How to Obtain Financial Freedom

General Trish Pigott 17 May

Does the idea of saving money and having financial freedom seem impossible? The average Canadian owes $23,000 in consumer debt and has at least 2 credit cards*. If you live paycheque to paycheque, this may be you.

But experts in financial education point out that no matter your income, a few changes to the way you’re living can make all the difference. It’s never too late to start to learn and reverse course, so that financial freedom can be in your future. If you’re still not convinced, here are a few simple ideas to get you started:

Pretend You Earn Less Than You Do

Give yourself a pay-cut. The goal is to put 10% from each paycheque into your savings account. The easiest way to do this is an automatic transfer from your chequing account to your savings accountevery payday.

Create a Budget

In order to stop living paycheque to paycheque, you need to know where your money is going. Creating a budget is simple with Google docs, or look into other online tools and sites to get started.

Build an Emergency Fund

Once you have your budget in place, review it and break it down into non-discretionary expenses (rent, groceries, utilities, etc.) and discretionary expenses (eating out, entertainment, clothes, etc.). See where you could cut down on discretionary spending and put that money towards your emergency fund. Even starting with just a little amount is great and helps you create a habit of saving.

Consider Downsizing

It may be time to consider a lifestyle change. Consider moving to a smaller place. Cut gym expenses with a trip to the local park. Think about if you really need that brand new car or if a used one would work just as well.

Pay Down Debt

If you have a lot of credit card or unsecured debt, try paying the minimum on all but one of them and aggressively pay down that one card. Once it’s paid off, attack the next one. If you’re so deep in debt that you can’t fight your way out, consider consulting with a company who specializes in debt consolidation. They will help you negotiate your debt into smaller amounts that you can begin to pay off.

Don’t Forget Your Future

Putting at least 3% of your paycheck into a retirement fund is a great idea. If you get a raise, try putting it into a savings account and forget about it. You’ll be glad it’s there when you need it in the future.

 

*Source: CBC.ca

The Down Payment

General Trish Pigott 19 Apr

A down payment is one of the most essential aspects of every mortgage application and new home purchase. Here are a few things to keep in mind while getting it prepared.

The Source of the Down Payment

Most home buyers are aware that they will require a certain amount of money for a down payment. What many do not realize, is that lenders are required to verify the source of the funds. This allows them to ensure that it is not coming from a source of debt, such as a line of credit or credit card. Instead, the best options for your down payment are as follows.

1. Savings Account

The first and most traditional method is your savings account; you’ve likely been saving for this your whole life!

If you are utilizing your personal savings for a down payment, lenders will require three months of bank statements. These should include your name, account number, past transactions and balance history. Any large deposits made in that time will require an explanation and supporting documentation.

2. Gifted From A Family Member

If you are fortunate enough to receive help from the Bank of Mom and Dad, there are certain requirements:

  • A signed gift letter from the immediate family member
  • Proof of the transfer into your bank account with the account history
  • Important note: If money is being transferred from immediate family overseas, most lenders will require copies of the wire transfer and account history

3. RRSP Withdrawal

Another option for a down payment is the use of a Registered Retirement Savings Plan (RRSP); this only applies to first-time buyers. First-time buyers are allowed to borrow up to $35,000 from their RRSPs tax-free. Note, the money must be repaid within 15 years over 15 equal installments paid once per year.

How Much of a Down Payment is Required?

The minimum down payment amount required in Canada is as follows:

  • 5% on the first $500,000
  • 10% on $500,000 to $1 million
  • 20% over $1 million

For example, on a $600,000 house you would need to put a minimum of $35,000 down ($25,000 on the first $500,000 and $10,000 for the additional $100,000).

If your down payment is less than 20% of the purchase price, you will be required to purchase mortgage loan insurance. These premiums range from 0.6% to 4.50% of the total amount of your mortgage. Using the example above, this would mean an additional $3,600 to $27,000. However, if your down payment is 20% or more, you will not be required to purchase mortgage loan insurance.

Additional Costs and Fees

Lastly, you have to consider closing costs. Closing costs are typically 1.5% to 4% of the purchase price. In order to get financing, you are required to show that you have enough to cover these costs. These funds need to remain in your bank account until they are provided to the lawyer to complete the purchase. This is because lenders will often request updated statements near the closing of the sale to ensure nothing has changed. If money has been moved around or there are new large deposits or withdrawals, they could affect the final approval.

We are always here to help guide you through the process.  Make sure you are upfront about your down payment amount, and where it is coming from. This will help determine whether or not it is suitable, and allow us to find the best lender and mortgage product for you!

Variable Rate or Fixed?

General Trish Pigott 8 Apr

Analysts are predicting another rate increase to the prime rate on April 13, 2022, with a few more to follow in the remainder of the year. Many variable rate mortgage holders have concerns, asking if they should lock in or take a fixed rate on a new mortgage.

If you are shopping for a mortgage or are currently in a variable rate mortgage term, there are many reasons why staying with a variable rate may benefit you.  Below are a few reasons why.

Benefits of Variable Rate Mortgages

  • Variable rates are currently about 2 -2.50% lower than fixed rates
  • If the prime rate changes, it will increase at a slower pace than just jumping to the current fixed rate
  • Paying lower rates will save you thousands of dollars in interest
  • Variable rates have the lowest penalty if you need to make changes to your mortgage during your term

Let’s Break Down the Numbers

This can be overwhelming for homeowners, so we’ve provided some examples below to help give you a better understanding.  The below figures are based on a current mortgage of $400,000 with a 25-year amortization.

Variable Rate: 1.50% to 1.85% (lender dependent)
Fixed Rate: 3.79% to 4.14%

Payment at a Variable Rate of 1.50% = $1598
Payment at a Fixed Rate of 3.79% = $2058

Penalty to Break a Variable Rate Mortgage = $1500 (always 3 months interest)
Penalty to Break a Fixed Rate Mortgage = $26,080 With 2 Years Remaining

These numbers are just estimates to give you an idea of what a variable rate mortgage and fixed rate mortgage could look like.

If you have questions about your specific situation, please reach out and let us know. We’re happy to review your current mortgage term and let you know what the best options are for your unique needs.

Downsizing Your Home

General Trish Pigott 5 Apr

Moving to a larger house is not the only time that things can change with your home and mortgage. Sometimes there comes a point when owning a home becomes a little too much to handle. Perhaps your children have moved out and you no longer need those three extra bedrooms. Whatever the reason, downsizing is a great option when you no longer need a full-size home. Perhaps you want to swap your two-story family home for a rancher, a townhome or a cute little apartment! There are many options for people wanting to scale down.

Homeowners who are fortunate enough to now be mortgage-free and looking to downsize could be sitting on a gold mine!

Breaking Your Current Mortgage

If you do still owe on your current mortgage, it is important to remember that downsizing during your current mortgage cycle, will be breaking the mortgage. This means that you will be required to go through the entire qualification process again – including passing the stress test. The stress test is now required for all mortgages. Its purpose is to determine whether a homebuyer can afford the principal and interest payments, should interest rates increase. It is based on the 5-year benchmark rate from the Bank of Canada or the customer’s mortgage interest rate plus 2% – whichever is higher.

Regardless of your current situation, there are some costs that go with selling your existing home and moving to something smaller or more affordable.

Costs Associated With Downsizing

  • Realtor commission fees (typically 2.5 to 5% of the home selling price)
  • Closing costs and legal fees (1 to 4% of the purchase price on the new home)
  • Miscellaneous costs such as moving expenses, upgrading appliances or buying new furniture
  • If you are moving into a condominium or townhouse there are strata fees to consider

Should You Rent or Buy?

General Trish Pigott 22 Mar

When it comes to the Canadian housing market, there are lots of options. From renting an apartment to owning a single-family home, it all comes down to where you’d like to live and what you can afford. There is no right or wrong answer when it comes to whether you should rent or buy, but we’ve broken down the pros and cons of both below.

Why Do People Rent?

One of the most common answers to this question is affordability. Most people rent because they believe it is cheaper than owning a home. This can be true in some cases, but there are also times when monthly rent costs more than monthly mortgage payments. Of course there are also cases where rent is far more affordable than buying. Affordability is fairly dependent on an individual’s situation, but it is not the only deciding factor for choosing to rent.

Another reason you may choose to rent is that you simply aren’t sure where you want to live. If you’re new to an area, you may want to rent until you get to know the neighbourhoods and determine which area is the right fit for you. In some cases, you may not be able to find a home that is affordable in the area you want to buy.

For people who travel a lot for work or like to be free-floating, renting can be the perfect option.

Pros and Cons of Renting

To help you decide if renting is right for you, we have put together a list of pros and cons:

Pros of Renting Cons of Renting
Less maintenance
Lower upfront costs
Short-term commitment if needed
Protection from decreasing property values
Monthly payments may increase
Potential for being asked to leave
Not building your own equity
Requiring permission to paint or remodel

Why Do People Buy?

According to the most recent data, Canada boasts an overall homeownership rate of 67.8%. Even for those Canadians aged 35 and under, more than 40% of households own their own homes. This is quite an impressive statistic! So, let’s look at why people choose to buy.

One of the main reasons that people choose to buy a home is stability and peace of mind. This means you are not at risk of the landlord asking you to leave (in accordance with residential tenancy terms).

For others, building equity is a very strong benefit. When you choose to rent, you are paying someone else’s mortgage, but when you work towards buying your own home, that money is invested into your own future. This is an extremely important aspect to consider if you are finding saving for retirement a challenge.

Pros and Cons of Buying

To further show the benefits of buying, we have broken down some pros and cons below:

Pros of Buying Cons of Buying
Freedom to renovate or remodel as you wish
Building up equity
Additional income with a rental suite
Stability and peace of mind
Coming up with a downpayment
Responsible for mortgage, property taxes, insurance & maintenance
Interest rates can increase
Possibility of unexpected costly repairs

So, Should You Rent or Buy?

The reality is that in the long run, homeowners often fare financially better than renters because homeownership enables forced savings that accumulate over the years through property equity. If you are unhappy renting or really prefer the idea of owning your own home, just know it’s possible! All you need is the right information and the right preparation.

Some other things to consider before buying include:

  • Your credit score – Do you have good financial standing to be approved for a mortgage?
  • Your savings – Do you have any money put away for a downpayment? If not, do you have wiggle room in your budget to start saving?
  • Your time – Do you have the resources to maintain a home?

Regardless of whether you choose to rent or buy, the most important factor is your financial security. What works for your friend or your parents may not work for you – and that is okay! However, educating yourself and looking into all the options will ensure that, at the end of the day, you are in the best situation for yourself. This is where talking with a real estate agent and mortgage broker can help you to determine if purchasing a home is viable. If you’re not ready to reach out but want to know if homeownership is an option, you can use our My Mortgage Toolbox app. It will calculate the minimum down payment needed and what your monthly mortgage costs might look like.

Financial Independence for Kids

General Trish Pigott 18 Mar

Financial independence is a critical skill for future success that your children will not learn anywhere else. Not only does financial literacy help your children have more success in life, but it allows them to move out sooner and avoids delaying retirement. As much as parents want to help their kids, it should not be done at the jeopardy of your own future. In fact, when it comes to teaching your children about money, there is no better time to start than now! So, how do you teach your children about money?

Review Your Attitude Towards Money

The first and most important thing is to examine your own attitude towards money. Are you a penny pincher? Frivolous spender? Do you buy on impulse, or take a long time to make a purchase? How much debt do you have? Your financial habits will shape your children’s. To ensure that you are setting them up for their best financial future, parents need to consider what messages they are sending with their own money habits.

Give Your Children an Allowance

Providing an allowance to your children (especially one in exchange for chores) is an age-old way of teaching your kids about money. A good guideline is $0.50 to $1.00 per year of your child’s age. For a 10-year-old, this would be $5 to $10 per week.

Teach Your Child to Save

If you are giving your child $10 per week in allowance for chores, encourage them to put even just $0.50 per week into a piggy bank. In six months, show them how much money they have saved and talk to them about why it is important, and what they can do with that larger amount now.

Encourage Kids to Think Before They Buy

While it’s hard to get a 10-year-old excited about an RRSP, there are other ways to help them plan ahead. One is to encourage them to think about their purchases before they commit. For example, if they saw a toy on TV they want, teach them about how advertisements are designed to make you want something. Then, ask them to wait a week – Do they still want it?

Involve Your Children in the Family Finances

It is more valuable than you might think to let your kids see and hear you discuss financial planning; let them be part of opening and paying bills, or planning vacations. Explain why you pay certain things and discuss affordable choices. This helps them be part of the conversation and will work to instill a sense of financial responsibility as they grow up.

Remember, you are the best example to your children about money. Don’t be afraid to share the ups and downs with them. Be patient with your kids, but don’t give up! The best thing you can do as a parent is to promote financial security and independence.

As always, feel free to reach out to us here with any questions about financial independence!

Tax Season is Upon Us

General Trish Pigott 15 Mar

As we get ready for the tax season, now more than ever you need to plan ahead.  This is especially crucial when it comes to self-employed borrowers. We’ve provided some insight below on how reporting your income can affect you as a home buyer or borrower.

Self Employed Borrowers

For self-employed people, banks will look at your past two years of taxable income on your tax returns.  If it is declining in the most current tax year, that is the amount that the bank will use. The two-year average is only used when you are in an increasing trend.  For example, if you show $50,000 of  net income in 2018 but in 2019 you only show $32,000, the banks will use $32,000 for your mortgage qualification. Alternatively, if you showed $32,000 in 2018 and $50,000 in 2019, then the bank will use $41,000 as the two-year average.  If you are a sole proprietor, we can increase that by 15% and use an income of $47,150.

If you are incorporated and take dividend income or T4 income, it will be different. However, banks will still use a two-year average if it’s an increasing trend. Similarly, if it’s declining, they will use the lower income.

Salaried and Hourly Employees
For salaried and hourly employees, banks will use your full-time or part-time guaranteed income.  You must have guaranteed hours in order for the bank  to use it.  If you are casual and working full-time hours your employer is required to confirm that you have guaranteed hours. Banks will require you to have been there for two years and will use the average income for qualifying.

Bonus and Commission Income

Banks will take this income into account for qualifying for a mortgage and again, will take the two-year average. If year two is declining, that is the amount they will use on your mortgage application.

Each application is unique and the best way to get qualified is for us to review your file.  We have lenders for all situations:

  • Self employed programs
  • High net worth programs
  • Medical professional programs
  • Equity-based products
  • Child tax income
  • Rental income

We will do everything we can when it comes to finding the best lender for your unique situation. Contact us today before tax season is in full swing.

How Do Car Payments Affect Your Debt Ratio

General Trish Pigott 25 Feb

“Should I buy or lease a vehicle?” This is a common question that we often hear and the answer depends on the specifics of your situation. Many consumers overburden themselves with car payments that they simply can’t afford. What people don’t realize, is how much it can affect your debt ratios and the ability it has to restrict your mortgage financing.

Should you lease or buy?

Leases and purchase loans are two different methods of financing. One finances the use of a vehicle while the other finances the purchase of a vehicle. Each has its own benefits and drawbacks. To determine which is best for you, you need to review your financial abilities and current debt ratios. If you’re unsure of how a car payment will affect you, it’s best to speak with a professional (like us here at Primex Mortgages!) prior to making your decision.

How does it work?

When you buy, you pay for the entire cost of a vehicle, regardless of how many kilometers you drive. This cost includes sales tax and interest, often 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; the part that you “use up” during the time you’re driving it. At the end of the lease you have the option to return the vehicle or purchase it for its depreciated resale value. For example, if you lease a $20,000 car that has an estimated resale value of $13,000 after 24  months, you pay the difference of $7000. However, when you buy, you pay the entire cost of $20,000. This is why leasing offers significantly lower monthly car payments.

Both methods include additional fees, taxes and interest or finance rates.

Breaking Down the Car Payments

Loan payments have two parts – a principal charge and a finance charge. The principal pays off the full vehicle purchase price, while the finance charge is interest. All vehicles depreciate in value by the same amount regardless of whether they’re leased or purchased. Therefore, part of the principal charge of each loan payment can be considered a depreciation charge. Unfortunately, it’s money you never get back, even if you sell the vehicle in the future. Although the other part of the principal charge will go towards the equity, the longer you own it, the less you will have.

Lease payments are also 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 that the lease company has tied up in the car while you’re driving it.

In conclusion, the monthly savings of leasing may give you the option of putting your leftover money into more productive investments. These could include your mortgage or an investment property, both of which will increase in value.

Understanding Your Credit Score

General Trish Pigott 22 Feb

Your credit score affects all aspects of your financial activities when it comes to borrowing money. It also has the ability to affect the job you get, the apartment you rent, and whether you can open a bank account.

What is a credit score?

Your credit score, or beacon score, is a number that gives mortgage lenders an idea of your lending risk. Credit scores range from 300 to 900 and the higher you score, the better. This can often impact the interest rate that you qualify for and what mortgage products might be available to you.

What is a credit report?

A credit report lists all of your mortgage and consumer debt. Here in Canada, the two main credit reporting agencies are Trans Union and Equifax. Both agencies have a credit history file on anyone who has ever borrowed money. Every time you borrow money or make a payment on a loan or credit card, the lender reports the information to these two agencies. Liens, judgments, work history and your home address are also documented. Together, this information makes your credit report.

The information on your credit report varies based on your creditors and what they have reported about you. Potential lenders view your credit history as a reflection of your character. Whether we like it or not, our financial habits have a lot to say about the way in which we choose to live our lives.

One thing that many people do not know is that you have the legal right to obtain a copy of your credit report. A mortgage professional can help you obtain a copy of this report and go through it with you to verify that all of the information is true and correct.

The good news is that your credit report is a working document. This means that you have the ability over time, to repair any damaged credit and increase your credit score.

What You Need to Know About Insurance

General Trish Pigott 15 Feb

Not all insurance products are created equal. One of the most common mistakes homeowners and potential homeowners make is that they hear the word “insurance” and just assume they have it! Well, you might have one kind of insurance, but you might be missing coverage elsewhere.

It is important to understand all the different insurance products to ensure you have proper coverage.

To help you get a better understanding of the insurance, below are the four main insurance product options you will encounter and what they mean:

Default Insurance

This insurance is mandatory for homes where the buyer puts less than 20% down. In fact, default insurance is the reason that lenders accept lower down payments, such as 5% minimum, and actually helps these buyers access comparable interest rates typically offered with larger down payments.

Default insurance typically requires a premium, which is based on the loan-to-value ratio (mortgage loan amount divided by the purchase price). This premium can be paid in a single lump sum, or it can be added to your mortgage and included in your monthly payments.

In Canada, most homeowners know of the Canada Mortgage and Housing Corporation (CMHC), which is run by the federal government, and have used them in the past. But did you know? We also have two private companies, Sagen Financial and Canada Guaranty, who can also provide this insurance.

Home (Property & Fire) Insurance

Next, we have another mandatory insurance option, property and fire coverage (or, home insurance, as most people know it by). This is number two on our list as it MUST be in place before you close the mortgage! It is especially important to note that not all homes or properties are insurable, so you will want to review this sooner rather than later.

In addition to protecting against fire damage, home insurance can also cover the contents of your home (depending on your policy). This is important for anyone looking at purchasing condos or townhouses as the strata insurance typically protects the building itself and common areas, as well as your suit “as is”, but it will not account for your personal belongings or any upgrades you made. Be sure to cross-check your strata insurance policy and take out an individual one on your unit to cover the difference.

One final thing to consider is that you may not be covered in the event of a flood or earthquake. You may need to purchase additional coverage to be protected from a natural disaster, depending on your location.

Title Insurance

Another insurance policy that potential homeowners may encounter is known as “title insurance”. When it comes to lenders, this insurance is mandatory with every single lender in Canada requiring you to purchase title insurance on their behalf.

In addition, you have the option of purchasing this for yourself as a homeowner. The benefit of title insurance is that it can protect you from existing liens on the property’s title, but the most common benefit is protection against title fraud. Title fraud typically involves someone using stolen personal information, or forged documents to transfer your home’s title to him or herself – without your knowledge.

Similar to default insurance, title insurance is charged as a one-time fee or a premium with the cost based on the value of your property.

Mortgage Protection Plan

Lastly, we have our mortgage protection plan coverage. This is optional coverage, but one that any agent can tell you is extremely important. The purpose of the mortgage protection plan is to protect you, and your family, should something happen. It acts as a disability and a life insurance policy in regards to your mortgage.

Typically, when you get approval for a mortgage, it is based on family income. If one of the partners in the mortgage is no longer able to contribute due to disability or death, a mortgage protection plan gives you protection for your mortgage payments. However, most homeowners don’t realize that if they buy one of these policies through their financial advisor, life insurance agent or bank, the policy will not be able to move with them to a new lender.

As your mortgage professionals, we have an exclusive opportunity with this product through Manulife. This means that, if you purchase a Manulife Mortgage Protection Plan with us, you are protected for the life of your mortgage. You do not have to stay with the same lender! If you move, your protection ports with you instead of other similar products where the plan is specific to that lender. In those cases, should you want to switch lenders, you would need to requalify for your mortgage protection plan – possibly at higher rates!

If you have any questions about mortgage insurance or what are the best options for you, please do not hesitate to reach out by phone at 604-552-6190 or by email at trish@primexmortgages.com! We would be happy to take a look at your existing plan and discuss your needs to help you find the perfect coverage to suit you and your family.