Money For You Blog

Your mortgage agreement is a legal contract and you need to understand the details before you sign. If your attitude is “just tell me where to sign” then you could be in for surprises down the road. Are you sure you are getting what you want? Are the mortgage terms the best for you? There are many different financial institutions, many different mortgage products, and THEY ARE NOT ALL THE SAME!! Read the details and become familiar with the terms. These days, the agreements are written in more user friendly language, but there are lots of words! If you are intimidated by all those details, have someone explain them to you.

Here are 5 key phrases and what they mean:

1. Interest Rate Differential (IRD) – This is the penalty you pay if you want to get out of your mortgage early. Most people assume “3 months interest”. Don’t assume that. IRD is a complex calculation that basically gives the financial institution the same amount of interest if you pay out early that they would have received over the term. You pay the higher of the two amounts.

2. Closed/Open Mortgage – A Closed Mortgage means your contract does not allow you “out” unless you pay a penalty (see IRD, above). An Open Mortgage provides more flexibility – but generally comes with a higher rate. It can be paid off at any time without penalties. You can also make additional payments without penalties.

3. Consent – When you provide “consent” to your financial institution, you are giving them permission to do act as they please for what you have given “consent” for. For example, you might allow them to do an additional credit check.

4. Cost of Borrowing – this is the interest rate (and any non-interest costs) expressed as a percentage, but will also be disclosed in dollars/cents in your mortgage agreement. This way, you know exactly how much your mortgage is costing you over the term.

5. Term – The terms of your mortgage include the interest rate, the repayment frequency (e.g. monthly, bi-weekly), the number of years the contract is for (e.g. 5 years), the number of years the mortgage is being amortized over (e.g. 25 years). The terms are critical – you must carefully consider your optimal mortgage.

 Here are the top 5 options that people generally want – if they are important to you be sure to tell your mortgage agent. Not all options are available in the same product, so make sure you are familiar with the details of your situation.

 1. The lowest rate – rates can vary depending on whether you choose a fixed or variable term, and how long you want to lock in for. REMEMBER: the lowest rate may not result in the optimal mortgage – you have to consider all the other terms and options and look for the best package.

2. Prepayment – people who have non-standard income may choose the most flexible pre-payment options. For example, if you earn commissions in a seasonal business, you might want to pay down your mortgage as much as you can in those months of higher earnings. A related option allows you to skip a payment – but beware – you pay interest on this for the rest of the term. Do the math before you skip the payment!

3. Pay your own realty taxes – some people like to pay their own realty taxes – others don’t want to think about it all. Your choice – but make your wishes known when you negotiate.

4. Double up – this is an option that allows you to double up your payment at predetermined intervals. Good if your salary has a structure of base + commissions – you can use your commission income to pay down your mortgage.

5. Leverage – using the equity in your home to invest or renovate could be a great option for you – so try to project a few years out – if you want that flexibility consider choosing a product that combines a home equity line of credit.

Don’t be surprised 3 years from now – take the time to read your mortgage documents carefully – and adjust before you sign!

Getting your first mortgage is a big deal. Those of you who are on to your second (or more) all know what you would have done differently. So, in the hope of helping the newbies and also those who still have more to learn, here are the top 10 mistakes that borrowers make.

1. Not getting pre-approved. Don’t go looking for a house unless you know what you can buy. Seems simple – but people don’t – they go shopping – fall in love – and then get stressed (either before approval wondering if they will be approved or after approval wondering why they wanted such a big mortgage…..). Avoid that stress – get pre-approved and then go shopping.

2. Assuming “the lenders all the same”. They are not. There are lots of lenders, lots of products, lots of variation. You need independent advice from a financial professional to help you analyze the options and determine the best solution for you.

3. Assuming rates won’t change in the term. Not true if you have a variable rate mortgage! Make sure you know what you signed up for.

4. Not negotiating with lender. Even for your first mortgage – don’t accept the first offer! Shop around – get the best deal you can. Use a mortgage agent to help you find the best product for you. It’s not all about the rate – look at all the components of the mortgage – term – repayments – rates.

5. Assuming you need to stick with the same lender all your life (even though they have your bank accounts). Not true. Why should you lock in with one financial institution if it’s going to cost you an extra 1.5% on your mortgage each month (eg a $250,000 mortgage, same terms except for a 1.5% rate differential – difference of $203.23 – is your loyalty worth $12,193.80?)

6. Not monitoring your financial situation during the term. Things change. Did you get a raise? Has the value of your home increased significantly? Has there been a significant change in rates? Be aware of changes that could impact you and your mortgage – and understand how you can benefit. For example – if the value of your house has risen maybe you could access some capital via a line of credit, and use the proceeds to invest or renovate.

7. Not considering the difference between “pre-tax” money and “after-tax” money. The after tax money is what you have left over after all your income taxes have been paid. Generally, you pay your mortgage with “after tax money”. If you can convert that to “pre tax” money – then you are better off. Look for ways to make your housing costs tax deductible (legitimate ways of course – speak to a finance professional).

8. Getting advice from your neighbour or colleague, not professionals (unless your neighbour is a finance professional!). If you don’t have enough knowledge to know what’s best for you, you won’t have enough knowledge to know what your neighbour did wrong. Speak to someone with knowledge and experience – someone who is independent and works in your best interests.

9. Failing to discuss exceptional circumstances with your lender or financial advisor. If you have financial obligations that don’t show on your credit report (e.g. alimony) – not considering them in your mortgage application could leave you financially constrained and in legal trouble. Remember – the mortgage is a legal agreement and somewhere the lender will ask you to sign a piece of paper that says something to the effect of “everything on here is true and correct”. If not – they can sue you, withdraw their funding, or do other nasty things. So – be open and truthful and tell the whole story.

10. Not reading the mortgage documents. You need to be familiar with details – after all – it’s your money and you want to protect it. Know what the expectations are for your mortgage, and make sure all the options you wanted are included in the terms. Confirm before you sign!

Know the ABC’s of buying a house – CMHC has a very useful glossary of mortgage terms – I think they’ve thought of all of them!  http://www.cmhc.ca/en/co/buho/hostst/hostst_011.cfm. But – not all letters are covered. Here are my additions:

J: Joint tenancy – a type of co-ownership of real property typically used by spouses purchasing a matrimonial home

K: Keen – describes the person who wants to work with you to find the best rates

Q: Quick turnaround – what you get when you work with a mortgage professional

U: Understanding – what you get when you work with a mortgage professional

X: Xtreme service – what you get when you work with a mortgage professional

Y: You are the centre of attention when you work with a mortgage professional

Z: Zilch – the savings you get when you don’t negotiate your mortgage on refinancing (or have a mortgage professional do it for you)

Oh-oh – Canada Revenue Agency called.

OMG. What do they want? Am I being audited? What should I do?

Heeeellllppppp!

Ok – first of all – take a deep breath – exhale slowly.

Now – respond to them. If they called – call them back. If they sent you a letter – call and speak to the person they indicated you should speak to. Don’t be rude – speak to them respectfully. It could be that they just need to clarify some information – this is not an audit. A lot of what they do is routine – random checks. Sometime your “random” comes up and you will the lottery J, other times your “random” means CRA calls. So, just answer the questions they ask. If you can’t answer, make sure you understand what they want, and pledge to get back to them. And, of course, make sure you do!!

If you think the situation is more serious, or if you think they are making errors, then seek professional help from someone who has more experience in dealing with CRA. They can act on your behalf.

I would guess that being audited by CRA is not on most people’s bucket lists.  Generally, CRA will audit within 4 years of the date of the original assessment (but if fraud is suspected they can back as far as they want). Here are 5 tips to minimize the likelihood of triggering an audit:

1. File your tax return on time (April 30). Being out of the normal “channel” may highlight your return – someone might just say – “hmmm – that’s odd – why is this person filing in August – maybe I’ll take a look….” (Plus – if you owe tax you will have to pay more in penalties.)

2 . Don’t try to hide anything. If you had earnings, even with no receipts, that is still taxable income. Accuracy and completeness are key. CRA has some sophisticated software and lots of data – they will run comparisons of people in similar businesses. If your numbers look unusual – someone might just say – “hmmm – that’s odd – why is this person’s margin so low – maybe I’ll take a look….”

3. Keep good records. If you are able to provide instant response to questions you might avoid a full blown audit. For example, if CRA asks for all your donation receipts and you supply them on a timely basis, they will probably just say “thank you”. If you say – I’ve lost them – someone might just say – “hmmm – that’s odd – if they’ve lost them maybe they didn’t exist in the first place – maybe I’ll take a look….”

4. Get the math right. This should be easy if you use a software program, but remember, “garbage in, garbage out”. Some relationships may just look odd to a reviewer. Use the helpful tips in the program to make sure you are filing an accurate return. If there a several inaccuracies – someone might just say – “hmmm – that’s odd – why is this person deducting interest expense I don’t see any investment income – maybe I’ll take a look….”

5. Be consistent. If you have wild swings in either your income or your deductions from year to year – someone might just say – “hmmm – that’s odd – those numbers are really bouncing around – maybe I’ll take a look….”

 Canada Revenue Agency has a number of ways that they review files – if you have some facts, maybe it won’t be so scary. Go here if you would like a bit more information. (http://www.cra-arc.gc.ca/nwsrm/fctshts/2011/m07/fs110720-eng.html

So – now you are a landlord and you are just learning the business of property investment. Here are some Do’s and Don’ts about your rental property.

DO…

1. …keep the property in good condition – you will attract better tenants and if it’s a nice place your tenants will be more motivated to keep it nice. Thus – you will sustain a stronger market value and keep it rented out.

2. …execute a lease. You are running a business; a lease is a contract that protects you. Understand your rights and obligations, as well as the tenants’ rights and obligations.

3. …check references of potential tenants, including job references and references from previous landlords.

4. …be aware of your rights – in Ontario– The Residential Tenancies Act, 2006.

5. …check in occasionally with your tenants. Make sure everything is ok – let them know you care about the place. You might hear some good information about a small problem that you can fix before it becomes a big problem. Maybe you’ll find out about their plans to move, giving you a longer lead time to find the next tenant.

DON’T…

1. …hesitate to take action if your tenants don’t pay the rent. Being “a nice guy” will cost you money. Remember, it’s your money. Take immediate action. Find out what the rules are, follow the process.

2. …ignore your tenants if they have concerns or complaints. You don’t want to be accused of being a “slum landlord” – a small complaint can damage your reputation. Respond to them in a timely manner, and maintain a professional relationship.

3. …ignore the business side of your investment property. Keep appropriate records so that you can prepare your income tax return and justify the expenses.

4. …forget to make sure all the right payments are made – the realty taxes, the insurance, the utilities, the mortgage. It’s not a good thing if your tenant’s gas is shut off in the middle of winter.

5. …allow variances from your lease. For example, “no pets” means “no pets”. Keep the rules consistent, for all your tenants. Someone might have chosen your place to live in because of the no pet rule. If the first tenant has a severe allergy, and then you relax the rule for the “other” tenant, you are putting yourself at risk.

So you think you are ready to invest in real estate? It’s a major decision, so do some research. If you think owning a home is hard work, now you will have more! You will have to deal with tenants, understand your legal obligations, and be responsive to your tenant’s needs. Owning your own home and renting part of it out qualifies you as a real estate investor – and might be a good place to start. Here are some Do’s and Don’ts about investing in real estate.

DO…

1 …educate yourself before you start looking for a house. There are lots of good books about investing in real estate inCanada. You might even find one that is particular to your province or city.

2 …plan your purchase. The rules about financing investment properties are different from personal residences. Find out about the differences and make sure you have the right amount of money to put towards an investment property. As with your home, get pre-approval so you can shop with confidence. Crunch the numbers!

3 …understand that owning an investment property is a business – so there are different tax considerations, you need to have some basic accounting knowledge, and you need a larger advisory team working with you – realtor – finance professional – accountant – lawyer – maybe even a property manager.

4 …make sure your realtor knows you are looking for an investment property. Not all properties are ideal for renting – for example – a house with a pool likely won’t attract a lot of tenants.

5 …research the area that you want to invest in – you will need to understand the rental dynamic – are there expected increases in jobs or investment? Is it a student area? How many rental units are there in the area? Is anything happening that will take people out of the rental market (e.g. plants shutting down)? Information about the area you want to invest in is key.

DON’T…

1 …make a decision based on emotion. You are not going to be living here! What would a tenant think?

2 …speculate. Get the facts. How much does the place cost? What can you rent it for? Will you be able to attract good tenants? Don’t think about how much the property might increase in value – think about its value as an investment property.

3 …buy a property that requires you to subsidize.  So what if you get a tax write-off – you are out of pocket for the gross amount, a tax refund will be a percentage of that amount. Think about all the expenses including the mortgage – and make sure the rent will cover them all, and leave some money for you.

4 …buy under pressure. Yes – it might look like a great deal – and yes – others might be interested – but don’t get into a bidding war, and remember – there’s more deals out there – you just need to keep looking! This is a long-term investment.

5 …give up too easily. Finding the right first property will take some time. Stay committed to you personal financial goals.

Buying your first home is a significant event in your life. It could well be your first major investment. Maybe it’s the first time you’ve ever had to deal with a lawyer. Here are 5 do’s and don’ts when you are just stepping into the real estate market.

 DO…

1. …get pre-approved for your mortgage. Use a mortgage professional to get the best rate. They will shop your qualifications to a number of different lenders, and come up with the best option for your situation. Once you know how much you are qualified for, you can house shop with confidence.
2. …find a realtor you are comfortable with – who listens to you – who offers advice and takes you to places that are in line with your budget and your “wish list”.
3. …prepare a budget that includes closing costs, costs of purchasing furniture, appliances, window coverings and the many other things that come with home ownership (e.g. garden tools, snow shovels…..). Be realistic. (Food does cost more than $20 week.)
4. …make a written list of all the things that are important to you – Bungalow? Trees? Proximity to schools or transportation? Maybe you could live without a garage but 2 bathrooms are mandatory? Pick your top 3 absolute priorities. If you write all your “wishes” down, it will be easier to figure out what you can to let go of.
5. …have your new home inspected, and be prepared to walk away if something serious becomes apparent.

DON’T…

1. …expect to find your dream home by only looking at 1 or 2 properties. It could take weeks or months.
2. …give up on what you really want unless you have thought about it for a long time and have someone independent offering unemotional advice. You will be living in this place for a few years – so you need to be happy with your choice.
3. …try to do EVERYTHING before you move in, or even in the first year. Make a plan – which rooms to decorate first – if it’s October maybe you start by planting a few tulip bulbs – don’t wear yourself out or you won’t enjoy your new home!
4. …be afraid to ask for help. Your realtor and mortgage professional work for you – they have experience – they can offer independent and unemotional advice. Make sure you understand exactly what you are getting yourself into. Buying a home is a legal transaction – know your rights and obligations.
5. …get caught up in a bidding war. Remember – there will be another perfect house! You might be very disappointed in not getting THAT perfect house, but keep looking. Do you really want to live with all your income going towards a mortgage?

The more you prepare, the higher the likelihood that you will find your ideal home that will make you happy for years to come.

Generally, couples buy homes for their families. A two-income relationship is very common, and so two people contribute to the costs. Single people buy homes too – they have only themselves to rely on when it comes to looking after the house – financially and physically. But – it’s not unheard of for 2 or more unrelated people who are friends to buy a house together. Why? Well – financially of course it makes sense – maybe each on their own couldn’t afford to own a home, and they want to take advantage of a strong real estate market – perhaps build some equity.  Maybe they are buying a vacation home in a location they both love, with the idea of sharing time. When we were looking for a home, we found this really neat co-joined home that would have been perfect for two people to buy together – not quite a duplex, it even had 2 different street addresses. Truly unique.

While absolutely do-able, make sure you plan ahead, get some advice, and develop a formal, written agreement (that includes a dispute resolution process). Key things to consider are compatibility, common values, joint vision for the property, financing the purchase and ongoing costs of ownership, and the process should one decide to opt out of the arrangement.

The first thing to do is to sit down and have a good heart-to-heart discussion. 2 or 3 of these is even better. Who gets what room? Colours? Is one of you a gardener and one of you is better at decorating? Do you both have similar tastes? If not – what’s the compromise? How are you going to pay for the monthly costs? What about the furniture selection? What about overnight guests? What if one of you looses your job? This is a different kind of “marriage” – maybe even closer to a business partnership – but it’s still a relationship that will work best with open and honest communication. If you think you are being pressured into something you are not sure about yet – then hold back. You don’t want to regret anything.

Once you think you’ve figured out the details, you will need to decide on the best way to assume legal ownership – will it be a co-ownership or perhaps through two legal corporations. At this point – you should be speaking with a lawyer for the best advice about your options. Your lawyer may also point out some things you overlooked, and will help draw up a legal agreement between the parties. Don’t assume you will “figure it out”. If something goes south you will be in a very emotional situation – so best to come up with solutions now while you are thinking logically and rationally.

Make sure you agree on the “end” now (i.e. “exit strategy”). What happens if one person needs out, but the other really wants to stay in the house? What if the other person sold their interest to someone you couldn’t possibly live with? Maybe you want to have the “right of first refusal” so that you could acquire full ownership. You need to think it through – with the help of a lawyer – and then agree in writing. You don’t want to end up enemies!

So – yes – joint ownership can work – plan it – document it – and then enjoy it! Here’s an article that talks about some friends who have bought homes together.

http://realestate.msn.com/article.aspx?cp-documentid=13107770

So – you have a fully executed (signed) agreement of purchase and sale, and you have your financing in place. Now what? Closing your home is a big deal. An even bigger deal if it is your first home purchase. Closing means the ownership legally transfers to you – so you don’t want anything to go wrong. So – be prepared and – understand what happens, work with your team, and you should be ok. Don’t leave it until the last minute! Here are 10 key steps:

1. You will need a lawyer – this is a legal transaction. If you don’t have one, ask your realtor or your mortgage professional for a referral. You might want to call around – get the best rate. But remember – you might be quoted a rate for fees, but that probably won’t be the amount you pay in the end. Think, Land Transfer Tax, disbursements, Title Insurance, utilities, HST. You should budget for approximately 3-4% of your home price for closing costs. Give copies of all the documents to your lawyer – the P/S agreement, your mortgage papers, anything else relevant to the transaction.

2. Maintain your commitments under the purchase/sale agreement. For example, if you said you were going to have a home inspection completed – DO IT! Don’t give anyone an excuse to void the deal.

3. If you are currently renting, let your landlord know your plans – hopefully you have enough notice time. If you have a fast closing, then don’t be afraid to negotiate. 

4. You will have to put home insurance in place. If you don’t have an insurance agent, ask your realtor or mortgage professional for a referral. Obtain a commitment – know the amount of coverage, which should be for the full insurable value of the building (not land), plus contents and anything else of value. (See – lots of things to think about so don’t leave it until the last minute!).

5. Contact the utility companies (cable, hydro, water, gas, etc.) about your new home – let them know the date you take possession, so that they can adjust the billings so that you pay only for your time as an owner. Make sure this information gets to the lawyer as well. Be prepared for some “set up fees” as a new customer at that location. Confirm all amounts prior to the closing date so there are no surprises.

6. Think ahead to your moving date – do you need a mover or do you have lots of strong friends with big vehicles? Call for quotes – they vary a lot!! Go with a reputable firm – don’t be a horror story (e.g. mover booked two people on same day, same time and they only have one truck……). Confirm their commitment – get it in writing.

7. Start packing TODAY! (it’s never too early to start……)

8. Think of all the people who will need to know your “change of address” – post office – work – magazines – monitor your mail for a few weeks to try to get everyone.

9. Visit your lawyer a day or two before closing – and get your money ready. You will need a certified cheque – confirm the amount in advance – your lender will need to know.

10. If closing day is also moving day (which it generally is for most people), arrange for someone to take care of kids and pets. You will be busy! First – get the key to your new home (likely from your lawyer).

GOOD LUCK!!!!