Are you planning on buying your first home soon? If so, this could be a great first step! Below is a link to a free eBook that goes over everything you may need to know about getting your first mortgage. From down payment, how qualifying works, paperwork needed and questions you may be asked, this should answer most of your questions about getting your first mortgage!

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Does it make sense to refinance even if you don’t need to pull out equity?

Depending on the situation, it could save you a ton of money! With the recent drop in interest rates to record lows there is a good chance your active interest rate is higher than what you could currently get. If you were to break your current mortgage early to get these rates it would lower your mortgage payments, and if you add those savings up over the remaining term of your mortgage it may add up to thousands of dollars in savings over those years.

What’s more, because the payment amount would be lower, you can refinance to a lower amortization (years left on mortgage) while keeping your current mortgage payments approximately the same as they are now. Depending on your current interest rates this may save you years on the life of your mortgage payments! And when you add up years worth or mortgage payments the savings can be quite substantial, all while keeping your payments the same as they would be now.

There are a few things to keep in mind before doing this:

Number 1- Your payout penalty

If you are in a fixed term mortgage your current lender will charge a payout penalty for breaking the mortgage early. This will either be what is called the ‘interest rate differential penalty’, or ‘The 3 Month Interest Penalty.’ This means they will charge you 3 months worth of regular interest payments, whichever is higher. Once that penalty is known we can calculate the savings of refinance and make sure that the savings in the end justify the refinance.

Number 2- Making sure you are able to break your current mortgage early for a refinance

Some mortgage products will not allow borrowers to break the mortgage early without the sale of the property, this information will be on the mortgage contract you signed, or you can contact the lender directly to find this information out.

Because of the size of the average mortgage, savings in interest payments or years of loan payments have the potential to add up to tens of thousands of dollars staying in your pockets. If you would like to find out more about refinances or current mortgage rates, please don’t hesitate to call me directly at 403 915 5956 or send an email to jesse.smith@dlcme.ca

One of the best things about investing in real estate is the number of options investors have for financing a rental property. Investment real estate can be funded via a conventional mortgage or private funding. But in addition to these, homeowners can buy a new home with the equity on their primary residence.

That’s because, as Real Canadian Management Solutions explains, if a substantial part of your mortgage is paid-off, lenders will let you borrow money on your home equity. This is a far easier way for would-be property investors to get started in the rental property business. How does this process work?

What is home equity?

The equity on your home is the difference between the home’s market value and the amount you owe on the mortgage. When you take a home loan, lenders always require that you pay a portion of the purchase price for the property.

If this amount is 20%, the lender will provide the other 80% to complete the home’s purchase. With this arrangement, the lender owns 80% of the house, and you own 20%. That 20% is your equity in the home.

Over time, however, that equity starts to grow as you make the monthly mortgage payments. These payments allow you to slowly transfer ownership from the lender to yourself.

The longer you pay the mortgage, the more equity you earn. Home equity can also grow as a result of value appreciation. When the property’s value increases, the mortgage amount stays the same, but the owner’s equity grows.

When you refinance you have access to a maximum of 80% of the total value of your home. For instance, if you paid $560,000 to buy your home and you owe $290,000 on the mortgage, your usable equity in the property would be $158,000. But if the house has appreciated and its market value is now $610,000, you have even more equity. The combination of mortgage payments and value appreciation will bring your usable equity in the property from $158,000 to $198,000. This amount is what you have available for financing your rental property.

How to leverage your home equity

There are three ways to use home equity to finance a rental property.

Cash-out refinancing

With this option, you first have your primary home revalued, and then you take a new mortgage on the home based on its current value. This new mortgage is used to pay off the outstanding amount on the old mortgage.

Doing this frees up the equity you have built upon the home. You can cash-out on this equity to finance a new property. Although refinancing your home creates a new loan, it also provides cash for further investment.

There are some costs to you as the borrower by doing a refinance, including the new appraisal of your property, lawyer or FCT fees for changing the mortgage on title, and any applicable payout penalty if you are breaking your current mortgage term early.  So it is important to know these costs, especially the mortgage payout penalty, before committing to a refinance as they can dictate whether it is worth doing or not.

Home equity loan

The second way to use home equity to finance a rental property is through a home equity loan. This extends a loan to you up to a certain percentage of your home equity. In Canada, this can be as much as 65% of the home’s value, as long as the loan amount and outstanding mortgage do not exceed 80% of the home’s value. Home equity loans come in two variants:

Traditional Home Equity Loan; This is a fixed loan amount paid to you in one lump sum. It adds a second loan to your primary mortgage and is regarded as a second mortgage. This second loan is subordinate to the first loan; in case of default and foreclosure, the first loan will be settled before the second.

Because traditional home equity loans pay out a large sum at once, they work best when you need to make significant one-time payments on a property.

Home Equity Line of Credit (HELOC); A HELOC does not make lump sum payments; it puts a portion of your home equity at your disposal. It is similar to a credit card loan because you can repeatedly borrow and repay all or part of the money.

Furthermore, you only pay interest on the amount you draw. This option is best when investing in things, like, a pre-construction condo. Your interest payment is limited to the money you use.

Why you should leverage home equity for real estate investing

• Firstly, using the equity in your home relives you of the burden of finding new cash for a new mortgage. And because the new property immediately starts to accumulate equity, you can repeat this process repeatedly until you build a sizable property portfolio.

• With a HELOC, you have access to a loan with an indefinite term – most HELOCs in Canada have an indefinite term. And with HELOCs, you only have to pay the interest on the loan every month.

The fact is, when it comes to retirement this generation faces some challenges that previous generations have not needed to worry about as much, speaking mainly of pensions. In the past, if you had spent your working life at one company, they would provide a pension to take care of your retirement for you. This was common practice then, and there were many companies offering this as part of their employment. This is hard to find now and is associated with only some of the biggest companies out there, and even then you are still more likely going to get company RRSP contributions than a full pension.

If it’s an excellent pension you’re after, your choices are basically left to government and military employment, but where does that leave the rest of us? It can be a staggering fact that if you retire at the typical age of 65 with today’s life spans climbing you could need 25+ years worth of retirement income.

If you don’t have access to a pension a good way to supplement that for yourself is with rental properties. For example, say you have a 20% down payment when you are 35 years old, on a 25 year amortization. You’re Making regular payments, and by the time you are 60 the property has paid for itself and you have a great source of revenue 5 years before retirement. In many cases the income from 1 mortgage free rental property can be as much, or more, than most pensions!

A common objection some people have with rentals is the management of them, the whole “I don’t want to fix toilets’ ‘ argument. The good news is, if you buy right you won’t need to do any of that, because investing in a property manager not only saves you a lot of time and headaches, it also allows you the freedom to explore rental opportunities out of your current market area. It can be really difficult to save up a 20% down payment in some of the larger centers where property values are high, but not as bad in some of the smaller centers outside of major hubs, and sometimes without much of a drop in rent prices. There is also a growing population who would rather keep renting than buy their own home, this means a steady flow of good quality tenants for years!

Does saving up a 20% down payment sound too daunting? That may not be as much of a problem as you would think, as long as you are ok with moving! There are no mortgage rules about turning your current property into a rental property. So lets say, if you bought a house with the intention of making it your primary residence and then decided for any reason to move at a later date (life happens), you can easily make that house into a rental property AND still do 5% down for your next purchase (assuming approval of mortgage insurance) as long as you are making it your primary residence.

You can only insure up to 3 mortgages at a time, so for the fourth house you will need 20% down, providing you keep the first houses insured. But once you have enough equity in the first 3 purchases you can refinance, drop the insurance and even use the equity you took out in the refinance as the down payment for the next purchase! see how the snowball starts to form?

The real magic of rental properties is that you can compound the returns. While the property is paying for itself, any extra cash flow can be put towards other investments like RRSP or TSFA accounts and keep growing! Your initial down payment investment could potentially cover most, if not all, of your retirement if it is done like this.

With retirement getting more and more expensive, and inflation creeping up every year saving for retirement is more important than ever, and the younger you start the greater the returns. Rental properties are a great way to have passive income in your golden years and are a fantastic way to diversify your investments. If you are interested in rental properties I recommend educating yourself on the subject, learn what to look for and how to work the numbers. Real Estate can be the most incredible investment, but it has to be done properly. I personally have rental real estate and love talking about rentals so if you have any questions at all please feel free to send me an email!

When a bank says they can, or cannot, make the numbers work, what numbers are they talking about? The majority of people have no idea, they either get pre-qualified just to know how much they can get approved for, or make a wild guess and put an offer on a house and worry about making it work later. So, what makes the numbers work? I hope to shed some light on the subject by explaining the two most important things that mortgage approvals are based on so that you can be a more informed shopper.

The first is the Gross Debt Service (GDS) Ratio, this states that your mortgage payments (principle and interest), your property taxes, heat bill and if applicable 50% of condo fees cannot exceed 39% of your total annual gross income. These are the basics costs of home ownership and a lower ratio makes the lenders more comfortable that you can keep up with paying the bills.

The second is the Total Debt Service (TDS) Ratio. This is everything included in the GDS ratio, plus all other monthly debt obligations like car payments and credit card bills. This ratio cannot exceed 44% of your gross annual income. This is the ratio that kills the most mortgage approvals, especially when it comes to vehicle loans, some vehicle loan payments are so large you may as well be applying for 2 mortgages!

Lets looks at an example, for easy numbers lets say you make $100,000 a year, and your car payment is $1000, That’s already 12% of your income taken up by that one payment, so if you are close on the GDS ratio that payment alone would put you over the TDS ratio. These ratios are federally mandated to the large ‘well known’ banks (or ‘A’ lenders) as a way to protect the Canadian real estate market and all of the industries that are connected to it.
There are two types of Alternative Lenders known as ‘B lenders’ and ‘Private Equity Lenders’ which are less mandated by the government and can therefore work around those ratios mentioned earlier.

Most B lenders are willing to go to 49% GDS and 49% TDS, while Private Equity Lenders are less interested in income than they are in the equity of the property. Both of these lenders will however require bigger down payments and higher interest rates that you would otherwise be paying with an ‘A’ lender, along with any applicable fees they may charge.