Unimor Capital Corporation

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  • Consumer Proposal vs Bankruptcy: The Impact on Mortgages

    Consumer Proposal vs Bankruptcy: The Impact on Mortgages

    Dealing with financial difficulties can be a daunting and overwhelming experience. In Ontario, individuals facing financial distress have several options to consider, two of which are consumer proposals and bankruptcy. These are legal processes that can help individuals manage their debts and regain financial stability. However, they have distinct differences, particularly when it comes to existing mortgages. In this article, we will delve into the disparities between consumer proposals and bankruptcy and explore what they mean for individuals with existing mortgages.

    Consumer Proposal: A Lifeline to Financial Recovery
    A consumer proposal is a formal arrangement between a debtor and their creditors, governed by the Bankruptcy and Insolvency Act (BIA) in Canada. It is an attractive option for those who are unable to meet their financial obligations but wish to avoid declaring bankruptcy. Let’s explore the key aspects of a consumer proposal and how it interacts with existing mortgages.

    1. Debt Reduction and Repayment
    A significant advantage of a consumer proposal is that it allows debtors to negotiate with their creditors to reduce the total amount of debt owed. Debtors work with a Licensed Insolvency Trustee (LIT) to create a proposal that outlines a feasible repayment plan. Creditors vote on whether to accept the proposal, and if the majority agree, it becomes legally binding.

    Regarding existing mortgages, consumer proposals typically do not directly affect secured debts like mortgages on real property. Your mortgage remains intact, and you are still responsible for making regular mortgage payments. However, by reducing your unsecured debts through the proposal, you may free up more of your income to meet your mortgage obligations.

    2. Protecting Assets
    Consumer proposals offer a significant advantage when it comes to protecting assets, including your home. In Ontario, the ‘homestead exemption’ allows individuals to keep their primary residence during bankruptcy, provided it falls within certain equity limits. However, consumer proposals do not have the same equity restrictions.

    If you have an existing mortgage on your home, a consumer proposal allows you to maintain ownership and continue making mortgage payments without the risk of losing your property. This can be especially beneficial for individuals who are committed to keeping their homes and want to find a structured way to manage their other debts.

    3. Impact on Credit Score
    While a consumer proposal has a more favorable impact on your credit score compared to bankruptcy, it will still have a negative effect. A consumer proposal remains on your credit report for 3 years after you complete it or 6 years from the date it was filed, whichever comes first. This can make obtaining new credit or refinancing your mortgage more challenging during that period.

    However, many individuals who opt for a consumer proposal are already struggling with their credit due to existing debts. Over time, as you make consistent mortgage payments and demonstrate responsible financial behavior, your credit score can gradually improve.

    4. Process Duration
    A consumer proposal typically spans over a maximum of 5 years, during which you make fixed monthly payments as outlined in the proposal. Once you successfully complete the proposal, you are considered debt-free, with the exception of any ongoing secured debts, such as your mortgage.

    Bankruptcy: A Last Resort with Significant Consequences
    Bankruptcy is a legal process that allows individuals to discharge their debts when they are unable to meet their financial obligations. It is generally considered a last resort due to its severe consequences. Let’s explore how bankruptcy differs from a consumer proposal and how it affects individuals with existing mortgages.

    1. Discharge of Debts
    In bankruptcy, most unsecured debts are discharged, meaning you are no longer legally obligated to repay them. However, this discharge does not apply to secured debts, such as mortgages. If you have an existing mortgage when you declare bankruptcy, you must continue making your mortgage payments to avoid foreclosure.

    2. Asset Liquidation
    One of the major differences between bankruptcy and a consumer proposal is the treatment of assets. In bankruptcy, a trustee may liquidate non-exempt assets to repay a portion of your debts. However, Ontario has exemptions in place to protect certain assets, including your primary residence (homestead exemption) up to a specific equity limit. If your home’s equity exceeds this limit, you may be required to sell it to satisfy your creditors. It’s crucial to consult with a bankruptcy trustee to assess your specific situation.

    3. Impact on Credit Score
    Bankruptcy has a more severe impact on your credit score compared to a consumer proposal. A first bankruptcy typically remains on your credit report for 6 years after your discharge, while a second bankruptcy can stay on your record for up to 14 years. This can make it challenging to secure new credit or refinance your mortgage during this time.

    4. Process Duration
    The duration of bankruptcy varies depending on your financial situation and whether it’s your first or subsequent bankruptcy. A first bankruptcy usually lasts for nine months, but it can be extended to 21 months if you have surplus income. Subsequent bankruptcies can last for 24 to 36 months. During this period, you must adhere to the rules set by the Office of the Superintendent of Bankruptcy (OSB) and continue making your mortgage payments.

    Existing Mortgages in Bankruptcy and Consumer Proposals
    Regardless of whether you choose a consumer proposal or bankruptcy, your existing mortgage remains a secured debt, and you are obligated to keep making regular payments. Failure to do so can lead to the lender initiating foreclosure proceedings, which may result in the sale of your home to cover the outstanding mortgage balance.

    However, there are some additional considerations regarding mortgages in these processes:

    Mortgage Arrears
    If you are already behind on your mortgage payments when you enter a consumer proposal or declare bankruptcy, it’s essential to address the mortgage arrears promptly. Both processes can provide a structured framework for managing your overall debt, which may free up funds to address your mortgage arrears.

    Refinancing & New Mortgages
    During the term of a consumer proposal, obtaining new credit, including refinancing your existing mortgage, can be challenging. Lenders may view you as a higher risk due to the proposal’s impact on your credit score. However, it’s not impossible to refinance or obtain a new mortgage after completing a consumer proposal. You may need to work with a mortgage broker who specializes in assisting individuals with credit challenges.

    In contrast, obtaining a new mortgage or refinancing during or immediately after bankruptcy can be even more challenging. Lenders typically prefer to work with borrowers who have reestablished their credit and have a stable financial history.

    Communicate with Your Lender
    Whether you choose a consumer proposal or bankruptcy, it’s crucial to maintain open communication with your mortgage lender. Inform them about your financial situation and the steps you are taking to address your debts. Some lenders may be willing to work with you to find a solution that helps you keep your home.

    What This Means for You?
    Facing financial difficulties can be overwhelming, but there are options available to help you regain control of your finances. Consumer proposals and bankruptcy are two distinct paths with different implications for individuals with existing mortgages.

    A consumer proposal offers a structured way to reduce and manage your unsecured debts while protecting your assets, including your home. Your existing mortgage remains intact, and you must continue making regular payments.

    On the other hand, bankruptcy is a more drastic step that discharges most unsecured debts but may require you to liquidate non-exempt assets if applicable. Your existing mortgage remains a secured debt, and you must continue making payments.

    Both processes have consequences for your credit score, and it may take time to rebuild your financial standing. Regardless of your choice, it’s essential to seek professional guidance from a Licensed Insolvency Trustee or Bankruptcy Trustee to navigate these complex financial decisions and ensure the best possible outcome for your unique circumstances. Additionally, maintaining open communication with your mortgage lender is key to protecting your home and working towards a more stable financial future.

  • How to Get a Mortgage with Poor Credit

    How to Get a Mortgage with Poor Credit

    Faced with high inflation and rising interest rates, more Canadians are finding it difficult to qualify for a mortgage. The problem can seem even worse if you struggle with poor credit. The good news is that even if your credit history is less than stellar, you may not have to put off buying a home, although you will likely pay more for your mortgage.

    Do You Know Your Credit Score?
    One of the biggest mistakes people make before getting a mortgage is not knowing their credit score before applying. Recent reports have revealed that more than 50% of Canadians have never checked their credit scores. If you’re only finding out that you have bad credit when you apply for a mortgage, it may be too late to do something about it.

    What is a Good Credit Score?
    While lenders can set their own minimum credit score guidelines, the following generally applies:

    • 800 or above: Excellent
    • 720 to 799: Very Good
    • 650 to 719: Good
    • 600 to 649: Fair or average
    • Under 600: Poor

    To obtain a mortgage with a Prime lender (banks and credit unions), you will likely require a credit score of 600 or higher. In fact, any mortgage with less than 20% down must also be approved by Canada’s mortgage default insurance providers, i.e., CMHC, who require at least one borrower to have a minimum credit score of 600 or higher. If your score is below 600, you will most likely need to deal with an alternative or private lender, come up with a 20% down payment, and be subject to a higher mortgage interest rate.

    How to Get a Mortgage with Poor Credit
    If you struggle with a bad credit score, there are still ways to qualify for a mortgage loan:

    Increase Your Down Payment Amount
    If you have bad credit, you can improve your chances of being approved for a mortgage by coming up with a larger down payment. While it’s possible to obtain a mortgage in Canada with as little as 5% down, if your credit score falls below 600, you won’t qualify for mortgage default insurance, and a 20% down payment will be required. A larger down payment has other benefits as well. By avoiding the hefty CMHC premiums, you will save thousands of dollars during the life of your mortgage.

    How to Find More Money for Down Payment

    • Gift from a family member. You can receive a part, or all, of your down payment as a gift from a family member. The lender will require them to sign a gift letter to confirm that the funds aren’t borrowed and that there is no expectation of repayment.
    • Withdraw RRSP funds under the Home Buyers Plan (HBP). If you are purchasing your first home, the government of Canada has a program that allows you to withdraw funds from your RRSP to use towards your down payment. The current withdrawal limit is $35,000. You will have to repay the amount you withdraw into your RRSP, but you have 15 years to do so, beginning in the second year after the year in which you removed the funds.
    • Delay your mortgage application. If you have tapped out all potential down payment sources and are still short, you may have to delay your mortgage application while you save more money. Can you hold off for six months or a year? Consider a side hustle to increase your income and your savings rate.

    Improve Your Debt Servicing Ratios
    In addition to having an adequate down payment and credit score, mortgage lenders must determine if you can afford to make the monthly mortgage payments. To do this, they use two calculations, Gross Debt Servicing (GDS) and Total Debt Servicing (TDS).

    Your total debt servicing (TDS) measures your total monthly obligations as a percentage of your gross monthly income. This includes your mortgage payment (PIT) and any other loans or credit card payments you might have. Your TDS ratio should not be more than 40%, although lenders may accept TDS as high as 44%.

    You can increase your approval chances by lowering your TDS. There are a few ways you can do this:

    Increase Your Income
    I alluded to this earlier but consider ways to increase your income. The easiest is to make more money at the job you already have, by asking for a raise, or getting promoted. If that’s not an option, think about a second job, keeping in mind that a mortgage lender will require you to be off probation before they can use your income for debt servicing purposes. Side hustle income is also great, but it likely can’t be used to qualify for a mortgage.

    Pay Down Existing Debt
    To improve your mortgage affordability, think about ways to free up cash flow by reducing your debt load. Among the worst culprits are huge vehicle loan payments, which have surged to record levels in recent years.

    Avoid Taking on Additional Credit
    You’ve heard the saying, “An ounce of prevention is worth a pound of cure.” It’s easier to say NO to more debt than dealing with the debt you already have (like that massive pickup truck loan.) If you’re in the market for a mortgage, it may be best to avoid taking on other debt. If you do, ensure it will not impact your chances of being approved for the mortgage.

    Go Through a Private Mortgage Lender
    If your credit is so bad that no A or B lender is willing to approve your mortgage application, talk to your mortgage broker about going through a private lender. Private lenders aren’t just ‘bad credit mortgage lenders.’ While they do a lot of bad credit mortgages, they also lend to borrowers who may have decent credit but whose application falls ‘outside the box’ of a bank or credit union.

    Your broker will bring up the private lender alternative before you do. Understand that private lenders charge much higher interest rates than A lenders, but the idea is to deal with them for a year or two and then move the mortgage to a prime lender.

    Obtain a Co-Signer
    If your credit score prevents you from getting a mortgage, another option is to obtain a co-signer. A co-signer must have very strong credit, a solid net worth, and enough income to support the mortgage on their own should the primary applicant fail to make the payments.

    The downside to obtaining a co-signer is that it ties you to that person financially, potentially for several years, in the case of a mortgage. It can also be challenging for the co-signer themselves, as they must include your mortgage PIT whenever they apply for credit, even though they are not making the mortgage payments. For these reasons and more, I don’t recommend using a co-signer, except in rare instances. But it is an option.

    Improve Your Credit Score
    Ultimately, if your credit score is standing in the way of getting approved for a mortgage from any lender, your only other option is to address your low credit score. And while it won’t happen overnight, there are several steps you can take to improve your score.

    How to Improve Your Credit Score
    If you are struggling due to poor credit, there is hope. Here are seven steps you can take to improve your credit score.

    1. Pay off any unpaid collection items. If you have unpaid collections showing up on your credit report, you need to settle them as quickly as possible. These are debts in such high arrears that the lender has sent them to a collection agency to pursue repayment. Generally speaking, no bank or credit union will lend money to someone with unpaid collections showing on their bureau. If you have multiple collection items, I recommend that you start by paying the lowest balance owed first.
    2. Pay your bills on time. If you have bad credit, continuing to make late payments will only worsen matters. Take steps to ensure timely payments going forward. Remember that most companies report late payments as soon as they are 30 days in arrears.
    3. Avoid making excessive credit inquiries. Each time you apply for credit, it counts as an inquiry on your credit report, and your credit score could drop as much as five or ten points, albeit temporarily. If your account shows multiple inquiries over a short period, say six to twelve months, potential lenders may view it as evidence of credit-seeking behaviour, and cause for concern.
    4. Keep Your Credit Utilization to a Minimum. Credit bureaus, like Equifax and Transunion, keep track of your credit utilization: the percentage of available credit you’re using. For example, if you have a credit card with a $10,000 limit and you carry a balance of $5,000, your utilization is 50%. When your credit utilization exceeds 30%, it’s a sign that you might struggle to manage your credit. Credit utilization is a determining factor for your credit score, so try to pay off balances in full, or at the very least, keep them under 30%.
    5. Don’t close longstanding credit accounts. One of the things that strengthen your credit score is the length of time a credit product has been reported to the bureau. When you close a longstanding credit card or line of credit, it may shorten your history and lower your score. And while it’s often beneficial to reduce the number of credit cards you hold, think twice before closing a longstanding account. If you feel like it’s the best choice, wait until after your mortgage application has been approved and finalized.
    6. Check your credit score regularly. What gets measured gets managed, but it could also be stated that what gets measured gets improved. If you check your credit report regularly, you can take corrective action if you notice any downward trends. You can also proactively correct errors and check your account for fraud.

    How Do I Find a Lender Who Will Approve My Mortgage?
    If you’re looking for a mortgage and are concerned about your credit score, your best bet is to consult a mortgage broker. Mortgage brokers have access to dozens of lenders, not just the big banks. They can shop your application to alternative and private mortgage lenders, in addition to the banks and credit unions, giving you the best chance for approval.

     

  • 5 Good Financial Habits to Bring Into the New Year

    5 Good Financial Habits to Bring Into the New Year

    When the New Year bells ring, finances are typically at the top of the resolutions list. It can be exciting and empowering to want to achieve your financial goals once and for all. However, what most people fail to realize is that you must strengthen those financial muscles first. It’s just like setting a fitness goal: you don’t set out to run a marathon without also changing your eating habits, sleeping habits, and workout habits. It’s the shift in these small habits that gets you prepared and moving towards your goal. The same is true for finances. If you intend to pay off your debts or save for that home in the coming year, you need to ensure that you are making changes to your everyday financial habits as well.

    1. Create a Budget
    It might be hard to hear this, but creating a budget is one of the best financial habits that you can have. Managing your money starts with knowing where your money is going, and without having a proper budget it can be quite easy to lose track of your monthly spending. How many times have you asked yourself, ‘Where did my money go?’ Creating a budget provides the clarity and control you need to stay on top of your finances.

    Keeping a budget ‘in your head’ is not wise. We can hardly remember what we did last week, so how do you expect to remember all the places where your money has gone? Create a well-formed budget by pulling together at least the last 6 months of all banking transactions. Use that data as a basis for how you would like to spend your money going forward. Be sure to include your savings goals and debt repayment goals within your budget as well. A budget is meant to capture your entire financial picture and should show how all your monthly income is being allocated.

    2. Check in With Your Money
    Having a budget is one thing, but using it is another. Most people fall into the trap of only looking at their finances at the end of the month, which makes it difficult to adjust spending before it’s too late. As with any major plan or project, there are check-in points. The same is true for your finances. Setting up weekly money meetings is important to ensure you stick to your budget and achieve your financial goals. Set up a time each week to track your spending and review it against your budget. Have you ordered delivery meals one too many times this week? Did you order another thing online that was not planned? Put a plan in place for the upcoming week of the changes that need to be made to avoid running over your budget.

    Having a pulse on your finances also allows you to be financially proactive instead of reactive. By knowing how your money is allocated, you can easily adjust and adapt in the event of any unexpected circumstance. This is how you remain in financial control.

    3. Say No
    This might be one of the hardest habits to develop, but it’s the most powerful. If you have gotten into the habit of saying yes to you, your kids, and your family, it might be time to release that habit now. Achieving your financial dreams starts with being financially responsible and that means sticking to your plan, living within your means, and saying ‘No’ to anything that is outside of your plan.

    Don’t go on this journey alone. Make sure you have communicated your new financial focus to your family. Have a family meeting to discuss your financial goals and priorities, share your budget and let your family know upfront that spending will be different this year. Tell a trusted friend about your commitment and ask them to keep you accountable. And, when you find yourself tempted to give in, remember why you started on this journey to begin with.

    4. Build Your Emergency Fund
    If there is anything that is certain, it’s that life is uncertain. You never know when life might send you on an unexpected path, so you must always ensure you are financially ready and prepared. This is where having an adequate emergency fund can help you to maintain financial security. Whether it’s losing a job, the car breaks down or the furnace needs to be prepared, life always seems to happen. In these circumstances, most people use their credit cards or line of credit to make it through but having an emergency fund ensures you avoid this debt spiral.

    The goal should be to have 6 to 12 months of your income saved in an emergency fund. Calculate how much that would be for you and your family and then develop the habit of savings towards this goal each month. You can create your own financial security if you prioritize this one important financial habit.

    5. Stop Celebrating the Minimums
    Paying the minimums on your credit cards is no reason to celebrate. If you are serious about getting out of debt, you will need to create the habit of paying more than what is due. If becoming debt-free is a meaningful goal for you, then you must take it a step further and create a debt repayment plan. A goal without a plan is only a wish, and wishing your debts away is not going to cut it. Look at your budget and see how much excess cash you have after all your expenses. Reduce or eliminate any unnecessary expenses. Determine how much money you can put towards your debts each month and then create a plan to do just that. To ensure you stick to the plan, set up automatic monthly debt payments so that the money is actually paid to your debts before you can spend it.

    And while we are on the topic, also make sure you pay all your debts on time. This can greatly impact your credit score which needs to remain intact should you ever wish to leverage credit for significant purchases such as a home or a car.

    Implementing these habits will create a more stable and secure financial future for you and your family.

     

  • What Money-Savvy Kids? 5 Lessons to Set Them Up for Financial Success

    What Money-Savvy Kids? 5 Lessons to Set Them Up for Financial Success

    As parents, it can be overwhelming to think about everything we need to teach our kids — whether it’s showing them how to cross the street safely, introducing them to the alphabet or teaching them to ride a bike. Unfortunately, money still seems to be a taboo educational topic — even among families. Teaching your kids about money lessons is essential for raising adults who are comfortable talking about and handling their finances. By following these tips, you can create a solid financial foundation for your kids.

    1. Talk About Family Finances
    We’re not suggesting that you study your financial spreadsheets with your kids for a family fun night, but your children can’t get comfortable talking about money until they know you’re comfortable talking about it. By setting up a consistent family budget meeting — you don’t have to call it that if the b-word scares/bores everyone — your gang can get in the habit of discussing topics like how much money it takes to keep your household functioning and why it’s important to plan for big purchases.

    If kids get the opportunity to give their input — and no, they don’t get the deciding vote, even if they outnumber you — it will empower them to take responsibility for how the household spends its money. It can start with something simple like: We have $50 extra spending money this month. Would you rather go to a drive-in theater or save the money so that next month we could go on a camping trip?

    2. Show Them Why Saving Pays
    Your child’s method of saving will evolve as they get older but teaching the basic value of setting aside money will help them avoid the temptation to make an impulse buy each time they have money in their hands.

    Use Real Dollars & Coins
    Using physical cash and coins is great for helping younger children understand the concept, as it allows them to see how their nickels and dimes (and dollars) can really add up. You can start out by teaching kids to budget their money — consider using one piggy bank for savings, another for spending and a third for giving.

    Open a Bank Account
    When they’re ready, you can take the next step by opening a bank account for your child. Many banks have accounts specifically for minors if their parents also bank there, which can help your children save on fees that banks may charge for regular accounts.

    By bringing them along to a physical location to open their bank account, you’ll help your kids become more comfortable dealing with financial tools and institutions. That way, banks won’t seem as intimidating when your kids open their own accounts as adults.

    Teach Them About Compound Interest
    Additionally, use their savings accounts as an opportunity to teach kids about compound interest — a basic financial concept that explains how your money can grow by earning interest on the interest.

    3. Let Them Learn the Value of Their Money
    Getting your children to value their money can give them a head start on money management skills. It starts with understanding where the money comes from (the ATM doesn’t count). Whether you pay them an allowance, they receive money as gifts from relatives or they’re making their own money (yes, even a lemonade stand business counts), your children will better understand how much a dollar is worth if they learn how to budget their money early on. Accounting for each dollar allows a child to learn decision-making skills that will prepare them for later in life when they’re parcelling out their paycheck.

    Ask them questions like: Is it worth doing an extra chore to have their pick in the candy aisle at the grocery store? By giving them the power to make that decision, your children will be able to apply the same money concepts when deciding as an adult whether it’s worth working an extra shift to buy those new shoes or taking on a side gig to pay to build an emergency fund.

    4. Don’t Let Investing Be Only for the Rich
    Your kids don’t need to become the next Warren Buffett to learn the value of investing. And they don’t need to be rich to start (and neither do you). No matter what their age, kids can learn about growing wealth by investing a small portion of their money. We recommend starting with a very small amount since there is, of course, a risk that their investment could lose value. It’s a tough lesson, but one that’s easier to accept if your child lost a week’s allowance rather than a lifetime savings.

    And investing doesn’t require a large cash outlay to start, especially if you work with a brokerage that allows you to open a custodial account and invest in fractional shares. For just a few dollars, your kids can pick a couple of companies that make their favorite toys or movies, then check the stock price each week to see how their investment is faring. If your family is the competitive type, let every member invest in a different stock and see whose stock grew the most at the end of a year.

    5. Don’t Make Debt a Four-Letter Word
    You want to protect your kids from all the bad things, so if you don’t talk about debt, they won’t end up in it, right? Maybe. But probably not. Giving them the tools to understand debt is a better way to avoid bad debt and responsibly handle the good debt that they’ll face in their lifetime.

    Differentiate Good Debt vs. Bad Debt
    So how can you teach kids the difference between bad and good debt? Remember these two factors:

    • What’s the interest rate?
    • What’s the value of the item they’re going into debt for?

    As a general rule, if you’re borrowing money at a higher rate than you can earn by investing, that’s bad. For example, if a credit card charges 18% interest, you can’t reasonably expect to get those kinds of returns on investments, so that’s a bad debt. However, if you get a mortgage with a 3% interest rate, there’s a good chance you could invest that money and make more in interest.

    It’s also important to teach kids that bad debt vs. good debt involves the types of things and events that they’d want to use the credit for. Borrowing money to buy a candy bar? Bad debt. Borrowing money to invest in a mower so you can start making money cutting the neighbor’s lawns? Good debt (since they’ll in theory be using that borrowed money to make more money).

    Get Real About Student Loans
    One of the biggest decisions kids will have to make early on in regard to debt is whether to take out student loans. Start talking to your teens early about how student loan debt could affect their lives after college. Although it can be a very personal decision, encourage them to consider the costs and benefits of student loan debt. For instance, is the private, out-of-state school with the gorgeous campus worth the debt burden if they’re getting an education degree? Teaching your kids early about how to use debt and credit lines responsibly — perhaps by adding them as an authorized user — will let them see the benefits of building a solid financial foundation.

    Start Small
    And if all this is a little much for your youngest kids to understand, you can introduce this money lesson with one of these debt free charts. Start by deciding on a bigger purchase your child wants but doesn’t have enough cash for yet — but small enough that they can “pay it off” in a few weeks or months. Each time they make a “payment” to you, they can color in another section of the chart. By the end, they’ll have a better understanding of what it means to pay off debt, and you’ll have another piece of art to hang on the refrigerator. Win-win.

  • Money Management Tips for 2021

    Money Management Tips for 2021

    Have you made your New Year’s resolutions? You might have already dusted off some of those perennial favourites: lose weight, drink less, travel more, etc. But what about resolutions for your wealth? Just as “lose 10lbs by visiting the gym twice per week” is a better goal than “get fit,” setting specific, measurable goals for your finances is an important step in achieving them. If you’re unsure of what to focus on beyond “spend less, save more”, let these 6 money-saving tips guide your resolutions to make 2021 a financial game changer.

    1. Invest in Yourself
    One of the best investments you can make is in yourself. The best areas to focus on are your earning potential, financial literacy, and mental health. 2020 was a difficult year for most, and caused significant upset to people’s careers, savings, and lifestyles. While no one could have prepared for a global pandemic, we can fix any vulnerabilities it identified. Now, more than ever, people are understanding how big their Emergency Fund should really be and why investing in the stock market is essential to financial security.

    This is a great time pursue extra education and credentials that can increase your earning potential. You might even want to switch to a new career entirely. Likewise, the stress of the past 12 months has emphasized how important it is to take care of your health. Go ahead and adjust your budget to fit essentials like a gym membership or therapy to ensure you can really go into 2021 ready for whatever the year has in store.

    2. Get Rid of Your High-Interest Debt
    Carrying multiple balances, especially at varying interest rates, can feel like death by a thousand paper cuts when your bills come in the mail. If one of your goals is to get your debt under control in 2021, consolidating that debt on a low-interest loan or line of credit might be the answer.

    Debt consolidation means moving all or most of your debt to one place, so that you can experience the joys of having only one interest rate, one minimum payment, and one repayment term. You can do this by taking out a line of credit, debt consolidation loan, or credit card and using it to pay off all your existing balances. Not only will credit consolidation alleviate the headache of managing a number of different payments, it can also reduce the carrying cost of your debt and even get you out of debt faster. It’s also likely to give your credit score a boost right off the bat!

    3. Start Saving for a Big Goal
    If you really want to start the New Year off right, take your first steps to accomplishing something big with your money. This can be anything from saving up a down-payment for your first home or finally starting a retirement savings account. Whatever your goal, make sure you know exactly what you’re saving for and the specific dollar amount you need.

    Once you know your money wish and the price tag, it’s time to plan. If you want to hit your target by the end of 2021, all you need to do is divide the amount you need to save by 12, and that will tell you how much you need to set aside each month. For example, this might be the year you finally make good on your promise to yourself to have an emergency fund. If you want to have $2,000 saved by the end of the year, you’ll need to set aside $167 per month to accomplish this goal.

    Once you know what you’re saving for and how much you’ll need, open a dedicated high-interest savings account, and start saving right away. Bonus points if you open the account with a financial institution other than your primary bank, so you don’t see the cash and are tempted to spend it every time you log in to your online banking. To give your goal an extra boost, don’t wait until your first paycheque in January to start saving. Even if you only have $10 to spare right now, deposit it in your new savings account to give your goal some momentum.

    4. Introduce Good Financial Habits
    The best way to ensure your meet your financial goals in 2021 is to set up good routines and habits that ensure your success happens automatically.

    Commit to “No-Spend” Days
    One of the best things you can do is commit to 1 or 2 two “no-spend” days per week. These are days where you don’t spend any money. You make coffee at home, you don’t order-in dinner, and you definitely don’t make any online purchases or visit any stores. No spend days help get you identify what spending is really necessary and how much you do just out of habit.

    Check Your Finances
    Another great thing you can do is set aside 1 or 2 hours each week to review your finances. This is a great thing to do Sunday night before the start of your week. Block off some time to review your spending, pay any outstanding bills, and check up on the performance your investment portfolio. Even if you have a budgeting app that tracks all your spending, you still need to go over everything and make sure there are no mistakes that are costing you.

    5. Reduce Your Financial Stress
    Managing your debt, saving for the future, and trying to earn more money all at one time can be exhausting, and make it difficult to do any one of those tasks well. To free up the emotional and mental energy you need to tackle big financial goals, focus on optimizing the little things first.

    Here are some quick ways to reduce the mental load of regular financial housekeeping, so you can focus on bigger tasks at hand:

    • Sign up to receive your credit report emailed to you monthly so you always know exactly where you stand
    • Automate all your regular bills to a single cash-back or rewards credit card
    • Set up a weekly transfer from your chequing account to your retirement investments to ensure you’re always saving for the future
    • Look for discounts by bundling services from one provider
    • Review your insurance coverage, and make sure you have the often-neglected but always-needed coverage, like disability insurance
    • Rid yourself of subscriptions

    6. Plan for the Future
    As soon as you have assets, whether they be in the form of property, stocks, investments, or a vehicle, you should start thinking about putting together a legal will. If anything were to happen to you, this is the only way to ensure your wishes are respected and your assets are disbursed how you want them to.

    Every day is a chance to start fresh with your finances, but there’s something about the New Year that can inspire that extra boost to get your bank account in order. There’s never been a better time to remedy old mistakes and reach new money milestones, so when you sit down to make your 2021 resolutions, make sure to include a few that will put more money in your pockets–now, and for many years to come!

  • Canada’s Climbing Debt-to-Income Ratio: What You Need to Know

    Canada’s Climbing Debt-to-Income Ratio: What You Need to Know

    Here we break down what the debt-to-income ratio means—for the nation’s financial health, and for yours. The latest headlines tell a now-familiar story: Canadian household’s debt loads have increased once again, with the debt-to-income ratio hitting 176.9% in June 2020. But what is this ratio, why is it rising, and—most importantly—do you need to worry about it?

    What is the debt-to-income ratio?

    First things first. The debt-to-income ratio is a measure of how much debt a household is carrying, relative to its disposable income—that is, the money you have available to spend or save, after taxes and other non-discretionary expenses, such as EI and CPP contributions, are made.

    A ratio of 176.9% means that, across all Canadian households, we collectively owe almost $1.77 for every dollar of disposable income we have. That’s very close to the all-time high of 178% in late 2017.

    How did we get here?

    There are two overarching reasons why we’ve ended up with our current level of collective debt.

    Debt is cheap.
    The basic laws of economics tell us that when prices fall, demand increases.  Here’s why that’s important for the debt-to-income ratio: what really matters is not the total amount borrowed, but the cost to service that debt over time—that’s the debt-service ratio.  The lower the interest rate, the cheaper it is to borrow money and service that debt, and thus the more debt a household can afford to carry.

    Over time, the debt-service ratio has remained pretty constant even as the household debt-to-income ratio has risen.  In 1980, for example, the ratio of household debt to personal disposable income was just 66%, or $0.66 owed for every dollar of disposable income.  Back then, however, the bank rate—the minimum rate of interest that the Bank of Canada charges on one-day loans to financial institutions, now superseded by the target interest rate—was 12.89%, compared to just 0.25% today.

    In practical terms, $100 borrowed for a year at 1980 rates would cost nearly 20 times as much as it would to borrow today.  This astonishing drop in interest rates accounts for why the debt-service ratio has remained relatively steady over time, fluctuating between about 12% and 15% from 1990 to the first quarter of 2020, and falling from 14.81% in the last quarter of 2019 to 14.67% in the first quarter of 2020.

    Our relationship to debt has changed.
    Over time, we’ve become more and more accepting of borrowing as a normal part of household finances. When the ability to borrow became available as a tool to “bring forward” our household spending, lots of us decided to do so. And as the cost of borrowing progressively dropped, we ramped up our debt.

    This behaviour is consistent with what financial economists call consumption smoothing, or the idea that we can maximize happiness by spreading our resources over our lifetimes to achieve the highest possible total standard of living. From this point of view, in the words of former Bank of Canada Governor Steven Poloz, “Simply put, debt is a tool that allows people to smooth out their spending throughout their life.”

    Does the debt-to-income ratio matter?

    The general consensus is that excessive levels of debt make households financially vulnerable.  Economic shocks are sudden and unpredictable changes in the variables that affect the overall economy, such as an unforeseen rise or fall in the cost of commodities, an unexpected shift in consumer spending, or a housing or stock market crash.

    At the individual level, however, you’re likely more concerned that too much household debt might mean you can’t make your mortgage, student loan or car payments if something unexpected happens—such as normal fluctuations in interest rates, or the loss of your job.  (These are personal financial shocks, compared to the economy-wide macroeconomic shocks of falling commodity or housing prices.)  Research into Canadians’ debt shows that younger people, those with household income of at least $100,000, and those with mortgages have more debt than older Canadians, non-homeowners, and those with lower incomes.

    The use of debt is also correlated with optimism about our financial futures.  People who expect their financial situation to improve over time are much more likely to have more debt: a Statistics Canada study shows that peoples’ expectations about their financial situation are strongly correlated with both their levels of indebtedness and their debt-to-income ratio.  Even the most optimistic households, however, are still subject to borrowing rules set by lenders, such as the new mortgage insurance rules for the Canadian Mortgage and Housing Corporation, which will go into effect on July 1, 2020.

    What do I need to know about the debt-to-income ratio to plan my financial life?

    Here are two ways to think about whether the debt-to-income headlines affect you.

    The average might not apply to you.
    The debt-to-income figure represents an average for all Canadian households, including those who have little or no debt—meaning it must also include some very highly indebted Canadians.  In fact, research from the Bank of Canada shows that the number of highly indebted Canadians —those with a debt-to-income greater than 350%—doubled from 2005 to 2014, from about 4% to 8% of all households.  So a rising average amount of debt may not capture individual household changes, including yours.

    Your individual circumstances matter.
    The more debt you have, the more vulnerable you are to “shocks” that can impact your ability to repay it.  At the same time, however, your age, income, appetite for debt and expectations about your financial future will all combine to impact your approach to borrowing.

    If you want to maximize your financial peace of mind and protect yourself from the risk of being unable to meet your debt obligations over time, you could minimize borrowing while prioritizing paying back any existing debt.  A personal debt management plan, which maps out how you’re going to repay what you owe over time, will allow you to see past headlines to understand debt as one tool in your financial toolbox.

     

  • Why These Homeowners Needed a Private Mortgage

    Why These Homeowners Needed a Private Mortgage

    Most of us don’t give much thought to private mortgages.  We are vaguely aware they exist, but perhaps have the impression they are mortgage solutions for financial derelicts, but that is not true.  Often, they are needed when bad things happen to good people.

    Private mortgages and B-lender mortgages are the fastest-growing segment of the Canadian mortgage industry.  One reason is because it’s much harder to qualify for an A-lender mortgage now than at any time in recent memory. High home prices, in major cities particularly, result in large mortgage requirements, and the mortgage stress test can put qualification out of reach for homeowners who previously had no such concerns.

    In addition, there are several situations people find themselves in which are not attractive to regular mortgage lenders.  These problems require solutions, but a different type of lender needs to step forward and help the homeowner get on track. Let’s look at three such situations.

    • This homeowner has too many debts, and his credit score is low. Notwithstanding lots of equity in his home, the banks have said no.
    • These homeowners are in the middle of a consumer proposal. The doors to the banks are firmly closed, yet they need to finance a car purchase, and they would like to improve their monthly cash flow.
    • This homeowner has large CRA debt. Banks and other A-lenders do not like refinancing to pay off CRA debt.

    1) Too Much Debt and Credit Score Too Low
    This person has been living proud and mortgage-free for several years, but meanwhile has racked up credit card debt that just won’t go away.  At first, people believe they can manage it, but the crippling high interest rates of 19.99% or more makes it difficult.  And when the cycle starts, they tap into other available credit to pay off the credit cards that are giving them a problem.  He has a nice town home with no mortgage, but $115,000 of unsecured debt and a credit score of 557.  The minimum monthly payment on the credit card debt was not much less than his take home pay from his job.

    The Solution
    We could see his credit score would zoom upwards once all the debts were cleared and no remaining balances.  A private lender would be happy to lend a new first mortgage on very favourable terms.  An annual mortgage interest rate of 5.99%, and a mortgage fully open after three months.  This means as soon as he is ready, he can refinance to an A-lender without penalty.  And when that happens, all the ugly credit card debt will be scrunched up into a mortgage at roughly 3% interest, with a monthly payment of around $500.  This is a game-changer compared to the $3,000 per month or so he was paying before.

    2) A Consumer Proposal
    These homeowners both have decent jobs and more than $200,000 equity in their home.  Three years ago, they both had to file a consumer proposal after a new business venture failed and left them with lots of consumer debt.

    They reached out for three reasons:

    1. Their bank, which holds their first mortgage, has told them they will not offer a renewal in late 2020.
    2. Their car lease is expiring in January 2020, and they want to exercise the buy-out option. They are being quoted high interest rates on a car loan.
    3. They are finding it tough, paying $1,300 each month towards the proposals, on top of their car payment, mortgage, taxes and utilities.

    The Solution
    The solution here is a one-year, private second mortgage for around $60,000.  Interest-only payments at a rate of 12%, and the monthly payment is only $600, which is half of what they are paying now on their consumer proposal.

    This small new mortgage will pay off their proposal completely and allow them to buy the car when it comes off lease.  After their proposal is paid off, they can rebuild their personal credit histories.  In late 2020, when their first mortgage matures, they won’t have to worry about the renewal.  They can refinance both mortgages into one new mortgage with a different lender.

    3) CRA Debt Problem
    This homeowner only owes $70,000 on his first mortgage, but he had neglected filing corporate taxes for a few years, and now owes CRA a significant amount of money.  There was a judgment against him for $49,000, which had been registered as a lien against the family home.  And another one looming for $133,000.  He had also accumulated a large amount of unsecured debt.  If you are self-employed and owe a lot of money to CRA, your borrowing options are very slim in the world of conventional mortgage lenders.  Occasionally, homeowners have tax debt that is so large it cannot be readily paid.  The result is a debt that can’t be negotiated away, with a creditor you can’t afford to ignore.

    The Solution
    The solution was either going to be a very large, disproportionate private second mortgage at a high interest rate (close to 12%) or to refinance the small first mortgage to a new private first mortgage at only 6.99%.

    He decided to take the first mortgage approach; paid off the CRA liens and all other personal debts.  As a bonus, the lender allowed him to partially pre-pay the mortgage payments in advance, so that the monthly payment for the new mortgage would be roughly what it will be when they refinance down the road – avoiding payment shock.  He contacted Equifax Canada to confirm the tax liens had been cleared and waited for his credit score to climb, unencumbered by a high debt load.  Sure enough, it all came to pass, and now he is refinancing the private mortgage into an A-lender, only six months later.

    These are three scenarios why a person may need a private mortgage, there are many other reasons.  It is important to remember that a private mortgage is a short-term solution to get you out of a tough financial situation.  It does not mean that you’ll be black-listed in the world of mortgages.

  • Homeowners Worried About Paying Down Debt as Rates Increase

    Homeowners Worried About Paying Down Debt as Rates Increase

    Younger homeowners have never experienced a significant rise in interest rates.  Many Canadian homeowners are worried about rising interest rates and how they will impact their budget, a new CBC Research survey finds.  Thanks to years of access to cheap money, household debt has ballooned in Canada.  Now that interest rates are rising, there are mounting concerns over how people will continue to pay down mountains of debt.

    Out of 1,000 Canadian homeowners surveyed online between October 5 -11, almost three-quarters of those with debt on their home, mainly mortgages, confessed they’re worried about rate hikes.  It won’t take much for most of them to feel the pinch: 58% of respondents said an increase of more than $100 in their monthly debt payments would force them to change their spending habits to make ends meet.

    Certified financial planner Shannon Lee Simmons says many people who come to her for help are in a similar predicament.  “I see that on a daily basis from clients who make relatively normal living wages, but everything is just budgeted to the dollar,” she said.

    “If you were to ask them, ‘Can you save $100 bucks a month?’ they might fail at that.”  Simmons says part of the problem is some homeowners have never experienced a significant rise in interest rates.  If you’re 40 right now and you bought your house at 30, you’ve pretty much had a decade of relatively low rates and that’s all you’ve experienced.

    Certified financial planner Shannon Lee Simmons says homeowners need to prepare for the true cost of rising interest rates.  Indeed, a 40-year-old would have been a toddler in 1981 when Canadian banks’ prime lending rate shot up above 20%. Conversely, since 2009, it has ranged between 3.70 and 5.75%.  Banks use the prime rate as a base to set their lending rates.  Failing to budget for heftier mortgage payments could lead to even more hardships, such as homeowners digging into their savings or turning to credit cards to make ends meet.

    The CBC survey findings come at a time when the Bank of Canada has already hiked the key interest rate four times since July 2017, from .50 to 1.50%.  The key rate influences the rate that banks charge for consumer loans and mortgages.  Many homeowners likely haven’t yet felt the full effects of the rate hikes because they’re still locked into a fixed mortgage, the most common type in Canada.  When their mortgage is up for renewal, ‘they might be in for a bit of a shock,” Simmons said.  The market expects another rate hike sometime in October, and some economists predict three more rate hikes in 2019.

    Bank of Canada governor Stephen Poloz says he believes Canada’s debt risk can be managed successfully.  Meanwhile, the amount of debt Canadian households owe has been on the rise for about three decades, totalling just over $2 trillion in August.  Mortgages make up close to three quarters of that debt.  For years, the Bank of Canada has expressed concern over rising household debt levels.  In 2011, Federal Finance Minister Jim Flaherty tried to temper borrowing habits with tighter mortgage rules.  They included lowering the maximum amortization period and requiring borrowers to qualify for a five-year, fixed-rate mortgage, even if they chose a variable mortgage with a lower rate. But interest rates remained low and Canadians continued to pile on debt.

     According to credit agency TransUnion, Canadians owed an average $260,547 in mortgage debt in the second quarter of 2018 — a 4.76% jump compared to the same period in 2017.  In the CBC survey, 36% of respondents said they had no debt on their home. 42% said they owed between $50,000 and just under $400,000 when combining both a mortgage and lines of credit.  Most respondents said they are very or somewhat comfortable with their current monthly payments.  However, as the survey shows, for many, that level of comfort diminishes when faced with the prospect of higher rates.

    And the impact could be more severe than some people think: When presented with a couple mortgage scenarios, less than a quarter of respondents were able to correctly estimate the added cost of a 2% interest rate hike.  Take, for example, a $400,000 mortgage with a 20-year amortization and a fixed five-year rate of 3.3%. With just a 2% rate increase, monthly payments would go up by about $400 a month.

    Simmons says many people find making the calculations daunting, but that homeowners need to understand the true cost of rising rates.  “Everyone is aware they’re going up, I just think that people aren’t necessarily prepared for how that impacts their daily life.”  It’s important to note that even with a projected rise in interest rates in 2019, they’ll still be relatively low compared to previous decades.  The Bank of Canada raises the country’s key interest rate to keep inflation in check, but governor Stephen Poloz, said in May that the bank will make rate decisions cautiously, considering the amount of debt households are still carrying.

  • How Much House Can You Afford?

    How Much House Can You Afford?

    Shop for your new home the smart way! Learn how to calculate how much house you can afford before hitting that open house or applying for a mortgage. Buying your first home is one of the most important and exciting financial milestones of your life. But before you hit the streets with a realtor, you need to have a good sense of a realistic budget. Just how much house can you afford? You can determine how much house you can afford by following three simple rules based on different percentages of your monthly income.

    The Rules of Home Affordability

    Mortgage lenders use something called qualification ratios to determine how much they will lend to a borrower. Although each lender uses slightly different ratios, most are within the same range. Some lenders will lend a bit more, some a bit less.

    Your maximum mortgage payment (rule of 28): The golden rule in determining how much home you can afford is that your monthly mortgage payment should not exceed 28% of your gross monthly income (your income before taxes are taken out). For example, if you and your spouse have a combined annual income of $80,000, your mortgage payment should not exceed $1,866.

    Your maximum total housing payment (rule of 32): The next rule stipulates that your total housing payments (including the mortgage, homeowner’s insurance, and private mortgage insurance [PMI], association fees, and property taxes) should not exceed 32% of your gross monthly income. That means, for the same couple, their total monthly housing payment cannot be more than $2,133 per month.

    Your maximum monthly debt payments (rule of 40): Finally, your total debt payments, including your housing payment, your auto loan or student loan payments, and minimum credit card payments should not exceed 40% of your gross monthly income. In the above example, the couple with $80k income could not have total monthly debt payments exceeding $2,667. If, say, they paid $500 per month in other debt (i.e. car payments, credit cards, or student loans), their monthly mortgage payment would be capped at $2,167.

    This rule means that if you have a big car payment or a lot of credit card debt, you won’t be able to afford as much in mortgage payments. In many cases, banks won’t approve a mortgage until you reduce or eliminate some or all other debt.

    How to Calculate an Affordable Mortgage

    Now that you have an idea of how much of a monthly mortgage payment you can afford, you’ll probably want to know how much house you can actually buy. Although you cannot determine an exact budget until you know what interest rate you will pay, you can estimate your budget. Assuming an average 6% interest rate on a 30-year fixed-rate mortgage, your mortgage payments will be about $650 for every $100,000 borrowed.

    For the couple making $80,000 per year, the Rule of 28 limits their monthly mortgage payments to $1,866.
    ($1,866 / $650) x $100,000 = $290,000 (their maximum mortgage amount)

    Include Your Down Payment

    Ideally, you have a down payment of at least 10%, and up to 20%, of your future home’s purchase price. Add that amount to your maximum mortgage amount, and you have a good idea of the most you can spend on a home.

    Note: If you put less than 20% down, your mortgage lender will require you to pay mortgage insurance, which will increase your non-mortgage housing expenses and decrease how much house you can afford.