As politically popular as it is to spew “soak-the-rich” rhetoric during an election campaign, the reality is that it is a very inefficient way to raise revenues or to address income inequality. Indeed, it will actually shrink the economic pie. It provides a disincentive to entrepreneurial spirit and work effort and it will make it more difficult for Canada to attract and keep its most productive talent, particularly in light of the much lower tax regime in the United States.

Our tax system is already highly progressive and it will be more so when the federal government reduces tax rates for the middle class. The reduction in middle-class tax rates is desirable because it will increase disposable income and spending for a group that has experienced little income growth in recent years.

The proposed tax hike for high-income earners is not desirable. The higher the tax rates, the higher the incentive to avoid them. There is already a good deal of planning going on by affluent taxpayers to adjust their finances in such a way as to avoid or at least minimize the effect of the proposed tax increases on people earning $200,000 and above. In consequence, the actual revenue gain associated with such a move will likely be far lower than the government has predicted. Tax planning can involve such things as rearranging sources of income, changing jurisdictions, legally using foreign trusts or changing the timing of the sale of capital assets. These actions will line the pockets of the accountants, tax lawyers and financial planners, but will do little to increase tax revenues or reduce income inequality.

Several provinces have already imposed heavier tax rates on higher-income earners, so that if the federal proposal to raise top marginal tax rates by four percentage points is implemented, marginal tax rates for these individuals will be above 50% in many jurisdictions (Table 1, from C.D.Howe Institute E-Brief, November 19, 2015).

Not only are these proposed top marginal income tax rates high enough to dampen potential growth rates, but dividend tax rates and capital gains tax rates will rise as well. For example, top marginal dividend tax rates in Ontario will rise from 33.8% to nearly 40% and top marginal capital gains tax rates will rise from 24.8% to 26.8%. In contrast, the top dividend tax rate in the U.S. is 28.6% and only 23% in the OECD. The average capital gains tax rate in the OECD is 18.4%. This will discourage business and personal investment in Canada and provide an enormous disincentive for innovation and job growth.

The market for top talent is global and raising Canadian taxation will make it more difficult for Canada to compete.We run the risk of a brain drain and it will be more difficult to attract foreign talent, particularly given the depreciation in the Canadian dollar. Thus, excessive taxation is self defeating and does not generate the tax revenue that some expect.

According to a recent study by the C.D. Howe Institute,” the proposed 4 percentage points tax increase on incomes above $200,000 could result in those affected taxpayers reporting approximately 4.5 percent less taxable income, costing the personal income tax base $7.3 billion in 2016. This erosion of the tax base could reduce projected tax receipts from the hike by about 70 percent; delivering to the government only about $1.0 billion of a potential $3.3 billion. The erosion of the tax base also means that provincial governments could also suffer from lower-than-otherwise personal income tax revenues – a non-negligible shortfall of $1.4 billion in 2016″.

The best way to reduce income inequality is to provide the necessary training and relocation assistance to disadvantaged workers and to remove barriers to opportunity.

The Canadian economy is under performing, damaged by the dramatic decline in oil and other commodity prices. The Bank of Canada has reduced interest rates twice this year, but now it is time for real fiscal stimulus–government spending increases and tax cuts. Our government debt-to-income levels are among the lowest in the OECD. We can afford to invest in our future by creating the environment necessary to boost innovation and technological prowess that assures Canadian prosperity in the future.

THIS JUST IN, MORTGAGE INTEREST RATES ARE…..and there it is again…headline news about another low rate from one of the main lenders. But what does it all mean and why does it continue to grab the headlines on the evening news?

It probably comes as little surprise that mortgage financing in Canada is big business and very competitive business. When you sit back and think about it for a moment you’ll probably start to realize that all of those headings, almost every one of them, are talking about the low rates. “Great no frills Special”, “Employee Pricing”, “First Lender to drop their rate”. For the most part Media puts the focus on the interest rate and as a result mortgage consumers are geared…or better yet, are driven to make the interest rate the first and only thing they ask their mortgage specialist about.

Now don’t get me wrong, the interest rate is a big part of the conversation you should be having with your mortgage specialist. It is, after all, the cost you’re paying to borrow the funds. However, the conversation should never stop at just the interest rate. There are a number of other key details that you should understand, as a mortgage consumer, before you sign on the dotted line.

The conversation should focus on what your plans are over the next few years (paying special attention to the time frame that is reflective of your mortgage term length). Have you thought about any of the following?

1. What are the chances you will experience a job change over the term of the mortgage? (lay off, role change, transfer, etc.)

2. Do you have any major life changes in the near future (getting married, new child, etc.)

3. How about major expenditures? (Wedding, expanding family, replacing a vehicle, etc.)

These are just a few important details that your mortgage specialist is likely to want to know about. How you answer those questions will likely impact the recommendations they have for you with regards to lender or term.

So what gives? How will knowing those details impact their term/lender recommendations?

Well to sum things up, they want to know how to save you money upfront but also over the term of the mortgage. Lump sum payments and portability options are just two ways that they make this possible. In addition, knowing if there are any special restrictions or how the pre-payment penalty is calculated, can save you thousands should you have to break your mortgage term early.

The bottom line?

When it comes to mortgage products, there is way more to the decision than simply the rate. It is important to understand restrictions, flexibilities and how the pre-payment penalty is calculated. Never simply assume that the lender with the lowest rate is the best. Sometimes it will be, sometimes it won’t…When shopping for apples, don’t buy lemons…you probably won’t be happy with the outcome. We here at Dominion Lending Centres are ready to help!

With a competitive market in full force, banks and credit unions are offering rates for their mortgages with free legal fees. Before you sign on what seems to be a great offer, take a look at the numbers and see what a mortgage with free legal fees is really costing you.

This is one of the first times in history you can find fixed mortgage rates at the same or similar rates to a variable rate mortgage. So all the lenders are competing with this product and using marketing campaigns, including special offers, to attract borrowers. With 5 year fixed rates around 2.79% the credit unions and major banks offering higher rates from 2.99%-3.04% are looking for ways to sway customers to them. The latest promotion is a mortgage with free legal fees. On paper it sounds attractive, saving you money up front when you don’t have to pay for an appraisal or legal costs. But when you look closer, consider this.

1. The offers include legal fees. This represents less than $500 of your legal bill as other costs such as title registration, disbursements and taxes will not be covered by this offer.

2. The offer includes appraisal fees. Most non-bank lenders do not require an appraisal or will utilize a general valuation system in lieu of a full appraisal. For those lenders who do require an appraisal the cost is less than $300.

I recently had a client come to me who had an offer for free legals with the rate of 3.04%. When we calculated the difference between a rate of 3.04% and no legal fees versus a rate of 2.89% with the client paying their own legal fees (no appraisal required), the savings to the client over 5 years going with the lower rate was $5,000! So the mortgage with free legal fees was not a good deal.

Offers for a mortgage with no legal fees stating “save up to $1,500 on legal and appraisal fees” are no savings at all. Yet these campaigns attract many home buyers. Always check with us at Dominion Lending Centres to compare the best mortgage for you which includes the terms, conditions, rate and penalty costs before you sign anything – it could save you thousands of dollars in interest and help you pay off your mortgage years sooner.

Finance Minister Bill Morneau said today that Canada’s budget is deeper in the red than we were told in the 2015 budget as the economy’s performance has disappointed. He also revised down the government’s outlook for the economy over the next year. According to the Minister, the federal books are short roughly $3 billion in the current fiscal year and $3.9 billion in 2016-17, with deficits continuing through 2018-19–a significantly gloomier fiscal picture than was painted by the Conservatives and even by the most recent report of the Parliamentary Budget Committee.

However, a large portion of this worsened outlook is because the Liberals chose to adjust down their forecasts of economic growth to levels well below the downwardly revised levels predicted by private-sector economists, effectively adding a contingency reserve.

This lower growth forecast adds C$1.5 billion to the projected deficit for 2015-16 and $3.0 billion for each of the five years from 2016-17 on.

Without that economic adjustment, the deficits would be $1.5 billion for 2015-16 and $3.0 billion for each of the five years from 2016-17 on. Nevertheless, all of these projections exclude the Liberals’ impending budgetary stimulus initiatives.

When quizzed by reporters, Morneau would not say whether he remained committed to no more than an annual budget deficit of no more than $10 billion over the next three years. He provided no specifics on exactly what the update portends for the upcoming budget—the timing of which was not released—but asserted that the government would stimulate the economy in a prudent manner.

Analysis

I agree that there are downside risks to the global and Canadian economies. Canada has suffered a severe blow with the dramatic and sustained fall in oil and other commodity prices, the impact of which has not yet been fully felt throughout the economy. Minister Morneau agreed that further reductions in employment and activity in the resource sector are coming in contrast to what the former government and the Bank of Canada have asserted.

Canada’s federal balance sheet is in great shape thanks to years of austerity beginning in the 1990s. Our structural deficit has been obliterated, helped by the secular decline in interest rates. Moreover, our debt-to-GDP ratio is barely above 30%, at the bottom of the Organization for Economic Cooperation and Development (OECD) countries performance. The proposed deficit of $10 billion is only 0.5% of Canadian GDP—an extremely low number by global standards, well-below the level in the U.S. of about 2.4%.

Canada’s economy is in need of fiscal stimulus. The risk is too little, too late—not, an overflow of red ink. The U.S. made of mistake of insufficient government stimulus in the aftermath of the financial crisis. Canada should not make the same mistake now.

We have been hard hit by external forces that have driven down a very important sector of our economy. The hard won gains on the fiscal front give us the bandwidth to now take significant action to reboot economic activity and to improve our productivity and competitiveness over the next decade. We should seize that opportunity, which will no doubt entail running budget deficits in the near term of more than $10 billion.

There you are, sitting down with your realtor and preparing an offer to purchase for that amazing home that you just looked at this afternoon. You get to the point in the conversation with your realtor about the need for a financing condition and you’re trying to remember what you talked about with your Mortgage Broker earlier in the week….were you approved? Pre-approved? Pre-qualified?

So here’s the thing, when it comes to placing an offer on a new property, the financing condition should always be there. The only reason for leaving the financing condition out of an offer is because you know that you could dip into your savings account right now and buy the house with cash if you had too.

If you cannot purchase the house with cash, then you really should have that pesky finance condition in the offer and here is why…

We know already that you’ve met with your Mortgage Broker, they have everything on file and they have told you that you’re pre-approved. It is important to understand that the pre-approval they issued is based on the information they have collected about you. However, they have no information about the house that you’re eventually going to purchase.

When your future lender reviews an application in full, there are two sides to your application. There’s you and then there’s the house. It’s important to note that the lender is investing in the whole package and at this point, no one knew what house you were going to buy. Your Mortgage Broker isn’t likely to receive any information on the specific property until you have an accepted offer. It is at that point when they will update your application and send in all of the details for a formal approval.

So you’re now wondering why all of this matters considering that during your pre-approval meeting your Mortgage Broker told you that you’re the perfect clients (great income, great credit, great down payment and just all around great people).

But what about the property? The lenders (and CMHC if you have less than 20% down) want to know that the same is true about the house you’re buying. Here are just a few questions that they are asking themselves about the house:

• Is it being purchased for fair market value?
• Is it located in a marketable neighborhood?
• Are there any major or obvious defects that could affect its value
• Is the house a previous grow op?

If something negative about the house comes back as part of the review, it could mean that the lender (or CMHC) could decline to finance the property. The financing condition gives you a way out of the agreement should something happen at this point. If you don’t have a financing condition, you could end up being legally tied to purchasing the home, with or without financing lined up. Definitely not a position you want to be in, so take the time to protect yourself by ensuring your offer to purchase includes a financing condition – and speak with us at Dominion Lending Centres.

The Home Buyers’ Plan (HBP) is a program that allows you to withdraw up to $25,000 from your registered retirement savings plan (RRSPs) to buy or build a qualifying home for yourself or for a related person with a disability .

You must be considered a first-time home buyer. 

You are not considered a first-time home buyer if you or your spouse or common-law partner owned a home that you occupied as your principal place of residence during the period beginning January 1 of the fourth year before the year of withdrawal and ending 31 days before your withdrawal. (Dec 31, 2010 or prior for anyone buying in 2015)

However, if you are a person with a disability, or you are buying or building a home for a related person with a disability or helping such a person buy or build a home, you do not have to meet this condition.

In addition, ALL of the following conditions must apply:

• You must enter into a written agreement (Offer of purchase) to buy or build a qualifying home. The agreement may be with a builder, contractor, realtor or private seller.
• You intend to occupy the qualifying home as your principal place of residence. When you withdraw funds from your RRSPs under the HBP, you have to intend to occupy the qualifying home as your principal place of residence no later than one year after buying or building it. Once you occupy the home, there is no minimum period of time that you have to live there.
• Your repayable HBP balance on January 1 of the year of the withdrawal is zero.
• Neither you nor your spouse or common-law partner owns the qualifying home more than 30 days before the withdrawal.
• You are a resident of Canada.
• You buy or build the qualifying home before October 1 of the year after the year of withdrawal.

Your RRSP issuer will not withhold tax from the funds you withdraw if you meet the HBP conditionsand complete Form T1036.

You can withdraw a single amount or make a series of withdrawals throughout the same year and January of the following year, as long as the total of your withdrawals is not more than $25,000.

If you buy the home with your spouse or common-law partner, or other individuals, each individual can withdraw up to $25,000 from his or her RRSP, provided each of you meet the HBP conditions.

Your RRSP contributions must remain in the RRSP for at least 90 days before you can withdraw them under the HBP.

Your first repayment is due the second year following the year in which you made your withdrawals.

You have up to 15 years to repay the amount that you withdrew under the HBP. Generally, for each year of your repayment period, you have to repay 1/15 of the total amount you withdrew until the full amount is repaid to your RRSPs.

Before home buyers go shopping for a home, it is important to know what you can afford before you buy. It is becoming more common for home buyers to make an offer, get declined for the mortgage and the deal collapses. This is stressful for everyone involved, including the buyer, the seller and the realtor. Make it easier on yourself by understanding what you can afford and all your options first.

Always start by asking yourself “How much do I think I can reasonably afford to pay for my mortgage, taxes, strata and heating costs per month?” Then we can use that number and work backwards to see what you can afford within your budget. This approach can help to ensure that your monthly housing costs meet your means.

As a mortgage professional, we consider three things for mortgage approval, your credit history and score, your ability to make the mortgage payments (gross monthly income) and your monthly debt obligations (loans, credit cards, other mortgage payments, child support,etc). I also suggest buyers have a monthly amount in mind they feel comfortable paying for their mortgage, property taxes and strata fees. For example if your budget allows for $2,000 per month after we allow for $200 for property taxes each month and $300 for strata fees each month we have $1,500 per month left to cover the mortgage payment.

Even if you think you can afford that payment each month, the lender uses two simple calculations to determine the maximum mortgage and payment you can actually qualify for. The first calculation, your Gross Debt Service Ratio (GDS), requires your monthly housing costs (mortgage principal and interest, property taxes, and half of the monthly condo fee if you are purchasing a condominium) should not be more than 32% -39% of your gross monthly income. The second calculation requires your entire monthly debt load (including housing costs and other debts such as car loans and credit card payments) not exceed 40%-44% of your gross monthly income. This figure is your Total Debt Service ratio,(TDS). The range of debt servicing will depend on your credit score, so it is wise to estimate on the lower numbers to start. To qualify for $2,000 per month in payments you would need to earn at least $6200 per month gross (before taxes), which represents 32% of your income for the GDS. Any additional debt for loans and credit cards should then not exceed the 42% TDS limit.

Once you determine your fit within these limits, you can get some idea of your monthly payment. I can then determine the maximum mortgage added to your down payment to set the maximum purchase price and you will know what you can afford before you buy to avoid any last minute pitfalls in buying your home.

The mortgage pre-qualification process is as simple as completing an application online via our Dominion Lending Centres website and then a conversation to review – approval can happen 0n the same day and you can be on your way.

This is a sequel to This vs That

Here are a handful of additional terms used in the real estate and mortgage industry and hopefully the explanation will provide some clarity.

MORTGAGOR VS MORTGAGEE

The mortgagor is the borrower and the mortgagee is the lender.

PORTABLE VS ASSUMABLE MORTGAGE

The act of porting a mortgage allows the borrower to transfer the terms, conditions and interest rate of the current mortgage to the home the borrower would like to purchase. There is sometimes a blend and extend that occurs as well. An assumable mortgage allows the purchaser to assume or take over the responsibilities and liabilities under the mortgage from the vendor.

DEPOSIT VS DOWN PAYMENT

The deposit is a sum of money negotiated in a real estate purchase/sale transaction by the seller and buyer upon removing subjects. It’s a sign of following through with the transaction in good faith. The deposit is then held “in-trust” with the Realtor and transferred to the lawyer for completion. The down payment is a sum of money required by the lender to seek financing to purchase the subject property. The percentage of down payment may vary from scenario to scenario as lender policies can shift with the economy. The deposit is a portion of the down payment. For example, if the purchase price of the home is $450,000 and the buyer is putting $45,000 (10%) down to secure 90% financing, the deposit is $15,000 (held in “in-trust”) upon removing subjects, then only $30,000 is required to be paid to the lawyer at completion.

CLOSED VS OPEN TERM

A closed mortgage that is terminated prior to the maturity date will be levied a penalty, either 3 months interest or an Interest Rate Differential calculation. An open mortgage, if terminated prior to maturity, will not be charge a penalty at all. One could have a Fixed Closed or Fixed Open mortgage and the same applies to variable – one could have either an open or closed term.

TERM VS AMORTIZATION (LIFE OF THE MORTGAGE)

The term of the mortgage represents the duration of the contractual obligation to the lender. Terms range from six months to five year with some lenders offering seven and 10 year terms. Amortization or the life of the mortgage is the process of repaying a loan by way of periodic payments. These payment amounts are a combination of principal and interest. The most common amortization schedule that borrowers follow is 25 years. The Latin word admortire means “to kill.” Most borrowers want to kill their mortgage as fast as possible.

CHATTEL VS FIXTURE VS REAL PROPERTY

Chattels are articles of personal property like TVs, cars, computers, bikes etc. A fixture is a chattel that has become attached to real property over time. There is a 2 part test to consider the intended and purpose of affixation. Real property generally consists of land and whatever is erected, growing upon or affixed to the land.

FREEHOLD VS LEASEHOLD PROPERTY

The owner of the freehold interest has full use and control of the land and the buildings on it, subject to any rights of the Crown, local land-use bylaws, and any other restrictions in place at the time of purchase. In some cases, you might purchase the right to use a residential property for a long, but limited, period of time – this is called a leasehold interest. Leasehold interests are frequently set for periods of 99 years.

Versus (vs) – as compared to or as one of two choices; in contrast with.

At least once a day I get asked, what’s the difference between ‘this’ and ‘that’? With this in mind I put together some content that will hopefully provide some clarity in regards to  a few of the more commonly asked questions.

LAWYER VS NOTARY

Most real estate deals are fairly straightforward, both a lawyer and notary can and will prepare the documents for you. If you are buying a home, they will: conduct a title search, obtain tax information and any additional information to prepare the Statement of Adjustments. Then they will prepare closing documents, including a title transfer, mortgage, property transfer tax forms and forward them to the seller’s lawyer/notary for execution. After you sign your papers, the lawyer or notary will register the transfer, mortgage documents and transfer funds to the seller’s lawyer/notary. Sometimes there are more complicated transactions, at this point one would need to decide LAWYER or NOTARY?

If something were to go wrong with your transaction, a notary cannot represent you in court of law, unlike a lawyer. Nor can the notaries represent and guide you through a dispute process. Notary also cannot advise you on legal matters, for example, if you go to a notary to convey a real estate file and you were to ask a legal question, such as, “I think my neighbour’s fence is on my land, what should I do?” the notary cannot give you advice on what your recourse is.

With regard to the fee structure, there isn’t much of a different these days. If you are unsure of which one to use, it’s always a good idea to phone a notary and a lawyer to describe the services you need and then decide from there.

GUARANTOR VS CO-SIGNER

A co-signer is a co-owner that is registered on the title and is equally accountable for payments, while a guarantor personally guarantees the payments will be made if the original applicant defaults. However, the guarantor has no claim to the property as they’re not registered on the title. Typically a co-signer is added to a mortgage application to increase the income, which will assist with reducing the debt service ratios. Whereas a guarantor will be utilized if the applicant(s) has received past credit blemishes and needs to strengthen the file.

TITLE INSURANCE VS SURVEY CERTIFICATE

These two are slightly different but work in conjunction with one another. Title insurance is an assurance as to the state of title of any given property. In practical terms, it protects lenders and purchasers against loss or damage suffered due to survey problems, defects in title and other matters relating to title fraud. A survey certificate will typically show the lot boundaries, improvement locations and often the locations of any rights of ways or easements registered against the property. This will also assist a purchaser in determining whether any of the improvements on the property encroach on a neighbouring property or if there are improvements from an adjacent property that encroach on the subject property.

JOINT TENANT VS TENANT IN COMMON

When a property is held in joint tenancy, the situation is what I refer to as “the last man standing.” When one joint tenant dies, the entire property belongs to the remaining, surviving joint tenant(s). Only that last person can use his or her Will to give the property to someone else. Tenants in common is a different story. In this arrangement, each person owns a percentage that is registered in their name. They can then leave their share to someone in their Will or sell it (never mind the logistical problems of trying to sell one third of a house).

SWITCH/TRANSFER VS RE-FINANCE

To switch/transfer one’s mortgage, it involves moving your current mortgage from one lender to another without changing anything except for the term and interest rate, amortization remains the same. If switching lenders within the term, there will likely be a penalty for breaking the mortgage, though often the savings in moving to another lender with a better rate will substantially outweigh the penalty. Doing a switch at the end of your mortgage term will allow you to completely avoid the penalty.

In re-financing a mortgage, the borrower is also likely taking advantage of lower rates whilst at the same time accessing equity. The reasons for this could range from; debt consolidation, renovation, purchasing a vacation home, post-secondary education, investment planning and so on… Two other major differences are when one wants to re-finance, the maximum loan is 80% of the market value whereas a switch/transfer lender can surpass the 80% mark as the mortgage amount does not change. And finally, with re-financing the mortgage will need to be disbursed and re-registered with the lender (or new lender) therefore a fee will be charged. With a switch/transfer, there is a possibility that there will be no extra fees charged.

ACCELERATED BI-WEEKLY VS BI-WEEKLY PAYMENT FREQUENCY

Nobody wants a mortgage and everyone that has one wants to pay it off faster, or at least they should. Payments are income streams that lenders blend a principal and interest amount into one payment with the goal to pay more principal than interest. As one gets further through the term the inevitable shift happens from paying more interest to paying more principal (P&I).

The bi-weekly payment is basically 12 monthly payments spread out over 26 installments or every other week. For example, if your monthly payment is $2,000 your total yearly mortgage payment will be $24,000. The bi-weekly or 26 payment equivalent is $923.08 ($24,000.08), the net amount remaining unchanged. To speed up the inevitable P&I shift, one might want to opt for accelerated bi-weekly payment frequency. This is the key to shortening or reducing the life of the mortgage (amortization). The accelerated repayment plan takes a 24 payment cycle and adds on 2 more payments of the same size, for a total of 26 payments or 1 extra payment every 12 months to total 13 payments. So you are paying slightly more each year, thus reducing the life of the mortgage. Using the same example from above, if your monthly payment was $2,000, adding two extra payments to the grand total, one’s yearly mortgage payment would be $28,000, with each payment now being $1,076.92.

Obviously if you have questions, we here at Dominion Lending Centres would love to answer them for you.