The federal government recently implemented new mortgage rules to reduce the risk of potential buyers losing their homes if there’s a shift in the economy or rise in interest rates.
By Farhaneh Haque, Regional Director – TD Canada Trust
Since 2008, there have been a number of tightening measure in Canadian Lending Rules, and amidst talks of further lending changes. So, what could the possible 30 year amortization change entail? It could mean:
Elimination of the 30-year amortization altogether;
Allowing a 30-year amortization where borrowers qualify fully on a 25-year amortization; or
Limiting the 30-year amortization to borrowers meeting certain qualifying criteria. For example, higher credit scores, larger down payments or lower debt ratio limits.
While there is no clear direction on what is proposed, or whether this will move forward, let’s turn our attention on what potential home buyers should consider as they prepare for home ownership.
A shortened amortization of 25 years (from 30 years) will impact potential buyers’ affordability in the same way as roughly a 0.75% increase in mortgage interest rates. Let’s compare:
From a qualifying lens; when qualifying for a mortgage, the monthly mortgage payment, in large part, determines the purchase price that the homebuyer may qualify for. Since the amortization period contributes to the monthly payment calculation, a shortened amortization translates to an approximate 7% decrease in a potential buyer’s buying capacity.
Consider that owning a home means payments in addition to monthly mortgage payments – property tax, home insurance, utilities etc. – reigning in the borrower capacity through the shortened amortization, especially for first time buyers, may make homeownership debt more manageable and may also require new buyers to be more realistic about their borrowing capacity.
To learn more contact your local TD Mobile Mortgage Specialist.
Whether you’re applying for a loan to buy a car, a mortgage or applying to rent, your borrowing history is crucial. Here’s an article written by my regional director at TD that I’m sure you’ll find useful.
By Farhaneh Haque, Regional Director – TD Canada Trust
For each article, I look for inspiration in what’s going on in the mortgage or real estate industry, to share some insights for the readers. This month, I wasn’t so much inspired rather distressed about something that happened, and so here I am writing about it!
Last week, I opened up my cell phone bill and was surprised to see that my balance was 3 times my normal monthly bill. At first, I thought perhaps I had forgot to pay last month’s bill – very unlike me – but about 2.5 hours and 5 different customer service representatives later, I was informed that someone had used my “excellent account repayment history” to obtain a free hardware upgrade to a smart phone and renewed me into a 3 year contract!
Well as the fraud analyst reversed everything and reset my account, he said to me “Farhaneh, I recommend that you contact Equifax to confirm that your good credit record hasn’t been used to obtain fraudulent credit elsewhere.”
Sound Advice, I thought myself and an appropriate topic for my next issue.
A survey conducted by the Financial Consumer Agency of Canada (FCAC) found that most people (90%) don’t know that you can get your own credit bureau report for free simply by requesting it by mail.¹ Sixty-two percent do not know that you can dispute an entry in your credit report, even though it’s as easy as writing a letter to the bureau.
Who compiles your credit history?
In Canada, credit information is collected by two major credit-reporting agencies, Equifax Canada and TransUnion Canada. They record how you have used credit and whether you pay your loans and bills on time, as reported by your lenders. They may share that information with others only in certain circumstances, one of which is when you have provided your consent, such as when you apply for a loan.
Finding out what’s in your report is easy. You can pay a small fee to request a copy of your credit record online – I paid $15 – or obtain it for free if you send a request by mail or fax. It’s a good idea to check your record once a year to ensure that it’s accurate.
What’s in your report?
Your credit report contains relevant details about your personal and financial situation, such as:
Basic personal history including your social insurance number
Any credit you have such as credit cards, loans or mortgages
Public records such as bankruptcy
Whether a debt was referred to a collection agency
Any inquiries made by you or other institutions about your credit
Mistakes can happen and you have the right to dispute any inaccurate information that may appear on your credit report.
You can find detailed guidance on how to correct an error through the FAQs and resources available on the Financial Consumer Agency of Canada website.
Why it’s important
The information in your credit history is the basis of your credit score, a measure that reflects your current financial situation and your ability to repay a loan.
Lenders take this score into account when you apply for a loan, mortgage or credit.
How to maintain a passing grade
To maintain a good credit rating, or improve one that’s not as good, the following dos and don’ts may help.
Pay your bills on time
Lower your debt ratio — the amount you owe relative to the amount you earn
Keep your credit balances well below their authorized limits
Close or cancel any credit accounts you don’t really need
Constantly max out your credit card limit
Be late with payments
Have your account sent to a collection agency
gnore any debt issues
The Financial Consumer Agency of Canada (FCAC) recommends that you not accept or use any form of credit before being comfortable with its terms and conditions, to avoid potential misunderstandings between you and the credit issuer that may end up in negative consequences.
Where to get help
To obtain your personal credit rating, contact Equifax or TransUnion. For more guidance, read the FCAC publication Understanding Your Credit Report and Credit Score.
The TD Canada Trust Mortgage Calculator1
This calculator can show you1
- How much of a home you may be able to afford
- The amount of mortgage you may qualify for
- What mortgage payments to expect based on the results
- Some strategies on how to save money over the life of your mortgage
You can explore multiple scenarios to help you take a comfortable first step toward home ownership. And, you will be able to print your results when you’re done.
* Required field
Since the last time I wrote, gold has dropped like a stone while the US stock market and the US dollar have gained nicely. The Canadian stock exchange is under pressure as it is commodity strong and the Canadian dollar is down to around 96 cents. Most Canadian money managers are allowed to hold a percentage in global stocks and they have enjoyed the uptick. As an advisor, it makes more sense for us to have fund managers with global experience and with the leeway to add global stocks to the portfolio. This is one of the major advantages of mutual funds…..you get diversification.
Here are some of the more frequently asked questions of me from clients over the past few months:
Gold: is it a good time to buy some as the price had dropped from a high of $1800 to $1400?
There is instability in the world markets and for that reason, holding some gold in either bullion or stock form makes good diversification sense. However, with the US economy showing very good signs of turning around, money is leaving gold for the US dollar and the US stock market. It may be sometime before gold picks up steam. Not more than 3 to 5% in gold, if you are keen to hold it.
- Real Estate
Real estate in Canada is cooling….prices have tapered off but not come down as much. The experts are calling for a flat market for the time being. If you are buying real estate for investment, you may want to hold off. Buy a real estate investment trust for real estate exposure or a REIT ETF.
- US market is up 16% in 2013…what next?
Two schools of thought where one believes that the market is going to correct downwards and the other it is going up to a 20% plus return. Let us not get greedy here. Good diversification in the portfolio is important. My portfolios are approx 40% US, balance in Canada and global markets. I like the US going forward. Some of the major blue chips are reinventing themselves and increasing global exposure to their goods. They are closing plants in developed markets and opening them in the BRIC nations. This will help them access some of the fastest growing consumer society in recent history. Ford recently announced closing plants in Australia to open one in China. Other companies are following suit. Investing in these companies gives you indirect exposure to emerging markets and the growth will be seen in the US stock markets.
- Interest rates.
Quite clear that the Bank of Canada wants to keep the interest rates low and this has been in the press recently. The question is how long can they keep the interest rates at such low rates? They will climb and it is a good idea to be paying off debt in such low interest environment. It will not stay low forever and can be quite painful at rates higher than where they are. Here is an interesting way to play the low interest rates. Use non-RSP equity holdings to pay off mortgage and non-deductible debt. Buy back the same holdings by borrowing the funds at these low interest rates. You have just converted bad debt to good debt, and have a nice tax deduction for the interest charged. The moment interest rates start to rise, sell and pay off the loan. This is a good strategy for executives of public traded companies. Call me to discuss.
- Where should I invest first…..RESP, RSP or TFSA or all three?
RESP should be first because of the 20% from the government, RSP because of the tax deferral and then TFSA as it allows you to build a tax-free income stream. If you have low income in any one year, then carry forward the RSP room and add to your TFSA instead. In future years, you can use funds from your TFSA to contribute to your RSP. TFSA room opens up when you take money from it.
- You have toned down on emerging markets and especially India….what are your current opinions?
I like the emerging markets for their rising middle class and that is it. The stock markets of these countries are quite young and I am not sure about Government due diligence over their operations. The extreme volatility in these markets is too much for me and would rather play these markets through blue chip global corporations.
- How much insurance should I carry? In addition, should I be concerned about Critical Illness coverage, disability insurance?
Insurance is the first thing I look at when taking on clients and the question is what happens if, the key income earner is hit by the bus. Who looks after the kids, the debt etc etc. Same thing with Critical Illness and disability. CI is a personal choice. Disability for a self-employed person becomes a bit more critical and should be looked at as being quite important. Give me a call or drop an email and we can discuss if you are concerned. This is an important segment of a financial plan.
Enjoy the summer, be safe and thanks again for being clients. Thank you.
And lets stay in touch.
(Please feel free to share this Malik’s Corner with friends, associates and family.)
The information contained herein are obtained from sources believed to be reliable, however, its accuracy or completeness is not guaranteed and Queensbury Securities assumes no responsibility or liability. Neither the information nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities or commodities. These comments and opinions are not necessarily the opinions of Queensbury Securities Inc. Securities mentioned may not suit all types of investors. Before making any investment decision, contact your investment advisor to discuss your investment needs.