There has been a common trend recently among clients with the concern of whether they should pay off their mortgage before it runs its natural course OR should I pay down as fast as possible using the pre-payment method.

The misconception I find in todays society is that we see our home, the one where we live, an asset. In my opinion, an asset is an instrument that puts money in your pocket on an ongoing basis, rather than require you to make constant payments to keep it operating. What I mean is, at the end of every month you are left with a net deficit because your principle residence does not generate monthly cashflow (unless you rent a portion of your home).

Yes, I understand that the home grows in value over time, but those are just paper profits! To build wealth we must invest in instruments that generate monthly cashflow that is positive net of any expenses. A more important point is that those expenses should be at the very least covered by someone rather than yourself.

I recommend taking a moment to sit down with a mortgage professional that has some level of understanding of assets VS liabilities, cash flow and balance sheets. This professional will be a tool in your arsenal of weapons which will allow you to deploy your capital in a way to build generational wealth.

Below you will find a few scenarios that will speak to the pros and cons of paying down your mortgage early:

You have a super low mortgage Rate
If you locked in at a great rate and have low interest on your mortgage, take advantage of it! Pay it back as you can but do not feel pressure to go above and beyond your monthly mortgage payment if it is not an option for you. I would advise in this instance, to speak with your financial planner or accountant to find out what your strategy is for debt repayment.
Having a solid plan can help set you up for future success and help you focus on paying down debts that have the highest interest amount first, thereby lowering the overall debt load you are carrying and paying out each month. I can recommend some fantastic accountants and financial planners if you are on the lookout for one!

The Property is a rental or investment property or houses a home-based business
This may be a consideration for some people as a portion of the interest (on rental properties and homes with home offices) are tax deductibles. In these cases, aggressive payback could have a downside in relation to your tax right offs.
Again, this is an instance where an accountant’s guidance can direct you towards the best option. For some, the tax break is significant and for the circumstances, it makes sense to keep the payments as they are. For others, it would make more sense to increase the payment as the interest is minimal Talk to a professional to get the best advice on this area and consider all your options.

You have a better investment opportunity
If you have an opportunity that will give you a higher return on your investment, consider taking that avenue vs. paying down your mortgage. For example, if you put $100,000 into your 3.00% mortgage, you save $3,000 next year but if you made a 5% return on that $100,000 instead, you could put that $3,000 towards your mortgage next year and still have $2,000 left over.

With that said, there are many instances when an investment may seem excellent on paper, but, is not ideal. Always seek advice from a professional first before making a financial decision.

These are just 3 examples of times it doesn’t make sense to pay down your mortgage right away. Ultimately though, you should consider what choice will be the right one for you. There are many instances where paying down your mortgage does make sense. As a Dominion Lending Centres mortgage agent, I am here to inform you of every option available to you and advise you on what we feel is the best course of action. I can work with you and your financial advisors/accountants to determine when and if paying down your mortgage is a good option for you—but at the end of the day, the decision is yours!

Thank you,

DF

416 550 3101

Daniel@finkelbergfinancial.com

Mortgage terminology can be confusing when not broken down and explained. Given that this is single handily the biggest financial investment of your life, you should know the basic meaning of the following terms. As your mortgage agent it is important for me to know that we are always on the same page. My goal is that after a meeting with me, you can teach someone else about the mortgage journey.

1. Amortization – “Life of the mortgage” The process of paying off a debt by making regular installment payments over a set period of time, at the end of which the loan balance is zero. Typical amortizations are 25 years or if you have 20% or over down payment – 30 years.

2. Appraisal – An estimate of the current market value of a home. A property is appraised to know the amount of money that a lender is willing to lend for a buyer to buy a particular property. If the appraised amount is less than the asking price for the property, then that piece of real estate might be overpriced. In this case, the lender will use the appraised value to lend. The buyer will have to come up with the difference or back out of the deal.

3. Closing Costs – Costs you need to have available in addition to the purchase price of your home. Closing costs can include: legal fees, taxes (GST, HST, Land Transfer Tax (LTT) etc.), transfer fees, disbursements and are payable on closing day. They can range from 1.5% to 4% of a home’s selling price.

4. Co-Signer – A person that signs a credit application with another person, agreeing to be equally responsible for the repayment of the loan.

5. Down Payment – The portion of the home price that is NOT financed by the mortgage loan. The buying typically pays the down payment from their own resources (or other eligible sources) to secure a mortgage. If you have questions on the minimum amounts and sources, please do not hesitate to reach out to me.

6. Equity – The difference between the price a home could be sold OR appraised value for and the total debts registered against it (i.e. mortgage). Equity usually increases as the mortgage is reduced by regular payments. Rising home prices and home improvements may also organically increase the equity in the property.

7. Fixed Interest Rate – a fixed mortgage interest rate is locked-in and will not increase for the term of the mortgage.

8. Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS)

a) GDS – Typically mortgage lenders only want you spending a maximum 35-39% of your gross income on your mortgage (principle & interest), property taxes, heat and 50% of your condo fees.

b) TDS – typically, lenders want you spending a maximum 39-44% of your gross income on your GDS – PLUS any other debt obligations you have (credit card debt, car payments, lines of credit & loans).

9. High-ratio mortgage / Conventional Mortgage – a high ratio mortgage is a mortgage loan higher than 80% of the lending value of the home. A conventional mortgage is when you have 20% or more down payment. In Canada, if you put less than 20% down payment, you must have Mortgage Default Insurance (see below). Since the introduction of B-20 your mortgage affordability (GDS & TDS) is “stress tested” with the Bank of Canada’s qualifying rate (currently 5.34%).

10. Interest Rate – This is the monthly principal and interest payment rate.

11. Mortgage – A legal document that pledges property to a lender as security for the repayment of the loan. The term is also used to refer to the loan itself.

12. Mortgage Broker – A professional who works with many different lenders to find a mortgage that best suits the needs of the borrower.

13. Mortgage Default Insurance – Is required for mortgage loans with less than a 20% down payment and is available from Canadian Mortgage & Housing Corp. (CMHC) or 2 other private companies. This insurance protects the lender in case you are unable to fulfill your financial obligations regarding the mortgage.

14. Open / Closed Mortgage

a) An open mortgage is a flexible mortgage that allows you to pay off your mortgage in part or in full before the end of its term, because of the flexibility the interest rates are higher.

b) Closed mortgages typically cannot be paid off in whole or in part before the end of its term. Some lenders allow for a partial prepayment of a closed mortgage by increasing the mortgage payment or a lump sum prepayment. If you try and “break your mortgage” or if any prepayments are made above the stipulated allowance the lender allows, a penalty will be charged.

15. Pre-Approval – A lender commits to lend to a potential borrower a fixed loan amount based on a completed loan application, credit reports, debt, savings and has been reviewed by an underwriter. The commitment remains as long as the borrower still meets the qualification requirements at the time of purchase. This does not guaranty a loan until the property has passed inspections underwriting guidelines.

16. Refinance – Refinancing is the process of replacing an existing mortgage with a new one by paying off the existing debt with a new, loan under different terms.

17. Term (Mortgage) – Length of time that the contract with your mortgage including interest rate is fixed (typically 5 years).

18. Title – The documented evidence that a person or organization has legal ownership of real property.

19. Title Insurance – Insurance against losses or damages that could occur because of anything that affects the title to a property. Insurance Title insurance is issued by a Title Company to insure the borrower against errors in the title to your property.

20. Variable Rate Mortgage or Adjustable Rate Mortgage (ARM) – A variable mortgage interest rate is based on the Bank of Canada rate and can fluctuate based on market conditions, the Canadian economy. A mortgage loan with an interest rate that is subject to change and is not fixed at the same level for the life of the loan. These types of loans usually start off with a lower interest rate but can subject the borrower to payment uncertainty.

I hope you found this list useful. If you have any questions please feel free to ask.

Thank you,

DF
416 550 3101
Daniel@finkelbergfinancial.com