Mortgage Insurance Premium Hike: What You Need to Know

CMHC LogoThe CMHC announced today that it will be raising it’s mortgage insurance premiums effect March 17, 2017.

Here are some things you need to know:

Who will this affect?

This rate hike will affect those that apply for mortgage default insurance AFTER March 17, 2017. The key takeaway here is that if you can apply for your insurance before this date and get approved, you’ll still be able to pay the old rates. This rate hike will likely also affect the general rate pricing in the market, as some lenders whose business models rely on bulk insuring conventional (more than 20% down) mortgages will have to pay higher rates and will have to pass those costs onto their customers like we have seen in recent months since the October 2016 Regulations came into effect.

What the hike looks like:

Loan-to-Value Ratio Standard Premium (Current) Standard Premium (Effective March 17, 2017)
Up to and including 65% 0.60% 0.60%
Up to and including 75% 0.75% 1.70%
Up to and including 80% 1.25% 2.40%
Up to and including 85% 1.80% 2.80%
Up to and including 90% 2.40% 3.10%
Up to and including 95% 3.60% 4.00%
90.01% to 95% – Non-Traditional Down Payment 3.85% 4.50%

The CMHC changes will affect the market as a whole, and its safe to assume the other mortgage insurers will follow suit in the coming months. This is yet another measure to cool down the housing market and reduce the risks that Canadian taxpayers have to foot the bill for the Crown-owned CMHC’s losses due to a housing collapse.

Source: https://www.cmhc-schl.gc.ca/en/corp/nero/nere/2017/2017-01-17-0830.cfm

Posted in Borrowing, Credit, Insurance, Leverage, Mortgages

What They Won’t Tell You About Your RRSP

rrsp-bank

I frequently read finance blogs and respond to comments and posts around the internet to deepen my knowledge of personal finance in the Canadian context. I recently came across a paper that proved my (a finance professional!) conception of the benefits of an RRSP to be completely flawed. In fact this groundbreaking paper challenges the conventional wisdom that your financial advisor will use to persuade you to contribute to your RRSP in the months and weeks leading up to March 1, 2017. One comment in particular that resonated with me was the universal assumption that Canadians stand to benefit from a lower tax bracket at withdrawal time for the RRSP. If you are going to be in an equal or higher tax bracket the benefits of the RRSP will be minimal or could even be losses compared to other investment avenues. My father once asked me a question I’ll pose to you: DO YOU PLAN ON EARNING LESS IN RETIREMENT?

The paper is about 10 pages long and a very good read for anyone considering making a contribution this year. I have listed the conclusions of the paper below but encourage you to read it here

Common benefits and assumptions listed by finance professionals, banks, Investopedia and even the CRA:

  1. The tax deduction on contribution – you pay less tax
  2. Profits are tax deferred – not taxed at the time but taxed on withdrawal
  3. The deferral of taxes on the original wages – the benefit of paying tomorrow versus today
  4. A lower tax rate on withdrawal than at contribution

The TRUTH!

  1. The tax deduction is not a benefit and the savings at contribution eventually fund the taxes at withdrawal
  2. Profits earned in the RRSP are in fact never taxed. The withdrawal taxes are an allocation of principal, not a tax on profits
  3. There is no benefit from deferring the taxes on the original wages because as the investment grows, the tax liability grows proportionally.
  4. There is no guarantee that the tax rate at withdrawal will be lower, and a higher tax rate would create a loss

Conclusion:

Many advisors and trusted financial resources understand the rules and procedures of the RRSP but fail to quantify the true and objective costs and benefits of contribution. Before making a contribution, Canadians should consider the net benefit of of all the factors at play, quantify them against other investment opportunities and finally make a truly educated decision.

 

Source: This post is a summary of Chris Reed’s 2015 Paper titled “Rethinking the RRSP’s Benefits” posted on the Social Science Research Network’s website. Chris maintains a financial literacy and investing website at http://www.retailinvestor.org

 

Posted in Bank Accounts, Financial Education, Income, Investing, Money Saving Tips, Risk Managenent, Tax

How Mortgage Lenders Treat New Build Homes

floor-planI have had a lot of questions from realtors and their clients regarding the way mortgage lenders treat purchasers of new build homes in Ontario. There are some key points that are different for new builds than existing ones that I would like to point out. I’ll structure the discussion chronologically.

Pre-approval

Typically, your builder will ask that you bring in a pre-approval when signing the purchase and sale agreement for a new build. This is different than buying an existing home because new builds often close months and sometimes years down the line which usually extends past the validity period of a typical pre-approval. For my clients, I have written letters of pre-approval from our brokerage and had them accepted. However, I have run into the odd time where a builder requires a pre-approval from their on-site mortgage lender. You’re never locked into anything with a pre-approval, so it is not an issue to get one from their exclusive lender and then find the best mortgage for you a month before your closing.

Borrowing for the deposits

You will not find that a mortgage lender will lend you money for the deposits on a new home or an existing one for that matter. Lenders are only able to offer mortgages using real property as security. If you don’t have the title yet, you can’t get a mortgage. That being said, it is very popular for folks to use a line of credit or a similar loan to put down some of their deposit money and spend time paying it back before closing.

Buying an assignment

If a builder permits assignments, you may want to buy or sell one as part of your financial plan. Financing assignments is possible but the choices are limited. Some lenders will only finance the original purchase price and some will even require that the assignment must be to a family member or non-arm’s length person. The mortgage broker industry has lenders that will lend on the appraised value, which is why you should have a talk with a broker (me of course!) in a case like this.

Finishes and other add-ons

Many builders leave the door open to buyers to select finishes and add-ons later in the construction phase of the build. If your builder is able to, you should always request that they amend your agreement of purchase and sale to include these finishes, and the mortgage lender will gladly finance them.

Appraisal

Appraisals for new builds usually occur in the final two weeks before closing because that is when the property is complete enough to have an appraisal. Typically, lenders require that the property is 97% complete for it to be appraised and of course 100% complete for the loan to be advanced.

Builder’s development fees and adjustment costs

Many people are surprised by the fact that mortgage lenders typically do not finance any of the final adjustment costs. The rule of thumb is: if it is not a component of the purchase price, it will not be financed. This is important because some contracts can allow for tens of thousands in final adjustments that need to come out of your pocket to close the deal. Make sure you and your lawyer have discussed the total amount of funds required to close the deal.

 

Below: Weteachfinance fan Liran Nirenberg showing off his best 3 point stance on a 16/12 roof pitch while framing a new home  in Caledon.

liran-building

Posted in Borrowing, Leverage, Mortgages

Why You Should Check Your Credit Score Today

credit scoreI’ve been a busy bee over the last few months. With the development and launch of two new websites next month, and the move to a new firm, the summer has had its challenges and kept me away from writing. Today however, I have some information I think will directly benefit you, and I didn’t want to wait to share it.

Why you should check your credit score today

Credit is something that is taken into account any time you want to borrow money. There is a certainty regarding your credit which is this: The lower your credit score, the higher the interest rates that you will have to pay. If you want to ensure you pay the least possible, keep reading.

What happened?

I had a friend ask me to pull his credit, which is a standard operation for every client of mine. What we discovered was that he had a debt in collections. The just under $500 debt had been delinquent for more than a year and it was for an account he had never heard of. We did some research and found out that he had co-signed a loan for a friend who was new to Canada a few years back. My friend never received any bills, or notices, but was on the hook if the person defaulted for the loan which was the eventual result. This debt sat on the credit report for more than a year, pummeling his score to below the bank’s threshold over that time period. The result was that my friend was being denied for the most basic credit applications, despite having an income more than $70K per year and almost no debt.

The solution

After contacting the old friend who was now living across the country, we were able to have the debt paid in full. This is just the first step in the months long battle to reclaim precious credit points lost. To complement and accelerate the rehabilitation of credit, I suggested a secured credit card from Home Trust, which will establish another trade line to draw from and earn credit depth.

If you’re looking at borrowing money in the future, now is the time to check your credit report and make sure you’re in shape to pay the least amount of interest.

Stay tuned for links to my new websites and future updates from weteachfinance.com

Posted in Borrowing, Credit, Mortgages, Risk Managenent

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