Monday, January 27, 2020

Know Your Words – Mortgage Words, that is

Buying a home is a big investment. With so much at stake, it’s important learn what you can about the homebuying process as well as understanding the “language” of mortgage lending.

A recent survey conducted by the Financial Consumer Agency of Canada, and the Bank of Canada in 2019 suggested that homeowners don’t have a good understanding of the terminology used in mortgage lending. A large percentage -- 74% of homeowners or soon-to-be homebuyers -- did not fully understand what a mortgage term or amortization period were.

So, to help you better understand what you’re getting into, here is a partial list of terms to increase your mortgage knowledge.

  • Adjustable Rate Mortgage (ARM): A type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. The interest rate resets based on the lender’s Prime rate plus or minus a variance. With most ARM mortgages, different from VRM mortgages (variable rate mortgages) the mortgage payment adjusts automatically with each change in interest rate.
  • Adjustment Date: A date used by the borrower and lender to move payment dates to a schedule that suits the borrower. Between the funding date and the adjustment date, the borrower typically pays interest only vs. principal and interest.
  • Amortization Period: The number of years over which you have to repay a loan. The most common period is 25 years for a first-time homebuyer.
  • Benchmark Rate:  A qualifying rate set by the Bank of Canada and can be adjusted at any time.  All insured and insurable mortgages must meet the standard affordability tests (Gross Debt Service and Total Debt Service) “as if” the interest rate is the Benchmark Rate. Also referred to as a “stress test”.  Designed to ensure that borrowers and the housing market can sustain higher interest rates.
  • Bridge Financing: (Also referred to as Interim Financing) A loan against a property being sold allowing the owner to use their equity to purchase a new property and take possession of the new property before the Closing Date of the sale.  There must be a firm sale of the property being sold.
  • Closed Mortgage: A mortgage whose term cannot be altered until maturity, unless the lender agrees and the borrower agrees to pay a fee called a pre-payment penalty.
  • Collateral Charges: Unlike a standard mortgage, a collateral charge is often re-advanceable, meaning the lender can lend you more money after closing without you needing to refinance and pay a lawyer. A collateral charge may not be transferable -- it cannot be assigned (switched) to a new lender like a regular mortgage.
  • Deposit: Money placed under the care of a third party (real estate representative, lawyer or notary) by the purchaser when he makes an Offer to Purchase. The money is paid to the vendor upon closing the sale or returned if the conditions are not satisfied. This is typically held in trust.
  • Downpayment: The part of the home purchase money that is not paid out of the mortgage loan.
  • Equity: The total value of the owner’s interest in a property, calculated as the value of the home less the total outstanding obligations.
  • Fixed Rate Mortgage: A mortgage for which the rate of interest is fixed for a specific period of time (See term).
  • Gross Debt Service Ratio (GDS): The percentage of the borrower’s gross monthly income that is used for monthly housing payments (principal, interest, taxes, heating costs, and half of any condominium fees).
  • HELOC: A home equity line of credit (pronounced hee-lock) is a loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower's equity in his/her house. These are often re-advanceable.
  • Insurable Mortgage: This type of mortgage can now be considered the new “insured mortgage”. These are still eligible for default insurance but may be portfolio-insured at the lender’s expense or high-ratio insured at the client’s expense.
  • Insured Mortgage: A mortgage transaction where the default insurance premium is paid by the client, as is typical in a high-ratio mortgage. 
  • Interest Rate Differential (IRD): A compensation charge that may apply if you pay off your mortgage prior to the maturity date, or pay the mortgage principal down beyond the amount of your prepayment privileges, usually in a fixed-rate mortgage.
  • Loan-to-Value: The amount of the mortgage loan compared to the value of the property.
  • Monoline Lender: Monoline lenders focus on just mortgages as opposed to banks and credit unions which offer a variety of services. 
  • Mortgage Default Insurance: If you have a high-ratio mortgage (more than 80% of the lending value of the property) your lender will probably require that you purchase mortgage loan insurance, which is available from CMHC, Genworth Canada or Canada Guaranty.
  • Mortgage Life Insurance: Provides coverage for your family should you die before your mortgage is paid off. This insurance can be purchased through your mortgage professional.
  • Open Mortgage: Allows the borrower to pay any amount of the principal, including the entire balance, off at any time without penalty. You may pay a higher interest rate for the flexibility of an Open Mortgage, but perhaps warranted if a sale is anticipated or in the case of buying property to fix up and sell.
  • Portable Mortgage: A mortgage with an option that allows a buyer to transfer a current mortgage to a new property. (Subject to full borrower and property approval)
  • Qualifying Rates: The rate used to qualify a borrower for a mortgage. Lenders use these rates to calculate your debt-service ratio, which is the ratio between your debt and income. This serves as a gauge of your ultimate ability to repay the obligation over the life of the mortgage.
  • Stress test and Stress Test Rate: Similar to Benchmark Rate and used for uninsurable mortgages. The Stress Test rate is the higher of the contract rate plus a government defined increment, currently at 200 basis points, or the current Benchmark Rate. All uninsurable mortgages must meet the standard affordability tests (Gross Debt Service and Total Debt Service) “as if” the interest rate is the Stress Test rate. Designed to ensure that borrowers and the housing market can sustain higher interest rates.
  • Term: The length of time that mortgage conditions, including the interest rate you pay, are in effect. At the end of the term, the borrower (you) can pay off the mortgage or renew for another term. Mortgage terms can range from six months to ten years; the most common is 5 years.
  • Un-insurable Mortgage: These mortgages are not eligible for default insurance and apply to refinances, rental properties, stated income clients, and on purchases greater than $1M.
  • Variable Rate Mortgage (VRM): A type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan.  The interest rate resets based on the lender’s Prime rate plus or minus a variance.  With most VRM mortgages, different from ARM mortgages (Adjustable Rate Mortgage), the mortgage payment does not adjust automatically change with each change in interest rate.  The lender typically reminds you that you may adjust the payment by contacting them. 

Of course there are more, but these seem to be the ones that homebuyers often ask about. If you need clarification or have question, contact your mortgage professional.

Wednesday, January 08, 2020

Reduce your holiday debt

Happy New Year! As we enter this new decade, do you have some spending regret?  You promised to stick to a budget; you promised to scale down and have an old-school, back-to-basics, holiday. But some items were just too hard to resist.

Well, you’re not alone. Holiday spending has been ticking up over the past few years, according to a report from PWC Canada. While the 2019 numbers aren’t out yet, PWC predicted that holiday spending would be up 1.9% to an average of CA$1,593. Why? Canadians’ confidence in the economy and their own personal finances is up. And while a quarter of Canadians planned to spend more than they did in 2018, it’s younger shoppers who are leading the charge, with 42% of Gen Z and 35% of millennials bringing more joy to their world.

Every holiday season, many consumers reach their debt limit. And January is when there is a rise in bankruptcy filings and consumer proposals.

What can you do?

Here are a few tips to help get rid of that extra debt quickly.

Create a budget
Know where you’re at financially and start wherever you are. If you’re unsure of where to start, try a budgeting app. Once you know what you earn and what you spend each month -- it helps to see those numbers written out and itemized -- any monies left over can be used to pay off debt.  See what bills have high-interest rates, and pay those off first.

Change spending habits in the short-term
Put away the credit cards. Pay at least the minimum amount owed to avoid extra fees, but if you can, pay extra to get that debt down faster. Look at your other expenses and see where you can trim.  You can review your grocery budget; cancel subscriptions and/or put memberships on hold.

Find, or negotiate, a lower interest rate
Credit card interest rates can be notoriously high. Sometimes, if your payments have been current, creditors may be willing to reduce the rate if you simply ask. Your card company wants to keep your business, after all, and now is when competitors unleash their most attractive balance-transfer campaigns.

Get a game plan to pay off multiple cards/debts
If you’re still stuck with high-interest cards, list them in order of rates, highest to lowest. A reasonable approach is to attack the highest-interest cards first (making sure you pay the minimum on the other cards) and work your way down.

Consolidate debt
This doesn’t actually reduce debt but it can make monthly payments easier and if the loan has a lower interest rate than a credit card, then you’ll save dollars in the long run.  If you own a home, consider speaking with a mortgage professional for a way to consolidate debt.

Refinance Your Mortgage
Mortgage rates are lower than consolidation loans and the increase can be amortized over the life of the mortgage. If you think refinancing may work for you, contact your mortgage professional and review all your current debts.

Use your holiday bonus
If you got one, consider using it toward paying off debt rather than spending it on a vacation or other luxury purchases. I know, you worked hard to get it, but you’ll be less stressed in the long run.

Life insurance loan  
If you’ve been paying into a life insurance policy that has built up a cash value, check to see how much is available to you. You won’t be cancelling your policy but companies may let you borrow the cash that’s been accumulated.

Don’t despair, there is usually a  solution for everything.