Understanding Mortgages &

Insurance

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Begin by asking yourself: What Can I afford?

What do I Want?

How is my Credit Rating?

$ Most Canadians know there is a credit system but know little, or nothing about it.

$ 95% of Canadians don’t know what their score is

0%

5%

10%

15%

20%

25%

30%

300 to 549 550 to 599 600 to 649 650 to 699 700 to 749 750 to 799 800 to 849 850 to 900

Beacon Score

How Do You Score?How Do You Score?

78%

60%

39%

23%

12%

5% 2% 1%0%

10%

20%

30%

40%

50%

60%

70%

80%

300 - 449 500 - 549 550 - 599 600 - 649 650 - 699 700 - 749 750 - 799 800 - 900

90 Days past due or worse

$ Lowest loan rates

$ Fast loan decisions

$ Save on Lenders and Brokers fees

$ No money down on vehicle leases

$ Lower interest rates

$ More home buying choices

$ Over draft on checking account

$ Increased purchasing power

$ Better access to Lines of Credit

$ Lenders report — similar to a report card

$ In Canada there are two credit agencies Equifax and Trans Union, they collect information on:

$ Credit limits

$ Payment history

$ Amount borrowed

$ Delinquencies

$ Employment

$ The credit system measures all these factors and produces the credit score which is a measure of credit risk for an individual

$ The FICO Score = Measure of risk, probability of paying new loan

$ Calculated by percentages

New Credit 10%

Types of Credit Used 10%

Length of Credit History 15%

Amounts Owed 30%

Payment History 35%Credit

Score

$ High number of accounts with balances $ 30%, 80%, and 100% of limit

$ Seriously Late payments

$ Outdated information

$ Recently seeking credit by a high number of inquiries posted on your credit file in the last 12 months

$ Change oldest Credit card

$ Revolving or non-revolving accounts established in too short of time

$ How to secure your good credit$ Pay bills on time

$Automatic payments

$Reduce interest costs$ Check your credit report for accuracy at

least once per year

$ Criminals steal nearly 700,000 identities a year

$ Thieves go through trash for personal information

$ Extra cards help thieves if wallet is lost or stolen

$ Before you apply for a loan/mortgage

$ 76% of credit reports have errors

$ Check your report once a year$ Name

$ Address

$ Social Insurance number

$ Birth date

$ Accuracy of accounts

$ Pay bills on time and call if it is late arriving

$ Shred old bills and other documents

$ Send bills from secure, locked mail box

$ Beware of individuals confirming personal information by Phone or Internet, genuine bank personnel will never ask for this information

$ Fraud Contact :

(Equifax 1-800-465-7166 ext 2)

$ How do I rebuild my credit after bankruptcy?

$ In order to build credit you need to have credit and use credit.

$ Obtain some form of credit card$ Secured Credit card from Capital one or Home Trust

$ Try for a Canadian Tire card

$ RSP Loan

$ Use it properly, spend a small amount on something that you need anyway (a tank of gas) and pay it off when you get the bill

$ As soon as you have reestablished some credit (12 months) apply to a major bank to obtain a standard credit card that you can keep and use for the rest of your life without changing it

How the Bank or Lender calculates what you can afford to borrow.

Debt Ratios: Gross Debt Ratio & Total Debt Ratio

The 6 C’s of Credit: this is how the lender views you!

GDS: GROSS DEBT SERVICE RATIO 32%

Mortgage Payment + Taxes + HeatQualifying Gross Income (monthly)

TDS: TOTAL DEBT SERVICE RATIO 40%

Mtg Pymt + ½ Condo Fee + Heat + Taxes + Debts

Qualifying Gross Income (monthly)

$ Character – Does the person appear to be trustworthy?

$ Capacity – The ability to pay off the debt, based upon earnings and outstanding debt.

$ Collateral – Is security required for the loan?

$ Conditions – Are there economic or regulatory influences that would come into

play?

$ Credit – Your credit history and score.

$ Capital – Your net worth determined by Financial Statement

$ Unacceptable beacon score

$ Late payments

$ Excessive number of accounts

$ Unable to prove income to service debt

$ High balances

$ Many recently-opened accounts

$ Bankruptcy or Consumer proposal

$ Unpaid accounts

Before you go house hunting!

Why?

You will know your budget

Interest Rate Guarantees to protect you against a rise in interest rates. Held for 60-120 days.

WHAT IS THE DIFFERENCE BETWEEN A MORTGAGE BROKER/AGENT AND THE BANK?

Shop around for the right mortgage professional!

Get References!

Loan to Value must be 80% of the value of the property

LTV = Down Payment or equity/Property Value

At least 20% of Purchase price or appraised value as down payment

LTV 95%

Down payment required minimum of 5%

CMHC Insured

Mortgage Agents/Lenders MUST verify that the borrow has the 5% down payment and 1.5% closing costs.

All or part of the mortgage may be paid off at any time without penalties.

Usually have shorter terms, & interest rates are generally higher

Mortgage payments include interest & principle

Amount of payment fluctuates according to rise and fall of interest rates

Interest rate usually compounded monthly

The lender caps the rate on a variable interest rate.

Rate fluctuates with prime.

Institution guarantees that you will not pay more that a certain interest rate that has been predetermined.

Payments are made for the term chosen Loan cannot be paid off early, except in the

case of sale. Accelerated payment options available with

some lenders Fixed rate: interest rates are locked in for the

term of the loan.

Fixed Rate, shorter term

Can lock into a longer term during the current term of the mortgage without penalty.

CHIP – Canadian Home Income Plan

Equity can be converted into cash without selling property or making monthly payments

At death, or sale of property, loan & accrued interest must be repaid.

This option is usually for Seniors

Open Line of Credit secured against the property

Funds can be withdrawn and replaced as needed

Interest rate is usually prime + 1

Your house is NOT an ATM

Only suitable in some circumstances

Like an Australian Mortgage

Essentially a secured line of credit that is also a chequing account

Interest & Principle calculated separately

Less interest is paid over all

Completely Open

The Term of a mortgage is the term of the loan

Terms can be: 6 months/1,3, 5 & 10 years

Amortization is the lifetime of the mortgage Usually 25 years. Can be 10 or 15 years. The shorter the amortization, the larger the

mortgage payment is. Principle & Interest are combined over the

course of the amortization schedule.

Credit problems: pull your credit first yourself on Equifax (this will be a soft pull and won’t affect your score) and fix any problems.

The mortgage agent will need to know ….

Rate Guarantees

Life Insurance

Disability Insurance

Critical Illness Insurance

Long Term Care Insurance

$ There are several types of insurance that need to be considered to provide a complete financial house

$ Most people only think about life insurance

Income Protection

Family Business Retirement Estate Planning Taxes

Ask yourself:

What Do I need?

What Do I want?

What can I afford?

For temporary needs: mortgage/debt

Family Protection

Business coverage

Inexpensive

For permanent needs

Long Term coverage

With or without cashvalues

Limited pay options

Essentially a Term 100 with an investment component

Very complicated

Owner must monitor closely

Asset Transfer Cash Values

Permanent Insurance

Cash Values Guaranteed

rates on Cash Values

A monthly benefit amount is paid to beneficiary upon total or partial disability.

Personally owned Only buy UW at

time of application!

Good for BFS

Lump sum payment on diagnosis of Criticall Illness

Dovetails with DI Children’s CI Tax Free

Bank Mortgage Insurance

Personally owned Mortgage Insurance

You need to consider the following:

Minimal Coverage Cheapest coverage you will ever get You do not control it! No Guarantees: cost Leave your job: leave your

insurance Some coverage is convertible

Keep coverage as a basic and add on to it

Ask if you can increase coverage

Make sure you have family coverage

Supplement with personally owned life insurance!!! This is the backup plan!

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The The Cost of FundingCost of Funding, which is set by:, which is set by:

1)1)Monetary Policy (i.e. Ye Olde Bank of Monetary Policy (i.e. Ye Olde Bank of Canada).Canada).

2)2)Bond Market Forces.Bond Market Forces.

0

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20

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Central Bank Rate

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1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Mortgage Rate 5-Year Bond Yield

The The Cost of FundingCost of Funding is: is:

1)1)Run by the Bank Rate at the short end!Run by the Bank Rate at the short end!

2)2)Run by Bond Market Forces at the long Run by Bond Market Forces at the long end!end!

The Cost of Funding is:The Cost of Funding is:

1)1)The The HighestHighest at the end of booms! at the end of booms!

2)2)The The LowestLowest in the middle of recessions! in the middle of recessions!

Banks are trend followers and tend to:Banks are trend followers and tend to:

1)1)Be overly generous in good times, but you Be overly generous in good times, but you should not get sucked in.should not get sucked in.

2)2)Be overly stingy in recessions and market Be overly stingy in recessions and market corrections.corrections.

The regulators in Canada are:The regulators in Canada are:

1)1)Making rules to prevent a debacle in Canada.Making rules to prevent a debacle in Canada.

2)2)Making rules to keep Making rules to keep youyou out of trouble. out of trouble.

3)3)Quite proactive, which you should always Quite proactive, which you should always remember in your decisions.remember in your decisions.

Did you know that you can pay an extra Did you know that you can pay an extra payment each year?payment each year?

Do you know how much you can save by Do you know how much you can save by doing that?doing that?

PeriodTotal

PaymentsAnnual

PaymentTotal Extra Payments

Balance EOP

DifferenceNet of Extra

Payment

10 Years $153,554 Nada Nada $75,913.98 Nada

10 Years $153,554 $5,000 $45,000 $14,730.74 $16,183

7 Years $108,768 $10,000 $70,000 $461.87 **$51,560

****Note :Note : The last row ends 3-years early!!! & Includes $25,592 of The last row ends 3-years early!!! & Includes $25,592 of payments you didn’t have to make!!! payments you didn’t have to make!!!

Open/Closed, Open/Closed, Fixed/Floating, Short/Long Fixed/Floating, Short/Long Term???Term???

In all of the following you will need to work out In all of the following you will need to work out the various scenarios.the various scenarios.

Use the PMT() function, etc., in Excel, or go Use the PMT() function, etc., in Excel, or go online to CMHC, or one of the banks and use online to CMHC, or one of the banks and use their mortgage calculators.their mortgage calculators.

It all depends. Ask Yourself Some It all depends. Ask Yourself Some Questions:Questions:

1)1)How much can I pay off each year?How much can I pay off each year?

2)2)What are my plans move/job/school?What are my plans move/job/school?

3)3)Cost???Cost???

It all depends: Overall Strategy...It all depends: Overall Strategy...

Since both house prices and interest rates Since both house prices and interest rates are both high in booms it may pay to:are both high in booms it may pay to:

1)1) Rent and wait for a house and Rent and wait for a house and mortgage at lower costs. If that suits mortgage at lower costs. If that suits you lifestyle.you lifestyle.

2)2)Go floating on you mortgage and wait Go floating on you mortgage and wait for rates to drop. Do the spreadsheet for rates to drop. Do the spreadsheet thingthing

It all depends: Overall Strategy...It all depends: Overall Strategy...

Since both house prices and interest rates Since both house prices and interest rates are both relatively low in recessions it are both relatively low in recessions it may pay to:may pay to:

1)1)Grab the house you want when demand Grab the house you want when demand is low!is low!

2)2)Get a closed &/or fixed-rate mortgage.Get a closed &/or fixed-rate mortgage.

What Term???What Term???

How much risk are you willing to take?How much risk are you willing to take?

If If a lot a lot you can “game the system” by you can “game the system” by playing the yield curve.playing the yield curve.

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0 2 4 6 8 10 12 14 16 18 20 22

TERM

Normal Inverted

In essence, the only way to tell is to make In essence, the only way to tell is to make up a spreadsheet and “model” the up a spreadsheet and “model” the alternatives.alternatives.

How much risk are you willing to take?How much risk are you willing to take?

If not a lot then you become a If not a lot then you become a price/rate taker. But, your risk is low.price/rate taker. But, your risk is low.

Refinancing???Refinancing???

This is largely a US game.This is largely a US game. The rules in Canada make it almost a The rules in Canada make it almost a

zero-sum game, as the banks can get the zero-sum game, as the banks can get the lost interest as a penalty.lost interest as a penalty.

Only make sense in extreme Only make sense in extreme circumstances.circumstances.

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