Estate Planning Tips for Real Estate Investors

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Mortgages & Life Insurance – how do they fit together?

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Congratulations!  You’ve just purchased the home of your dreams, and your advisor has secured you a great mortgage to make this dream a reality.

Now that you have a mortgage, it can make a lot of sense to insure it.  While owning a debt free home is a financial goal for many, putting plans in place to make sure your mortgage is paid off in the event of your death can be a critical part of estate and family planning.

A good rule of thumb to follow when searching for advice?  Ask an expert.  If the analysis points to a need for mortgage insurance, the question then becomes should you purchase the lending institution’s product that is offered with your mortgage, or should you explore term life insurance that is available from a life insurance advisor/company?

While both options have their pro’s and con’s, other than potentially more paperwork, the life insurance company option typically offers more overall value as outlined in the 8 key points below:

1 – Cost

Term life insurance available from a competitive life insurance company is usually less expensive than mortgage life insurance provided through the lender.  This is especially true if you qualify for non-smoker rates.

2 – Availability 

If you have some health issues, the lenders mortgage insurance may not be available to you.  This may not be the case with term life insurance where competitive underwriting and substandard insurance are more readily attainable.

3 – Declining coverage

Be aware that the death benefit of creditor/mortgage insurance declines as the mortgage is paid down.  Meanwhile, the premium paid or cost of the coverage remains the same.

With term life insurance the death benefit does not decline. You decide how much coverage you want to have.  This gives you the flexibility to reduce the amount of coverage and premium when the time is right for you.  Or keep it should another need arise or in the event you become uninsurable in the future.

4 – Portability  

Term Life insurance is not tied to the mortgage giving you flexibility to shift it from one property to the next without having to re-qualify and possibly pay higher rates.

5 – Flexibility

Unlike creditor/mortgage insurance, term life insurance can be for a higher amount than just the mortgage balance so you can protect family income needs and other obligations but pay only one cost-effective premium.

When you pay off your mortgage you will no longer be protected by creditor/mortgage insurance but term life insurance may continue. Also, unlike mortgage insurance, you are able to convert your term life insurance into permanent coverage without a medical.

6 – The beneficiary controls the death benefit

With creditor/mortgage insurance there is no choice in what happens to the money when you die.  The proceeds simply retire the balance owing on your mortgage and the policy cancels.

With term life insurance your beneficiary decides how to use the insurance proceeds. For example, if the mortgage carries a very low interest rate compared to available fixed income yields, it might be preferable to invest the insurance proceeds rather than to immediately pay off the mortgage.

7 – Can your claim be denied? 

Term life insurance is incontestable after two years except in the event of fraud.

Often creditor/mortgage insurance coverage is reviewed when a death claim is submitted.  Creditor/mortgage insurance allows for the denial of the claim in certain situations even after the coverage has been in effect beyond that 2 year period.

8 – Advice 

Your bank or mortgage broker can advise you on the best arrangement to fund your mortgage but advice on the most appropriate way to arrange your life insurance is best obtained from a qualified insurance advisor who can implement your life insurance coverage according to your overall requirements.

Your mortgage will probably represent the single largest debt (and asset) you will acquire. Making sure your mortgage doesn’t outlive you is the most prudent thing you can do for your family.

Please contact Outline Financial’s insurance group if you think it is time to review your current insurance protection or please feel free to forward this to someone you think may benefit from this information.

 

 

 

 

 

Copyright © 2017 Outline Financial & FSB – All Rights Reserved

Rate Update: Bank of Canada maintains overnight rate target at 1.75%

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Video Recap: Outline Financial and Urbanation – 2018 Condo Market Outlook Event

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Gallery: 2018 Condo Market Outlook Event

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Thank you to everyone that joined us for our 4th annual Condo Market Outlook Event.  Please enjoy the pictures, and also be sure to check out the video recap in an upcoming post.

Economic Update: What our economist is saying about government intervention, and the direction of the economy.

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Rate Update: Bank of Canada Increases Overnight Rate to 1.50%

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The Bank of Canada today increased its target for the overnight rate to 1 ½ per cent. The Bank Rate is correspondingly 1 ¾ per cent and the deposit rate is 1 ¼ per cent. The Bank expects the global economy to grow by about 3 ¾ per cent in 2018 and 3 ½ per […]

2018 CMHC Prospective Home Buyers Survey

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In preparation for its 2018 Home Buyers Survey, CMHC surveyed 2,507 prospective home buyers on-line. Respondents were all prime household decision-makers who intend to purchase a new home within the next two years, including approximately 1,500 First-Time Buyers, 500 current owners, and 500 previous owners.

The survey results highlight that:

• First-Time Buyers and Previous Owners share the same top motivator to purchase a home: they want to stop renting. Improved accessibility (physical obstacles and barriers) and investment opportunity were also noted as top motivators across all groups. Changes to mortgage regulations and concerns about possible future interest rate increases were not among the top motivators.

• Over four-in-ten First-Time Buyers and Previous Owners say they would delay their home purchase if they were not able to find their ideal home, with a fairly similar proportion saying they would be willing to compromise on the size of the home and location.

• The majority of future home buyers intend to obtain a mortgage to finance their home purchase, with First-Time Buyers showing higher incidence compared to Previous Owners and Current Owners.

• Across all future home buyers groups, more than six-in-ten say they are likely to have a financial buffer in case their expenses change in the future. Furthermore, the majority of future home buyers, especially Current Owners, agree that they feel confident they have the necessary tools and information to manage their mortgage and debt load.

• Among all groups, the two most common actions completed one to two years prior to the purchase of a home were saving for a down payment and determining what type of home to buy. On the other hand, in the last three months before purchasing, about two-in ten of prospective buyers pre-qualify for a mortgage.

• About one-in-four prospective home buyers stated that they would be very likely to consider delaying their purchase in the event of an increase in interest rates.

https://www.cmhc-schl.gc.ca/en/hoficlincl/moloin/sure/upload/2018-prospective-home-buyers-survey.pdf

 

 

 

Bank of Canada Increases Overnight Rate to 1.25%

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Jan 17, 2018 – The Bank of Canada today increased its target for the overnight rate to 1 1/4 per cent. The Bank Rate is correspondingly 1 1/2 per cent and the deposit rate is 1 per cent. Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity. However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economic outlook.

The global economy continues to strengthen, with growth expected to average 3 1/2 per cent over the projection horizon. Growth in advanced economies is projected to be stronger than in the Bank’s October Monetary Policy Report(MPR). In particular, there are signs of increasing momentum in the US economy, which will be boosted further by recent tax changes. Global commodity prices are higher, although the benefits to Canada are being diluted by wider spreads between benchmark world and Canadian oil prices.

In Canada, real GDP growth is expected to slow to 2.2 per cent in 2018 and 1.6 per cent in 2019, following an estimated 3.0 per cent in 2017. Growth is expected to remain above potential through the first quarter of 2018 and then slow to a rate close to potential for the rest of the projection horizon.

Source: Bank of Canada

Picture Source: Financial Post

Major Policy Change – another day, another mortgage change…and this one’s BIG!

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While the details are still trickling in, the Office of the Superintendent of Financial Institutions (OSFI) has once again used its powers to tighten mortgage qualification rules.  These changes could be effective as early as today for some lenders, but no later than January 1, 2018 and will impact anyone looking to purchase or refinance a home with 20% or more down payment or equity – i.e., a lot of people.

We will continue to monitor this closely as the various banks and lenders issue their responses/implementation dates and guidelines.  We hope you find the below helpful, and we are available at any time to discuss any specific or general questions or scenarios you may have.

 

What’s Changing?

While a number of changes were announced today, the most significant is with respect to setting a new minimum qualifying rate, or “stress test” for uninsured mortgages (i.e., mortgages with 20% or more down payment).

As a recap, currently if you have 20% or more for a down payment and you select a 5-year fixed mortgage term, you can qualify for a maximum mortgage using your actual monthly payment in the calculations.  A typical 5-yr fixed bank rate is around 3.24% right now, which is called the “contract rate” or “actual rate”.  Going forward, while your actual mortgage payment would still be based on your contract rate, you would need to qualify using a much higher monthly mortgage payment based on the new “stress test” rate requirement which is the HIGHER of:

  • The 5-yr benchmark rate published by the Bank of Canada (currently 4.89%), or
  • The contract rate plus 2.0% (i.e., if the contract rate is 3.24% the qualifying rate would be 5.24%)

In the above example, this change would significantly reduce the maximum purchase price or refinance amount that a person could qualify for as it would require them to qualify based on a stress test rate of 5.24% vs. the contract/actual rate of 3.24%  – please refer to the impact section below for examples.

 

When is This Changing?

The banks/lenders have yet to comment, but it is anticipated some may start implementing the new rules as early as today, but no later than January 1, 2018.  As this is a federally regulated change it will directly impact the banks, but is also expected to roll out through the mono-line lenders.  As our credit union lenders are provincially regulated, it will be interesting to see if they will have a competitive advantage vs. the other lenders in the coming months and into the new year.

 

What is the Potential Impact?

While every case is different, we have included a sample max purchase price impact calculation for a 20% down buyer*.  Please contact us if you would like us to run the numbers for any specific scenario or would like the detailed calculations for the below:

Impact Example #1 (Max Affordability):
Total household salaried income = $200,000
Down payment available = 20%*
Mortgage Product Chosen = 5-year Fixed
Purchase Style / Location = Freehold / Toronto
Debts = limited debts (i.e., credit card, car, etc.)

Current Max Purchase Price = Approx. $1,550,000*
Max Purchase Price After New Stress Test Rules = Approx. $1,320,000*
(Note: the above is for illustration only.  Please contact a member of Outline Financial to discuss, or for specific scenarios.)

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Impact Example #2 (Max Affordability):
Total household salaried income = $100,000
Down payment available = 20%*
Mortgage Product Chosen = 5-year Fixed
Purchase Style / Location = Condo / Toronto
Debts = limited debts (i.e., credit card, car, etc.)

Current Max Purchase Price = Approx. $720,000*
Max Purchase Price After New Stress Test Rules = Approx. $620,000*
(Note: the above is for illustration only.  Please contact a member of The Lang Team to discuss, or for specific scenarios.)

*Note: for the above examples we converted the 20% down payment to a $ amount and used that same $ amount for both the contract rate and new stress test rate qualifying scenarios.  Many media reports on the subject appear to be using a straight 20% down payment for both scenarios which would make the decrease in affordability appear larger.

 

What is the Media Saying?

While additional details are expected to be published throughout the week, we have included a link to the OSFI announcement as well as a few relevant articles that have come out in the media today:

 

Additional Comments

While it is clear this change will have a significant impact on affordability, the argument for this change is that it will help stabilize the Canadian housing market over the long term.  In a worst case scenario, if the housing market overshoots on the downside, given the numerous tightening measures implemented by the government in recent years, they now have many tools at their disposal to help stimulate the housing market if/when needed (i.e., by increasing amortization, lowering the stress test rate, increasing the availability of CMHC insurance, etc.)

Should you have any questions regarding the above, please contact us at any time.

Sincerely,

The Outline Financial Team
t: 416 834 1590
e: hello@outline.ca