How is your credit score calculated? It is a complex answer and, as such, common myths persist. Today, we are going to help you get a better understanding of your credit score and how to make the grade by busting the most common credit score myths!

MYTH #1: TOO MANY CREDIT CARDS WILL HURT MY CREDIT SCORE

The reality is that cancelling healthy, active cards or accounts hurts more than having too many. When you cancel a card, all your payment history is lost as well as the type of credit granted. While you may think having a couple credit cards is extreme, the average Canadian has TEN credit sources. What many Canadians don’t realize is that lenders want to see a history of credit; they want to see payments made on time. In addition, lenders also want to see balances maintained at no more than 70% of your credit limit in use. So, if you have a $10,000 credit card, you don’t want to owe more than $7,000 on it at a time.

MYTH #2: AVOID USING CREDIT CARDS IF YOU WANT TO BUILD CREDIT

It is easy to think that different forms of credit matter more than others, but that is simply not the case. In fact, all lenders want to see is a history of credit and payments made on time. This is what will build your credit score and, eventually, give you the ability to qualify for financing. A history of on-time payments and manageable balances shows the lender that you are a promising investment and not likely to default.

MYTH #3: PAYING MONTHLY UTILITIES BUILDS CREDIT

Unfortunately, paying utilities does not build credit. In fact, these providers only check your credit score to determine creditworthiness; they don’t report your payment history to the bureau. Unless you are late to pay, that is. The other organizations that only report on default are municipalities and vehicle insurance providers, so make sure you keep these payments up-to-date. Be sure to pay any traffic tickets and bylaw infractions too!

MYTH #4: I CAN’T DO ANYTHING ONCE A PAYMENT IS LATE

Don’t be discouraged. Lenders understand that you are only human and, in many cases, they are often willing to work with you if there is a late payment. If they are notified within a timely manner, a late payment can be easily reversed. Just be careful not to make a habit of it.

MYTH #5: CHECKING MY CREDIT SCORE WILL DECREASE IT

Not exactly. There are two types of credit inquiries: soft and hard. A soft inquiry occurs when you pull your own credit report. Credit card companies also pull this type of inquiry when marketing pre-approval offers. Soft inquiries do not affect your credit score.

A hard inquiry, on the other hand, is triggered by the applicant when submitting a loan or credit card applications. As a result, hard inquiries will affect your credit score slightly as they are included in the calculation done. Recording the number of inquiries a consumer has on the credit report allows potential lenders to see how often a consumer has applied for new credit; this can be a precursor to someone facing credit difficulty. Too many inquiries could mean that a consumer is deeply in debt and is looking for loans or new credit cards to bail themselves out. Another reason for recording inquiries is for preventing identity theft. Hard inquiries that aren’t made by you could possibly be from a fraudster trying to open accounts in your name; therefore only individuals with a specific business purpose can check your score. Creditors, lenders, employers and landlords are some examples of approved business people. The inquiry only appears on the credit report that was checked.

In addition, hard inquiries remain on all credit reports for two years, after which they are removed. Soft inquiries only appear on the report that you request from the credit bureaus and will not be visible to potential creditors.

Credit score plays a vital role when it comes to potential financing for car loans, mortgages, or even personal loans. It is important to recognize good credit habits now and maintain them for a higher credit score today, and better chance of financial approval in the future.

Did you know that the process to purchase a second property depends on whether you’re buying a vacation home or an investment property?  While many of the steps are the same, there are some important differences that are specific to the type of property you’re purchasing.

SECOND HOME VS. INVESTMENT PROPERTY

A second home (or vacation home) and a rental property are not treated the same when you apply for a mortgage.

A vacation home or second home is intended to be enjoyed by you and your family. You are not purchasing it for rental income.

An investment property is intended to be rented out. There are two main types of investment properties:

• A standard rental property is one where you, as the landlord, do not live on the property.
• An owner-occupied rental property is one where you live in one part or unit of the property. A duplex where you live on one side and tenant on the other, or where you rent the basement suite of your house

The purpose of the property is important in determining how much you can afford to borrow and how much you’ll need for a down payment.

HOW MUCH MORTGAGE CAN YOU AFFORD?

Whether you’ve already chosen a property or are just starting to look, you’ll need to weigh your current financial obligations against the new debt you’re planning to take on.

As with any mortgage, your debt servicing ratios, which weigh your financial obligations against your income, are important in determining how much you can borrow.

Read: Why Are Debt Servicing Ratios Important When Applying for a Mortgage?

When purchasing a second home, you’ll need to prove you can afford both your current mortgage (if you have one) as well as the additional mortgage. When you purchase a rental property, you have the added advantage of being able to include projected rental income in the calculations, which improves your ratios.

HOW MUCH DO YOU NEED FOR A DOWN PAYMENT?

The down payment required will depend on the type of property you’re purchasing and the lender you are using. Generally, this is the minimum amount you’ll need:

Note that these percentages are general guidelines only and each lender may have specific requirements. For example, Bridgewater Bank requires 25% down, but only 10% of that must be from your own resources or gifted. Some lenders need 20% down and it must all be from your own resources. Your mortgage broker can help you find the right product for your situation.

Some other things to consider:

• If you’re putting down anything less than 20%, it’s considered a high-ratio mortgage and you’ll need mortgage loan insurance. Take note that mortgage loan insurance isn’t available for vacation homes, rentals or a non-owner-occupied second home.
• If you already own a home, you may be able to use the equity (up to 80% of the value) to help pay for your new property.

FACTOR IN THE CLOSING COSTS AND OTHER EXPENSES

In addition to your down payment, you’ll need to have funds available to pay the closing costs and other expenses for your new property.

The Canada Mortgage and Housing Corporation estimates that closing costs and other expenses range between 1.5% and 4% of the property purchase price.

• Closing costs: There are additional costs when closing your deal, such as appraisal, home inspection and land transfer fees.
• Repairs: You may need to make repairs to the property before you can use it or rent it.
• Hookups: There may be fees involved in turning on access to phone service and utilities.
• Insurance: You’ll need to buy additional insurance for your new property.
• Professional services: You’ll be consulting lawyers, accountants, and other professional service providers during and after your purchase.

WHAT ARE THE TAX IMPLICATIONS OF A VACATION OR RENTAL PROPERTY?

The tax implications of owning a vacation home or rental property are complicated, but you can be sure there are tax rules that will affect you. You should consult an accountant or tax advisor about your specific situation, but here is some general information.

• A vacation property that does not earn any income does not usually affect your taxes until you sell it, or it is probated as part of an estate.
• The Canada Revenue Agency has specific rules about reporting the sale of a home and what is considered your primary residence.
• You will need to report your rental income, but you will also be able to deduct some expenses from your rental property.

Again, talk to a tax specialist for advice on your property so that you can take advantage of any tax breaks available to you.

RISKS AND REWARDS OF A VACATION HOME OR INVESTMENT PROPERTY

What’s a risk and what is a reward? Not everyone will view things in the same way. For some, extra income is worth the time spent maintaining the property and managing tenants. Others would never want to be in that position, even with the extra income. Some people place more value on getting away to a vacation place while others would prefer to maintain just one home. So here are some questions to ask yourself.

Can you afford that second mortgage?

Even if you can meet the lender’s requirements to take on another mortgage, should you? For example, if you use the equity in your home to secure the second mortgage, you need to be sure about your ability to pay both mortgages. Defaulting on one mortgage could affect the other. Be sure that you are comfortable with taking on that additional debt.

Do you have funds to maintain more than one property?

Whether you’ve purchased a vacation home or a rental property, your monthly expenses have just doubled. In addition to the new mortgage payments, you’ll have utilities, property taxes, insurance, and maintenance costs. While a rental property will generate income to help pay for those costs, your vacation home does not.

Are you ready to be a landlord?

Before you buy that rental property, read up on the landlord and tenant laws in your area. You’ll have both rights that protect you and responsibilities for choosing tenants, maintaining the property, and evicting tenants. There is work involved in running a rental property.

Owning a rental property can be financially rewarding, especially if your property value increases. You’ll also benefit from the regular stream of income coming in.

TALK TO A MORTGAGE BROKER

Your mortgage broker is your expert guide through the purchase of a second home or investment property. They’ll help you find the right lender and the right rate for your second property.

A down payment is one of the most essential aspects of every mortgage application and new home purchase. In Canada, home purchases require a minimum cash payment from your own funds that is put towards the purchase. This is your down payment and is considered your stake in the deal.

Many home buyers understand that a certain amount of money down will be required on a home. However, most don’t realize the ins-and-outs of down payments, such as where the funds are allowed to come from and ensuring a proper paper trail.

Here are a few things to keep in mind while preparing your down payment and working towards your perfect home!

SOURCES OF DOWN PAYMENT

Most home buyers are aware that they will require a certain amount of money for a down payment. What many do not realize, is that lenders are required to verify the source of the funds. This allows them to ensure that they are coming from an acceptable source. Sources that further contribute to indebtedness are less-likely to be considered (such as line of credit or credit card). Instead, the best and most traditional options for your down payment are:

SAVINGS ACCOUNT

The first and most traditional method is your savings account, where you have been pinching your hard-earned pennies to save up for this day!

If you are utilizing your personal savings for a down payment, note that lenders will require three months of full bank statements. This includes name, account number, transactions and balance history. For any large deposits made in that time (sale of a car, work bonus, etc.), explanations and supporting documents will be required.

GIFT FROM FAMILY MEMBER

If you are fortunate enough to receive help from the Bank of Mom and Dad for your down payment, there are certain requirements:

• A signed gift letter from the immediate family member contributing the fund
• Proof of the transfer into your bank account. This can be a bank statement documenting the money being moved from the donor’s account and into yours. The statements must include names, account numbers and the full transaction history during the time period in question.
• Important note: If money is being received from immediate family overseas, most lenders will require copies of the wire transfer. In addition, they may ask for account history.

RRSP WITHDRAWAL

Another option for down payment is the use of Registered Retirement Savings Plan (RRSP), but only if you are a first-time buyer. This is part of the Home Buyers’ Plan (HBP), which allows first-time buyers to borrow up to $35,000 from their RRSP’s (tax-free!) -as long as the money is repaid within 15 years. Please note: The minimum repayment is 15 equal instalments paid once per year.

HOW MUCH DOWN?

When it comes to putting money down on your new home, you need to consider the minimum down payment required as well as additional fees.

The minimum amount required in Canada is 5% for the first $500,000, with 10% down on any amount beyond that threshold. For example, on a $600,000 house you would need to put $35,000 down at minimum ($25,000 on the first $500,000 and $10,000 for the additional $100,000 purchase price).

Keep in mind, if your down payment is less than 20% of the price of your home, you will be required to purchase mortgage loan insurance in case of default. These premiums range from 0.6% to 4.50% of the total amount of your mortgage. Using the example above, this would mean $3,600 to $27,000 in mortgage insurance premiums.

If you are able to put 20% down on your new home (which is the recommended amount), you would be looking at an investment of $120,000 down with no mortgage insurance premiums required.

ADDITIONAL COSTS AND FEES

One component of the purchase process that homeowners often forget about, are the closing costs. These are typically 1.5% up to 4% of the purchase price. In order to get financing, you are required to show that you have enough to cover these costs, which include legal fees.

When you have collected the funds for your down payment and closing costs, you must ensure those funds remain in your bank account once you’ve provided confirmation. They should only leave your account when they are provided to your lawyer to complete the purchase. This is because lenders will often request updated statements closer to the closing of the sale, to ensure nothing has changed. If money has been moved around, or if there are new large deposits or withdrawals, they will all need to be confirmed and could affect approval.

The last thing that anyone wants when purchasing a property is added stress or for something to go wrong late in the process. Consider contacting me today to help guide you through the process! Make sure you are upfront about your down payment amount, and where it is coming from. This will help me determine whether or not it is suitable, and allow us to find the best lender and mortgage product for you!

Twenty-five or thirty years can sound like an impossibly long time to service a loan – and for many of us, it is. If you are looking to pay off your mortgage faster, here are some tried-and-true tactics to get you to financial freedom that much sooner!

1) Make a Double Mortgage Payment: A double payment once a year can shave over four years off the total life of the mortgage! Better yet, if your mortgage allows for double-up payments, another option is paying an extra $100 into your mortgage – per month. This can save you over $26,000 in interest on a 5.5% fixed-rate, 25-year amortized mortgage.

2) Increase Your Payment Frequency: Changing your mortgage from monthly to bi-weekly accelerated payments can shave over three years off your mortgage. At $2,000 a month, three years of no payments is worth $72,000 (not to mention the interest saved!).

3) Increase Your Payment: Did you know? A one-time 10% increase can shave four years off the mortgage. That’s $96,000 in savings! Imagine if you bumped the payment 10% every year from the get-go. You would be mortgage-free in 13 years—start to finish! Can’t do it? How about 5% every year? You would be mortgage-free in 18 years! You can also consider increasing the payment by the amount of your annual raise.

4) Lump Sum Payments: This is another option to become mortgage-free even faster! Even just one extra payment a year equivalent to one monthly payment will give you similar results as #2 above. Annual work bonuses or other extra-income is a great option for this.

5) Renegotiate When Rates Drop: Revisiting your mortgage is a good idea when rates drop. However, it is always best to get expert advice from a mortgage broker to ensure it makes sense for you. If so, the benefits can be huge! For instance, a 1% reduction on a $300,000 mortgage will save $250 a month—times five years, that’s $15,000.

6) Maintain a High Credit Rating: Even if you have already qualified for the mortgage you want, don’t let your credit rating slip. Pay your bills on time and keep balances low in relation to limits on credit cards, lines of credit, etc. Ideally, using 30% or less of your available credit will garner the highest results (assuming you pay the balances in full every month). Even if you’re filling your card to its credit limit max and paying it off in full each month, it will look like you are maxing out your credit limit and your credit score will drop accordingly.

7) Increase Your Mortgage: Increasing your mortgage for the purpose of debt consolidation can be helpful for paying off credit card debt, line of credits, car loan and so on for a better rate and a set payment plan.

8) Make an RRSP Contribution: By making an RRSP contribution, you can then use your income tax refund to pay down your mortgage!

9) Switch to a Variable Rate: Switching your mortgage to variable-rate while keeping your payments the same as if on fixed can help you pay your mortgage faster. Since variable rates are typically lower, you will be paying more to your principal loan versus the interest.
Caution: Variable rates are not for everyone. Always be sure to seek the help of a mortgage broker to find out if variable-rates are the best choice for you.

10) Take Your Mortgage With You: When you move, switch your old mortgage to the new property to avoid a penalty or higher rate on a new mortgage. This is called “porting”, however not all mortgages have this feature so be sure to ask! It is not widely known but could save you a ton of money.

11) Set Up Automatic Savings: Even setting aside $10 per paycheck can help! When your extra savings reaches the amount of one mortgage payment, apply it to the mortgage! This concept goes nicely with #4.

12) Unhook From The Money Drip: Stop paying with your fancy points credit or debit card. These make it way too easy to overspend. Go old school, go off the grid and pay cash. It works and can help you stay on track!

13) Don’t Buy on Layaway: You know, those don’t-pay-for-six-month “deals”, well a lot can change in six-months and you’ll still be on the hook. If you cannot afford it now, don’t buy it. Wait until you are financially able to make the investment.

14) Downsize Your House: Are you living in a 5-bedroom family home but your kids are grown up and moved out? Consider downsizing to a smaller house. It will save you money on your mortgage payments and maintenance fees in the long run!

15) Rent Out the Basement: Not ready to move? Consider converting spare rooms to rental and use the income to pay down debt.

16) Make Your Mortgage Tax-Deductible: If you are self-employed, own rental property or have investments, this is likely possible. Check with your Dominion Lending Centres mortgage broker to see if this option is right for you!

17) Prioritize Your Payments: Define your various debts by category. This can help you see where you spend your money and also help you pay off your debt faster.

18) Start With the Highest-Interest Rate: Pay off loans with the highest interest rates first, as these are the ones eating into your extra income!

19) Leave Tax-Deductible Until Last: Pay the non-tax deductible loans first and fastest and leave tax-deductible debt to the end.

20) Focus on Ugly Debt First: Debt such as credit card balances are the worst on your credit rating. Pay these off first.

21) Pay Off Bad Debt Next: Debt for items that depreciate in value, such as car or boat loans, should be the next on your priority list.

22) Clear Good Debt Last: Loans such as mortgages or investments for assets that should appreciate in value are the least harmful to your net worth and can be paid out last.

23) Buy a New Car – Outright! Finance it if you have to but don’t lease, unless you are self-employed in which case leasing makes more sense.

24) Use Your Secret Stash: If you have $20,000 in a bank account for a rainy-day or vacation and yet owe $20,000 on a line of credit, you need to reconsider. The bank account is paying you next to no interest (which is taxable income) and the line of credit rate is way higher (and not tax deductible). You know what to do. You can keep the line of credit open and on standby for a rainy day. Make it the secret line of credit that you have but never use.

25) Give your Banker More Money: No, really. Keep enough in your chequing account to meet the minimum requirement to waive your service charges. Some banks charge a fee for transactions and nothing, zero, zilch, zip if you keep $2,500 in the account. Let’s see, $10 x 12 is $120 a year to pay off debt. I’d have to earn 5% with the $2,500 in my savings account to come out ahead. No-brainer here. Oh yeah, if you need more than 25 transactions a month, see #12 above.

Let’s face it, your financial future will not get any brighter if you continue to run deficits forever. Unlike a bank or big company, you won’t get a bailout! Stop procrastinating and take charge of your own finances with the above tips!

If you are looking for expert advice about your mortgage and how to pay it down faster, contact a Dominion Lending Centres professional to discuss YOUR situation and options.

BORROWER BEWARE:
It is always important to take things with a grain of salt. This is especially important when it comes to too-good-to-be-true, ultra-low-rate mortgages. These “no frills” mortgages are often loaded with restrictions such as pre-payment limitations, fully-closed terms, stripped-out features or unusual penalties. If you’re not looking at what you’re giving up, you may regret it in the future. These hidden terms alone could prevent you from taking advantage of tips #1, 2, 3, 4, 5, 7, 8, 9, 10, 14, 16 and 22!