The decision to choose a fixed or variable rate is not always an easy one. It should depend on your tolerance for risk as well as your ability to withstand increases in mortgage payments. You can sometimes expect a financial reward for going with the variable rate, although the precise magnitude will ebb and flow depending on the economic environment.

Fixed rate mortgages often appeal to clients who want stability in their payments, manage a tight monthly budget, or are generally more conservative. For example, young couples with large mortgages relative to their income might be better off opting for the peace of mind that a fixed-rate brings.

A variable rate mortgage often allows the borrower to take advantage of lower rates — the interest rate is calculated on an ongoing basis at a lenders’ prime rate minus a set percentage. For example, if the prime mortgage rate is 5.5 percent, the holder of a prime minus 0.5 percent mortgage would pay a 5.00 percent variable interest rate.

As a consumer, the best option is to have a candid discussion with your mortgage professional to ensure you have a full understanding of the risks and rewards of each type of mortgage.

Owning a home is generally considered to be a sound, long-term investment that can provide satisfaction and security for you and your family.

Each month when you make your mortgage payment, you are building equity in your home.

Equity is the portion of the property that you actually build through your monthly payment versus the portion that you still owe the lender.

At the beginning of your mortgage, more of your payments go toward paying off the interest and less toward paying off the principal. But the longer you stay in your home and the more mortgage payments you make, the more principal you pay off and the more equity you accumulate.

Most mortgages also offer you the option of making additional monthly or annual payments to reduce your principal faster. Some prepayment privileges, for instance, enable you to pay up to 20% of the principal per calendar year. This will also help reduce your amortization period (the length of your mortgage), which, in turn, saves you money.

There is also a tax advantage. If your home is your principal residence, any profit you make when you sell it is tax-free. A home can appreciate – or increase in value – as time passes, building more equity. As you build up equity, it’s usually easier to upgrade to a more expensive home in the future thanks to the profit you’ll make when selling your current home.

As an owner, you can also decorate and improve your home any way you like. Ownership tends to give you a sense of pride and can offer you and your family stronger ties to the community.

If you do decide that home ownership is right for you, it’s important to choose a home you can afford. If you can’t afford to buy your dream home, purchasing a more modest home can be a great place to start building equity that one day may allow you to buy the home of your dreams.

Since we’re currently in a buyer’s real estate market and interest rates have been dropping, now may be an ideal time to enter into home ownership for the first time.

There are generally two ways to get a mortgage in Canada: From a bank, or from a licensed mortgage professional.

While a bank only offers the products from their particular institution, licensed mortgage professionals send millions of dollars in mortgage business each year to Canada’s largest banks, credit unions, and trust companies … offering their clients more choice, and access to hundreds of mortgage products!

As a result, clients benefit from the trust, confidence, and security of knowing they are getting the best mortgage for their needs.

Mortgage professionals work for you, and not the banks; therefore, they work in your best interest. From the first consultation to the signing of your mortgage, their services are free. A fee is charged only for the most challenging credit solutions, and it’s especially under those circumstances that a mortgage professional can do for you what your bank cannot.

Whether you’re purchasing a home for the first time, taking out equity from your home for investment or pleasure, or your current mortgage is simply up for renewal, it’s important that you are making an educated buying decision with professional unbiased advice.

The question of whether it’s better to lease or buy a vehicle is a common dilemma. And do you buy or lease a new or used vehicle? The answer depends on the specifics of your situation.

It’s important to realize that many consumers overburden themselves with car leases or loans they simply can’t afford. While most of us require a vehicle to get to and from many destinations throughout the course of any given week, we don’t need a high-end vehicle to serve this purpose.

The key to remember when you’re looking to purchase a home and obtain a mortgage or refinance an existing mortgage is that, if you overspend on a vehicle, it affects your debt ratios and may restrict or negate your mortgage financing ability.

Leases and purchase loans are simply two different methods of automobile financing. One finances the use of a vehicle while the other finances the purchase of a vehicle. Each has its own benefits and drawbacks. 

When making a lease-or-buy decision, you must, therefore, look at your financial abilities in terms of your debt ratios. And if you’re unsure about how leasing or purchasing a vehicle will affect your ratios, it’s best to speak to a Dominion Lending Centres Mortgage Professional prior to making your decision.

When you buy, you pay for the entire cost of a vehicle, regardless of how many kilometres you drive. You typically make a down payment, pay sales taxes in cash or roll them into your loan, and pay an interest rate determined by your loan company 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, which is the part that you “use up” during the time you’re driving it. You have the option of not making a down payment, you pay sales tax only on your monthly payments, and you pay a financial rate, called a money factor, which is similar to the interest on a loan. You may also be required to pay fees and a security deposit. At lease-end, you may either return the vehicle or purchase it for its depreciated resale value. 

As an example, if you lease a $20,000 car that will have, say, an estimated resale value of $13,000 after 24  months, you pay for the $7,000 difference (this is called depreciation), plus finance charges and possible fees.

When you buy, you pay the entire $20,000, plus finance charges and possible fees. This is fundamentally why leasing offers significantly lower monthly payments than buying.

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

Loan payments also have two parts – a principal charge and a finance charge. The principal pays off the full vehicle purchase price, while the finance charge is loan interest. Since all vehicles depreciate in value by the same amount regardless of whether they’re leased or purchased, however, part of the principal charge of each loan payment can be considered as a depreciation charge. Just like with leasing, it’s money you never get back, even if you sell the vehicle in the future.

The remainder of each loan principal payment goes toward equity – or resale value – which is what remains of your car’s original value at the end of the loan after depreciation has taken its toll. The longer you own and drive a vehicle, the less equity you have.

With leasing, you may have the option of putting your monthly payment savings into more productive investments, such as your mortgage, an investment property or a vacation home, which will increase in value. In fact, many experts encourage this practice as one of the benefits of leasing.

While No-Frills mortgage products typically offer a lower – or more discounted – interest rate when compared with many other available products, the lower rate is really their only perk.

This type of product will only seem ideal for you if you have no plans to take advantage of benefits that will help you pay off your mortgage faster – such as pre-payment privileges including lump-sum payments.

Essentially, this product is only ideal for first-time homebuyers who want fixed payments and have limited opportunities to make lump-sum payments during the first five years of their mortgage; and property investors who need a low fixed rate and are not concerned with making lump-sum payments.

No-Frills products also won’t let you take your mortgage with you if you purchase another property before your mortgage term is up – ie, portability is not an option with this product. Portability is an important option that could save you money over the long term if the home of your dreams is within your reach before your mortgage term is up and rates have risen, which they have a tendency to do over a five-year period.

It’s understanding why these products may seem appealing. After all, during tougher economic times who has the extra cash to put down a huge lump-sum payment? And who needs a portable mortgage if they’re not planning on moving until the market picks up? But it’s important to remember that a lot can change over the course of five years – or whatever term you choose for your mortgage.

The thing is, you can still obtain great mortgage savings without giving up the perks of traditional mortgages. For starters, many lenders are willing to offer significant discounts if you opt for a 30-day “quick” close.

There are, however, other ways in which to earn your own discounts. For instance, by switching to weekly or bi-weekly mortgage payments, and by obtaining a variable-rate mortgage but increasing your payments to match those of the going five-year fixed rate, you’ll be ahead of the typical 0.1% discount of a No-Frills product within approximately three years.

No-Frills products represent a great example of why interest rates are not the only important factor to consider when deciding whether to opt for a particular mortgage product. Much like buying a car, you get what you pay for. If you don’t want a car with air conditioning, a stereo, a cup holder, and so on, then you can get the cheapest car going… but you’ll likely regret it later.

Canadians purchase homes for a variety of reasons. Some want the stability of owning their own home, while others also look at home ownership as an investment vehicle. No matter what the reason, the truth is that home ownership has proven itself to be a good stable investment over time, and one which many Canadians are profiting from.

While many people have chosen to purchase their first home during these times of lower interest rates, there has also been a large movement to refinance home loans and pull out equity for home improvements, investments, college expenses, and even high interest debt consolidation. Canadians have been borrowing against their home’s equity in record numbers, taking out billions of dollars in cash each year.

In years past, many saw their homes as a shelter of safety, yet today, they are more than ever before willing to borrow against the equity owned in their homes to further their investment portfolios, get out of debt, send their children to university, make improvements to their home, or even boost their RRSP contributions. Where home equity was once sat upon, today it is something to be tapped out and used to one’s advantage.

While tapping the equity in your home can be a good idea, you should do so with caution and understand any of the possible consequences. The best thing you can do is consult a licensed mortgage professional and financial planner to discuss opportunities to make your home’s equity work for you.

If you’re self-employed, you may have a more difficult time obtaining financing for your real estate purchases than you encountered just 18 months ago thanks to the recent recession. And as of April 9^th, 2010, Canada Mortgage and Housing Corporation (CMHC) raised the required down payment amount, as well as decreased the percentage at which you can refinance an existing mortgage if you’re self-employed.

To add to the confusion, there are also new rules for those who have been self-employed for more than three years.

Still, if you can prove your income, show you’re up-to-date on your taxes and you have solid credit, your chances of being approved for a mortgage are greatly improved.

There are essentially two types of self-employed or business-for-self (BFS) borrowers – those who can prove their income and those who cannot, and must instead use a stated-income mortgage product. But, if you have been self-employed for more than three years, you can no longer use a stated-income product.

By providing the required documentation, you’re much more likely to be approved for a mortgage if you qualify based on your income. The trouble is that if you cannot prove your income, you pose a higher risk in the eyes of lenders.

CMHC currently offers default mortgage insurance for people who have been self-employed less than three years through a stated-income mortgage product up to 90% loan to value (LTV) – meaning the down payment can be as low as 10% of the purchase price. But prior to April 9^th, 2010, the maximum LTV for self-employed individuals was 95% for purchases – meaning the down payment would have only been 5% instead of the current 10%.

And if a BFS individual wishes to refinance an existing mortgage, the maximum loan amount was reduced to 85% from the previous 90% of the home’s value.

Regardless of the maximum LTV, however, the income amount you are stating has to make sense based on your occupation. This is important, because the chances of finding lenders to fund this type of deal are significantly boosted if the mortgage is insured.

Lenders and insurers are well aware of the tax write-offs that BFS borrowers can leverage, but these deals are accepted or declined based on average incomes for specific fields, as well as your credit rating. It pretty much goes without saying that those with credit blemishes will have a tough time obtaining mortgage financing if they’re self-employed.

Getting pre-approved

While BFS mortgage financing is viewed on a case-by-case basis, if you work with a licensed mortgage professional to obtain a pre-approval, you can be confident you have access to mortgage financing and you will know how much you can spend before you head out shopping for a property.

It’s important to note, however, that there is a significant difference between being pre-approved and pre-qualified. In order to obtain a pre-approval, the lender fully underwrites the deal whereas, with a pre-qualification, only the most basic details are considered. Remember that many banks will only issue a pre-qualification.

Should a pre-approval and/or mortgage default insurance be unobtainable, the maximum mortgage amount you are likely to qualify for is between 50% and 75% – meaning you will need a much larger down payment.

Alternative financing

If you do not qualify for traditional financing all is not lost, since you may be eligible for alternative – or private – funding. Mortgage professionals often have access to private investors who are willing to lend money to BFS individuals looking to obtain mortgages. Although you will pay a higher interest rate – on average about 12% – this route may enable you to acquire funds to purchase a home.

It’s also important to note that there are added fees involved with private funding because the deals involve a higher degree of risk. The combined lender/brokerage fee will depend on the specific deal and the risk it poses, but the figure will be disclosed upfront so you know exactly what you’ll be expected to pay for these services.

Another key point to consider is that private financing is equity based, meaning that the lender’s decision will be based on a specific piece of real estate. Private lenders want to know that the property is marketable and that they will be able to easily sell it should the mortgage go into foreclosure.

If you have a job awaiting you on Canadian soil, it’s possible to also secure the purchase of a home if you plan ahead and connect with professionals before you even begin packing.

The main reason you’ll want to get in touch with the right professionals before you start to pack is to find out what important paperwork you’ll need to set aside to ensure smooth sailing through the home financing and purchasing processes.

Your first step should be to get in touch with an experienced mortgage professional. In doing so, you can set the home financing process in motion by securing a mortgage rate guarantee and pre-approval, and figuring out what supporting paperwork you need to provide to purchase a home in Canada.

The services of mortgage professionals are typically free – they are paid by lenders for bringing in new business. Mortgage professionals have access to multiple lenders – including banks, credit unions and trust companies – where they can compare products and rates, and find the ideal mortgage to meet your unique needs.

In most cases, Canadian mortgage lenders and insurers want to see employment letters that prove your offer of employment and salary in Canada. You must also have at least a 5% down payment for the home from your own resources – which means it has to be your own money, not borrowed or gifted. So, for instance, if you’re selling your home in another country and using some of the proceeds as a down payment on a home in Canada, you must be able to prove this.

Lenders and insurers also want to see that you have a solid credit history. Although requirements for this proof varies based on which insurer and lender your mortgage is funded through, your mortgage professional will be able to tell you exactly what documents you’ll need to provide. Often, an international credit bureau is sufficient to prove your credit history. If this is not available, you can also provide 12 months’ worth of bank statements, mortgage or rental payment receipts, utility or telephone bills, and so on. Again, there are several options from which to choose and your mortgage professional will be able to specifically tell you what a particular lender and insurer want to see.

You must also apply for landed immigrant status to get the ball rolling on securing your social insurance number (SIN), which is required before you begin working in Canada.

By securing mortgage financing prior to moving to Canada, all you have to do when you arrive is find a home. This will be an easier task when you already know exactly how much you can spend thanks to your pre-approval. And since your mortgage professional can put you in touch with a trusted real estate agent prior to your move, you will also be able to research homes before you arrive in Canada. Again, real estate agents do not typically charge a fee to find you a home to purchase.

By planning ahead before making your move, you truly can save yourself a lot of hassle and stress when it comes to securing mortgage financing and purchasing a home. And if you’re already living in Canada, many of the available New to Canada mortgage products apply to new immigrants who have been in the country for up to 36 months.

Paperwork to gather/set aside before packing:

• Proof of employment and salary in Canada

• Proof of at least 5% down payment from your own sources

• Government proof of residency application

• Copy of your immigration papers

• Copy of your passport

• Credit report

• Mortgage or rental payment receipts for the past 12 months

• Bank statements for the past 12 months

• Utility and phone bill payments for the past 12 months

Mortgages in Canada are generally amortized between 25 and 35 year terms. While this seems a long time, it does not have to take anyone that long to pay off their mortgage if they choose to do so in a shorter period of time.

With a little bit of thinking ahead, and a small bit of sacrifice, most people can manage to pay off their mortgage in a much shorter period of time by taking positive steps such as:

• Making mortgage payments each week, or even every other week. Both options lower your interest paid over the term of your mortgage and can result in the equivalent of an extra month’s mortgage payment each year. Paying your mortgage in this way can take your mortgage from 25 years down to 21.

• When your income increases, increase the amount of your mortgage payments. Let’s say you get a 5% raise each year at work. If you put that extra 5% of your income into your mortgage, your mortgage balance will drop much faster without feeling like you are changing your spending habits.

• Mortgage lenders will also allow you to make extra payments on your mortgage balance each year. Just about everyone finds themselves with money they were not expecting at some point or another. Maybe you inherited some money from a distant relative or you received a nice holiday bonus at work. Apply this money to your mortgage lender as a lump-sum payment towards your mortgage and watch the results.

By applying these strategies consistently over time, you will save money, pay less interest and pay off your mortgage years earlier!

For US homeowners, mortgage interest is automatically tax deductible. But for Canadians, the write-off is not so straightforward. In order to make your mortgage interest tax deductible, homeowners must be able to prove that the money is being reinvested and is not being used for personal expenses.

A properly structured mortgage-centric tax strategy has several key elements – the most important of which is a multi-component, readvanceable mortgage or line of credit.

It’s best to have a single collateral charge with at least two components – usually a fixed-term mortgage and an open line of credit – that can track and report interest independently. This is absolutely essential under Canada Revenue Agency (CRA) rules and guidelines.

Second, the strategy must employ conservative leverage-investment techniques – which is why a financial advisor must be involved in order to comply with federal regulations. The financial advisor should be a Certified Financial Planner (CFP) who is experienced in leveraged investing, and able to actively monitor a homeowner’s portfolio on an ongoing basis.

Homeowners who opt for a tax-deductible mortgage interest plan make their monthly or bimonthly mortgage payments the same way they would when making any type of mortgage payment. The payments go towards reducing the principal amount of the mortgage and are then moved over to the line of credit as the mortgage is paid down. But in order to be tax-deductible, the funds must then be transferred to an investment bank account, which can be done automatically by your CFP.

Once the money is in an investment bank account, it can be reinvested and the money becomes tax deductible. Essentially, the homeowner is borrowing from the paid portion of the mortgage for reinvestment purposes.

On average, a typical 25-year mortgage can become fully tax deductible in 22.5 years.

If you have a rental property, you can also use this tax-reduction strategy even further. When you receive your rent, you can then use the funds to help pay down your personal mortgage. Once paid, the rental funds move to the line of credit and are then transferred to the investment bank account. They are then used to pay down the mortgage on the rental property. Using this method, it is possible to have your mortgage interest become fully tax deductible in only 3.5 years.

The ideal client

Ideal borrowers for an advanced mortgage and tax strategy are typically professionals or other high-income earners who have a conventional mortgage (have at least 20% of the cost of the home to put towards a down payment) and have built up substantial equity.

As high-income earners, their total debt-servicing ratio will be quite low and they will have excellent credit (700+ Beacon scores). These borrowers are financially sophisticated homeowners that are keenly interested in establishing a secure financial future and comfortable retirement. They also have good investment knowledge.

The risks

The financial benefits of tax-deductible mortgage interest are indisputable and justify the risks to the right borrower. That said, a problem can arise if a homeowner spends the funds as opposed to reinvesting them. As well, any tax refunds have to flow through the investment cycle in order to realize the benefits of paying down the mortgage as quickly as possible – and making as much of the interest payment as possible tax deductible.

Short-term financial risk is liquidity risk (sometimes referred to as cash flow risk). Cash flow risk addresses the possibility that interest rates will sharply drive up the cost of borrowing at the same time as markets falter, resulting in a negative client monthly cash flow for a brief period of time.

This short-term risk is typically only prevalent in the first two to four years because, after this period of time, the homeowner has stockpiled enough equity through annual tax refunds that other liquidity options exist and the risk is fully mitigated.

Liquidity risk varies widely based on the balance sheet strength of the homeowner. Highly qualified homeowners are easy to manage as these borrowers have no difficulty meeting the short-term cash flow demand should the need arise.