Frequently Asked Questions – Part 3

Welcome to our third installment of Frequently Asked Questions. In this installment, we will explore the following topics: conventional mortgages, bankruptcy, child support, RRSPs, mortgage loan insurance and home inspections.

What is a conventional mortgage?
A conventional mortgage is usually one where the down payment is equal to 25% or more of the purchase price, a loan to value of or less than 75%, and does not normally require mortgage loan insurance.

How does bankruptcy affect qualification for a mortgage?
Depending on the circumstances surrounding your bankruptcy, generally some lenders would consider providing mortgage financing.

How will child support affect mortgage qualification?
Where child support and alimony are paid by you to another person, generally the amount paid out is deducted from your total income before determining the size of mortgage you will qualify for.

Where child support and alimony are received by you from another person, generally the amount paid may be added to your total income before determining the size of mortgage you will qualify for, provided proof of regular receipt is available for a period of time determined by the lender.

How can you use your RRSP to help you buy your first home?
Today, about 50% of first-time home buyers use their RRSP savings to help finance a down payment. With the federal government's Home Buyers' Plan, you can use up to $20,000 in RRSP savings ($40,000 for a couple) to help pay for your down payment on your first home. You then have 15 years to repay your RRSP.

To qualify, the RRSP funds you're using must be on deposit for at least 90 days. You'll also need a signed agreement to buy a qualifying home.

Even if you have already saved for your down payment, it may make good financial sense to access your savings through the Home Buyers' Plan. For example, if you had already saved $20,000 for a down payment - and assuming you still had enough "contribution room" in your RRSP for a contribution of that amount you could move your savings into a registered investment at least 90 days before your closing date. Then, simply withdraw the money through the Home Buyers' Plan.

The advantage? Your $20,000 RRSP contribution will count as a tax deduction this year. Use any tax refund you receive to repay the RRSP or other expenses related to buying your home.

While using your RRSP for a down payment may help you buy a home sooner, it can also mean missing out on some tax-sheltered growth. So be sure to ask your financial planner whether this strategy makes sense for you, given your personal financial situation.

What is mortgage loan insurance?
Mortgage loan insurance is insurance provided by Canada Mortgage and Housing Corporation (CMHC), a crown corporation, and GE Capital Mortgage Insurance Company, an approved private corporation. This insurance is required by law to insure lenders against default on mortgages with a loan to value ratio greater than 75%. The insurance premiums, ranging from .50% to 3.75%, are paid by the borrower and can be added directly onto the mortgage amount. This is not the same as mortgage life insurance.

What is a home inspection and should I have one done?
A home inspection is a visual examination of the property to determine the overall condition of the home. In the process, the inspector should be checking all major components (roofs, ceilings, walls, floors, foundations, crawl spaces, attics, retaining walls, etc.) and systems (electrical, heating, plumbing, drainage, exterior weather proofing, etc.). The results
of the inspection should be provided to the purchaser in written form, in detail, generally within 24 hours of the inspection.

A pre-purchase home inspection can add peace of mind and make a difficult decision much easier. It may indicate that the home needs major structural repairs which can be factored into your buying decision. A home inspection helps remove a number of unknowns and increases the likelihood of a successful purchase.

As always, if you have any questions about your mortgage or mortgages in general, please do not hesitate to contact me!

Canadians Confident with their Mortgages

Canadian mortgage holders have told the Canadian Association of Accredited Mortgage Professionals (CAAMP) in its fall 2013 survey that they're comfortable with their mortgage debt levels and consider mortgages to be a form of “good debt.”

This level of comfort may be due to the fact that Canadians believe they’re in control of their mortgages – taking aggressive actions to pay them down, leveraging their equity to consolidate debt or make new investments, taking advantage of low interest rates and increasingly turning to mortgage brokers rather than major banks for their mortgage needs.

The Annual State of the Residential Mortgage Market in Canada report, released late last month, contains some interesting information and statistics pertaining to Canadians’ mortgage views and borrowing habits.

Key highlights from the new report include:

• Mortgage brokers are gaining share in the overall mortgage market compared to traditional financial institutions. Among all new mortgages obtained this year, 40% were obtained through a mortgage broker and 42% from a bank. Overall, mortgage broker share increased from 25% to 28% in the past year
• Confidence in the market is strong. Less than 10% of Canadians expect that a housing bubble will burst, though the expectation is stronger among younger people
• 80% of homeowners selected at least one of the following emotions when asked about their mortgages: comfortable, confident, content, secure
• More than 80% of Canadian homeowners have at least 25% equity in their homes
• Of the new homes purchased in the past year, 57% were purchased by first-time buyers
• 68% of Canadians feel mortgage debt is “good debt”
• For mortgages repaid in the past two decades, actual repayment periods have been 30% shorter than original contracted periods
• This year, 38% of mortgage holders took steps to accelerate their repayments and shorten their amortizations

The report also covers the role housing has played in Canada’s recovery from the 2008/2009 recession.

As always, if you have questions pertaining to your specific mortgage needs, I’m here to help!

Tips to Keep in Mind Between Your Mortgage Approval and Funding Dates

In light of the new market realities and tightening of credit underwriting standards by both lenders and mortgage default insurers as of late,  keep in mind that now – more than ever – it’s important to be careful what you do between the time your mortgage is approved and when it funds. 

A few mortgage lenders and insurers have been doing something lately that they have not done in a long time – pulling new credit bureaus prior to funding, especially if there is a long period between the time of your approval and when the mortgage actually funds.

Following are eight tips to keep in mind between your mortgage approval and funding dates:

1. Don’t buy a new car or trade-up to a more expensive lease.
2. Don’t quit your job or change jobs. Even if it’s a better-paying job, you still are likely to be on a probationary period. If in doubt, call your mortgage professional and they can let you know if this may jeopardize your approval.
3. Don’t change industries, decide to become self-employed or accept a contract position even if it’s within the same industry. Delay the start of your new job, self-employment or contract status until after the funding date of your mortgage.
4. Don’t transfer large sums of money between bank accounts. Lenders get especially skittish about this one because it looks like you’re borrowing money. Be ready to document cash transactions or money movements.
5. Don’t forget to pay your bills, even ones that you’re disputing. This can be a real deal-breaker. If the lender pulls your credit bureau prior to closing and sees a collection or a delinquent account, the best you can hope for is that they make you pay off the account before they will fund. You don’t want to have to scramble to pay off a debt at the last minute!
6. Don’t open new credit cards. Again, just wait until after your funding date.
7. Don’t accept a cash gift without properly documenting it – even if this is from proceeds of a wedding. If you have a bunch of cash to deposit before your funding date, give your mortgage professional a call before you deposit it.
8. Don’t buy furniture on the “Do not pay for XX years plan” until after funding.  Even though you don’t have to pay now, it will still be reported on your credit bureau, and will become an issue – especially if your approval was tight to begin with.

While you may not risk losing your mortgage approval because you have broken one of these rules, it’s always best to talk to your mortgage professional before doing any of the above just to make sure!

Keeping Heat in Your Home

Many Canadians are doing everything they can to cut down on the amount of energy used around the house. One of the best ways to do this, while also reducing your environmental footprint and lowering your monthly utility bills, is by ensuring your attic is well insulated.

Adding insulation to an attic is a lot like putting on a hat when it’s cold outside. Insulation helps keep the heat inside the home where it belongs, so you can stay warm and cozy without spending a fortune. Insulating and air sealing an attic can also help prevent icicles from forming at the roof edge.

To help save money while keeping your home warm in the winter and cool in the summer, Canada Mortgage and Housing Corporation (CMHC) offers the following tips on how to super-insulate your attic:

• Create an air barrier by having all gaps and holes that pass through the ceiling into the attic sealed. A good air sealing job will help prevent warm, moist, house air from escaping into the attic. This is a very important first step to any attic insulation project. Ceiling electrical boxes, exhaust fans, pot lights, wiring and duct penetrations, attic hatches, vent pipes and chimneys are locations that should be inspected and properly sealed. 
• If you don’t need frequent access to your attic and if space permits, consider having at least a 71-centimetre (28-inch) layer of blown-in or batt-type insulation added over top of existing insulation. Make sure the new insulation does not block the ventilation spaces needed to permit air to move freely from the eaves into the attic. Insulation dams or guards can be installed to ensure this ventilation space does not become blocked by the new insulation.
• In restricted spaces, such as the eaves where the roof passes over the exterior walls, spray foam insulation may provide a better air seal and insulation level than can otherwise be achieved with batt-type or blown-in insulation. Spray foam insulation can also help prevent “wind washing” of the insulation in this area, which can reduce its insulating value and create cold spots along the ceiling-wall intersection below the attic.
• To stop heat from escaping through the attic hatch, insulate the hatch with RSI-5.3 (R-30) or similar high-R-value solid board insulation. Add compressible weatherstripping and a couple of latches to the hatch to ensure an airtight seal.
• If you think you will need access to different parts of your attic, have planks installed through the roof truss members above the insulation layer to provide a surface to crawl over.
• In some cases, due to the condition of the roof, limited space, or a desire to change the appearance of the house, it may be possible to install a new roof over top of the existing roof. This can provide an opportunity to add more insulation than would otherwise be possible.

For more information on how to insulate your attic, visit CMHC’s website: www.cmhc.ca; or call; 1-800-668-2642.

Frequently Asked Questions – Part 2

Welcome to our second installment of Frequently Asked Questions. In this installment, we will explore the following topics: documentation required for a mortgage, gift funds, fixed and variable rate mortgages and we will also discuss the length of a mortgage term.

What type of documentation will be required to obtain a mortgage?
Some of the items you will need to provide are:

- Your personal information, including identification such as your driver\'s license
- Details on your job, including confirmation of income
- Your sources of income
- Information and details on all bank accounts, loans and other debts
- Proof of financial assets
- Source and amount of down payment
- Proof of source of funds for the closing costs (approximately 2.5% of purchase price)

Can I use gift funds as a down payment?
Most lenders will accept down payment funds that are a gift from family as an acceptable down payment. A gift letter signed by the donor is usually required to confirm that the funds are a true gift and not a loan. where the mortgage requires mortgage loan insurance, Canada mortgage and housing corporation requires the gift money to be in the purchaser's possession before the application is sent in to them for approval. where mortgage loan insurance is provided by GE Capital this is not a requirement.

What is a fixed rate mortgage?
The interest rate on a fixed-rate mortgage is set for a pre-determined term - usually between 6 months to 25 years. This offers the security of knowing what you will be paying for the term selected.

What is a variable rate mortgage?
A mortgage in which payments are fixed for a period of one to two years although interest rates may fluctuate from month to month depending on market conditions. If interest rates go down, more of the payment goes towards reducing the principal; if rates go up, a larger portion of the monthly payment goes towards covering the interest. RBC open variable rate mortgages allow prepayment of any amount (with certain minimums) on any payment date.

What should the length of my mortgage term be?
The length of mortgage terms varies widely - from six months right up to 25 years. As a rule of thumb, the shorter the term, the lower the interest rate the longer the term, the higher the rate.

While four or five year mortgages are what most home buyers typically choose, you may consider a short-term mortgage if you have a higher tolerance for risk, if you have time to watch rates or are not prepared to make a long-term commitment right now.

Before selecting your mortgage term, we suggest you answer the following questions:

1. Do you plan to sell your house in the short-term without buying another? If so, a short mortgage term may be the best option.

2. Do you believe that interest rates have bottomed out and are not likely to drop more? If that's the case, a long mortgage term may be the right choice for you. Similarly, if you think rates are currently high, you may want to opt for a short to medium length mortgage term hoping that rates drop by the time your term expires.

3. Are you looking for security as a first-time home buyer? Then you may prefer a longer mortgage term, so that you can budget for and manage your monthly expenses.

4. Are you willing to follow interest rates closely and risk their being increased mortgage payments following a renewal? If that's the case, a short mortgage term may best suit your needs.

Should you go with a short or long-term mortgage?
A longer-term mortgage is worth considering if you have a busy life and don't have time to watch mortgage rates. Our 4, 5 and 7-year mortgages let you take advantage of today's rates, while enjoying long-term security knowing the rate you sign up for is a sure thing.

If you want to keep your mortgage flexible right now, you can explore a shorter-term mortgage that usually allows you to take advantage of lower rates and save.

As always, if you have any questions about your mortgage or mortgages in general, please do not hesitate to contact me!