Mortgages By Bernie

Comparing Popular Readvanceable Mortgage Products

The key component missing from many mortgage products available today that would make them attractive options for real estate investors is a readvanceable home equity line of credit (HELOC) portion.

These more advanced products make money available on a HELOC as soon as a payment is made towards the amount owing on the mortgage.

This core function enables investors to put this money towards the down payment on their next property without having to re-apply to use the built-up equity in the property.

The readvanceable HELOC products typically enable an investor to finance the down payment for about three properties, depending on the amount of equity built up in their principal residence.

There are a number of banks that offer products that can consist of fixed rate and/or variable rate and HELOC portions, but two offer superior products of this nature. These include National Bank’s All-In-One and Scotiabank’s STEP (Scotia Total Equity Plan).

But if you plan to use the credit for both personal and investment purposes, the All-In-One or STEP products are ideal because they make tracking tax-deductible investment interest easier thanks to the multiple account components contained within these two offerings.

This tracking component is only essential, however, when the HELOC funds are being used for both personal (such as a dream vacation or post-secondary school education) and investment use. While it is possible to track mixed-use portions using the Matrix product, all calculations must be completed manually, which can be quite onerous.

Comparing three top readvanceable products
The Matrix mortgage is the most basic of the three products listed above. It consists of only two components – a mortgage portion where you can choose the term (eg, three-year, five-year, etc), amortization (ie, payments spread out over a duration up to 35 years) and type (ie, fixed or variable), and a HELOC component.

Up to 80% of the equity built up in the property minus what you owe on your mortgage can be accessed through the HELOC portion. As with any readvanceable product, as the mortgage is paid down, the HELOC increases without having to re-apply to use the equity in the property. And you only pay interest on the portion of the HELOC that is being used.

The main set-back to this product is that if you use the HELOC for both personal and investment purposes, you must manually track your spending, since the interest on your investment portion can be tax deductible, whereas your personal use funds are not.

One major bonus this product has is that you can also get a Matrix mortgage on an investment property in addition to the initial one on your principal residence if you have at least 20% equity in the investment property. It’s important to note, however, that the maximum number of Matrix mortgages is capped at two – one for your principal residence and one for an investment property.

The STEP product can do everything the Matrix can do and more as it can include up to three components on the mortgage side and three for the HELOC. The mortgage portion can have a mixture of terms, and fixed and/or variable rates. For example, you can place a portion of the mortgage in a five-year fixed, some in a five-year variable, and the remainder in a one-year fixed. And the HELOC can also be split into three portions to track both personal and investment expenditures separately – where all three could be personal, all three could be for investment purposes, or any other possible mix between the two uses to a maximum of three different components.

Like the Matrix mortgage, the STEP product can also be used on your investment property as well as initially on your principal residence. There is, however, no cap on the number of properties for which you can have a STEP mortgage as long as you qualify.

The All-In-One mortgage is the most advanced of the three offerings as it can be split into up to 99 components, although few people require this many options.

The major bonus to this product is that it also has a bank account component. As such, your paycheque goes directly into an account and is used to automatically pay down your mortgage, which saves interest. Money can also be set aside in a sub-account for personal use. And because you can have multiple sub-accounts, you can easily have one sub-account for each investment property.

The downfall with this product, however, is that, unlike the Matrix or STEP offerings, you can’t have an All-In-One on your investment property – just your principal residence. While you can use the HELOC on your personal residence for down payments on investment properties, having the option to also have a readvanceable portion attached to an investment property can give you automatic access to equity in that investment property.

Comparing two top readvanceable products

Scotia Total Equity Plan (STEP)
Benefits
• Easy to track personal use versus investment use for investment property interest tax-deduction purposes
• Both the mortgage and HELOC components can be broken up into three portion, allowing for greater flexibility
• No cap on the amount of STEP mortgages you can obtain as long as you qualify (ie, principal residence and multiple investment properties)

Considerations
• No bank account option

National Bank All-In-One
Benefits
• Most advanced of the three offerings as it can be split into up to 99 components
• Offers a bank account component that can be broken into sub-accounts to thoroughly track all properties separately
• Easy to track personal use versus investment use for investment property interest tax-deduction purposes

Considerations
• Can only use this product on your personal residence

The Key to Success: Mind Your Own Business…
Are you minding your own business? If you are an employee, it is not what you do from 9-5 that counts. It is what you do with your paycheck after you receive it that counts. In other words, what you do from 9 to 5 is your profession or your job. What you do with your paycheck is your business. Too many people rely on their employer or their government to take care of them.
Who are you working for? Let’s say you have a salary of $48,000 per year. In other words, you are paid $4000 per month to mind your employer’s business. Then you receive your paycheck and it is for only $2500. The $1500 of withholding taxes is you minding Harper’s business. Then you have to make your mortgage payment to the bank of $1500, which represents you minding the bank’s business. Oh, and let’s not forget that credit card balance that you let get away from you. That $400 payment is you working for the credit card company. Another $440 goes for living expenses. What are you left with? At the end of the month you are lucky to have $160 for investment, that’s $1 per hour that you are earning working for yourself.
It isn’t how much money you make that counts, it is how much money you keep. Most people work for everyone else but themselves. Financial struggle is often a direct result of people working all their lives for someone else and at the end of their working days they have nothing left for themselves.
To become financially secure, you need to mind your own business. Your business revolves around your asset column, as opposed to your income column. Learn the difference between assets and liabilities and start buying or building assets. Assets include businesses, real estate and paper assets. You can start minding your own business today!

Written by Paul Kondakos,

One of the most common catch phrases, veteran investor Paul Kondakos hears from Canadians reluctance to invest in real estate is “It’s not a good time.” Ah, but it is, he writes in this Top 3 list of reasons to commit.

That catch phrase is a very vague statement that can be interpreted to mean either (a) it’s not a good time for me personally to invest or (b) it’s not a good time to invest in the real estate market.

Granted that there may be circumstances that preclude certain individuals from investing in real estate for any number of reasons, but for the rest of you out there, “it’s not a good time” is a statement that can end up costing you tens of thousands to hundreds of thousands of dollars in potential real estate gains in the long term.

In fact, I believe “it’s always a good time” to invest in real estate (and let me be clear that I am talking about investing in cash-flowing real estate and not talking about speculating in real estate hoping for future appreciation).

When it comes to real estate investing, time is your biggest ally if you are invested and your greatest enemy if you are not. The phrase “Time is money” has never been truer when you apply it to real estate investing. Time facilitates the three most important pillars of real estate investing:

1. Mortgage pay down

Most individuals use leverage (eg. a mortgage) to purchase an investment property which makes it such an appealing investment. For every mortgage payment you make a certain portion goes towards interest, but more importantly, a certain portion goes towards principal and contributes towards building your equity in the property. I like to think of it as “forced savings” which may sound a little paternalistic in nature, but for most of us it’s a good thing.

The amortization period is typically between 20 to 25 years which means that after that timeframe you will own a free and clear property. As many like to think of their real estate investments as a retirement fund, given that you derive the greatest benefit of mortgage pay down the longer you own the property, investing NOW becomes all that much more compelling if you are counting on it for your retirement.

BONUS: After several years of equity build up, you have the option to re-finance or put a Line of Credit on the property and take money out. Psychologically knowing you have this type of security in an emergency is immense.

2. Cash Flow

As stated from the outset, investing in real estate means buying a property that provides monthly cash flow. The formula is relatively simple; Gross Income – Expenses – Mortgage Payment = Cash Flow. The beauty of real estate investing is that the cash flow is there from Day 1 (if it’s not, then you are speculating and not investing). I don’t need to tell you the benefit of having extra income coming in every month.

BONUS: For those who are sick and tired of their jobs and looking for a career change, once you have accumulated enough cash-flowing real estate, you can focus on managing your portfolio full time and enjoy the independence and flexibility that comes along with it.

3. Appreciation

I have intentionally put down appreciation down as the last of the three benefits. As I stated above, investing in real estate strictly for appreciation can be a huge gamble. I know people that lost everything because they gambled on the real estate boom in the late 80s and lost in a big way. On the other hand, the potential benefit of appreciation coupled with steady mortgage pay down and consistent flow is a big winner. Typically appreciation is calculated at 1-2% annually. So very conservatively speaking, by the time your mortgage is paid off, the property will have appreciated in the range of 25-50%. It’s more likely that you will see appreciation in the range of 100%+, but I like to be conservative.

BONUS: Appreciation can be like a lottery ticket. Over time some properties can become extremely valuable based on their geographic location and return 100%, 500% and even over 1000% depending on how desirable that location has become (eg. King Street West in Toronto or pretty much anywhere in Vancouver)

If you have every seriously considered investing in real estate, every day that slips by is costing you money. As such, since you can’t start investing in real estate yesterday, you need to start taking steps TODAY towards making your first income property investment.

Paul Kondakos is a seasoned property investor and his RealtyHub.ca helps others get a leg up, or two, in real estate.

Paying your mortgage off the traditional way takes 25 to 40 years and costs about TWICE the purchase price of your home. Here are some effective ways to pay off your mortgage sooner, build equity faster and save thousands in interest.

• Change your payments. Simply increasing your payment frequency to bi-weekly or weekly costs nothing and can save thousands of dollars over the life of your mortgage. If you can afford to pay a little extra, consider accelerated bi-weekly or weekly payments—these are equivalent to making one extra monthly payment per year which results in substantial savings. Or you can make a lump sum payment which can realize savings several times as great over the life of your mortgage.

• All-in-one mortgage. Instead of making extra payments, consider switching to a mortgage that pays off the principal faster without costing you anything more. All-in-one mortgages combine a line-of-credit mortgage with a chequing account to reduce interest costs and pay off your mortgage in as little as half the time, without changing your spending habits. You deposit your pay into the all-in-one account and pay bills as you normally would. While you’re not using your money, it’s used to reduce your daily loan balance. Over the life of the loan, this can save hundreds of thousands of dollars in interest!

• Merged account mortgage. If you’d rather not refinance your existing mortgage to switch to an all-in-one mortgage, consider a merged account mortgage. This system uses your existing mortgage (any type of first mortgage will work), an advanced line-of-credit (ALOC), and specialized software that makes a connection between your bank account, ALOC and mortgage. Each time you deposit income into your account, the software automatically generates an interest cancellation on your mortgage. The result is that a 30-year mortgage can be paid off in about 8 to 11 years, with no change to your lifestyle or refinancing of your existing mortgage.

To help decide which of these options is the best way for you to become mortgage-free sooner, call us today for a free analysis.

As credit has become more and more abundant in our society, your credit report, and thus your credit rating, has become more important in your daily life. Your credit rating affects all aspects of your financial activities when it comes to borrowing money. Your credit rating also has the ability to affect the job you get, the apartment you rent, and even the ability to open a bank account.
Your credit report itself is simply a listing of all of your mortgage and consumer debt. Here in Canada, the two main credit reporting agencies are Trans Union and Equifax. Both agencies have a credit history file on anyone who has ever borrowed money. Every time you borrow money, or make a payment on a loan or credit card, the lender then reports the information about the transaction to these two agencies. In addition to credit information, you will also find liens and judgments on your credit report as well as your address and possibly your work history. The accumulation of all of this information is called your credit report.
The information on your credit report varies based on your creditors and what they have reported about you. Potential lenders and others, such as employers, view your credit history as a reflection of your character. Whether we like it or not, our financial habits have a lot to say about the way in which we choose to live our lives.
The credit score, or beacon score, is a number which gives mortgage lenders an idea of your lending risk.
Credit scores range from 300 to 900, the higher your credit score the better. The mortgage products and interest rate that you will qualify for are often determined by your credit score.
One thing that many people do not know is that you have the legal right to obtain a copy of your credit report. A mortgage professional can help you obtain a copy of this report and go through it with you to verify that all of the information is true and correct.
The good news is that your credit report is a working document. This means that you have the ability over time, to repair any damaged credit and increase your credit score.

Transitioning from renter to homeowner is one of the biggest decisions you’ll make throughout your lifetime. That’s why it’s essential to surround yourself with a team of experts – including both a mortgage and real estate professional – to walk you through the steps to home ownership, answer all of your questions and concerns, help you decide what kind of home you can afford and get you pre-approved for a mortgage.

With interest rates still hovering around “emergency” levels – low rates never before seen by your parents and even your grandparents – now is an ideal time for first-time homebuyers to embark upon homeownership.

Down payment
The main reason many renters feel they can’t afford to purchase a home has to do with saving for a down payment. But there are many solutions available today that can help first-time buyers with their down payments.

Many lenders will allow for a gifted or borrowed down payment. And of those lenders that will not provide this alternative, many offer cash-back options that can be used as a down payment.

Better yet, there are programs available from some financial institutions where they will offer a “free down payment” or a “flex down”. Of course, you will end up paying about 1% more in your interest rate, but the program will help you get in the homeownership door and start accumulating equity earlier. You must, however, stay with the original lender for the full initial five-year term or else you’ll have to pay the down payment back.

Last year, a $5,000 increase was made to the RRSP Home Buyers’ Plan, meaning first-time homebuyers can now withdraw up to $25,000 from their RRSPs for a down payment – tax- and interest-free.

And if you’re part of a couple making a home purchase together, you can each withdraw up to $25,000 from your RRSPs.

Educating and coaching
There’s an endless amount of information available to prospective homeowners – through the Internet, friends, family members and anyone willing to voice their opinion on a given subject. What you really need, therefore, is education and coaching as opposed to being bombarded with more information.

Speaking to a mortgage professional in order to obtain a pre-approval prior to setting out home shopping can help set your mind at ease, because many first-time buyers are overwhelmed by the financing and buying processes, and often don’t know what it truly costs to purchase a home. Real examples can go a long way in showing you what it costs to buy a home in your area versus what you’re currently paying in rent. For instance, if a renter is currently paying $800 per month, with that same payment (including taxes) they could afford to buy a $120,000 home. And assuming real estate values increase 2% per year over the next five years, the new homeowner would have accumulated $27,000 in equity in their home. If they continue renting, however, this $27,000 has generated equity in someone else’s home.

Mortgages in Canada are generally amortized at 25 year terms. While this seems a long time, it does not have to take anyone that long to pay off their mortgage if they choose to do so in a shorter period of time.
With a little bit of thinking ahead, and a small bit of sacrifice, most people can manage to pay off their mortgage in a much shorter period of time by taking positive steps such as:
• Making mortgage payments each week, or even every other week. Both options lower your interest paid over the term of your mortgage and can result in the equivalent of an extra month’s mortgage payment each year. Paying your mortgage in this way can take your mortgage from 25 years down to 21.
• When your income increases, increase the amount of your mortgage payments. Let’s say you get a 5% raise each year at work. If you put that extra 5% of your income into your mortgage, your mortgage balance will drop much faster without feeling like you are changing your spending habits.
• Mortgage lenders will also allow you to make extra payments on your mortgage balance each year. Just about everyone finds themselves with money they were not expecting at some point or another. Maybe you inherited some money from a distant relative or you received a nice holiday bonus at work. Apply this money to your mortgage lender as a lump-sum payment towards your mortgage and watch the results.
By applying these strategies consistently over time, you will save money, pay less interest and pay off your mortgage years earlier!