173870
177630
Mortgage-Matters

Good debt vs. bad debt

Until recently there was no such thing as ‘good debt’ or ‘bad debt’ as all debt was ‘bad debt.’ Owing money for any reason wasn’t a good thing and it was important to focus on paying off everything.

But now we are hearing about having ‘good debt’ and having ‘bad debt.’ So what’s the difference?

‘Good debt’ is considered to be funds that you borrow to purchase an appreciating asset. Something that may grow in value, such as real estate, a business or investments.

‘Bad debt’ would be money you borrow to purchase a depreciating asset – cars, boats, clothes, consumables – or something that you can’t afford. Something that quickly loses value or doesn’t generate any revenue. It is most likely at a higher interest rate, and even if the rate is low today, you should also factor in a higher rate to ensure that you can afford it in the future.

High-interest-rate credit card debt is considered ‘bad debt.’ Credit cards themselves are not evil if they are used prudently and balances are not carried over.

Mortgages are considered ‘good debt’ because real estate generally appreciates over a period of time, although there are no guarantees. You are also borrowing at lower interest rates.

Home equity lines of credit, which are a type of mortgage, can be either ‘good debt’ or ‘bad debt’ depending upon what they are used for. If you are using your line of credit to purchase depreciating assets or using it for your day-to-day expenses, it would be considered ‘bad debt’. Consolidating your high interest credit card debt into a home equity line of credit would be ‘good’ as there would be a significant lowering of the interest rate.

Car loans would be ‘bad debt’ as you are purchasing a depreciating asset, but unfortunately the reality is that this is the only way that most people can afford a vehicle. The best thing to do is pay cash or as much cash up front for a car as possible. Do you really need a fancy new car or should you rather consider a lower mileage used vehicle?

Pay day loans or cash advance loans are definitely ‘bad’ as the interest rates and fees are astronomical.

In reality, it can be argued that no debt is ‘good debt’ but used in moderation and with an educated approach, debt can assist in many things.

If you are a homeowner and you would a review on how you might eliminate some of your ‘bad debt,’ please give me a call at 1-888-561-2679 or email [email protected].





Buying a fixer-upper

Are you thinking about buying a diamond in the rough to transform into your dream home? No doubt it’s easy to be tempted by all of the magical home makeovers that are seen on the home improvement shows these days. With home values rising this could be a great way to make home ownership a little more affordable for some by buying in a neighbourhood that is undergoing a transition.

Obviously you need to avoid buying a money pit. Working with professionals will ensure that the improvements you are considering will be worth it in the end to improve the value of the home. You don’t want to over-renovate the home for the area so avoid renovations that just won’t be worth it in the end.

But how do you afford to do a renovation? When you purchase the home you will need sufficient funds for the down payment and closing costs. You take possession of the home and if you don’t have the cash set aside you will then need to secure a home improvement loan or perhaps use a line of credit. It could be difficult to qualify for additional financing when you have just purchased a home and these options can also be expensive.

The great news is that there is an affordable solution – there are insured mortgage programs that require as little as a 5% down payment that will allow you to borrow up to 20% of purchase price for improvements. If the improvements are over $40,000.00 then a full appraisal is required and advance draws will be managed by the mortgage insurer. The property value must be less than $1,000,000.

The value the lender will lend on is based on the lesser of the improved value of the property or the purchase price plus the direct costs of the improvements. The improvements must increase the value of the home once completed.

Here are the steps that you need to take:

Step One:

Obtain a mortgage pre-approval from a mortgage professional to determine your maximum approval amount.

Step Two:

Find a home and have a general idea of what renovations need to be done as well as their cost. The purchase price plus the renovation cost cannot exceed your maximum approval amount for a mortgage. Lenders will request written quotes to be provided, detailing the work to be done, as well as the cost.

Step Three:

Once your offer is accepted, you will need to provide the accepted purchase offer, as well as the quotes for the improvements, to your mortgage broker. A financing request will be sent to the lender which includes the cost of the renovations.

Step Four:

Once you take possession of your home, you can begin the renovations. The Lender will instruct the Solicitor to hold the additional Renovation funds, until the lender confirms the works has been completed. Once the renovations are completed an appraiser will complete an inspection to verify the work is completed as per the quotes.

Step Five:

The lender will receive the inspection report from the appraiser, and validate that the work has been completed in a good manner. They will instruct the lawyer that they are able to release the funds to you to pay the contractor.

If the property is valued at more than $1,000,000 then there are other options available to complete renovations.

If you would like to see if this program can help you affordably turn a fixer upper into the home of your dreams, give me a call. I’ll provide an analysis of your needs and financial situation to complete a mortgage preapproval.



Mortgage broker or bank?

If you’re thinking about buying a new property or taking advantage of today’s low interest rates to consolidate high-interest credit card debt, your first thought might be to call your bank.

Read this article first as it could save you time and money and explain why working with an independent mortgage professional is in your best interests.

Mortgage brokers are independent, trained professionals licensed to represent and provide you with the best advice for your mortgage needs.

We deal with many different financial institutions, which allows us to offer you more choices and generally more competitive rates. It also means that our advice is impartial and based on whatever is in your best interest and not what is best for your bank.

We represent you and not the lender. (We must also keep the lender’s best interests in mind and due our due diligence.) We are not employees of any lending institution. Bank employees are salespeople and not mortgage professionals.

Each bank branch acts as a separate profit centre independent of their head office. They are rewarded and paid based upon the profitability of their overall mortgage portfolio.

As a mortgage broker, I will offer you the best terms and rates upfront. This doesn’t always happen at a bank. It is not in their best interests to offer you the best rates or direct you to another lender if they think the other lender has a better product.

A bank branch also has limited access to mortgage products as they can only offer what’s available in their portfolio and unfortunately as mortgage brokers we often see client who have been placed into restrictive mortgage products based solely on low rates that were being promoted by banks.

We can sort through dozens of lenders in the time it takes you to book an appointment at your bank. Shopping for mortgages can be time consuming and frustrating

if you do it yourself. We know the quality of products offered by the various lenders and can quickly short list the ones that best match your needs. You’ll end up with the best features and rate, all in one stop.

Mortgage brokers deal with the same reputable, established Canadian financial institutions that you deal with every day but we have access to some innovative broker-only lenders who sometimes offer even more attractive rates and features.

We also work with alternative lenders for those who don’t fit within the bank box.

The best part, there is no cost to you for allowing us to assist. In most cases, the lender pays our fees.

Please give me a call to arrange a no obligation consultation whether you are buying a home, renewing an existing mortgage or looking for additional funds.

We can review all of your options so you can make your best decision on the largest financial transaction of your life.



175988


Monster in your mortgage

If you are a typical Canadian mortgage holder, you will take a fixed rate mortgage (77%)* with a 25-year amortization (90%)* and you won’t increase the amount of your payments, or:

  • Pay any lump sum payments
  • Increase the frequency of your payments (66%)* at any time during your mortgage.

The Monster in your mortgage is the interest you are paying. It’s really quite outrageous when you think about it. Yet, every day, many Canadian home buyers are accepting The Monster in their mortgage without a thought to what it might mean to their overall financial health for the future.

Here’s a typical scenario.

You have found your dream home. Congratulations! Your realtor was a great negotiator and you purchased your new home for $550,000. Your mortgage is $440,000 with monthly payments of $1,932 a month over a 25-year amortization.

You were also able to negotiate a great rate (2.32%)* with your mortgage lender, so you are feeling pretty good right about now.

But wait a minute, let’s total those payments:

  • That’s $579,600 worth of mortgage payments over the next 25 years.
  • With your down payment of $110,000, does that mean you are paying $139,600 more than you agreed to pay for the house?

Assuming that there is no increase in mortgage rates over the next 25 years, the answer is yes. Yes!

If rates increase the overall cost of buying your home will increase significantly as you renew your mortgage at higher rates assuming that rates will increase within the next five years, which is most likely.

The good news is, something can be done to weaken The Monster and make it nearly helpless. With a couple of small affordable strategies that do not even require lump sum payments, you could potentially save thousands in mortgage interest even within the first five years of your mortgage.

You can start by setting your mortgage repayment at accelerated bi-weekly payments. Just rounding up your payment to an even amount will save you and then set yourself on a program to increase your mortgage payments annually.

These are only three of the many strategies that are available to get your mortgage under control and you don’t have to be a new homeowner or wait until your mortgage is up for renewal. They can be implemented at any time during the life of your mortgage.

If you would like to know more specifically how these strategies can put a large amount of the interest on your mortgage back into your pocket, let me know. We can discuss and implement a mortgage plan that will help reduce the overall cost of borrowing on your mortgage.

For more information please call 1-888-561-2683 or email [email protected]

*Annual State of the Residential Mortgage Market in Canada – Mortgage Professionals Canada March 2021



More Mortgage Matters articles

167519
About the Author

April Dunn is the owner and a Mortgage Broker with The Red Door Mortgage Group – Mortgage Architects. She has been assisting clients to purchase, refinance or renew their mortgages for over 20 years.

April has experience as a Credit Union manager, a Residential Mortgage Manager with a large financial institution and as a licensed Mortgage Broker. By specializing in Strategic Mortgage Planning she has the tools available to build a customized mortgage plan, with the features and options that meet your needs.

April provides a full range of residential and commercial mortgage financing options for clients all over the province of British Columbia and across Canada through the Mortgage Architects network.

Contact e-mail address: [email protected] or by phone at: 888-561-2679.

Website:  www.reddoormortgage.com



177373
The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

Previous Stories