer, you may be eligible for the government's Home Buyers' Plan (HBP). This allows you and your spouse or partner to withdraw up to $25,000 each from your Registered Retirement Saving Plans (RRSPs) to add to your down payment or to cover purchase-related costs.

Best of all, you don't have to pay income tax on the funds, as long as you repay the total amount to your RRSP over the next 15 years. The repayment period starts the second year following the year you made your withdrawals. If the full $25,000 is withdrawn, the minimum annual repayment would be $1,666.

For more information on the Home Buyers' Plan, please visit the Canada Revenue Agency website.

http://www.cra-arc.gc.ca/E/pub/tg/rc4135/rc4135-e.htm

Mortgage Basics 101

A mortgage is a loan that uses a property as security to ensure that the debt is repaid. The borrower is referred to as the mortgagor, the lender as the mortgagee. The actual loan amount is referred to as the principal, and the mortgagor is expected to repay that principal, along with interest, over the repayment period (amortization) of the mortgage.
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A mortgage can be used for financing many different things, including:

    Purchasing or constructing a new home
    Purchasing an existing home
    Refinancing to consolidate debts
    Financing a renovation
    Financing the purchase of other investments
    Financing the purchase of investment property

Since a mortgage is a fully secured form of financing, the interest you pay is usually less than with most other types of financing. Many people use the equity in their homes to finance the purchase of investments. Using a Secured Line of Credit, or a fixed-rate mortgage, the interest costs are lower, and they can even write off those interest costs against their taxable incomes.

The Application Process

Chances are you’ll spend that initial meeting nervously waiting for the lender to approve you. You give the lender all of your information and they spend some time inputting that into a computer. Then you give them the information on the house you’re buying. At some point the lender pulls your credit report as well. If the lender likes the information, the borrower is approved. If not, borrowers are rejected and they probably cry. At least, that’s what I would do.

After that initial approval, a borrower must then prove to the mortgage lender that the information contained in the application is factual. If you’re dealing with your bank some of this verification comes easy; after all, they can just check your account to see whether you have as much money as you say. Other verifications are a little harder and might require some hustling on your part to get these things done.

A borrower will need several kinds of statements to prove their income, the source of their down payment and other paperwork such as information on the house being purchased, any child support or alimony payments (either paid out or received) and a copy of the purchase contract. Income is proven by paystubs and a letter from the employer for salaried borrowers, and by 2 years of  Notice of Assessment's for self employed borrowers.

With all the mortgage fraud that exists in the market, lenders remain extra cautious when it comes to confirming a borrower’s information. By the end of the process, most borrowers will be frustrated by the mountains of paperwork.

The Down Payment

To get a mortgage in Canada, a borrower has to have at least 5% of the property’s value for a down payment. The lender supplies the rest of the money to pay for the house and the borrower slowly pays back the lender. To avoid CMHC insurance premiums, a borrower must put 20% of the house’s value up as a down payment.

For the most part, any money you have sitting in any account can be used as a down payment. Money in a chequing or savings account obviously can. It’s the same thing with money or even securities sitting in a brokerage account, except the securities will have to be sold. Even a borrower’s RRSP can be used, providing the borrower pays that money back in 15 years. If the borrower doesn’t, that money will be taxed. You can even use your TFSA or equity in an existing property as a down payment.

The borrower has two options if they don’t have the cash available to cover the down payment. They can either borrow the money or get the money as a gift from a relative. A borrower can either borrower the money in the form of a unsecured line of credit, or use a cash back mortgage to repay a down payment loan. A cash back mortgage can’t be used directly for the down payment. Or, if a borrower has a relative that is willing to help them, they can get a gift from that relative, providing both parties sign a simple agreement that there is no expectation of repayment.

Canadian lenders are extremely flexible when it comes to down payments. If you can’t come up with the required down payment, then maybe homeownership should be rethought.

Income Qualifying

The two ratios that determine your maximum mortgage are gross debt service ratio (GDS) and total debt service ratio (TDS). The formula's are as follows:

GDS: Payment + Property Tax + Heat + ½ Condo Fees = less than 32% of gross income

TDS: Payment + Property Tax + Heat + ½ Condo Fees + All Other Debts = less than 40% of gross income

The formula's are much less complicated than they appear to be. If you made $72,000 per year (that’s $6,000) per month then all you’d need to do is multiply 6000 by .32 and .40 to get the maximums, in this case being $1920 and $2400.

What that means is $1920 per month maximum can go toward the mortgage payment, property tax, gas bills and half the condo fees (if applicable). This also gives the borrower a maximum of $480 per month of debt payments the lender will tolerate.

Depending on how high a borrower’s credit score is, GDS and TDS ratios can go higher. Any borrower with a credit score above 680 can have a GDS of 39% and TDS up to 44% of their gross income.

Let’s look at a real world example.

Couple A makes a combined $80,000 per year. What’s the maximum mortgage they’d qualify for? They have excellent credit (both above 700) and have a car payment of $400 per month. They’re looking for a 5 year fixed rate of 4.5%.

Income: $6666 per month
Debt: $400
Property Taxes (estimate) $400
Heat: $85
Condo Fees: N/A

So we multiply $6666 by .44 to get $2933.33. This is the maximum the couple can pay for their commitments.

$2933.33-$400-$400-$85 = $2048.33

$2048.33 is the maximum mortgage payment this couple can have. Plugging that back into a mortgage calculator, it means the couple can max themselves out at $370,087, assuming they take out a 25 year amortization.

Of course, just because a borrower can qualify for a specific number, doesn’t mean they should max themselves out. I would recommend to everyone not surpassing the 32%/40% ratios, no matter what their credit score is. Ideally, I’d want a borrower to not spend 32% of their income on housing plus debt. However, I realize in many Canadian cities this isn’t very realistic.

CMHC Default Insurance

CMHC has all sorts of different homeowner products (more info on them can be found at CMHC’s website) that have different insurance policies depending on the size of the down payment and the length of the amortization. If you have a bigger down payment then the premium amount goes down.

CMHC insurance is mandatory for any mortgage with less than 20% down. Sometimes it required by the lender on properties with more than 20% down, especially rental properties. Once a borrower applies for a mortgage and the lender approves it, the lender then sends that mortgage into CMHC for their approval. CMHC receives the electronic submission and looks at two things- the borrower and the property.

Since so many homes have CMHC insurance, the system has a large database of similar homes in the very same neighbourhood that it can use as comparables. Using the database, the system comes up with a value for the home, a number they will insure up to. Once the borrower’s credit is also verified CMHC will approve the property.

The premium is added to the principle owing the borrower doesn’t have to come up with the case for an insurance policy totalling thousands of dollars. Don’t confuse mortgage default insurance with mortgage life insurance. The only person mortgage default insurance protects is the lender. The borrower won’t see two dimes if the bank is forced to take back the house.

Fixed Or Variable Rate

Typically a borrower will save money if they go with a variable rate. According to mortgage guru Moshe Milevsky in a study published in 2001, variable rate mortgages came out ahead of their fixed rate counterparts 88% of the time since 1950. Those savings can really add up on a mortgage in the hundreds of thousands and over 25 years.

Advocates of fixed rate mortgages often cite the stability of the payment as the biggest advantage of having a fixed rate and they are absolutely correct. The borrowers who take on the standard 5 year fixed loan take comfort that their payment will be the same every month, no matter what interest rates do. For them, taking out the fixed rate hedges their interest rate risk.

Ultimately, a borrower needs to decide how much this payment certainty is worth to them before deciding on a fixed or variable rate mortgage.

There are other options for borrowers who can’t decide between a fixed or variable mortgage. They could take a short term fixed term (say 1 or 2 years) which will have an interest rate lower than a 5 year fixed. Lenders are also starting to offer hybrid products that combine a fixed and variable mortgage, giving borrowers a lower interest rate and increased rate protection if interest rates go up.

Mortgage Affordability: How Much Can I Afford?

Read the following mortgage affordability tips before you set out to find the home of your dreams:

Consider your annual household income. This is a key factor when determining how much of a mortgage you can afford. In addition to calculating your annual household income, consider any income changes that may impact your ability to make your payments. For example, if there are currently two major income sources within your household, would you still be able to afford your mortgage if one was removed? What if a child comes into the picture and your partner decides to become a stay-at-home parent? Consider all factors before deciding.

Consider your down payment. Currently, you are required to have at least a 5% down payment when buying a house. The size of your down payment is one factor in determining the size of mortgage you can afford.

Consider your debt. When determining “How much can I afford?” one of the other important factors to take into account is the amount of debt you currently have. The lower your debt-to-income ratio, the more money you’ll likely have to put towards your mortgage. In addition, your debt level will also help to determine how large of a mortgage you will qualify for.

Consider your amortization period. If you are simply trying to keep your regular mortgage payments low in order to comfortably fit the payment into your budget, you will probably want to apply for a mortgage with a longer amortization period. However, if you don’t mind a somewhat larger regular mortgage payment in order to save money on interest in the long run, you may want to consider a shorter amortization period.

Consider your closing costs. Closing costs are an often overlooked expense that will definitely help determine how much money you can afford as a down payment.

Consider your property taxes, various types of homeowner’s insurance such as damage, title etc and additional expenses. Lastly, there are a few additional expenses that may impact how much money you have to put towards your mortgage each month. Expenses like property taxes, homeowner’s insurance and even things like home maintenance should be factored in before making your final decision. These costs are often overlooked but should be considered before settling on the home of your dreams.

How to improve your credit rating

Increasing your credit score when considering the purchase of a home and obtaining a mortgage is important to have a high credit score.  But more importantly you should have good overall credit.

Starting with the basics, what is a credit score and credit report? When applying for credit, companies consult one of two central reporting agencies – Equifax or TransUnion. Equifax, the larger of the two, is most commonly used.  Whenever a lending company extends credit they report to either Equifax or TransUnion or both, on your credit limit, credit used, and status of repayment.  A person’s total score and report are based on all the creditors’ information combined together.

There are a couple options for checking your own credit score.  You can have a certified Canadian Home Buyers  Mortgage Broker get your report for you OR you can do it yourself. If you choose to do it yourself you can purchase your credit report directly from Equifax (www.equifax.ca).

Equifax does offer free reports, however, they do not include credit scores on the free reports.  This lack of information severely limits their usefulness.  The advantage of checking your score yourself is that your report and score are unblemished.
When another institution or company checks your score it will affect your score negatively to a small degree. Whether you order your own report or you have a broker do it for you …know your score.

To qualify for the best mortgage rates and products you will want to ensure that you have at least 2 accounts that have been active for at least 2 years.  Ideally your credit score would be north of 680. It is possible to work with less, but your options may be more limited.
If your score and report need some work, what can be done?

1.     Pay bills on time.  While this may seem like a bit of a no-brainer, it is the basic foundation of a good score and a good report. Nothing will hurt your score more than consistently missing payments.

2.     Low balances. Credit cards and other revolving credit facilities are very important methods of establishing your credit.  Know this though: high balances will hurt your score. They also tell lenders that you might be a client who overuses credit, whether that is the case or not. Keeping your balance to less than 50%, will help you improve your score, while going above 75% can hurt it.

3.     Pay Quickly. Pay off your high balances as fast as you can – preferably monthly. At the very minimum, make sure you are keeping up with your minimum payments.

4.     “Flash” your Cards. All credit card companies will automatically pay your monthly charges if you phone to request this. It’s a great way to eliminate interest charges, and it builds your credit rating fairly quickly.

5.     What you need. Do not seek more credit just for the sake of it. Opening new accounts lowers the average age of your existing accounts, which can bring down your score. Don’t be a credit glutton.

6.     Old accounts are good. That old account you don’t use anymore that you were considering closing? DON’T! Unless there is something terribly wrong with that account, closing an older account will again reduce the average age of your accounts. Use the account now and then to keep it current, but again, make sure to pay your bills on time.

7.     Eliminate Errors. Nobody is perfect. Not even the companies who are responsible for reporting your credit usage. If you find an error in your report you can have it removed by contacting Equifax. Removing these errors can be the difference between “Approved” and “Declined”.

8.     Limit applications for credit. When you are trying to open a new account, do not apply for a card or loan unless you have already decided on the provider. Too many credit applications in a short period of time will lower your score, and could hurt your eligibility. When it comes time to make your home purchase, a mortgage broker can help you with this very point. As brokers generally have similar interest rates available, you should determine who you are going to use before ever making an application. Select a broker you trust who has proven their ability to manage your mortgage and help you reduce the overall cost of homeownership.

9.     Meet with a credit counsellor. As a last resort, if you have major credit issues you are unable to solve on your own, consider meeting with a credit counsellor. In this regard, be very careful. There are a lot of “wolves in sheep’s clothing” out there in the credit industry. Select a company that is non-profit and can show you how they will help you improve your credit and get out of debt. Do not listen to companies who tell you they will help you pay less than what you owe – it will end up costing you more in the long run.

10.  Time. Sometimes it just takes time. All of these things need to be done for a while before they will have much effect on a person’s score. In this, patience can be a real virtue.
A final note to address the severely credit challenged: If you are recovering from a bankruptcy or consumer proposal you will likely need more extensive credit counselling. There are mortgage products available to the credit challenged, but you will find they are more costly than and not as attractive as what is available if you can improve your credit.

The basics of credit are really quite simple – get what you need, use it wisely, pay your debts quickly. Your discipline and hard work will pay off.

What is Real Estate Fraud

Real estate fraud is a broad term used to describe the different types of fraud that the real estate industry faces.

Mortgage fraud
Mortgage fraud is a type of real estate fraud that most often hurts the financial institutions that lend money for purchasing property. The most common form of mortgage fraud involves fraudsters acquiring property and then artificially increasing the property’s value through a series of sales and resales between the fraudster and someone in cooperation with them. A mortgage is then secured on the property based on the price that has been artificially inflated.

Title fraud
Title fraud is a different type of real estate fraud that most often hurts individual homeowners. In comparison to the more than two million real estate transactions that occur each year in the province, there are a limited number of cases of title fraud. The most common forms of title fraud involve fraudsters using stolen identities or forged documents to transfer a registered owner’s title to himself or herself without the registered owner’s knowledge. The fraudster then obtains a mortgage on this property and once the funds are advanced on the mortgage, he or she disappears. This type of fraud is also sometimes referred to as “mortgage fraud.”

Protect your property by protecting your identity
Ontario’s land registration system has a proven track record for security, accuracy and efficiency. Property owners in this province can trust in a constantly improving system that has introduced automation, electronic registration and enhanced security to land registration. The system is built on 200 years of legal and regulatory best practices, using the best technology currently available.

However, in any system, it is impossible to completely avoid fraud. Ontario homeowners can take an active role in protecting their property by protecting themselves from identity thieves. Fraudsters have been known to impersonate the owner of a property by obtaining false identification and then transferring property that does not belong to them. To help avoid this situation:
-Always store personal information, including your birth certificate, Social Insurance Number card, bank account numbers and credit card details, in a secure place that others cannot access.
-Never carry your birth certificate or SIN card in your wallet.
-Shred documents, such as credit card statements, before you discard them.
-Never reply to spam or e-mails that ask for banking information, credit card details, passwords or other sensitive information involving property you own.
-Check references from prospective renters if you are renting your property and be sure to check on your rental property regularly.

Be alert to identity theft
Pay attention to the following in order to detect fraud early:
-Tax statements or bills are unexpectedly mailed to your home, addressed to a different individual.
-You receive a phone call from a caller inquiring about a new mortgage that has already been arranged for your property.
-Bills do not arrive as expected.
-Creditors contact you regarding purchases you did not make.
-There are discrepancies in your bank or credit card statements.

Power of attorney
Another way in which you can protect yourself is by being cautious when granting power of attorney. Whenever you give another person a power of attorney that permits them to deal with your personal assets, you should consult with your lawyers or advisers regarding appropriate limitations.

Title insurance
Consumers can also talk to their lawyers and advisers about alternative methods of protection, including the benefits of purchasing title insurance.

Contact information
Director Of Titles
Policy and Regulatory Services Branch - ServiceOntario
20 Dundas Street West
Toronto, Ontario M5G 2C2
416-314-4882

Ontario’s land registry offices – Ontario is the world leader in land registration and the first jurisdiction in the world to provide electronic land registration. Visit our section on land registry offices for more information on services offered at your local office.

PhoneBusters – A national anti-fraud call centre jointly operated by the Ontario Provincial Police and the Royal Canadian Mounted Police. Visit their website and download the Identity Theft Statement and Information Package or call 1-888-495-8501.

Equifax Canada – One of Canada’s national consumer reporting agencies.
1-800-465-7166
www.equifax.ca

TransUnion Canada – One of Canada’s national consumer reporting agencies.
1-877-525-3823
www.tuc.ca

How to Pay Your Mortgage Off Fast

How many years from now do you want to own your home free and clear?
As you may already know, paying your mortgage off the traditional way takes 25 to 40 years and costs about TWICE the purchase price of your home.
Here are some effective ways to pay off your mortgage sooner, build equity faster and save thousands in interest.

Change your payments. Simply increasing your payment frequency to bi-weekly or weekly costs nothing and can save thousands of dollars over the life of your mortgage. If you can afford to pay a little extra, consider accelerated bi-weekly or weekly payments--these are equivalent to making one extra monthly payment per year which results in substantial savings. Even if you pay monthly and increase your monthly mortgage payment, any additional payments over and above your obligated payment will go direct to principle. Or you can make a lump sum payment which can realize savings several times as great over the life of your mortgage. Make sure your mortgage has flexible  prepayment option. When you renew your mortgage upon maturity for a new lower rate and payment, keep the payment the same.

Home Power Plans and All-in-one mortgage. Instead of making extra payments, consider switching to a mortgage that pays off the principal faster without costing you anything more. All-in-one mortgages combine a line-of-credit mortgage with a chequing account to reduce interest costs and pay off your mortgage in as little as half the time, without changing your spending habits. You deposit your pay into the all-in-one account and pay bills as you normally would. While you're not using your money, it's used to reduce your daily loan balance. Over the life of the loan, this can save hundreds of thousands of dollars in interest!