Favourable interest rates on line of credit give homeowners another way to borrow money

Denise Deveau
Sun

When Dyna Vink decided to start anew after her divorce, one of the first decisions she made was to leverage some of the equity she had in her home to purchase a new car.

“The interest rates were far more favourable with a home equity line of credit than a car loan,” she says.

While the Ottawa-based marketing professional has always had an unsecured line of credit, she admits she hasn’t used it since she discovered it makes much more sense to go the home equity route. She can even create different accounts within her Scotiabank home equity line of credit to separate RRSP loans from other purchases and investments.

“When you’re only paying three per cent on your loans — that’s pretty nice,” she admits. “It’s way better than the 18 per cent credit cards are charging.”

Some people might get nervous at the thought of putting up their hard-earned equity to fund other investments — whether to buy a car, renovate a home or invest in a second property. But experts say that with the right approach, using your home equity can be a savvy way to manage your finances.

Of course, it’s important to do the homework when making any investment decision.

“If you are investing in a home renovation for example, make sure that it’s something you can afford — and that the renovation will go toward increasing the value of your home,” says Myron Knodel, director of tax and estate planning for Investors Group in Winnipeg.

If you do decide to go the reno route, a home equity loan can offer a number of advantages, provided you’re in a reasonably healthy cash-flow position. You have the flexibility to pay down the loan by any amount you wish and can take advantage of highly favourable interest rates.

If you don’t have enough equity to make it worth your while, another option would be to refinance your mortgage — but check to see if there are any penalties before making that decision, advises Knodel.

Karen Leggett, head of home-equity financing for Royal Bank of Canada (RBC) in Toronto, says the banks have made it much easier for homeowners by developing a whole range of options within their home-equity financing vehicles. These flexible plans can be structured into “segments” that combine revolving credit lines, as well as fixed- and variable-rate mortgages so you can borrow and transfer funds under your terms of choice. Typically the limit is set at 80 per cent of the equity value of your property. “What you do with those [options] depends on your risk profile and what you can afford.”

She adds that the best part of a segmented equity line of credit is that it can be a great tracking mechanism for understanding how you are spending your money and your interest payments. It can also let you restructure your finances whenever you like in order to take advantage of various rate options.

“You can start by using a credit line for your renovation for example. Once the renovation is done, you can then flip the balance to a fixed or variable rate mortgage [within the line of credit] to lower your rates even more.”

Despite the economic crisis, having some home equity financing to play with could turn out to be more advantageous than you might think. For anyone who has been holding back on using their home equity to renovate for example, the recent federal Home Renovation Tax Credit (HRTC) makes it an opportune time to get the job done. With the HRTC, homeowners can claim a 15-per-cent tax credit for a minimum of $1,000 and up to a maximum of $10,000 worth of renovations done between Jan. 27, 2009 to Feb. 1, 2010. (The maximum allowable credit is $1,350.)

“Don’t do the renovation simply for the sake of getting the credit, but if you were planning one within the next four or five years, you may want to move that up to 2009,” says John Turner, director of mortgages for Bank of Montreal in Toronto.

It is also an ideal time for anyone who has had an eye on securing a second property, says Leggett. “Prices are down, and the interest rates are lower than they have been in at least 10 years. Leveraging your home equity to [buy another property] is a great strategy because the market has never been more attractive.”

Turner says whatever your choice, “Leveraging equity is an important part of a wealth accumulation strategy. But in order to do it right, you need to sit down with an accredited financial planner and look at whether you have the right risk profile for it. More importantly, you have to know when it’s the right time to retire your debt and capitalize on your wealth.”

© Copyright (c) The Vancouver Sun

Governments, lenders offering many rebates to encourage energy-efficient home upgrades

Denise Deveau
Sun

It seems like governments and financial institutions alike are doing what they can to keep homeowners thinking green. From rebate programs to new mortgage offerings, financing a home purchase or renovation can be a wonderful opportunity to cash in on your green intentions.

For homeowner Mark Raes, when the time came to replace a 25-year-old furnace in his recently purchased home in Toronto, he decided to get an energy audit done just to check out how energy-efficient the house actually was. In the process he discovered that not only could he get a sizable rebate on the furnace replacement, other upgrades would also qualify.

“So instead of just one thing, we decided to do four all at once,” he says. After investing $9,000 in a furnace, attic insulation, a tankless hot water heater and air conditioner, he ended up qualifying for $3,200 in rebates from the provincial and federal governments. And his energy bills now come in at 30 per cent less than before.

It just goes to show that when home purchasers play their cards right, they can tap into a number of incentives to help them start on a greener path.

Above the rebates, borrowers can even get a bit of help from their lenders. TD Canada Trust’s Green Mortgage, for example, offers a one-per-cent cash back to be used for Energy Star qualified purchases or any renovations/upgrades that make the home more energy efficient. “Add that to the government incentives, and that can make a big difference,” says Joan Dal Bianco, vice-president of Real Estate Secured Lending for TD in Toronto. “When every penny counts, $2,000 cash on a $200,000 mortgage can go a long way to taking care of some big ticket item appliances or repairs.”

Despite the fact that green building projects can come at a premium, the price difference can easily be realized within a year through energy savings, Dal Bianco says. “Our studies have shown that people are now willing to spend more on a green home because of the energy savings they get.”

Looking at green options can also help the resale cause. According to a recent RBC Financial Group-sponsored Ipsos study, over 75 per cent of homeowners believe that green home improvements will increase the value of their home. “A good energy rating [on a home] is definitely becoming an important selling and buying feature for consumers,” says Bernice Dunsby, senior manager, home equity financing for RBC in Toronto.

RBC offers a choice of Energy Saver mortgage and loan products that provide homeowners a partial rebate on a home energy audit, or in some cases, a discounted interest rate.

“It all depends on the size and scope of the project you are willing to undertake,” Dunsby says.

Homeowners should be aware of the fact that home energy audits will soon a must if you want to sell your property. Initiatives like Ontario‘s Green Energy Act will require anyone listing a home to conduct a home energy audit. “The government is doing what it can to make sure that every homeowner can achieve a good rating and is as energy efficient as possible,” says Peter Hwang, president and CEO of EnWise in Toronto.

For those new to the audit process, a certified professional performs a pre-retrofit audit on your home to assess and rank your energy rating and pinpoint areas for improvements.

Different energy-saving investments qualify for various rebate levels. For example, a high-efficiency furnace could qualify for $1,125 in combined government rebates; attic insulation, $1,200; an energy-efficient air conditioner, $600; and a tankless hot water heater, $500.

When the work is complete (you have 18 months from the pre-retrofit audit date to finish your retrofits), a second audit is done to verify the improved performance. The homeowner can then apply for a rebate under the federal government’s ecoENERGY Program to a maximum of $5,000; and depending on the province, an additional rebate from the provincial government. (The Ontario Home Energy Savings Program, for example, matches the federal rebate dollar for dollar.) “We encourage people to wait the full 18 months before applying in case they want to do extra things in that time frame, and you can only apply for it once,” Hwang advises.

This year homeowners can benefit even more by taking advantage of the federal government’s Home Renovation Tax Credit of up to $1,350. They can also leverage a number of manufacturer and utility rebates.

So although some might think that going green comes at a premium, with available incentives and rebates — along with affordable financing options and improved energy savings — doing the right thing for the environment when financing your home isn’t quite so expensive after all.

© Copyright (c) The Vancouver Sun

Mortgage insurance provides coverage in the event of an unexpected emergency

Denise Deveau
Sun

June Jell will never forget the time she and her husband John sat down with their agent and turned mortgage insurance down flat. Six months later, he died suddenly of a heart attack at the age of 59, leaving her struggling to keep up with house payments.

While she got back on her feet eventually, it wasn’t without sacrifices along the way — including the family home.

Now she tells everyone she knows, “If you can get it, take it. We thought mortgage insurance was expensive at the time and because of our age, believed we could handle everything.”

In retrospect she realizes, “It really wouldn’t have been that expensive after all. It would have been a blessing.”

Insurance of any kind is one of those things people like to put on the back burner or do without.

“A lot of homeowners don’t want to add the cost of insurance to their mortgage payment,” says Feisal Panjwani, a senior mortgage consultant with Invis Inc. in Surrey.

“One of the biggest mistakes they make when they sign their mortgage is declining insurance, thinking they will research it on their own. Nine times out of ten they don’t get around to it. Then when something goes wrong, it’s too late.”

It’s not surprising that some homeowners balk at mortgage insurance, especially when they feel they are already stretching their monthly payments to the maximum.

Especially in these economic hard times, however, you can’t afford to be without it, says Jennifer Hines, vice-president of creditor insurance for RBC Insurance in Mississauga, Ont. “Clients at all stages need to make sure their mortgage is protected. Some have life and disability insurance, but the family still could be left holding a debt on what tends to be a person’s largest individual debt obligation.”

The ideal time to look at options is when you do your mortgage application. The most common are insurance tied to the mortgage itself, or to the lender.

Tying insurance to a mortgage balance is usually preferred since you can switch lenders and keep the same policy. This reduces the risk of facing higher premiums or finding out you are uninsurable when you reapply at another bank, Lorne D. Greenwood, a real estate lawyer based in Milton, Ont. advises.

“Getting insurance through an independent broker to cover the same amount means you won’t have to re-qualify with each mortgage,” Greenwood says. This is also a good choice when your mortgage balance decreases and you want to reduce your premiums.

Panjwani notes that it’s especially important for first-time or younger buyers to get coverage because the mortgage balance is high, insurance premiums tend to be in their favour, and medicals are not generally required.

For those that think their disability and life insurance policies are enough if things go wrong, that may not be the case, warns Hines. “Typically disability policies will only pay 60 to 70 per cent of your monthly income, so there is still a gap. You still need coverage for other expenses. We tell people it doesn’t have to be an either/or situation. We also suggest they consider whether they need to top up what they have, so they don’t have to be concerned about mortgage payments in the event of a death or disability.”

There are additional considerations homebuyers should be aware of regarding mortgage-related insurance. When it comes to high-ratio mortgages, according to the Bank Act anyone borrowing more than 80 per cent of the value of the property must insure the mortgage to protect the lender against defaults. The premium for this default insurance (not to be confused with conventional mortgage/life insurance coverage) is paid once at the time of the closing, at a rate that varies between 0.5 to 3.75 per cent of the mortgage amount.

Title insurance is also an increasingly important option for protection against title problems and fraud. “Just about every lawyer is recommending it,” says Greenwood. “The premiums can range in price depending on the value of the home you are insuring.”

Panjwani notes that buying mortgage insurance doesn’t have to break the bank. “If you can’t manage it all, cover what you can afford. For example, you can insure a percentage of a portion of the outstanding balance, or the life of one of the borrowers through a term life policy. There is no real right or wrong answer on what type of insurance you should take. Regardless of the choice, some coverage is better than none at all.”

© Copyright (c) The Vancouver Sun

Government trying to make mortgages easily available while preventing foreclosures

Ray Turchansky
Sun

Jim Stirr, a 48-year-old brewery worker, had rented in Edmonton for seven years and suddenly found himself facing a monthly increase that would nearly double his original payments.

So he decided the time was right last November and bought a condo nine blocks away, just weeks after stricter mortgage-lending rules took effect — changes that did nothing to dampen his enthusiasm for home ownership.

On Oct. 15, the federal government had reduced the maximum insurable amortization period in which to pay off a mortgage from 40 to 35 years, and took aim at interest-only mortgages by requiring a minimum five-per-cent down payment.

“I wouldn’t even look at that,” said Stirr, of interest-only mortgages. “I realize eventually you have to pay something off the principal. I knew when I was buying I wanted something I was putting some equity in. Now I look at the $300 or $400 more a month [than renting], and it was definitely worth it.”

He opted for a 30-year mortgage with bi-weekly payments only $58 more than those on a 35-year mortgage.

“When I looked at the amortization, I didn’t want to pay longer than I had to, but I wanted something affordable as well.”

The Canadian government has been wrestling with the dilemma of making home mortgages readily available to stimulate the economy, while at the same time preventing a glut of housing foreclosures because payments cannot be maintained.

The result has been a rash of changes in mortgage restrictions, and some new incentives.

A homebuyer with less than a 20-per-cent down payment must get mortgage insurance with a firm covered by the Bank Act.

The Canada Mortgage and Housing Corp. (CMHC), a Crown corporation with 70 per cent of the mortgage insurance market, said in early 2006 that it would insure mortgages with amortization periods of 30 years, compared to the traditional 25.

Genworth Financial Canada, one of a small group of private insurers, said it would insure 35-year mortgages.

Then CMHC matched that and went one better by also insuring interest-only loans that effectively required no down payment.

Soon CMHC, Genworth and AIG United Guaranty all insured 40-year mortgages — and there was talk of insuring 50-year mortgages.

Former Bank of Canada governor David Dodge warned that a glut of homebuyers would cause a run-up in prices. At the same time, people extending the amortization period from 35 to 40 years lowered their payments on a $240,000 mortgage at 5.75 per cent by $50 a month, but it cost them an additional $55,220 in interest.

And interest-only loans meant people with a house falling in value could quickly owe more on their home than it was worth.

“If you couldn’t afford five per cent down or have a conventional mortgage because your gross debt-service ratio was greater than 30 per cent, reducing your payments means you’re going to pay for your house three times,” said York University finance professor Moshe Milevsky. “It’s instant gratification.”

When more than half of the mortgages taken out in Canada during the first six months of 2008 had 40-year amortizations, and as housing foreclosures mushroomed in the United States because mortgages had become too easily obtained, Canada tightened lending practices on new mortgages last fall.

Then the federal government introduced measures in January’s budget to make home purchases and renovations easier to handle.

The First Time Home Buyers’ Tax Credit was created, meaning first-time homebuyers acquiring a qualifying home will be eligible for a non-refundable tax credit, based on an amount of $5,000 and worth up to $750 for 2009.

The amount first-time homebuyers may withdraw tax-free from their RRSP under the plan was also increased, from $20,000 to $25,000.

And existing homeowners are allowed to claim a non-refundable tax credit on eligible home improvement expenses between Jan. 27, 2009 through Feb. 1, 2010, on expenses greater than $1,000, up to a total of $10,000. That’s a savings of as much as $1,350.

Receipts are necessary and may be claimed for projects such as renovating a kitchen, bathroom or basement; installing carpet or hardwood floors; building an addition, deck or fence; replacing a furnace or water heater; painting a house; resurfacing a driveway; or laying new sod.

These are things Stirr wishes he had known were coming before he purchased his condo.

“When I bought, it was vacant and I repainted and redid all the carpets, but, definitely, if I had some inkling I would have waited,” said Stirr. “It would have made a huge difference.”

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