Tips on Managing Your Credit

 

The Privacy Commissioner of Canada recommends checking your credit report once a year to protect against identity theft. The Canadian provincial credit reporting laws grant consumers the right to receive a free copy of your credit report by mail if you request in writing or in person and include a photocopy of identification.

 

The two major credit reporting agencies in Canada are:

Equifax Canada Inc. www.equifax.com

TransUnion of Canada www.transunion.ca

You may also request your free personal credit file by phone using TransUnion’s secure automated telephone service at 1-800-663-9980. It only takes about 7 minutes.

Note: Your free credit reports do not include your credit score. You can request your free credit report from Equifax and purchase your credit score for $11.95 (tax included).

Once you get your credit report, check for new accounts opened, inquiries made, address change and identification information change to ensure accuracy and watch out for any debts or activities you haven’t authorized. If you find something inaccurate, inform the credit reporting agency right away. As mandated by consumer reporting legislation, you can have information deleted that cannot be verified but you cannot change negative information that is accurate on your credit file.

Factors that influence your credit score include types of account (installment, revolving, open payment), numbers of account, limit on accounts, balance outstanding and if they are “paid as agreed.” Generally, the credit is grouped by industry and the more diversified in industries and types of account, the higher the score.

On the other hand, it can negatively impact your credit score if you apply for credit from lenders known to charge high interest rate or lenders that provide credit to people with low credit score (ie. department store credit cards). Too many inquiries (ie. when lenders check your credit rating) in a 12 month period may also negatively impact your credit score because it could be viewed as a sign that the consumer is over-extending oneself. If the different inquiries happened in a very short period of time, as when people are shopping for the best rate from different lenders, the inquiries are often considered as one event and do not have a negative effect on credit score.

Your credit score is one of the important factors lenders consider before they extend credit to you. In addition to your credit score, lenders also look at your debt-to-income ration, income stability, type of loan/credit you are seeking, payment history, how much debt you are carrying, length of time you’ve been using credit (more than 5 years is considered solid), etc.

Talk to your mortgage broker before you go shopping for a home to find out how much you can afford and to arrange for a mortgage. If you need referral to mortgage brokers, please contact me at 604-818-7317 or jenny@ultimatehomeguide.ca

HST Calculator

The HST is coming into effect on July 1, 2010.

Essentially, the BC government is harmonizing its GST (5%) and PST (7%) to become the HST (12%).

PST will no longer exist.

How would this affect you when buying or selling real estate?

The HST will apply to “new” residential housing or substantially (90% or more) renovated homes. Resale (ie. “used”) homes are not subject to GST nor HST.

There’s a BC New Housing Rebate that would be available to help home buyers with some of the increase in tax. The rebate is 71.43% of the provincial portion of the HST, up to a maximum of $26,250.

According to the BC government: “purchasers of new homes up to $525,000 do not pay any additional tax due to harmonization.”

But based on my calculations, for a new construction of $525,000:

Before July 1, the purchaser will pay $26,250 in GST ($525,000 * 5% GST).

After July 1, the purchaser will pay $36,750 in HST after rebate.

$525,000 * 12% HST = $63, 000

A rebate of 71.43% of the provincial portion of the HST is $525,000 * 7% PST = $36,750 * 71.43% = $26,250

Total HST payable on the $525,000 new home is therefore $63, 000 HST – $26,250 Rebate = $36,750 which is $10,500 more than the GST.

To easily calculated how the new HST will affect your purchase price, please use the HST Calculator above.

In addition, if you are selling your home, the real estate commission will be applicable to the 12% HST instead of the original 5% GST. For any other services that already charge both GST and PST (7%) , there will be no increase.

The property transfer tax remained the same at 1% on the first $200,000 and 2% on the balance of the purchase price.

Here’s a summary of the benchmark price of homes in Greater Vancouver in May 2010:

Houses: $$810,175

Townhomes: $500,339

Condos: $398,783

IMPORTANT: Always contact your tax lawyer or accountant concerning any and all tax implications resulting from the purchase and sale of real properties, including GST and HST liabilities, exemptions, transitional provisions and rebates.

New Mortgage Rules

I get this question a lot at open houses. What’s the deal with the new mortgage rules?

Here are the three new changes that were implemented on April 19, 2010.

1. When applying for a mortgage or Home Equity Line of Credit (HELOC), the borrower will have to qualify based on the 5-year posted fixed-rate or The Bank of Canada’s benchmark rate, which ever is greater at the time. Even if the borrower is applying for a variable mortgage at a shorter term.

The change is quite significant. For example, a family with $80,000 income with no debts applying for a 4-year fixed rate mortgage would be able to borrow $525,505 under the old rules. Now they would only qualify for $425,505. That’s a $100,000 difference!

2. When refinancing an owner occupied property, the maximum loan-to-value ratio has decreased from 95% to 90%. This means that you can only refinance and take out 90% of the value of your home.

3. For investment (non-owner occupied) properties, the maximum loan-to-value ratio is now 80%. This means the investor will have to put 20% down or refinance up to 80% of the value of the property. Any non-owner occupied properties also need to be insured by Canada Mortgage & Housing Corporation (CMHC). But a lot of financial institution will only finance up to 75% and only 50% of the rental income can be used as income.

If you are buying investment properties, it is a good idea to refinance your home or get a Home Equity Line of Credit now before the interest rate goes up. The difference between refinancing and HELOC is that once you refinance, you need to pay for the mortgage payment every month. If you apply for a HELOC, the available funds are there and you only make payments if you pull out the money. You pay for it only when you use it. This is how I buy my foreclosures in the U.S.

Every person’s financial situation is different. It is a good idea to sit down with a mortgage specialist or two to find out what’s the best financial product for you. If you need referral to qualified mortgage specialists, please feel free to contact me. Our in-house mortgage specialists allow new immigrants or self-employed clients to borrow up to 75% with no or little income confirmation.

Building Credit

Real estate and financing go hand in hand. Therefore, building your credit is important in real estate investing. Here are some tips on building your personal credit.

There are three credit repositories: Equifax, Experian, and Transunion. Check your credit report every six months for any discrepancies or sign up for credit monitoring services.

The credit score are calculated based on the following percentages:

  • 35% Payment history
  • 30% Debt to available credit ratio
  • 15% Length of credit history
  • 10% new credit
  • 10% types of credit used

Pay your credit card bills on time. Be aware that some credit card companies change the due date without notice. You can also call your credit card companies and change the due dates of all your cards to fall within several days so you don’t forget.

Other than payment history, we have the most control over the debt to available credit ratio. Call your credit card companies to increase your credit limits and decrease interest rates every six months. Also, apply for new cards every quarter to increase available credit and hence increase credit score. Do not use more than 30% of your credit limit on any one card or it will bring down your score. Get rid of your department store cards which are considered “bad” credit cards.

Feel free to contact me to get a free investment property analysis worksheet and the script for requesting credit increase with your credit card companies.

Rich Dad’s Real Estate Investment Strategy

Robert Kiyosaki, the best selling author of “Rich Dad Poor Dad” is all for cash flow.

He’s teaching us in his book that don’t depend on your job, government or retirement plan to bail you out after retirement. Instead, everyone should start your own business and start investing in real estate for cash flow and not capital gain.

His strategy for investing in real estate is to:

1. Buy a property in a good location that’s close to many jobs.

2. Financing – borrow money from the bank or private investors or both for the amount of the purchase plus improvement costs. You can still put 20% down but it would be from an investor making the deal “nothing down.”

3. Improvements – increase the value of the property by making improvements such as adding a bedroom and a bathroom.

4. Increase rent – since the property has been improved, you can get more rent for the property.

5. Refinance at the new appraised value to pull your money out and re-invest.

6. The cost of the mortgage interest and other expenses such as property tax, insurance, etc should be covered by the rent so the property cash flow.

The important points to his investment strategies are:
– Improvements to the property
– Good location with jobs nearby
– Good financing or investor
– Good property management (Choose your tenants carefully and hire professional property management!)

Once you found a great property, bought it and improved on it, you think your job is done. But from my experience, the hardest thing to do is to find a good property management company.

Now the property is vacant, you want to find a tenant as quickly as possible. But remember, getting rid of a bad tenant costs lots of time and money. It is much easier to just wait for the right tenant. Property management company is also very important. They are dealing with your money and your assets. It is best to find one from referral where other people had good experiences with the company and interview them yourself. Ask lots of questions. I can write a book about property manager nightmares from the first company I hired. It sure is an eye opening learning experience.

Tenant Occupied Properties

Recently, I’ve witnessed first hand an argument between the seller, the listing agent and the tenant where the tenant was right about the fact that the seller is required by the Residential Tenancy Act to give 2 full months’ notice and compensation equals to one month’s rent.

Effective January 1, 2004, the Residential Tenancy Act requires every tenancy agreement be in writing. There is a standard form developed by the BC government that properties owners can use: Residential Tenancy Agreement.

When selling your tenant occupied properties, provide a copy of the lease agreement to your listing agent so he or she can accurately determine if it is a fixed termed tenancy or periodic tenancy.

When writing up the tenancy agreement, you will choose whether the tenancy may continue on a month-to-month basis OR the tenant must move out of the residential unit at the end of the fixed term.

There are pros and cons for either choices, but let’s say your buyer wants to buy and live in the home that you are selling. The buyer will have to ask you to give notice to the tenant to vacate.

The seller can only give notice after all the subjects in the Contract of Purchase and Sale have been removed. The notice has to be in writing and it is best to deliver the notice to the tenant in person and get a receipt.

You cannot ask a tenant to vacate before a fixed term tenancy ends. In the case of a fixed term tenancy where you’ve chosen the option to let the tenancy continue on a month-to-month basis, two full months’ notice is required and compensation equals to one month’s rent is payable to the tenant.

If you’ve chosen the option that the tenant must vacate on the end date of the fixed term tenancy, the tenant has to move out and no notice or compensation is requires.

If it is a periodic tenancy (ie. month-to-month), two full months’ notice and compensation equals to one month’s rent is required from the seller to the tenant.

If the buyers or their close family did not occupy the property, the tenant may claim compensation equals to two months’ rent.

There was this buyer who said he’s going to live in the property and asked the seller to notify the tenant to vacate. After the transaction was completed, the tenant found out that the new buyer had torn down the property and built a new one which was for sale. The tenant then sued the seller/landlord for compensation.

Thankfully, here at Opus Realty, we have standard forms created by the renowned real estate attorney Mike Mangan to protect the seller’s rights. The tenant was not able to sue the seller successfully because we’ve asked the buyer to put in writing that he was indeed going to occupy the property.

This simple act has saved the sellers from having to pay for something they have no control over (the buyer not being truthful).

Therefore, when selling your tenant occupied property, seek the advice of a professional real estate agent to help protect your rights.

Foreclosures

I am noticing more and more foreclosures in the Richmond area. From lower priced condos to higher priced houses.

We don’t have the subprime mortgage crisis as in the States where interest rates shot from 0% to more than 5% overnight.

A lot of people can’t afford the sudden increase in mortgage payment and their homes were foreclosed.

Here, our prime rate is still as low as 2.25%.

I couldn’t find any news on the internet about foreclosure rates in Canada.

But not surprisingly, the unemployment rate is 8.5 now. It increased sharply since October 2008. Before that, the unemployment rate remained about 6.5 for several years.

Maybe that’s why. The housing prices are increasing dramatically, people are buying more expensive homes with bigger mortgage payments.

I did read in the news once that instead of the recommended 30% of household income going to housing costs, with the high prices of real estate, 50% or more of household income are going to pay for housing.

Once someone loses their job, how can they pay for the high mortgage payment?

We probably didn’t put away enough savings for times like this because so much of our money are going to housing costs. And we still need to eat. Saving for the raining day seems to be lower on the priority list.