29 Sep

THE TRUTH ABOUT THE CASH BACK MORTGAGE

General

Posted by: Brad Lockey

We often see ads from the major lenders offering cash back incentives on their Mortgage products.

Gone are the days where a Cash Back Mortgage could be used to facilitate a purchase without the required minimum of a 5% down payment. Cash Back incentives are now made available for other enticing uses; New Furniture and Appliances, Renovations and the other great hook…..Apply the cash back portion directly on your Mortgage for a better effective rate!

Just a few weeks ago, I was emailed an offer from a major lender who shall remain unnamed;

“NEW PROMO … Cash back for purchases. Effective 5 year Rate as low as 2.62%….”

First off, the Cash Back Mortgages are offered at a premium (higher) compared to other standard rates available. The ploy suggested by the lender here is pay it straight down on principle and lower your effective interest rate over time.

READ THE FINE PRINT

The kicker here and warning to all….there IS a catch! If you are to break the mortgage midterm, whether to sell your home or refinance, you not only have to pay the interest penalty, you also have to return the Cash Back portion to the bank. Even if you used it to pay down your Mortgage. This is in the fine print on the websites and in your contract for you to see.

I have seen this happen to a few people that I know and it ended up being a $10,000 – $20,000 factor in their decision not to move or change careers!

There are other more cost effective ways to obtain financing in better programs such as Purchase Plus Improvements, or Home Equity Lines of Credit (HELOC), that expose you to less future risk and still provide you with flexibility to accomplish your goals.

This is why you need a certified Mortgage Broker – like the fine folks at Dominion Lending Centres – working for you.
We know of these programs and can offer advice on which ones most suit your situation.

29 Sep

KNOW YOUR 5 C’S OF MORTGAGE LENDING

General

Posted by: Brad Lockey

We all know the real estate industry is hot right now and for many getting into the housing market, it can be a pipe dream. With tightening government and lending regulations, historically low interest rates and soaring housing prices, it can be a daunting endeavour for anyone.

Whether you are a first time home buyer, wanting to upsize to accommodate your growing family or purchasing an investment property, these are the factors that lenders will be looking at. This will determine which mortgage type and interest rate will be available to you.

Know Your 5 C’s:

Collateral – The property itself that you are hoping to purchase.

Capital – Where is your down payment coming from? At a minimum, you need 5% down for a “high ratio” insured mortgage or a “conventional” mortgage with 20% down. This money can come from your own resources or can be gifted from a family member. Requirements will vary, so make sure to check with your mortgage professional.

Credit – Do you have proven credit and show a good history of repayment?

Capacity – The most important by far! How are you going to pay for your mortgage? Proof of income and requirements differ depending on whether you are salaried, self- employed, paid hourly or somewhere in between!

Character – Are you a super person? This is the least important factor to lenders these days.

Just as important to consider, when deciding on your mortgage, is to determine your current financial situation and longer term goals. This will help you decide which mortgage term and amortization (for example a 5 year term with a 25 year amortization) and mortgage rate (variable or fixed) is best for you. Finally, don’t forget to discuss the FEATURES that come with your mortgage as this could save you thousands of dollars and potential grief over the term of the mortgage. These features can include pre-payment options, lower early payout penalties and portability, providing you with flexibility and options for paying down your mortgage faster or making changes, should the need arise.

Mortgages are NOT a one size fits all, so always make sure to contact and discuss your options with a licensed mortgage professional BEFORE preparing to find the home of your dreams.

29 Sep

WHAT DOES A TECHNICAL RECESSION MEAN FOR MORTGAGE HOLDERS?

General

Posted by: Brad Lockey

Well the word is out…Canada is in a technical recession…so what does that mean for Canadian mortgage holders? The main question that I have been asked is, “how will the recession impact interest rates or my mortgage?”

For those currently in the middle of a mortgage term, there will be minimal to no impact on your mortgage. If you have a fixed rate mortgage, nothing will change as long as you continue to make your mortgage payments. If you have a variable rate mortgage, this will likely work in your favour for at least a little longer.

With rates staying low, it is a good time to take a look at your current mortgage term to see if there is an opportunity to restructure your financing into something that is going to take advantage of the low rates.

Currently looking at purchasing a new home? The main concern with a recession is an impact on employment. If there are changes to your employment, it is important that you review these changes with your Mortgage Broker. Not expecting there to be any changes? Then, just like those that currently have a mortgage, take advantage of the low rates and make sure you understand the fine print in the mortgage contract that you are signing up for…especially the details about pre-payment penalties

22 Sep

COLLATERAL VERSUS STANDARD CHARGE MORTGAGES

General

Posted by: Brad Lockey

 

Since an increasing number of lenders are moving towards collateral charge mortgages these days, it has never been more important to understand the differences between a collateral and 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 ING Direct and 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. At Dominion Lending Centres, we have access to multiple lenders and we can help ensure you receive the product and rate catered to your specific needs.

18 Sep

SO, WHAT DOES THAT MEAN?! MORTGAGE TERMS EXPLAINED

General

Posted by: Brad Lockey

 

What does all that technical mumbo jumbo mean? Here are some common mortgage related terms.

Getting a mortgage can be a daunting task. There is so much to know and understand including some pretty confusing language. Borrowers are often confused by terminology like the difference between amortization and term.

And by the way,

Term

The period of time you are under contract with a specific lender at the interest rate that they are providing for that time period

Amortization

A term used to describe the period of time over which the entire mortgage is to be paid assuming regular payments. Usually 25 or 30 years.

Here are some other mortgage related definitions.

Appraisal

An independent assessment of the property by a qualified individual.

Closed Mortgage

A mortgage that cannot be repaid or prepaid, renegotiated or refinanced prior to maturity, unless stated in the agreed upon terms.

Closing Costs

Costs that are in addition to the purchase price of a property and which must be paid on the closing date. Examples include legal fees, land transfer taxes, and disbursements.

Closing Date

The date on which the mortgage closes either in the case of a refinance or new purchase.

Debt Service Ratio

The percentage of the borrower’s income used for monthly payments of principal, interest, taxes, heating costs, condo fees (if applicable) and debts. GDS is gross debt service – how much you spend on Principal, Interest, Taxes and Heating. TDS is total debt service – GDS plus all other debt payment obligations.

Default

A homeowner is ‘in default’ when he or she breaks the terms of a mortgage agreement, usually by not making required mortgage payments or by not making payments on time.

Down Payment

The money that you pay up-front for a house. Down payments typically range from 5%-20% of the total value of the home, but can be anything above 5%, if you qualify.

Early Discharge Penalty

A penalty you may pay your lending institution for breaking the mortgage contract early. This is usually 3 months interest or the Interest Rate Differential (IRD), whichever is larger. See below for IRD.

Equity

The difference between the market value of a property and the amount owed on the property. This difference is the amount a homeowner actually owns outright.

Home Equity Line of Credit

A loan that is secured against your house, like your mortgage, but you obtain a maximum amount that you may borrow but only borrow in the amounts that are needed. You only make payments, minimum is interest only, on what you have borrowed at any given time.

High Ratio Mortgage

A mortgage where the borrower is contributing less than 20% of the value of the property as the down payment. The borrower may have to pay a mortgage default insurance premium such as CMHC insurance, usually tacked onto the mortgage amount.

Interest Rate Differential

A way lenders calculate the penalty for discharging a mortgage before the end of a closed mortgage contract.

The difference between the interest that the financial institution will make if you continued your mortgage to the end of the contract and what they will make by loaning it to someone else at the current interest rate.

Land Transfer Tax

A tax that is levied (in some provinces) on any property that changes hands.

Lump Sum Payment

An extra payment that you make to reduce the amount of your mortgage, usually as stipulated in your mortgage contract.

Mortgage

A loan that you take out using property as the collateral.

Mortgage Broker

A company or individual that finds mortgage financing for individuals and companies whether for purchase, refinance, lender switches, etc. A broker does not actually lend money but seeks out a lender and arranges the mortgage terms.

Mortgage Default Insurance

Required if you are contributing between 5% and 20% of the value of the property as the down payment or to satisfy lender requirements, when necessary.

Mortgagee/Mortgagor

Mortgagee is the lender; mortgagor is the borrower.

Mortgage Life Insurance

This form of insurance pays the outstanding balance of your mortgage in full if you die or become disabled. This is different from home or property insurance, which insures your home and its contents.

Mortgage Interest Rate

The percentage of interest that you pay on top of the principal amount of the loan.

Open Mortgage

A mortgage which you can pay off, renew or refinance at any time. The interest rate for an open mortgage is usually higher than a closed mortgage rate.

Porting

Transferring an existing mortgage from one home to a new home when you move. This is known as a “portable” mortgage.

Refinancing

Usually renegotiating the terms of your mortgage, often increasing the amount of your current mortgage, usually at a new interest rate. The term of the new mortgage is usually equal to or greater than the term remaining on your current mortgage. Often the existing mortgage is paid out and a new one is established with a different lender.

Variable Rate Mortgage

A mortgage with an interest rate that changes with prime rate, usually expressed as an amount plus or minus prime rate.

17 Sep

4 THINGS THAT WILL KILL YOUR MORTGAGE APPROVAL

General

Posted by: Brad Lockey

So, you’ve worked hard to save every penny and have managed to finally afford the down payment necessary on a home. You have searched high and low, only to find the house of your dreams at a price you can afford. Though your credit rating is good and you have a stable job, there are some key things to avoid while waiting for your mortgage to be approved.

Here are 4 things you must absolutely avoid to ensure that you get that dream house:

1. Buying a Vehicle

Your current car may have finally given up or a great deal has arisen, but before making any decision on a new vehicle, check with your mortgage professional. You need to ensure that the numbers you provided on your mortgage application hold true in order to be approved!

2. Changing your Credit or Payment Routine

Before putting extra money towards a debt or changing your payment schedule on any liability, you must check with your mortgage professional. Again, anything that doesn’t align to the information you provided on your mortgage application could put your approval in jeopardy.

3. Changing Jobs

There are many opportunities and challenges that come with any job, but before deciding to drastically change your employment situation, keep the following in mind:

If you are accepting a new position you need to ask if you will be given a probation period. Any mortgage lender will not accept probationary employment on a mortgage application.
If your income situation is changing, such as receiving bonuses, overtime, or commissions, you could be putting your approval in limbo. This is risky because these job perks require a 2 year history before a lender will accept them as income.
If you cannot stand your job any longer and are considering leaving the position, you need to talk to your mortgage professional immediately. The information you provide on your application must check out, especially when it comes to your employment. Most likely, you will need to wait to leave your job until after the mortgage has been approved and you’ve taken possession of the home or you’ll risk losing your dream house.
If you are considered a contractor or self-employed person, you must provide a 2 year history in order to be approved for a mortgage. If you are considering going into this line of work you’ll need to wait until after you take possession.

4. Making Payments Late

While waiting for your mortgage to be approved, make sure you make every payment early or on time! If your credit experiences even a slight drop because of a late payment or maxed out credit card, a lender will not approve your mortgage and will cancel the application.

Getting approved for a mortgage doesn’t have to be difficult! As long as you do your due diligence and know all the information, you will be on the path to a happy home-buying process. Contact Dominion Lending Centres to inquire about mortgage approvals. We’re always happy to lend a helping hand!

17 Sep

WHAT AMORTIZATION SHOULD I HAVE ON MY MORTGAGE?

General

Posted by: Brad Lockey

 

Short answer: the longest possible amortization you can get!

However, the goal is to get the longest amortization possible, but then increase the payment or make lump sum payments to move the amortization to the lowest possible and therefore be mortgage free faster. I will explain more later.

Amortization is the total authorized repayment period of a mortgage. If you have a hi-ratio mortgage, by law – government guidelines, the maximum is 25 years. However, if you have a conventional mortgage or, in other words, at least 20% down or 20% equity, then you can amortize up to 30 years and in some cases with some of our lending partners, 35 years. Question: Why would you want a longer amortization? Well qualifying is based upon the payment. So it is easier to qualify with a longer amortization as a longer time frame means a lower payment. For example, you could qualify at 30 years amortization, but elect to pay bi-weekly accelerated based upon a 25 year amortization (an effective amortization of 22 years). The benefit of this strategy is that you can go back to the original amortization, less time elapsed, should you ever need to.

Let’s look at an example:

Mortgage of $300,000. Payment of $1,200/month based on a 30 year amortization. However, you elect to pay bi-weekly accelerated based on a 25 year amortization (effectively an amortization of 22 years – amortization is a function of payment). So bi-weekly is $680. However, 10 years into the mortgage you suffer a set back and are temporarily out of work. Only your spouse continues to work. You can approach the lender to “re-amortize” your mortgage, meaning 30 years less time elapsed, so effectively 20 years. However, in the 10 years that have elapsed, you have been making accelerated payments so your mortgage balance is lower than it would have been otherwise. The result is that your re-amortized payment is $1,000/month! Effectively built-in payment reduction insurance at no cost! Note: you could also use this strategy if rates were to rise substantially and you want to lower your payment!

Another reason to opt for longer amortization:
Rentals – a longer amortization means better cash flow! And with a rental property, cash flow is king!
If it pays for itself every month and the interest is tax deductible, who cares how long it takes to repay the mortgage? Every month it is building equity and eventually you will have enough equity you can refinance it to get a down payment to buy the next property and build up your rental property portfolio!

As always, get independent professional advice on which strategy and options are right for you.

Brad Lockey
416-518-7476
mortgages@bradlockey.ca

15 Sep

VERIFYING YOUR DOWN PAYMENT – WHAT YOU NEED TO KNOW

General

Posted by: Brad Lockey

 

Saving for a down payment is often one of the biggest challenges facing young people looking to break into the real estate market.  The source of your down payment could come from your own savings, a gift from a family member, your RRSP if you’re a first time home buyer or from the proceeds of selling your current home.

No matter where your down payment comes from, one thing that is for certain is your lender will be verifying your down payment prior to full approval.  It’s required by all lenders to protect against fraud and to prove that you are not borrowing your down payment, which can change your lending ratios and your ability to repay your mortgage.

DOCUMENTS YOU WILL NEED TO SHOW WHEN VERIFYING YOUR DOWN PAYMENT

1. Own Savings/Investments:  If you’ve saved enough money for your down payment, congratulations!  What your lender will want to see is a 3 month history of any source accounts used for your down-payment such as your savings account, TFSA (Tax Free Savings Account) or Investment account.

Your statement will need to clearly show your name and your account number.  Any large deposits outside of your normal contributions will need to be explained i.e.  you sold your car and deposited $12,000 or you received your bonus from work.  If you have transferred money from one account to another you will need to show a record of the money leaving one account and arriving in the other.  The lenders want to see a paper trail of where the money came from and how it got in your account.  This is mainly to combat money laundering and fraud.

2. Gifted Down Payment:  Especially in the pricey Metro Vancouver and Toronto real estate markets, the bank of Mom and Dad is becoming a more popular source of down payments for young home buyers.  You will need a signed gift letter from your family member that states the down-payment is indeed a gift and no repayment is required on the funds.

Be prepared to show the funds on deposit in your account no later than 15 days prior to closing.  Again, the lender wants to see a transaction record.  i.e. $25,000 from Mom’s account transferred to yours and a record of the $25,000 landing in your account.  Documents must show account number and name.

Gifted down payments are only acceptable from immediate family members (parents, grandparents, siblings). You can learn more about gifted down payments and get a sample gift letter here.

3. Using your RRSP:  If you’re a First Time Home Buyer, you may qualify to use up to $25,000 from your Registered Retirement Savings Plan (RRSP) for your down payment.  To see if you qualify for the Home Buyer’s Plan to use your RRSP’s as a down payment visit here.  You will need to complete a Form T1036 to withdraw your funds without penalty.

Verifying your down payment from your RRSP is just like verifying from your savings/investment accounts.  You will need to show a 3 month history via your account statements with your name and account number on them.  Funds must have been in your account for 90 days.

4. Proceeds From Selling Your Existing Home:  If your down payment is coming from the proceeds of selling your current home then you will need to show your lender a fully executed purchase and sale agreement between you and the buyer of your home.  If  you have an outstanding mortgage on the property, be prepared to provide an up-to-date mortgage statement as well.

5. Money From Outside Of Canada:  Using funds from outside of Canada is acceptable but be prepared to have the money on deposit in a Canadian financial institution at least 30 days before your expected closing date.  Verifying your down payment from overseas will also require that you provide a 90 day history of your source account.

No matter what the source is, verifying your down payment will require you to show documentation of where the money originated from and be ready to explain any large deposits.  Making regular contributions into your savings or investment accounts will help develop a pattern of deposits and avoid any red flags.  Don’t stockpile your cash and make large lump-sum deposits.

Most lenders will want to see that you have 1.5% of the purchase price on deposit as well to cover your closing cost.  If you buy a home for $650,000 you will need a minimum of 5% down ($32,500) and another $9,750 (1.5%), for your closing cost.  You will need to show a total of $42,250 available on deposit.

15 Sep

HOW TO PAY OFF DEBT FASTER – 25 SECRET TIPS YOUR BANKER DOESN’T WANT YOU TO KNOW

General

Posted by: Brad Lockey

 

1. Make a double mortgage payment whenever you can. Doing this once a year can shave over 4 years off the mortgage! Sometimes you can skip a payment later on too…if you really, really need to. Try not to. If your payment is $2,000 a month, four years of no payments is $96,000!!

2. Increase frequency of payment. For Example going from monthly to bi-weekly accelerated can shave over three years off your mortgage! $2,000, three years of no payments is $72,000!!

3. Increase your payment. For example a one-time 10% increase can shave 4 years off the mortgage. That’s $96,000! Imagine if you bumped the payment 10% every year from the get go!!! You would be mortgage free in 13 years! Start to finish! Can’t do it? How about 5% every year….you would be mortgage free in 18 years! How about increasing the payment by the amount of your annual raise?

4. Lump sum payments…same idea…mortgage is gone way faster! Even just one payment a year equivalent to 1 monthly payment will give you similar results as #2 above! How about using your annual work bonus?

5. Renegotiate whenever rates drop to save interest and pay mortgage faster! Generally a good idea however *Caution* get independent professional advice (a cost benefit analysis) to make sure it makes sense for you at that time. I can help. A 1% reduction on a $300,000 mortgage will save $250 a month…times 5 years…that’s $15,000!!

6. Keep your credit rating high for best rate. Always pay on time. Never let payments slip past their due date. Always keep balances low in relation to credit limits on credit cards, lines of credit, etc. 50% or less is best even if you pay the balances in full every month. What generally reports to the credit bureau is the statement balance each month. So if your credit limit is $3000 and you are running $3000 a month through the card each month (to collect all those points you never spend or can’t use in blackout periods) and paying in full, it will look like you are maxing out your credit limit and your credit score will drop accordingly.

7. Increase your mortgage! Yeah I know sounds backwards! Do it to roll in your credit cards, line of credit, car loan etc for a better rate and a set payment plan. Oh you say you don’t want to extend the repayment period of that stuff by rolling it into your mortgage or you have a low or promo rate credit card (those never end well) I agree! Then keep the total payment amount the same but pay it in one neat monthly payment to the increased mortgage.

8. Make an RRSP contribution and use the refund to pay down your mortgage.

9. Go variable rate with your mortgage but keep payments as if fixed rate. Variable rates usually win out over fixed rates. By paying a higher payment you will pay off the mortgage faster. It’s also a buffer in case the rate rises above the fixed rate for short periods of time. *Caution* variable rates are not for everyone. Get independent professional advice to find out what is best for you. I can help!

10. Take your mortgage with you when you change properties to avoid penalty or higher rate on a new mortgage. This is called “porting”. Make sure that your mortgage has this feature. It is not widely known and could save you a ton of dough.

11. Set up auto savings every paycheque, even $10, when it reaches the amount of one mortgage payment, apply it to the mortgage. This concept goes nicely with #4 above.

12. Unhook from the money drip…stop paying with your fancy points credit or debit card. Way too easy to overspend! Go old school, go off the grid…PAY CASH, it works!

13. Don’t ever buy on layaway, you know, six months don’t pay schemes. You think…No problem I’ll just pay it in six months, it will be okay. Yeah right!

14. Downsize your house. Two good friends and clients of mine, having followed many of the tips here, are in great shape except they have a six bedroom house! Two people, six bed house – go figure! They are nearly debt free so no biggy, but can you say the same? Circumstances change, make the adjustments along the way!

15. Don’t want to move? Convert the basement/rooms to rental and use the income to pay down debt.

16. Convert your mortgage to tax deductible. If you are self-employed, own rental property or have investments, this is likely possible. I won’t go into details here, just ask me how.

17. Have a payment priority.

18. Pay off the highest interest rate first.

19. If you have tax deductible loans, pay them off last, slowest. Pay the non-tax deductible loans first and fastest.

20. Pay off ugly debt first. Stuff like credit card purchases.

21. Payoff bad debt next. Stuff like car loans, boat loans. Things that depreciate in value.

22. Pay off good debt (or shall I say “not so bad debt”) last. Stuff like mortgages, investment loans. Things that hopefully appreciate in value.

23. Buying a car? Finance it if you have to, don’t lease! *Exception* If you are self-employed it might make sense.

24. You have $20,000 in a secret bank account for a rainy day fund and $20,000 owing on a line of credit. Seriously? The bank account is paying you next to nothing (which is taxable income to boot) and the line of credit rate is way higher (and not tax deductible). You know what to do. You can keep the line of credit open and on standby for rainy day funds. Make it the secret line of credit that you have but never use.

25. Give your Banker more money. No really. Keep enough in your chequing account to meet the minimum requirement to waive your service charges. My bank charges $10 a month for 25 transactions and nothing, zero, zilch, zip if I keep $2,500 in the account. Let’s see $10 x 12 is $120 a year to pay off debt. I’d have to earn 5% with the $2,500 in my savings account to come out ahead. No brainer here. Oh yeah, if you need more than 25 transactions a month…see #12 above.

26. #26? BONUS TIP and MOST IMPORTANT. Let’s face it, you’re not the Government and you’re not a Bank, you can’t run deficits forever and you won’t get a bailout….stop procrastinating already! See 1 through 24 above and take action now!

Sidenote: *Caution* beware of some too good to be true ultra-low rate mortgages. These “no frills” mortgages are often loaded with restrictions like pre-payment limitations, fully-closed terms, stripped-out features, or unusual penalties. You really need to compare product to product. If you’re not looking at what you’re giving up, you may regret it in the future. This alone could prevent you from taking advantage of tips #1, 2, 3, 4, 5, 7, 8, 9, 10, 14, 16 and 22!


Brad Lockey, Lic # M11002365
416-518-7476
mortgages@bradlockey.ca

 

8 Sep

THE SELF-EMPLOYED DILEMMA

General

Posted by: Brad Lockey

 

You’re likely asking yourself, what is the dilemma that self-employed workers face?
Well, with more and more Canadians joining the ranks of the self-employment every year, one has to ask themselves how they are going to tackle the age old question, how much does one write off vs how much income does one claim on their taxes. We all want to earn as much money as possible and pay as little income tax as required.

This was my train of thought until the topic of ‘paying taxes’ was brought to my attention by a friend that’s an accountant. As he said, paying income tax isn’t such a horrible thing, in fact it’s a necessity which provides for our infrastructure and without it the ‘world’ we know would be drastically different. Here was the response from him after I re-posted a reference to INCOME TAX RELIEF DAY that I saw on social media.

“I would actually look at it more positively and say that I/we spent this money to live in a great country, province and municipality and it’s worth every penny in taxes spent. I will guarantee you there are billions of people on this planet that would switch positions with us in a second and remember this so called date (INCOME TAX RELIEF DAY) is based on the average Canadian family income of $45,000 and is based on all taxes including not just income taxes, but property tax, sales taxes, health taxes, fuel taxes and much more. So technically not all of it is going to Canada Revenue Agency (CRA). Some of it is going to municipalities.

After reading over this message, it got me thinking about how some self-employed people report their taxes and the effect that it has on their chances of qualifying for a mortgage. Besides the duty to provide to our country, we all have a personal desire to provide as much as possible for our family. It’s a so-called ‘tug-of-war’ of who gets your money and how much of it. Here’s where the dilemma gets complicated if you want to borrow money from a lender to purchase residential real estate.

The federal Government of Canada regulates the CRA as well as the lending criteria and policies followed by ALL the ‘A’ lenders. ‘A’ lenders are our chartered banks and non-bank or monoline/investment lender. We also have credit unions that are provincially regulated but follow the CMHC lending criteria, which is federal. Having more ‘cash’ in your pocket actually allows you to borrow less. Showing more income claimed, which requires you to pay more tax allows you to borrow more money if desired. ‘A’ Lenders assess their risk management for lending money to borrowers on historical earning and in this case, if one is self-employed then they require a 2 year average based on T1 Generals or in some cases Notice of Assessments (NOA).

It’s a CATCH 22 and you (and your qualified accountant) need to decide which path you’re going to follow; write off maximum expenses and claim ‘little’ income or claim a ‘healthy’ income and pay more income. Neither is right or wrong.

Upon getting the urge to buy residential real estate a detailed conversation on how ‘your income’ is structured should be had with their Mortgage Expert and Certified General Accountant. Once you have chosen which style of accounting your business will adopt, you just have to be prepared to follow the lending guidelines. Plus, it’s really not that bad either way.

Let’s face it, everyone wants the lowest rate possible when it comes to their mortgage. As a Mortgage Expert, it’s something that I seek for every client. But not all clients are eligible for the lowest rate for a number of different reasons. Two main reasons are because of credit blemishes and, of course, lack of income reported.

BUSINESS CASE

The following is a fictitious scenario that represents a self-employed person that writes down expenses in order to minimize CRA income tax.

Jane is a business owner in Vancouver. She has a modest business that is experiencing growth year after year. Jane enjoys the many perks of being a business owner, especially the tax breaks that come along with it!  Since Jane is able to work with her certified accountant, and considerably write down her income, she often saves thousands of dollars a year on taxes.

Jane would like to purchase a new home. She has a 20% down payment to place on a home, and knows that she grosses more than $100,000 per year in her business. However, since she currently writes down her income to $20,000 per year, her Mortgage Expert has just informed her that she will need to state her  income with a ‘Non-Prime’ or ‘B’ lender for approval.

Now if Jane claimed $100,000 per year for the last 2 years, she may qualify for the best rate out there from an ‘A’ lender. However, let’s look at what that really means:

Income claimed     $100,000/year     $20,000/year
Taxes paid              $25,060/year     $1,761/year
Jane has saved $23,299 per year because of the tax laws the government has legislated for self-employed business owners. Now let’s compare the interest on a ‘typical’ verified-income loan, and a ‘non-prime’ stated-income loan.

Loan Type                     ‘A’               ‘B’
Mortgage                 $200,000     $200,000
Rate                        2.69%         4.50%
Term                       1 year         1 year
Interest per Term     $5,281        $8,826

** For ease of comparison to BC yearly tax rate– 1 year term has been used. Rates are approximations for example purposes.**

Jane is paying $3,545 more in interest per year, but her income tax savings are $23,299 per year.  She is actually saving $19,754 per year more than the typical ‘verified-income’ employee that was able to receive a mortgage interest rate of 2.69%.

With all entrepreneurs there is one thing in common – they are all savvy and driven to succeed, or fail, on their own terms.

It takes an extreme amount of hard work to get a business from the infancy stage to a self-sufficient entity that produces a constant and steady flow of revenue. Business owners all want to save money while at the same time earning and establishing a presence in their chosen space. Business financials are all structured differently and, depending on how one chooses to operate, will dictate how they can proceed once it’s time to seek residential real estate financing.

If you are self-employed, make sure to consult with us at Dominion Lending Centres to find out how your mortgage can be tailored. Every mortgage scenario is completely different from the next, so make sure yours fits correctly and you are informed before you start the financing process.