Debt Management Series: Mortgage Debt Management Matters

As of October 17, 2017 new mortgage rules were introduced that could change the way Canadians approach debt management. Advisors, we’ve prepared this resource to share with your clients so they understand how mortgages play a significant role in debt management strategies.

Beginning October 2017, borrowers are required to undergo a “stress test” using the Bank of Canada’s (BoC) posted rate, a move that could help prepare homeowners for higher interest rates. Paying attention to mortgage debt is one of the most effective ways you can manage your overall debt load and build family wealth.

Under the rules, the purchaser can negotiate an interest rate as low as 2.5 percent with a bank, but will also have to undergo a test to see if they could still make payments at the current BoC’s posted rate (current rate is 4.99 percent). Homeowners can now only refinance up to 85 percent Loan to Value (LTV) as opposed to the previously allowed 90 percent.

The Mortgage Should Matter to You. Because of the sheer size of this debt for most families, and the fact that it is generally their lowest interest rate debt, you can make the biggest impact on your finances by making sure the mortgage repayment strategy is part of your overall financial plan. You will want to determine how to prioritize debt repayment, bearing in mind you will likely be in it for the long term with your home mortgage.

Types of Mortgages. Homeowners must first understand the lingo behind the acquisition of a mortgage:

• Conventional Mortgage refers to a mortgage that doesn’t require any form of high-ratio insurance, which organizations like Canadian Mortgage and Housing Corporation (CMHC) offer. Once upon a time the only mortgage one could get was a conventional mortgage.
• Non-conventional, High-Ratio Mortgage refers to a mortgage where more than 80 percent of the value of the property is financed and, therefore, insurance is required. Genworth and CMHC are the most common mortgage insurers.

Down Payment Requirements. In Canada, one way or the other, a down payment is required to buy a home. The minimum down payment in Canada on a primary residence is 5 percent, although mortgages with a non-traditional source of down payment such as borrowed funds, lender cash-back or gifts are still available in Canada. Technically no matter how it is done, you must put 5 percent down on the purchase of a home in Canada. Self-employed persons must make a 10 percent down payment.

Amortization Periods. Amortization periods have a significant effect on the actual cost of a mortgage. Rates tend to be the one thing clients understand how to compare, but as most advisors know, time and money have a significant relationship. Tacking time onto debt makes it grow just like tacking time onto investment returns makes an asset grow.

Longer amortization periods can reduce monthly payments for the borrower, but they also increase exposure to interest rates and increase the cost per dollar borrowed in total. If you can pay quicker—two payments each month instead of one, for example—you’ll start saving a lot of money, especially if you can afford to shorten the amortization period, too.

Rates Fixed vs. Variable. Fixed rates are generally available over specific terms, often ranging from six months to ten years. Fixed-rate mortgage products can be open, meaning there is no penalty for a client to pay the balance out, but normally those options are only for short periods of time such as six to eighteen months. Variable rates can be offered on both closed or open mortgage products, and of course mortgage lines of credit would only offer a variable rate. Most variable rates are usually referred to as having a “floating” interest rate and are tied to prime, but every institution and every product is different. Be sure to negotiate rights to pay down as much principal as you can between terms.

Speak with a mortgage specialist or your financial advisor before selecting which mortgage and rate is best for you. Based on your income and debt level they may be able to save you money that can be invested in other areas of your wealth management plan.

Is Mortgage Interest Tax-deductible? In some cases it can be, if used for income-producing purposes, but for most taxpayers it is not. A DFA-Tax Services Specialist can discuss situations in which interest paid on a mortgage may be tax-deductible.

This is the second article in our debt management series by Knowledge Bureau faculty member Marcia Elaschuk, DFA-Bookkeeping Services Specialist^TM. Marcia hosted this month’s CE Summit workshop session on Managing Debt Sources. You can still register for the Toronto workshop on Tuesday, November 28!

Additional educational resources: Debt and Cash Flow Management Course, Elements of Real Wealth Management

©2017 Knowledge Bureau Inc. All Rights Reserved.

Refer a Friend	Research	Calculators	Course Trials