Feeling overwhelmed? Your finances are all over the map, living paycheck to paycheck? Thinking about taking the plunge and purchasing your first home? Wanting to trade in your vehicle for the latest model? Life happens, the key is preparation and financial knowledge. Don’t worry, money advise is my specialty 😉 and I will ensure you are equipped with the right information and I will help guide you by making sure you have the proper tools and people in your corner!
What was the best part of my job as financial advisor for the past 10 years? Being that sounding board for my clients and in turn taking the time to give sound advice based on their concerns. I have since left the financial industry but still find myself missing the guidance aspect of my job. I fell upon a post today asking for mortgage advice and my financial antenna began tingling and I couldn’t help myself, I offered my professional opinion, it felt good to offer up my knowledge. After all, lending and mortgages were my specialty when I worked at the Credit Union and Bank.
The question was; “I am looking to find a realtor that can help us purchase a new home and can offer a mortgage with a built-in down payment, who would you recommend?”
The answer is simple; There are no built-in down payment options out there. There used to be, but the government discouraged financial institutions and default insurance companies from offering this option due to the high risk of bankruptcy. Good thing we thought about this prior to the financial crash in 2008, the economy continued to lose hundreds of thousands of jobs and the national unemployment rate increased to 10 %. Housing prices fell 31.7% and employment loss climbed, resulting many to loose their homes due to foreclosure because they could no longer afford their payments and the loan to value of the property could not be paid off once sold. This is due to the fact that most banks had lent up to 100% of the property valuation. The minimum down payment is 5%. Many other commentators had mentioned borrowing funds and depositing into a bank account for 90 days and then providing the statement to the mortgage specialist as proof of down payment. Then in turn using their Tax Refund that year to pay off the loan. That is horrible advice. Depending on a quote on quote potential tax return to pay off the loan is not sound advice.
“Any financial advisor that would recommend borrowing for a down payment is doing you a disservice, they are strictly looking at making the sale and not looking out for your financial well-being. If you cannot afford the minimum 5% down payment, then it is simply not the right time to make such a life changing financial investment. The best options out there are by saving through an investment vehicle such as a TFSA, or by utilizing RRSP (first time homebuyers only) and you can use up to $25,000 towards your down payment. Also, keep in mind it is not taxed at the time of withdrawal and you have up to 15 years to repay your RRSP and avoid taxation charges. Your best bet is to find a sound financial advisor that will look out for you best interests and are not only in it for the sale. They will then refer you to a knowledgeable realtor. Piece of advice, go get your mortgage pre-approval done prior to looking at properties. High Ratio mortgages require a secondary approval from CMHC or Genworth (even if your lender has approved the mortgage, CMHC and Genworth can decline the application) because they will be offering default insurance to the institution that will be lending the funds for the mortgage and ultimately have the final say in the application process. I have witnessed to many individuals loosing out on a purchase for this exact reason. I worked as a financial advisor for over ten years and proper preparation is key to a smooth purchasing experience. I always looked out for my client’s best interest first, even if it caused me to lose out on a sale.” – Tracy
Mrs Money Queen
Another point I would like to touch on is that too many of us wait too long before seeking help from a financial advisor… I have encountered this so many times during my career as a lender. I wanted to help my clients, but my hands were tied because they had waited to long before coming in seeking help. The primary reason I could not help was due to a poor credit score, no savings and credit maxed out and this takes time and effort to correct the outstanding issues, but I always remind them to never get discouraged and to continue on with the plan I had established. Often, we may find ourselves delinquent on telephone payments or credit card payments, most people who are struggling financially will concentrate on paying the important bills first and then go down the list. Or, some have forgotten to pay altogether, these small slip-ups can make or break a loan application. The easiest thing to do is to set up automatic payments on the due date or by reducing/removing the expense if any affordability restraint exist. The sacrifice of going without is scary, but necessary because there are more pressing matters such as creating savings, rebuilding their credit history and paying down high interest debt.
Buy now? or Pay Later?
The buy now, pay later gimmick is another big problem now. We want everything right now, yet do not have the means to pay for it. Granted, in today’s world and economy we often feel obligated to go this route for certain purchases such as; the purchase of a vehicle, home and major purchases. However, many are not paying attention to the terms, conditions and interest rate when signing on the dotted line. This simple oversight can add years and interest paid over the life of the loan/mortgage. Be mindful of trading your vehicle to often, the results may be catastrophic. We seem to forget that the value of a vehicle drops dramatically once we drive off the lots of the dealership. Yet, we trade in our vehicles prior to the loan balance being paid off and this creates a top up on the new loan.
- You purchase a 2017 Ford F150 in 2017 for $60,000.
- The interest rate over 84 months is 1.99%, the payment is $353 bi-weekly.
- The total interest paid during that two year period is roughly; $2071
- The principal payment for that period is $16,298.
- The remaining balance owing at the end of two years would be $43,700.
- The F150 now has an approximate value of $34,350 based on black book value.
- Now you would like to buy a 2019 Ford F350 with the purchase price of $88,000 because you will be pulling heavier loads and require the extra HP.
- Trade-In Value for 2017 F150 – They give you roughly $31,000 (could be less or more depending on dealership)
- Outstanding Debt Owing is $43,700 – (minus) Trade in Value $31,000 for 2017 F150 = (equals) $12,700 outstanding on loan.
- New Loan – $88,000 + $11,440 (13% tax) + delivery (roughly $500 give or take) + licensing fee ($59 Plate + $265.25 validation sticker due to weight) = $100,264 total cost of loan + $12,700 from outstanding debt from trade in.
- New Loan is now $112,964!
- You will be paying the outstanding $12,700 owing from the previous truck in this new loan for the next 84 months!!! Further adding a gap between the money owing and the black book value of the new F350. The cycle continues, and worsens each time you upgrade your vehicle.
Bottom line, dealerships focus on the payment only. If they presented the loan application this way you may think twice before purchasing a newer truck. Another thing to take into consideration is that you will be refinancing the outstanding $12,700 on the previous loan for the F150 due to vehicle depreciation and it will be added onto to the new loan for the F350. Now I have had discussions with clients regarding residual value, and past a certain point there is no true value in trade-in prior to paying off the debt. That is true, but way your options prior to signing on the dotted line.
Don’t rush into switching mortgage providers…
One more thing, once you lock in your mortgage do not transfer out to another financial institution prior to the locked in date, this applies to closed fixed rate and variable mortgages. Also, make sure you give adequate time prior to the renewal date before making the switch. I have witnessed multiple institutions that renew their client’s mortgage automatically, always notify your advisor if you’re a planning on transferring out your mortgage. The reason being, avoiding any penalties from automatic renewals (some note this automatic renewal in the terms and condition of the initial mortgage agreement) and will try offering client loyalty discounts, but would you want to stay with an advisor that only offers this once you are looking to leave? I was always reviewing my client’s loans and mortgage portfolios and booking in reviews to go over their financial picture and 9 times out of 10 I would offer better solutions and lower interest rates. Staying in touch with my clients kept them in the loop and in turn eventually created trust over the long term and I was very successful with my targets due to my integrity and intentions, I always told myself I want to do what is best for my clients vs my specific sales targets.
“A goal without a plan is just a wish.” – Antoine de Saint-Exupery