Why Some Very Successful People Still have to Pay Higher Rates

In the mortgage and other credit industries, I often find that clients who are very successful still have to pay high rates. Some of my clients don’t understand why and for this reason I think it’s worthwhile to teach you about how lenders evaluate risk and expect to be compensated for it, with higher rates. I’ll break down a few different archetypes of clients that need to pay higher rates.

The Classic Poor Credit

The classic poor credit client is someone who has not paid their bills in a timely manner, declared bankruptcy, or has been denied credit more than once due to high obligations as compared to their available credit. Institutional lenders need to charge these clients a higher rate to ensure that they are compensated for the additional risk presented by a client who has a history of not paying in a timely, comprehensive manner. The threshold for many lenders is about 640. If you are below the line, you have to pay a higher rate, and are often not offered options with your mortgage unless you pay an even higher rate.

The Self-Employed Tax Evader

A lot of successful self employed individuals including lawyers, consultants, dentists, accountants, and construction contractors, have to pay higher rates on their credit. Why? — They don’t like to pay taxes. Who does? As a self employed individual with stellar credit, many people try to expense everything they possibly (and legally) can in order to claim that they have the lowest possible taxable income. Some of the things you can write off include meals (with clients*) gas, rent for a home or office, supplies, gifts for clients and more. Some lawyers make less than $40,000 per year on paper. It is because people show such little income that when they want to buy that $800,000 home in Toronto, their bank refuses to give them financing at a low rate. Banks are handcuffed by their strict borrower profiles, which is why many of these clients head to mortgage brokers to sort out their home financing.

The Newly Employed or Promoted Homebuyer

This poor fellow is simply guilty of not making enough money for a long enough time. I have a friend who quit his high paying IT job to work as a consultant. He is making more money than he was in the past BUT, since he is now self-employed (and expensing a lot) it looks like he doesn’t make the big bucks anymore. If you just got a raise, or work in an industry where your 2nd and 3rd years are going to bring you significantly more income, you may find yourself not being able to borrow enough money to buy your home. When your employment is in flux, you’ll have to pay a higher rate to justify a lender taking a risk on you. What if you lost your new job at your higher rate of pay? How would you make your loan payments?

These are just some examples of clients who need credit and mortgage advice. I hope you learned something here, and am always available for further explanation in the comments.

Stay tuned for more finance.

Beginner’s Luck: An Overview of Canada’s First Time Home Buyer’s Plan

In 1992 the federal government introduced a plan to allow more Canadians to become homeowners. Since then over 2.6 million people have taken advantage of the tax breaks and incentives that the government offers to those purchasing a qualifying home. In order to benefit from this initiative, it is critical to understand what benefits are available and how you can qualify for them.

There are three government programs that benefit first time home buyers (FTHBs) and they have different criteria and nominal values.

The three programs are:

  1. Land transfer tax rebate – a pro-rated rebate of up to $2000 ($4,000 in Toronto) based on home price)
  2. FTHB RRSP plan – allows up to $25K withdrawal from each person’s RRSP for down payment
  3. FTHB tax credit – a credit of $750 (all parties combined) from income taxes

These three benefits are a great way to let the government reward you for helping drive Canada’s housing market and the overall economy. The land transfer rebate and tax credit are obvious opt-ins for most folks but the RRSP Plan benefit really depends on your tax bracket at contribution time versus your bracket at withdrawal time. Taking advantage of the RRSP withdrawal will allow you to reduce your (current) tax liability by a larger amount as your annual income increases. Actually I used to believe this benefit was greater than it actually is. The real benefit of the RRSP FTHB benefit is the tax not paid on the withdrawal for the term of the loan and the resulting savings on money that does not have to be borrowed under the mortgage. For example, a $25,000 withdrawal with a 30% tax rate yields a benefit of $7,500 of tax that is not required to be paid and can therefore reduce the mortgage amount. If the mortgage rate is 4%, then the actual benefit of the withdrawal is $400 for the first year. This benefit reduces over time as the loan must be repaid over 15 years.

Who is a first time homebuyer?

The CRA does not use identical criteria to determine eligibility for each benefit listed above. The criteria which are common however, are quite simple. Below is a short list of the basic criteria, with links to the CRA website for more comprehensive definitions befitting more complex situations.

FTHB Eligibility:

  1. You must purchase a qualifying home (most homes qualify, more on this here) and intend to occupy it as your principal residence within 1 year of your purchase date. You may also buy the home for a relative with a disability and not occupy it yourself.
  2. For Land transfer rebate – You may not have owned an interest in a home anywhere in the world previously
  3. For Tax credit and RRSP – You may not have lived in a home owned by you or your spouse in the previous 4 year period as defined here

Other useful rules criteria:

  1. RRSPs must be in your account for 91 days before you withdraw them for your deposit. The funds must also be paid back to your RRSP over the next 15 years.
  2. You must build or buy a qualifying home before October 1st of the year after you withdraw the RRSP funds
  3. The government wants you to claim these benefits all in the same tax year.
  4. You can own a rental property and still be considered a FTHB for the Tax credit and RRSP

This is all well and dandy but…

How does one actually receive these benefits?

All of these benefits can be claimed at the time you would have incurred the tax liability.

  1. Land transfer tax rebate – Apply either electronically or by paper form to the Land Registry Office. The lawyer who closes your purchase and/or mortgage will usually do this for you.
  2. FTHB RRSP plan – Fill out and submit a T1036 to the institution where you withdraw your RRSPs
  3. FTHB tax credit – Claim this credit on line 369 of your yearly income tax return

Some interesting facts that might surprise you:

  • One could qualify as a FTHB under the RRSP Plan more than 3 times with enough persistence.
  • Your spouse could have owned a home that they are selling this month, and as long as you have not lived in it, you are entitled to receive some FTHB benefits.
  • You don’t have to spend the RRSP funds on your down payment if you’ve got $25,000 cash already going into the home. You could spend it on closing costs, renovations, furniture, or whatever you like because your cash is replaced by the withdrawn funds.

I am always available to discuss the contents of this article by phone or email at 416-371-2077 or david@mortgageoutlet.ca. I also maintain a blog at www.weteachfinance.com for all your financial and borrowing needs.

Edit: After posting this article I was asked to weigh in on Four essential questions for the FTHB by the editors at Typical Geek, an honour I gladly accepted.

Useful Resources:

Income Tax Calculator:

http://www.ey.com/CA/en/Services/Tax/Tax-Calculators-2015-Personal-Tax

CRA – Home Buyer’s (RRSP) Plan:

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html

CRA – Home Buyer’s Tax Credit:

http://www.cra-arc.gc.ca/hbtc/

Ministry of Finance – Land Transfer Tax Credit:

http://www.fin.gov.on.ca/en/refund/newhome/

 

Why You Should Check Your Credit Score Today

I’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 it’s 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 worse your credit is, the higher the interest rates you pay are. 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 to 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, the time is now 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

Bank Hack 3% interest 1% loan

 

Bank Hack: Earn 1% on as much as you can borrow unsecured from Scotiabank

I am always looking to make a quick easy buck. There are plenty of opportunities to do so if you know the promotions in the personal finance marketplace. I wrote an article last week about credit score improvement and this week I have found a Bank Hack that could earn you some pocket change, and improve your credit with 2-4 hours of work.

The borrowing play:

Scotiabank has a promotion whereby you can borrow on their Value Visa for 0.99% for the first 6 months.  There are many terms and conditions, which are mostly standard, the card has a fee of $30/year unless it is part of a Scotia Total Equity Plan (STEP) mortgage. The maximum credit limit for each card is $75,000 but you can have more than one if you qualify. For this hack you’ll want to get approved for as much as possible.

The investing play:

Equitable bank is a bank licensed mortgage lender looking to grow in the residential and commercial mortgage business. They are starving for your deposits, and have offered what is the best bank account I have ever heard of. The offering consists of a 3% interest rate bank account with zero fees for most things, 5 free interac e-transfers per month and more. As part of this Bank Hack they will give you $25 for opening your account by using the referral code mentioned in the next step.

The set up:

  • Open a High interest savings account at Equitable bank (eqbank.ca/savings), and use a referral code to receive $25 (no money to me, only account holder L) Referral Code: 968833
  • Have a seat with a Scotiabank advisor and tell them about your intentions to get a Value Visa at as high a limit as you qualify for.
  • Use a Cash Advance to make out a cheque from yourself to yourself for deposit into the EQ Bank Savings account (through their app)
  • Set the EQ Bank account to make a monthly recurring payment to your Scotiabank Value Visa for your minimum payment
  • Create a set of payments (max $5,000 each) to close out your position at the end of the promotional period on the Visa.

OR

5)  Move your Value Visa balance to another card with a promotional rate and repeat.

The expected return:

With a $20,000 Value Visa limit, you can earn $195 for less than 4 hours work.

If you can get a Value Visa with a $50,000 limit, you stand to earn $495 over 6 months after bonuses and fees.

If you have a STEP mortgage with a $150,000 line of credit, you stand to earn $1,525 over that same period.

It’s not exactly a free lunch but it’s well worth the work and as risky as having money in a bank account.

You’re welcome!

What determines your credit score? –  And how to be proactive about improving it

An Equifax credit score is a valuable resource to you that is surprisingly misunderstood by many Canadians. Scores range from 300-900 while most mortgage lenders prefer a score above 650. Almost every time you need to apply for some sort of credit, a lender will pull your score. You can best prepare yourself to ensure you’re always granted access to the credit you need by understanding the strategy to maintaining a good score. The most crucial step to formulating a good credit strategy is developing an understanding of how your score is determined. This article will cover the 5 factors that make up your score and offer tips to keep your score high.

Payment History – 35% of your score

Equifax receives reporting from creditors in Canada regarding the timeliness of payments on a particular account. There are various codes for different types of credit, revolving, installment, and open all of which are paid differently. The timeliness of your payment is noted right next to the type of credit it is. A code of R1 for example means you pay within 1 month of receiving your statement. When you get to R2-R5 rating, you have not been paying your account on time and are penalized in your score for doing so. This realization gives rise to the number one rule of maintaining good credit. Always pay your bills on time.

Utilization – 30% of your score

The credit report also features the current balance of each account along with its high credit limit. The high credit limit refers to the maximum amount of credit you are allowed on that trade line. As your utilize proportionally more of the credit that is available to you on a single account, the system will negatively impact your score. Say you 2 lines of credit for $10,000 each and you need $9,000 to buy a car. It is a much better strategy to borrow a smaller proportion, say $4,500 from each line of credit as opposed to $9,000 from either one exclusively.

Length of Credit History – 15% of your score

The length of credit history refers to the amount of time you have been using credit facilities. If you’re new to Canada, or a young person looking to borrow money, you’ll want to make sure that you start to use credit as soon as it is available to you. Starting off with a credit card, secured with a deposit if need be, is a great way to build a strong credit file. Lenders are looking for mature credit, and the longer you operate within the good practices, the higher your score will soar.

New Credit Inquiries – 10% of your score

There is a very prevalent myth that pulling your credit is bad for your score. While this does hold some truth, for the majority of cases numerous credit pulls (3-4) in a short period of time are just fine. Different creditors are tagged by Equifax as offering certain products and the system has protocols to avoid penalizing you for multiple credit hits. A prime example of this is their process called de-duping, whereby credit hits coming from one agency multiple times is mitigated and does not adversely affect one’s score as much as is widely believed.  

Credit Mix – 10% of your score

Equifax notes that there is a strong correlation between consumers who have a diverse mix of credit facilities and those who pay reliably and on time. As I mentioned earlier there are different types of credit such as revolving, open, and installment, but there are also a wide variety of credit-offering companies. As part of a balanced credit profile, it is wise to use credit of different types and sources.

Take Aways

  • There is no quick fix to improving your credit, but time and best practices as mentioned here will help your score move up as quickly as possible
  • There are credit myths that you should be aware of so as not to be confused and stray from the optimal path
  • As a mortgage agent I’d be happy to pull your credit for free and walk you through it before you make a critical borrowing decision
  • No quick fix, but methods to make sure you’re building your score each month

Getting Your Notice of Assessment Online

I hate paying taxes.

We all do, but doing so is one of the certainties of life. There is a bright side to paying your taxes, your proof of income filed with the government, in the form of your notice of assessment is one of the most preferred and rock solid proofs that you can afford a mortgage and pay a better-than-the-bank low rate.

If you’re like many of my clients and the thousands of other Canadians looking for a mortgage this year, you may find yourself in an awkward position, asking yourself, “Where the heck are my NOAs?”

I am writing this post for one reason: to help you get your NOAs as quickly and conveniently as possible. To this end there is a very valuable tool that you can use to access your NOAs and get a copy at home – your computer and internet connection!

Step 1: Navigate to the CRA’s Website on your Device (Computer, Phone, Tablet)

Go to the Canada Revenue Agency’s  – My Account web page here.

On this page you will see that you have a choice to sign in through a sign in partner, or register with the CRA directly. If you are signed up for services with one of the partners, follow the instructions to log in to your account with that provider and then you will be redirected to the CRA webpage for further instructions. If you do not use any of the partners shown, click CRA Register, and sign up directly on the CRA website. You will need your Social Insurance Number (SIN) and your most recent tax return to sign up.

Step 2: Register and Confirm (Takes a few days)

Follow the on screen instructions asking you to confirm your private information to help prevent fraud. If you are successful, you will have to wait 5-10 business days for the CRA to mail you a security code to complete the last step of the registration process. When you open this piece of mail, simply revisit the CRA site, and input the security code to gain access to all your government documents at the CRA.

Step 3: Find your Documents and Other Resources Online

Once you have confirmed your account, you will have access to many CRA forms and documents.

Here is a great list of things you can do in this portal:

  • Access/ Print your current and old tax returns and CRA assessments
  • Set up direct deposits for GST/HST/Child tax benefits
  • Pay your taxes online through pre-authorized debits
  • Check any credits you are going to receive (GST/HST/Child tax benefits)
  • Check for contribution room on your RRSP and TFSA accounts
  • Change personal information like your address, marital status, or authorize representatives for your CRA needs

Links and information:

My account for individuals

http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html

Sign in partners for the CRA’s ‘My Account’:

  • BMO Financial Group
  • CHOICE REWARDS MasterCard
  • Scotiabank
  • Tangerine
  • TD Bank Group

To Register with the CRA for ‘My Account’ you’ll need

  • Social Insurance Number (SIN)
  • Past tax returns (usually last year’s)

Why You Need A HELOC ?

  • Cash to use for investments or purchases , Convenient way to withdraw large amounts of money
  • And at one of the lowest rates available Interest is tax deductible
  • Pay off and re-borrow
  • A charge on your home which helps prevent mortgage fraud
  • You need to be financially prudent and disciplined
  • http://www.thestar.com/news/gta/2014/04/05/golnaz_vakili_lawyer_in_hiding_accused_of_stealing_millions_swears_shes_innocent.html

House Free and Clear? –Here’s Why You Need a Line of Credit

A home Equity Line of Credit (HELOC) is a useful tool to any homeowner, yet I still meet with clients who are skeptical about using one. This has prompted me to write a concise post listing what I believe to be the advantages of a HELOC and the one reason you might not want one.  As always I’m looking to impart some of my financial knowledge I’ve gained advising clients over years and studying finance at one of Canada’s top business schools – The Schulich School of Business.

Reason #1: Liquidity

Having assets that are liquid enables you to take advantage of opportunities. An opportunity may present itself as a chance to buy an investment, a chance to pay off your credit card balance, or to buy a camping trailer at a great price. When you need a large sum of money to get a great deal, or invest to make more money, where will you get it? The short answer is that pulling the money out of your home is a great way to take advantage of opportunity.

Reason #2:  Low Cost of Borrowing

As I have mentioned in some of my other posts, borrowing money using real estate as security will help you get one of the lowest rates around. Currently, most financial institutions offer HELOCs at 3.5% (Prime + 0.5%).  Most reasonable investments should expect to return much more than 3.5% even in tough economic times like these. As an example, the S&P/TSX composite index closed July 23, 2014 at 15,394.38 which was up from 12,672.30 exactly one year before on July 24, 2014, a gain of 21.4%. More than 20%!!! This is not your typical return, but we had a good year in Canadian markets. How much profit would you have made if you borrowed money on your home to invest in the market? I don’t want to upset my readers, so take a breath before you continue. If you borrowed $100,000 against your home, you’d have earned $21,400 less the interest charges of $3,500 and assumed taxes of$6,265 at 35% for a total gain of $11,635. If you’re one of the lucky few who own a million dollar home free and clear, you’d have earned $69,810 on borrowed funds of $600,000. Why do you think you can or should afford to have your money tied up in your house?

Reason #3: A Charge on Your Home Helps Prevent Title Fraud

Fraud is always prevalent where it can be profitable, and fraudsters are always discovering new ways to rip off everyone from the big banks to Johnny Homeowner. An example of a very profitable form of fraud is Title Fraud. Title fraud usually occurs when an individual steals a person’s identity and takes a mortgage in their name against a home that is rightfully owned by the victim. The fraudster then takes the funds advanced as part of the loan and disappears, leaving the homeowner to pay the bill. Title fraud can be prevented by having a charge on your home which prevents someone else from borrowing against the home. The result – opening a HELOC can be an easy way to add one more layer of fraud protection to your home and life.

Why you might not want a HELOC

After listing numerous advantages, I will also give you the #1 reason not to take out a Home Equity Line of Credit: your own discipline. A HELOC has the potential to be a very large loan and needs to be managed very carefully. Some individuals who have issues budgeting may run up the line of credit too high and have trouble paying it off. Given the fact that they are usually issued with variable interest rates, your payments can increase drastically if the prime rate goes up. The way to mitigate this risk is to be financially responsible, and plan when to use the funds and for what. A line of credit is a great way to shift your high interest credit card debt to a lower rate, but shouldn’t be used as an excuse to run up an unmanageable amount of debt.

Parting Words:

If you can operate on a budget, with discipline and understanding of your financial situation, a HELOC is a great tool for building your wealth. Feel free to leave questions in the comments section below.

More finance to come!

The Time Value of Money

I sometimes think that one of the most important lessons a young person can learn is that $1 today is worth more than $1 tomorrow. It is amazing to observe that many young adults don’t learn this, one of the most critical principles of finance, until they reach university. My goal with this post is to make it easy to understand why money today, this month, or this year is worth more than money in the future.

Why is money today worth more than money tomorrow?

Simply put, because money can earn interest (and have less purchasing power due to inflation).  If I receive $100 today and can earn 5% interest annually, my money is worth $105 is one year. $105 a year from now is worth exactly the same as $100 right now for me as an investor. That being said $100 today is worth more than $104.99 in a year from now.

Why is this important? 

Making personal financial decisions is something that we have to do every day. If we know that it is better to pay in the future (because money is worth less at that time) then we would surely take advantage of times where people let us pay later rather than now. My favorite example of this is a car loan. Many car dealerships will offer you 0% or a very low interest rate to incentivize you to buy a vehicle from them. If you had $10,000 to pay for the car outright, is it still better to finance it? Yes! Simple math can show you that if you have no borrowing cost, but can earn interest that your $10,000 car could cost you much less!

You could pay $10,000 today for that vehicle, or you could pay $275 a month (for example) for 3 years and pay off the car. If you take time to pay off the car, your cash that would have been used to pay the whole balance can be in an investment earning you 5%. After one year, you will have paid $3,300, and used the remaining $6,700 to earn you $340 in interest, making the care effectively cheaper.

This principle is one of the fundamentals of financial theory and will affect the way that we calculate the value of things today versus in the future. There is a formula which can be used to describe the relationship between dollars today and dollars tomorrow. It is shown below.

PV = Present Value (value today)

FV = Future Value (value after one period)

r = The discount rate for the period (interest rate with or without inflation included)

 

Why Use A Mortgage Broker

I passed my mortgage agent’s license in December of last year and have been talking with my friends and family about what I do and it surprised me to learn that not a lot of people actually know what a mortgage broker does or why they should use one. If there is one thing you can take from this post it is this. If you are seeking out real-estate backed credit (e.g. mortgage for any reason) you MUST talk to a mortgage broker. But why?

  • We ask the right questions

Arranging mortgages all day can be a tough job, but it hardens us mortgage agents into financial fighters, credit combatants, money mercenaries, you get the point. We have extensive knowledge of the many different mortgage solutions that exist for folks in all types of situations, and can provide well informed guidance toward the products which best suit your unique needs.

  • We shop around

When you are looking to buy something that costs more than $1,000, do you go to one store, hear their pitch and then buy whatever product they offer you? Wouldn’t it be smart to consider looking at other stores? A mortgage broker is like a personal shopping assistant who can bring you the best from over 45 mortgage lenders. This is the best way to get to know what products are offered across the industry. You could call all the lenders in Canada or the GTA, it wouldn’t be THAT hard, but you could also let a broker point you in the right direction.

  • We negotiate on your behalf

Not surprisingly, many clients I have dealt with have issues negotiating with the bank or asking for a better rate. As brokers we demand a better rate. The banks and lenders know us, and know we are fully informed negotiators who know what price it will take to get our clients’ business. This negotiating power and experience combined with our volume as partners of the lenders make us the most suitable champion of your interests.

  • We provide service for life

Many lenders will let your mortgage roll over every term and automatically renew you until you re-actively check into your options. Good brokers have a duty to follow up with you every few months to ensure your product is still working for you, and to investigate whether you might benefits from a change in your mortgage. We follow you every step of the way until you are mortgage-free.

Essentially, a mortgage broker is an expert shopper who is paid by the lender to provide you with a mortgage. You have absolutely nothing to lose, and everything to gain by dealing with a mortgage broker. Now that we have cleared that up, happy home buying!

Full disclosure: I am a net-present-value ninja and mortgage agent at Northwood Mortgage. Call me anytime at 416-371-2077.