How your house just got more expensive

How your house just got more expensive

How your house just got more expensive

Yes your house is getting more expensive. Your house is going to cost you a lot more money in total to pay for. You bought your house as an investment; as your retirement savings however, it is costing you a lot more money. Here is how your house just got more expensive:

Interest rates are on the rise

Both in Canada and the United States prime rate has increased, already multiple times within the last year. Prime has been at its lowest historical rate for years but is now on the rise as shown in the nice graph on ratehub.ca. If you have a fixed rate mortgage, upon renewal of your mortgage your interest rate will surely increase. If you have a variable rate mortgage your rate already rose and you now paying more interest on your mortgage.

Interest rates will continue to rise

Interest rates will continue to rise as the economy grows and inflation increases. Inflation (the increase in costs of goods we buy like groceries) increases as the price of goods increase. If we are feeling good about the future and have more money to spend we are willing to pay more for goods. This causes inflation and if it increases too quickly governments will raise interest rates to force us to save instead. With higher interest rates we earn more on our savings accounts, and other fixed income products like GICs.

Using your home equity line of credit is more expensive

Home equity lines of credit (“HELOC”) are lines of credit secured against your house. You can borrow up to 65% of the market value of the house less anything you owe on your mortgage.

HELOCs have lower interest than conventional lines of credit however have higher interest rates than mortgages. They are used for renovations and home additions. Renovations and additions add to the cost of your home and incurring interest on that debt makes the costs even higher.

As debated in our article Rent vs Buy: The Debate of a Lifetime buying a home may not be as financially beneficial as first thought. Now with the additions and extra interest cost from the HELOC your home value needs to increase even further just to break even!

How to decrease the additional costs to your home

The easiest way is to save money and use cash to pay for the renovations. But before you do, consider the value to your life and to the value of your home of the renovation or addition. If the renovation or the addition is to keep up to your neighbours it is not a good decision! If the renovation or addition is needed based on your growing family (i.e. addition of children or an elderly parent) than the additional cost may be worth it!

never attend this party

Never attend this party

Never attend this party

Parties are a fun time. Parties are a gathering of friends and family to celebrate an event or occasion in life. A baby shower, a bridal shower, a birthday and a retirement are some great examples of parties. These occasions are a great time, celebrating, with the underlying nature of the event a joyful one. However there is one party that the underlying nature can cripple someone for life. You should never attend this party; a housewarming party.

Housewarming parties

Housewarming parties are meant as celebrations of someone or a couple taking the next stage in their lives. The next stage being purchasing a home of their own and facing life. Friends and family are invited to celebrate the new home. We are expected to show up with a gift, smile and say how nice their large home is. The new homeowners will be trying to impress us, with how large their home is, how fancy it is with new appliances, expensive furnishings, etc.

This type of party, underneath, is a giant hole, not a grand home in which the new homeowners are building their lives. Home prices in North America are at an all time high and interest rates are on the sharp rise. Your friends who just bought that house are swamped in debt and will be for the next 25 to 30 years. For one third of their lives they will be paying that debt back and you just showed up to their house to celebrate this!

How to make the party enjoyable

There is nothing you can do to make someone else’s party enjoyable; they took the debt themselves and are asking you to celebrate this monstrosity. You can however make your party enjoyable by purchasing a home you can afford. Here’s how:

Determine whether you can you afford the home

Your housing costs which includes your mortgage payment (both interest and principal), insurance, maintenance and utilities should not be more than 30% of your after-tax salary. If the housing costs are above this you may want to consider the following.

Making a down payment of 20% or more

Making a down payment of 20% of more of the asking price is a great way to reduce the total amount you owe, save you tens of thousands of dollars in interest and will eliminate the need for mandatory CMHC insurance.

Clean up your credit

Your credit may be holding you back from qualifying for a lower interest rate. Cleaning up your credit will improve your score and you will less risky to lenders which in turn will result in a lower interest rate. With a lower interest you will be better able to afford the home you want. I have discovered 5 proven ways to increasing your credit, find out here.

Consider renting

Renting does not involve going into debt and having to pay that debt off for a third of your life. Consider renting it may prove to be more financially viable than buying (check out Rent vs Buy: The Debate of a Lifetime and how to save on your mortgage) and you have more freedom to move if you find a better place!

Your party

You have control over your party. Celebrate with your friends and family knowing you made a financially sound decision.

The new year is fast approaching. January 1, 2018 will be here before you know it. Are you ready for the new year?

Are you ready for the new year?

Are you ready for the new year?

The new year is fast approaching. January 1, 2018 will be here before you know it. Are you ready for the new year?

You are thinking to yourself the new year is about new year’s resolutions. A chance to start over. Try to go back to the gym or try to start eating healthy again. Perhaps you would even consider trying to make decisions that are financially better for you and your loved ones.

What many people do not realize, especially those entering the housing market, that new mortgage rules are effective January 1, 2018. The new year will bring changes that could affect you whether you like it or not.

What are these new rules

As we wrote about before in Why 20% down won’t protect you here are the new rules coming into effect:

  1. Home buyers making a 20% or more deposit will be subject to qualifying for a mortgage at higher interest rates. The interest rate will be either the 5 year interest rate posted by the Bank of Canada or your mortgage rate plus 2%, whichever is higher. As of November 22, 2017 the Bank of Canada rate was 4.99%.
  2. Current home owners with a mortgage are not subject to the new rules unless their lender chooses to have them qualify on a mortgage renewal under the new rules.

What this means to you

If you are thinking of entering the housing market you need to sit down to see whether you can afford to qualify at these higher rates. Remember these new rules are already in place for home buyers making a less than 20% down payment. Either way as a new home buyer you are subject to these rules.

If you are looking to renew your mortgage, ask your lender whether they are going to make you qualify under these new rules.

Under the new rules you will afford less than what you did previously. The house you wanted to buy may not be in your reach.

How to buy the house you want regardless of the rules

Despite these strict rules you can still buy the house you want, here is how:

Make a larger down payment

Making a larger down payment at first thought may seem counter-intuitive since you are subject to the new rules however it can save you a lot from your mortgage. Making a larger down payment reduces the amount of mortgage debt you will take on. With less debt you have a greater ability to pay them back.

Earn more income

Earning more income, providing you do not spend it of course, means you can afford to pay down more debt. You should still not over leverage yourself just because you make $1 more does not mean you can take on $1 more of debt.

Your free mortgage guide awaits!

If you have not already got your free copy of the Mortgage Guide, sign up to our mailing list and it is yours for free!

 

Now the question you need to ask yourself is “are you ready for the new year?”.

winter is coming

Winter is coming

Winter is coming

Winter is coming, for some winter is already here. The days are getting shorter, leaves are falling ever faster and we are already seeing record low temperatures for this time of the year. With winter coming, the colder weather upon us, it is time to keep ourselves warm.

The first thing that comes to mind is turning on the furnace! We also start to dress in layers and thicker ones as winter approaches. Some of us may also have automatic car starters to warm our cars up before driving. There are many more ways of getting and staying warm however not all of them cost the same. Today we are exploring how you save money while still staying warm as winter is coming!

Top tips for saving money while staying warm

Turning down the thermostat

Having your furnace run less often means more money in your pocket for that tropical vacation. Your house loses less heat at lower temperatures according to Ragsdale. Here you have a few options. First off you can turn down the thermostat for the entire winter, even by 1 or 2 degrees you can save. A second way is to have the thermostat lowered when you are sleeping and at work or school. Once again according to Ragsdale the savings having your thermostat at a lower temperature outweigh the additional cost of having the furnace work harder to heat up the house. Your third option is to lower the thermostat when you are away on vacation.

A word of caution here, do not lower your thermostat so much that you risk your pipes being frozen!

Wearing thicker and more layers

Clothing is great because it is a one time cost. If you are keeping your thermostat lower the entire winter, investing in some nice warm layers is great to stay warm and comfortable in your home. Likewise if your office is saving money the same way a nice warm and comfortable sweater at work goes a long way. Even a thin long sleeve sweater over top of a dress shirt is a great way to add a stylish layer and keeping warm!

Hats and socks are a great layer investment! You lose a lot of body heat through your head. Simply having a hat on will keep you warmer! Likewise people find themselves cold many of times and by simply putting on a pair of socks you feel instantly warmer. We have a lot of nerves in our feet, they sense when we walk across a cold floor. So protect your head and feet to stay warm this winter!

Invest in another blanket or thicker bedding

With the thermostat lower during the evening and us not moving (very much) during our sleep, we can lose a lot of heat. Sleeping with an additional blanket or under thicker materials will better retain your body heat throughout the night!

Adding insulation around the house

Do you have a patio door or large window that does not get used? Patio doors and windows are not as insulated as the house walls and are the number 1 area you lose heat. By adding foam board insulation like this to your door or window you will be increasing the heat retention of your home and will be saving you money.

A quick note on adding insulation; if your door and windows weather stripping have gaps or tears in them you should first replace the stripping. Having doors and windows airtight is the first layer of defense against the cold.

Replacing your doors and windows

If you realize your doors and windows need replacing try to get a door without windows and try to get windows with additional panes of glass.  Double or triple pane glass is more expensive however the cost savings can add up quickly especially if you are turning down the thermostat. If you are looking to do some home renovations this time of year check out Union Gas’ Home Reno Rebate.

Winter is coming and you want to be ready however not break the bank while doing so. Follow these winter is coming suggestions above, stay warm and save money!

Looking for other ways to save?

If you are looking for other ways to save check out these other great articles from us!

Saving money on vacation

6 ways to save with a roommate

37 fast and easy ways to save

Mortgage Guide

Mortgage Guide

Your house and your mortgage for that matter is the largest expense you will encounter. It can be difficult to navigate the housing market not to mention the mortgage market. There are many, too many, things to consider with buying a home and many more when negotiating your mortgage. As you had read in our article Rent vs Buy: The Debate of a Lifetime and how to save on your mortgage purchasing a home is very expensive, here is your opportunity to take control of your largest expense!

Today we are releasing the Simple Money Living Mortgage Guide! This comprehensive guide is your lifeline, your map to negotiating the perfect mortgage that works for you! It’s time you got the largest expense of your life right and working for you.

What’s in the Mortgage Guide

What the mortgage guide entails are the following eight (8) steps and what you can expect to learn:

Step 1: What down payment can I afford?

Getting your down payment right means you will still have money for other things in your life and a manageable mortgage to pay back. Make too much of a down payment and you will be cash poor; make too little of a down payment and you are overwhelmed with debt.

Step 2: What rate can I get?

The great debate of fixed vs. variable rate debt; which one is right for you? With a fixed rate mortgage you can sleep at night knowing the rate of interest you are paying. With a variable rate mortgage your interest rate can fluctuate within a day; you may end up paying more than you want to.

Step 3: Who is the best advisor for me?

Dealing with an advisor with integrity and has your best interests in mind will help to make sure you are getting the best deal on your mortgage. You want to deal with someone who is upfront and honest with you and your loved ones.

Step 4: What amount, amortization and term length should I get?

Figuring out the amount of a mortgage you can afford and deciding on how long you will take to pay it back and over what term will you agree to the interest rate type is important.

Step 5: What are the opportunities to pay down my mortgage quicker?

Accelerated payments and anniversary payments are just two great ways to pay your mortgage back quicker without being cash poor. The sooner you pay back your mortgage the less interest you will pay overall.

Step 6: What are your refinancing options?

In the amortization period of your mortgage you will have many chances on refinancing. You may want to change the interest rate type depending on your risk tolerance and the trend in interest rates. Likewise you may want to change payment frequency or the amortization period.

Step 7: What restrictions or penalties come with this agreement?

Negotiating an agreement comes with restrictions or penalties and you need to know what they are. Early repayment may come with additional cost or you may only be able to make up to a certain anniversary payment. So it is important to read your agreement before signing and ask questions to know exactly what you are agreeing to.

Step 8: What up front/hidden fees are you paying?

With a mortgage you want to know exactly what you are paying. Hidden fees are no fun any time during the year.

Action Required

By signing up for our mailing list you will receive the Mortgage Guide!

 

rent vs buy

Rent vs Buy: The Debate of a Lifetime and how to save on your mortgage

Largest purchase of your life

Purchasing a home is the largest single expense in your life, so why would you overpay? A home and even condominiums costs hundreds of thousands of dollars at the minimum to buy. Having a huge mortgage on the property is the cancer to eroding your wealth. Getting this purchase wrong and you could be paying for it for the next 25 years! That is why today we discuss the greatest house debate: rent vs buy.

The smart folks out there take their time with this purchase as it may be a decision they have to live in for 25+ years. It’s the largest physical item you’ll own and will be your pride and joy.

If you have not had a chance to read our Mortgage Talk series, check them out here:

  1. How long should I take to pay off my mortgage?
  2. How to pay off your mortgage faster
  3. Variable vs fixed rate mortgages: which one is right for you?

Today we take the most detailed look into the housing industry’s greatest debate: rent vs buy. We will explore which option is best and how not be overexposed on your mortgage!

True cost of a mortgage

Please sit down for this one. You will be utterly shocked at the true cost of purchasing your home using a mortgage. According to livingin-canada.com the average price for a house in Canada is $480,000. Do you even have that kind of money?

Using mortgage calculators from the National Chartered Banks in Canada we have the following situation:

  • Home price of $450,000
  • 5% down payment of $22,500 for first time home buyers
  • 25 year mortgage with monthly payments of $2,500
  • Interest rate of 4.64% is used is on a five year fixed term (rate obtained from Royal Bank of Canada)

The amount of interest paid on this mortgage is $303,000 – 67% of the value of your home! You’ve now paid $753,000 for a home excluding any renovations and additions needed to keep up with the debt trapped Joneses next door!

Not only is the interest horrendous but how can you afford the down payment when you are carrying credit card, auto loan and student debt? Will you have to borrow for the down payment from a line of credit that is carrying interest in most cases double the mortgage rate?

Future Interest

We are currently in a low interest rate environment meaning in the future interest rates will increase and having more debt now means having less money in the future.

Go to a store today and take a look around, everyone is shopping for a deal, they are trying to save, well why are we not doing that with life’s largest purchase? If you get life’s largest expenses right you will have money to finance those dream vacations.

Emotions of home ownership

A home is not a house. When buying a home it is hard not to become emotional about this purchase, it’s the item you will be living in for many years. Being comfortable, safe, and in the desired location are important things to everyone. Let’s take a look around for a moment.

I have seen it with myself and with friends, we venture into a house showing and came to the conclusion it was the house of our dreams finding out two weeks later there is a better one around the corner. It is human nature to want things we do not have and to always look for better. It is the keeping up with the Joneses disease all over only in a different form.

I get it, I really do that you’ve fallen in love with this house and you’ll pay anything to get it. Write down what the priorities are in life. You’ll see that you want other things in life that require more money.

Unless you learn to live comfortably you will find another better dream home the instant you move into last week’s dream home. So look around and follow your priorities, don’t get wrapped up in a bidding war, you’ll pay more for it than just money and that’s your freedom.

Rent vs buy: the debate has begun?

The gloves come off in rent vs buy. As we have seen above the cost of the $450,000 home is really $753,000. Assume you put into the home $45,000 for renovation over the 25 year period bringing the total spent to $798,000.

Renovations include:

  • Finishing the basement – $20,000
  • Redoing the kitchen – $15,000
  • Redoing the bathroom and making a second one $10,000

According to a blog post from Rentseeker.ca the average rental price for a three-bedroom apartment in Canada is $1,535. A three bedroom apartment is a sufficient size for the modern family. The cost of renting over 25 years is $590,000 (2% inflation per year).

Now time to figure out if purchasing a house is worth the investment.

Cost of house = $798,000

Cost of renting = $590,000

Your home would have to increase 135% in order to break even. BUT wait what if we took the difference between the mortgage payment and the rental payment and invested that over 25 years?

Mortgage payment = $2,500

Rent payment = $1,950 (average across 25 years)

The difference of $965 per month invested at 2% (rate of return is below historical average rate of return in a balanced portfolio) would in 25 years become $282,000. This investment reduces the cost of renting which is evidenced in our revised figures are below:

Cost of house = $798,000

Net cost of renting = $308,000

Rent vs buy debate: the winner is

I’ll let you be the judge of who wins the rent vs buy debate. I’ll suggest the following:

Bulls of the housing market argue the house wins because:

  1. There is strong expectation that the value of the house in 25 years will at least double eliminating the entire cost and then some.
  2. You get less house when you rent vs buy.
  3. Renting a comparable size home is far above cost of a mortgage.

Bears of the housing market argue renting wins because:

  1. 4% investment growth rate is below what the 25 years expectation really would be driving down the cost of renting much further.
  2. With renting you have the flexibility to move, almost every year, if you wish.
  3. No timing the market with renting, good renters are always in high demand.

Ways to save on your mortgage

Debt is the cancer of the financial world. It erodes financial security and cripples you from achieving freedom and happiness in life. Is owning a house a SMART investment?

Here’s a few steps to help you reduce the real cost of your mortgage. Utilizing any one of these steps could help you save huge amount of your money and live a life with less debt!

Step 1: Live by your means

Step 1 Part 1: Determine what your means are

Take a look at your life and determine what size of home do you need; how many bedrooms, bathrooms, how many square feet. Do you need to live near work or school? Have you considered the need for a garage? Once you have these figured out it is much easier to find the perfect place that not erode your wealth.

Step 1 Part 2: Can your means fit into the budget?

Within the financial world a general guideline is to have your housing costs (mortgage, property taxes, insurance, hydro, etc.) equal 30% of your after-tax income. Purchasing a house that allows you to live within the 30% is ideal providing you do not have credit card debt.

Step 2: Increase the down payment

A larger down payment (double of the down payment in the scenario above) means $20,000 less interest over the 25 years! That’s more money in your pocket. It will take more time to save up for a down payment however just because your friends are buying homes too early in life does not mean you have to. Live at home if you can, rent if you must, the down payment should be cash not on credit.

Step 3: Pay your mortgage

Accelerated payments is a great way to tackle the principal portion of your debt. By going with accelerated weekly payments you can save $50,000 of interest, that’s 6% on the total price of the home. Now where can you get a guaranteed 6% rate of return?

Step 4: Read your contract

Anniversary payments: Every year you can make a lump sum payment that goes directly on the mortgage principle. Using that bonus from work or your tax refund is a great source of this extra cash. Plus you can sleep better at night knowing you just filled a large portion of the giant debt hole.

Step 5: Shorten your mortgage

Amortize your mortgage over a shorter period. On the above scenario changing your amortization period from 25 to 20 years will save you $65,000 with monthly payments and $100,000 on accelerated weekly payments! Talk about a great way to save!

Step 6: Pay cash (if you can!)

Pay cash for the entire house. Yes that’s right, save the money and pay in cash! You won’t make any friends at the bank but you have enough friends already and they’re not trying to steal your money.

Despite the many financial pitfalls of home ownership there are more than enough easy ways to reduce your debt. Following these steps, you should be able to reduce the true costs of your mortgage.

Other considerations:

Co-ownership

Have you considered purchasing a home with another person? This may be a great way to cut the overall purchase price and expenses in half! Millennials in major cities are purchasing homes together as the current prices are far too high for just one of the them to buy. Just like any partnership or business it is very important to make sure you have a co-ownership agreement in place to specify the responsibilities of each party and what the exit strategy is. Consider what happens if one owner wants out while the other(s) do not.

Roommate

Perhaps an easier way to save is simply renting out a vacant room or town in the house to generate additional income which will make your house more affordable. You will further save on utilities especially in the common areas of the house as there will be more than one person using them. A common saying is “two can live cheaper than one”.

YOUR NEXT MOVE: RENT VS BUY

Your next move is a big one. If you have not yet purchased a home, should you? In looking at the analysis if you expect the home to double in value in 25 years than buying a house makes more financial sense. However we must consider that the interest rates will raise and in 25 years the housing market may be a downturn. That is why using the ways to save are so important to making your largest purchase work in your favour. Don’t let the biggest purchase of your life cripple you for life, enjoy your home, make it your own, don’t let it make you.

why 20% down won't protect you

Why 20% down won’t protect you

For weeks we have been talking about mortgage rate increases and how you can protect yourself. Our discussions have been centered around those that make less than a 20% down payment. However new rules are lurking in the future for those that make a 20% or more down payment. Here is why 20% down won’t protect you.

Why 20% down won’t protect you

What would happen if you had to qualify for a mortgage at an interest rate 2% above? Can you afford your mortgage if you had to pay an additional 2% of interest? Well according to an article I read on the Financial Post the government is considering having folks that made a 20% or more down payment qualify based on an interest rate that is 2% higher than their contract rate. Do you even know what interest rate you are paying let alone what it will be if it is 2% higher.

Last week we took a look at what a mere 1% interest rate increase would look like inAre you part of the 1% group?”. Here is what a 2% increase would look like:

What a 2% interest rate increase looks like

Home price = $450,000

Down payment = $112,500 (20%)

Amortization = 25 years

Interest rate = 4% and 6% (1% increase)

Here is what the numbers look like:

4% Interest Rate 6% Interest Rate Increase
Mortgage (home price less down payment, no mortgage insurance) $337,500 $337,500  
Monthly Payment $1,775 $2,195 $420
Total of monthly payments for 1 year $21,300 $26,340 $5,040

Even with a 20% down payment a 2% increase will set you back $420 a month or $5,040 per year. Can you afford a 2% increase?

How you can protect yourself

Pay down your credit card debt

The amount of mortgage you can afford is limited by the amount of your other debts! Especially ones that charge high interest rates, like credit cards, which causes you to pay more. Paying down your high interest debt first before applying for a mortgage may be the strategy you need. With more money at your disposal an additional 2% increase on an existing 3% rate is still much better than paying debt with 20% interest rates.

Increase your down payment

Yes the larger down payment you make the lower your outstanding debt and lower payments meaning less interest! Save up more money using one of these 25 simple ways to save.

Make an anniversary payment

It is your anniversary! It is time to make a payment on your mortgage. After having saved up cash from reducing frivolous expenses you may have enough saved for a nice anniversary payment. Even if you make an anniversary payment every few years you can still put a huge dent in your debt.

Increase your income

To afford more you’ll need to increase your income which is one of the hardest things to do. Each day we come across many choices where we can save money; each day we do not come across many choices where we can make more money. In any case here are a number of ways.

Plan to earn a raise – raises do not just come out of nowhere from the goodness of your boss’ heart, they are earned. So how will you earn you next one? Who do you have to influence to get that raise? What do they want to see done for you to earn that raise?

Prepare your resume and go second job hunting – having a second job is a nice way to earn extra cash even if it is temporary. But first you will need a good resume that potential employers will like. Your resume doesn’t have to be perfect, it does have to be professional and showcase your skills and background.

Hobbies are not for enjoyment, they can earn you some extra cash – Even the simplest of hobbies such as walking can earn you some extra cash. You may offer a walking tour around your area’s most scenic hot spots and look outs. Perhaps your passion for baking can be yield you some extra dough at the next farmers’ market. The important thing is to keep your hobbies enjoyable so they stay that way.

How to start investing in real estate

How to start investing in real estate

Investing in real estate can be a great way to generate income and wealth. Just take Wang Jianlin the world’s 18th wealthiest person with a net worth of over $30,000,000,000 ($30 billion)! I get a lot of questions about investing in real estate and so this week we are talking about how to start investing in real estate.

How to start investing in real estate

Buy a Real Estate Investment Trust (“REIT”)

The first way you can invest in real estate is as simple as buying into a REIT. REITs are comprised of a variety of real estate properties; similar to a mutual fund. Instead of owning many stocks and bonds a REIT owns real estate like apartments, commercial units, land for development and more!

Here are the benefits of REITs:

  1. They are liquid because they are traded on the world’s most prominent stock exchanges
  2. They provide good returns through higher yield dividend returns
  3. You can invest in real estate far beyond your current financial means. Popular REITs in Canada include:
    1. RioCan (Superstores)
    2. H&R (H&R Block)
    3. Chartwell Retirement Residences (Chartwell)
    4. Boardwalk (Residential Apartments)
  4. REITs are affordable and can play an important part of your investment portfolio.

Buying a rental property

Buying a rental property is a common first step to invest in real estate. Generally a person would buy a house that be any of the following:

  • Single family dwelling
  • Duplex
  • Triplex
  • Student house rental

Here are the benefits and drawbacks with investing in a self-managed rental property.

Benefits

  1. Have greater control over the property than other forms of real estate investing
  2. You can select the property you want and the tenants you want
  3. Decide whether you want to renovate or not

Drawbacks

  1. Everything is on your shoulders.
    1. Finding the property
    2. Finding and deal with tenants
    3. Dealing with repairs and renovations
  2. You are on call 24/7. If the tenants have an issue they call you, for EVERYTHING!

Which one is right for you?

REIT Self-managed rental
Type Passive Active
Control Less More
Stability in returns Stable Stable if managed properly
Diversity Diversified All eggs in one basket

If you are seeking a more passive investment, with stable returns and you do not mind not having direct control, a REIT may be right for you. You can also invest in many real estate types as mentioned above and will not be tied to one specific property. Proponents of REIT investing would ask: “prudent investing would suggest that it is not wise to invest in only one stock (you would invest in more to diversify the risk) so why only buy one single property that makes up your entire real estate portfolio?”

For those of you that prefer direct control, want to focus on one investment and can thrive in a more active investment, a self-managed rental may be right for you.

Being informed so you know how to start investing in real estate

With either method you need to be informed. Here are a number of key ways to get and stay informed:

  1. Do your homework: research the investment until you are comfortable with the purchase.
  2. Speak with others dealing in those investments and be selective with who you speak to. Not all advisors and real estate professionals are created equally.
  3. Subscribe to industry association email lists that provide updates and insights in those investment industries.
How to dig yourself out of paying only 5% down

How to dig yourself out of paying only 5% down

How to dig yourself out of paying only 5% down

Last week we discussed why and how making a 20% down payment on your mortgage saves you a lot of money. We learn why the difference between 20 and 15 is not 5! This week a good friend mine and a contributor to Simple Money Living brought up the great topic of for those of you who only made a 5% down payment how can you still save money. So today we learn how to dig yourself out of paying only 5% down!

Key strategies on how to dig yourself out of paying only 5% down

Accelerated payments

Accelerated payments are what they are; payments made more frequently than the standard monthly payments. This is one of the easiest ways to save on your mortgage costs. The sweet spot in accelerated payments is accelerated bi-weekly, which means you will be making mortgage payments every two weeks (26 times a year). This is the sweet spot for two reasons:

  1. Accelerated bi-weekly payments gives you the most savings. In our example from last week you will save $56,000 of interest over the 25 years or $2,200 a year. I know of some great uses for that $2,200 a year and I am sure you do as well!
  2. Most people are paid either weekly or bi-weekly which means you will have money coming in just as it needs to go out to pay for your mortgage! That makes it easy to schedule and easy to avoid temptations of spending that money frivolously!

Anniversary payments

Anniversary payments are fixed payments made at specific intervals- say, annually- directly towards the principal of your loan. A typical anniversary payment might allow you to pay off up to 15% of the total loan amount each year on an “anniversary date”.

With the example from last week’s article after one year your mortgage balance would be down to $508,000. With a one time 15% payment of $76,000 you would be able to pay off your mortgage in 18 years instead of 25! What can you do with your debt being paid off that early? Would you retire early? Take that vacation of a lifetime? Use your money to leave a legacy through donating? The choice is yours and the important thing is, the choice is YOURS, no one else’s.

Renegotiate a shorter amortization period

When your term is up you can negotiate a shorter term. With a shorter term you pay the mortgage off sooner saving you a lot of interest. Here are some of best reasons on why renegotiating a shorter amortization period makes sense.

  1. You may be earning a lot more money than you did at the beginning of the term that just finished and now you can afford to make higher payments.
  2. You want to be debt free sooner and have that financial freedom to pursue your goals and dreams in life.

Get your shovels

It is never ever too late to save on your mortgage. The key strategies above are your shovels to dig yourself out of debt. So whether you are approved for a mortgage the first time or you didn’t make more than a 5% down payment, you have the tools and the time to save. Saving money, saving time of being in debt all so you have the time and money to do what you want in life.

Why the difference between 20 and 5 is not 15!

Why the difference between 20 and 5 is not 15!

At first thought the difference between 20 and 5 is 15, at least basic math proves this. However in the world of mortgages the difference between 20 and 5 is not 15, it is $77,000! Today we find out why the difference between 20 and 5 is not 15!

Where the difference arises

Assume you are a first-time home buyer, you have the option of putting a 5% down payment on your home instead of the required 20%. According to the Canadian Real Estate Association, as of March 2017 the average house price in Canada was $550,000, though hopefully you are looking at a much more affordable home. In any case you take a 25 year mortgage at a rate of 4.64% (which is the current five year closed fixed rate).and make a 5.5% (5% on first $500,000 mortgage and 10% afterwards) or $30,000 down payment.

With only a 5.5% ($30,000) down payment you will pay over $357,000 in interest! That is 65% of the purchase price of the house! How crazy is that.

With a 20% ($110,000) down payment you will pay only $300,000 of interest which is 16% less interest than if you only made a 5.5% down payment.

The table below illustrates this quite well:

Down Payment Mortgage Total Interest Paid
5.5% (approx $30,000) $520,000 $357,000
20% down payment ($110,000) $440,000 $300,000
Interest difference $57,000
Interest difference per year ($57,000/25 years) $2,280

Now you can see the difference between 20 and 5 is not 15, it is actually $57,000 or $2,280/year! Bear with me, yes $57,000 is not $77,000, this is only the first piece. You can save, as a first time home buyer $2,280 per year of interest on your mortgage simply by having saved (which had earned you interest income) up for a down payment. I can think of some great things (i.e. vacations, donating to your favourite cause, funding a RESP for your children) you can do with that money!

However with anything less than 20% the lender is required to obtain mortgage loan insurance which is passed on to you, the borrower.

Additional Savings you did not even know about

Not only do you save $57,000 but with a 20% down payment there is no need for mortgage loan insurance through CMHC. If you only put down a 5.5% down payment your mortgage will increase by $20,790! And guess who benefits from this insurance?

Your lender benefits from this insurance, not you. In case you stop paying the lender is protected however they pass this expense of theirs to you! If you make the 20% down payment there is no insurance and you save! You can save yourself at least some of the $20,790 by making between a 5% and 20% down payment

Your total savings is really over $77,000 or $3,080 a month!

Benefits of making a larger down payment

There are many benefits of making a larger down payment and here they are:

  1. Less interest you will pay
  2. Little to no mortgage insurance you will have to pay
  3. Less stress and anxiety because your debt will be less and more manageable

What can you do

I understand that making a larger down payment can be tough to do, not everyone has that kind of money laying around and to save that amount may take longer than you need or want. Here are some strategies to use to make sure you are buying a house you can afford and making a down payment you can afford as well:

Your best strategy is to budget. 25% is the maximum recommended of your after-tax income that you should be spending on your house (i.e. mortgage, insurance, maintenance). Utilities is separate at 5%. So for simplicity use 30% for the maximum.

  1. Calculate what 30% of your after-tax monthly income is.
  2. Add up the monthly mortgage payment, monthly insurance cost, monthly expected maintenance and utility costs.
  3. Determine whether the amount in b) is greater than the amount in a), if it is the house you are want to buy is one you cannot afford unless you make a large down payment to decrease the mortgage. If b) is less than a) it is a house you most likely can afford.