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?

The mortgage rules have changed.

We have all heard that times they are a changin’ when it comes to mortgages: many new rules and regulations change how you qualify for a mortgage in Canada. Well, I want to fill you in on how these will affect you, the consumer.

First, let’s get something out in the open here; I am a straight shooter. I do not sugar coat the truth to make it sound better than it is, nor will I hold back on something you need to know. That being said, here we go!

Mortgage Loans and Consumer Debt

To put it bluntly, it just got a whole lot harder to purchase a home.

Since we are talking opinion, I will offer mine. There are two sides to this. On one hand, as a mortgage broker I am paid a percentage of your loan amount. So, the more you borrow, the bigger my paycheck is. If that were all I cared about, I would say, buy the biggest and fanciest home you can get approved for. “Yes! you can totally afford that expensive house with a 75,000 a year family income.”

However, that is not all I care about. I was raised to believe that you should live within your means and not spend more than you earn; bad things happen when you fall into that trap. When this side of me sees a young couple buying a starter home with a hefty price tag of half a million dollars, I find myself torn; such a house is usually not a starter home. Granite counter tops, hardwood floors, and more than 2800 sq ft of space is a lot. I often ask if they ever considered that they may want to afford a lovely wedding, honeymoon, and maybe even a maternity leave. I worry should, heaven forbid, someone becomes sick or injured after signing the papers.

Thus, my go-to rule with lending is “just because you can, does not mean you should.”

That being said, I also believe that home ownership is a wonderful thing — it creates roots, and builds families. I understand the Federal Government’s concern surrounding debt. Consumer debt is the major issue they are worried about, not the “national housing market”. Many Canadians do not save enough, and we sure know how to spend. We are always trying to keep up with the Joneses. I wonder what makes us so unhappy that we need a closet full of expensive clothes or a brand new high-end car? When we understand and solve this question, it will lead naturally to less consumer debt.

Why is it that you can buy a car with zero money down? Why can you make minimum payments of almost interest only on your credit card? If the government wants to solve these debt problems, it is not with housing or mortgages; it’s with consumer debt. I feel if people had forced accountability for their finances (debt) they would naturally be wiser with their mortgages.

To explain in detail, I am going to break this up into two types of mortgages: “high ratio,” with less than 20% down payment, and “low ratio” or “conventional,” with greater than 20% down payment.

High Ratio Mortgages

This is how the new mortgage rules work. If you have a household income of 80,000 and let’s assume you have no debt and good credit, your purchasing power has dropped by $80K as a result of the “stress test” that must be performed by all lenders. The jury is out on this, is it bad or good? If you are a landlord it is great, as this will drive the rental market. However, it is bad for individuals because it’s now harder to qualify to purchase a home so Canadians are forced to rent so rents will go up and, in turn, so will consumer debt.

This is definitely not the goal the policymakers were aiming for.

Low Ratio (Conventional) Mortgages

If you are irked by the changes to high ratio mortgages, wait until you hear about conventional mortgages.

With the new changes that came into full effect on November 30, 2016, lenders are not allowed to back end insure mortgages. What does this mean? Historically, when you got a mortgage and with a 20% down payment, many lenders would bulk insure it thru one of three Canadian insurers without you knowing, and they would pay the insurance premium on it. It took away their risk of losing any money if you were to default on your mortgage. I TOTALLY support stopping lenders from doing this. Keep in mind CMHC insurance is paid for by Canadians with our tax dollars, and the last time I checked, if I made a bad decision as a business owner, that risk was on me – not Canadian taxpayers.

With the new changes that came into full effect on November 30, 2016, lenders are not allowed to back end insure mortgages. What does this mean? Historically, when you got a mortgage through a broker with a 20% down payment, many lenders would bulk insure it thru one of three Canadian insurers without you knowing, and they would pay the premium on it. This took away their risk of losing any money if you were to default on your mortgage. I TOTALLY support stopping lenders from doing this; this insurance is paid for by Canadians with our tax dollars, and the last time I checked, if I made a bad decision as a business owner, that risk should be on me – not Canadian taxpayers.

That being said, because lenders are not allowed to back end insure, they want to find a way to offer higher-value conventional mortgages and guess who is paying for it. You! Some lenders have either removed conventional mortgages from their product mix, others have increased the interest rate. So, if you have done the right thing and saved 20% down you may now have to pay more.

That totally ticks me off, and should upset you as well; These new rules penalize the savers. Good job bureaucrats – glad you clearly thought this through.

On the bright side, I do applaud the change to close the loophole so that only people who were living in their home as a principal residence before the house was sold are eligible to claim a capital gains exemption…. this was an excellent move, a great decision to bring in tax revenue.

In summary, I think some of the changes were necessary but the execution with only two weeks notice and the far-reaching impacts on Canadians were not considered to the degree I would have preferred.

These changes and their effects are why now more than ever, you need a licensed mortgage broker working for you. Mortgages and their associated rules can be confusing and involved with many choices. An experienced professional mortgage broker who knows all the products and can guide you into making good long-term financial decisions.

 

 

Krista Lindstrom has been a licensed mortgage broker for ten years and a good money manager her entire life. If you need good mortgage advice call 780-946-6222 or email Krista@MortgageSimple.ca