Information sourced from : https://www.canada.ca/en/services/finance/debt.

html
Identifying good and bad debt moves

Consider the following scenarios and determine the positive and

negative impacts each decision may have on the person’s financial
future.
Scenario 1

Ryan just moved into his first apartment and he wants to buy a flat screen TV for
the living room. He works, but between college tuition, books and rent, his funds
are running low.

Ryan decides to take advantage of a financing offer from a local electronics store
and buys the TV on a line of credit.

Is this a good or bad debt move? Why?

Answer: Ryan’s desire for a new television is a want and, therefore, not a
great purchase to make using credit, especially since his money is needed
for other items such as rent, tuition and books.

If Ryan is unable to repay the loan, his credit score could be damaged.
Scenario 2
Blake just graduated college and accepted a new job as a graphic designer for a
marketing firm. He wants to buy a $100,000 condo near his new job and he has
saved enough money for a 20% down payment.

He is planning on taking out a loan, or a mortgage, for $80,000 to purchase the

property.

Is this a good or bad debt move? Why?

Answer: Blake has steady employment and a solid down payment,
making the condo purchase a good investment for him.

The home loan will give Blake the opportunity to continue building his
credit history and “creditworthiness.”
Scenario 3
Nora has heard that opening a lot of credit card accounts is a good way to
build credit. She currently has five credit cards, but is sometimes forgetful
in paying her bills on time and usually has a balance on
each card.

Her favorite store is offering a $50 coupon on her next purchase, with the
promise of more coupons in the future, if she opens a credit card. She
decides to open the store credit card to get the discounts.

Is this a good or bad debt move? Why?

Answer: Because Nora already has five credit cards and is sometimes late in
paying her bills, opening another credit card could potentially damage her
credit score if she continues to be late in payments.
3 C’s of Credit
Character

Character is an evaluation of how likely you are to repay

your debts. Potential lenders look at your past
history, including:

• Have you used credit before?

• Do you pay your bills on time?
• Have you ever declared bankruptcy?
• Can you provide character references?
• How long have you lived at your present address?
• How long have you been at your present job?
Capital

Lenders often want to know if you have any assets you can use to
secure the loan, in case you lose your job or default on a loan
payment.

• What property do you own that can secure the loan?

• Do you have a savings account?
• Do you have investments to use as collateral?
Capacity

Capacity looks at how much debt you can handle based on your current
financial situation. Lenders want to know whether or not you have been
working regularly in a job that will provide enough income to
support your credit use.

• Do you have a steady job or income?

• How much do you earn?
• How many other loan payments do you have?
• What are your current living expenses?
• What are your current debts?
• How many dependents do you have?
Buying a Car:

Create a Budget: How much you can afford to pay monthly, taking into account
the:
cost of the car,
auto insurance,
maintenance and gas.

Down payment: How much can you afford to pay up front. More down means
less interest paid over the life of the loan.

Comparison: Shop auto loans to find the best option for you (apples to apples).
consider the length of the loan term, monthly payment amounts, and the
interest rate to determine the best deal. New vs. Used (new to you)

Interest rates: Consider variable rates P+ __ , as they tend to be lower than fixed
rate for specified term. Shorter term rates are usually lower so consider
renewable loan options (term vs. amortization). Rates are usually lower on
newer model years. Beware longer terms at zero %, take longer to build equity.

Your credit score may get you a better interest rate,

Personal Property Security Act (PPSA)

Legislation that applies to the taking and enforcement of security for borrowed
funds

Security types:
Goods - classified into consumer goods, equipment and inventory
Instruments – deposits
Documents of title – insurance policies
Chattel paper - leases and conditional sales contracts
Securities – stocks and bonds
Money – deposit accounts
Intangibles - licenses and any other matter not included above

Typically the Cost to register lien on vehicles is passed on to the borrower.

Raw land and developed property are secured through the land registry office
Buying a Home (long term decisions require research)

Know what you need and want in a home and in a mortgage

Take stock of your financial situation – know what you can afford (budget)
Share this on a need to know basis, banker needs, (realtor does not)
https://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MC-CH-eng.aspx

Find a lawyer – ask family and friends for names and shop for best rate vs.
Reputation (how thorough and timely will they get the job done)

Research lowest interest rate and shop around with different lenders
to obtain pre-approvals for a mortgage before you start looking for a home.
Have lender lock in a rate at this time (usually up to 120 days) with no obligation.
If rates fall, have rate rebooked to lower rate when you find a home to purchase.

Attend open houses for houses at the low end and top end of your price
range in the area you would like to live in and make notes about each property.
(Comparison shopping and watching for fluctuations in price, length of time
On the market, Cost of utilities, heating source and property tax from last year)
Understand the impact of closing costs, moving costs and other costs related to
owning and maintaining a home will impact your budget.

Closing Costs: (bank uses 1.5% of purchase price can be as high as 4%)
Appraisal fee $250
Home inspection reports ($400) - Select your own inspector
Legal fees ($500 -$1000)
Land transfer tax ($300,000 = $2,975 -$2,000 first time home buyers rebate =
$975)
Title Insurance fee ($400)
Realtor Fees (5-6% vendor pays, move up buy )
Premium and HST on Default Mortgage Insurance (CMHC, Gemco)
HST/GST on new construction
Municipal levies (may apply to new homes in subdivisions)
Property Tax and utility adjustments (to repay the seller for prepaid bills)
Interest adjustments (interest for the period between your closing date and your
first mortgage payment due on the first business day of the following month)
Survey or Certificate of Location cost
Estoppel certificate (clearance for condominium unit fees)
Water /Septic tank tests (if applicable).
What you should bring to a pre-approval interview
Identification
Proof of Employment
Proof of current salary or hourly pay rate (for example, a current pay stub and a
letter from your employer)
Self-employed or fluctuating pay, bring your Notices of Assessment from Canada
Revenue Agency from the past two years
Proof of saved down payment and closing costs
Recent monthly bank accounts and or investments statements
Information about your other assets (car, cottage or boat)
Information about your debts or financial obligations (balances, limits and payments)
child or spousal support amounts, leases, student loans and personal loans
Lender will assess capacity for mortgage repayment:
GDS = monthly obligations – mortgage, heat and taxes/ Gross income (35%)
TDS = monthly obligations including mortgage heat and taxes / Gross Income (44%)

Questions to ask during prequalification:

Do you automatically get the lowest rate if interest rates go down while you are pre-
approved? How long is the pre-approved rate guaranteed? Can the rate booking be
extended?
Understand the following terms:

Home Buyers’ Plan (HBP) - withdraw RRSP savings $25,000 tax free, easy
repayment over 15 years back to your RRSP

“Open” vs. “closed” mortgages – open term gives the flexibility to make
prepayments during the term with out incurring compensation interest charges
at the cost of a higher rate than closed term.

“Term”- the period that you lock in your interest rate and repayment conditions,
“Amortization” the period you have to pay the full mortgage balance. Choosing
Short vs. long terms – should align with your plan to stay in the house, need to
remodel /remortgage and risk of higher payments at the time of term renewal
(Portability clause allows borrower to move remaining term contract to another
property and avoid compensation (penalty) interest.
“Fixed rates”- based on long term bond rates, usually higher as length of closed term
increases, usually higher than published “Variable rate” which is based on bank’s
prime rate– Can your budget withstand an increase in payment amount during the
term if you choose a variable rate (rate caps and convertibility features may still leave
you with a higher overall rate)

http://www.tradingeconomics.com/canada/bank-lending-rate
Current Mortgage Rates - Nov 2022
Understand cash-back offers where institution pays you 4-5% of mortgage
balance in cash on fixed term rates, you are opting out of deeper rate discounts
that may be more valuable and you may have to repay cash back if you
renegotiate your term contract prior to maturity. If you are looking for cash
back to do renovations at time of purchase, you may find it cheaper to access
additional funds through “Purchase Plus Improvements” through CMHC’s
Default Insurance program for a slightly higher premium, while negotiating a
better rate on the entire amount.

Standard vs. Collateral charge mortgages – impact transferability between

lenders. Beware of interest computed monthly cost to borrower is higher than
computed semi-annually. Rate quoted on charge is the highest possible rate
while the mortgage charge is registered on the property not the rate you will
pay refer to “commitment” for APR and interest factor.
Reduce How Much Interest You Pay:

Accelerated payment options can help you save money in interest and
shorten the time it will take you to pay off your mortgage (Biweekly rapid =
13 monthly payments or one extra payment per year, reducing a 25 year
amortization by 8 years. (Biweekly vs. Weekly, always choose the rapid option
and best to time with your income)

Prepayment privileges 10-20% of original balance prepayment annually

during the term, prepay any amount at renewal.

Increase regular payment up to double your payment amount during your

term. Payoff mortgage sooner, pay less interest

Use mortgage payment calculator link to see the impact of prepayment options
http://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MC-CH-eng.aspx
Optional insurance available on mortgages:

Mortgage life insurance, consider if co-signor or guarantor is required.

If you have a spouse / family that would have to afford on single
income. Work insurance coverage may not always be in effect, legal
strike, or other absence. Premiums based on age at the time of the
mortgage and do not increase…claim pays off mortgage balance only.

Alternative, term insurance policy in the amount of the mortgage may

be lower premium cost for 30 year olds but renews every 10 years
causing price to go up, claim pays out full policy coverage.
Mortgage disability or critical illness insurance – depending on age can be a
reasonable premium and exceeds work coverage.
Disability not as common due to difficulty approving claims and cost vs.
benefit of insurance paying mortgage until your return to work.

Critical Illness Premium based on age at the time of opening the mortgage
and does not increase, claim pays off mortgage in full.

All insurance coverage is subject to change if you renegotiate your

mortgage for more money. (high probability if you are paying for 15 years
or more)

Title insurance- set up by lawyer for a small premium $300-$400, to cover

possible title infringements but has additional coverage for septic and
structural issues. Obtain a copy of policy from your lawyer at the time of
closing and keep with your banking documents until you sell the property.
 CMHC and Debt Servicing and Loan to Value
Mortgage Default Insurance
The minimum down payment required to buy a home in your price
range. 5% down payment with CMHC \ Genworth \ Canada Guarantee
mortgage default insurance. CMHC premium can be ported if moving
to a new property. The default mortgage insurance premium can be
included in the mortgage amount or paid up front. With 5% down
payment, cost is 4% of purchase price.

Total Debt Servicing

Your gross income against ALL of your debts including your mortgage,
property taxes, and heating. Must be 42% or under (Beacon Score 650-
700}, 44% or under (Beacon Sscore 700+).

Loan to Value
20% down payment for conventional mortgage (saves default
insurance premium and lowers overall amount borrowed) However,
interest rate will be slightly higher than an insured mortgage. 5%-19%
down payment is insured hence the lower rate.
 Refinance and Home Equity

When the value of your property exceeds what you owe on your
mortgage.
Example:
Your home is valued at $500,000 and you owe $240,000 on the
mortgage.
$500,000 x 80% = $400,000
$400,000 - $240,0000 = $160,000 home equity.

You can wrap up debt using this equity through a HELOC (Home
Equity Line of Credit) or refinance your mortgage. If term is up, no
penalties, if during term, penalties will be changed.

Why Refi? Save cash flow and pay off debts.

 More about mortgages…

Check out FCAC website…

https://www.canada.ca/en/financial-consumer-agenc
y/services/mortgages.html