Category Archives: home equity loans

8 HOME INSPECTION RED FLAGS

8 HOME INSPECTION RED FLAGS:

Our gallery of home inspection nightmares (below) is good for a laugh, but a home inspection is serious business. It’s the buyer’s opportunity to make sure that the house they’re about to purchase doesn’t hold any expensive surprises.

A typical home inspection includes a check of a house’s structural and mechanical condition, from the roof to the foundation, as well as tests for the presence of radon gas and the detection of wood-destroying insects. Depending on the seriousness of what the inspection uncovers, the buyer can walk away from the deal (most contracts include an inspection contingency in the event of major flaws) or negotiate with the seller for the necessary repairs.

These are the red flags that should send a buyer back to the negotiating table, according to home improvement expert Tom Kraeutler of The Money Pit.

1. Termites and other live-in pests: The home you’ve fallen in love with may also be adored by the local termite population. The sooner termites are detected, the better. The same goes for other wood-devouring pests like powder-post beetles. Keep in mind that getting rid of the intruders is just the first step. Once the problem has been addressed, have a pest control expert advise you on what needs to be done in order to prevent their return.

2. Drainage issues: Poor drainage can lead to wood rot, wet basements, perennially wet crawlspaces and major mold growth. Problems are usually caused by missing or damaged gutters and downspouts, or improper grading at ground level. Correcting grading and replacing gutters is a lot less costly than undoing damage caused by the accumulation of moisture.

3. Pervasive mold: Where moisture collects, so grows mold, a threat to human health as well as to a home’s structure. Improper ventilation can be the culprit in smaller, more contained spaces, such as bathrooms. But think twice about buying a property where mold is pervasive — that’s a sign of long-term moisture issues.

4. Faulty foundation: A cracked or crumbling foundation calls for attention and repair, with costs ranging from moderate to astronomically expensive. The topper of foundation expenses is the foundation that needs to be replaced altogether — a possibility if you insist on shopping “historic” properties. Be aware that their beautiful details and old-fashioned charms may come with epic underlying expenses.

6. Worn-out roofing: Enter any sale agreement with an awareness of your own cost tolerance for roof repair versus replacement. The age and type of roofing material will figure into your home inspector’s findings, as well as the price tag of repair or replacement. An older home still sheltered by asbestos roofing material, for example, requires costly disposal processes to prevent release of and exposure to its dangerous contents.

7. Toxic materials: Asbestos may be elsewhere in a home’s finishes, calling for your consideration of containment and replacement costs. Other expensive finish issues include lead paint and, more recently, Chinese drywall, which found its way into homes built during the boom years of 2004 and 2005. This product’s sulfur off-gassing leads to illness as well as damage to home systems, so you’ll need to have it completely removed and replaced if it’s found in the home that you’re hoping to buy.

8. Outdated wiring: Home inspectors will typically open and inspect the main electrical panel, looking for overloaded circuits, proper grounding and the presence of any trouble spots like aluminum branch circuit wiring, a serious fire hazard.

The McMillan Group/Centum Supreme Mortgages Ltd.

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15 home insurance myths to stop believing now

home insurance

Source: Moneyense.ca – by  

Find out what your home insurance does and doesn’t cover

Home insurance can be a tricky topic, and if you’re not reading the fine print, you could be relying on inaccurate myths to inform your coverage decisions. Luckily, InsurEye, a Canadian insurance education site has compiled a massive list of 111 insurance myths that are out there. Last month we looked at the top 10 auto insurance myths to debunk. This month we’ll look at the top 15 home insurance myths and get the facts.

1.MYTH: You must have home insurance.

FACT: Unlike auto insurance, home insurance has not been made mandatory by the government. If you own the property and have a mortgage on it, often, your bank or lender will require that you hold an active home insurance policy and name them on that policy. If you do not own the property but are renting it, your landlord may require that you have renter’s insurance.

2. MYTH: If I am away on vacation, my house is covered.

FACT: If you simply leave for vacation without taking precautions, you are not always covered. Thus, if you go away during the “usual heating season” then you usually need to either:
Shut off the home’s water supply and empty all pipes or take steps to ensure the home’s heating is maintained. If you don’t take one of these two precautions, then you may not be protected against water damage resulting from frozen pipes that burst. Check with your provider to determine what length of vacation requires you to take extra precautions, such as somebody visiting your place on a regular basis in your absence. Different policies may require different frequency of those visits, but in general it is every 3-7 days.

3. MYTH: If I have valuables, they are covered.

FACT: A standard home insurance policy covers your personal property and most valuables up to the selected limit of insurance. It’s important to note that sub-limits often apply to specialty property, like jewellery or furs. For these items, you have the option of adding coverage to your policy. Often, you will need to provide proof of value (e.g. an appraisal or a receipt).

4. MYTH: If I have a home insurance policy, I am protected against sewer backup.

FACT: Sewer backup damage occurs when the sanitary and storm sewer systems cannot handle high volumes of water, which causes water to back up into your home through toilets and drains. As is the case with freshwater flood protection, most providers offer some sort of OPTIONAL sewer backup protection, but it is not usually included on default standard insurance policies. Just a few providers include it in their standard home insurance policies.

5. MYTH: My insurance protects me against flooding.

FACT: It depends on the type of insurance policy you have. Typically, a home insurance policy protects you against sudden and accidental entry, or release of, water in your home (e.g. burst pipes).

A standard home insurance policy often would not protect you against “overland flooding” (when water flows over normally dry land and enters your home through doors and windows, such as due to a river overflowing its banks or snow melting).

Prior to 2015, flood insurance was not available in Canada at all. Instead, homeowners and renters had to rely on the disaster financial assistance programs offered by the government. Today, most home insurance providers offer some sort of freshwater flood OPTIONAL protection. A few providers, such as Square One Insurance, automatically include it in all eligible policies.

6. MYTH: My home insurance only covers the house.

FACT: Home insurance policies cover your house and its contents. They also cover any detached structures on the property, additional living expenses you may incur if the house is uninhabitable, and personal liability exposures you may face.

For condos, policies also cover unit owner improvements and some assessments made against you by the condo corporation. Make sure that you have a thorough understanding of what it covers. Our overview of condo insurance (including quoting) will explain the details of condo insurance coverage.

7. MYTH: Home insurance covers the market value of my house.

FACT: Home insurance does not cover market value, only the rebuilding or replacement value of your house. If your house burns down, the purpose of home insurance is to cover the costs required to re-build the house as it was before the loss. Rebuilding value is typically lower than market value because it does not include the value of the land. Back to the example of your house burning down, the land is still there so your insurance does not need to “replace” the land. An insurance policy can often include costs to clean up the debris, such as after a fire.

8. MYTH: Home insurance covers earthquakes.

FACT: Your home insurance covers earthquake damage only is you purchased an “earthquake rider” on your policy. These are mostly meaningful in British Columbia and Quebec. Some providers, like Square One Insurance, automatically include earthquake protection in their policy.

9. MYTH: Insurance is cheaper for older, less expensive homes.

FACT: Insurance is usually more expensive for older houses since there is a higher chance that something will go wrong, and it will cost more for the insurer to fix it. Also, many older house elements, such as plumbing, are more likely to fail than plumbing in new homes that use upgraded pipes and materials.

10. MYTH: Insurance covers damages caused by termites and other insects.

FACT: Usually not. Make sure that you know how your insurance policy treats this kind of damage.

11. MYTH: Condominium corporations provide insurance that covers my condo.

FACT: Condominium corporation insurance will cover the overall building structure, its exterior finishes, roof, windows and common areas like elevators and hallways. It does not cover the contents of your condo, its upgrades and 3rd party liability should you cause damage to other condo units (i.e. via flooding).

12. MYTH: If I am a tenant, my landlord’s insurance covers everything—it is his/her responsibility.

FACT: No. Landlord’s insurance does not cover your liability (i.e. if you flood your neighbours) and your contents (if something is stolen from your unit). A landlord may require you to have a tenant insurance policy.

13. MYTH: Damage from natural disasters or Acts of God are excluded by home insurance.

FACT: No, there is no such thing as an Act of God exclusion in home insurance policies. In fact, most policies cover damage from hailstorms, lightning, wildfires, etc. Optional coverage is available for certain types of natural disasters, like earthquakes. Other types of natural disasters, like seawater flooding or landslides, are excluded.

14. MYTH: If I get in a fight with someone and they sue me, my home insurance will defend me and cover any costs.

FACT: No, the personal liability protection included in your policy only covers accidental and unintentional injury of others or damage to the property of others. So, if you intentionally injure someone, you’re on your own.

15. MYTH: If my dog bites and injures someone, my home insurance will not protect me. I need a special insurance policy.

FACT: As long as you properly answered any questions relating to your pets in the application and investigation process, then your policy will cover costs associated with your dog biting and injuring a third party.

home insurance

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InFocus: The Role of Appraisals Why accurate appraisals are more important than ever before

As certain Canadian real estate markets reach dizzying new heights, homebuyers are loading themselves with debt in order to secure their place on the housing ladder. Paying over the asking price is no longer an exception to the rule and, as a result, many Canadian homebuyers are playing a risky game with their financial futures. Brokers have an important role to play in ensuring that their clients don’t buy something they can’t afford and, in these tumultuous times of economic and real estate uncertainty, securing an accurate appraisal has never been more important.

“One of the opportunities that appraisers bring to the table when asked to give their opinion is not just understanding the dynamics of the valuation, but also understanding what that means within the current market conditions,” says Dan Brewer, President of the Appraisal Institute of Canada (AIC) and licensed mortgage and real estate broker. “There appears to be a situation where people are willfully under listing properties to create a frenzy, which is potentially misleading. It makes an appraisal all the more critical in the current market.”

Brewer has been monitoring a region in Ontario where homes are consistently selling for 15 – 30% more than list price; where paying a premium is the new norm. These premiums are being driven by current supply-demand issues, and in a situation where 20+ buyers are vying to purchase a property there really is only one winner: the seller.

Despite homes selling consistently over asking and accurate valuations becoming increasingly important, Brewer still notices a lack of broker knowledge around the appraisals process and the bodies who govern the industry. “The mortgage agent world had exploded in recent years and many people don’t have the specific training they need,” Brewer says. “The AIC has several professional development programs designed specifically for broker organizations to help them train agents and investors in the market place. It’s important that everyone, including brokers and agents, gets the education they need.”

Source: MortgageBrokerNews.ca

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To flip or not to flip

For rookie investors one of the first decisions is whether to flip a property for profit or hold on to it while bringing in rental income and watching its value rise.

Looking for advice from the slew of television programs touting the profitability of flipping houses is a mistake, says one real estate agent.

“I call it the HGTV mentality,” Erwin Szeto, a sales representative with Rock Star Brokerage Inc., in Hamilton who specializes in helping property investors, told CREW.

“Whenever [the shows] talk about flips, they don’t spend enough time on locating the property, identifying the deal.

“The error that most new investors make, especially those looking to flip is that they are only concerned about the execution – making the property look good – but they overlook what they paid for the property.

“When you buy too cheap of a home the room isn’t there for the appreciation.”

Sometimes cheap housing is cheap for a reason says Szeto.

He cites an example of a novice investor who purchased a home located at the intersection of two of Hamilton’s busiest streets. “The property was cheap because no one wanted to live there,” says Szeto.

His advice to newbies is to buy in neighbourhoods where people have a lot of money and are emotional about buying a home, such as Oakville.

He also cautions against looking for the quick flip. “I tell people that historically you make more money buying a flipped property and holding on to it, renting it, than you do just flipping the property.”

Source: Canadian Real Estate Wealth; John Tenpenny 25 Sep 2015

To get mortgage qualified for your next flip, contact the Ray C. McMillan Mortgage Team

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Canadians spending more on fixing homes than buying new ones as renovations top $68 billion

"While (renovation pending is now) below the long run average of 3.6 per cent, it is impressive stacked up against overall economic growth of 1.6 per cent record for the same period," said Altus, in its report.

Maybe it’s the influence of all those home renovation shows or perhaps it’s the cost of moving, but Canadians are increasingly spending more money to update their houses than to purchase new ones.

A new survey shows renovation spending reached $68 billion in 2014, $20 billion more than was spent on new homes last year.

Some of it is the so-called “HGTV effect,” according to Altus Group, but Peter Norman, chief economist with the real estate research company, said it’s also because the housing stock in Canada just keeps getting older.

“There are a number of homes out there that are more 50 years old and they require a lot of work all the time,” he said, adding that low interest rates have probably helped the renovation sector more than the new home sector. “Every person who renews their mortgage from five years ago renews it at a lower rate. To a lot of people that frees up cash they’ll put back into their house.”

Altus expects the spending on renovations to continue to grow by three per cent annually in 2015 and 2016, which would leave renovation outperforming the general economy.

Renovation spending is now such an important part of the overall Canadian economy that it accounted for 3.4 per cent of gross domestic product in 2014.

Most of the spending, three out of every four dollars, is going toward alterations or improvements. The rest of the spending is primarily going towards repairs.

Gregory Klump, chief economist for the Canadian Real Estate Association, said strong real estate sales ultimately lead to renovation spending. The average amount of money spent on renovations following a real estate sale was $9,535 in 2013.

“Often it can make a lot of economic sense to renovate instead of moving,” Klump said.

 

From the 2000s up to the recession, renovation spending grew by 8.7 per cent annually. Post-recession it grew by 2.6 per cent annually.

Phil Soper, chief economist with Royal LePage Real Estate, said the biggest reason for the uptick in renovation spending might be the cost of homes.

“In our biggest cities in every province the homes have become more expensive and the gap between entry level and luxury homes has grown,” Soper said. “Many people look at that and say rather than stretching to buy an entire new home, maybe I can upgrade my existing property.”

Contrary to conventional wisdom, not all the spending is being done with debt. Only about 20 per cent of all dollars borrowed under home equity lines of credit are earmarked for renovations.

One concern for the government might be the percentage of home renovation conducted in cash, and therefore part of the underground economy. About 40 per cent of respondents in the Altus survey believe small renovation jobs under $5,000 are done with cash.

Another worrisome issue for consumers might be that many of these renovations are being conducted without proper insurance coverage.

TD Insurance warned Tuesday that not telling your insurance company about what you plan to do in your home could result in the denial of a claim.

“I think some homeowners believe keeping their insurance company in the dark about renovation is going to keep their premiums from rising,” said Craig Richardson, vice-president at TD Insurance. “If renovation work is done that materially alters the insured property, the original insurance may be voided. The homeowner is actually paying for coverage they no longer have.”

Some changes to your home, like increased square footage, could raise your rates. Finishing your basement may also cost you more but it’s important to understand your sewer backup limits.

But you might also get a reduction in rates if you did something like upgrading the electrical wiring in your home.

Source: Financial Post Garry Marr | July 14, 2015 5:44 PM ET

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Shadow mortgage lending on the rise as house prices soar

Canadian house prices have risen 36 per cent since June 2009, according to the Teranet-National Bank.

Canada’s housing boom is increasingly driving homebuyers to seek mortgages from private lenders, who demand rates that can be more than five times higher than those charged by the nation’s banks.

Canadian house prices have risen 36 per cent since June 2009, according to the Teranet-National Bank house price index. At the same time, Canadian banks have become more conservative and regulators are making it harder to lend, giving rise to an alternative market, including Canadians who refinance their own homes at low rates and then use the money to become mortgage lenders themselves.

Some analysts say a housing investment is increasingly risky because the pace of price increases has vastly outstripped wage growth, all amid a time of historically low interest rates and record debt levels. If and when interest rates rise, the concern is that consumers would have little ability to increase their payments, because they have so much debt.

“The risk arises if the unintended consequence of regulation is to push out the risk profile of the less regulated sector, and to encourage it to grow quickly at the same time,” said Finn Poschmann, vice-president of policy analysis at the C.D. Howe Institute.

“In dollar terms it is not a huge part of the economy (but) my concern is that we pay attention, because small problems sometimes get unexpectedly large, and quickly so.”

Mortgage broker Lou Perrotta said that in terms of volume, 20 per cent to 30 per cent of the mortgages he puts together are now privately financed, typically because borrowers are declined for a bank loan for reasons like a low credit rating or unsteady income. That represents about $4 million to $5 million of the $20 million of mortgage business he does annually, he said.

“Business is brisk, without question. (It has) probably tripled in the past three years,” said Perrotta, president of Domus Financial Corp in Toronto, where house prices have increased by 55 per cent in the last six years.

‘It’s not for the faint of heart’

Perrotta acts as a matchmaker between individuals who have money to lend – and who are seeking higher rates of return than can be had in stocks or bonds – and borrowers who are willing to pay a higher mortgage rate to get into the market.

He also invests his own money, lending between $25,000 and $250,000 each to “five or six” borrowers a year who offer a good balance between risk and return.

“It’s not for the faint of heart, and you need to understand the dynamics of real estate,” Perrotta said.

One private lender, who asked not to be named because she is close to the real estate market and fears hurting her business, took out a C$400,000 mortgage on her paid-off home at 2.49 per cent and then gave that money to a broker that lent it to a borrower at a higher rate, for a fee.

“Who the hell is going to give me 9 per cent return?” said the lender, who said she has recourse to the borrower’s assets if he defaults.

Shadow lending ‘growing very fast’

CIBC senior economist Benjamin Tal said the shadow lending market represents about 4 to 5 per cent of Canada’s overall mortgage market.

“This is something that is growing very fast, because many borrowers are not having access to banks because the banks are highly regulated,” said Tal.

In Ontario, Canada’s most populous province, private lending accounts for about 4 per cent of new mortgage originations, or $1.1 billion, or 2 per cent, of total mortgage lending by dollar value, according to Teranet.

While that’s a fraction of the sub-prime lending that got the U.S. housing market into trouble seven years ago, analysts are concerned that the market is growing rapidly and may be concentrated in hot housing markets such as Toronto and Vancouver where a sudden downturn could take hold.

Legal practice

The practice is legal, and can be done through a person-to-person loan, in which the lender is named as a lienholder on the mortgage, or through a Mortgage Investment Corp, in which investors can pool their money to lend to those who either don’t qualify for a traditional loan.

While major Canadian lenders offer five-year fixed mortgage rates at about 2.5 per cent to qualified borrowers, rates in the private market range between 7 per cent and 15 per cent, one mortgage broker said.

Traditional lenders also send business to alternative lenders, feeding the pipeline.

Royal Bank of Canada, the country’s biggest bank, said when a client does not qualify for a mortgage, the bank will recommend an alternate lender, which may include a trust company, a mortgage broker or a private mortgage corporation, an RBC spokesman said in a statement.

Canada’s financial system regulator, the Office of the Superintendent of Financial Institutions, said it monitors the alternative mortgage market but would not comment on its size, whether it was growing or whether OSFI had any concerns.

Anthony Croll, vice president of Individual Investment Corporation, a Montreal-based private lender that has been in business since 1958, said he’s seen a rise in the number of small private lenders over the last few years competing with the 10 per cent to 12 per cent interest his company would charge.

He also thinks inexperienced lenders may be underestimating the risks associated with non-payment of a loan.

“Occasionally an accountant or someone else has said – after hearing about our rates, or what the deal is – ‘I can do that myself,'” Croll said. “But you know everything is easy and fine to do until you have a problem.”

Source: By Andrea Hopkins, Thomson Reuters Posted: Jul 09, 2015 2:36 AM ET

HELOCs and household debt

Brokers are wary about the high level of HELOCs in Canada, and the long-term effect they could have on household debt.

“I think HELOCs are detrimental to the housing market; people are running themselves up in debt and at least with a mortgage you pay it down,” Gary Green of Mortgage Plus told MortgageBrokerNews.ca. “With a HELOC, though, you can just keep running the credit up.”

Canadian outstanding debt currently sits at $266 billion, according to RBC, a chunk of that in home equity lines of credit.

According to CAAMP’s most recent figures, 22 per cent of Canadians have a home equity line of credit.

And skyrocketing prices in many markets have industry players worried that clients will be enticed to take on more debt than is necessary.

“It’s like turning your house into an ATM,” chartered accountant and personal finance author David Trahair told the CBC. “If you’ve got a house, especially in Toronto with these insane values, you can borrow an incredible amount of money against the house.”

And while lenders have become more stringent about HELOCs, brokers say they are still easily accessible.

“Lenders have gotten more strict with offering HELOCs but they’re still relatively easy to get,” Green said. “The banks have tightened up and they’re looking at cash flow a lot more these days.”

For his part, James Shinners of Mortgage Managers believes HELOCs can be a good vehicle for clients with high cash flow, though he admits many don’t consider that circumstances can change.

However, it’s another type of credit that Shinners is most worried about.

“I’ve had clients who had mortgages paid off and the banks offered an unsecured line of credit that they’ve had to convert into mortgages to pay off,” Shinners said. “The banks are in it for the money, not for the client, so we always tell clients to call us first to help them decide what is best for them.”

Source MortgageBrokerNews.ca by Justin da Rosa | 07 Jul 2015

How banks/lenders weigh your mortgage application

Understanding the Gross Debt Service Ratio (GDS) and the Total Debt Service Ratio (TDS) and how it affects your mortgage application.

Before a lender approves your mortgage application, they will attempt to quantify how your debt affects your finances and predict your ability to make mortgage payments. They measure your affordability using two ratios: the Gross Debt Service Ratio (GDS) and the Total Debt Service Ratio (TDS).

Gross Debt Service Ratio (GDS)

The GDS looks at the percentage of your income that is needed to cover your required monthly housing costs; this includes your monthly mortgage payments, property taxes,heating costs, and 50% of your condo maintenance fees (if applicable).Generally, this percentage must not exceed 32% of your gross monthly income, to qualify for a mortgage. For example, if your gross monthly income is $3,500,you should be spending less than $1,120 on monthly housing expenses.

Your GDS ratio max limit: $3,500 x 32.0% = $1,120

Total Debt Service Ratio (TDS)

The TDS ratio takes the GDS ratio one step further, by including ALL debt obligations into the calculation, such as car payments, credit card debt, lines of credit, and alimony (if applicable). The percentage of your income that is needed to coverall monthly obligations must not be greater than 40%. For example, if your gross monthly income is $3,500, you should not be spending more than $1,400 per month.

Your TDS ratio max limit: $3,500 x 40.0%= $1,400

Both the GDS and TDS are tools used to measure your credibility and risk. The guideline limits are enforced by the Office of the Superintendent of Financial Institutions (OSFI),which is the primary regulator of banks and other financial institutions in Canada.

Falling outside the limits

Can you still get approved if the bank determines your GDS and TDS ratios are just outside the upper limits?

“The limits to the GDS and TDS ratios aren’t set in stone; however, banks do treat them as a hard guideline,” said SteveLevine, a mortgage broker with True North Mortgage. “Every lender is a little different, in terms what they are willing to accept beyond the max limits. Some banks will accept TDS ratios of 41% or 42%, depending on the situation, so there is a bit of wiggle-room. However, no bank will accept a TDS ratio that is 5% above the limit.”

When asked on what mortgage applicants need in order to get an exception with high GDS/TDS scores, Mr. Levine says that consumers need “clean files” with strong credit scores.

“Mortgage brokers have unique relationships with lenders, so if I have a client that is slightly above the limit, I might call a mortgage underwriter with a particular bank and explain my clients’ case, so long as I believe the client has a quality file – one that the lender will find appealing.”

If you find yourself outside the GDS and TDS limits, you may also implement four strategies to lower your GDS and TDS percentages, before submitting your mortgage application:

1) Increase your down payment amount

2) Reduce your overall debt

3) Increase your gross household income (i.e. add on a spouse’s income)

4) Choose a less expensive property

Understanding your Gross Debt Service Ratio and Total Debt Service Ratio is important before you plan to buy a home, because these ratios are used to determine your credit worthiness to lenders.

#mortgagesmadesimple

Cash-back Down Payments Dead Next Week

The door is closing on one of the last remaining forms of 100% financing. On June 30, insurers are banning cash-back down payment mortgages.

Only a handful of lenders still market these products, and they’re all provincially regulated credit unions. OSFI has effectively barred cash-back down payment mortgages at the federal level (e.g., at banks).

Despite questions about the risk of these products, they’ve been an almost insignificant concern for the mortgage market. The fact is, their uptake has been extremely low. Most people find a way to scrape up a 5% down payment and avoid paying posted rates for 100% financing. Moreover, the only borrowers who qualify for these no-down mortgages are those with pristine credit, solid employment/income prospects and low debt ratios (i.e., a strong borrower, albeit one with little equity).

With the demise of this product we may very well see an uptick in unsecured line of credit (ULOC) usage. Insurers will still permit the minimum 5% down payment to be borrowed from ULOCs, as long as that credit line payment is factored into the applicant’s total debt service (TDS) ratio. In fact, the mortgage lender itself can provide that ULOC, and a few may even start actively promoting it.

Homeowners who borrow their 5% down payments must pay an additional 0.25 percentage point default insurance premium. That’s on top of the recently increased 3.60% standard premium for 95% loan-to-value financing.

Source: Canadian Mortgage Trends Rober McLister June 24, 2015

Eternal truth of personal finance No. 4: Don’t be a renter

No matter the business cycle or the trends, there are some things that never change when it comes to saving, building and managing money. Long-time Financial Post columnist Jonathan Chevreau presents the fourth instalment of the seven eternal truths of personal finance.

I’ve always said a paid-for home is the foundation of financial independence. You have to live somewhere and you can’t live in an RRSP. Most of us have a simple choice: either become a homeowner or rent from someone who is a homeowner.

You may rationalize when you’re young that you don’t want to be tied down to a mortgage. But consider that when you’re renting, you are still paying a mortgage: your landlord’s!

The problem with being a perpetual tenant is that the rent will never stop and your landlord will likely hike the rent in line with inflation. When you own your own home, the total outlay may exceed your rent in the first few years but eventually, as you pay down principal, more and more of your mortgage payments will be used to pay down still more principal, and less interest relative to principal.

Tie this in with taking advantage of the annual prepayment privileges – generally 10 to 15 per cent of initial principal – and there will come a day when your mortgage is fully paid off. On that fine day, you’ll no longer be paying interest or principal and the home will be owned free and clear. For the rest of your days, you’ll be able to live rent-free!

Let’s say that took 10 years to accomplish. Compare it to the 10 years, if you continued to rent. In year 11, you’d still be renting and likely shelling out a good deal more per month than when you first signed your lease. And unlike the mortgage, there would be no prospect of those rent payments ever ceasing. But the homeowner who paid off the mortgage after 10 years will forever more be living essentially rent-free, although of course there will still be property taxes, utility bills and perhaps maintenance fees if you own a condo.

I don’t know about you, but I’d far rather enter retirement or semi-retirement with no mortgage, or any other debt for that matter. Not having to come up with the monthly rent means your monthly “nut” is that much lower. You won’t have to earn as much and so will pay less income tax.

But there are also several other benefits to having a paid-off home.

First, a principal residence is a major form of tax shelter, right up there with owning your own business. That’s because Ottawa does not tax any capital gains on your primary home. If you bought for $400,000 and years later sold for $800,000, you’d have a tax-free capital gain of $400,000 that could be added to your retirement nest egg.

Second, if you have a good chunk of equity in your home, it can be used as collateral for an emergency source of cash. You could have a Home Equity Line of Credit (HELOC) that could be used (though I advise against it) to renovate the home, put on an addition or go on a major vacation. Similarly, retirees with no heirs who find themselves house-rich but cash-poor could always resort to a reverse mortgage to convert some of the home’s equity to a tax-free source of cash.

Again, I wouldn’t recommend this for most people and certainly not if your children or other heirs view such an act as potentially cutting into their inheritance. However, in certain situations this may be an option for those who really want to stay put and have few if any alternative sources of retirement income.

A third possibility, which is really a variation of tapping your home’s equity, is downsizing at some point. A typical retirement fantasy is to sell the suburban monster home and swap it for a downtown condo AND a cottage on a lake somewhere. Assuming the condo and cottage are each roughly half the price of the big home being sold, you’d essentially be swapping one home for two. Because of the capital gains exemption on the principal residence there would be no tax consequences, although normal real estate brokerage commissions and land transfer taxes would have to be considered. Alternatively, you could sell the big-city home for a similarly large home in the country, perhaps getting “twice the house for half the money” and adding the difference to your retirement kitty.

Source: Financial Post Friday, Jun. 19, 2015 Jonathan Chevreau blogs at www.financialindependencehub.com and other sites. He can be reached at jonathan@findependencehub.com