5 reasons homeowners refinance their mortgage

There has been a flurry of refinance activity this year given our rock bottom interest rates, providing homeowners with access to today’s low rates and the most cost-effective way to get needed funds. Refinancing means getting out of your current mortgage and replacing it with a new one. A minimum of 20% home equity is required to complete a refinance.

There are several compelling reasons why homeowners refinance their mortgage:

1. To get a lower interest rate.  Refinancing to get a lower rate makes sense if the savings you achieve with the lower rate is greater than the cost of getting out of your existing mortgage.
2. A much-needed financial reset. Debt restructuring is one of the primary reasons homeowners refinance. If you have too much high-interest debt that is eating your monthly cash flow, you may be able to get the breathing room you need by rolling that debt into a new low-interest mortgage. You’ll get one manageable monthly payment, immediate cash-flow relief, and long-term interest savings. It is also a great way to improve and protect your credit score.
3. Renovate. Homeowners are renovating to adapt to their new covid lifestyles, whether it’s to improve the quality of their lives, or for functionality like a new home office.  At the same time, your renovations can increase the value of your home, a nice added benefit.
4. Invest in the future. If you’ve found the perfect cottage or the retirement home of your dreams, refinancing may be the way to make that purchase happen if you’re not quite ready to sell your primary residence. Or perhaps you are thinking rental property for a long-term wealth building opportunity and a source of retirement income.
5. You need funds. You may be able to get the funds you need for major expenses, like a new business, tuition, or wedding, often a better strategy than loading it all onto high-interest credit cards or unsecured line of credit.

Since breaking your current mortgage comes with a fee, I would be happy to complete a personalized cost/benefit analysis so you can determine whether refinancing makes sense. The fee to break your mortgage depends on several factors so it’s best to get in touch to discuss. It is not expected that rates will go much lower so there may not be any benefit to waiting to see if you can get a better deal later.

Get in touch at any time. It’s my job to help you create financial security and enjoy life to the fullest!

Important credit score tips

There’s a virtual credit file with your name on it! When it comes time to take out a mortgage, that file gets opened and the result is a credit score that will help determine whether and how much you can borrow and at what rate.  

The good news is that you are entirely in control of your own credit score. Even if your past credit history has been bumpy, there are steps you can take to increase your score: showing lenders that you are a good risk and worthy of their best rates. Here are a few important tips:

1. Never let a bill get past due. This is the single biggest factor in your credit score: paying your bills on time. Set up automatic payments if you can or keep a careful calendar. This one habit carries the most weight when it comes to your credit score so be sure to take it seriously.
2. Create your own credit limits. If the credit card company gives you a credit limit of $10,000, create your own limit of $3000: or no more than 30% of the available funds. Have more than one credit facility? Balance them out. It’s better to be at 30% on three cards than have one at the limit and two that are never used. You want to show that you are using your credit but using it wisely. 
3. If you are getting too close to your limit, pay more than the minimum every month and work towards clearing off your balance entirely. Having your credit limits increased can help if that doesn’t cause additional spending.
4. Keep that history. Make sure you do have a credit history. You may have a low score because you do not have a record of owing money and paying it back. Since history is important, you don’t want to cancel a card and lose that history. The longer you’ve had a card, the clearer the picture is of how you manage your debt. If you feel you really need to cancel a card, get advice first.
5. Never ever let a bill go to collections. This can be a tough one if you’re short of money or a bill is under dispute. But a bill that is sent to collections is - next to bankruptcy - one of the blackest marks on your good credit name. If you’re having trouble paying, talk to the creditor about a negotiated payment plan. 
6. Be selective. Applying too frequently for credit has a negative impact on your score. A raft of cards looks like you’re an out-of-control spender and not a good credit risk. So when you’re asked - would you like to apply for our Store Card to save on your purchase – just say no; the high rate that goes with that card isn`t worth your savings on that particular purchase.

Get in touch if you want to discuss taking control of your credit score. If you need to get a mortgage while you’re still working on improving your score, I can also advise how that may be possible. I do this all the time and am here to help! 

Could an investment property be your pension?

The recent shock to the economy has had many Canadians thinking seriously about what their life might look like after their paycheques stop. Even if you have a workplace pension plan to look forward to, you may find it falls short of the income you’d like to live on. Is it possible to take your pension into your own hands and create sustainable long-term income?

An investment property has the potential to provide a monthly income and grow your wealth over time. Property values have a good track record of appreciation, and often outperform stocks and bonds over the long term. And, with interest rates so low, this is a wealth-building strategy that is within reach of ordinary Canadians -

• Most Canadians look for a way to transition into their retirement years, even more so as COVID changes their prospects and priorities. An investment property can supplement income now and boost pension income later: potentially giving more freedom, sooner.
• Many working Canadians who have found their dream retirement property have decided to buy now and lock in the price, renting for income until it’s time to use it themselves.
• Some first-time buyers want to skip a “starter condo” and go directly to a single-family home in a neighbourhood they love - by using income from a rental suite to help them pay the mortgage. Or when their first home becomes too small, they move to a bigger home but keep the first as a rental property.
• Parents often realize that the monthly cost of housing for their college or university student might as well support their own mortgage - and not someone else’s, while also gaining a sound investment.

So, what kind of downpayment will you need?

If you will be living in one of the units, then the property is considered “owner occupied”. If you’re not living there yourself, you’ll need a larger downpayment:

• Owner Occupied: 5% down for 1-2 units on the first $500,000 and 10% on any amount over $500,000; 10% down for 3-4 units 

•  Non-Owner Occupied: 20% downpayment is required, and the funds must come from your own savings (you cannot use gifted funds). Only a portion of rental income can be used for qualifying purposes.

Another option if you already have equity in your primary residence - is to refinance your home to generate the cash for the investment property.

Ideally you want it to be cash flow positive right from the start, so be sure to think about closing costs, needed repairs, and whether you can cover the costs for this and your own property.

If you are thinking about an investment property, get in touch to have all your questions answered. I can help you determine your downpayment options and run the financial calculations that you will want to see for cash flow and capital appreciation.

Be safe. Be well. Be happy.

No need to panic over new mortgage rules

No one has a crystal ball to see what the next few months - or years - will bring, but it’s likely that some Canadians will have trouble with their debt in the wake of COVID. With that possibility in mind, the Canada Mortgage and Housing Corporation (CMHC) recently announced that it is tightening the rules for Canadian homebuyers looking for insured mortgages. Homebuyers with less than 20% downpayment require mortgage default insurance: an important protection for Canadian lenders.

Alternative options available

This is a great time to work with a mortgage broker! I work with dozens of lenders… and private mortgage insurers – Genworth Canada and Canada Guaranty - that are an alternative to CMHC. Neither have announced new underwriting guidelines, which means I expect to be guiding many new homebuyers through these alternate insurance channels. This is great news and why there is no need to panic.

Get in touch at any time

Having trouble keeping up with all the changes lately? That’s why I’m here. My only focus is mortgages and I am always up to date on the changing mortgage marketplace. If you or someone you know is looking to buy, it’s important to get in touch early so we can put a solid plan in place. Or, if you have concerns about your current mortgage strategy, let’s talk, especially if you want to find out if you can renegotiate your mortgage to take advantage of today’s low rates, or refinance to consolidate troubling high-interest debt.

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Summary of the new CMHC rules (effective July 1):

1. Reduced buying power. Previously, CMHC allowed 44% of total income to service all your debt and up to 39% of total monthly income to service housing payments (principal, interest, taxes, heat, condo fees). They have now tightened this back to 42% of total income can now go to service all your debt, and 35% of total monthly income to service housing costs. This reduces a homebuyer’s purchasing power by anywhere from 9 to 11%. As an example, someone qualifying for a $500,000 home now, will see that decrease to approximately $445,000.
2. Higher minimum credit score. At least one applicant’s credit score must now be a minimum of 680, up from 600. Find out your own score - free - through Equifax or TransUnion.
3. Downpayment funds can no longer include most borrowed downpayment sources. Very few buyers used this option so this will have a minimal impact.

Six questions answered

As the longest spring in memory finally gives way to summer, it’s nice to see people safely enjoy the sunny weather. I hope that you and yours are in good health. There continues to be uncertainty about the shifting mortgage market. Here are the most common questions:

Should I break my fixed mortgage to get a lower rate?  

If you’re only partway through your fixed mortgage term, you’ll need to pay a penalty to break your mortgage. Locking in a low rate now can be a strategy to provide some reassurance in an uncertain future, and you may be able to save considerable money over the long term and not be out of pocket to complete the transaction. If this is a question that’s on your mind, get in touch so I can provide you with detailed cost/benefit analysis.

Can I refinance my mortgage to deal with high credit card balances? 

If you have more than 20% equity in your home, you may have the option of refinancing your mortgage and roll all your debts into a new, low-interest mortgage. You can get immediate cash-flow relief and one manageable monthly payment. Your lender will need to re-qualify you, so if you’re already dealing with reduced income or collecting CERB payments that could impact your ability to qualify. I can help you look at all your options.

What about my mortgage renewal? 

Get in touch now to start a consultation on your options. A lost job or drop in income will be a factor if you want to move to a new lender for a lower rate. You can renew with your current lender at their best offer, or use an open mortgage for a few months, with a strategy of moving to a lower-rate closed mortgage without penalty as soon as your finances stabilize.

Should I lock in my variable-rate mortgage? 

If you have a deeply discounted variable-rate mortgage, you are in a very good position given the recent drops in prime rate. Variable mortgages can be converted to fixed without penalty, providing long-term peace of mind knowing you have security for the next five years. While the rate environment remains in flux, it might be best to enjoy your lower rate for now and re-evaluate in 6 to 12 months.

Should I take the mortgage payment deferral that is available?  

The immediate relief is compelling. However, your lender will add the interest accrued during the skipped period to your outstanding balance, which will increase your mortgage balance. Alternatively, you may be able to borrow from a Line of Credit, making interest-only payments until the financial stress begins to ease. Other options include extending your amortization or moving from accelerated to monthly payments.

Fixed or variable mortgage rate? 

The answer again depends on you: your tolerance for risk, where rates are expected to go, and personal preference. With the rate environment changing all the time, what may be the right decision for you this week, could be different next month. Let’s have a conversation so I can get a clear picture of your plans and current situation. 

Good news! The qualifying rate has been lowered to 4.94%, which is great news since it is used in stress tests for both insured and uninsured mortgages, and a lower rate means it is easier for borrowers to qualify. For the first time since January 2018, when stress testing began, the mortgage qualifying rate is under 5%. Find out how much you qualify for! 

Have a question? Get in touch at any time. Be safe. Be well. Be happy.