Save, Save, Save!

In the mortgage business, the following are the key factors used to determine success at getting approval on a mortgage or not:  credit, income, downpayment and net worth.  As always, the economy affects the financial industry mood.   Therefore, when the economy is unstable, like today, it determines the way lenders evaluate the factors listed above. 

One strong comment from lenders these days is if the client’s credit is not so great and the person is being given the downpayment from someone else (gifted money) the lenders see this as a weakness and may decline the mortgage application.

If you are not planning to buy for several months, get the gifted money into your account now, so when asked to prove downpayment in the future by giving your three months bank history, the lender does not see the large gifted deposit in your account. 

Of course, the best way to get the mortgage you want is to:

 Save, save, save your money!

Sources of Down Payment

When you decide it’s time to buy a home, I highly recommend using an independent Broker Agent, and this is not entirely self promotion—The truth is, the mortgage industry and a large number of lenders can make understanding and achieving your “perfect” mortgage somewhat complex.   A knowledgeable person who knows the difference between lenders, and has the option to choose multiple lenders to best suit your needs, can speed up and ease you through the process.  To illustrate, I would like to share the main sources that are acceptable to use for a downpayment:

1. Personal savings.  

The full downpayment does not have to be in the bank until 10 days prior to the closing date, but there are limits to the amount you can deposit.  Depending on the lender, a deposit over $1000.00-$2000.00 at any one time must be proven with three months printed bank history.  Or, if you are using money from someone else, this is called a gift.  The lender will require a signed letter stating the money is non-repayable, and must be from an immediate family member (and still requires three months history).

2. RRSPs.

You can use up to $25,000.00 from your RRSP contributions.  This allows the RRSP lender to lend you your desired amount and repayment doesn't begin until after a two year waiting period.  You then have fifteen years to repay in full.  You should ask your financial advisor how long it takes to get the money, and then make sure it is in your account about 1 week before closing.

3. Bank loan/line of credit. 

If you seek a loan, the amount must be calculated into your debt ratios.  This will usually lower the affordable purchase price.  Declare your intention to the Broker Agent so this debt can be factored in.

4. Cash back.

This method is only allowed by a select number of lenders.  In this case the lender provides both the 5% down and 95% mortgage value.  However, you must take into consideration interest rates.  For example, on Nov. 16^th, 2010 I could get a solid client a 3.49% rate for a 5 year term; yet, if using cash back, the borrowing rate becomes 5.19%.  Make sure you advise your Broker Agent of your intention because the higher the rate the less you will be able to afford.

5. Investments (GIC’s, etc.).

Beware of investments—make sure that you can cash yours in without a huge penalty.  If you aren't locked in, they can be used for downpayment.

--Different lenders allow different sources of downpayment, so discussing options and numbers with a Broker Agent is a smart choice.  For more information, e-mail slaney81@gmail.com or call 519-426-9842.

Tips to Pay Off Your Mortgage Sooner

Client's often don't realize the cost of principal and interest, and how it multiplies over the course of a mortgage - often amounting to more than the initial home purchase price.  The fact is, taking even the smallest steps now will make a HUGE impact in the long run.  

The following are some easy tips to be "mortgage-free, sooner:"

1. Accelerate your payment frequency.

• Choose a bi-weekly accelerated payment.  Instead of making 24 payments a year, you will make 26 - which can take off up to 6 or more years from your payments.  Accelerated weekly, even faster.

2. Amortize frugally.

• If you can afford higher payments, choose a shorter amortization period. 

3. Make lump sum payments.

• Making a $1000 prepayment in the first year on a $300 000 mortgage will save more than $4 500 in interest in the long run.  And making $1000 prepayment every year will produce long-term savings of over $50 000 and take off four and a half years off the amortization period.

4. Adjust your payment.

• If your term is nearing its end, right now interest rates are at "near-historic lows," now may be the time to increase your monthly/bi-weekly/weekly payments.  Every little bit helps.

As you can see, these are very simple, small steps that move you forward on your payments, so you can put your mortgage behind you!

These tips were taken from the Invis Home & Mortgage Magazine, "Tips for Reducing Interest Costs," edited by Ajay Soni & Steven Moyes. Volume 1 Number 1/2010.  Check out www.invis.ca for more information.

"The world of mortgages is changing"

Welcome to our new site!

Once you begin to think about buying a home, the amount of information available can feel overwhelming. After reading the September 2010 issue from Media Planet dedicated to mortgages, I believe this article is an excellent beginning point of reference for those new to the mortgage process. Please enjoy, and if you like this article, I highly recommend checking out the full "Mortgages" issue.

"Buying your first home: down payment options and pre-approvals" 

As a first-time home buyer, you probably have many questions, including the right down payment amount and whether you’ll be approved for a mortgage.  One of the first steps in buying your home is obtaining a pre-approved mortgage. A preapproval will demonstrate to sellers and real estate agents that you are a serious buyer, which can help in your negotiations.  

Another advantage of having a preapproval is that you will know how much you can realistically afford and what your payments will be before you start looking at homes. This also allows you to lock in your interest rate with a 90 day guarantee which is a great feature in a rising interest rate period.

Homebuyers will generally need to have an appraisal of the property they are purchasing in order to obtain a firm approval of their purchase. When it comes to deciding on the right down payment amount, there are a number of options to consider:

Conventional Mortgage

A conventional mortgage requires a down payment of at least 20% and is offered on both a fixed or variable interest rate mortgage. Conventional mortgages have the lowest carrying costs because they do not have to be insured against default. So while it may take longer to accumulate this type of down payment, it will also save on mortgage costs over the long run. 

Low Down payment Insured Mortgage

Most lenders now offer insured mortgages for both new and resale homes with lower down payment requirements than conventional mortgages-as low as 5%. Low down payment mortgages must be insured to cover potential default of payment; as a result, their carrying costs are higher than a conventional mortgage because they include the insurance premium.

Using Your RRSP as a Down Payment

Under the federal government’s Home Buyer’s Plan, first-time home buyers are eligible to use up to $25,000 in RRSP savings per person ($50,000 for couples) for a down payment on a home. The withdrawal is not taxable as long as you repay it within a 15-year period. To qualify, the RRSP funds you plan to use must have been in your RRSP for at least 90 days.

Bernice Dunsby

Director, Home Financing, RBC

editorial@mediaplanet.com