What’s the first thing you think of when someone says ‘debt consolidation’? Trouble… or, you can’t pay your bills…cashflow problems… We probably all think there is some financial problem..
Sure, that’s the popular reaction…and who can blame us for thinking that way with the recent media hype about Personal Debt concerns… One day we have an article saying that Personal Debt levels are high or increasing… The next day, Canadians are conservative and managing our debts well. This flip-flop would confuse anyone. click here for some articles from earlier this year.
But debt consolidation can actually be a good thing most of the time… And that time is now. You’ve heard of ‘buy low and sell high’… Well in credit, you ‘borrower when rates are low to save high amounts of money’…
With record low interest rates it makes sense to borrow….If you own a home, have some equity and have some non-mortgage debt, such as credit cards, a car loan, a student loan, a line of credit, etc… These debts probably carry a higher rate of interest than what you could get through a mortgage… Debt Consolidation is a smart thing….paying less interest puts money in your pocket.
Here’s a good calculator to figure out how much you can save…DEBT CONSOLIDATION CALCULATOR.
Use these rates for comparison…Mortgage rates are well under 4.00% today… a 5 year fixed rate is somewhere around 3.59% and Variable rates are around 2.25%… compare this with 12% to 18% credit cards, 6% lines of credit, 7% car loans, etc… Rolling these debts into a mortgage is not a bad thing, it’s a smart thing. Paying less interest just makes good financial sense.
And as always, speak with someone who knows and understand financial matters… talk with a qualified Mortgage Broker or Financial Planner….
Saw an article this week that talked about low mortgage rates being used an incentive to help sell your home faster. Most mortgages are assumable, meaning the buyer of your home can take them over upon qualification.
If interest rates increased significantly, then having a 3.69% mortgage could lead some buyers to your home.
Another strategy that is used during a slower housing market is to buy the interest rate down to below market rates… this is something that would need to be negotiated at the time of signing the mortgage but it is offered by a few major lenders…
Turn on the TV, listen to the radio, read a newspaper or talk to someone at the office water cooler. What are we hearing? ‘House prices fall’…. ‘Mortgage rates are going up’…
Okay, are you ready to hear some good news? Let’s talk about what’s really happening and how YOU can benefit.
Firstly, house values are actually stable according to the Canadian Real Estate Association (CREA). The article goes on to say that House sales may cool this fall due to a robust Spring market and that house prices may fall. Hey, that’s okay.. we don’t want to see a runaway market… but that should trigger us to do something now. Take advantage of these incredibly low rates.
Interest Rates are at historical lows and yet I don’t see much news coverage about that…did you know that a 5 year fixed rate can be had for around 3.69% and in some cases even better for qualified borrowers…. Variable rate is also great… 2.30% is an excellent rate…. and Economists are forecasting for no real increases until the Spring…
REFINANCE WHEN RATES ARE LOW
It’s really no secret…. you’ve heard of buy low and sell high?… well, with interest rates it’s ‘borrow when rates are low and get rid of high interest rate debt’….. This is the best time to borrow money. Here’s how you can benefit….
Let’s suppose your situation looks like this:
- have a house worth $350,000
- a mortgage balance of $200,000 @ 5.00% with payments of $1,100/mth.
- credit cards $8,000 @ 12.00% with payments of $240/mth
- a line of credit $10,000 @ 6.00% with payments of $300/mth
- car loan of $15,000 @ 6.00% with payments of $480/mth
- you want to invest some money into rrsps or resps or some other GOOD investment for $20,000….
- your monthly payments total $1,640.
Here’s what you could be doing:
- increase your mortgage by up to $80,000 to $280,000
- pay off all that debt and take the extra funds (up to $47,000) and invest or use as you require
- your payment based on today’s 5 year fixed rate of 3.695 would be $1,427/mth
- your payment based on today’s Variable rate of 2.30% would be $1,227/mth
Your cashflow would actually improve and you would put money in your pocket.
This is just one example of how you could benefit… we all have different needs and different situations…get your finances analyzed by a qualified Mortgage Broker. See how you could benefit….It’s a great time to borrow…
Owning a rental property can be a great way to build your net worth and also enhance your income. In recent years, house values increased to a point where it was next to impossible to find a property that had a positive cashflow.
The biggest cost in owing a rental property is the mortgage. And we are seeing historical low interest rates …. under 4.00% for a 5 year fixed and variable rates of under 3.00%….
Does the math work for you? Let’s take a look at a mortgage I arranged for someone who bought a townhouse for $320,000. Here’s what the math looked like:
- We arranged a 1st mortgage for $256,000.
- negotiated a 5 year fixed rate of 3.89% amortized over 35 years.
- Monthly payment is $1127.
- property taxes are $240/mth.
- tenant pays $1500/mth rent plus utilities.
- end result is a $133/mth positive cashflow.
This was a good situation.. not all rentals will produce a positive cashflow but they don’t always have to. There are usually some tax advantages to owing a rental property that is producing a slight loss..
Here are my tips when buying a rental property:
- you should plan on holding for at least 7 years… most economic cycles will have run their course in that time and property appreciation is more likely…any initial costs incurred when the property was purchased are easier to absorb over that time.
- speak with your accountant and mortgage broker about obtaining the best financing…it usually makes sense to buy with as little down as possible, finance as much as possible and minimize or eliminate any profits to reduce income tax exposure….again, speak with your accountant.
- maximize the amortization your rental property so you can minimize the amount you pay towards the principal portion of the mortgage… again, this requires thorough of your personal situation but generally speaking, most borrowers carry other personal debt that should be paid off before the rental property mortgage.
- pay off all other personal debt first….. good debt is tax-deductible debt like a rental property mortgage….bad debt is non tax-deductible debt like credit cards, personal loans, mortgage on your principal residence.
- I love variable rate mortgages, but when it comes to rental properties, you need to consider a fixed rate… it’s important to know what your costs are when buying a rental property… many lenders don’t even offer a variable rate mortgage on rental properties which will limit your choice of lenders.
Qualifying for a mortgage on a rental property has changed significantly in recent years.
The biggest changes started immediately after the U.S. mortgage crisis in October 2008. Lenders all but stopped financing them. Earlier this year, the Federal government stepped in and changed CMHC’s rental policies for those with less than 20% down. I would say it’s almost impossible to qualify for a 1st mortgage greater than 80% on a rental property with ‘AAA’ rates.
And for those with 20% down or greater (a conventional mortgage), it was still difficult to qualify. Most lenders changed their polices here as well. Some Lenders wanted as much as 35% down or had debt servicing ratios that were not reasonable or practical.
The good news.… Lenders are interested in rental properties again.. not like pre-Oct. 2008 days, but we are seeing more reasonable qualifying. These record low rates make rental properties very appealing...
There are some interesting cashback mortgages available these days…. I’ve been asked if they are worth considering…
Let’s take a look at one of the better ones being offered out there…
The deal is simple.. you must take a posted 5 year fixed rate….currently at a very low 5.39%. You get 5.50% back in cash. Sounds pretty good but how does this compare with taking a discounted 5 year fixed rate of 3.69%?
We’ll use a $200,000 mortgage with a 25 year amortization in this example….
- 5.5% cashback equals $11,000 in cash to you.
- mortgage rate of 5.39% will give you a monthly payment of $1,208.01.
- your mortgage balance after 5 years will be $178,080.91
NO CASHBACK AND A DISCOUNTED RATE
- interest rate would be 3.69%.
- monthly payment is $1,018.70
- your mortgage balance after 5 years will be $173,155.72.
And the end result is…..your monthly payments alone would almost balance out… there is a savings of $358.60 in favour of the discounted rate. But look at the difference in the balance at the end of 5 years…. a $4,925.19 additional savings.
The obvious first choice is to take the discounted rate….but the Cashback is a good option for those that are just starting out or need funds for the initial expenses associated with buying a home…. The best choice for you will depend on your circumstances, goals and plans….. Talk to a qualified Mortgage Broker that doesn’t work for any one bank to understand the differences…