Spruce Grove Mortgage Broker: Krista Rumberg
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My Best Advice For Improving Your Credit

Someone recently asked me about the best credit advice I could give.

I thought after being a mortgage broker for 14 years I certainly have some best practices about finances and credit I could write about. One of the biggest things I have learned is money, finance, and credit are concepts that a lot of people know nothing about. Here are some things you may find useful.

One of the biggest questions is, how do I improve my credit score or how do I keep it high?

Most Canadians have a credit score between 650 – 680. Anything over 700 is considered excellent and anything under 620 is considered poor credit.

The two biggest factors that drive that score are:

  • Credit utilization or how much of your available credit are you using. I have found that your credit score stays higher if you are only using 50% of your available credit. Therefore, if you pay off a credit card, keep the card open (exercise self discipline and don’t use it) with a zero balance to maintain a high score
  • The other significant factor is payment history. This means do you pay on time? You need to pay at least your minimum payment ON TIME or better yet pay it in full, ON TIME.

Keep your credit limits high and balances low.

Cell phones and mortgages now report to the credit bureau. If you are looking for a great way to start your teenager in establishing credit, put their cell phone in their own name.  Your mortgage also reports to the credit bureau. There is ZERO tolerance in lending for late mortgage payments. Credit bureaus hold history for about 7 years. That’s longer than the average marriage!  If you need to default on something don’t pick your mortgage.

Keep your credit limits high and balances low.

If you are someone who struggles with temptation, I recommend freezing you card into the middle of an ice cream bucket filled with water. This way the card is accessible in an emergency but its going to take a considerable amount of effort to access. Delete the memory of your card number on your computer.

It’s very important to establish credit in your own name.

I have an Aunt who lost her husband after being married for over 50 years. In addition to not knowing how to fill the car with gas she also had zero credit on her own. Everything was in her husband’s name. There she was 70+ years old trying to establish credit on her own and learn how to bank. Her questions were simple. How does the money go from my bank account to the gas station? Does someone run the money over? I know this is an extreme case but do yourself a huge favour and get a credit card on your own name and take an active role in understanding and doing your banking. When I say get a credit card in your name, I do not mean a supplementary card that your husband/wife is the primary applicant.

You need to be the primary card holder even if your limit starts at $500… get started.

Can we talk about consumer proposals and bankruptcies? Sometimes bad things happen to good people and sometimes people are just financially irresponsible and make poor choices. I think the biggest struggle is the moral one. A consumer proposal combines all your debts and your creditors are paid a small percentage of the overall debt. The individual who files the proposal along with a trustee reviews income and liabilities and a payment schedule is set. You make your payments over a period of several years. You get to maintain your registered investments like RRSP’s and often your home, if your debt excluding the mortgage is less than $250,000. When your payments are all paid back you become discharged and the consumer proposal reports to your credit bureau for 3 years after discharge. When you claim bankruptcy, your creditors don’t get paid anything and you don’t make payments. You don’t get to maintain your home or any assets and it will stay on your credit bureau for 6 years after discharge. From a mortgage stand point a consumer proposal is viewed very similarly to a bankruptcy and very frowned on by potential mortgage lenders. You need two years of PERFECT re-established credit to qualify for a mortgage after both consumer proposal and bankruptcy. Here are a couple websites that may provide some help, Romans Debt Solutions Inc. and The Credit Counselling Society.

I have some pretty strong opinions on what I deem to be poor choices on managing your finances.

Don’t make these poor choices:

  • Don’t buy an RV or a boat with 20-year or more amortization – you won’t keep it for 20 years and you will have negative equity and quite frankly if you need to amortize a purchase like this over 20 years you can’t afford it. Don’t buy it.
  • Don’t buy a vehicle with a balloon payment at the end. Don’t ever put yourself in a situation that when you sell the vehicle you will owe more than it’s worth. I strongly feel the government needs to step in a ban this garbage.
  • If you have credit card debt make sure you are paying it back significantly more than the minimum payment. Remember that credit card interest starts at the moment of purchase (when you have a balance owing) and compounds DAILY. So that means you are paying interest on interest on interest, etc. and the balance grows every day. Now that thing you bought because it was on sale but you couldn’t afford isn’t a very good deal.

Here are a few things that I deem to be good financial choices:

  • Use a broker when ever possible – general insurance broker, life insurance broker, mortgage broker, stock broker. A broker has a license to broker the product they are selling so they are likely specialized and have a variety or products for you to choose from that best fits your needs.
  • Pay your property taxes on your own. Don’t include them in your mortgage payment. Three times I have received frantic calls from clients – their tax account slipped thru the cracks and didn’t get paid by the lender.  If you don’t pay your property taxes for three years the municipality has the right to commence foreclosure proceedings. And they do! The TIPPS program is free from most municipalities and they will deduct it monthly from your bank account or you can pay in full on June 30 every year. In addition, when your mortgage comes up for renewal it’s way easier to change lenders if your tax account isn’t attached to your mortgage.
  • Use the clauses in your mortgage contract in your favour. Your mortgage likely has a portability clause (unless you have a no-frills mortgage). This means that if you want to change homes, you can port or move your existing mortgage from one home to the next. There are some rules surrounding this but this is an awesome clause that avoids paying the mortgage penalty in the event of a move. Use your prepayment privileges. Depending on your lender you can increase your mortgage payment from 10% to doubling up your payment. In addition, you can lump sum your mortgage up to 20% of the loan amount. These additional funds go directly to your principle and can save you thousands of dollars in interest and take years off your mortgage.

 

Because I have a mortgage brokering license,

I will expand on why you want to use a mortgage broker over your bank.

What’s the difference?

Brokers have a license which allows them to access mortgage funds from all sorts of lenders. This is great for you, as it creates a competitive rate environment. A mortgage broker gets paid a percentage of your loan amount from the lender and gives you the best discounted rate for your situation. Your banks mortgage specialist is a bank employee and they only offer their banks mortgage. They can be knowledgeable on that banks individual mortgage products but they get paid more if they give you a higher rate. Keep in mind a mortgage shouldn’t always be about rate. You have to look at the terms of the mortgage. The big 5 banks mortgage penalties strongly favor the bank where the monoline lenders have consumer friendly mortgage penalties. RBC, BMO, CIBC, TD, Scotia, and ATB all have mortgage specialists. One of my biggest pet peeves is when a bank mortgage specialist refers to themselves as a broker. They are not – they don’t have a brokering license and they only offer their employers mortgage.  Keep in mind your mortgage broker can often offer you one of the big 5 bank’s mortgages too – some exceptions apply.

Your banks mortgage specialist is a bank employee and they only offer their banks mortgage.

Stay away from a collateral mortgage clause attached to your mortgage. Better yet ask if your mortgage has one? Don’t be surprised if your personal banker at your branch doesn’t have a clue what it is… but keep asking until you get the answer. There are some minor perks of a collateral charge but the risk far outweighs the gain. A collateral charge on your mortgage allows your lender to extend secured credit to you easier and with less risk to them. On the downside a collateral charge makes it more expensive and difficult to move your mortgage to a new lender on renewal and the biggest risk of all… in the event of default on any trade line extended as a result of your collateral mortgage, your bank can FORESLOSE on your home because of the defaulted trade. In some cases with a line of credit there is no option except to collateral charge but I highly recommend asking for a STANDARD mortgage charge. The power of a collateral charge mortgage may be best described by what happened to one borrower.

The parents had a collateral charge clause on their mortgage (nobody ever told them what this was nor did they know it was in the fine print of their mortgage paperwork). They held all their banking with “their bank”- credit cards, line of credit and in this case a car loan they co-signed for their son. The son was in an auto accident and the car was written off and not covered by insurance and for whatever reason the son stopped making the car payments. The bank started foreclosure proceedings on the parents’ home to recover the loss on the car loan.

You never know what can happen in your life, loss of job, sickness, etc that can impact your finances. I think the last thing you need to do is put your family home at risk.

There are many things that I covered here…and many I did not. This post could literally be 10 pages long.

Hopefully the tools above help you in your journey.

Who taught you about money?

My parents are still married after four decades together and recently retired after they successfully sold their business. My in-laws have also been married for four decades, and both couples live happily thru retirement. How did they do that? How did they like each enough to stay together that long, and how did they save enough money to be retired while they still had their health?

Tightening the belt

As I think back to some of my memories growing up, I can remember my mom and dad calling a “family meeting”. I hated these growing up…(mostly because my friends made fun of me) I think I was in grade eight? My mom had quit her job in accounting for my parents to build a car wash. I knew something big was going down because my mom was in tears.

As I sat and listened, I learned that my parents had put a mortgage on our family home (that was previously paid off) and had used every possible shoebox stash of money they had. My mom was crying because the car wash had encountered some delays opening its doors (as any project does) and they were out of money. They were not going to be able to buy my brother and me back-to-school clothes.

As I think about that today. The message that was sent to my brother and me. The message was “if you don’t have money to pay for it – you go without.” And we did . . . we went without new back-to-school clothes and it wasn’t the end of the world.

I certainly wasn’t traumatized by it. I learned a much bigger lesson. Live within my means and if I didn’t have the money to pay for it in my bank account, I didn’t get it. That lesson has stuck with me my entire life. And today we operate our household finances the same way.

Pinch the pennies

I was very fortunate in relationship number two, that he was raised the exact same way I was. In the early parts of our relationship, I quickly realized that he was better at money than I was. He spread larger expenses out over the year and made sure our bank account went in the right direction every month. In the event, if went backwards there was a conversation between us on what happened and how we were going to fix it.

I remember my father-in-law coming to visit and for the first time, I heard him say if you pinch the pennies the dollars will take care of themselves. I think of him every time I am grocery shopping and it’s really cold and I don’t want to take the buggy back to get my $1 back.

Where did Canadians go wrong?

When I think about the headline, we see almost weekly “Canadian debt increasing at an alarming rate,” I think, where did Canadians go wrong? Well, I think a lot of it comes down to marketing. When did it become ok to only advertise how much a monthly payment is for something instead of what the total cost is?

The worst financial choice a consumer can make is to allow a “balloon payment” at the end of financing or to finance a vehicle (a depreciating asset) greater than five years. When you enter any financing situation the question you should always ask yourself is “what is my exit strategy?” If you don’t have a good one then you better not do it.

Ask more questions

The other thing I absolutely despise and is a VERY poor financial decision is to finance a boat or RV over 25 years. Not only are these recreation pieces a depreciating asset but your overall cost is astronomically amortized over 25 years. My mentality on this is if you can’t afford to buy a piece of recreation equipment with cash . . . do not buy it!

I assure you that you don’t need a $100,000 boat or RV. Save some money, and spend a few hours on Kijiji. We need to ask more questions and be better thinkers about what our financial future looks like.

I recently bought a new to me vehicle and I am so excited about it….no car payment! It’s not fancy, 2017 Honda Civic touring, but it had 17,000kms on it when we bought it cash. But I have pure joy when I fill gas and its $35 for a full tank that lasts me 10 days and my insurance cost cut in half from my previous Nissan Murano.

I learned the hard way with that Murano…I (not my husband) wanted to buy it new from the dealer. So, we did, and when we sold it after three years our deprecation on that vehicle was $10k per year. OUCH! My plan is way more practical this time. When I go to sell it three years my depreciation cost should be about $1500 per year. Yes, I clearly learned the hard way.

How do you sleep at night?

In closing, I think we need to go back in time with how we think. Does all that debt to look like you have the biggest and the best really bring you that much joy? How do you sleep at night? What happens if you get sick or injured and you can’t work? Do some basic math and figure out how much that purchase is actually costing you? Who cares what the damn payment is – what is the hard cost of owning it? And if you can honestly say that you can afford it and it will bring you total happiness with no regret – then please proceed. Me? I like nice things, but I sleep better with money in my bank account.

Should I be locking in my variable rate?

Times have changed in the mortgage industry. For the majority of my mortgage career my clients have been split about 50/50 between fixed and variable. Now, the vast majority of my clients are choosing fixed rates, and I get it. Never have I seen fixed rates lower than variable rates. For all of you sitting in variable rate mortgages, are you aware that you can convert to fixed mortgage with no penalty? The bigger question is, should you? Let’s discover whether this makes good sense for you.

PRO – Reduced Rate

If you timed the market just right you may have a prime minus one mortgage. Prime is 3.95 – 1.0 = 2.95%. Today the best discounted five-year rate is 2.69% so that’s a savings of about a quarter point. That’s not insignificant, and you can lock that in for the remainder of your term. That will equate to a couple of thousand bucks depending on the size of your mortgage. I’ll take reducing my mortgage by a couple grand! The savings will even be more significant if the Bank of Canada raises prime rate in the coming years. But what are the consequences?

CON – Penalty

If you had the experience of working with me you have likely heard me say, “what is your exit strategy?” If you are fortunate, and you actually make it to the end of your five-year term, then you won’t have to consider what your penalty is to break your mortgage. But statistically, six out of ten Canadians break their mortgage (usually around the three-year mark) and that triggers a penalty. I know, you’re not the one who gets transferred, or divorced, or loses a job, or has a spouse pass, or your port is declined– but it is happening to greater than 50% of Canadians.

If you convert to a fixed rate mortgage the penalty clause wording changes from three months interest to three months interest or IRD (interest rate differential), whichever is greater. And IRD is kind of like a swear word . . . it’s nasty. Every lender calculates IRD differently.

If your mortgage is with a big bank CIBC, BMO, RBC, Scotia, and TD then you need to be aware that those banks have the least favourable penalty calculation to the consumer. They calculate your penalty on the spread between benchmark (5.19% today) or posted rate and what your actual interest rate is. This can come up with some pretty nasty numbers (again depending on the size of your mortgage) but I have seen IRD penalties in excess of $20,000.

If you are with a monoline lender (only available thru a mortgage broker) they generally calculate the penalties based on prime rate (3.95% today) or contract rate and what your actual interest rate is. This is greater than three months interest but certainly less than the big five banks.

Why is this happening?

Let’s remember that fixed rates and variable rates are totally different markets. Fixed mortgage rates are driven by the bond yield – how much banks can borrow money for, and variable rate mortgages are driven by the overnight interest rate set by the Bank of Canada – economy based.

I (we) have a variable rate mortgage and we are not converting to fixed, and here’s why. We plan on moving within the term of our mortgage, and we like the flexibility, that if the timing does not work out perfect, the maximum penalty we will be charged is three months interest. So yes, it’s going to cost us some extra money in interest but it will cost us more if we convert and have to break a fixed rate mortgage and pay interest rate differential. Is this called opportunity cost?

Worth the risk?

Most people choose a variable rate because it’s typically priced half, to and entire percent less than a fixed rate mortgage. Combined with the maximum penalty of three months interest it’s often worth the risk of the fluctuating prime rate. I feel the upcoming Federal election has an impact on this unique situation and if I were betting this window is short lived. We are definitely in a quirky situation with fixed being lower than variable and that begs the question, is the risk-reward payoff enough to make the switch to fixed rate mortgage?

First Time Home Buyer Incentive

When the federal budget came out earlier this year and the First Time Home Buyer Incentive (FTHBI) was announced, “I thought what a piece of garbage – that’s not going to help anybody!” Now that September second is here, I have had the FTHBI at the back of my mind while I am working on client’s mortgage applications, and I think I am changing my tune a little bit?

FTHBI: Thanks for the job security, feds!

It appears that the FTHBI may assist a small number of individuals who would not have qualified in the past and now they are qualifying for a mortgage – or giving them a bit more buying power. It’s not as easy to qualify for a mortgage as it was prior to fed’s implementing the benchmark rate (when Canadian’s need to qualify for a mortgage two percent higher than what they are paying or the benchmark rate – whichever is greater) but it’s a small step in the right direction. And by small step, I mean baby step.

I attended a learning opportunity on the FTHBI last week, as there has been very little published on how Canadians actually qualify for this program. Turns out you have to go to the National Housing Strategy website and fill out the application, sign it, and sent it to your mortgage professional.  We have to do some things on our end, as your broker, as does the mortgage lender – but overall it does not seem to be overly difficult to apply. Maybe, still, a bit taxing for consumers to understand.

This follows suit with this government, as the last several changes to mortgage rules have made it extremely confusing, to both mortgage professionals and consumers. I guess I should say thank you to the feds for giving me a bit more job security? There are still a lot of unknowns that will have to fall out in the wash on the FTHBI but again it’s a start.

The Biggest Unknown

Probably the biggest unknown is whether they are going to allow the FTHBI to work in conjunction with the spousal buyout program? The rules say that if you have gone thru a divorce, despite owning a home in the past four years you still qualify for the FTHBI (providing you meet the other qualifying criteria). In addition, you are allowed to piggyback mortgage insurer programs with the FTHBI. Therefore, I am inclined to say you can do a spousal buyout and use the FTHBI as part of your down payment.

But . . . there is also some wording that says down payment must come from savings, RRSPs, or gift . . . the missing word here that I would like to see is EQUITY. When you are taking over the matrimonial home from your ex your down payment is equity, not the three listed in the FTHBI.

I have submitted my first mortgage application combing the FTHBI with equity as down payment and we will see how this throws down? It’s the grey area that is not addressed. I’m not one to not challenge rules, so I’m happy to be one of the broker’s who has a challenging application submitted to the lender for approval, ready to argue for my client on Tuesday morning, if required.

The Numbers

Despite the fact that the FTHBI may be helping some people qualify, there are some things that consumers need to consider once they are into the program. It’s likely best to explain this via an example. Molly buys a “new to her home” using the FTHBI and her purchase price is 400,000. Therefore, her FTHBI is $20,000 which comes in the form of an interest-free loan (in addition to her $20,000 in savings). This loan is registered to her title in second position. The FTHBI needs to be paid back on sale or prior to 25 years, whichever comes first.

Let’s assume Molly wants to sell her home in ten years and she sells for $480,000. This means she will payback five percent which is now $24,000 (($480,000 – $400,000) x 5% = $4000 plus the original $20,000). However, if she sells in a depressed market and she sells for $331,040 she only pays back $16,552 (($331,040 – $400,000) x 5% = -$3,448. $20,000-$3448 = $16,552) So, despite the feds calling it “interest-free” – it’s not technically “free” as they get their share of your market increase if the economy goes in the right direction.

Drawbacks

In addition, you will see increased legal costs for both your purchase and your sale, as an extra lien will need to be registered and discharged. The FTHBI will also limit your access to a home equity line of credit as it is unlikely that a lender will be interested in registering their security in third position.

My Final Thoughts

Overall, I am interested to see how much this helps Canadians? I anticipate it’s likely to help lower-income, lower price point buyers outside of Toronto and Vancouver . . . so I’ll keep it as a tool in my mortgage broker toolbox and hope I can use it to my client’s advantage.

What Is Collaborative Divorce?

What is Collaborative Divorce?

I am a Collaborative Divorce Alberta Association professional that works with people through the association is helping find collaborative ways to separate and divorce.

Not all separations are “nasty” and sometimes people find that they need to go their own ways from each other. Through the collaborative divorce process there are professionals that have the same goal as you. They want to help you and your spouse reach a fair divorce settlement, based on your priorities and without the potentially huge expenses and stress associated with a settlement reached in court.

How can I help?

In the process of separation and divorce I work with families and their finances to keep family homes through spousal buyout and/or find mortgages that suit them in their new homes. We work together to find what is the best options for everyone.

It’s imperative to examine your finances to determine if you can comfortably afford to buy out your spouse. If you’ve decided to remain in your matrimonial home, but the mortgage payments, taxes, monthly bills and upkeep push you to your financial limit, the stress that this will put you under may not be worth staying put – even for the sake of keeping something constant in your children’s lives.

As a mortgage specialist who works with divorcing couples, I’ve adopted three key priorities to ensure I serve every client to the best of my ability, including:

  1. Operating with integrity by always ensuring my clients receive the best mortgage product and rate to meet their unique needs – both now and over the long term.
  2. Providing solutions, support and answers while navigating unchartered territory such as separation/divorce, which ultimately leads to financial independence.
  3. Keeping a positive outlook regardless of the situation at hand to help keep clients in a positive frame of mind while they complete their separation/divorce and split the matrimonial home.

Please contact me if you have any questions and I also encourage you to check out Collaborative Divorce Alberta Association for further resources.

Mortgage Broker Spruce GroveMortgage Broker Spruce Grove

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