Tag Archive for canadian mortgage

Laurin Jeffrey | July 12, 2011
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Don’t be afraid to leave your bank for a better rate

Garry Marr, Financial Post

Are the banks doing an incredible job of retaining customers or are Canadians just too lazy to shop around when renewing their mortgages?

One finding of a survey by Canada Mortgage and Housing Corp. released this week was that 89% of consumers renewing their mortgage stay with the same financial institution. And 68% stay when they are doing a refinancing.

“They stay with the lender because of rate and they leave the lender because of service,” says Pierre Serré, vice-president, insurance product and business development, with CMHC.

Consumers are more aggressive shoppers when they are seeking a mortgage to buy their first home than they are upon renewal. Only 57% of first-time buyers took out their mortgage with their existing financial institution.

Rob McLister, a mortgage broker and editor of Canadian Mortgage Trends, says the banks are doing more to retain customers but there is a pretty good chance you won’t get the best deal if you renew automatically.

“Most of the time people do some rudimentary research before they go back to their lender. Not so long ago people would just take the renewal letter, sign it and send it back. It still happens but not as much anymore,” he says.

Mr. McLister says the banks “are not as stupid” now and when they send out renewal rates they have special offers. The posted rate on a five-year fixed closed mortgage today is 5.39% but he’ll see clients get offers in the mail as low as 4.04% in a renewal letter. The problem is a broker could probably get you 3.59% — meaning you just left 45 basis points on the table.

On a $250,000 mortgage at 4.04% paid monthly and amortized over 25 years, the monthly payment would be $1,320.48, with the interest cost during a five-year term at $47,014.79. Chop the rate down to 3.59% and the monthly payment drops to $1,260.09 ,with the interest over the five years falling to $41,658.85.

If you were crazy enough, or lazy enough, to take the posted rate, you would pay $1,510.01 monthly for the same mortgage and your interest cost would jump to $63,201.92.

Let’s just say it pays to shop around. So why don’t more people do it?

There is a perception that it’s difficult to switch banks, plus it will cost you some money to switch. Yes, it’s a hassle but for $5,000-plus, count me in. As for the costs, the bank you are switching to will often cover your legal costs. Even if it doesn’t or say you face a discharge fee of $300, that’s small price to pay upfront.

Mr. McLister says if you change the terms of your mortgage and refinance, it could cost you as much $700 to switch, something you would have to do if you have a home-equity line of credit or have a collateral charge on your mortgage.

Elton Ash, regional executive vice-president with Re/Max of Western Canada and a long-time realtor, says for most people if the customer service is good, they stay.

“Unless the lender has really screwed up, they stay,” says Mr. Ash says. “It’s like realtors, not all of them charge the same fee. There are lots of discounters out there but it’s based on service levels more than costs and fees, if it’s relatively competitive.”

The banks are more competitive these days for existing customers. Part of the reason is it can cost a financial institution up to 30 basis points to attract a new customer, so why not just spend the money on retaining existing customers?

“We start calling customers in advance to remind them their mortgage is coming up,” says John Turner, director of mortgages at Bank of Montreal. “It is an increasingly competitive marketplace and customers are shopping. It’s in our interest to advise the customer of their options. That could include refinancing the mortgage overall.”

Farhaneh Haque, regional manager of mobile mortgage specialists with Toronto-Dominion Bank, says her bank starts calling customers as much as 120 days before renewal to discuss options.

“This all about relationships, they are not going to up and leave for a five-basis-point difference,” Ms. Haque says.

She’s right. A 0.05 percentage point is not a great reason to sever your relationship. But renewal time is a great time to test your relationship with your bank and get it to show you some love — or a better rate.

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Contact the Jeffrey Team for more information  -  416-388-1960

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Category: First Time Buyers, Mortgages | Tags: , , , , , , , , , , , , , , , , , , , , , , , ,
Laurin Jeffrey | April 19, 2011
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Creating a tax-deductible Canadian mortgage

Ayton MacEachern – Investopedia.com

The way that mortgages are treated in the Canadian tax code is slightly different than in the U.S. One main difference is that the interest on a mortgage for a principal private residence in Canada is not tax deductible. However, no taxes are payable on any capital gains upon selling the home. But what if there was a way to take advantage of the capital gains exemption, and make the interest tax deductible? Keep reading to find out how to make your Canadian mortgage tax deductible.

Your Net Worth and Cash Flow

An individual’s net worth is his or her assets minus liabilities. To increase your net worth, you must either increase your assets, decrease your liabilities, or both.

An individual’s free cash flow is the amount of cash that is left over after all expenses and debt payments have been made. To increase your cash flow, you must spend less, get a better paying job, or pay less tax. Let’s take a look at a strategy to help you increase your assets by building an investment portfolio, decrease your debts by paying off your mortgage faster, and increase your cash flow by paying less tax; effectively increasing your net worth and cash-flow simultaneously.

The Strategy

Every time you make a mortgage payment, a portion of the payment is applied to interest, while the rest is applied to principal. This principal payment adds equity to the home and can be borrowed against (often at lower rates). If the borrowed funds are then used to purchase an income-producing investment, the interest on the loan is tax deductible, which makes the effective interest rate on the loan even better.

This strategy calls for the homeowner to borrow back the principal portion of every mortgage payment, and invest it in an income-producing portfolio. Under the Canadian tax code, interest paid on monies borrowed to earn income is tax deductible. As time progresses, your total debt remains the same (as the principle payment is borrowed back each time a payment is made), but a larger portion of it becomes tax deductible debt (good debt), and less of it remains as “old” non-deductible debt (bad debt).

This strategy can be taken a step further: The tax-deductible portion of the interest paid creates an annual tax refund, which could then be used to pay down the mortgage even more. This mortgage payment would be 100% principal (because it is an additional payment), and could be borrowed back in entirety and invested in the same income-producing portfolio.

The steps in the strategy are repeated monthly and yearly until your mortgage is completely tax deductible. As you can see from the previous figure and the next figure, the mortgage remains constant at $100,000, however, the tax deductible portion increases each month. The investment portfolio, on the side, is growing also, by the monthly contribution and the income and capital gains that it is producing.

Benefits

The goals of this strategy are to increase cash flow and assets while decreasing liabilities. This creates higher net worth for the individual implementing the strategy. In addition, this strategy also aims to help you become mortgage-free faster, and to start building an investment portfolio faster than you could have otherwise.

Let’s look at these a bit closer:

* Become Mortgage-Free Faster:
The point at which you are technically mortgage free is when your investment portfolio reaches the value of your outstanding debt. This should be faster than with a traditional mortgage because the investment portfolio should be growing at the same time as you are making mortgage payments. The added mortgage payments from the tax returns can pay down the mortgage even faster.

* Build an investment portfolio while paying your house down:
This is a great way to start saving. It also helps free up cash that you might otherwise not have been able to invest prior to paying off your mortgage.

Now, let’s compare a traditional mortgage to that of a person using this tax-deductible technique.

Case Studies

Dick and Jane’s House – Bought the Traditional Way

Dick and Jane bought a $200,000 home with a $100,000 mortgage amortized over 10 years at 6% with a monthly payment of $1,106. After the mortgage is paid off, they invest the $1,106 that they were paying for the next five years earning 8% annually.

After 15 years, they own their own home, and have a portfolio worth $81,156.

Dick and Jane’s House – Bought Using the Tax Deductible Strategy

Dick and Jane bought a $200,000 home with a $100,000 mortgage amortized over 10 years at 6% with monthly payments of $1,106. Every month, they borrow back the principal and invest it. They also use the annual tax return that they receive from the tax deductible portion of their interest and pay off the mortgage principal. They then borrow that principal amount back and invest it. After 9.42 years, the mortgage will be 100% good debt, and will start to produce an annual tax refund of $2,340 assuming a marginal tax rate (MTR) of 39%. After 15 years, they own their own home, and have a portfolio worth $138,941 – a 71% increase.

A Word of Caution

This strategy is not for everyone. Borrowing against your home is psychologically difficult, and if the investments don’t yield expected returns, this strategy could yield negative results. By reborrowing the equity in your home, you are also removing your “cushion” of safety if the real estate (or investment) markets take a turn for the worse. By creating an income-producing portfolio in an unregistered account, there can also be additional tax consequences – so always consult with a professional financial adviser to determine whether this strategy is for you, and if it is, have it tailor-made to you and your family’s personal financial situation.

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Contact the Jeffrey Team for more information  -  416-388-1960

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Category: Miscellaneous, Mortgages, Real Estate Investment | Tags: , , , , , , , , , , , , , , , , , , ,
Laurin Jeffrey | April 10, 2011
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Despite stress, no crash seen in housing

Steve Ladurantaye – Globe and Mail

The Canadian housing market is showing several serious signs of stress, but Bank of America Merrill Lynch says there’s no reason to believe values are set for a sharp dive.

“Valuation metrics are clearly stretched, but the usual symptoms of a tipping point are simply not there,” according to a report authored by economists Sheryl King and Ryan Bohren.

“Speculation is low, price expectations are cautious, home building is not excessive and most importantly the economy continues to expand steadily.”

The resale housing market has been strong through the first half of the year.

The Canadian Real Estate Association will release its national resale numbers for February Tuesday, and is expected to show stronger than usual activity as buyers continued to take advantage of record low interest rates.

(There are also some who believe buyers bought in February to secure 35-year amortizations on their mortgages, which are no longer available as of mid-March.)

The report said the structure of the Canadian mortgage market makes a U.S.-style crash unlikely, and listed four key reasons the market is unlikely to tank:

* Mortgage insurance is explicitly guaranteed in Canada, limiting bank exposure to higher risk borrowers.
* Recourse laws mean fewer borrowers walk away from mortgages.
* Thirty per cent of mortgage funding is government backed, providing a stable and liquid source of financing.
* Canadians are “relatively conservative, with leverage ratios only just matching the levels of a significantly deleveraged U.S. household.”

The report also outlined reasons Canadians should be concerned about rising prices (don’t worry, a list of reasons why not to worry follows):

* Canadian home valuations look stretched, with “the average estimated asking rental yield at all time lows. Housing affordability looks relatively good, but will likely to decline as mortgage rates are set to rise and lending rules are tightening.”
* Canadian home ownership rates are near record highs of close to 70 per cent, and real estate assets are near a record 38 per cent of household assets.
* Canadian mortgage-debt-to-disposable-income reached a record high of 93 per cent (similar to the U.S.).

As promised there are three reasons to believe the market won’t crash:

Canadian home sales as a percentage of housing stock remains below the 10-year average, “suggesting the turnover is not excessively speculative.”

Housing starts in 2009 and 2010 have averaged around 160,000, “just below the natural formation rate of around 170,000.”

“Most importantly – economic conditions in Canada continue to improve. The employment levels are above pre-recession levels, wages are growing and financial conditions remain very easy.”

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Contact the Jeffrey Team for more information  -  416-388-1960

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