TFSA vs RRSP: Head to Head Comparison – Updated 2018

General Doug English 31 Jan

TFSA vs RRSP: Head to Head Comparison – Updated 2018

By Young and Thrifty

There has been a lot of talk about which one is better, the TFSA vs RRSP in both the PF blogosphere and the media.  Both are great savings and investing tools for us Canadians, but there are important differences between and choosing correctly between the Tax-F

ree Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) can save you thousands of dollars in the long-term.

In an ideal world, one would max out both their RRSP and the TFSA.  In the real world though, life happens.  It is oftentimes very difficult to be able to scrounge up the money (without having to sell a kidney on the black market) to be able to max out both if your tax-advantaged accounts.  (Which is why I recommend using a pre-authorized contribution plan to your discount brokerage account or setting up a pre-authorized “set it and forget it” investment solution with one of Canada’s robo advisors to pay yourself first!)

We wrote this article several years ago, and have updated it every few months since then.  For some reason, everyone wants to learn about RRSPs right now (January/February) because it’s “RRSP Season”.  I still don’t really understand this personal finance phenomenon.  Any financial planner worth their salt will tell you that January-December should be RRSP/TFSA/RESP/”Other Goals” season!  From what I’ve been able to deduce, financial institutions sort of borrowed the fact that you are able to contribute to RRSPs during January and February each year and decide at that point if you wish to count those contributions back to the prior calendar year, or use them for the new calendar year.  When combined with the fact that everyone is making New Year’s resolutions this time of year (still going to the gym everyone?) and that tax season is just around the corners, and we suddenly have this perfect storm of deadlines and marketing that results in a “season for buying RRSPs”.  Man, I hate that expression!  Read on below for more info on how to contribute to RRSPs and TFSAs, and when it’s best to save in one over the other.  Keep in mind though, that going forward, your overall plan would really benefit if you considered this decision over the entire year, as opposed to during a specific marketing-heavy “season”.

 

RRSP Vs. TFSA – Comparison Starts Here

In my opinion, the RRSP and the TFSA are like siblings. Not twins mind you – but siblings with different personalities. In some ways they are almost mirror opposites and the inverse of each other.  Both options share the trait that they allow you to shelter your investments from taxation – allowing your money to grow tax free using a wide variety of investment options.  Each have their time and place, and are fantastic tools in their own way, but as we all know, one probably deserves more of your attention than the other (just like parents who really do have a preference of one sibling over the other, but they don’t say it aloud) *uh oh, is my middle child syndrome coming out in my post?!  Sorry about that*.

So let’s talk about the RRSP first (the older sibling):

The Basic Lowdown on the RRSP:

TFSA vs RRSP
The RRSP was introduced in 1957 (yeah, it’s the really old sibling)

  • The RRSP can hold a number of things (including GIC’s, stocks, mutual funds, and bonds); it’s like a basket of investments sheltered from tax.
  • Contributing to the RRSP is done with PRE-TAX income (the tax refund you get is your pre-tax money, but given to back to you at a later date).
  • You will have to pay tax eventually when you take money out – it’s a tax-deferral program. The hope is that when you take money out of the RRSP, you’ll be at a lower income than when you put money in (aka retired), so the average tax rate that you pay on the savings/investments will be lower.
  • You are supposed to contribute to it to reap the tax deductions when you’re at a higher tax bracket, and take it out when you are in a lower tax bracket.
  • Your maximum RRSP contribution is calculated by calculating 18% of your gross income or $26,230 (as of 2018) – whichever is lower. Any unused contribution room can be carried forward to the next year.
  • There are two options where you are allowed to borrow money from your own RRSP (but it has to be paid back later):
    • Home Buyers Plan ($25,000 max)
    • Lifelong Learning Plan ($10,000 per year, $20,000 total max)

The TFSA Lowdown:

TFSA vs RRSP

  • People could first contribute to a TFSA in 2009 (this is the new toddler sibling, becoming ever more popular).
  • Each year after the age of 18, you can contribute up to $5,500 per year to a TFSA. (It is now indexed to general inflation after briefly being raised to $10,000 per year – with no indexing – under the Federal Conservative government in 2015.)  This contribution room doesn’t disappear if you don’t use it – it accumulates and is waiting for you to make use of it in later years if you missed some earlier years.
  • Currently in 2018, if you haven’t opened a TFSA before, you can contribute up to $57,500!
  • Like an RRSP, you can hold a number of things within the TFSA. The TFSA is like a basket that you put investments into. (GIC’s, High Interest Savings Accounts, stocks, bonds etc.)
  • Money contributed to TFSAs is done with AFTER TAX income – meaning that you don’t get a tax refund because the money you put it was done after you paid taxes on it.
  • You can withdraw money any time – tax free!
  • If you withdraw money, you have to be careful about making contributions back into your TFSA within the same year. It’s kind of a weird rule, but the TFSA only gives you back your contribution room during the following calendar year. For example, if you have maxed out your TFSA contribution, then you withdraw $2,000, you can’t put $2,000 back into your account later in the year unless you want to pay a penalty (known as a TFSA overcontribution). Instead, in 2019 you would have $7,000 worth of contribution room available.
  • Many people have been using the TFSA as an emergency fund, but with the increasing amount allowed ($57,500) I think people should be looking at other options for their TFSA. If you use the TFSA to invest in long-term equities, you can shelter a substantial amount of investment earnings in your TFSA. Would you rather shelter the 1% you are getting in a high interest savings account, or the 7-8% a balanced index ETF portfolio could snag you?

RRSP = pre-tax dollars invested, taxed when you withdraw
TFSA = after tax dollars invested, no tax when you withdraw.

Now that we’ve introduced the siblings, let’s look at their good and bad traits.

PROS of the RRSP:

      • It feels awesome to get that tax return. Especially when you use that tax return to supercharge your RRSP contributions for the following year.
      • RRSPs are great in that you are sort of forced not to withdraw from it (other than for school or for a first time home purchase) because of the tax hit you will take if you do so. We’re all human, and if we know that money is accessible then it’s hard to keep sticky fingers away from the cookie jar! Consequently, using an RRSP is a great way to develop disciplined investing habits.
      • It’s an especially good tool for those with high incomes who are taxed to the nines. It can feel good to get some of your tax dollars back and then defer your investment returns until you retire to a lower tax bracket.
      • RRSPs are perfect for holding stocks and ETFs from the USA. This is because of a tax treaty that Canada and the USA have when it comes to taxation of dividends.  It can get kind of complicated (if you want the in-depth explanation, here’s a good place to start), but suffice it to say that RRSPs are a great place to park US-based equities.
      • You can have your money managed through robo advisor firms like Wealthsimple and BMO SmartFolio:
         Try a Wealthsimple RRSP for FREE

RRSP vs TFSA

CONS of the RRSP:

      • It’s a tax deferral… so if you’re fortunate to have a great pension, you will be taxed to the nines when you are in retirement, especially when you are forced to take your RRSP out when you turn 71 via Registered Retirement Income Fund (RRIF). Some people end up paying an even higher tax rate than they would have during their early working years.
      • You can’t take money out penalty-free except for buying your first home or under the Lifelong Learning Plan.
      • If you aren’t making much money that year (e.g. if you are a student) there isn’t too much point in taking a deduction and chasing a big tax return via an RRSP contribution. You already aren’t taxed very highly (if at all), so you won’t get much of your taxes paid back.  Better to use a TFSA here.
      • If you don’t re-invest your tax refund (woo hoo Caribbean trip!), then you lose out on the pre-tax advantages. Most Canadians gloss over this little detail.
Now let’s look at the flashy younger sibling: the TFSA

PROS of the TFSA

      • It’s a very flexible savings tool that allows folks to take money in and out of a tax-sheltered account easily and without penalty.
      • TFSA investments have already been taxed, so unlike your RRSP investments, you can safely determine exactly how much money you can take out when you retire. RRSP withdrawals of course are subject to whatever new tax rate comes out.
      • When you retire and started pulling money out of your RRSP and TFSA accounts, as well as collecting government payments such as Old Age Security (OAS), the government takes your RRSP withdrawals into consideration when “clawing back” your OAS – but this is not the case when withdrawing from TFSA.
      • Just like the RRSP, your investments can compound inside your TFSA tax-free (this can make a HUGE difference if you start at a young enough age).
      • You can have your money managed through robo adviso firms like Wealthsimple:
         Open a FREE Wealthsimple TFSA Today

RRSP vs TFSA CONS of the TFSA

      • The problem is that  TFSAs are being heavily marketed as a Tax-Free High Interest Savings Account by all the big banks. You get 2% interest as a return on your investment if you’re lucky.  This misinformation means that people are actually severely misusing their TFSA.  I’m in favour of renaming the entire package and making it a Tax-Free Investing Account.  This would give people a much more accurate view of the ideal way to use the tax-sheltered account.
      • The majority of Canadians still earn significantly more during their working years than they do in retirement. This usually tips the balance in favour of RRSP contributions.
      • Because it’s so easy to take money out of a flexible account such as the TFSA, human nature might tempt you into making decisions that are not conducive to building long-term wealth.
      • Some employers only offer pension-match contributions for RRSP contributions. If this is the case – then ignore everything else – take the free money your employer is offering!
      • You can’t use an RRSP investment loan (see our Borrowell review for more info) to supercharge your TFSA account (because the tax man won’t send you a refund for a TFSA contribution).

Decision-Making Flowchart

There is more to choosing where to place your hard earned savings than tax considerations.  Here’s a great tool that we borrowed from a friend.  Don’t be afraid to ask questions in the comment section below!

Young and Thrifty’s Take:

The short answer when it comes to the TFSA vs RRSP debate is: “Yes… DO IT.”  Truthfully, the real danger here is paralysis by analysis.  Picking the “wrong” one (the better term might be “slightly less efficient one”) is still much much better than not saving at all!

RRSP vs TFSA

Personally, I am trying to contribute to both my TFSA and RRSP Questrade accounts in order to take advantage of each’s unique characteristics.  I don’t have very much money that I am allowed to contribute towards an RRSP anyway because of the Pension Adjustment I receive as a teacher, so a little tax refund is always nice to offset some things like capital gains, interest income, etc., otherwise I might be paying more taxes when I’ve already paid so much in taxes from my primary source of income.  Being that I’m in a relatively high income tax bracket right now, some RRSP contributions make sense; however, I am one of the very fortunate souls that will also have a nice pension to depend on when I retire (assuming I don’t get fired!) so going all-in on RRSP contributions isn’t my favoured approach.

I would recommend that for those who are not paying a relatively high level of taxation it is better to contribute to a TFSA.

The TFSA is better than an RRSP for short term goals (within 1-10 years), like saving for a down payment, saving for a car, saving for that future baby, or saving for that big trip.  As we discussed before however, the TFSA is actually best used for long-term investing.  It is like the Swiss Army Knife of registered accounts.

RRSP vs TFSA

Of course, everyone is different and would have a different reason for having one or the other as a better option for their situation.  It’s best to sit down and really think about the merits of each option to figure out which one you want to allocate the majority of your hard earned money to.

2018 RRSP and TFSA Update

Before 2016’s federal election there was considerable noise about changing the TFSA and RRSP – but with a Liberal win the registered plans remain very similar.  Our former Prime Minister had promised to raise the amount allowed under the Home Buyers Plan to rise to $35,000 and decided to put the TFSA annual contribution up to $10,000.  Following the election, the $35K home buyers plan option was taken off the table due to concerns about rapidly rising housing prices (personally I think saving for your downpayment using an high interest savings account from an online bank within your RRSP is still the most efficient way to get into a house ASAP).  Canadians got to enjoy one year of the $10,000 TFSA before the rules revered back to a $5,500 annual contribution limit that will be indexed to inflation.  It is good to note though that Canadians will get access to that $10,000 limit whenever they have the ability to save in life as the annual contribution room in both the Tax Free Savings Account and Registered Retirement Savings Plan accumulates and is not a “use or lose it” proposition.

Another 2017 update the fact you can run your RRSP or TFSA account via robo advisor , one of the most cost effective ways to manage your money nowadays. We particularly like Wealthsimple’s offer : Young and Thrifty readers to get $10,000 of their funds managed for free.

8 THINGS YOU CAN DO TO GET THE BEST RENEWAL

General Doug English 29 Jan

8 THINGS YOU CAN DO TO GET THE BEST RENEWAL

With 47 per cent of homeowners scheduled to renew their mortgages this year, 2018 is a year of change for lots of Canadians.
Here are the top 8 things you can do to get the best renewal:

1. Pull out your mortgage renewal now, and start early. When you are proactive instead of reactive you can see if there is anything on your credit score or lifestyle that we can modify to ensure you are positioned for the best renewal. You are only in a position to do this when you start early- in the last year of your mortgage you will have the most amount of options available. For example, there can be an inaccuracy in your credit report or you may be considering an income/job change that would impact your options. We can look at timing accordingly for you.

2. Do not just sign the renewal offered. Lenders can change the terms of your mortgage, and the renewal you are signing can cost you up to four per cent of your equity if you are with the wrong lender for your current life stage.

3. Most people think the best rate is the best renewal – WRONG. The terms are most important and with all terms moving or selling is the only reason most people think they would ever break a mortgage- THIS is simply not the case, a change in the interest rate market, divorce, health, job change, investment opportunity and many other reasons would contribute to a future modification being beneficial for a consumer.

4. Take into consideration lender history. The lender can have a higher prime then anyone because they know the cost to leave outweighs staying the course. The lenders are very smart with their calculated risks- and this is not something they have an obligation to disclose.

5. Remember your lender has a bias – their job is to handcuff you so they can make as much profit off you as possible- don’t be a victim.

6. Do not shop each lender on your own, it takes points off of your credit score. All lenders have different rates based on your score and you want to position yourself to get the best. By using a mortgage professional, they can shop multiple lenders protecting your credit using only one application, while the rate variation can be on average a half a percent!

7. Don’t get sucked into the online rate shopping- any monkey can post a rate online and you can drive yourself crazy looking at something that does not exists. In today’s complex mortgage market there are significantly different rates based on – insured mortgage vs uninsured mortgage, switch vs refinance, purchase or renewal, principal residence vs rental, salary or self-employed, 600 credit score or 700 credit score, amortization of 20 years to 30 years, type of property condo vs house, and leased land or freehold. The variations can mean a difference in thousands of dollars. Like diagnosing a medical condition, you can’t go online, you do have to put in the appropriate application and supporting documents to verify which options are available to you that will result in the lowest cost in borrowing.

8. Remember your mortgage is the largest debt and investment most of us have, when you contact an independent mortgage professional, we are going to invest all the work and expertise and advise you in your best interest regardless if we get your business. We may after our review advise you to stick with your existing lender, or make another recommendation for you. We are only here to enhance your finances and save you money, and there is no cost for our service.

Angela Calla

ANGELA CALLA

Dominion Lending Centres – Accredited Mortgage Professional

MORTGAGE BROKER VALUE

General Doug English 23 Jan

MORTGAGE BROKER VALUE

Not surprisingly, borrowers often default to their own Banker. And why not? It’s an established and comfortable relationship. Perhaps it’s viewed as the path of least resistance. But is it the right lender for the borrower’s current specific needs? Perhaps not.

More sophisticated borrowers may be of a size or scale that they have their own internal resources in finance, quite capable of securing the required financing. They are likely only in the market infrequently however, and almost certainly not fully knowledgeable as to all of the financing sources available.

Aren’t all Lenders pretty much the same?
Borrower’s may think that all institutional lenders are pretty much the same. Offering comparable rates, and standardized borrowing terms. This is rarely the case. Lender’s often prefer one asset class over another. They may have a particular need for one type of loan. A specific length of loan term may be desirable, for funds matching purposes. Real Estate risk is a fact for real estate lenders. How they mitigate this risk differs however. It may be stress testing interest rates during the approval process. Sophisticated risk pricing models may be used, having regard to previous loss experiences. The lender may rely significantly on collateral value, or guarantees. The conditions precedent to funding will often differ from lender to lender.

A real world example
I had the pleasure last year in advising a client who had 3 sizable real estate assets, in 3 quite distinct asset classes. The borrower’s loan amount requirements were significant, however they were flexible on loan structure. Accordingly, I sought out competitive, but differing deal structures. My goal was to provide a competitive array of options. A number of “A” class lenders were approached, several/most of whom this particular borrower had no previous experience with. I shortened the list to 5 lenders, and received Term Sheets from each.

Each Offer was competitive on a stand alone basis, but they differed quite substantially, in the following ways:

  • Loans were either stand alone, or blanket loans, or some combination.
  • Length of terms offered, differed by asset class.
  • There was as much as a 75 bps rate difference, from highest to lowest Offer.
  • The amortization period depending upon asset class, ranged from 15 to 25 years.
  • Loan amounts on individual assets differed as much as 20%.
  • Third party reporting requirements differed between lenders.
  • There were a combination of fixed vs. floating rate loan structures.
  • Recourse was limited by some lenders, on select assets, or waived entirely, upon a higher rate structure.

Leverage Your Knowledge
These variances are striking, yet each of the 5 lenders were considering the precise same asset, at the same time, with common supporting information from which to base their analysis. How was the borrower to know which Offer to exercise? As a Broker, I can add value by helping the borrower to consider both their immediate and longer term strategic requirements, in the context of their overall real estate portfolio needs. This was precisely how this borrower landed on the most appropriate Offer for their particular circumstances. In this particular case we presented different, yet competitive, and uniquely structured options for the borrower’s consideration.

Consider a Dominion Lending Centres Mortgage Broker when next in the market for financing. Leveraging a Broker’s knowledge is a tremendous value proposition.

Allan Jensen

ALLAN JENSEN

Dominion Lending Centres – Accredited Mortgage Professiona

Variable vs Fixed / Open vs Closed Mortgages

General Doug English 20 Jan

Mortgage-YT-2

Buying a house and getting a mortgage can be a stressful experience – especially if you’re going through it for the first time.  Whether you’re going through a traditional bank or a mortgage broker, with terms such as variable, fixed, closed, open, prime interest rates and many more, it can be easy to get intimidated.  Because of all this new information zipping past you it’s unfortunately very common to misunderstand important details when it comes to what is often the most important purchase of our lives.
If you’re new to the process or just need a quick refresher on any aspect of the house purchasing process in Canada, check out our comprehensive FREE eBook: Getting Your Foot In The Door.
Since I’ve been looking to get a pre-approved mortgage for a while now after amassing a down payment (check out the free ebook if you want to know more about how I saved for a down payment) I’ve been researching and meeting with a variety of mortgage brokers and bank specialists.  I wanted to share some of what I learned with you all, so that you can sound like you’ve been doing some research when you meet with your mortgage people.  Here are some basics when it comes to variable vs fixed and open vs closed mortgages.

What is a Variable or Floating Mortgage?

 A variable rate mortgage (VRM) – sometimes called a floating rate mortgage – is a mortgage where the interest rate that you are paying can go up or down during your mortgage term.  The variable rate is related to the prime interest rate.  The term “prime interest rate” refers to the interest rate that a bank extends to their most trusted customers.  This preferential rate is based on the Bank of Canada’s overnight rate or key interest rate – which is the rate at which banks get money from the Bank of Canada.  All of this means that if you choose a variable mortgage, your payment will go up or down depending on what the Bank of Canada does and how your bank (or other lender) reacts with their prime interest rate.  While some people think they know what the BoC is going to do when it comes to interest rates, the truth is that no one knows what interest rates will do over the long term.
You will often see banks advertise their variable interest rates as “prime minus .2%” or something similar, which means that you will get .2% off of the floating prime interest rate – which could go up or down (or stay the same – the most common occurrence lately) throughout the length of your mortgage term. Historically, choosing a series of variable rate mortgage terms over the course of your overall mortgage will save you more money versus choosing fixed rate terms each time your mortgage comes up for renewal.  Yet Canadians still tend to drift towards fixed interest rates because of the predictability and safety factors.

Mortgage-YT-3

What is a Fixed Rate Mortgage?

 Fixed rate mortgages are a little easier to understand and have remained a favourite amongst Canadians for years.  The basic idea is that you sign on for your mortgage term of X years at a specific rate, and during that time the bank can’t change your interest rate regardless of what the Bank of Canada or the prime interest rate does.
In return for this simplicity and security, banks and other lenders will demand a premium.  Consequently, expect to pay a little bit higher interest rate if you choose this option (banks have to protect themselves against possible interest rate rises after all).  This is ultimately why sticking with a variable rate has proven to almost always be cheaper over the long term, even though they do entail some risk of rising interest rates in the short term.
There is a third option when it comes to mortgage interest rates called a hybrid mortgage.  This is essentially when a mortgage agreement has a certain portion of the amount borrowed as a fixed rate, and the rest as a variable rate.  This option is rarely chosen by Canadians, but can offer an interesting middle-ground when it comes to risk and reward.

What is a Closed Mortgage?

 When it comes to your mortgage, the terms closed vs mixed essentially refer to the ability to pay off all of the remaining money that you owe on a mortgage loan and be done with the loan instantly at any point in time.  Most Canadians prefer the simplicity of a basic closed mortgage with fixed interest payments. They are easy to understand and there are no surprises; however, closed mortgages cannot be fully paid before the end of their term. Most lenders allow limited pre-payment privileges (i.e., extra payments over and above your normal mortgage payment). These privileges allow you to pay a certain percentage of the original mortgage amount with no penalty, but full payoff requires that you pay a penalty – unless you wait for your maturity date.
Related: How To Port A Mortgage
The vast majority of Canadians don’t have the means to pay their mortgage off all at once or at an extremely accelerated rate; therefore, most aren’t worried about the fact that they are “locked in” for the length of their term. In exchange for sacrificing some flexibility with a closed mortgage, lenders will usually reward you with a significantly lower interest rate compared to an open mortgage. Typically, the majority of rates you see displayed on rate comparison sites or bank advertisements are for closed mortgages.

Mortgage-2-YT-1

What is an Open Mortgage?

An open mortgage is appropriate for people who want flexibility built into their mortgage. You can typically pay off an open mortgage at any time without penalty or convert it to a closed mortgage. Some people like this flexibility if they expect to sell their home relatively soon, or come into a large sum of money, which they can use to pay off their entire mortgage.
For more information on fixed vs variable rates, closed vs open rates, and other mortgage stuff like down payments, mortgage contract details, the Home Buyer’s Plan, and much more, download our FREE eBook: Getting Your Foot In The Door: The Ultimate Guide to Buying a Home in Canada.
 Author: www.youngandthrifty.ca

 

INSURED, INSURABLE & UNINSURABLE VS HIGH RATIO & CONVENTIONAL MORTGAGES

General Doug English 16 Jan

INSURED, INSURABLE & UNINSURABLE VS HIGH RATIO & CONVENTIONAL MORTGAGES

Insured, Insurable & Uninsurable ss High Ratio & Conventional Mortgages

You might think you would be rewarded for toiling away to save a down payment of 20% or greater. Well, forget it. Your only prize for all that self-sacrifice is paying a higher interest rate than people who didn’t bother.

Once upon a time we had high ratio vs conventional mortgages, now it’s changed to; insured, insurable and uninsurable.

High ratio mortgage – down payment less than 20%, insurance paid by the borrower.

Conventional mortgage – down payment of 20% or more, the lender had a choice whether to insure the mortgage or not.

vs

Insured –a mortgage transaction where the insurance premium is or has been paid by the client. Generally, 19.99% equity or less to apply towards a mortgage.

Insurable –a mortgage transaction that is portfolio-insured at the lender’s expense for a property valued at less than $1MM that fits insurer rules (qualified at the Bank of Canada benchmark rate over 25 years with a down payment of at least 20%).

Uninsurable – is defined as a mortgage transaction that is ineligible for insurance. Examples of uninsurable re-finance, purchase, transfers, 1-4 unit rentals (single unit Rentals—Rentals Between 2-4 units are insurable), properties greater than $1MM, (re-finances are not insurable) equity take-out greater than $200,000, amortization greater than 25 years.

The biggest difference where the mortgage consumers are feeling the effect is simply the interest rate. The INSURED mortgage products are seeing a lower interest rate than the INSURABLE and UNINSURABLE products, with the difference ranging from 20 to 40 basis points (0.20-0.40%). This is due in large part to the insurance premium increase that took effect March 17, 2017. As well, the rule changes on October 17, 2017 prevented lenders from purchasing insurance on conventional funded mortgages. By the Federal Government limiting the way lenders could insure their book-of-business meant the lenders need to increase the cost. We as consumers pay for that increase.

The insurance premiums are in place for few reasons; to protect the lenders against foreclosure, fraudulent activity and subject property value loss. The INSURED borrower’s mortgages have the insurance built in. With INSURABLE and UNINSURABLE it’s the borrower that pays a higher interest rate, this enables the lender to essential build in their own insurance premium. Lenders are in the business of lending money and minimize their exposure to risk. The insurance insulates them from potential future loss.

By the way, the 90-day arrears rate in Canada is extremely low. With a traditional lender’s in Canada it is 0.28% and non-traditional lenders it is 0.14%. So, somewhere between 99.72% and 99.86% of all Canadians pay their monthly mortgage every month.

In today’s lending landscape is there any reason to save the necessary down payment or do you buy now? Saving may avoid the premium, but is it worth it? You may end up with a higher interest rate.

By having to wait for as little as one year as you accumulate 20% down, are you then having to pay more for the same home? Are you missing out on the market?

When is the right time to buy? NOW.

Here’s a scenario is based on 2.59% interest with 19.99% or less down and 2.89% interest for a mortgage with 20% or greater down, 25-year amortization. In this scenario, it takes one year to save the funds required for the 20% down payment.

  • First-time homebuyer
  • Starting small, buying a condo
  • 18.9% price increase this year over last

Purchase Price $300,000
5% Down Payment $15,000
Mtg Insurance Premium $11,400 (4% as of March 17, 2017)
Starting Mtg Balance $296,400
Mortgage Payment $1,341.09

Purchase Price $356,700 (1 year later)

20% Down Payment $71,340
Mtg Insurance Premium $0
Starting Mtg Balance $285,360
Mortgage Payment $1,334.40

The difference in the starting mortgage balance is $11,040, which is $360 less than the total insurance premium. As well, the overall monthly payment is only $6.69 higher by only having to save 5% and buying one year sooner. Note I have not even built in the equity that one has also accumulated in the year. The time to buy is NOW. Contact your local Dominion Lending Centres mortgage professional so we can help!

Michael Hallett

MICHAEL HALLETT

Dominion Lending Centres – Accredited Mortgage Professional

OSFI MORTGAGE CHANGES ARE COMING

General Doug English 15 Jan

OSFI MORTGAGE CHANGES ARE COMING

As many of you may remember, this past October the Office of the Superintendent of Financial Institutions (OSFI) issued a revision to Guideline B-20 . The changes will go into effect on January 1, 2018 but lenders are expecting to roll this rules out to their consumers between December 7th – 15th, and will require conventional mortgage applicants to qualify at the Bank of Canada’s five-year benchmark rate or the customer’s mortgage interest rate +2%, whichever is greater.

OSFI is implementing these changes for all federally regulated financial institutions. What this means is that certain clients looking to purchase a home or refinance their current mortgage could have their borrowing power reduced.

 What to expect

It is expected that the average Canadian’s home purchasing power for any given income bracket will see their borrowing power and/or buying power reduced 15-25%. Here is an example of the impact the new rules will have on buying a home and refinancing a home.

 Purchasing a new home

When purchasing a new home with these new guidelines, borrowing power is also restricted. Using the scenario of a dual income family making a combined annual income of $85,000 the borrowing amount would be:

 

Up To December 31 2017 After January 1 2018
Target Rate 3.34% 3.34%
Qualifying Rate 3.34% 5.34%
Maximum Mortgage Amout $560,000 $455,000
Available Down Payment $100,000 $100,000
Home Purchase Price $660,000 $555,000

 

Refinancing a mortgage

A dual-income family with a combined annual income of $85,000.00. The current value of their home is $700,000. They have a remaining mortgage balance of $415,000 and lenders will refinance to a maximum of 80% LTV. The maximum amount available is: $560,000 minus the existing mortgage gives you $145,000 available in the equity of the home, provided you qualify to borrow it.

 

Up to December 31, 2017 After January 1 2018
Target Rate 3.34% 3.34%
Qualifying Rate 3.34% 5.34%
Maximum Amount Available to Borrow $560,000 $560,000
Remaining Mortgage Balance $415,000 $415,000
Equity Able to Qualify For $145,000 $40,000

 

In transit purchase/refinance

If you have a current purchase or refinance in motion with a federally regulated institution you can expect something similar to the below. A note, these new guidelines are not being recognized by provincially regulated lenders (i.e credit unions) but are expected to follow these new guidelines in due time.

 

Timeline: Purchase Transactions or Refinances:
Before January 1, 2018 Approved applications closing before or beyond January 1st will remain valid; no re-adjudication is required as a result of the qualifying rate update. 
On and after January 1, 2018 Material changes to the request post January 1st may require re-adjudication using updated qualifying rate rules. 

 

Source (TD Canada Trust)

These changes are significant and they will have different implications for different people. Whether you are refinancing or purchasing, these changes could potentially impact you. We advise that if you do have any questions, concerns or want to know more that you contact your Dominion Lending Centres mortgage specialist. They can advise on the best course of action for your unique situation and can help guide you through this next round of mortgage changes.

Geoff Lee

GEOFF LEE

Dominion Lending Centres – Accredited Mortgage Professiona

IS IT TIME TO LOCK IN A VARIABLE RATE MORTGAGE?

General Doug English 11 Jan

IS IT TIME TO LOCK IN A VARIABLE RATE MORTGAGE?

Approximately 32 per cent of Canadians are in a variable rate mortgage, which with rates effectively declining steadily for the better part of the last ten years has worked well.

Recent increases triggers questions and concerns, and these questions and concerns are best expressed verbally with a direct call to your independent mortgage expert – not directly with the lender. There are nuances you may not think to consider before you lock in, and that almost certainly will not be primary topics for your lender.

Over the last several years there have been headlines warning us of impending doom with both house price implosion, and interest rate explosion, very little of which has come to fruition other than in a very few localised spots and for short periods of time thus far.

Before accepting what a lender may offer as a lock in rate, especially if you are considering freeing up cash for such things as renovations, travel or putting towards your children’s education, it is best to have your mortgage agent review all your options.

And even if you simply wanted to lock in the existing balance, again the conversation is crucial to have with the right person, as one of the key topics should be prepayment penalties.

In many fixed rate mortgage, the penalty can be quite substantial even when you aren’t very far into your mortgage term. People often assume the penalty for breaking a mortgage amounts to three months’ interest payments, which in the case of 90% of variable rate mortgages is correct. However, in a fixed rate mortgage, the penalty is the greater of three months’ interest or the interest rate differential (IRD).

The ‘IRD’ calculation is a byzantine formula. One designed by people working specifically in the best interests of shareholders, not the best interests of the client (you). The difference in penalties from a variable to a fixed rate product can be as much as a 900 per cent increase.

The massive penalties are designed for banks to recuperate any losses incurred by clients (you) breaking and renegotiating the mortgage at a lower rate. And so locking into a fixed rate product without careful planning can mean significant downside.

Keep in mind that penalties vary from lender to lender and there are different penalties for different types of mortgages. In addition, things like opting for a “cash back” mortgage can influence penalties even more to the negative, with a claw-back of that cash received way back when.

Another consideration is that certain lenders, and thus certain clients, have ‘fixed payment’ variable rate mortgages. Which means that the payment may at this point be artificially low, and locking into a fixed rate may trigger a more significant increase in the payment than expected.

There is no generally ‘correct’ answer to the question of locking in, the type of variable rate mortgage you hold and the potential changes coming up in your life are all important considerations. There is only a ‘specific-to-you’ answer, and even then – it is a decision made with the best information at hand at the time that it is made. Having a detailed conversation with the right people is crucial.

It should also be said that a poll of 33 economists just before the recent Bank of Canada rate increase had 27 advising against another increase. This would suggest that things may have moved too fast too soon as it is, and we may see another period of zero movement. The last time the Bank of Canada pushed the rate to the current level it sat at this level for nearly five full years.

Life is variable, perhaps your mortgage should be too.

As always, if you have questions about locking in your variable mortgage, or breaking your mortgage to secure a lower rate, or any general mortgage questions. contact a Dominion Lending Centres mortgage specialist.

DUSTAN WOODHOUSE

Dominion Lending Centres – Accredited Mortgage Professional
Dustan is part of DLC Canadian Mortgage Experts based in Coquitlam, BC