Carrying more than you like on credit? Try wrapping your debt into your mortgage

Many individuals and families that I’ve recently met in my mortgage practise are still digging out of the recession, with unexpected debt. As the economy grew between 2004 and 2008 at a high pace, many manufacturing and labour workers relied on overtime income as a part of their regular pay. This is also true for white-collar workers where bonuses became expected as an income supplement.

We’ve been in an economic recession for almost a year-and-a-half and many sectors still haven’t recovered. A turn-around in manufacturing and more job prospects is expected; however, growth in the future will be slower and gradual.

If you’re carrying debts that total more than $15,000 outside of your home mortgage or a car loans/leases, you should consider refinancing that debt into your mortgage. The two benefits include a decrease in your monthly carrying costs and improved household cash flow. It’s also a great time to look at a family budget and understand what you can reasonably expect for income versus the expenses you have.

Here’s a summary of things you need to consider:

You’ll need 20% equity in your home

A good place to start is to determine what equity you have in your home. It’s best to look into refinancing if you have at least 20% equity in your home. At this point you have enough equity to refinance some debt but there will be a default insurance premium that you’ll need to pay. If you’re revolving debts plus your mortgage, and mortgage-related refinance costs equal less than 80% of the value of your home, you likely won’t have to pay the default insurance premium. The value of your home will be determined by an independent appraisal because banks and lenders want to ensure that you are not overleveraging the new mortgage loan that they’re giving.

Know your penalty costs

Call your mortgage lender or broker and they will help you determine the penalty costs. If your mortgage is with a traditional chartered bank, most good mortgage brokers have access to those lenders and can help you get the penalty cost, even if you did not get the mortgage through them originally. They will have you sign a “client consent” form which gives them the authority to call the lender on your behalf and ask the correct questions so that an exact penalty cost can be determined.

No fee refinances are available

Some wholesale banks that mortgage brokers work with will offer no-fee refinances. If there is no change to the title of the mortgage, a title-closing company can be used in place of a lawyer. The main benefit of this is that there are no legal costs. Some lenders will also pay up to $2000 worth of penalty costs. The only thing you may need to pay is the cost of an independent appraisal which is normally less than $300.

Things you need to know for the next six months in real estate

I'm getting right to the point here...a quick snap shot of things to consider for the next six months if you're interested in real estate...

A prime rate that’s “back-to-normal”

The prime rate has been artificially low throughout the recession. The Bank of Canada has kept their policy rate low to help stimulate activity in the economy. When interest rates are low, money is cheap to borrow, and consumers and industry spend. Now that things are getting back to normal, the Bank of Canada will move its policy rate. The increases in the rate will begin in mid-summer and continue. The forecast for the prime rate is an increase of 2% over the next year to year and a half. This adjustment is a reaction to the continued improvement in the economic outlook.

Fixed rates are moving up, buy why not variable rates?

Fixed-rate mortgages are based on the bond market which forecasts the outlook for future inflation. Because of the predicted improvement in the economy, inflation is expected to kick-in. The recent increases in fixed rates are a predictable move given that the Bank of Canada key policy rate will move up in mid-summer. The increase in rates does not mean that inflation will be a problem, but that we are moving out of the recession and into a marketplace where growth is slow and steady.

Smart real estate investing – it may not be smart

Over the past two years many have lost money in their traditional financial investments. With the strength in the real estate market, we’ve seen a strong movement to buy rental properties. Why have prices been so high in real estate investment properties? It’s because interest rates are so low. Low rates give rise to low mortgage payments, which in return justify higher prices in investment properties. Recent changes in the lending guidelines for real estate investing, such as a 20% down payment requirement, will help eliminate investors who may not have enough capital to cover changes to future interest rates. In my own investing, I normally watch what the mass market is doing and do the opposite. A herd mentality in any type of investment leads to unprofitability. It's always a good time to invest in real estate by keeping the fundamental of positive cash flow the goal.

Private mortgage investments

If your financial investments have suffered in the last two years and you are looking for a more conservative investment with a good rate of return, I believe private mortgage investing is an option worth exploring. As mortgage-lending guidelines have tightened, there are still borrowers who are willing to pay a higher interest rate, in order to consolidate debt or purchase a home. Private mortgages can balance the need for borrowers and real estate investors. The higher the risk, the higher the rate-of-return for investors. When considering if a private mortgage is a good investment ensure you work with a reputable mortgage broker who has experience in this area and can advise you on both the benefits and the risks of each private mortgage investment.

Changes in mortgage lending shouldn't stifle prudent borrowers

The Minister of Finance announced changes to mortgage lending aimed at helping Canadians with borrowing against their homes. The changes shouldn’t stifle borrowers who have been good with their money. Here’s a commentary on each of the changes slated to come into effect on April 19, 2010.

Mortgage lenders will qualify borrowers on a five-year fixed rate mortgage, even if they want a variable-rate mortgage

In the last three years variable-rate mortgages have increased in popularity because the interest charged on variable-rates has been lower than fixed-rate mortgages. In my practise, nearly 35% of clients choose variable-rate mortgages. Understanding the risks associated with variable-rate mortgages can help people make good financial choices. This changes proposed mean that the majority of Canadians will be shielded against some of the rate increases that will occur in 2010 to the prime rate. By being more conservative and qualify mortgage borrowers on higher interest rates, the likelihood of running into problems with making mortgage payments in the future will be less. A slight adjustment in the qualifying rate shouldn’t discourage borrowers since I find that most borrowers don’t want to be house poor and are conservative in budgeting for their mortgage payments anyway.

Refinances up to 90% instead of 95%

Although the default insurance premium guidelines allow borrowers to refinance to 95% of the value of their home, I’ve had a hard time finding any lenders that would allow this anyway. Certainly in Guelph and Wellington County, homes under $250,000 are holding their value and in some cases appreciating considerably because of the demand in homes for first time home buyers and investors. If home prices are to soften in 2011, the ability to refinance a home to 90% instead of 95% will allow these borrowers to have more equity left in their homes should they decide to sell within three to five years.

20% down payment on rental properties

Guelph is a hot market for real estate investing because of the driving force of student rental properties. The government will be requiring a 20% down payment on rental properties in order to insure them against default. Ensuring that a borrower has a good down payment, means the landlord has more at stake in the property. Many people in the last year have wanted to get into owning rental properties because they believe they can make a quick buck. Buying real estate is a get rich slowly plan. There are creative ways to work around the 20% down payment, which can still make sense. These will be available for people who have good credit and a history of managing their money.

Inflation...what the...

I recently had a great conversation with a friend who is a financial planner. His feedback concerning inflation mirrored my opinions on where interest rates are heading in 2010.

One of the main indicators for inflation over the next year will be the price of oil. This opinion makes a lot of sense as it takes time for the increased cost of oil to show up in our groceries, plastic packaged items, toys and so on, even if the higher cost of oil shows up immediately at the pump. But the higher the cost of oil over a sustained amount of time, the more likely this will have an impact on our figures for inflation.

We'll likely see an increase in the price of oil sometime late next year as economies gain momentum. As a result we should expect inflation to start trickling into the system shortly after that, with the bulk of the increase in 2011. So for people wondering if they should renew their mortgages early or consider a variable rate, it's important to remember that the fixed rates will move up based on the expectations for inflation - so making a move before 2011 may be a wise decision.

With the Bank of Canada likely not to move their rates much until 2011, we may see a giant spread between variable and fixed mortgage rates. So don't take your eye off the ball if you want to have a fixed rate with a stable payment. Consider locking-in sometime around the summer of 2010.

Clear up debt for 2010: a great financial goal because of low rates

About a quarter of my mortgage practise consists of people who come to ask advice and help around paying off debt. Considering that a mortgage is normally a person’s largest liability, there are a couple of simple things you can do if you’re carrying balances on credit cards, or lines of credit.

With the recession affects lingering for another six to eight months, and overtime pay at many companies cut, consumer debt has steadily increased. The majority of individuals carry balances on credit cards and lines-of-credit from month-to-month.

A financial focus to pay off debt in 2010 will give your personal balance sheet a boost and increase your net worth.

Here are a few ideas:

1. Pay off higher-interest debt first
Paying-off higher interest debt first such as credit cards is a good approach to paying down consumer debt. The interest rates on credit cards is normally much higher than on debt that is secured by a property (such has a mortgage) or a loan on a vehicle. The reason is that the greatest incidence on credit defaults occurs on credit cards.

If you have a budget that’s aggressive to allow you to pay-off the debt in a few months, you may want to consider consolidating all your debt onto the card or line-of-credit that has the lowest interest because it will save you money. However, beware of credit-cards that offer low-interest payments for the first months.

2. Pay off debt that has the highest payments first

A positive cash flow is the most important aspect of an individual or family’s financial health. The reason why people don't pay off their credit facilities every month is because they spend more than they make. A simple family budget can help you eliminate this trend. Another approach to paying-off debt is to review all the monthly payments on your credit facilities and look at paying off the ones with the highest payments first. This approach will help you improve your family’s cash flow until you have paid-off all your debt.

3. Consolidate debt into a lower-interest mortgage

If you’re still finding that you can’t pay-off your outstanding debt in six months, consider wrapping it into your mortgage. There will often be a penalty to pay, even if you go with the financial institution that you have your mortgage with. However, it makes sense if you are paying-off high-interest debt.

If this is the approach you’re going to take, ensure you speak to both a mortgage broker and a bank and look for options that can help you pay-off the debt. The mortgage professional should also advise you on a family budget and how to structure it so that you don’t run into the same situation again.

The benefits of paying-off consumer debt are that it will allow you to increase your credit score and put you in a better financial position.

How to pay your mortgage off before you retire...

Most people want to pay their mortgage off before they retire. It’s a good plan because if you don’t have a mortgage payment to worry about when you’re retired, you can often live more freely in retirement. If your goal is to have your mortgage paid off before you retire, this information is for you.

Here are three simple suggestions on how to pay off your mortgage as soon as possible

1. Change how you pay your mortgage

The majority of the people that I see in my mortgage practice have the pay that they earn deposited directly into their bank account and then make their mortgage payment. To accelerate the payment on your mortgage, there are ways to deposit your entire pay directly into your mortgage and then move the money into an account to pay for your day-to-day living expenses.

The benefit of paying your mortgage this way is that by depositing your pay directly into your mortgage you are significantly accelerating the payment. Your money is still easily accessible for day-to-day living. There are also handy tools attached to this type of mortgage that allow you to decrease the fees that you pay on banking and help you budget for your lifestyle.

2. Think of a floating mortgage rate

In the last three years, more people have considered a variable rate mortgage because of the low rates. Historically, research shows that people tend to pay less money in interest over the long-term with mortgages that have floating rates based on the prime rate. Floating-rate mortgages have come a long way and there are many ways to create stability and protect against changes in the rate, while allowing you to pay less money in interest.

3. Budget : A little pain means long-term gain

Develop a family budget so that you understand how much money you have coming into your household versus your expenses. Many people choose longer amortizations because they are unsure of how much they can actually afford in a mortgage payment. I’ve found that working with my clients and helping them create a budget shows they can be more aggressive with paying down their mortgage and shortening the amortization, while not impacting their lifestyle significantly. Shortening an amortization can save thousands of dollars in the interest paid.

Now’s a great time to revisit your mortgage, especially if you’d like to pay it off before you retire. Rates are low and there are many good options.