Mortgage infographic

Click to enlarge.

Resource found here.

Paying off your mortgage early can cost you- The Toronto Star

The Toronto Star's Peggy Mackenzie writes:

---

You can get a cheaper mortgage by shopping around.

SHUTTERSTOCK PHOTO

Paying off your mortgage early seems like great financial planning since you’re freeing up money that can be put towards savings.
But discharging a mortgage early can mean a prepayment penalty because the bank loses money. If you had a two-year term and paid the mortgage in full after 16 months, the bank is out eight months of interest. They charge the difference so they don't lose out. The closer you are to the end of the mortgage, the smaller the penalty but it's money out of your pocket.
For those lucky enough to be near the end of their mortgages and ready to hold a mortgage burning party, they need to keep an eye on the mortgage statement that shows the principal/interest mix if they want to avoid penalties. This is particularly true for those with a variable rate.
People with variable mortgages pay fixed amounts, but the amount going towards principal and interest fluctuates depending on prime. If the prime rate decreases, more of the payment goes to the principal and less to interest. While decreasing principal is great, you’ll be hit with a penalty if the mortgage ends before the term does because the bank loses interest payments.
There's not as much worry for those paying fixed rates; just skip double-up-payments unless the bank agrees that you can retire the mortgage early.
If you’re close to the end of your mortgage, but don’t have enough cash on hand to retire it outright at the end of the mortgage term, you’ll need to renew for a short period. Here are a several options that will not incur prepayment penalties:

-  Take out a short-term variable-rate-mortgage and keep monthly payments the same. Pay any leftover amount at the end to retire the mortgage. You’ll need modest extra savings for this plan but make sure that if prime drops, you aren't in jeopardy of paying it off early.

- Take out a short-term fixed-rate-mortgage and increase monthly payments so that the principal will be paid in full at the conclusion of the term.

- Increase the mortgage term and decrease payments. This will add to the length of time that you pay off your mortgage, but will help if finances are tight. Again, for those paying a variable rate, religiously check your balance in the last three months to ensure you don’t inadvertently pay the mortgage in full ahead of time.

Contact Peggy Mackenzie at pmackenzie@thestar.ca or follow her on Twitter:@PeggyMackenzie

New Mortgage Rules Effective Today

Don't forget homebuyers, Canada's new mortgage rules go into effect as of today, March 18, 2011.


In case you've missed all the discussions, the three new rules are as follows:


1) The maximum amortization period has been reduced to 30 years from 35 years for government-backed insured mortgages with loan-to-value ratios of more than 80 per cent.


2) Ottawa will lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes.


3) Ottawa will withdraw government insurance backing on lines of credit secured by homes.

Finance Minister Jim Flaherty announces Canada's new mortgage rules in January 2011.

What happens to your retirement savings in a divorce?

As written by MARY GOODERHAM and published in the Globe and Mail 


Who gets what? When a marriage breaks, a couple’s major assets are divided as well. But when they are socked away in registered plans, splitting those assets evenly and smartly becomes about avoiding tax hits.

Registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) as well as pensions are considered family property to be divided 50-50 in a legal separation or divorce. The Income Tax Act provides for tax-free rollovers of RRSPs and RRIFs between spouses where there is a court order or written separation agreement, which allows for the equalization of registered assets without significant tax implications.

But then things get tricky. Dividing the funds in registered plans along with other family assets can involve complex deliberations and leave one or both members of the couple scrambling to make up for retirement.

“For most people the math doesn’t work very easily,” says Eva Sachs, a certified financial planner in Toronto who is also a certified divorce financial analyst specializing in issues such as financial settlement options for divorcing couples.

More than half of the clients Ms. Sachs sees in her fee-for-service consultancy, called Women in Divorce Financial, are ending marriages of between 20 and 30 years. Already in their late 40s or early 50s, these couples must quickly gear up for retirement, while variously paying hefty costs related to the separation, learning anew to manage finances and supporting two households.

“Getting divorced really messes up the retirement plans they had been working on as a couple,” she says. “It’s a huge thing.”

Take Peter and Joan Wright, for example. The Wrights (not their real name) jointly own a house worth $500,000 and RRSP assets worth $400,000. Mrs. Wright wants to keep the house, which means she must give cash – or the equivalent in RRSPs – to her ex. (She could perhaps take out a significant line of credit or extend the mortgage on the house to pay him some of the funds.) Mr. Wright may end up with the lion’s share of the RRSPs, but he then needs to pay for housing and other costs.

One significant issue on the divorce ledger sheet is that the value of RRSPs is calculated by taking into account the deferred tax that must be paid. A notional tax rate is usually applied, based on the expected income and thus the taxation level upon retirement of the person who gets them.

“Sometimes the negotiations get a little complicated,” says Douglas Lamb, a certified financial planner at Spera Financial in Toronto.

The best way to get back on track with RRSPs, he says, is to establish a comprehensive financial plan “that reflects an individual’s new economic realities” and develop an investment plan that supports it. That means figuring out any new expenses and sources of income as well as projecting what you will need for retirement.

A spouse who is newly receiving regular alimony or child support payments, for example, must realize that this is income that is taxable, but also handily creates RRSP room, Ms. Sachs says. Making sure to set aside the funds to pay the tax or to invest in the RRSP, while covering all other expenses incurred in their new household, is critical.

Many people end up with huge costs related to the divorce itself, she explains, such as legal bills, counselling for the kids and credit card debt from emotional spending. Many people finance these expenses by cashing in RRSPs. Worse, she says, many people take a hiatus from making RRSP payments, thinking they will get back to it, but “it’s hard to start up again.”

Getting good advice, establishing a firm financial plan and making informed decisions on your retirement, she says, must start with figuring out what your new life is costing and buckling down on expenses.

“Something has to give,” Ms. Sachs says. “You need to adjust your spending to meet the new reality.”

Mr. Lamb adds that often in the case of divorce, one partner is less aware of issues such as RRSPs, especially if the other partner had the “financial administration responsibilities, wrote the cheques and did the investing.”

Those in the first category “have all of the emotional turmoil of the separation and they’re just bewildered,” he adds. In such cases, doing a long-term plan and considering where funds will come from in retirement, be it from RRSPs, tax-free savings accounts or even a real estate investment, he says, will “tell you what you’re going to do for the rest of your life.”

Spousal RRSPs

Investing in a spousal RRSP is a smart move for couples who want to split their income – and pay less combined tax – in retirement. If you break up before you get to that stage, however, the assets belong to the person whose name is on the plan, although the funds will be equally divided.

Spousal RRSPs are especially useful when couples anticipate that they’ll generate unequal amounts of taxable income when they retire, for example from pensions, retirement savings or investments. They can also be used to build up both spouses’ RRSP accounts in equal proportion, where one person doesn’t work or earns less and therefore has less RRSP contribution room than the other.

In a spousal RRSP, one spouse uses his or her own contribution room to pay into an RRSP account in the partner’s name. The person who makes the investment benefits from the tax deduction, while the partner in whose name the RRSP is registered owns the account.

Upon divorce, spousal RRSPs are actually treated the same as the rest of the family’s assets. A couple’s RRSPs and RRIFs are evenly split and can be transferred tax free, so in most instances contributing to a spousal RRSP is no different from contributing to an RRSP in your own name.

New Mortgage Rules

Changes to the rules for mortgage lending received a lot of press in the past week. However, these changes won't affect most borrowers significantly.
The March 18, 2011 changes are really phase three of a gradual return to what I would call normal mortgage lending rules. In the “old days” - like 10 years ago - home buyers needed a minimum 10% down payment, they needed to pay for CMHC mortgage insurance in order to protect their lender if they had a down payment smaller than 25%, and they had to pay off the mortgage within 25 years. Even after the most recent changes, a home can be purchased with 5% down and paid for over 30 years. No wise person would amortize over more than 30 years, but you can still do that if you have made more than 20% as a down payment. If you are refinancing an existing home, you can still borrow up to 85% of its value, although down from the previous 90%. The third change – effective April 18, 2011 - is going to make lenders more cautious, because it removes the government insurance protection on home equity-backed lines of credit. These have been a fabulous business building tool for banks and credit unions, as well as a convenience for homeowners. This change simply means that the bank or credit union will have to be more careful to make sure you can repay them, because CMHC is no longer guaranteeing it.


as reported in The Viewpoint of the Clearsight Investment Program