Do you need to take a healthy look at your finances?

As a mortgage broker, I am seeing a scary trend among my clients. To make sure I am not being paranoid, I spoke to a few colleagues in my industry to see if they are seeing the same trend. To make matters worse, I am also seeing the same patterns on the news. Consumer debt is completely out of control, with no end in sight.

When I asked my parents about their finances 30 years ago, they told me something interesting. They each had one credit card, no home equity line of credit, and they both had steady jobs. They had a small mortgage with an interest rate of over 18%!! There seemed to be more of a mentality back then to spend what you earned. Today, people are financing their lives on FOUR credit cards, lines of credit, furniture cards, car loans and any other kind of loan they can get their hands on. Household debt is surpassing people's household family income!

You have to ask yourself a simple question. Is it the credit card company's fault for giving out credit cards like candy and charging 20% interest? Or is it the consumer's responsibility to spend responsibly. I am sympathetic to the fact that in today's economy people aren't earning as much and are losing their jobs. The problem is that people today are living their lives on lines of credit/credit cards. You could finance a year of your life with $25,000 by using them. The scarier trend is that, as interest rates stay low and home values stay high, people are pulling the max 85% equity out of their homes.

Eventually, something has to give. The Baby-Boomer generation has no savings for their retirement and their children will not be able to support their own family and their parents. The average person that retires at 65 and lives to 85 will need $500,000 to retire comfortably.

Do you fall into this category?

Self-employed – To your advantage or not?

In my large network and circle of friends, I know people who are
salaried as well as some who are self-employed. There are positives
and negatives to both so I will discuss how each affects your family
life and also your ability to get financing.

Let's face it....finding a job in today's economy is extremely tough

and competitive. Many graduates are leaving university with great
grades and promise, only to be disappointed by little opportunity
and/or little pay. Should you be employed, there is a risk that you
get replaced by someone who will work for less, or worse, a computer
program.

In terms of financing though, banks prefer salaried people over
self-employed people. They see you as less likely to default on
your mortgage, since you receive a consistent pay cheque every two
weeks. In terms of family life, it gives you the peace of mind that
you can budget your expenses. On the other hand, it gives you little
flexibility when it comes to family time. You have your weekends free,
but if you want to take a Friday off because your son is sick, you
don't have that same flexibility.

As tough as it is to find a job in today's economy, starting your own
business isn't much easier. It usually takes a strong financial
investment to start up. If you go into a field like real estate, you
usually need money to survive at the beginning. It takes time to grow
your client base and, while you pound the pavement to get your
commissions, you need savings to be able to feed your family. Life can
be stressful on a family waiting months for a commission cheque, so
unless your partner is salaried and bringing in good money, it can be
tough.

On a positive note, you can deduct expenses like your gas,
phone, Internet etc., which in turn can lower your net income, thus
lowering the taxes you have to pay the government. These expenses must
be legitimate, but this is a huge advantage. Another advantage is that you
are paying yourself first. If you make a real estate commission in
January 2012, you only have to pay taxes to the government in mid-
2013. If you are salaried and you get a $3,000 paycheque, you will
have about 50% deducted from that paycheque at source right away. You
have to budget for income taxes, true, but think about the advantage of
holding on to your money for an extra year and a half. Unfortunately,
banks have tightened their rules for mortgage financing for
self-employed individuals. These applicants pay higher insurance
premiums for their mortgages and their self-declared income is highly
scrutinized. In most cases, you also have to be self-employed for two
years.

My specialty is mortgages for self-employed individuals, so if you
have any questions, please don't hesitate to contact me.

Multi-unit building purchase: Is it right for you?

Many real estate gurus in the last 10 years have talked about achieving financial freedom through the purchase of rental property. Although there is some truth to this depending on your investment/return, you have to be sure that owning rental property is right for you. It isn't as glamourous as people think and is often hard work. I will discuss a few benefits, but also a few downfalls, of being a landlord. It isn't just about collecting the rent cheques.

One of the strongest benefits is that you can buy a multi-unit property for as little as 10% down for triplexes and fourplexes and as little as 15% for sixplexes and up. This enables the property owner to keep most of the cash in their pocket, while the rental income covers the mortgage. This allows time for the property to appreciate in value as well....a side benefit.

Another reason to get into real estate is to use it a passive income stream. Is it  SO passive, though? Many people underestimate factors such as repairs/vacancy. If you don't have a contingency fund for emergency expenditures, you could be in trouble. You must be ready to spend hundreds of dollars should something break in one of your apartments. What if your tenant stiffs you for three months’ rent and leaves? Do you know your rights? Since Quebec law generally favours the tenant, it is important to choose your tenants carefully.

Another factor which works against you can be the insurance premium. Let's say you have a $500,000 mortgage while putting the minimum 15% down and want the highest amortization to get the payment as low as possible. The premium added onto a mortgage like this would be almost $25,000, making your mortgage $525,000. If you are planning on holding onto a property as part of a portfolio, the benefit will likely outweigh the downside. If you are planning on reselling your property quickly, that $25,000 will obviously impact you more. You must consider as well that there are usually file-opening fees with the lender and CMHC fees when buying these types of properties. The CMHC will also want to make sure that they calculate whether the property you are buying is a good investment. If not, they will not insure the loan, which will in turn force you into a conventional loan that carries with it higher interest rates.

Multi-unit purchases typically take longer, but if done with the proper real estate agent/mortgage professional, they can be very fruitful. It is essential, however, to be aware of what it takes to buy one, so you don't end up with nasty surprises down the road that discourage you from completing the purchase.

If you have any questions about multi-unit purchasing, I will be happy to assist; Please visit my website to see how I can help you: Mortgageratesmontreal.com

Buying a home - What to expect in terms of your costs

Most of my clients are uneducated in terms of the costs involved when buying their first house. Many of them believe that once you have the down payment, you are all set. Not knowing these costs can frustrate buyers because they don’t realize that they are necessary in the buying process. In the next few paragraphs, I will outline a few of the costs associated with your purchase so you can be prepared.

 Building Inspector

 Most people try and find the cheapest building inspector they can find. Most building inspectors cost at least $300-350 depending on the size of the property. 

Some inspectors can cost over $500. What is important to remember is to not be penny-wise but pound foolish. If you pay an inspector $50 more, but he finds a defect in the house like a crack in the foundation, you will be more than happy to pay it. A crack in the foundation can lead to hundreds if not thousands of dollars of unwanted repairs, and even lawsuits to recoup the money for repairs.

Appraisal

Most of the time, a bank will cover the cost of the appraisal up front, while some ask you to pay for it and then reimburse you. Please make sure to get this information up front since different lending institutions work in different ways. Usually, an appraisal will cost $300, and most banks will cover it. If you are trying to get a loan through an alternative lender, the cost is always at the expense of the client.

Provincial sales tax on CMHC Premium

When you buy a home with less than 20% down, you have to pay an insurance premium. If you put 10% down, for example, on a purchase of $200,000 your mortgage will be $180,000. Once you add the 2% premium, the new mortgage amount will be $183,600 with the $3600 insurance premium.  There is a 9% provincial tax on the $3600, making the total amount $3924. This $324 of tax must be paid when the loan is at the notary. It cannot be added onto the loan.

Notarial Costs

When you secure a mortgage on a home, it must be registered with the land registry office by an accredited notary. This professional’s job is to make sure that they verify that the property’s new mortgage is registered properly, to verify that the title is clean, as well as verify the certificate of location. They make sure that the buyers have the proper documentation with them at the closing to make sure that the transaction goes smoothly. Typically, for a home purchase, a notary will cost anywhere between $1,050 and $1,400. Once again, it is important to use a notary that you trust is competent, because a bad notary can wreak havoc on an otherwise straight-forward transaction. If you refinance a property, the fees are usually cheaper, but it depends from one notary to the next.

As always, should you have any questions regarding costs, or the mortgage process in general, please let me know. Anything I can do to educate you, or make the process easier, it would be a pleasure.

www.mortgageratesmontreal.com

(514) 771-1352   Fax : (514) 666-9166

info@mortgageratesmontreal.com

Bankruptcy: A decision with strong ramifications

I encounter a number of calls/emails from people who have declared bankruptcy and are looking for financing. Although there are mortgage solutions for these people, they are almost always more expensive than it is for people who have not declared bankruptcy.

I have seen people declare bankruptcy for amounts under $10,000, to over $100,000. I have seen people who are 25 years old declare bankruptcy and people in their 50’s and 60’s do so. The stigma is still the same: Whatever the reason for it, people cannot and will not accept responsibility for their debts. I understand some people have no choice, but at the end of the day, it affects your ability to buy a home in the near future.

If you have had a bankruptcy and have been released, the first thing you should do is to get a secured credit card with a $1000 limit. Once this has been open a few months, get a second card with the same limit. Use both sparingly, making sure to use each one every month. Using two cards at the same time, and keeping the balances low, will assure your credit improvement. 

NEVER MISS A PAYMENT ON THESE CARDS OR THERE IS A GOOD CHANCE YOU WILL NOT BE ACCEPTED FOR CREDIT/FINANCING AGAIN!

Typically banks want to see you released from bankruptcy for one year, with a year of re-established credit on one or two cards. Since different banks have different policies on this, it is impossible to give you a strict answer. Once you have re-established your credit, you can re-apply with me to a regular chartered bank. Should you require a mortgage, and you were given poor advice, chances are you do not have re-established credit. In these cases, I have lenders that will go up to 85% of the value of the property. This means you need at least 15% as a down payment for a new home purchase. The rates are higher, but the only requirement is that you have proof of a bankruptcy release.

If you are thinking of declaring bankruptcy, look at all your options first. Do you have family/friends that can help bail you out? Most people don’t see the stigma and effects of a bankruptcy until afterwards. They are in a very vulnerable time and their bankruptcy trustee may not be giving them honest advice on what effects the bankruptcy will have. It is important to do your research and find a trustee that will explain the process to you, and may even suggest some alternatives. 

I work with a trustee that has an excellent reputation, so if you need any advice on this topic, please let me know and I would be happy to help.