What You Can Do if Your Credit Takes a Beating
Sometimes bad things happen to good people. Credit problems can be caused by many events.
I have had clients who have had a sudden job loss or a serious illness with a child. When these things happen, it's hard to focus on paying your bills on time.
Just because you had some trouble with credit at a certain time doesn't mean you won't ever be able to get a mortgage. If you have had a bankruptcy or a consumer proposal, you will have to wait two to three years from the date of discharge or in the case of a consumer proposal the payoff date, before you can apply for a high ratio mortgage.
What if you have a mortgage already? Sometime homeowners get behind on their bills because of an unexpected loss of income or life event and they start to accumulate balances on their credit cards and lines of credits.
It is really important to keep the minimum payments up to date so your credit does not suffer. If possible look at refinancing your first mortgage to repay the debt. Sometimes the credit is so far behind that a private second mortgage is required to payout all of the debt.
Fortunately, with the increases in values of homes this is sometimes not too hard to accomplish.
What if you want to buy a home and have bad credit? The best option is to pay out the debt and start to re-build again. If you have an existing home, you may consider selling, paying out all or most of your debt but leaving enough to have a healthy downpayment of at least 35 per cent if the credit is already bruised.
Sometimes, I have started my clients in a private mortgage with 25-35 per cent equity because the credit was so far beyond repair. After repairing credit for a year and the payment of the private mortgage the homebuyers are ready to move to a B type lender with a little bit better interest rate and a small or no fee mortgage.
Most credit will take two to three years to rebuild and at that time the clients' mortgage can be transferred to a regular financial institution.
Buying a home is one of the largest investments we will make and we often ponder whether to sell our home and upgrade or if we should renovate instead.
Buying a home is primarily to provide shelter for ourselves and family, but it is also a huge investment, which will appreciate over time.
Our homes' values are not only impacted by their locations, but also the market and the health of the economy. The last few years most areas in Canada have seen significant housing increases especially Vancouver and Toronto. It is usually expected that over 20 years, a home will appreciate significantly.
As the Baby Boomers age, it is anticipated that many will sell their large homes and downsize into smaller homes or strata units and invest the remaining proceeds into retirement investments.
Some of those who will retire in the next few years, plan on renovating to their homes before putting them up for sale. While renovations should increase the value of a home, it is advisable to be cautious in what kind of improvements will see the best increase in value.
Here are a few insights for you to keep in mind if you plan to renovate.
Bathrooms and Kitchens
Bathrooms and kitchens are often renovated and usually the money invested is recouped in the increased value. Upgrading lighting and fixtures can have a significant impact with relatively modest expenses. Anything more than that require a greater out lay of money.
If the bathroom upgrades include whirl pool baths or soaker tubs then costs will increase. Similar increases can be seen in the kitchen when the upgrades include new appliances, upgrading counter tops and cabinets. Costs can be prohibitive.
Another common renovation project is the basement, which will increase the living area. This is a strong selling feature; converting an unfinished basement into a usable space will usually fetch extra money in a sale.
Basements are useful for families with teenagers to provide a separate space or they can be converted into a suite with a separate entrance to accommodate tenants for added income. Suites are also useful for in-laws who choose to move in with their children later in life. Either use provides good value for the money spent.
Poor Renovation choices
Some renovations projects will provide good resale value while other renovations could lessen the value received or hinder a sale. At the top of the list is the addition of a pool.
While many people love the idea of having their own pool, this is a feature that families with young children will avoid. Not only are pools dangerous to young children, they also require a lot of maintenance and cleaning, which makes them unpopular with some buyers.
Another poor choice is converting a garage into living space. While it may increase the square footage of a home, many people like the idea of having a place to park their vehicle out of the weather. Garages also provide a lot of storage and so potential buyers may see this as a loss.
Finally, while these major investments may not increase the visual appeal of your home to a potential buyer, they may still increase the value. It is important to keep the major items in good repair.These include the roof as well as heating and cooling systems.
These are items that stand out in a home inspection, which most potential buyers will obtain. These big ticket items if in disrepair can cause the buyer to lose money in a sale or the sale itself.
By Chuck Duerden
If you are looking to enter the housing market — and if you meet the definition of a first-time buyer plus other conditions — the federal government will help you buy or build.
It will allow you to withdraw funds directly from your Registered Retirement Saving Plan (RRSP). That’s tax-free.
This is made possible through the Home Buyers’ Plan (HBP), under which you are allowed to withdraw up to $25,000 from your RRSP in a calendar year for the purpose of acquiring a home for yourself or a disabled relative.
Your spouse can also draw up to $25,000 out of his or her RRSP if you’re planning to buy or build a home together, if both of you meet the HBP’s qualifications. In the case of a spousal RRSP, monies may be withdrawn under the Program in the name of the annuitant, or owner, rather than the contributor.
If you withdraw more than $25,000, you will be liable for taxation on the excess.
A program as generous as this does not come without conditions.
- The contributed monies you withdraw from your RRSP must have been in the account for a minimum of 90 days before you can take them out under the HBP.
- Otherwise, they may not count as deductions for any year in which case the Canada Revenue Agency (CRA) will levy a tax on them. So watch out.
- The funds you have taken out from your RRSP must be paid back over the next 15 years. It does not matter if the original HBP withdrawal came from a regular RRSP or from a spousal one; the funds must be repaid to a regular RRSP.
- If you do not repay on schedule, the required amount is added to your taxable income for the year. However, you can repay the full amount into your RRSP(s) at any time. If you don’t, then the CRA will send you a Home Buyers’ Plan statement of account, with your notice of assessment (or reassessment).
- The home that you buy or build must become your principal residence within one year of completing the purchase or the construction. If you’re buying or building for a relative with a disability, that person must likewise occupy the home as his or her principal place of residence.
- In other words, the home must be for you rather than something you plan to rent out.
- We come to the thorny question of what constitutes a first-time home buyer under HBP rules.
- Get this: rather than being disqualified if you have ever owned a home in Canada, the rules state you are considered a first-time home buyer if, within the preceding four years, you did not occupy a home owned by you alone, or in conjunction with your spouse or common-law partner.
- To make the program even more accessible, even if you have taken advantage of the HBP before, you might still be able to participate again, providing your repayable balance on your HBP account is zero on Jan. 1 of the year you wish to make another withdrawal.
All this is all well and good, I hear you say, but what if neither I nor my spouse have $25,000 in our RRRSPs or anything like the amount necessary for the down payment on the home of our dreams?
Fear not, for qualified applicants, it may be possible to borrow money from a specialized lender to purchase an investment to place in an RRSP.
The same rules for withdrawing funds apply as before; an investment purchased with an investment loan must remain in an RRSP for 90 days before it can be withdrawn, and then of course liquidated to free up the necessary cash.
That means having selected your dream home, and presumably qualified for mortgage financing also, you must cool your heels for three months before you can start moving to purchase it.
You’re probably wondering what happens to the loan you took out to purchase the investment for your RRSP. Well, it will continue to exist and continue to require servicing as part of your overall debt load.
That’s the downside of this strategy; besides the debt of your mortgage you will also have the debt for your down payment.
Obviously, it is an approach that should be attempted only if your credit is strong. And that’s where we come in; if you are considering using a leveraged load to access the Home Buyers' Plan, or even using your RRSP to access the HBP without such a loan, talk to a financial adviser first.
These are relatively complex financial strategies, and, as we have mentioned, not without an increase in risk.
We would be remiss, particularly for our readers in British Columbia, if we did not mention a new program recently announced by the provincial government to assist would-be home homebuyers.
If you are a first-time home buyer (that phrase again!) the B.C. H.O.M.E. Partnership Plan will match what you have saved for a down payment up to $37,500 or five per cent of a maximum purchase price of $750,000.
For the first five years, the loan will be interest free and payment free. After five years, buyers can either repay their loan or enter into monthly payments at current interest rates. Like most mortgages, loans awarded through the program become due after 25 years.
Conditions as always do apply and in this case, unlike the Home Buyers' Plan, an important one is that to qualify as a first-time buyer for the H.O.M.E. program you must not have owned an interest in a residence anywhere in the world at any time.
Another stricture is that you must intend to reside in the home you are purchasing with the aid of the Program for the first five years.
You must have obtained a high-ratio insured first mortgage on the property for at least 80 per cent of its purchase price.
(A high-ratio mortgage is one in which a borrower places a down payment of less than 20 per cent of the purchase price on a home.)
Also, since the Program is geared to fostering home-ownership among middle-to-lower income British Columbians, the maximum combined annual income of all persons on the title must not be greater than $150,000.
Since this is a matching program, by implication you must have a down payment amount at least equal to the loan for which you plan to apply.
When coupled with the federal Home Buyer’s Plan mentioned above, the B.C. H.O.M.E. Partnership Plan greatly expands the possibilities of home ownership for qualified applicants.
It should be stressed once more that given its complexity such a strategy should not be attempted solo but rather with capable financial adviser.
Chuck Duerden is an insurance and investment consultant at Septen Financial.
You can use your RRSP for all or part of your down payment, but the rules have changed in recent years.
If you think you know them, double check here.
What is it?
In February 1992, the federal government introduced the Home Buyers’ Plan (HBP), which allows RRSP plan holders who are also first-time home buyers to use up to $25,000 of their RRSP to apply to the purchase of their home.
The plan, extended twice, is in effect as of July 1997 until further notice.
Who is eligible?
Buyers who have not owned a property in the last five years.
How does it work?
Up to two partners in the home can combine their RRSPs for a total maximum of $50,000.
The only subsequent requirement is that they pay the withdrawals back into their plans (without further deductions) over a maximum of 15 years.
Failure to do so will result in 1/15th of the RRSP initially withdrawn having to be added back to taxable income in any year the minimum re-deposit is not made.
The Home Buyers’ Plan enables you to borrow money to top up your RRSP plan using accumulated RRSP eligibility limits.
If your tax assessment notice indicates you are eligible for $18,000 in contributions in the current year, and you already have $9,000 in a self-directed plan, you are allowed to borrow — subject to credit approval – the $16,000 to buy the RRSP required to bring you up to the $25,000 Home Buyers’ Plan limit.
Then, you can claim the eligible deduction against your current year’s income in order to get a large tax rebate. You can use the rebate to pay down the loan or apply it to the cost of buying the home. Here, of course, the amount of tax you’re paying each year is an important factor.
If the $16,000 deduction in this example results in a $5,000 tax rebate, it can be used as you see fit. If, on the other hand, two partners each earning $80,000 per year take their maximum RRSP of $25,000 each in the current year, they could net a total of $15,000 or more in a tax rebate.
You are then allowed to withdraw up to the $25,000 maximum from the RRSP 90 days after topping up or creating the plan, subject to the re-deposit requirements described above.
What else should you know?
If you’re planning to borrow the money for the maximum RRSP, you could end up disqualifying yourself for a mortgage because your monthly payments will be too high.
Your “total debt servicing ratio” – the proportion of your gross income required to service both the home related costs and other monthly obligations – may exceed the usually acceptable monthly maximum of 42 per cent.
Another $600 per month could well make the difference in whether or not you’ll qualify for a mortgage.
Call us today 250-862-1806 so that we can further explain this unique program to you.
More The Mortgage Gal articles
- How risky do you feel? Feb 20
- Hike your credit score Feb 6
- CMHC premiums rising Jan 23
- Home-owner plan criteria Jan 9
- Down-payment blues Dec 26
- What's your 5-year rate? Dec 12
- Need a bigger mortgage? Nov 28
- Help with kid's first home Nov 14
- Brokers save you money Oct 31
- Home dreams in jeopardy Oct 17
- Mortgage methods Oct 3
- Housing tax worries market Sep 19