Achieve your long-term financial goals with your home equity

Achieve your long-term financial goals with your home equityYour home has the potential to build your personal wealth over the long term. If used prudently, a home equity line of credit (HELOC) can help you reach your financial goals.

But with a HELOC, you might be tempted to use your home as an ATM. You need a plan to use this line of credit wisely, and be aware of potential risks.

Home ownership can be a great long-term investment strategy, especially if housing prices rise. Your mortgage debt goes down, because you make regular payments against both the interest and the principal borrowed. This increases your home’s equity — the difference between what you still owe and the value of your home. A HELOC lets you borrow against this growing equity. With this form of debt, you can delay repaying the principal balance as long as you cover the interest each month. However, this short-term credit advantage can mean a long-term debt problem.

Ask yourself if a low interest rate and easy access to credit may encourage you to spend more than you can afford to pay back and jeopardize your long-term financial security. For example, if interest rates continue to rise, will you have trouble keeping up with your payments?

Avoid a debt spiral where you could find yourself using additional home equity just to stay current on your mortgage. Here are some tips:

Establish a repayment plan. Try setting aside a portion of your HELOC in a sub-account with a fixed-term repayment schedule, so you pay more than just the monthly interest.

Develop a plan for how you will use a HELOC. This includes making a realistic budget for any home renovation projects you are funding.

Create an emergency savings fund. Using a HELOC for an unexpected circumstance, like job loss, carries risks if you need to use it to cover your monthly bills for an extended period of time. What you need is an emergency cache.

Learn more about HELOCs and find useful financial planning tools online at canada.ca/it-pays-to-know.

What do rising interest rates mean for your home?

What do rising interest rates mean for your home?There has been a lot of buzz about rising interest rates, which have increased since last summer after remaining quite low for seven years. If you’re like many Canadians, you may be facing staggering levels of household debt.

If some of your credit products carry variable interest rates, you have cause for concern. For instance, home equity lines of credit (HELOC) typically offer relatively low, variable interest rates. According to the Financial Consumer Agency of Canada, HELOCs represent a significantly larger portion of household debt than credit cards. If you’re already living paycheque to paycheque, even a small increase in your HELOC interest rate could make it tough to make your payments.

With flexible repayment terms and a credit limit that may increase automatically as you pay down your term mortgage, a HELOC can be part of an effective strategy to pay off other, higher-interest debt. But if you opt for this route, know that banks may approve you for a higher limit than you need, making it tempting to overspend. Consider negotiating a lower credit limit that does not increase as you pay down your mortgage.

Lower your risk of finding yourself in over your head and create a plan to pay down the principal amount borrowed on your HELOC over a fixed period. Aim to pay more than the minimum payment or interest every month. With a HELOC, there is usually no penalty to pay back as much as you can at any time.

If you think your spending habits are the cause of your existing debt, follow a budget and avoid using your home like an ATM.

Learn more about how to manage your HELOC wisely online at canada.ca/it-pays-to-know.

Renegotiating your mortgage?

Renegotiating your mortgage?There’s so much to think about when renegotiating your mortgage. You may be shopping around for the best rate, you may have to pay fees to switch lenders, and your bank will likely offer you a readvanceable mortgage.

Some banks bundle other financial products, like car loans or credit cards, together under a readvanceable mortgage — a term mortgage combined with a home equity line of credit. This is typically offered at an attractive interest rate.

While a readvanceable mortgage has its benefits, be aware of the fees that apply and the risks of tying different credit products together before signing on the dotted line.

HELOC debt is different than other forms of debt. Unlike a credit card or unsecured line of credit, a HELOC is secured by using your home as collateral. While HELOC interest rates are often lower than other forms of credit, they are variable. At any time, banks can demand that you repay your HELOC or increase your interest rate. If you can’t pay back the money you owe, you may lose your home or have no choice but to sell it.

Compared to a home equity loan — a lump sum loan with a fixed interest rate, term and repayment schedule — a HELOC works more like a credit card. Your available balance decreases as you borrow and increases as you pay it back, up to a certain credit limit. Some HELOC credit limits increase automatically as you pay down your mortgage.

To switch lenders the next time your mortgage is up for renewal, you may first need to repay all credit products tied together under your readvanceable mortgage. And there are additional legal fees you wouldn’t incur when moving a traditional mortgage.

When deciding your strategy, think long-term. Are you planning to use your home’s equity to fund your retirement? How long do you plan on staying in your home? How will you use your HELOC — for renovations, to invest, to consolidate higher interest debt, for emergencies, for a second home, for a vacation? How would interest rate hikes, job loss or illness impact your ability to repay your debt? Would a HELOC tempt you to use your home like an ATM?

If a HELOC is the right product for you, stick to a plan to pay it off fully and avoid continually borrowing against your home’s equity. Learn more online at canada.ca/it-pays-to-know.

Moving on up: Should you buy or sell first?

Moving on up: Should you buy or sell first?In Canada’s evolving real estate markets, both buying and selling a home are very personal decisions. Add buying and selling at the same time, and the process becomes even trickier. The path up the property ladder is different for everyone and which to do first depends on your unique circumstances.

“Buying and selling a home at the same time is no small endeavour and involves extensive research and a clear understanding of all the steps involved,” explains Nicole Wells, vice-president of home equity finance at RBC.

Here are some things to consider before making a move:

Should I sell first? The upside of selling first is that you will know how much money you have to work with, and it’s also easier to get new financing when you need it. However, if there are delays or challenges finding the right new home for you, you may incur additional rent and storage costs in the interim.

Should I buy first? In this case, you will have time to plan your move and get your current home ready to sell. However, closing dates on both the purchase and sale may not line up and if your home doesn’t sell for a while, you’ll be stuck with two mortgages at once and a higher debt-to-income ratio.

Add a contract contingency. Whether you’re buying or selling, try to add a contingency to your contract that lines up the closing dates to bridge the in-between period. This isn’t always possible, as it depends on the market and whether the buyer/seller is willing to agree to an extended or reduced period of time.

Know the markets. Research prices in the areas where you’re buying and selling. Does the market favour buyers or sellers? This is the best way to decide which move to make first. As a rule of thumb, you want to sell first in a buyers’ market and do the contrary in one that favours sellers.

Consider rental revenue. Research the rental market in your area and calculate the cost versus profit ratio of renting out your home to tenants, rather than selling it. It could be financially advantageous, and real estate could be a great way to diversify your investment portfolio.

Find more information online at rbc.com/home.

www.newscanada.com

Your first home may not be your forever home

Your first home may not be your forever homeHome ownership is a goal for most of us, and millennials appear to be the most optimistic group. According to an RBC poll, two in five millennials said they intend to buy a home in the next two years. But the cost of home ownership and things like regulatory changes can make saving for a downpayment more difficult and, for many, put the dream of home ownership out of reach.

Sometimes, however, first-time buyers may not be looking at all their options. A little flexibility and compromise can help make ownership more accessible when considering the following:

Begin with a starter home. Few people spend 50 years in one home these days. Think about your lifestyle for the next five to 10 years and make a decision based on that. Your dream home in your dream neighbourhood may still be yours, just a bit later in your life.

Get a renter. Could you afford the home you want if you rented out part of it? Many people create a basement apartment or rent out a second bedroom as a way to offset their mortgage payments.

Consider co-ownership. Buying a property with family or friends is a great way to get your foot in the door. Discuss options with your mortgage specialist and be sure to establish a solid contractual agreement that will help avoid or mediate any future disagreements when selling the property, renegotiating terms or buying each other out.

Be realistic. Don’t expect perfection. Every home has some issues and you may have to compromise or decide what you can and can’t live with. What is a permanent feature versus something that’s an easy aesthetic fix? Set your priorities, but be realistic and flexible.

Be patient. Style your home slowly and resist the temptation to furnish it from top to bottom the day after you move in. Get creative with chic but less expensive, gently used furniture or pieces that may not last a lifetime but will save you money today.

Find more information online at rbc.com/home.

www.newscanada.com

Should you rent or buy a house for your student?

Should you rent or buy a house for your student?With high school students across the country deciding on their post-secondary education right now, where they will live while at school should play an important part in the decision. Given that more than two-thirds of post-secondary students plan to live away from home during their studies and parents often foot the bill, have you considered how much it will cost?

While many rent, some parents opt to invest by purchasing a home for their kids to live in while away. But when does this option make sense? According to Nicole Wells, vice-president of home equity finance at RBC, there are five questions you should ask yourself when deciding.

1. What is the market is like? The conversation will be different depending where the school is located. In a more urban market, prices may be high compared to smaller towns, where you might find a better deal. Is the market volatile or stable? Do your research first.

2. Do I want to be a landlord? If you’ll be renting to your kid’s roommates as well, make sure you look into the logistics and legalities of being a landlord. Are you prepared to handle the maintenance on the house? What if someone doesn’t pay their rent on time?

3. When do I plan to sell? Will you sell as soon as your child finishes school, or continue to rent it out? You may get more value by holding on to it as a rental unit. Being a university town, there likely won’t be a shortage of renters.

4. Who will benefit? Is this a short term play, or are you planning ahead for other siblings that might go to the same school? Think about holding onto the property for longer to gain more value and plan ahead.

5. Have I run the numbers? Calculate the break-even point and when you would see profit. Don’t forget to include “extras” such as maintenance, repairs, taxes and insurance. You also need to put yourself first and ensure you aren’t drawing on retirement savings that might put your future in jeopardy.

Find more information online at rbc.com/home.

www.newscanada.com

How to avoid real estate fraud

How to avoid real estate fraudAs housing prices climb in many markets across the country, real estate fraud can become a much more enticing prospect for scammers. While it’s one of the lesser known kinds of fraud in Canada, its impact can be devastating.

There are two types of real estate fraud that may result in financial losses — title fraud and foreclosure fraud.

Title fraud happens when a fraudster steals the title to a home — usually after stealing the owner’s identity — then sells the home or applies for a new mortgage against it.

Foreclosure fraud happens when homeowners having difficulty making their payments mistakenly turn to a fraudster, who convinces them to transfer their property title in return for a loan. Often, the fraudster keeps their loan payments and resells or remortgages the victim’s home.

Protect yourself from becoming a victim of real estate fraud with these simple tips:

Safeguard your personal financial information.

Contact your mortgage lender first if you are having difficulty making your mortgage payments.

Consult your lawyer before giving another person a right to deal with your home or other assets.

Research the company or individual who is offering you a loan.

Do a land title search with your provincial or territorial land registry office. This search will show the name of the property owner and any mortgages or liens registered on the title.

Consider buying title insurance to protect against title fraud.

Find more information online at canada.ca/money.

www.newscanada.com

Top tips to create an ideal income suite

Top tips to create an ideal income suiteFrom the condominium craze to the rise of multigenerational living, the climbing cost of homeownership across Canada continues to spawn new trends. The transformation of basements into rental suites is a big one that can help offset mortgage costs. There are plenty of advantages, as well as some important considerations to ensure the best result.

Do your homework. Check zoning, bylaws and adhere to your local building code. As with any new construction or renovation, building permits must be obtained, and all work must be code compliant. This will protect you and any future tenants.

Waterproof it. Check the interior foundation and floors for existing moisture issues, water damage or mould problems. Address any primary moisture issues before finishing the space.

Insulation is key. As a landlord, it’s wise to invest in smart renovations that can improve efficiency and bolster your bottom line. For the best results, insulate well. I recommend installing a rigid board insulation, like Rockwool ComfortBoard 80, against the concrete foundation before you stud the wall. The board is mechanically fastened or adhered to the concrete foundation wall, which prevents thermal bridging through the studs, providing better thermal performance. Finish with a moisture-resistant and dimensionally stable insulation between the studs, like R14 Comfortbatt, to protect against common basement issues such as mould, mildew and rot.

Consider fire safety and soundproofing. Select building materials with a high fire-resistance rating that will not off-gas or contribute to toxic smoke in the event of a fire. Soundproofing is also a must when you plan to share space. Install sound absorbent insulation between floors with resilient channels to reduce sound transfer between living areas. Contractors love stone wool fire and soundproofing insulation, because it protects against fire and noise and is easy to install.

Spend wisely. Keep the renovation budget reasonable. Spending no more than two years’ worth of rent to convert your space is a good general rule of thumb. Forego high-end finishes. Instead, create focal points that will “sell” the suite.

Scott McGillivray is the host of the hit HGTV series Income Property and Moving the McGillivrays, a full-time real estate investor, contractor, author, and educator.

www.newscanada.com

How mortgages have changed

How mortgages have changedIf you’re like millions of Canadians, you’re busy paying down your mortgage. It could take 25 years or so, but it can be a great way to accumulate personal wealth, especially if house prices rise. However, with changes to mortgages in recent years, it’s important to understand just how they are different if you want to fully benefit from your home’s potential to build your personal wealth over the long term, rather than your debt.

Today, to finance your house most banks will offer you a readvanceable mortgage if you have a down payment of 20 per cent or more. It combines a traditional mortgage with a home equity line of credit (HELOC). There’s a big difference between these two forms of debt.

First, your mortgage debt only goes one way — down — because you must make regular payments against both the interest and the principal borrowed. This increases the equity you have in your home, meaning the difference between what you still owe and the value of your home.

But as you pay down your mortgage, a HELOC lets you borrow against your growing equity as part of your mortgage. Unlike your mortgage, you only have to make regular payments against the interest. You can ignore the principal until you sell the house. This short-term credit advantage can mean a long-term debt problem.

With flexible repayment terms, low interest rates and a credit limit that rises with your equity, a HELOC can be used to pay off other, higher-interest debt or home renovations.

But would a HELOC tempt you to use your home like an ATM? Mounting HELOC debt could put you at increased risk if you lose your job, get sick or injured, interest rates go up or your home decreases in value. If it consumes too much of your equity, you might end up owing more than your home is worth, lose your home or have to sell it to pay down your debt.

To use this borrowing tool wisely, stick to a plan to pay it off fully and avoid continually borrowing against your home equity.

Learn more online at canada.ca/it-pays-to-know.

www.newscanada.com