A few simple steps to healthy credit…

Just like you should have a physical every year to make sure you’re healthy, you should do the same for your credit report and score.

Don’t wait until you go to buy something and you are turned down. And don’t worry… chequing your own credit does not affect it. So, what should you be looking for?

MISTAKES

Make sure your personal information is correct and upto- date. Also check that your date of birth and any other identifying information is correct as well.

ERRORS

Even creditors make mistakes sometimes so carefully look over any negative information appearing on your credit that isn’t true. Creditors are required to change any errors that you find on your report.

HINT: Send a letter to the credit bureaus, as well, to let them know there was an error and send a copy to the credit agency who incorrectly reported to motivate them to take care of it in a timely manner.

OUTDATED INFORMATION

Credit agencies are required to remove certain information from your credit after a certain number of years. For example, if you got behind on your payments but then went back to your normal payment schedule, that late history is to be removed after 6-7 years. Don’t assume it will be. Be proactive and follow up to make sure it was done.

FRAUD

We all know someone who has had their identity stolen and nothing wrecks a credit score and report more than someone hijacking it. It doesn’t necessarily have to be a stranger either. Family and friends have been known to “borrow” someone’s credit. Be smart and make sure to protect your credit from the known and the unknown.

WHY DO ERRORS MATTER?

Even minor errors like a misspelled name or a wrong address can keep you from getting a loan or even lower your credit score. Keep your credit as healthy as possible by checking it every year. Choose a day that will be easy to remember like your birthday or the day you file your taxes.

written by DLC Chief Economist Dr. Sherry Cooper

Did You Know? The average Canadian owes $23,000 in consumer debt and has at least 2 credit cards. Source: CBC.ca

If you live paycheque to paycheque, the idea of somehow having enough money to invest and eventually have financial freedom seems about the furthest thing possible.

But experts in financial education like to point out, no matter your income and place in life, a few changes to the way you’re living life can make all the difference. It’s never too late to start learn and reverse course. If you’re still not convinced, here are a few simple ideas to get you started:

PRETEND YOU EARN LESS THAN YOU DO

Give yourself a cut in pay. The goal is to put 10% in savings from each paycheque into your savings account. The easiest way is to do an automatic direct transfer from your chequing account to your savings every pay day.

CREATE A BUDGET

In order to stop living paycheck to paycheck, you need to know where that paycheck is going. Creating a budget is simple with Google docs, or look into other online tools and sites to get started.

BUILD AN EMERGENCY FUND

Once you have your budget in place, review it and break it down into non-discretionary expenses (rent, groceries, utilities, etc.) and discretionary expenses (eating out, entertainment, clothes, etc.). See where you could cut down on discretionary spending and put that money towards your emergency fund. Even starting with just a little amount is great and helps you build the habit of saving.

CONSIDER DOWNSIZING

It may be time to consider a lifestyle change. Consider moving to a smaller place. Get rid of that cost of going to that expensive gym with a trip to the local park. Think about if you really need that brand new car or if a used one would work just as well.

PAY DOWN DEBT

If you have a lot of credit card or unsecured debt, try paying the minimum on all but one of them and aggressively pay down that one card. Once it’s paid off, attack the next one. If you’re so deep in debt that you can’t fight your way out, consider consulting with a company who specializes in debt consolidation. They will help you negotiate your debt into smaller amounts that you can begin to pay off.

DON’T FORGET YOUR FUTURE

Putting at least 3% of your paycheck into a retirement fund is a great idea, or maybe when you get your first raise instead of thinking of it as free money, simply put it into a fund and forget about it. You’ll be glad it’s there when you need it in the future.

written by DLC Chief Economist Dr. Sherry Cooper

One of the first questions that potential buyers want answered is: “What is your interest rate?”It is easy to think that this is the most important question, but there is a lot more to your mortgage contract than just the rate. And so, the rate debate continues!

The rate debate is a hot topic in the mortgage world. Not just the rates itself, but the importance of the rate versus other factors in the mortgage – such as terms and penalties. As a borrower, it can be easy to get caught up in one thing but, if you’re not paying close attention, ignoring other factors could cost you in the long run.

Before we get into these other factors, let’s talk rate. While not the only factor, it does continue to be an important decision criteria with any mortgage product. The interest rate is the percentage of interest you are paying on the principal loan; lower interest rates means more money to the mortgage and who doesn’t want that?

VARIABLE VS. FIXED

There are two types of mortgage rates: variable-rate and fixed-rate. A fixed-rate is just that – a fixed amount of interest that you would pay for the term of the mortgage. A variable-rate, on the other hand, is based off of the current Prime Rate, and can fluctuate depending on the markets.

Fixed rates are typically tied to the world economy where the variable rate is linked to the Canadian economy. When the economy is stable, variable rates will remain low to stimulate buying.

Fixed-Rate Mortgage: First-time homebuyers and experienced homebuyers typically love the stability of a fixed rate when just entering the mortgage space. The pros of this type of mortgage are that your payments don’t change throughout the life of the term. However, should the Prime Rate drop, you won’t be able to take advantage of potential interest savings.

Variable-Rate Mortgage: As mentioned, variable-rate mortgages are based on the Prime Rate in Canada. This means that the amount of interest you pay on your mortgage could go up or down, depending on the Prime. When considering a variable-rate mortgage, some individuals will set standard payments (based on the same mortgage at a fixed-rate), this means that should Prime drop and interest rates lower, they are paying more to the principal as opposed to paying interest. If the rates go up, they simply pay more interest instead of direct to the principal loan. Other variable-rate mortgage holders will simply allow their payments to drop with Prime Rate decreases, or increase should the rate go up. Depending on your income and financial stability, this could be a great option to take advantage of market fluctuations.

BEYOND RATES

When considering your mortgage, other considerations such as penalties can be important factors for deciding on a mortgage product. If you have two competing products, say 1.65% interest fixed-rate and a 1.95% interest variable-rate, it seems as though it is a pretty easy decision. But, what about the ability to make extra payments? And what are the penalties?

It is easy to think that nothing will change throughout your 5-year mortgage term, so you probably haven’t even considered the penalties. However, when looking at the fixed versus variable rate mortgage, penalties can be quite different. Where variable rates typically charge three-months interest, a fixed rate mortgage uses an Interest Rate Differential (IRD) calculation.

Given that nearly 70% of fixed mortgages are broken before the term ends, this is an important variable. Fixed-rate mortgages are typically okay when the penalty is your contract rate versus the Benchmark rate. However, when penalties are based on the Benchmark rate (sometimes called the Bank of Canada rate), it is typically much higher than your contract rate, resulting in greater penalties.

In some cases, penalties for breaking a fixed mortgage can sometimes be two or three times higher than that of a variable-rate. While the interest rate is lower, lower penalties are sometimes best should anything happen down the line.

CONVENTIONAL VS. HIGH-RATIO MORTGAGE

Another consideration beyond just the interest rate, is whether or not you will be obtaining a conventional or a high-ratio mortgage. Whenever possible, it is recommended to put 20 percent down payment on a new home. This results in a conventional mortgage. However, as not everyone is able to do this, many buyers will end up with a high-ratio mortgage product.

So, what does this mean?

High-ratio mortgages need to be insured by either Genworth Financial, the Canada Mortgage and Housing Corporation (CMHC), or Canada Guaranty. This is due to the Bank Act, which will only allow financial institutions to lend up to 80 percent of the homes purchase price WITHOUT mortgage default insurance. Insurance on the mortgage is important to protect the lender should you default on your payments, leaving the insurer to deal with the borrower.

The difference between conventional and high-ratio mortgages is that high-ratio mortgages require insurance, which results in an insurance premium. This is added to and paid along with the mortgage, but is an important factor when considering your monthly payments. These premiums are based on the loan to value (LTV), which is the amount of the loan versus the value of your home.

All high-ratio mortgages are regulated to have mortgage insurance, but some homeowners with a conventional mortgage may choose to pay for mortgage insurance to get a better rate.

SMART QUESTIONS TO ASK

To ensure you understand your mortgage contract, and how it could affect you now and in the future, we have compiled a few smart questions to ask before you sign.

1. What is my interest rate? Can I qualify for a better one?
2. Do you recommend fixed or variable-rate?
3. What are the penalties for breaking my mortgage?
4. Are there any pre-payment penalties?
5. Will I require mortgage insurance? If so, what are the premiums?
6. What will my monthly payment be?
7. Is my mortgage portable?

These are just a few examples of good questions to ask. It is important to do your own research and be diligent with any contract you are signing. Contacting a Dominion Lending Centres mortgage broker today can help ensure you understand what you are agreeing to, and that you are getting the best mortgage product for you!

written by DLC Chief Economist Dr. Sherry Cooper

There are four major components to any successful home buying A-Team: your mortgage professional, realtor, home inspector, and lawyer. Each of these individuals is important to various aspects of the home buying process.

MORTGAGE PROFESSIONAL

While many people think a real estate agent is the most important person when it comes to buying a new home, your mortgage professional comes first. This is especially true for anyone looking to pre-qualify for a mortgage before searching for their forever home! Not only does pre-qualification help you establish your budget, but it can also lock in a low rate for you for up to 120 days while you search for your perfect home.

When it comes to choosing a mortgage professional, there has been a recent upward trend in using a mortgage professional to arrange mortgage financing. Many banks are cutting back on staff and centralizing operations to save money. While this doesn’t affect the day-to-day finances, it can create a headache when it comes time to discussing and finalizing a mortgage agreement.

You may not know much about mortgage professionals, but they are steadily gaining popularity due to providing top-notch service and unbiased advice. Also, unlike individual banking representatives who often move from one branch to another, mortgage specialists work to form lifelong relationships with their clients. The dedication of mortgage professionals to their clients and their unique position in the mortgage market often results in finding lower rates for their customers and providing the best possible plan to ensure their clients’ financial success.

One of the reasons mortgage professionals are able to find their clients such amazing deals when it comes to mortgage interest rates is that they operate independently of any single financial institution. Banks are only able to access their rates – no one else’s. Mortgage brokers, on the other hand, have access to MORE rates and lenders than the bank! In fact, a typical broker has access to over 90 lenders! This means they are able to shop around, on your behalf, to find the most affordable option thereby saving you tons of time and money in the long run.

So, not only can a mortgage professional shop around for you AND save you money on your interest rate, their services are almost always free to the homebuyer! This is because mortgage professionals get paid by the lenders directly! What else can you ask for? Better rates, personalized service, flexibility, and products at no cost to you. Some people may argue that the fee is built into the payment, but this is not so. It costs the banks approximately 40 percent less to generate a mortgage through an agent than a branch, as there is no overhead to pay if the bank doesn’t get a client’s business. Instead, the mortgage broker bears the entire cost of day-to-day business activity and the bank simply pays for the privilege of gaining you as a client.

Your mortgage professional has also developed relationships with numerous realtors and is also able to recommend a qualified realtor to help you through the home-buying process.

WHO CAN FUND YOUR MORTGAGE?

Mortgage professionals have access to a variety of lenders to ensure they find you the best rate, but who exactly are these lenders?

BANKS

A bank is a financial institution that accepts deposits, lends money and transfers funds. Banks are listed as public, licensed corporations and have declared earnings that are paid to stockholders and are regulated by the federal government’s Office of the Superintendent of Financial Institutions. Most Canadians know the five big banks: BMO, Scotiabank, CIBC, RBC, and TD Canada Trust. Big banks are great options for variable rate mortgages as they have smaller penalties if you have to break the mortgage for any reason. When it comes to fixed-rate mortgages however, the penalty can be quite large when compared to different types of lenders.

CREDIT UNIONS

Credit unions also deposit, lend and transfer funds much like a bank, but beyond that there are some major differences between the two.

Credit Unions have an elected Board of Directors that consists of elected members from their community. They are local and community-based organizations and, unlike the banks, are provincially regulated versus federally.

One major advantage of getting your mortgage through a credit union versus a bank is that the credit unions are not subject to the recent “stress test” changes for uninsured mortgages (excluding Quebec). This is due to the fact that credit unions are provincially regulated and the stress test is a federal regulation. Of course, your ability to pay down your debt will still be tested, but not at the higher rate.

Another advantage of using a credit union is that the calculation for penalties when it comes to breaking a mortgage agreement are typically friendlier to the borrower, and, if there are credit issues, they tend to be more understanding than the big banks.

MONOLINES

A monoline is a type of financial service that specialises in consumer credit, home mortgages or a sole class of insurance. While these businesses typically do not have branches and are mainly accessed through a mortgage professional, there are some advantages to the consumer when it comes to using a monoline lender.

The first is that monolines usually offer better discounted rates and how they calculate the penalties can be friendly to the client. The biggest strike against them is they’re just not as well-known or trusted as a bank. It should be noted, however, the major investors in monolines are the big banks, so there’s nothing really to fear.

ALTERNATIVE LENDERS

If for any reason you are not able to get approved for a mortgage through traditional lender channels, there is another option – Plan B. In fact, these secondary lenders make up almost 10 percent of mortgage transaction volume! That said, there are a few things to know.

The first is that alternative lenders often provide higher interest rates than A-lenders as it is a more risky investment. In addition, most B-lenders will charge a one-time fee of 1% of the loan amount. However, if you have no other options this is still a viable way to get approved!

Mortgage professionals have access to a fair number of alternative mortgage lenders (B-lenders) who offer excellent solutions above and beyond the traditional branch-based options. When mortgages are arranged through an agent with an A-lender, the charge is covered by the lender directly. However it is important to note that there may be a fee when sourcing an alternative mortgage lender.

WHAT DOES A LENDER NEED TO KNOW?

Before a mortgage can be approved, there are a few things that your lender or mortgage professional needs to know.

INCOME AND JOB STABILITY

The first thing that your mortgage professional or lender will ask for is details surrounding your income and job stability.

Your income will determine how much money you can borrow. In most cases, 35 percent of your gross income for salaried, non-self-employed, or commissioned people is used to determine how much you can borrow to cover the cost of the mortgage payments, taxes and any applicable maintenance. All other debts (car loans, credit cards and lines of credit, etc) must not exceed an additional seven percent of your gross income.

It is also important to note that sticking with your employer while going through the home buying process is crucial. Any changes to your employment or income status can stop or greatly delay the mortgage approval process.

CREDIT HISTORY

Your credit history and credit score are used to show that you pay your bills on time. A great credit score includes keeping a balance on credit cards at any given time that is below 30 percent of the total card limit – and paying it off monthly. A credit rating above 680 puts you in a good position to get financing while a score below will result in higher interest rates or a more challenging mortgage acquisition.

If you’re new to the world of credit, consider the 2-2-2 rule. Lenders want to see two forms of resolving credit (ie: credit cards) with limits no less than $2,000 and a clean payment history for two years.

WHAT DO YOU NEED ONCE YOUR OFFER IS ACCEPTED?

Once you have put in an offer on your dream home and it has been accepted, there are a few things you will need to finalize your mortgage agreement.

INCOME CONFIRMATION

Supplying your income details to the lender for pre-approval helps to determine your budget and how much you can borrow. Once you are ready to finalize the mortgage, you will need to confirm this information. For salaried individuals, this can be done by submitting a letter of employment, your most recent pay stub, your last two years’ income, and Notices of Assessment from Revenue Canada.

DOWN PAYMENT CONFIRMATION

The lender will require that you prove the source of your down payment. You’ll have to send in bank statements, RRSP statements, stocks, etc that show the previous three-month history of your accounts. If there are any large lump-sum deposits, you’re likely to be asked to show where the deposit originated. You’ll also be asked to demonstrate that you have access to 1.5 percent of the purchase, in addition to the down payment, to ensure you are able to cover closing costs such as: legal fees, Title Insurance, property tax prepayment and Property Transfer Tax.

CONTRACT OF PURCHASE AND SALE

This is a copy of the accepted offer of the home you intend to purchase and a copy of the MLS listing sheet. The purchase contract will also be accompanied by a Property Disclosure Statement and a Strata Form B Disclosure if applicable.

REAL ESTATE AGENT

As you may already know, a real estate agent is one of the most vital members of your homebuying A-Team! In fact, in today’s competitive real estate market, it can be very difficult to acquire property WITHOUT the help of a realtor.

One of the reasons realtors are integral to the home buying process is that they can provide access to properties that never even make it to the MLS website. Realtors also gain access to information about homes that may come onto the market before a listing is even signed.

Most importantly though, a realtor understands the ins-and-outs of the home buying process and can tell you how to be successful in your endeavors to purchase a home by guiding you through the process from the first viewing to having your bid accepted.

HOME INSPECTOR

While a competitive market can make a home inspection more difficult, it is a highly recommended part of the home buying process! Having a home inspection done is important to ensure that there are no hidden surprises which may crop up after the sale is finalized. A home inspector can determine what’s behind the walls and look for any signs of mold, leaks or old wiring that could cost you down the road. A good home inspector can often be recommended by your mortgage professional or realtor who may know of many reliable options for getting your inspection done.

While most people assume home inspections are just for the buyer, that’s not always the case. If you’re selling a home, you might want to consider a home inspection too! Any issues that come up during an inspection by a potential buyer can lead to delays and kill a deal all together but scheduling a certified inspection prior to putting the home on the market could save you time and ensure a smooth process once you do start getting offers!

LAWYERS AND NOTARIES

Once you are ready to finalize financing and purchase a home, you will need a lawyer or notary to draw up the documents and register them on file for you. Since the visit to your legal professional is the last step in the entire process, it’s extremely important that this be handled with care. Mortgage professionals can recommend a qualified lawyer or notary who specializes in real estate transactions that can help streamline this process.

If you are looking to get help with your mortgage, contact one of Dominion Lending Centres Mortgage Professionals today for expert advice you can count on!

written by DLC Chief Economist Dr. Sherry Cooper