Mortgage Questions
I have included a video that I think makes a very strong point. When you are dealing with a financial institution ask questions about the products you plan on using and get the answers in writing. This is applicable to all products but I will concentrate on mortgages.
When you are first buying a home it is very exciting and very stressful. You will deal with your mortgage rep and lawyer and you will likely run into things that you don't quite understand. Ensure that you ask questions and have things explained to you until you do understand. Some common questions would be:
- Is the mortgage portable and assumable?
- What are the exact prepayment privileges? When can prepayments be made and how much?
- Can the mortgage contract be broken without selling the property?
- What is the penalty if the mortgage contract is broken and how is it calculated?
- Can you increase the payment amount and the payment frequency?
- If you are in a variable rate mortgage and want to lock in, what fixed rate do you receive? Posted less a certain percentage, or is it negotiated?
- If I take a cash back mortgage does the penalty increase and by how much?
- If you accept mortgage life and disability insurance can it be canceled at any time?
Ensure that you ask questions as not asking may cost you in the long run. Be wary of mortgages with very low rates. Many are "Value" or "No Frills" mortgages which offer little or no prepayments and you may not be able to break the mortgage contract unless you sell your property. These mortgages can be very restrictive.
I am still working on my ebook, The Mortgage Reduction Guide which will be a little more specific with some questions that may end up saving you hundreds, or thousands of dollars on your mortgage. Make sure you ask for ask for a real pony or be left disappointed and possibly with less cash in your pocket! I love that commercial.
Mortgage Update
After being backed up for a couple of weeks due to the sheer volume of applications National Bank has issued a commitment for our mortgage. We have sent in all of the documents and we are hoping that we will have the All In One Account in place by May 13th. When it is in place I will start tracking our finances a little differently. I will be tracking our mortgage debt, tax deductible debt for our rental expenses and net worth. Although I was focused on paying off our entire $316,000 mortgage in 5 years I may have been too focused and missing out on some other opportunities.
My spouse can buy back some of her pension. Retiring earlier is very inviting. I will continue to keep my RRSPs topped up and my spouse will contribute to a spousal RRSP as we prepare for me to move to 100% self employment in the future. We may even look at TFSAs. Unfortunately the prepayment privileges are a little restrictive compared to my original mortgage. A 10% lump some and up to double every payment will not allow me to fully pay off the mortgage by the end of the 3 year term. If we are ever in a position where we are having money idly sitting around we will discuss ways to use it. At the end of the term we will not have a fixed component to our All in One product and should be able to pay off the balance in a few months.
If you have ever Googled anything like, "pay off your mortgage sooner" or "save money on your mortgage" you have likely come across mortgage acceleration programs or money merge accounts. The premise of most of these systems is that you never have money idling sitting in a chequing or savings account. Your money is always offsetting interest on your debt. This is what we are going to do, but I will pass on any pricey software. This will work to our advantage because at any given time we have between $9,000 - $15,000 sitting in our bank accounts waiting to pay expenses. Our plan is to keep our line of credit with a balance of about $20,000 while the rate is under our mortgage portion interest rate. When prime goes up and our line of credit interest is higher than our mortgage interest we will keep our line of credit balance right around $0.
Switching to product will save us on interest costs and give us the flexibility with our debt and finances. I am looking forward to it.
Total Debt Service Ratio 2009
With our taxes now complete, I have the opportunity to figure out exactly what our Total Debt Service Ratio was for 2009. First I want to define GDS (Gross Debt Service Ratio) and TDS (Total Debt Service Ratio).
The GDS is the maximum percentage of your gross income that is allocated to paying the costs of carrying your home. This ratio includes your principal and interest mortgage payment, property taxes, heating and/or condo fees. To qualify your monthly carrying costs cannot exceed 32% of your gross monthly income.
The TDS is the maximum percentage of your gross income that can be used to pay your GDS plus all other debts. This ratio includes everything from the GDS as well as any other loans, credit cards or lines of credit. To qualify it cannot exceed 40% of your gross monthly income.
I want to mention that these are guidelines only and those with good history of managing their credit are allowed to go as high at 44% TDS without considering GDS at all. Yes, if people are not carrying any other debt and have no other monthly obligations their housing costs can eat up 44% of their gross income. This is somewhat scary as someone wanting a $400K mortgage could qualify making just under $60K per year. If you want to read further click for the CMHC Quick Reference Guide.
I take the attitude that if CMHC uses 44% at the maximum TDS then that is what we should attempt to achieve. For 2009 our TDS was 41%. Not bad, but why were we unable to achieve 44%? $5523 represents that 3% of our income that we did not use for housing costs. This means that we were short approximately $460 per month for mortgage payments. Could we have found that money? Of course we could have. Cut gym memberships, cut donations, cut eating out, cut new computer, cut new theater seating, cut vacations and take advantage of public transit more often. Making up this $460 per month would be very easy for us.
Although achievable, I don't see cutting those "luxuries" as an option. We are making great progress paying down the mortgage and as long as we are able to stay on track we are not going to change our lifestyle.
I want to note that we are at 41% by choice. Although with our regular mortgage payment and prepayment averaged just over $5,900 per month we are not locked into this payment and we have no other monthly obligations. There would be considerable stress if we were locked into those payments.
When considering your mortgage options ensure that you are not over extending yourself.
New Mortgage Rules Mean Less House or Less Choice for Mortgage Terms
Canada Mortgage and Housing Corporation has announced that as of April 19th home buyers will have to qualify for their mortgages at the bank's posted 5 year rates if you are putting less than 20% down and are taking a variable rate mortgage or a term of less than 5 years. This is being done to ensure that people do not over extend themselves and end up losing their home in the future because they are forced to renew their mortgage at a higher rate. What does this mean to home buyers? You will now qualify for less of a mortgage than before or you are stuck with a five year mortgage term.
For example if the maximum amount you qualify for with a 3 year rate of 3.49% is $350K you will now only qualify for $273,674 because you have to qualify at the 5 year posted rate of 5.39%. Your interest rate will still be 3.49% but you qualify for over 20% less of a mortgage because of the new rules.
How will this effect you? What do you think it will do to real estate prices in general?
RRSP Season
We are just into February and I am sure you are being bombarded with advertising about RRSPs. I received my magazine earlier in the week and I wanted to share a portion of the article about RRSPs.
Q. I have a pension. Do I need an RRSP too?
A. For most people the answer is yes - although if you have a good pension at work you can certainly contribute less to your RRSP than someone without one. With no pension, you can contribute up to 18% of your income to an RRSP each year. If you have a private pension, then the amount you are allowed to contribute to your RRSP will be reduced, to reflect the fact that you are also contributing to your retirement 
income through your pension at work.
There is one group that doesn't need RRSPs at all: government workers. Teachers, police officers and other civil servants have among the best pension plans available and won't need help from RRSPs to retire comfortably. For instance a couple who are both government workers can expect to enjoy a combined annual pension income of at least $50,000 with is roughly the kind of income that a million dollar portfolio would generate
Q Which should I contribute to first: my mortgage or my RRSP?
A. Financial planners have debated it for years, but from a pure dollars-and-cents perspective the correct answer is usually to pay your mortgage down first. Every time you make an extra mortgage payment you reduce the amount owed on the principal. If you mortgage interest rate is 5%, paying it off faster is like getting a guaranteed 5% return. yes, you can get a better return than that in the stock market (if you're lucky), but it's no guaranteed. So unless you can find GICs that pay 5% you may want to attack the mortgage first.
I want to add a couple of comments to these points. If you are carrying a balance on any high interest debts such as credit cards or loans you are better off paying them before your RRSP and mortgage. Those who are involved in a group RRSP plan where your employer matches your contributions should contribute to these plans before making additional mortgage payments.
What do you plan to do this year, pay down your mortgage or contribute to your RRSP?