Dropping rates

Fixed rates are steadily lowering. Hopefully this will breathe some life into our soft market...

Residential rates:
1 yr fixed – 4.00%
4 yr fixed - 4.89
5 yr fixed - 4.99
5 year variable – 4.1% (Prime +.6%)
• Prime is currently 3.5%

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Need a quote on your mortgage? Call me at 416 876 2031.

Stuck with two properties: Investor mortgage may be the solution to your problem

It’s a fairly common scenario nowadays. You bought a new property and arranged financing that was conditional on the sale of your old property. And now with the market having fallen off, you’re under pressure to reduce the price of your original property but you hesitate to do so because you don’t want to realize a major loss.

Enter the investor mortgage, available with as little as 5% down. What is an investor mortgage? It’s a mortgage that allows you to offset the rental income you will receive from either one of the properties against the carrying cost the property. With a lender that allows rental offset, the total amount of mortgage (or mortgages) you are allowed to carry will be significantly higher than they would be with a mortgage on an owner occupied property. In other words, if you prefer not to realize the loss on your original property, it may be possible for you to keep both properties. The insurance premium on the investor mortgage is higher than the premium on a regular mortgage – insurance premiums apply when your down payment is less than 20% -- but this may be the solution for you if you want to hang on to the original property and wait for a better market to sell.

Call me direct at 416 876 2031 if you would like more information about the investor mortgage.

Q&A: Improving Your Credit Profile

I just received the following e-mail from an interested real estate investor about credit. I thought others might find the information useful so I am posting the Q&A...

Question: "As a mortgage broker are you looking at credit cards and there balance? The reason I'm asking is that I have 7 credit cards. Over the years company's just give them to me..I don't have a balance on any of them. And I only use 3. I have a high credit limit on them.

I"m just wondering when I go to apply for a mortgage are those card going to look bad and I might not get approved because I have them?

I'm try to get my application together so when I find my investment property I will not have a problem getting a mortgage.

Do you think it's a good idea to close those accounts? and will closing those accounts has an effect on my credit report?

Answer: "I would definately NOT close the accounts. Closing accounts will probably reduce your credit score. Do you know what your credit score is? I would recommend going to www.equifax.ca and checking your score on line for around $25. If your score is 680+ then you are fine. Keep the balances on your cards as low as you can and don't apply for any more cards unnecessarily. If you have no balance on your cards then it won't affect the debt service ratios with any of my lenders"

Do you have a mortgage question. Feel free to contact me by email or by phone.

Is now a good time to lock in your mortgage?

I just received an e-mail from a client asking the following question... "Given today's large Bank of Canada interest rate cut of .75%,should we be thinking about locking in our mortgage?"

I think a lot of people might be wondering the same thing so I thought I'd share my answer.

"Long term fixed rate mortgages ie. 3-5 year terms, are currently around the 5% mark. Fixed rates do not move exactly in tandem with the Bank of Canada overnight rate. When the Bank of Canada reduces the overnight rate as they did today, the banks normally follow by reducing their prime lending rate. After the Bank of Canada annoucement today, the banks dropped their prime lending rate almost immediately by .50% from 4% to 3.5%.

Variable rate mortgages are tied to the prime lending rate so if you have a variable rate mortgage you benefit directly the rate cuts. For example, if your rate is based on the prime rate less .60% (in the last few years many people took out mortgages rates below prime)then your current rate would be 2.9% which is a great rate. The premium you would have to pay to lock into a long term fixed rate of around 5% is pretty steep, therefore I would recommend you enjoy the current low rate for while".

Do you need help with your mortgage? Give me a call 416 876 2031.

Investment Tip: You Can Buy a 5 unit apartment building w/as little as 15% down

With stock markets down, investors are looking for solutions to make up for steep losses.

Here’s a tip for people open to looking at a real estate investment as a way repair their badly bruised stock portfolios.

With a 5 + unit rental property, you can reduce your investment risk in comparison to a 1 or 2 unit rental property... in the event that you have a vacancy, you can count on the other tenants to ensure you have a steady income stream.

Real estate is a great investment.

With real estate, at least you can see your investment, so you know it’s not going to disappear on you (as long as you pay the mortgage that is !...)

Did you know that CMHC will insure a 5 + unit residential property with just 15% down, or up to 4 units with 5% down?

Sound interesting? Call me for more information.

Mortgage Investing Attractive Option to Stock Market Investing

Given the recent upheaval in the global stock market, many of us who thought their investments were safe because they own balanced mutual funds and blue chip stocks have of late, found that a substantial amount of their life savings has eroded. If you’re one of these people, what should you do? Should you cash in your mutual funds, sell your stocks and instead buy bonds and GICs? Selling low and locking in your losses is never a good strategy, but if you’re someone who has been losing a lot of sleep at night, and if you find you’re a bit frantic about checking out the daily financial reports, you may want to consider balancing out your portfolio with good quality, income producing mortgages.

One of the purported benefits of the mutual funds that many of us currently hold in our investment portfolios is that investment professionals take care of the stock picking for you. The average person doesn’t have the time to analyze individual companies and then figure out if the stock is underpriced or overpriced. An investment professional will take care of balancing your portfolio too, making sure that you have a balance of stocks and bonds, to level out the performance of the portfolio. Your mutual fund is probably also diversified by industry. The theory is that when one sector goes through a slump, better performance in another will keep your portfolio from bottoming out. Recently I have spoken with a lot of people at a loss, who have seen the value of their balanced, diversified portfolios shrink 30, 40 and in some cases as much as 50% since their peak.

Let me explain how mortgage investing works, what kind of returns you are likely to achieve and what the risks are. With mortgage investing you can see and touch the underlying asset that your loan is secured by, and without a lot of training and expertise, you can make a reasonable assessment about the value of the property. Where is the property located and what is its’ use? What condition is the property in and how much income can the property generate? You will also want to know something about the borrower and his or her ability to repay.

Private 1st mortgages will usually generate a return of around 8-9% while higher risk, second mortgages will give you a return of 10-12%.

There are risks associated with mortgage investing that you should know about. If the borrower stops making his mortgage payments and if in an economic downturn the value of the property drops below the sum of the mortgage(s) on the property, you could lose part or all of your investment. Second mortgages are a higher risk than 1st mortgages because the 1st mortgagee has the 1st claim to the property. As a rule of thumb, you should not lend more than 75% of the value of the property. That way, even if the property drops in value by 20%, your investment is safe, allowing an additional 5% margin for legal and selling costs.

It is important to note that if the property owner stops paying the mortgage, the mortgagee (the investor) has a right to foreclose on the property. In the late 80’s when interest rates were as high as 18-20% and a lot of people could not afford to pay their mortgages, a number of mortgage investors acquired substantial real estate holdings. When real estate values eventually started to go up, they made a nice profit on their holdings.

Although from a tax perspective mortgages are the least desirable because the income is 100% taxable in comparison to stock dividends and capital gains, you can defer the taxes by putting your mortgage investment into your RRSP. Jason Heath from E.E.S. Financial in Markham says that as a rule of thumb, given the costs involved in setting up a mortgage in your RRSP, the investment should be at least $75,000 for it to be worthwhile. The downside of putting the mortgage in the RRSP is that if you lose on the investment, you won’t get that RRSP room back.

If you would like to learn more about mortgage investing, call me at 416 876 2031, or send an e-mail to david@mortgagemensch.ca, and I'll keep you up to date with investment opportunities as they arise.

Changes to Mortgage Lending in Canada

This past summer, Canada’s department of finance announced they would be making changes to insured mortgage lending guidelines, making it harder for prospective homebuyers to get a mortgage. In Canada, when you buy a property and you have less than 20% down, the mortgage has to be insured by one of the nation’s mortgage insurers. Since mortgage insurance is backed by the government of Canada, it is within their jurisdiction to mandate changes they feel are necessary. The changes, which took effect on October 15th this year were as follows:

1) Minimum 5% down required on a home purchase (previously zero down was allowed)
2) Maximum 35 years amortization (previously up to 40 years was allowed)
3) Minimum credit/beacon score requirement up from 600 to 620

These changes effectively make it harder for buyers to get mortgages. The changes were mandated in order to reduce the insurance risk and to protect Canadians.

How can prospective homebuyers deal with these changes?

Homebuyers who have been unable to save for a down payment should aim to take advantage of the Canadian Home Buyer’s Plan (HBP). In Canada, first time buyers are allowed to take up to $20,000 out of their RRSP for a down payment on a home and they do not have to pay taxes on the withdrawal. You have fifteen years to replenish the RRSP after taking out funds under the HBP. If you haven’t been making regular contributions to your RRSP, you may also want to consider taking out an RRSP loan to make the most of your allowable RRSP contribution room. Funds must be in the RRSP for at least 90 days before they can be withdrawn under the HBP.

To ensure you meet the minimum credit/beacon score requirements, be sure to establish at least two trade lines. A trade line is a credit card, line of credit or a loan. Don’t cancel older credit cards or make unnecessary loan applications -- doing so will negatively impact your credit score. Avoid carrying high balances on your cards and always pay at least the minimum amount owing.

If you are self employed, be sure to get your taxes done on time. Don’t worry about the fact that you’re not reporting a lot of income (this is a common concern for self employed people). It is understood that for accounting purposes you will minimize the amount of income you are reporting and that your ‘net income’ may not be a good measure of your ability to pay. You can still get a mortgage without have to prove income, as long your credit is good, and as long as you can prove that you’ve been self employed and working in the same business for at least a couple of years.

David Grossman talks about improving your credit on CBC's Living in Toronto

Several changes to mortgage insurance will be taking place on October 15th 2008 which will impact Canadian homebuyers. Among the changes mandated by the department of finance, the minumum beacon/credit score requirement will be going up from 600 to 620.

Given these changes, it makes it that much more important that people know what is being reported on their credit report and how to build a good credit rating.

I recently spoke with Mio Adilman on CBC's Living in Toronto about building a good credit profile. For tips on how to build a good credit profile, click on the video below.



Call me if you have questions.

Some Good Economic News for Canadians

The economy is suffering worldwide in what now appears to be a global credit crisis however there is some good news in Canada which might make you feel a little better.

Yesterday it was reported that a survey by the World Economic Forum found Canada to have the soundest banking system in the world. On a list of 134 countries Canada was ranked number one. Click here if you would like to read the article now.

Also, last Friday's Globe & Mail reported that Canadian employers created a blockbuster 107,000 new jobs in September. Though most were part time, this blew away economist’s expectations of an increase in 8,000 new jobs.

Also in Canada, sales of new vehicles rose 1.7% last month compared with the same month a year ago.

In an effort to stave off a worldwide crisis, most of the worlds banks reduced their rates this week. The Bank of Canada reduced their overnight lending rate by a half a percentage point.

The new Prime lending rates charged by the banks are:

TD Canada Trust – 4.35%
CIBC – 4.35%
Scotiabank – 4.25%
RBC – 4.25%
BMO – 4.25%

It's good news if you’re have a variable rate mortgage. Contact me if you have questions.

Canadian Government Throws Wet Blanket on Mortgage Market

On Wednesday this week the Department of Finance announced that some of the mortgage products created in the last two years including 40 year amortizations and zero down mortgages would be eliminated effective October 15, 2008. They also announced they would change some of the documentation requirements (I anticipate more strict requirements for self employed/no income qualifer mortgages) and institute a minimum beacon score requirement of 620 (they say would consider lower scores on an exception basis.

For more details on the changes check out my video below..



Tips on dealing with the changes:
If you're in the market and you want to purchase using one of the existing programs, make sure you get your mortgage application in by October 15th. If you were planning to buy a home and you think these changes will impact your ability to follow through with your plans, talk to your financial planner about the Home Buyers Plan which allows you to take funds out of an RRSP tax free after just 90 days as long as its for down payment purposes. Use your savings or look into getting an RRSP loan to get money into the RRSP. If your self employed, get your taxes filed so you can show your current with your taxes and if your credit score is on the low side, eliminate unnecessary loan inquiries and try and reduce your credit card balances. You can check your credit score by going to www.equifax.ca. There's no impact on your credit score when you check it yourself.

Should You Go with a Variable or Fixed Rate Mortgage?

I recently got into a discussion with a client about whether he should go with a fixed or variable rate mortgage and I shared with him a copy of a paper that was written by Associate Professor Moshe Milevsky at Schulich School of Business in 2001. The paper is called 'Floating Your Way to Prosperity' and you can find a copy of it and other papers written by Professor Milevsky at http://www.ifid.ca/research.htm. The study incorporated movements in rates over a 50-year period and proves that 8 or 9 times out of ten you would have won out by going short term vs. long term on your mortgage. Following is a copy of the discussion...

"Thanks for the article. At first glance, although I have not read it all yet, it looks professional and seems to support our decision to go with the variable rate. Two questions pop up in mind so far (there may be probably more as I read through the article);
1) How relevant you think is this article and its conclusions considering the fact that it was published in 2001 and today we are facing a new situation in real estate (sub prime) which has an ongoing impact (and we still don't know where and when it's going to stop) of downturn in economical stability and residential house prices?
2) He bases some of his analysis on past history. I have learned in life that especially in economics past does not equal the future. What is your view as to the predictability of past events on forecasting future trends?"

My response - "His study was based on the 50 year period up to 2001. If he did the study again to include the period from 2001 up to 2008, I think that the results would not be any different. I have had a variable rate mortgage for the last six years and while I think there was a short period of time when some people locked in to a fixed rate mortgage at around 4% (a very good fixed rate), I think that for the rest of the time you would have been better off with the variable rate. As far as the subprime crisis goes, while it has had a severe impact on the U.S. economy and definitely some impact on the Canadian economy, I think that the end is in sight. It is also important to note the Canadian mortgage and real estate situation is very different than the U.S. We have steady immigration, a relatively healthy economy and low unemployment, and of course a favourable interest rate environment keeping our real estate market healthy. I should also mention that we have far more conservative lending practises in Canada."

Mortgage Tip: Ask about your Lender’s Variable Rate Mortgage “Lock-in Privileges”

Not all variable mortgages are created equal. In the current mortgage market, the spread between fixed and variable rates is very wide. Fixed rates are around 5% while variable rates are closer to 4%. As a result, most borrowers are opting for variable rate mortgages. When trying to decide which variable rate mortgage to go with, one of the most important things you need to find out about, are your lender’s “lock in privileges”. What rate you will get, if you decide to lock in to a fixed rate mortgage in the future and will the lender guarantee that in writing?

Banks advertise their posted fixed rates which are higher than the rates you be offered if you were negotiating a new fixed rate mortgage today. Knowing that you will get the best discounted rate at the time of locking in will give you peace of mind now and could save you thousands of dollars in the long run. Call me for a run down on the differences in the “lock in privileges” among Canada’s largest lenders.

Complaining About Property Tax Like Crying with a Loaf of Bread

A lot of people were very upset when the Toronto Liberal government recently announced a proposal to increase property taxes. You may disagree, but I don't think the proposed property tax increase is a big deal. Based on the average price of a home in the city of Toronto, which is around $365,000, the proposed increase would amount to a total of $81 per year. But to be fair, when you consider all the escalating costs homeowners have been facing in recent years including the new city land transfer tax on purchases in addition to rising utility costs and taxes, together they add up. And if you're on a fixed income, keeping ahead of it all can be a challenge.

Now if you are a homeowner and have owned a home in the city of Toronto for the last ten years, let’s consider for a moment how you have benefited. House prices have increased dramatically in the past ten years -- if you bought a house in 1997 for $190,000, given an average increase of 6% per year, your house would be worth approximately $365,000 today. Last year alone you would have benefited from an increase of approximately $22,000 in the value of your house! When you look at the big picture, it makes an additional $81 a year in property taxes look like spare change. And CMHC has forecasted yet another 6% increase in house prices this year.

My grandfather once said to me, when you have something great and you complain about it, it’s like crying with a loaf of bread. And having lived through the great depression, he knew that if he had nothing else but could still afford to buy a loaf of bread for dinner, then you still had something. Let’s not forget how fortunate we are to live in a city like Toronto (in Canada actually). Because of the high demand for real estate, homeowners have benefited from considerable increases in the value of their homes and in their net worth in recent years.

So how do you convert equity into cash you can use to pay bills? You borrow against the equity you have in your home. One method is to get a line of credit. Usually the rate charged on a secured line of credit is at Prime. Prime rate is currently 5.25% and with downward pressure on rates as a result of the subprime mortgage crisis in the U.S., rates are expected to go down.

If you’re reluctant to borrow, you could also consider downsizing your home. For some, that may be a good solution, especially if you're an empty nester and you have more house than you need. You'll probably enjoy lower property taxes and utility costs on a smaller home too, but selling costs are high. You’ll have to pay real estate commissions and legal fees on the sale of your home, as well as land taxes and legal fees on the purchase. After expenses, if you move from a $400,000 home to a $300,000 in the city of Toronto, you'll end up saving around $70,000. Approximately $30,000 will go up in smoke. Moving expenses can take a large bite out of your equity.

If you want to stay in your home because you’re comfortable there, and if you’re over the age of 60, you may qualify for a reverse mortgage. The dominant player in the reverse mortgage market in Canada is CHIP -- that stands for Canadian Home Income Plan. CHIP has been around for 20-years. Their borrowing rates are around 2% higher than the current prime rate, but the benefit of the reverse mortgage is that you never need to make a payment and they won't ever force the sale of your home as long as you’re living in it. I recently had a conversation with Greg Bandler, an SVP at CHIP. CHIP takes a holistic approach to addressing the needs of their clients by leveraging their network of financial planners and by looking at your whole financial picture.

How to Lose a Deal in Ten Days

Losing is never easy. And just because you lose, as you will some of the time, it doesn't mean you're a loser. So when you know you're going to lose, do it like a winner. People aren’t out to get you. They just do what they think is in their best interest and they aren’t thinking about how they can 'get' you. So don’t take it personally. The trick is to learn whatever you can and move on.

I recently had a client who after speaking with several different mortgage specialists, decided to use my services. Yeah, victory! Not so fast. This is the beginning of the story and like all good stories, this one has lots of twists and turns.

The mortgage application was unique because the borrower just moved to Canada and worked for a company that was also new to Canada. I applied at a major bank that was known to offer a lending program suited to the borrower. Since the company was also new to Canada, the bank was giving us a difficult time with the application. The applicant was more than patient, working with us over a period of two weeks, providing the additional documentation the bank requested to help get the loan approved.

One of the other mortgage specialists the borrower had been in touch with worked at a branch at the same bank that I applied to. He did a good job, staying in touch with the borrower the whole time. He told the borrower he could easily get the approval that we were working so hard to get. Seems strange he was so confident he could get the approval we were having such a difficult time getting, at the same bank!

After much effort, we finally got the word, our application was approved! Now we just needed to get a written commitment from the bank and get the borrower signed up. The deal was closing in just a few days and we didn’t have a lot of time -- by now the applicant was really on edge. The lender promised to have the paperwork to us the next day by noon but they did not deliver. The borrower finally lost his patience and called the mortgage specialist at the branch. I finally got a written commitment that afternoon at around 4 PM but by that time the borrower had already met with the mortgage specialist at the branch where they produced a written commitment before we did.

The borrower called me the next day and explained that he wanted to go with the mortgage offered to him by the branch because even though my mortgage was from the same bank, he felt that the branch did a better job getting him the mortgage than we did. My channel was slow and even once we had the approval we failed to deliver the paperwork at the promised time. He wanted to continue dealing with the branch. Here’s the rub.

He was also being told by his branch that due to internal politics, his branch would not be able to fulfill the mortgage, unless I cancelled my mortgage application with the bank first. Since we applied for the mortgage first, according to the bank’s policy, the branch was not allowed to offer him the mortgage. Later that day I sent an e-mail to the bank, cancelling my mortgage application. (I added a few comments about why the application was being cancelled and how the poor service they provided was the reason for it, but that's another story.)

Some people would argue that I should not have cancelled my mortgage application and would have then won the business by default. I disagree. If someone doesn't want to do business with you, you cannot force them. In the end, the applicant was pleased with the way I handled things, despite the fact that I did not fulfill the mortgage for him. As a result, he referred me to several other clients and gave a positive report back to the person who originally referred him to me.

What would you have done in this case?

Why Mortgage Lenders Care About Where Your Down Payment Comes From

When people are applying with me for a mortgage and I ask them where their down payment is coming from, they often give me a confused look. They don’t understand why their lender would care where their down payment comes from. After all, a down payment is a down payment. Who cares where it comes from? Actually, it matters a great deal where your down payment comes from.

The source of your down payment says a lot about the strength of your mortgage application. For example, if you have been able to save $50,000 for a down payment, it says something about how you handle money. All else being equal, a mortgage application with a down payment that comes from your savings is stronger than an application with a down payment that is a gift from a family member.

Lending institutions like banks and trust companies will ask to see proof of your down payment. If your down payment is from your savings, you will need to provide either 3-months bank statements or copies of investment certificates. If the down payment is a gift from a family member, a gift letter will need to be provided with the donors contact information.

In some cases it is a requirement of the mortgage that the down payment be from the borrowers own resources. For example, there is a mortgage product available for self employed people in Canada where proof of income is not a required, but it is a condition of the mortgage that the down payment – which must be at least 5% of the purchase price – come from the borrowers own resources. I guess they figure that if they are going to loan you that much money without proof of income, you should at least be able to show that you’ve been able to save the down payment!

Sometimes, people want to borrow their down payment. Why would anyone want to borrow funds for a down payment? The main reason is to avoid insurance premiums. In Canada, when your down payment is less than 20% of the purchase price, you must pay mortgage insurance premiums. Mortgage insurance premiums normally range between 1% - 3.1% of the mortgage amount. By increasing your down payment, you can reduce or avoid the insurance premium.

The disadvantage of borrowing funds for a down payment is that your ongoing monthly cost to service all your debts may become onerous. On a line of credit most institutions require 3% of the outstanding balance to be repaid monthly. It’s usually not worth borrowing your down payment but there are exceptions. I recently prequalified a buyer who had an unsecured credit line at prime. By drawing $50,000 on her line of credit she would save approximately $10,000 in insurance premiums. Since the rate on the credit line was attractive and since the line of credit payments were interest only in her case it made sense.

Condo Financing 101: Financing for Condo Buyers

There are many reasons people buy condos. For some, it’s a lifestyle decision. When living in a condo you are not directly responsible for the upkeep of the property. No more snow shovelling or grass cutting! You still pay for these services, but the cost is shared among all the condo owners. For others, especially if living in the city is an important factor in your decision about choosing where to live, a high-rise condo is a more affordable way to purchase a home.

Mortgage lenders consider income a major factor in deciding how much mortgage they will approve you for. If, based on your income, you don’t qualify for a mortgage big enough to buy a single family home and you don’t need all the space you get with a single family home, you might qualify for the mortgage you need to buy a high-rise condo.

One of the things that frequently confuses people who buy new condos is that they usually do not take title to the unit when taking occupancy. The occupancy date -- some builders call it an ‘interim’ closing date, just to add to the confusion -- is frequently mistaken for the closing date. The purchaser does not take title to the unit until the condo is registered with the municipality and that usually doesn’t happen until at least ninety percent of the building is occupied. The occupancy period can be as long as a year – and until the condo is registered, you must pay an occupancy fee while living in the unit. Your mortgage lender does not advance funds and you don’t have to start paying your mortgage until you take title to your unit.

Another thing that some people are surprised to learn is that the total of the deposits you give to the builder from the time of purchase up to the closing date do not have to equal the down payment you finally make on your purchase. On average, builders will collect 20%-25% of the price of the condo in deposits on your unit between the time of purchase and the closing date. When your unit is ready to close, you can get a mortgage with as little as zero down. People are often relieved to hear that they can get money back on closing, especially if they find themselves short on funds.

If you opt for a down payment of less than 20% of the purchase price, keep in mind that the mortgage will have to be insured and you will have to pay high ratio mortgage insurance premiums. In Canada, high ratio mortgages must be insured by CMHC, Genworth or AIG. It makes no difference which insurance company your lender uses; the insurance fees are the same with each insurer. The premium is determined by the percentage down payment you make on your purchase and the length of the amortization you choose.

To give you an idea of how much insurance costs, let’s say you bought a $300,000 condo with a ten percent down payment. On a mortgage of $270,000, the insurance premium would be $5,400 (2% of the mortgage amount on a 25-year amortization). The insurance premiums can be paid up front but most people opt to have them added to the mortgage. PST on the insurance premium must be paid at the time of closing. You can find a complete schedule of premiums on Genworth’s website at http://www.genworth.ca/ or contact your lender for more information.

Most builders have a representative from a bank on site that can pre-approve you for a mortgage and offer a guaranteed mortgage rate at the time of making your purchase, which will be held for you up until the closing date. It is possible that your ‘rate hold’ expires prior to closing if the project is delayed. It’s wise to get a rate hold in place at the time of purchasing your unit because it costs nothing to do so. If rates go down before the closing you can negotiate a lower rate. If they go up, at least you are protected. It’s a good idea to start shopping around for a mortgage at least three months prior to the final closing, to make sure you are getting the best deal. You want to make sure you’re getting the right mortgage for your needs.

Today, many people are opting for variable rate mortgages because variable rates are approximately a half a percentage point lower than fixed rates and there is pressure for rates to go down further. It is expected that variable rates will go down even further when the Bank of Canada meets again in early March. With most of the variable rate mortgage products on the market, you can lock into a fixed rate later on, if rates start to rise.

When you buy a resale condo, the seller must provide you with a status certificate which should contain up to date financial statements for the condo corporation, information about any special assessments, proof of insurance and information about the unit you are purchasing. Your lawyer will have an opportunity to review this information and if s/he advises that you should not proceed with the purchase, you are not obligated to proceed.

When you purchase a property, whether or not it's a condo, it is advisable to put a financing clause in your offer which states that you have five business days to obtain satisfactory financing. By having this clause in your offer, you will be allowed to walk away if you do not obtain satisfactory mortgage financing. Even though you may have been pre-approved for a mortgage, your financing is not firm until you have purchased a property and your mortgage lender has issued a mortgage commitment for that property.

Critics of Longer Amortizations Need to Consider More Than Just Interest Cost

The Royal Bank of Canada recently issued a report that 50% of borrowers of insured mortgages are opting for extended 35 and 40 year amortizations (a mortgage is insured when the down payment is less than 20% of the purchase price). Critics of the longer amortization argue that borrowers will pay more interest in the long run. In a recent National Post article on the topic, an example of a $340,000 home with 25% down and a 7% mortgage rate was used -- the article stated that the borrower would pay an additional $47,000 by opting for a 40-year amortization instead of the traditional 25-years.

There are a number of factors influencing a home buyer's decision when choosing the amortization on their mortgage. Firstly, there is an affordability issue -- you can't ignore the fact that over the last 10-years real estate prices have gone up considerably. Given the high cost of real estate in Canada, especially in Toronto, the payment on a mortgage amortized over 25-years is just not realistic for some people. In looking other countries, you find that Canada one of the last developed countries in the world to introduce mortgage amortizations longer than 25 years.

By reducing your monthly payment, it might make it possible for you to buy a bigger house, or a house in a more desirable location that will better meet your long term needs. No-one wants to move into a home they are likely to outgrow in 3-years.

Couples may want to start a family and reducing their monthly mortgage payment will give them a bit of extra breathing room. As a result they may be under less stress to have mom or dad get back to work as quickly after having a baby. Less stress on families today probably isn't a bad thing.

Finally, just because you choose a 40-year amortization when your mortgage closes, it doesn't mean you have to be paying the mortgage for the full 40-years! There are ample prepayment privileges with most mortgage products, and if your financial situation changes you can accelerate your payments and pay down the mortgage much faster.

Fixed rate mortgages up in the U.S. -- that was unexpected

The best explanation I could come up with for why this happened is as follows...

With the Fed lowering the prime rate dramatically in the last few months, investors have started moving their money out of the bond market and into equity markets where higher returns are expected. To attract investors, bond sellers must offer a higher rate of return. Since bonds are used to fund fixed rate mortgages and the costs are now higher, people taking out fixed rate mortgages must now pay a higher rate. If you have a better explanation or something to add, your comments are welcome.

How To Make Your Mortgage Tax Deductible

You've heard about the Smith Manoeuvre and you want to make your mortgage tax deductible. Here's an example of how the Smith Manoeuvre works...

Assume you take out a $250,000 mortgage at 5.84%. On a 25-year amortization, the monthly payment on this mortgage would is $1576. Let's also assume that for 25-years, you don't have any extra cash to invest and all you pay is the monthly mortgage payment of $1576.

Scenario A: No Smith Manoeuvre -- After 25 years you'll have paid off your mortgage at which time you'll own your house free and clear but you have no savings.

Scenario B: With the Smith Manoeuvre..
Your monthly payments are still $1576. At the end of each year however, you re-advance on your mortgage by the amount of principle you've paid down, take the money and invest it. You need to have a re-advanceable mortgage or a line of credit to effectively make this work.

You have started to build your investment portfolio, and are still only spending $1576 per month.

In Canada when you borrow money to invest, the interest cost on the money you borrowed is tax deductible, so you get a tax refund. When you get that refund, you use it to pay down your mortgage principle further. At that point, you readvance again and use that money to invest. The cycle continues. You are building your investment portfolio and still only spending $1576 per month. All the while you are replacing the original mortgage debt with debt that is tax deductible.

If you employ the Smith Manoeuvre, here's what your financial picture could look like after 25 years ~ you have $250,000 of investment debt (on which the interest cost is tax deductible), but you also have an investment portfolio worth $602,000. That means you are ahead by $352,000!

* Assumptions are that your marginal tax rate is 46%, you pay 6.25% on the money you borrowed for the purpose of investing (that's the current prime rate) and you earn 8% on your investments.

If you would more information about the Smith Manoeuvre, contact Greg Holohan, CFP at Scotia McLeod. (If you want to use the Smith Manoeuvre, get help from someone who is qualified to advise you on it). Greg's website address is http://www.gregholohan.com/ and his phone number is 905.479.8238.

If you would like more information about the type of mortgage you need to make this strategy work, or if you have mortgage questions of any kind contact me.

RRSP strategy: Creating a down payment

Thinking about buying your first home but you don’t have a down payment? Here’s an RRSP strategy you can use to create one. By taking an RRSP loan and buying RRSP’s, you’ll get a tax refund once you file your taxes. The refund is found money you can use as a down payment for your new home.

If a husband and wife each buy $18,000 in RRSP's, the total refund could be as much as $16,500 -- you should talk to your accountant first to determine exactly how this will work out for you. On a $300,000 house purchase, that’s enough for a five percent down payment, plus you’ll have some money left over to put toward closing costs!

After 90 days, can you withdraw the funds from the RRSP under the provinces Home Buyers Plan and you don’t have to pay tax on the withdrawal. At that point, you can repay the RRSP loan. You have fifteen years to put the money back into the RRSP, which for most people shouldn’t be too difficult.

Call me at 416 876 2031 or call Steve Notis from Investor's Group at 647 200 7308 for more information. I can prequalify you for the mortgage, Steve can get the RRSP and the RRSP loan set up for you.