9½ STEPS TO REPAIR AND IMPROVE YOUR CREDIT

General Konstantin Seroshtan 27 Jul

by Kelly Hudson

Though credit scores aren’t always an indicator of financial health, they are used in a variety of ways that could have a major impact on your life. Interest rates (including mortgage rates) are almost always determined by your credit score. Some employers & landlords may require a credit check to see if you have past credit issues.

Remember this is your credit report, not your “I’m Fiscally Responsible” report. Lenders want to know how you have historically handled credit in order to determine if you are a good credit risk. Higher risk = higher rates!

The Rule of Two:
• You should always have 2 “tradelines” going. This can be a combination of 2 credit cards OR a credit card and a line of credit/ loan etc.
• Credit lines should have a minimum $2,000 limit
• Minimum of 2 years old

So, if your credit score sucks, it could be costing you.
The good news is, you don’t have to live with bad credit forever. There are plenty of things you can do to improve your credit score. Use the 9½ tips below, to improve your credit score

#1) Know Your Credit Score and Credit History
Request a free copy of your credit report from both of Canada’s credit agencies (TransUnion and Equifax). You are legally entitled to one free credit report yearly from each credit agency.

#2) Review both TransUnion & Equifax Reports for Any Errors or Discrepancies.
If you find any errors in your credit report, you should dispute them with Equifax or TransUnion and request to have them correct any errors.

#3) Pay On Time, EVERY time!
This might seem obvious, but you need to make your payments on time, every time! This is crucial to repairing and maintaining your credit rating. The largest percentage of your credit score is based on your payment history!! Even being a couple of days late will have a negative impact on your score. Staying current with your payments has a huge positive impact. If you can’t pay the balance off in full, pay the minimum amount on time!

#4) Don’t Go Over Your Card’s Credit Limit
Going over your credit limit, even once will have a huge negative impact on your credit score. You need to be aware of your credit limit and your current debt levels to avoid this.

#5) Pay Off Any Overdue Accounts ASAP
Paying off a collection account will not remove it from your credit report, so do your best to avoid going to collections. If you have any overdue accounts that have gone to collections, negotiate to pay them off ASAP.

#6) Reduce Your Debt
Easier said than done, but if you want to increase your credit rating, you need to reduce your debt. The closer you are to your credit limit, the lower your score. In a perfect world you only want to use about 30% of your available credit. If you have a lot of credit card debt you might consider a loan (with lower interest rates than the credit cards) to consolidate your debts.

#7) Limit Your Inquiries for New Credit
You lose points from excessive hard inquiries on your credit bureau. Any attempts to take on multiple loans/credit cards will look bad in your report.

#8) Avoid Closing Credit Cards
Account age is a factor that reflects positively on your credit score. Too many new accounts lowers your average account age and negatively impacts your credit score. For the same reason, you may want to keep an old account open, even if you are not actively using it.

#9) Time is your Friend
When rebuilding your credit, time will be your best friend. The impact of past credit problems lessens with time, so that a late payment from a year ago will have much less weight than a late payment today. Get current and stay current.

#9.5) Protect Your Credit from Identity Theft
As more of our personal information gets circulated via the internet, there’s more room for “bad people” to steal your personal details so that they can make fraudulent purchases in your name. This can be extremely damaging to your credit history. You can protect your credit history from this by paying for a service that can alert you to fraud.

Contact me if you have any questions about your credit!

Can you afford a million dollar home?

General Konstantin Seroshtan 21 Jul

$1 million used to be enough money to set you up for life, but those days are long past. In some parts of Canada, you’re lucky if $1 million will buy you a decent home, let alone fund your retirement. This couldn’t be truer in cities like Kelowna, where the average property price currently hovers around $750,000.

So, if it costs $1 million to buy many homes in cities like Kelowna, are you one of the lucky Canadians who can afford it? Let’s take a look at the factors that will determine if you can afford the average mortgage on a 1 million dollar home.

Can you afford a million-dollar home?

Here’s the short answer: To buy a million-dollar home in Canada, you’ll need a yearly income of at least $165,230, as well as a cash down payment of at least $200,000. That’s the minimum you’ll need in order to qualify for a large enough mortgage. Well, that or you’ll need $1 million in cash, to avoid taking out a mortgage altogether.

What is a million dollars today?

Remember the song “If I Had $1,000,000” by the Barenaked Ladies? When the band released the song in 1992, $1 million had some serious purchasing power. Fast forward a couple of decades and it’s a different story.

Thanks to inflation, money loses its value over time. Inflation is the yearly increase of the cost of goods and services, affecting everything from food and electronics to wages and real estate. Because of inflation, what might have cost a million dollars in 1992 will cost much more in 2012.

Here’s a table showing what $1 million is worth over time – starting from the release of the song:

Year Equivalent Value
1992 $1,000,000
2002 $1,281,922
2012 $1,636,255
2022 $1,972,402
2032 $2,524,841

Source: Smart Asset Inflation Calculator

As you can see above, inflation has a serious impact on the value of $1 million over 40 years.

Getting a million-dollar mortgage

Most Canadians buying a $1-million home don’t have $1 million in cash just lying around. Most of them would need to save a down payment and take on a mortgage on a 1 million dollar home.

So, can you afford to get a mortgage for a $1 million home? There are two key factors that affect your mortgage affordability – your down payment, and your gross debt service ratios.

1. Your down payment

Not having a large enough down payment is what disqualifies most buyers from buying a $1 million home. Saving for a mortgage down payment is hard enough, but Canadian law states that homes with a purchase price of over $1 million require a down payment of 20% or more.

If you’re buying a home with less than a 20% down payment, your mortgage is what’s called a high-ratio mortgage, and you’re required to pay for mortgage default insurance. Mortgage default insurance protects your lender, in the event that you default on your loan. Mortgage default insurance is usually purchased by your lender from the Canada Mortgage and Housing Corporation (CMHC). However, the CMHC doesn’t provide insurance for homes valued over $1 million.

Since a high-ratio mortgage is out of the question for a million-dollar home, you’ll need a 20% down payment of at least $200,000, resulting in a typical mortgage on a million-dollar home of $800,000. But that’s not all – you’ll also need to pay closing costs. Closing costs usually amount to 1.5% to 4% of a home’s value and include expenses like a home inspection fee, legal fees, title insurance, and the property transfer tax (PTT).

The PTT is by far the most expensive closing cost. Use the land transfer tax calculator to determine how much you’ll owe at closing. Depending on your location, you should expect to pay between $15,000 and $40,000 in closing costs.

To be on the safe side, you should have your down payment of $200,000 plus an additional $40,000 for closing costs to buy a $1 million home. That’s why this factor is the one that disqualifies most homebuyers: Not many homebuyers have a cool quarter-million sitting around!

If you’re one of the few Canadians with a large enough down payment – congratulations! Now let’s look at whether you can afford the monthly mortgage payments on a million-dollar home. We’ll determine this by calculating your debt service ratios.

2. Debt service ratios

Your debt services ratios determine whether you can afford the payments on a million-dollar mortgage (or a mortgage of any size, for that matter). Your debt service ratios are two formulas set by the CMHC that lenders use to find the maximum mortgage you can afford. Your maximum mortgage is then added to your down payment to determine your maximum purchase price. Let’s look at the first of the two formulas: The gross debt service ratio.

Gross debt service ratio:

Your gross debt service ratio determines whether you can afford the monthly carrying costs associated with your home. Your lender will add your annual mortgage payments to the costs of owning your home, then divide this by your annual household income. To qualify for the loan, the resulting ratio must be less than 39%. This is the official formula:

Gross Debt Service Ratio
Mortgage payments + Property taxes + Heating Costs + 50% of condo fees
Annual Income

Let’s calculate the gross debt service ratio on a $1 million home. If you put 20% down on a $1 million home, you’ll have an $800,000 mortgage. Using a mortgage payment calculator and today’s best mortgage rate of 2.54%, we can determine this mortgage rate would leave you with a monthly mortgage payment of $3,600. As this mortgage is for a million dollar house, condo fees don’t factor in.

Expenses Monthly expenses Yearly expenses
Mortgage amount $3,600 $43,200
Property tax $833 $9,996
Heating costs $208 $2,496
Total $4,641 $55,692

Your gross debt service ratio needs to be less than 39% for you afford this home. That means your household income needs to be at more than $142,800 per year to qualify ($55,692 ÷ $142,800 = 39%).

Total debt service ratio:

Now let’s look at the next debt service ratio: your total debt service ratio. This ratio takes the factors above into account, but also adds in any debt obligations you may have. Here’s the official formula:

Total Debt Service Ratio
Housing expenses (per GDS) + Credit card interest + Car payments + Loan expenses
Annual Income

Let’s run our numbers again, but also factor in a $600 a month car loan, and a $600 a month student loan.

Expenses Monthly expenses Yearly expenses
Mortgage amount $3,600 $43,200
Property tax $833 $9,996
Heating costs $208 $2,496
Car loan $600 $7,200
Student loan $600 $7,200
Total $5,841 $70,092

In this case, your ratio cannot be more than 40%. That means you’ll need an income of at least $159,300 to afford your mortgage and your other debt obligations ($70,092 ÷ $159,300 = 44%).

To satisfy both debt service ratios, you’ll need an annual income of at least $159,300 to afford a home worth $1 million.

Be cautious about borrowing to your maximum affordability

According to these ratios, you can afford a home worth $1 million on an income of $160,000, but that doesn’t mean this is a wise financial decision. When deciding how much to spend on a home, you should consider the following variables:

Saving for retirement: The debt service ratios above don’t take into consideration saving for retirement. You should make sure there’s enough room in your budget to save for your retirement. Many experts recommend saving at least 10% of your gross salary for retirement.

Rising interest rates: While you may be able to afford a $1 million home at today’s interest rates, keep in mind that interest rates can change dramatically in the long term. Make sure you can still afford your $1 million home if you have to renew at higher rates. For example, if you had to renew your mortgage at historical interest rate norms of 3.89%, your monthly mortgage payment would rise to $4,161. Can you still afford your home? Run the numbers through our mortgage affordability calculator to be sure.

Life events: While you may have the income to afford a $1.5-million house right now, make sure that you’ll still be able to afford your home if major life events happen. Examples could include having a baby, sending a child to university, retiring, or purchasing another property. These events will change your budget, but they mustn’t change whether you can afford your home.

The Bottom Line

Buying a $1 million home isn’t an easy feat. You’ll need a large down payment, and your debt levels should be under control. You’ll need a high income and the ability to handle renewing your mortgage at higher interest rates. The good news is that if you meet those requirements, you can afford a $1 million home’s monthly payment – or maybe even a $1.5 million house dollar monthly payment. Either way you should contact me for a consultation to figure out exactly where you stand and what options are available to you.

by Jordann Brown

Mortgage Stress Test

General Konstantin Seroshtan 13 Jul

Buying a new home is already a stressful experience. With an introduction of a mortgage stress test for all aspiring homeowners, that has only become more so. There are several requirements to meet before a successful application, and the aspiring homeowner must be sure they will be able to meet the monthly payments before applying.

What is it?

The mortgage stress test is designed to ascertain that the applicant is able to keep up with their payments even in the face of changing interest rates. So you will need to qualify at your contracted mortgage interest rate plus two per cent or the Bank of Canada’s five-year benchmark rate, whichever is greater.

In real terms, the stress test means that, for example, a borrower with 20 per cent down payment, no debts and an income of $100,000 a year could buy a house worth about $597,000.

When was it created?

The test, created by the Office of the Superintendent of Financial Institutions in 2017, was meant to tackle the high household debt that Canadians have been facing. Originally, the test only applied to mortgages with less than a 20 per cent down payment and subject to default insurance premiums. As of October 2017, anyone applying for a mortgage must pass the test, including if they decide to switch to a different lender.

“The stress test was poorly designed,” said Rob McLister, founder of Toronto-based RateSpy.com. “It was based on a rate that six banks can manipulate and it traps an estimated 5-10 per cent of renewers with their existing lender.”

Rules around the stress test apply to the lenders, where they are required to further scrutinize the loan-to-value ratio of the mortgage to make sure the mortgages are not too large compared to the value of the home.

What’s the problem?

The test has proved controversial for some first-time homebuyers as it slashes their purchasing potential by as much as 20 per cent. It has also made it more difficult for current homeowners to refinance or renew their mortgages.

Many recent retirees have also faced difficulties with the stress test, since it looks at your current income as part of the requirements. For those looking to both retire and refinance their mortgage, it is best to plan a few years in advance to get the loan you need.

“Banks are motivated to keep 5-year posted rates high for their own economic self-interest, largely because it earns them more prepayment penalty revenue,” said McLister. “A fairer stress test would be the 5-year Canadian bond yield plus 300 to 350 basis points.”

Laird recommends the adoption of a 30-year amortization for first time homebuyers instead of 25.

“What that does is, increases affordability by about 10 per cent,” said Laird. “What I really like about that is on a month-to-month basis a household isn’t paying any more they’re just paying for a little longer period of time.”

That being said, the stress test can be avoided if you turn to lenders outside of federal regulations, like credit unions or some private lenders.

How can you prepare?

While you can’t do much to change the Bank of Canada’s five-year rate, there are some ways you can prepare for a mortgage stress test. Lenders use a few metrics when determining if you will be able to pay your mortgage on time. One is gross debt service ratio (GDS), which represents the percentage of one’s pre-tax income that’s required to pay all housing costs. This includes not just the monthly mortgage housing payment but all other monthly housing expenses like utilities and property taxes. Lenders typically want to see no more than 32 per cent GDS.

There is also the total debt service ratio (TDS), which includes all of one’s debts, like student loans, lines of credit and so forth. This should constitute no more than 42 per cent of your monthly pay in order to pass the mortgage stress test.

Getting a co-signer for your mortgage can also help you get a larger loan, and according to McLister there have been many more parental down payment “gifts” since the implementation of the stress test.

Find out what you qualify for HERE.

Have questions – Contact me today for a free consultation.

📲250.826.7626

📩konstantins@dominionlending.ca

 

Condo or house? The quick pros and cons

General Konstantin Seroshtan 6 Jul

condo or house

As a first-home buyer, you have a lot of decisions to make. With your first property purchase on the horizon, there’s reason to be anxious about what property to buy, where to buy it, and whether you’re making the right decision.

One of those decisions is whether you should buy a house or a condo as your first home. There are arguments for and against both, and you’ll need to weigh them up and decide which is the right approach for you. I’ve broken down the basic arguments for each below, and have included a little more detail for those who want to go a bit deeper.

Condo or house? The quick pros and cons

Here’s the quick argument for buying a condo: Buying a condo as your first home lets you get onto the property ladder sooner, because condos are generally cheaper than houses. This lets you begin to build equity, which could make it easier to trade up to a home, especially if the condo increases in price by the time you sell. As far as the location goes, buying a condo will give you more flexibility on where to live, because they are slightly cheaper than houses.

Now, the quick argument for buying a house: Selling a property and buying a new one is an expensive process, so buying a house as your first home (assuming you want to eventually live in one) prevents you from having to make a second transaction. Buying a more expensive property like a house can also help you maximize any rebates and benefits you receive as a first-time homebuyer (although not always). Houses also let you borrow more on your mortgage, for reasons explained below.

Mortgage qualification favours a house

While the best mortgage rates in Canada are the same for a condo or house, buying a house may help you qualify for a bigger mortgage. This is because of a quirk in how lenders figure out the amount of money they will lend you.

Lenders determine how much you can afford to borrow with a set of calculations called your debt service ratios. Your gross debt service ratio (GDS) looks at your total cost of ownership as a percentage of your income. Your total debt service ratio (TDS) looks at this plus your other obligations. These ratios can be no more than 39% and 44%, respectively. When calculating your total cost of ownership, there are four contributors: your mortgage payment, property taxes, heating costs, and 50% of condo maintenance fees. The more you spend on these, the higher your debt service ratios will be.

Notice that maintenance fees are only calculated when they relate to condos. Even though your overall maintenance obligation will probably be higher if you purchase a house, you will be able to afford a bigger mortgage because the cost isn’t factored into how much mortgage you can afford. It’s may not make complete sense, but this can make a big difference to your final mortgage amount.

In addition to the absence of maintenance fees, buying a house with a secondary unit gives you the option to rent it out. When calculating your debt service ratios, you may be able to add up to 50% of the potential rent to your income for qualification purposes. That’s not an option when you buy a condo.

The upshot of this is that you’re more likely to be approved for a bigger mortgage when buying a house over a condo, all else being equal. however, borrowing more on your mortgage is not always the best option. A bigger mortgage can mean a bigger or better-located home, but it also means more debt and higher monthly payments.

Maximizing your first-time homebuyer programs

The programs for first-time homebuyers are only ever available once. When you buy your first home there are a series of programs and incentives you can receive, depending on where you live. These can include withdrawing up to $35,000 tax-free from your RRSP, getting a rebate on the land transfer tax, and claiming a $750 rebate on your income tax. The land transfer tax component to this is especially important if you’re buying your first home in BC, Ontario, or PEI. Depending on your province and city, you can get a full land transfer tax rebate on homes up to $500,000.

If you’re thinking about buying a condo to start and then moving up to a house after a few years, you might want to consider the long-term tax benefits of starting with the larger property. You could potentially get a bigger land transfer tax rebate as a first-time homebuyer and save yourself the later expense of paying the full land transfer tax.

If you buy your first home for $500,000, your land transfer tax will be $4,475 in Toronto, $2,475 in the rest of Ontario, and $0 in BC. If you buy your first home for $350,000 in any of those places your land transfer tax will be nil. But if you choose to move up to a $500,000 home later, your land transfer taxes will add up to $12,950 in Toronto, $6,475 in the rest of Ontario, or $8,000 in BC.

This isn’t an argument for a house or condo specifically, but it could be an argument for maxing out your incentives by buying a property worth at least $500,000, or whatever the appropriate threshold is in your province. It’s also worth noting that there are some first-time homebuyer programs that phrase out for more expensive properties, meaning that this rule can work in reverse. It’s also important to remember that this plan only works if your budget allows it. It’s not worth jeopardizing your financial well being to save a few thousand dollars in tax.

Contact me for a free consultation to better understand the impact of your local first-time homebuyer programs on your first property purchase.

Selling a home is expensive (and risky)

If you’re planning on buying a condo (or a cheaper house) with the view of buying a more expensive home later, it’s important to think about the cost of your next property transaction. Selling a home is an expensive process, and the fees involved in both selling your current home, as well as buying your next one, can eat away at any financial benefits you’ve worked to make.

For a start, real estate commissions are typically 5% of your sale price, plus tax. Closing costs can easily cost a few thousand dollars too, as can moving. Buying your second property will also be more expensive than your first, as you won’t receive any first-time homebuyer rebates the second time around. Add to this the cost of getting a new mortgage, especially if you decide to break your mortgage term as part of the transaction, which could result in prepayment penalties.

Finally, this plan to upsize to a second property also carries the risk that the price of your home drops, leaving you in a worse financial position. Even if your home does increase in value, you’ll have to pay capital gains tax on any profit you make, which can also affect your tax return for that year.

Since the simple act of selling your home can erase tens of thousands of dollars in built-up equity, it may be worth buying a larger home that will meet your needs in the first place. If you plan to own a home eventually, that could mean going directly to the housing market. If you think a condo or cheaper house will suit you for at least five years, the cost of selling and moving won’t be as much of a consideration. This is because the costs of selling will be spread out over several years, and you’ll reduce the risk of losing money on your first home purchase.

The more important solution to this point (spoiler, it’s the solution to this entire article) is to make sure you’re happy and can afford whatever home your purchase. Depending on your financial situation, and the overall market, you could end up in your first home for longer than you expect, so it’s important that you’re happy with it from day one.

Houses cost more to own and maintain

Despite home maintenance not being included in debt service ratios, houses do cost more to maintain than condos. This is important to factor in when you decide whether to buy a condo or house – from both a financial and lifestyle perspective!

With a condo, most of the maintenance is covered by your monthly condo fees – this is because most maintenance is done at a building level. When you buy a house, you’re personally on the hook for every repair to every component at the time it comes up. A failed furnace or leaky roof can easily cost you thousands of dollars. You’re also responsible for mowing the lawn, shoveling the snow, and all the day-to-day activities that are covered for condo owners.

A good rule of thumb is to assume you’ll spend 1.5% of your home’s value on maintenance each year. This is a pretty typical percentage when you average it over several years. Some years it will be less than 1.5%, while in other years it will be much more.

The bottom line

Whether you buy a condo or house as your first home is not as important as you might think. There are certainly financial differences between buying a more expensive home versus a cheaper one, but that’s really separate from the condo vs house question. Financially, you need to weigh up what you can afford, and whether or not selling in the short to medium term (say, within ten years) will negate any benefits from buying a less expensive property to start with.

As far as purchasing a condo or home, you need to decide what property you are happy to live in, as well as what you can afford in the near future. Whether you decide to buy something modest today or go into your debt for your dream home, you need to be comfortable in that home – and to be comfortably able to pay for it. Your financial and personal circumstances will likely change, as will the world around you, so you need to be ready to live in whatever home you buy for the long term, even if that’s not the plan.

This isn’t an easy decision to make, of course. The good news is that you don’t need to make it alone. One of the best things you can do as a first-time homebuyer is speaking to a mortgage broker.

My consultations are free, and I can offer my expertise to consider your situation and lay out your options. I can also help you get a great mortgage rate if you decide to make a purchase.

Let’s chat – 250.826.7626

 

by Tim Bennett