Budgeting Towards Home Ownership

Transitioning from renter to homeowner is one of the biggest decisions you’ll make throughout your lifetime. It can also be a stressful experience if you don’t plan ahead by building a budget and saving prior to embarking upon home ownership.

Budgeting is a core ingredient that helps alleviate the stress associated with money issues that can sometimes arise if you purchase a home without knowing all of the associated costs – including down payment, closing expenses, ongoing maintenance, taxes and utilities.

The trouble is, many first-time homeowners fail to carefully think about their finances, plan a budget or set savings aside. And in this society of instant gratification, money problems can quickly escalate.

The key is to create a realistic budget based on your goals. Track your spending and make your dollars go further by sticking to your budget once it’s in place. Budgeting offers a step-by-step formula for figuring out how to best save your hard-earned money to invest in home ownership.

Start by listing your household income, then your household expenses, and review your spending habits. All of this can be done on a pad of paper or on a computer spreadsheet.

Keeping receipts for everything that you purchase will enable you to accurately keep track of where your money is going each month so that you can review and make necessary changes to your plan on an ongoing basis.

Examine all areas of your life from entertainment to the type of food you buy, where you buy your food and clothes, and how and where you travel. Also look at your spending personality and make necessary adjustments. Are you a saver, a splurger, a spontaneous shopper or a hoarder? Become smarter with your money and avoid impulse buying.

If you find you’re spending a lot of money in one area, such as entertainment for instance, set aside a reasonable amount each month and prepare to stop spending money in this area once your budget has been exhausted.

Budgeting provides you with the opportunity to re-evaluate your needs and wants. Do you really need the magazine subscriptions, the gym membership and all the other things you may spend money on each month? Although everyone needs some “me time” to wind down, could you not get that by taking a walk or reading a good book you borrowed from the library?

If you can set your budget solidly in place before you head out home or mortgage shopping, you will be far more prepared to purchase your first home.

Following are three top tips to help you prepare for the purchase of your first home:

1.      Set up a savings account. You can deposit a predetermined amount into this account each pay period that you will not touch unless it’s absolutely necessary. This will enable you to put money aside for a down payment and cover closing costs, as well as address ongoing home ownership expenses such as maintenance, taxes and utilities.

2.      Save up for big-ticket items. As you accumulate money in your savings account, you will be able to also save for specific purchases to help furnish your home – avoiding the buy now, pay later mentality, which can have a negative impact on your credit when you’re seeking mortgage financing.

3.      Surround yourself with a team of professionals. When you’re getting ready to make your first home purchase, enlist the services of a licensed mortgage professional and a real estate agent. These experts are invaluable to you as you set out on the road to home ownership because they help first-time buyers through the home purchase and financing processes every day. They will be able to answer all of your questions and set your mind at ease. A mortgage professional has access to multiple lenders, and can help you get pre-approved for a mortgage so you know exactly what you can afford to spend on a home before you head out house hunting, while a real estate agent will be able to match your needs with a house you can afford. Both parties will negotiate on your behalf to ensure you get the best bang for your buck. And, best of all, these services are typically free. They will also be able to refer you to other reputable professionals you may need for your home purchase, including a real estate lawyer and home appraiser. If you have any questions contact David Cooke, your Calgary mortgage broker via http://davidcooke.ca

http://davidcooke.ca

Collateral Versus Standard Charge Mortgages

With some lenders moving towards collateral charge mortgages, it’s important to understand the differences between a collateral and a standard charge mortgage. The primary difference is that a collateral charge mortgage registers the mortgage for more money than you require at closing. For instance, up to 125% of the value of the home at closing with TD Canada Trust or 100% through many credit unions, instead of the amount you need to close your transaction (as is the case with a standard charge mortgage). The major downside to a collateral mortgage becomes evident at your mortgage renewal date. For borrowers who want to keep their options open at maturity and have negotiating power with their lender, this isn’t the best product feature because collateral charge mortgages are difficult to transfer from one lender to another. In other words, if you want to change lenders in order to seek a better product or rate in the future, you have to start from the beginning and pay new legal fees, which range from $500 to $1,000. With a standard charge mortgage, in most cases, the new lender will cover the charges under a “straight switch” in order to earn your business. In addition, with a collateral charge, it could be difficult to obtain a second mortgage or a home

equity line of credit (HELOC) unless your home significantly appreciates in value. Lenders offering collateral charge mortgages promote the benefit that it makes it easier and more cost effective to tap into your equity for such things as debt consolidation, renovations or property investment. There’s no need to visit a lawyer and pay legal fees – the money is available as your mortgage is paid down. Yet, if you read the fine print, you may still have to re-qualify at renewal. A standard charge mortgage gives you the ability to move to another lender at renewal should you want to without incurring legal fees, and many borrowers find it more beneficial to keep their options open. If you need to borrow more with a standard charge mortgage, you have the option of a second mortgage or a HELOC, which also enables you to take money out as your mortgage is paid down. Navigating through the mortgage process alone can be tricky. Working with a mortgage professional who has access to multiple lenders will help ensure you receive the product and rate catered to your specific needs. As always, if you have any questions about the information above or your mortgage in general, I’m here to help! for more information contact me via my .http://davidcooke.ca

Are Gift Letters blowing up the Real Estate Bubble?

Recently a National Post article brought up an interesting issue. Are parent's fueling the real estate boom in Toronto by giving their children a down payment to purchase a home now rather than let them take time to save it up on their own.
    IN a recent blog, Garth Turner, a former MP, said that this is running counter to the government's attempt to cool the real estate market by getting people into the market before they normally would be entering it.
   He felt that this was throwing the natural forces of the market off. I'm not so sure about that.
 When I got married and started looking at our first home, my parents gave us some money for the down payment. I found out years later that my grandparents did the same thing for my parents when they bought their first home.
   If this has been going on for 3 generations in my family, I think it probably is going on in plenty of other Canadian families.
  Sometimes people look for a problem when there isn't one.
 

Why bank preapprovals are not as good as a mortgage broker's.

It's so satisfying to be able to beat the banks at their own game.
  I was in a meeting recently when it was mentioned that all preapprovals by this lender are underwritten before issued. I've known this for some time but a question came to mind. Do banks underwrite their preapprovals. When you go to a bank and fill out an application does anyone check over the numbers and your credit report and see how much you really can afford?
     I asked this question and was told that banks don't underwrite their preapprovals. This is the reason why you are preapproved for $400,000 and when you make an offer on a house for $400,000 it may be declined by the bank. If they took into account the $500 a month car payment that you have they could have given you a more accurate pre-approval anmount of $350,000.
     I should caution you. Not all lenders do this. If you are concerned you should tell your mortgage broker that you want a pre-approval that has been underwritten. This limits the number of lenders it can be sent to but you can shop with confidence with this document in hand.
  For further information contact David Cooke at www.davidcooke.ca 
    

Brace for mortgage renewal time.

Fixed rates nudge up yet again – - – although still well below historical norms, fixed rate mortgages continue to rise, slowly but surely. They have gone up 5 times in the past 3 months.  Many borrowers are still enjoying variable rate mortgages at 2.25% or prime less 75 basis points, some even lower. What’s going to happen when these mortgages come up for renewal?
Let’s assume your mortgage was done 5 years ago with a 35 year amortization. Further, let’s assume you went with a variable mortgage rate at 2.25% – - what a great choice you made! The renewal date on your mortgage is October 1st, and there is $300,000 outstanding. Your current mortgage payment for the past 5 years has been $1031.06 monthly. And finally, let’s assume that this time, you decide to go with a fixed rate mortgage at current rates today – - your monthly payment will increase to $1512.10! – - an increase of almost $500 amonth.
    Let's say you  decide to stay with a variable rate mortgage. The best discounted rates today are prime minus .40 or 2.60%- your monthly payments will still rise to $1250. Here's something else you should be aware of. The mortgage rules have changed in the past 5 years. If you alter your mortgage amount in any way, you do not get the 35 or 40 year mortgage amortization you had 5 years ago. It will drop to 25 years which will increase your monthly payments.
 Can your budget absorb this increase? It is especially important for you to contact a mortgage broker before renewing as you may not be aware of these changes and a broker's impartial advice can and will save you money. For more information visit David's website at http://davidcooke.ca

Canadian Housing Still Affordable

It’s difficult to scan the latest news without coming across one headline or another that talks about Canada’s housing market being on the verge of collapse or its bubble bursting.

But the true market experts beg to differ. That’s why it’s important to look at the facts.

According to BMO Capital Markets, an examination of valuations and affordability across the country – not just in Toronto and Vancouver – suggests less risk of a nationwide hard landing than implied by many headlines.

In fact, aside from detached properties in Vancouver, Toronto and Victoria, the other major cities BMO Capital Markets studies appear affordable for median homebuyers.

In other words, mortgage payments and other housing-related costs do not exceed 39% of family income (that’s the guideline established by the government in July 2012 for obtaining an insured mortgage).

In addition, with the exception of Vancouver’s condos, Canada’s major cities would remain affordable even if mortgage rates rose two percentage points to more normal levels.

Nationwide, mortgage payments on the average-priced house consume a moderate 28% of household income, or 23% for people living outside Vancouver and Toronto, says BMO. Keep in mind that national mortgage-service cost ratio peaked at 44% in 1989 and 36% in 2007.

Most important, the current 28% matches the long-term norm, suggesting that rising income and falling mortgage rates have largely offset the deterioration in affordability caused by higher home prices.

To pump life into the economy, the Bank of Canada (BoC) has kept Canada’s overnight rate at just 1% since September 2010. According to BMO, a normalized overnight rate would be closer to 3.5% given the inflation target of about 2%.

RBC Economics also notes that, while home prices are currently elevated, exceptionally low interest rates keep the ownership cost burden manageable for the most part.

While affordability levels generally do not appear to pose a threat to the Canadian housing market at the moment, RBC cautions things could be radically different if interest rates were to move rapidly and significantly higher, explaining that exceptionally low mortgage rates have been the main factor preventing affordability from reaching dangerous levels in recent years.

Thankfully, RBC sees continued lower interest rates, expecting the BoC to leave its overnight rate unchanged at 1% throughout 2013 and raise it only gradually starting in 2014.

The CD Howe Institute’s monetary policy council is recommending the BoC keep the target at 1% until March 2014.

RBC believes the eventual rise in rates will take place at a time when the Canadian economy is on a stronger footing, thereby generating solid household income gains, which, in turn, provide some offset to any negative effects from rising rates.

If interest rates remain low, income continues to rise and home prices stabilize in 2013 – as BMO anticipates – fears of a deep housing correction should recede.

With mortgage rates remaining at all-time lows, now’s a great time to get a new mortgage and/or take measures to accelerate your mortgage payments while rates are still low. There are many ways to pay your mortgage off quicker such as increasing the frequency of your payments from monthly to weekly or every other week, or making extra or lump sum payments.

The Public's fear of Small Lenders

Every day I hear clients say, " who are they? I've never heard of this lender. Can't you put me into a bank mortgage?" Yes, I could but I like you and want to do what's best for you.
As a mortgage broker, I offer mortgages from banks, trust companies , credit unions and mortgage companies , sometimes called, "monolines". What is a monoline?. It is a financial company that only deals with one aspect of the financial market, in this case, mortgages. Unlike banks that offer car loans,RRSP's , consumer loans, credit cards and bank accounts, monolines only deal in mortgages.
What does this mean to you? No cross-selling. If you have one product at a bank they will call you, ask you when you visit a branch and mail you literature trying to get you to move all your banking business to them. This can be annoying and you do not always get the best products but you have it all in one place, which is what they want. Why? You are less likely to shop around and to move it to another institution if you have all you banking stuff in one place. You now are paying more for the same mortgage than your neighbour, just for the convenience of having your stuff in one place. Here's another trick. You know the mortgage insurance that banks try to sell you? It is non-transferable. When you move your mortgage you have to re-apply. If you are older and now have per-existing conditions, , it can be expensive and may not be available any more. Interestingly, the insurance companies that offer this product to the banks offered to make it transferable and the banks declined the offer. , hmmm. In who's best interest is that?
Many people worry about monolines being small. Why? They worry that if the monoline were to go bankrupt they could lose the mortgage. No worries, the mortgages are sold in bundles to insurance companies and banks. As Boris Bozic of Merix Financial says, "Why are you worried? you are not depositing your money with us, we are giving you the money?"
As you can see, there are no disadvantages in dealing with a mortgage company rather than a bank and there are plenty of advantages. Who needs a bank marketing department calling them at supper time 2 times a month to try to sell insurance, RRSP's or trying to get you to open another bank account?

      Banks have limited choices and they can not offer you the best rates , nor will they. They are interested in cross selling and will try to year after year. It's in your best interests to consider a monoline lender and to consult a mortgage broker to see who have the best product for you. 

Let me finish by offering you this video on monolines. It's an eye opener for consumers. 

Enjoy the video.

If you have any questions, pop me a line at davidcooke.ca