DEBT: TO CONSOLIDATE OR NOT TO CONSOLIDATE? THAT IS THE QUESTION

If you are a Canadian living in debt, you are not alone. According to Statistics Canada, household debt grew faster than income last year, with Canadians owing $1.79 for every dollar of household disposable income to debt(1).

• Canadian households use almost 15% of income for debt re-payment(1).
• 7.3% of this re-payment goes towards interest charges (1)
• Interest charges are at their highest level in 9 years(1).
• The cost of living is projected to increase in 2020 (2)

So how can one ever get out of debt? Debt consolidation.

What is debt consolidation?
Debt consolidation means paying off smaller loans with a larger loan at a lower interest rate. For example, a credit card bill debt with interest of 19.99% can be paid off by a 5-year Reverse Mortgage with an interest rate of 5.74%* from HomeEquity Bank. (*rate as of May 2, 2019. For current rates, please contact your DLC Mortgage Broker).

A lot of confusion surrounds debt consolidation; many of us just don’t know enough about it. Consider the two sides:

The pros
• The lower the interest rate, the sooner you get out of debt. A lower monthly interest allows you to pay more towards your actual loan, getting you debt-free faster.
• You only have to make one monthly debt payment. This is more manageable than keeping track of multiple debt payments with different interest rates.
• Your credit score remains untarnished because your higher interest loans, such as a credit card, are paid off.

The cons
• Consolidating your debt doesn’t give you the green light to continue spending.
Consolidating helps you get out of debt; continuing to spend as you did before puts you even further into debt.
• A larger loan with a financial institution will require prompt payments. If you were struggling to pay your debts before, you may be still be challenged with payments. A CHIP Reverse Mortgage may be a better option; it doesn’t require any payments until you decide to move or sell your home.
• You may require a co-signer who will have to pay the loan, if you’re unable. Note that a Reverse Mortgage does not require a co-signer, as long as you qualify for it and are on the property title.

So how do you know if debt consolidation is the option for you? Start by contacting your mortgage broker and asking if the CHIP Reverse Mortgage could be the right solution for you.

SOURCES:

1 https://www.cbc.ca/news/business/household-debt-income-1.5056159

2 https://www.statista.com/statistics/271247/inflation-rate-in-canada/

https://www.bankofcanada.ca/2019/03/spending-shifts-and-consumer-caution/

https://www.cbc.ca/news/business/consumer-spending-consumption-canada-1.5006343

–ANDREA TWIZELL

THE PREDATORY LENDING SURGE IS HERE

As we’ve been reporting for months on our North East blog, instead of protecting many homeowners, the federal government’s restrictive mortgage rules are pushing people out of the safe mortgage market, and into the arms of secondary lenders.

By pushing people to the alternative lending market, they’re being pushed away from the safe harbour of high-quality lenders and into a less regulated and higher-interest area of the market.

To be clear: federal government policies are producing the opposite result of what the stated intention of the policies were.

What’s happened is the new rules, particularly the stress testing, have begun excluding many responsible Canadian homeowners who had previously qualified for mortgages, so many are unfortunately trying their luck with alternative lenders; either to handle their entire mortgage (highly inadvisable), or to top up a down payment.

In a recent paper for CIBC, economist Benjamin Tal says the data in Ontario shows people are increasingly looking to the alternative market for their mortgages.

“Over the past two years, mortgage originations provided by alternative lenders rose by a cumulative 27% while originations in the market as a whole fell by 11%,” Tal said in his report.

In pure dollar figures, he said the alternative mortgages now account for 7% of the market, up from 5% just two years ago.

This trend is worrying because desperate homeowners are seeking relief from these lenders, who will tell them they are suddenly able to qualify for a mortgage. There is, of course, a catch.

What these homebuyers may not realize is why they’re being accepted for those loans.

First, the alternative lenders tend not to be so strict when applying the stress test, because they don’t have to be. Regulation is looser on the alternative market, so by letting debt-to-income ratios climb much higher, it makes it easier for people to qualify for a mortgage. The catch is that by letting those ratios go higher, the homeowners are taking on more risk.

And more risk means lenders need to get something from consumers to make it worth their while. So, they’ll charge higher interest rates. They’ll tack on fees. They’ll add clauses to your mortgage that make it difficult—and costly—to refinance or get out of your mortgage.

Instead of paying in the 3% range, you’ll find yourself paying rates closer to 6%. Over the life of a mortgage, that’s thousands and thousands of extra dollars you’re flushing down the toilet, just on interest.

Someone who’s been denied a mortgage offered by a large bank or another first-tier lender and has been able to find a mortgage elsewhere may be relieved to be in their new home. But they’re sitting on a growing pile of toxic debt.

Things get even worse when homeowners find themselves on the private market.

Consider someone who’s been turned down for a traditional mortgage, and turned down again for a mortgage on the alternative market. Instead of paying that 6% on for an alternative mortgage, you’ll be looking at rates comparable to credit cards; in the double digits, sometimes as high as 21%.

To make matters worse, you’ll be trapped. These private lenders often set the value of your house much higher than anyone else would, essentially locking you in with them. Even if you’re able to turn your financial circumstances around, there’s no way you can refinance a loan for a property worth less than the mortgage is valued.

Until the government changes direction, consumers on the edge of the primary market are just going to have to wait a bit longer to build their nests, lest they get themselves into real trouble.

If a reputable broker is telling someone their file doesn’t work, there’s probably good reason for it. People aren’t turned down for mortgages because a bank or a broker doesn’t want their financing. They’re being turned down for specific reasons.

The whole purpose of these rules, like the enhanced stress test, was to keep people from taking on toxic debt. And what the rules are doing in practice is placing those marginal homeowners in a situation much worse than what they’re being protected from.

–TERRY KILAKOS

REVERSE MORTGAGES – TRENDING NOW

With approximately 1,000 people retiring every day in Canada, it’s not surprising that there has been an increased demand for Reverse Mortgages.
A Reverse Mortgage can assist people aged 55+ to realize their dreams in retirement. Whether they want to travel, help their kids or grand kids or even just supplement their monthly income, a Reverse Mortgage can be an effective way to have their home assist them to meet those goals.
There is a lot of misinformation out there however, that could make people hesitant to get into a Reverse Mortgage.
Many people think that the Bank will own their home but this is completely untrue. A Reverse Mortgage is just that – a Mortgage registered on the home’s Title, just like any other bank mortgage. The client retains full ownership and control of their home. They have the freedom to decide if and when to move or sell.
Another misconception is that you could end up owing more than your house is worth. In fact, due to the Reverse Mortgage lender’s conservative lending practices, you can be confident that there will be equity left in the home when the loan is repaid. They will only issue a Reverse Mortgage up to 55% of your home’s value so there is lots of equity remaining to offset accrued interest charges even if you choose to make no payments at all.
In fact, over 99% of Reverse Mortgage clients have equity remaining in the home when the loan is repaid.
Many people view a Reverse Mortgage as a ‘last resort’. In fact financial professionals recommend a reverse mortgage because it’s a great way to provide financial flexibility. Since it’s tax-free money, it allows retirement savings to last longer.
Some people think that you cannot get a reverse mortgage if you have an existing mortgage. But many Reverse Mortgage clients use the funds to pay off their existing mortgage and other debts, freeing up cash flow for to use as they wish – and be free of regular mortgage payments too.
I personally have parents over 70-years that could be looking at the expense of Assisted Living for my Mom in the near future. They own their home outright and once both of them are retired that added cost could be too much for their pensions and could force them to sell their home before they’re ready.
I have advised them of the Reverse Mortgage option and we have decided to look into that possibility when the time comes. It is my belief that nobody should feel forced to sell their home and they will explore any options available to them so they have choices.
If you’d like more information on how a Reverse Mortgage may work for you, I recommend speaking with a Dominion Lending Centres Mortgage Professional to get all the facts.

–KRISTIN WOOLARD

6 WAYS TO GET A DOWN PAYMENT

When is it time to think about saving for a down payment? I would say about a year before you think about buying a home. While that’s ideal in today’s world, we often do not have much time to save for a down payment. Sometimes your landlord is planning on retiring and wants to sell the property. How do you get a down payment?

Here’s a few ways to get a down payment for your home:

1. Save – it’s old fashioned but it works. Open a Tax Free Savings Account (TFSA) and put a set amount into it. If you don’t have the discipline arrange for automatic deposits from your bank account. How much can you save $50 a week? That’s $2,600 in a year. Not enough. How about $200 a week?
   Stay at the Mom & Dad Hotel – while your parents may not be able to help you with a down payment they often have a spare room that you can stay in. One year of not paying rent would make a good down payment even if you chip in for groceries.
2. Extra Income – get a second job and bank every cent from it. I know of many young people who have a day job and are servers on the weekends.
3. Home Buyer’s Plan – the federal government will allow you to pull up to $35,000 from your RRSP account. This goes for your partner. You could put down $70,000 between the two of you. These funds need to be returned to your RRSP over the next 15 years. This is a great quick source for a down payment.
4. Take out an RRSP Loan – borrow an amount that you need for a down payment as an RRSP. Hold the funds for 90 + 1 days and you can withdraw the funds. The cons are that you now have more debt and you have to wait for 90 days. Most sellers want a possession day sooner than that.
5. Sell an asset. I had a client sell his vintage Cadillac Fleetwood for a down payment. Be sure to get a receipt or to sign a bill of sale with the purchaser to show where the funds came from. Rare stamps or coins, another property or vehicle are all acceptable assets.
6. The Bank of Mom and Dad – This may be the easiest way to get a down payment or it may not. Most parents are nearing retirement and trying to save funds. There can be creative ways to get a down payment. They might set up a a secured line of credit and use the equity in their home. You could make the payments over the next few years. Note: these payments must be included in your debt ratios. If they decide to gift you the funds and make the payments themselves a gift letter is all that’s needed. They could sell their home and move into a granny suite in the basement or over the garage.

Before you start it’s always a good idea to speak to your favourite Dominion Lending Centres mortgage professional.

–DAVID COOKE

ZERO DOWN PAYMENT MORTGAGE–DOES IT EXIST?

Did you know that you can buy a home with ZERO down payment?? If a home purchase is your goal this year but you aren’t able to save up enough of a down payment, you may qualify for a low or zero down payment mortgage. One of our Lenders is offering a great zero down program.

What is a Flex-Down Mortgage?
A Flex-Down Mortgage is a mortgage product that has a flexible down payment amount. There is still a down-payment required, but it will vary based on the property value.

• For a property valued under than or equal to $500,000, 5% down payment is required (sources available below)
• For a property valued at greater than $500,000 and less than $1 million –5% down payment is required up to $500,000 with an additional 10% down payment on the portion of the home value above $500,000.

Flex-down mortgages can only be on first mortgages, not second or third or used in refinance situations. As noted above, the total property value has to be less than $1 million. This type of mortgage will also have insurance included with it—the premium will be lesser of the premium as a % of the total new loan amount or the premium as a % of the top-up portion additional loan based on the rates at that time.

Those that choose to go with this type of mortgage product will have to meet requirements, just like any other mortgage. There are a few specifications with this product:

• You must show that you have standard income and employment verification papers
• A credit score of 650 or higher is highly recommended
• You must have no previous bankruptcies
• Some lenders may still require you to have some of the down payment from your own resources

Those considering this type of mortgage are recommended to have very little debt and be able to accommodate the additional cost of higher mortgage insurance (due to the higher risk to the lender on this type of mortgage). Typically, the insurance premium would be 0.2% higher on a flex down mortgage.

How it Works
You can borrow your 5% payment from a Line of Credit or even a credit card. This can then be used for your down payment. You have to disclose this to the Insurer and it will be on the application that goes to the Lender.

This is perfect for someone just getting into a new high paying job or for someone who is renting and can afford higher monthly payments but would take forever to save up the 5% down payment. This type of mortgage product can be an excellent option if you don’t quite have enough for the down payment. Are you interested in learning more about this mortgage product? Contact a Dominion Lending Centres mortgage professional who can show you how a Flex mortgage can make the home of your dreams happen sooner than you think!

3 THINGS YOU MAY NOT KNOW ABOUT CASH-BACK MORTGAGES

About twice a year, one of the big Canadian banks likes to run an advertising campaign for their cash back mortgages. These are mortgages usually with 5 year terms where you receive a certain percentage back in cash. The percentage varies from 1% to 5% in most cases. You can use these funds to build a fence, landscape, buy window coverings etc. The idea is to be able to pay for some things that you would not be able to as you put all your money into the down payment and closing costs and need some help to get started.

1- There are multiple lenders who have cash back mortgages. Don’t jump at the first one you see. They all have different terms and conditions.
2. You are really getting a loan on top of your mortgage. The interest rate is calculated so that by the end of the term you will have paid the lender back the money they gave you and a little bit extra. Sometimes this little bit extra may be twice as much as you got in cash back.
3 – The average cash back mortgage is a 5 year term. Most Canadians move every 30 months. Therefore when you break a cash back mortgage you have to pay a penalty as per usual but you also have to pay back a portion of the loan that they gave you. If you are 36 months into a 60 month mortgage, you have to pay them back 2 years’ worth or 40% of the cash back. Combined with the penalty this can be a hefty sum. In addition, there are some lenders who require you to pay back 100% of the cash back if you want to break the term.

Before signing for a cash back mortgage it’s better to discuss your needs with your local Dominion Lending Centres mortgage professional. They can advise you on cash backs, line of credit, Purchase plus Improvements or Flex Down mortgages which may be better for your situation.

–DAVID COOKE

WHAT IS A MORTGAGE BROKER?

You may have noticed that there are many different terms for those of us who work in the mortgage industry besides “broker”.
Mortgage: specialist, expert, advisor, associate, officer, etc. I just want to clear up some potential confusion with all these monikers.
There are 2 main categories that these fall in to. Those that work for a bank to sell mortgage products available from that bank.
The other is for those like myself that work within a mortgage brokerage that has no direct affiliation with any one bank.
Each mortgage brokerage has agreements in place with multiple banks and mortgage lenders to be able to submit mortgage applications for consideration.
There are of course obvious differences between these but some may not be quite so apparent.

Mortgage Brokerage
All those working in the mortgage brokerage industry must be licensed by a provincial government agency, in Saskatchewan it’s called the Financial & Consumer Affairs Authority (FCAA).
While every province has their own set of guidelines, there are 3 different types of licenses offered by FCAA: mortgage associate, mortgage broker & principal broker.
The mortgage associate and broker are very similar as both advertise themselves to obtain clientele, work directly with the clients, mortgage lenders, mortgage insurers, realtors and lawyers in the service of their clients. The key difference is that an associate must work under a supervising mortgage broker to ensure they remain in compliance with FCAA regulations.
Each mortgage brokerage will have a principal broker (aka: broker of record) that oversees the operations of the brokerage as well as all the associates and brokers within the brokerage.
Most all those working in the mortgage broker industry are commission based. Our income is derived from the mortgage lenders that we submit mortgage applications to.

In order to apply for a license as a mortgage associate, applicants must complete an approved mortgage associate education course and provide a current criminal record check along with the required application documents.

Application for a license as a mortgage broker are the same as for an associate with the addition of a previous experience requirement.
The applicant must have been licensed as a mortgage associate for at least 24 of the previous 36 months.

In addition to annual applications for renewal, licensees must also:

• Purchase and remain in good standing with professional errors and omissions insurance
• Complete FCAA approved annual continuing education courses
• Provide FCAA auditors access to mortgage files for review whenever requested
• Advise FCAA of any changes to brokerage or contact information
• Immediately advise FCAA of any offences under the criminal code (other that traffic offenses)

Bank Branch Mortgage
Those that work in mortgage lending for a bank are normally paid by the hour or are salaried and may have a performance bonus structure.
Entry level positions do not require any education beyond high school. Training is provided on the job by the employer with supervision by the branch manager and more experienced staff.
There are no licensing requirements by any provincial or federal governing body and errors and omissions insurance is not required.
Many banks have mobile mortgage staff that may or may not conduct business within the branch and are often paid on a commission basis rather than hourly or salary.

If you have any questions, contact your Dominion Lending Centres Mortgage Broker near you.

–KEVIN CARLSON

MAKING THE MOST OF YOUR VARIABLE MORTGAGE

Working with your DLC mortgage professional can save you thousands of dollars by making the most of your variable rate mortgage in a shifting market.

In the past year we have seen an increase in the prime lending rate by 1%. For those home owners with variable rate mortgages who secured a low discount, savings can be gained moving to a new higher discount variable mortgage rate even if prime is higher than before.

How is that possible you ask?

Consider this. Ed and Anna refinanced their mortgage in 2016 at prime minus .15% (2.55% at the time). The original mortgage was $556,000 with payments of $2,206 per month. Since the prime lending rate has moved up the new effective rate is currently 3.55% (3.7% minus .15) with a payment of $2,442. Of that payment there is $1,533 per month in interest and $909 goes to principal pay down.

The current best rate is 2.75% (3.7% minus .95) so the new payment would be $2,233 per month. Of that payment $1,194 per month in interest and $1,039 towards principal pay down. If Ed and Anna choose to switch their mortgage to a new lender at the better rate in the end their payment is lower by around $100 and they save $340 per month in interest. They also have that bigger rate discount of .95% for the next 5 years so it puts them in a better place as rates move.

Even with the penalty for early pay out the savings is still thousands of dollars over the next term in their mortgage.

Consider making the most of your variable rate mortgage — contact a Dominion Lending Centres mortgage professional near you.

–PAULINE TONKIN

JIDD HAPPENS

You may have heard people say “s@@t happens. In the mortgage broker world, JIDD happens. These are unexpected events that can turn a happy homeowners’ life upside down. JIDD consists of:

Job Loss – often unexpected and with no time to save for emergencies, things get ugly pretty quick. E.I. payments can run out leaving you with the option of buying food for the family or paying your mortgage.

Illness – Cancer treatments can be so hard on a person that even if it’s only a 5 minute radiation treatment, you are left feeling unable to work for the rest of the day. Short term disability plans usually top out a 75 per cent of your average salary. However, when you’re ill, your bills don’t drop by 25 per cent. In fact, they often increase due to extra medication, medical equipment rentals etc.

Death – one of the borrowers dies leaving the other person to pay out the mortgage by themselves on one income.

Divorce – once again one income where there were two and often expensive legal fees and bills that get forgotten in a tangle of emotions and a spouse moving out.
While you can find a job again or get over an illness, often there’s a period of time when you need to catch up on your bills and this is when people fall behind in their mortgage payments.

What should you do if you are in one of these situations?
Call all your Dominion Lending Centres mortgage professional and tell them what has happened. Let them know as soon as possible. They will look up your mortgage and let you know who the lender is and who your mortgage was insured with. They can guide you through the process of contacting the lender and insurer to see how they can help you out.
What can CMHC, Genworth or Canada Guaranty do for you? Depending on your circumstances they will allow you a forbearance which is a temporary mortgage payment deferral. They also may change your mortgage amortization lengthening it to lower your payments. They may also take your missed payments and just tack them on to your mortgage balance without a penalty. All these options are available but you have to contact your mortgage professional in order to get the ball rolling. JIDD happens but you’re not alone.

–DAVID COOKE

RENOVATING? CONSIDER A REFINANCE PLUS IMPROVEMENTS

Let’s take a closer look at how a Refinance Plus Improvements mortgage can get you the extra cash you need to get your renovations completed.

The Standard Refinance

An everyday refinance allows the home owner to access up to 80% of the fair market value of the home. The value is typically determined by a Market Appraisal on the home. Here is how it would look:

• Current Appraised Value of the home: $250,000.00
• Max New Mortgage Amount: $200,000.00 ß 80% of present value
• Your current Mortgage Balance: $190,000
• Equity Available to you for the renovations: $10,000.00

*Note: some of the equity will cover closing costs (it is a new mortgage after all, so a new registration and fund advance needs to happen. If you are breaking a current mortgage, there could be a pre-payment penalty as well)

The remaining equity can be used towards your improvements. But what happens if it’s not enough to cover the improvement costs? You’re now stuck with either making sacrifices to your dream reno, covering the additional costs out of pockets, use a higher interest line of credit or not doing the renovations at all. None of which are a great options.

The Refinance Plus Improvements Mortgage

Here is how the Refinance Plus Improvements mortgage can make all the difference.

For argument sake, let’s assume for a moment that the home owner is thinking about renovating their kitchen and main bathroom. These are in no way a small improvement. They are quite significant improvements…new flooring, cabinets, counter tops and paint in the kitchen along with a full gut and renovation in the main bathroom.

After sitting down with a Mortgage Broker to determine mortgage affordability, the home owners next step is getting estimates for the renovations. After having multiple contractors quote on the work, the home owner settles on a contractor that has quoted $20,000.00 for the job (Labour and materials costs, all in, turn key project). Let’s also assume for a moment that the renovations are going to increase the value of the home by $30,000.00 (side note: Kitchen and Main Bathroom Renovations can have the biggest impact on the value of a home). Here is how it would look:

Refinance Plus improvements:

• Current Home Value: $250,000.00
• Post Renovation Home Value: $280,000.00
• New Max Mortgage Amount: $224,000.00
• Your Current Mortgage Balance: $190,000.00
• Equity Available for the renovations: $34,000.00

See the difference? The refinance plus improvements in this scenario can get the home owner access to an additional $24,000, far exceeding the improvements planned for home. No sacrifices required. No unsecured higher interest financing required. No need to tap into personal savings. Just a nice new mortgage with a low interest rate and one simple payment.

If you have questions about how a refinance plus improvements mortgage can make all of the difference with your renovations plans, please feel free to connect with a Dominion Lending Centres mortgage professional near you. We are always happy to chat mortgage strategy with you while at the same time shopping the market and rates on your behalf!

Happy Renovating!

–NATHAN LAWRENCE