- Business Administration Degree with a Major in Marketing from Red River in 2007
Mortgage Strategy: Being Able To Afford Your Dream Home
Most first time buyers have been previously renting or living at home, so buying their first home means having to become accustomed to paying their mortgage and all of the added expenses that come with homeownership (Visit my Blog: Calling All First Time Buyers- Dont Become House Poor).With that said, your next home isnt really front of mind until you decide its time to move. So how are first time buyers preparing themselves to be able to afford their next home? I have a strategy that I have share with my clients that, when used, can really make purchasing a dream home a reality.
Heres the strategy:
DISCLAIMER:Please keep in mind I live in Winnipeg, Manitoba where we see a steady 1-2% increase in house prices year over year, we have in my opinion, one of the most consistent, affordable, steady markets across Canada. So the numbers I am using are based on this particular market. I am using an interest rate of 3.44% as its just a rate I used to derive a payment and is not best rate today (April 17, 2019). By the way my next blog post will be why its important we need to stop talking about rate (stay turned).
The example Im using is a $250,000purchase with 5% downpayment, mortgage payments are based on 3.44% over a 25 year amortization is$624.95 accelerated bi-weekly payments(pays off your mortgage 2 years sooner). In my experience most first time buyers are ready to move up around the 5 year markso I am using that as the timeframe.
My strategy is simple, use the lenders pre-payment privileges to create more equity and pay less in interest costs. By increasing your payment you will also limit your payment shock when moving to your next home.
Heres the breakdown:
A lot of lenders will allow you to increase your mortgage payment up to 20% for no fee. If your mortgage payment is $624 you can add $125 to each mortgage payment, which will make your new payment $749 bi-weekly. That and extra $3000 you are paying your mortgage down per year and $15,000 over the 5 year term. Not only did you just increase the equity in your home but over a 5 year term alone you are saving $3000 in interest costs ($26,389 over the 25 year period).
Mortgage Payoff Summary
Original loan amount
Original mortgage amortization
Normal payment (PI)
$624.85 accelerated bi-weekly
$26,389.37 over 25 yrs
*Assuming the interest rate does not change during the amortization period.
Regular Payment Schedule
Prepayment Payment Schedule
Ending Principal Balance
Ending Principal Balance
Now lets take into account that Manitoba has a steady 2% increase in house prices year over year for the past few DECADESso its reasonable to say that your $250,000 home would be closer to $275,000 in 5 years time.
So in 5 years time you could potentially have close to $83,000 in equity for the purchase of a new house.
So lets look at a new purchase and what this could mean so we can talk about the bonus of doing this strategy- Avoiding payment shock!
Net sale proceeds(no mortgage penalty for this example)
$83,000 Sale Proceeds *sale price of $275,000
$12,000 Estimated real estate fees
$500 Estimated discharge fee for you current mortgage
$69,500 Net Sale proceeds
$425,000 Purchase Price
59,000 Downpayment from sale proceeds
$10,500 Closing costs (estimated) from sale proceeds
*No cash out of pocket for the new purchase
$864 New payment (non accelerated payment/ using same interest rate)
$749 Old payment accelerated with extra payments
$114 Difference in payment bi-weekly
If you did notincrease your mortgage $125 your payments would have been $624 bi-weekly and your downpayment would have been $41,000 compared to 59,000. The difference between your old payment and your your new payments would be $289 bi-weekly THATS A DIFFERENCE OF $22,750 over a 5 year term!
By add$125 to your bi-weeklypayment you not only got yourself into a $425,000 home in 5 years but also your lifestyle will remaining the same as your payments will be relatively close to what you were used to paying over the past 5 years.
After reading all of this you may be questioning just how you could free up $125 bi-weekly in order to increase your mortgage payments. Not to worry, my next blog will cover this!
$5000 First Time Home Buyer Tax Credit
The First Time Homebuyers Tax Credit is available for qualifying first time homebuyers who purchased a home after January 27, 2009.
You can claim an amount of$5,000 for the Home Buyers Tax Credit (HBTC) if both of the following apply:
you or your spouse or common-law partner acquired a qualifying home; and
you did not live in another home owned by you or your spouse or common-law partner in the year of acquisition or in any of the four preceding years (first-time home buyer).
the home you acquired must be located in Canada and includes existing homes and new construction. Single-family homes, semi-detached homes, townhouses, mobile homes, condominium units, as well as condos all qualify. The home must be owner occupied as a principal residence no later than one year after it is acquired.
You dont have to submit documents supporting your purchase transaction with your income tax and benefit return, but you must make sure this information is available if Revenue Canada requests it.
Note this is a non-refundable tax credit. If the total of your non-refundable tax credits is more than your federal income tax, you will not receive a refund.
For more information, please visitFirst Time Homebuyers Tax Credit.
Why you should know what a MONOLINE lender is...
Monoline Lender Definition: Monoline lenders (aka non-deposit-taking lenders) are an important cog in the mortgage market. Their mortgage products andlow pricing improve consumer choice and force our dominant banks to be more competitive.
Being a part of VERICO One Link Mortgage I have access to over 50 different lenders which include banks, credit unions, monoline lenders, alternative lenders, and private lenders. As the largest mortgage brokerage in Manitoba along with being a part of our national network VERICO, I am able to offer the most competitive mortgage rates. The lowest rates we advertise are often offered by Monolines. Some reasons for that are the fact they strictly do residential mortgages and have low overhead costs. So why do people ultimately choose a monoline?
Frequently Asked Questions:
Q: Are there any risks to deal with a Monoline?
A: No, there really arent any. Monolines are regulated by the federal government just like the major banks so they must follow similar lending guidelines and regulations. Fun fact, many Monolines receive their funding from major banks!
Q: What if a Monoline decided to leave the market place?
A: Another lender would take over their mortgages and the terms and conditions of their existing mortgage stays intact. A great example is a company I used to work for, FirstLine Mortgages, they decided to leave the marketplace and CIBC took over their book of business and services all of those mortgages.
Q: What are some other benefits to using a Monoline than just a low rate?
A: Well monolines typically have smaller penalties in the event you have to break your mortgage, pre-payment options that are typically better than the banks, monolines register a standard charge term on the title of your property which allows you to move to any lender once your term is up to take advantage of the best rates on the market. Banks and credit unions tend to register collateral charges which would make you incur legal fees to transfer your mortgage at the end of the term.
Here are some advantages of monoline lenders:
They focus on one line of business: mortgages. This allows them to focus on providing the best possible mortgage products
No bricks and mortar buildings, they are virtual banks essentially, making their overhead costs lower passing on savings to the consumers.
The mortgage industry is heavily regulated by the government now more than ever, so whether youre dealing with a major bank or monoline lender they are subject to satisfying the same guidelines for qualifying and approving customers.
Mortgages are registered on title as a standard charge and not collateral charge which means you can transfer the mortgage to another lender at the end of the term without incurring legal fees (providing there isnt a 2nd mortgage and/or secured line of credit on title)
Rates are often lower than the major banks (no posted rates like the banks) which typically result in a lower penalty should the mortgage be discharged prior to the end of the term. Fun Fact; the average a Canadian is in their mortgage for is 3 years.
Really good pre-payment options available
They also offer online access to your mortgage as well as customer service departments to take on telephone inquiries. I always tell my clients to contact me for any mortgage questions and I will be able to help OR lead you in the right direction. Most of the time I can have a client consent form signed by the borrowers and deal with the lender on my clients behalf.
Some disadvantages people have expressed to me over the years would be that some people physically like to walk into their bank and speak to someone. My solution for that is my office is always open to my clients to speak about their mortgages and better yet I can be reached outside of regularbank hours. The other comments I have had arepeople like to have everything in one placewhich is completely understandable, however, if you can get a better rate and mortgage product elsewhere does it become as important if youre saving money?
As a broker it is my job to make sure my clients pay the least amount of money over the term of their mortgage and for years after that. Every circumstance is different and I make sure I evaluate every clients needs and make recommendations oflenders based on their needs, most often it is a monoline lender. Fun Fact, I have my own mortgage with a monoline.
*Some monoline lenders I use; MCAP, RMG, First National, Merix, Lendwise, LifeCycle, CMLS, and Radius.