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Your Home as an Investment Vehicle


Your home is not just the place you hang out with your family and friends. It is also where you put a great percentage of your income through your mortgage and upkeep. The upkeep is an ongoing expense, but the  mortgage payments turn into equity. The equity can turn into an investment vehicle that will help you prosper when others are not and may also make your retirement years affluent rather than poverty stricken.

Most people are happy to finish paying their mortgage. Some even have “Mortgage Burning parties`. This is one way to look at a mortgage that relieves you of your monthly obligation. It just shows that you can work hard, not smart. There are other ways to look at a mortgage that are better for your long term financial health.  These have been heavily written about by Robert Kiyosaki in his series of books, his lectures and his on-line presence.

Working smart means that you use proven strategies to turn the equity in your home into an investment into another house that someone else will pay for through their rent. The equity built in this rental house is yours to borrow against or to cash out should you decide to sell. This strategy can be successful if you are judicious in the buy and screen tenants  to avoid downtime irregularities in the rent and damage to the place.

You can also put that same amount of money into a pool that buys you part of  a multi-family housing business.  If the investment is structured correctly, there will be a monthly income for all investors. This has less vacancy risk  than a single house  because there are a greater number of rentals.  Should someone do a midnight move, the profit for each investor is a little less for that month.

I am very fond of `Real Estate ` as an investment as opposed to many other investment vehicles. The return on an investment in real estate  depends upon the investor for the most part  because they must do `Due Diligence`. This includes buying at the right price so there is cash flow after the mortgage is paid.  This is valid whether the investment is a single house or an apartment complex.

It also depends on screening the prospective tenants to weed out the disruptive and addictive personalities. Many investors prefer to hire a property manager rather than doing this kind of thing themselves. It reduces the immediate profit, but gives long term profit as a good  manager sees more prospective tenants and will learn to read the signs better.

Should anyone decide to invest in a company, I would advocate investing in a local company rather than doing it through the stock market. You can stop in to see the business practices of a local company, whereas that is usually impossible if you invest through the stock market. The owner of a local company will usually be much more inclined to answer questions about bottom line decisions and returns. You probably would know that person which increases your chances of not being burnt on your investment.

As you may have noticed, I do not like the stock market as an investment vehicle for the most part. I also do not like  Mutual Funds or other investments of that manner. There are too many ways that investments can disappear leaving the investor with a worthless piece of paper while many involved have a pocket full of the investors` cash.

If you wish to pull equity out of your property for an investment while keeping your same payment schedule, contact  me 250.766.2106 or email  at fredmurray@shaw.ca for a cost free obligation free consultation. We have helped thousands of others, we may be able to help you.

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Mortgage Contracts – A Must Read


 

Should the need arise to terminate your mortgage early, the Mortgage Payout Penalty may be one of the largest surprises in the contract. Most early mortgage payout penalties are either 1) three (3) months interest or the Interest Rate Differential, whichever is greater.

If you are paying off your mortgage before the maturity date, most  financial institutions charge three months interest.  This means if you have a balance of $210,000  and a rate of 6.29% you will pay:

$210,000.00 x 6.29% = $1,100.75 per month x 3 months= $3,302.25

However if there is a significant difference between your rate and the current rate, your lender may use the interest rate differential to calculate your rate. You were smart to educate yourself and get a great rate. However most financial institutions use current posted rates on the day you signed rather than negotiated rates to calculate your penalty.

Since the posted rate when you got your mortgage was 7.79% , you negotiated 6.29% and  current rates are 4.79%, combined with your 5 years remaining of a 10 year mortgage,  the differential you will pay is :

$210,000 x (7.79% – 4.79%) 3% x 60 months (5 years) =$31,500 which is 9.53 times as much as three months interest.

As a banks primary goal is profit, guess which one you are going to be charged. Now had you had included using your negotiated rates rather than posted rates, the penalty would have been 1/2 of that or $15,750. This is one of the items in the mortgage contract that may be negotiable. If you don’t ask, the answer is always “No”

Every bank /financial institution uses a different system to calculate penalties. When you are in negotiations, find out what system your lender will use should you want or need to pay out your mortgage early. Do your best to get the lowest payout possible and make sure that it is carried into your new contract if and when you renew.

Many lenders will revert to standard clauses when you renew and it is in your interest to watch for this kind of change-up. Even though the wording may be similar to what it was, make sure you are clear on the meaning because the difference can be costly. Make sure you get a Mortgage Payout signed by your lender to ensure that there are no misinterpretations on your part.

The banks spend a lot of money on training their loans officers. Whether you have a short time to the end of your term or you just started, we have well trained long term industry professionals that may be able help you with a financial plan to save you years of payments and reduce the pain should you need to terminate your mortgage early.

Contact me ~ 250.766.2106 or ~ fredmurray@shaw.ca for a cost free obligation free consultation to see if we can help you pay the bank less.

Mortgage Payment Options


 

Mortgages used to be paid the same as rent, once a month. However, for awhile now, financial institutions have been allowing more flexibility in payment plans. This includes weekly, bi-weekly and semi-monthly, all outside the traditional once a month payment.  Depending on paycheck schedule, these options allow payments to coincide with paycheck.

However, unless you are on an accelerated plan, the interest paid on all schedules are almost the same. Within the Canadian housing market, the average mortgage is approximately $300,000. Canadian mortgages are now a maximum of 25 years. Within this framework, below is a comparison of  the interest paid on different payment schedules.

The mortgage amount is $300,000 at 5.24% on an amortization schedule of 25 years. The term is 5 years.

12 Monthly payments of $1786 gives $73,675 in interest.

26 Bi-monthly payments of $823 gives $73,675 in interest.

52 Weekly payments of $411 gives $73,497 in interest.

Accelerated payments mean you put more on each payment reducing amortization to 21.5 years.

26 Accelerated Bi-weekly payments of $893 gives $72,282 in interest.

52 Accelerated Weekly payments of $447 gives $72, 216 in interest.

The bottom  line with a normal mortgage is that if you want it to come down faster, you must put more money on it, whether it be weekly, bi-weekly, monthly or yearly.

To get your mortgage paid the fastest with the least money, you must pay interest only on what you owe, decrease your mortgage payments along with your decreasing balance and apply the savings as interest free payments against your outstanding balance.

Since all banks want the maximum amount of profit, the loans officer will not want to do this. It must be a negotiated payment schedule. If you want to reduce what you pay, you must improve your negotiation skills or hire someone with great negotiation skills.

For those reading this who do not like to pay any more interest than absolutely necessary, whether you just renewed or if your term is almost ready for renewal, contact me at 250.766.2106 or fredmurray@shaw.ca. We may be able to save you years of payments. We have the negotiation skills and the experience to help you pay less.

Your Credit Score ~ The bottom line


Your credit score affects your ability to borrow money and how much it will cost you to borrow. Keeping a credit score above 700 is imperative to borrowing money at the best rates. If you are under 620 you will  pay more to borrow if it is possible at all.

If you have let your credit score slip due to foreseen or unforeseen circumstances, repair it as quickly as possible. The cost can be hundreds of dollars every year until you have changed whatever is necessary to get it back up. There are a few simple fixes that can lead back to much better interest and insurance rates.

You can get your credit score once a year for free, so it pays take the time to check where you stand. It also does not hurt your score when you check yourself, so it is a good idea to check it every 6 months if you are rebuilding.  FICO is the agency lenders use when they are evaluating your past ability to pay, so it is where you get the numbers for their final decision.

There are a number of things you can do to get your score back up fairly quickly.  Most are very simple, but they all require your attention and action to implement the changes.

1)  Pay all bills promptly or ahead of due date. This includes utility bills which are expected occurrences. If you are regularly late it will negatively affect your score.

2)  Get a small ( affordable) loan and pay the installments on time. Ensure that the lender  is reporting to all three credit bureaus.

3)  Get a credit card if you do not have one.  If you cannot qualify for a credit card, go for a secured credit card that has your deposit as the limit.  Again make sure the lender is reporting to all credit bureaus.

4) Pay your credit cards off every month. This leaves you with available credit you are not using, part of the formula that credit bureaus use to set your credit score.

5) Do not max your card every month and pay it off the belief that this will help your score. Using a small portion, about 25% to 35%,  of your card every month and paying it off  works better. This shows available unused credit indicating  responsible debt management, thereby increasing your score.

6)  Like wine, old credit is better than new credit. So if you have a credit car you have not been using, start using it. If you leave it unused too long, it may be shut down. If your score is fairly reasonable and you  are just trying to improve your credit, try to increase the limit.  Make sure the company is reporting your to all three credit bureaus while you are on the phone.

7)  Make sure your company is reporting your limit to the credit bureau. If they are not, there is no indication of unused credit and you will get a lower score. If you have increased your credit limit and it is not accurately reflected on your report, call your lender to get it changed. Otherwise it will artifically lower your score.

8)  Get  your credit report and go through it with a fine toothed comb. Highlight any entries that seem inaccurate or outdated. Check with the lenders who made the reports that you deem inaccurate. Contact them and try to get the report changed. If they refuse to do this , you can challenge them through the credit bureau.

So if your life and credit took a hit, you can use these tips to rebuild your credit score back to the magic 700 in the quickest way possible.  If you are over 700 it it will help, but it is a longer process, more a matter of tweaking than rebuilding.

If you want to avoid this scenario by paying the bank less of your hard earned money, contact me at 250.766.2106 or fredmurray@shaw. If you can qualify, we can save you up to half of the payments you are legally obligated to pay your present lender.

Doing Business with your bank ~ as friends


Some profit is better than none and there is always the next customer who may not be so savvy that can and will be charged a higher rate. So before you go to the bank to get a mortgage or renew an existing one, educate yourself and prepare to do some bargaining. It can save you thousands of dollars.

Marie’s mortgage was coming up for renewal. As with most people, she wanted to pay the bank less, so she started shopping. She checked online for rates. She consulted several mortgage brokers and then contacted me. We were unable to help her due to a poor credit rating. So it was back to her Credit Union.

As a rule Credit Unions are a better bet for banking as their rates are normally a little better and they are a local entity. The staff is local and although they may transfer across town, they do not transfer across the country.  A personal relationship can be developed with the staff of a Credit Union. They do not make as much profit as a bank by design and profit is shared with the members.

Armed with her desire to get a better rate, Marie made an appointment with her Credit Union. She talked to the loans officer making it plain she was shopping for better rates. A credit check with her friendly local told her why she was paying more to borrow money. She always paid her debts.  She had no outstanding debt.  But she was late far too often to have a top credit score.

Within those paramaters  she was able to get a 2% reduction in her rates that she unable to get at any other banking institution.  Because she was a member of the Credit Union, she had been dealing there for many years and they did not want to loose her business, she was able to negotiate a rate that will save her a lot of money over the next Five years.

At her original rate of 6.75% on a $275,000 mortgage, she was paying approximately $1,884 per month or $22,608 per year. At her new rate of 4.75% she is paying $1,560 per month or $18,720 per year, a saving of $19, 440 over the Five year period. She also vowed to pay her bills on time to get an even better rate at renewal date.

The longer you are at a financial institution, the greater the possibility of this happening as long as you do your homework.  Because you have been with a bank for 10 or 15 years is not a good reason to assume you are going to get the best rates with any given credit score.  If you are not prepared to do some homework  and negotiate with the bank, be prepared to pay more money to borrow.  Every employee at the bank is working in the best interest of the bank, whatever story they may tell you.

If you are planning on buying a new house or renewing your current term, here are some tips to save money : 1) Ensure that your credit score is the best it can be (700 or better and it does not hurt your score to check it yourself) ,  2) Go online and check for current rates (Canada Mortgage.com), 3) Talk to a local mortgage broker with score in hand 4) Talk to the mortgage broker at your  bank and be prepared to negotiate.

Even with all of this, there are some ways to pay the banks less that are not easy to find, online or off. If you want to keep more money in your pocket, call  ~ 250.766.2106 or email me ~ fredmurray@shaw.ca for a cost free obligation free consultation to see if we can help even more.

You and the Bank ~ Getting Acquantied


At the bank, anyone with the right clearance can find out: 1) where you live, 2) where you work, 3) what you do the pay the bills, 4) who your supervisor is, 5) what your home is worth, 6) what your vehicle(s) is worth, 7) when you were born and where, 8) who your spouse is and much of the same information on them, 9) how many children you have and how old they are, 10) how much is in your savings account, 11) value of your RRSPs, TFSAs, and more. I may have missed a couple, but that is what your bank knows about you.

What do you know about your bank, other than it is the beautiful building on the most expensive real estate in town. You may remember the name of your loans officer that took your application, if she/he is still at this location. You probably know the first name of your favorite teller, but you probably don’t know the name of the manager or his/her assistant. I am sure you have never stopped to think about how the bank corporation can afford the most expensive property in town, so I will fill you in on some of the ways.

As with any other business, banks tie the managers’ bonus to production. Since their production comes out of our pockets, this is not always good for your or my financial health. The size of the bonus depends on how many new credit cards, investments, mortgages and accounts the staff puts on the books. This leads to a trickle-down effect on all supervisory people to keep the numbers up in their department.

They also do a lot of training to teach loans officers how to make you think you are getting a good deal when that is not the case. One way they do this is with posted rates. The posted rate may be 5.21%. You bring up your long term history with the bank and the loans officer drops it to 4.65%. You think you are getting a deal.
However, the next client who has done their homework asks what kind of an introductory rate they can get. This is the third bank they have gone to and this time they get a rate of 3.25%. The bank fools a lot of people who think they are getting a better deal than they are because of the posted rates. The one major exception to this rule is ING. They practice naked banking which means their posted rate is their rate, no fooling with numbers.

Posted rates can also cause a much larger payout if you want or need to sell your home. Many banks will use the “posted rate” to calculate your penalty rather than the lower rate you actually got. Always check the contract for this kind of changeup. After you sign the contract it is too late to get the best terms for your financial health.
Have you ever been sent a “NEW” updated credit card with all the bells and whistles with a slightly lower rate and a larger limit. That is called an “upsell” in the sales world. It just meant that someone in the credit card department looked at existing clients, ran their spending habits and extended the limits on those who they thought could handle it or afford it. It also meant a “NEW” account with the “OLD” one being closed down not counted against their total.
Another very profitable product the banks love to sell is life insurance on credit cards, mortgages, lines of credit. etc. It is known as “creditor insurance” and is usually not in your best interest to get it from the bank. A friend of mine who is an investment counsellor has on her business cards and her website “Ask me about creditor insurance” because she very strongly feels it is about bank profits rather than protecting clients.
Creditor insurance is about the bank making sure it is covered while you probably will not be happy with the outcome should you need the coverage. This type of insurance is called “post-claim underwriting”. The insurance company does not actually approve your application until you you make a claim. Since the policy was not investigated as in any normal insurance policy, you may not be eligible even though you have been making payments.
Creditor insurance only covers the balance of the debt ensuring that the bank is paid. However the payments on this kind of insurance is based on the original loan. You are always paying the same monthly amount with an ever decreasing balance on the loan. If you need it toward the end of your loan payments, a normal life insurance would have been a better choice.

Use the coverage from the bank for short term until you can talk to a knowledgeable insurance agent. With a normal life insurance policy, the terms are much more flexible for your needs and not geared toward the banks profits. You are also not tied to a particular bank should your needs change for any reason. Having to re-qualify 10 or 15 years down the road can be more challenging. Also, making payments on a $1 million insurance policy that you have control over is much better than being broke while the bank gets paid at a time of your desperate need.
If you feel compelled to stay with a particular bank, talk to the mortgage specialist at the bank. They can give you better advice than someone who is a generalist. The bank manager may be a great person, but in this case , you want a specialist. They can find the best fit for you and your circumstances within the limitations of that particular bank.
Always remember when you are getting acquainted with a bank ~ THE BANK CONSIDERS PROFITS MORE IMPORTANT THAN YOUR NEEDS. The individuals at the bank must go along with this program or find another place to work. You must do your homework when dealing with any bank. The bank is in the BUSINESS of lending money, so make sure your assets are covered before you sign that contract.
You will never know as much about the bank as it knows about you, but I hope I have helped with how it makes its living. The individuals within the bank, no matter how nice, are still working within the structure the bank set up and can only give you the breaks and rates management allows.

Are the Banks your friend?


When one considers that a mortgage averages $301,000, installment loans average $22,849, for auto loans it is $19,228 and credit cards are $3,573 on average, it is easy to see where people are paying the bulk of interest.

Many people think that the bank is their friend. They get their mortgage, their auto loan and their other consumer debt at that bank. And because they consider the bank to be their friend, they never do any shopping before they sign on the dotted line.

They do not realize that even though they have given the bank all of their business for 10 or 15 years, they are not getting as good a rate as a newcomer to the bank who has done their research before they made an appointment. Becoming complacent can be an expensive state of mind when incurring a large debt.

As an example, if you are borrowing $300,000 to buy a house, in a 5 year term at 5.24% you will pay $73,675 in interest. If you get a better rate of 4.2% %, you will pay $58,709 in interest and if you can get the interest rate as low as 3.2% you will pay $44,444 in interest for the same 5 year period. I used an online Canadian mortgage calculator for both the rates and the amortization schedule.

So you can see that if you shop for rates on a $300,000 mortgage, you can save up to $29,231 in 5 years doing nothing but a little homework. The banks will not tell you this. The banks profit depends on uneducated customers.

What a bank does is kind of average the rates they charge customers. A bank will give a new customer a very good rate to get the business especially if that customer has educated him or herself. Whereas an established client who assumes they are getting the best rate will pay a higher percentile for their loans.

We are not powerless. The banks are in the business of lending money and if we shop around and let our current lender know that we are shopping, we can negotiate better rates. As in all business , the informed negotiator will get the better deal.

If it is anywhere near the end of your term do some checking online. Your favorite person at the bank will not necessarily give you the best rates unless you share blood ties or wedding vows. You must do your homework.
There are other terms that can be negotiated to reduce the amount you will pay the bank that will be discussed in later posts. If you want to see if we can help you at FEAT send me an email or call me at 250.878.7306.

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