The Penalty you Pay When you Bite the Bait of the Low Rate

I just witnessed the highest payout penalty quote any of my clients have ever received in 8 years of business. The culprit: HSBC, the penalty: $91,000. You read that right –  if a doctor at one of Toronto’s trauma centers wants to break his mortgage to switch to a lower rate, it will cost him $91,000.

Now, this outrageous penalty is only so large because his mortgage is approximately $2,000,000. I know what you’re thinking – this is a very large mortgage but translate this to an average Toronto-sized mortgage of $500,000 and you’d be paying approx $22,750 – not chump change for the majority of the Canadian population.

Flip to one of my other clients, also a very successful professional with a $900,000 mortgage. In March we broke his original mortgage with rate of 2.85% fixed to lock him into a 2.29% rate with a local credit union. The savings greatly outweighed the costs and we ended up netting him about $10,000 in savings over his remaining 4 years of his term. Fast forward to today and rates have dropped AGAIN and we are going to break the mortgage we gave him in March and pay a $5K penalty to save another $10,000 over the next 4.5 years.

The penalty on your mortgage, and how your prospective lender calculates it will either pound you into submission, or open up an avenue to future savings. this is why you want to speak to someone who knows the ins and outs of the industry and not just bite on the rate. Unfortunately, lenders, amazon, facebook and google are learning very quickly how to manipulate you to act in the best way they see fit. I’m here to help you defend yourself and your money.

How to Improve Your Credit Score in Canada

There are a few simple reasons why you might have a bad credit score. You haven’t paid in full or on time, or you have borrowed lots of money without having a lot of assets or income to use as security.

Once your credit is in the danger zone (less than 550 Beacon), there are a few things you can do to improve it effectively. In the mortgage industry we say “Two trades for two years” helps build you back up. Below are some examples of trade lines of credit

Types of Credit Which are Good Building Blocks for Credit

Getting a Secured Credit Card

The best way to improve your credit score is to have credit and deal with it properly, i.e. PAY YOUR LOANS! A secured credit card is a credit instrument whereby you put down a deposit and borrow against it using your credit card. This is a sure way to show future creditors that you have the intent and capacity to pay your debt.

Taking out an RRSP Loan

An RRSP loan is borrowed from the bank and used to make a deposit into your RRSP account which is later invested for tax-sheltered profits. The loan is one of the easier types of credit to qualify for, and can also help you establish a positive credit history.

Using a Car or Furniture Loan

A car or furniture loan will be a monthly payable which as mentioned before helps your credit score. Car and furniture sellers are also motivated to grant you financing to buy their products, so it is a relatively easy way to get diverse credit.

You Also Need to:

Pay all Your Loans Credit Instruments in a Timely Manner

If you can qualify for 2 of these credit facilities and pay your bills on time, you should be in a much better credit situation in as little as 1-2 years. This will ensure that you don’t have to pay those high rates forever!

Avoid Having too Many Credit Checks

Be careful with which types of credit you apply for and often consider going through a broker who can share your credit information without having other parties inquire about you separately. The less people who check into your credit, the better.

Avoid Borrowing more than 75% of your credit limit for each credit facility

Utilization of credit is a heavily weighted factor used to determine your score. If you borrow a high % of your limit, you are penalized and your score may go down.

 

It’s tough but doable!

If you follow the steps I mentioned above you should be well on your way toward being able to borrow the money you need once more.