Welcome to the May issue of my monthly newsletter!
This month’s edition looks at accessing your home’s equity to invest and getting to know your lender. Please let me know if you have any questions or feedback regarding anything outlined below.
Thanks again for your continued support and referrals!
ACCESSING YOUR HOME'S EQUITY TO INVEST
To tap into your home’s equity, it all starts with refinancing your home. If you own a home, the equity you have built up in it is one of the most valuable assets you have available to you. It is also much more accessible than taking out a large loan. In many cases, home equity loans and lines of credit can offer you a lower interest rate as compared to other types of loans while providing you with access to credit for investment purposes. You can view an excellent comparison of loans here.
Often times we see clients who refinance in order to:
- Renovate their home
- Purchase a secondary property for investment purposes
- Debt consolidation
- Business Development
- Assisting their children’s post-secondary education
- Financing through a “life event” such as illness
In this particular article, we are going to highlight the value of utilizing your home’s equity to reinvest in other investments such as:
- rental properties
- stocks
- bonds
- mutual funds
- RRSP’s
- RESP’s
The first question that people ask is how much can I borrow? Generally speaking, you can borrow up to 80% of the appraised value of your house. For example, if your home value of $650,000 assuming one qualifies, they can access up to 80% of $650,000 which would be $520,000, if their current mortgage is $450,000 they may be able to get a home equity line of credit for $70,000 (totalling $520,000).
Working with your mortgage broker, you can go through the refinance and approval process if this is something you are interested in accessing. It is always a good idea to consult with your broker and understand the personality of your mortgage—there may be limitations of how much equity you can access and the conditions relating to the refinancing. There are also potential costs associated with this type of refinance including:
- appraisal fees
- title search
- title insurance
- legal costs
Keep in mind that these potential costs can be rolled within your new loan amount and will not be “out of pocket.”
Now, if you have been approved and are utilizing your home equity for one of the above investments (after speaking to your financial planner/advisor first) and can expect to see a higher rate of return than the interest you are paying to borrow the money, then it is worth considering. We emphasize that you should always proceed with caution and get advice from sound professionals before choosing to invest your hard-earned money.
We have found that this type of investing works extremely well for many and is a safer and less risky way to access funds for further investment purposes. We recognize that this option may not be suitable or comfortable for some, but it is a viable way to capitalize on the equity sitting in your home and make it work for you! If you have questions or are interested in learning more, please do not hesitate to contact a mortgage professional near you.
GET TO KNOW YOUR LENDER
One of the biggest aspects of a mortgage is figuring out the best lender. Since every file is unique, a good mortgage broker will likely tell you there’s no “best” lender. Instead, it will be those unique qualities in your mortgage that will determine which lender you’re going to use.
In a typical mortgage, there are three potential types of lenders: the big banks, credit unions and monolines.
A Bank
A bank is a financial institution that accepts deposits, lends money and transfers funds. They are listed as public, licensed corporations and have declared earnings that are paid to stockholders. A key point: they are regulated by the federal government-Office of the Superintendent of Financial Institutions. Everyone knows the big banks and they are considered to be trusted. If you decide to use a fixed-rate mortgage from a big bank, keep in mind the penalty to break the mortgage will be larger than other lenders. The big banks are best for a variable rate, since the penalty will be smaller.
Credit Unions
Credit unions also deposit, lend and transfer funds. However, after that, we run into some differences between the two. Credit Unions have an elected Board of Directors that consist of elected members from their community. They are local and community-based organizations and unlike the banks, they are not federally but provincially regulated. The advantage to a credit union is they are not subject to the recent stress test rules announced for uninsured mortgages, so they can still service debt under the older rules. The credit unions calculation for penalties are typically friendlier to the borrower and if there are credit issues, they tend to be more understanding than the big banks.
Monolines
Monolines specialize in a single type of financial service, such as consumer credit, home mortgages, or a sole class of insurance. While monolines are often used by mortgage brokers because they are broker friendly, there are some advantages to the consumer. Monolines usually offer better-discounted rates, while how they calculate the penalties can be friendly to the client. The biggest knock is they’re just not as well-known or trusted like a bank. It should be noted the major investors in monolines are the big banks, so there’s nothing really to fear.
Now that you know a little about the lenders, you need to know how a mortgage broker can help. A typical broker will have access to up to 90 lenders. That can be a real advantage because if your mortgage isn’t fitting into the right box, a great broker will turn over every stone and work with the lenders to find a solution. And since a broker has a number of different lenders to choose from, they’ll understand each of the lender’s guidelines to get you the right mortgage.
HOMEOWNER TIPS
Choosing a Home Security Company:
Once the decision has been made to have a security system installed in your home, don’t simply open the phone book or go online and choose the very first company listed. It’s best to talk to friends and neighbours to see what company they use. Find out if they have been pleased with the company. Also make sure that you check with the Better Business Bureau to see if there have been any reports made against the company. Look for a company that has been around for several years and seek references from some of their existing customers.
DID YOU KNOW...
Mortgage repayments should not account for any more than 40% of your monthly income, preferably less. Anything more is considered “mortgage stress” because it leaves you with little, if anything, left over once other homeownership costs and living expenses are accounted for. I can help you stick to what you can afford.