Essential Knowledge Series
Everyone has heard the “one size fits all” saying. And everyone has experienced a salesperson trying to tell them that the product they offer is the perfect item for them, even if it's not.
You wouldn't buy new wheels if you didn't have a car.
The same goes for mortgage financing. We believe that every person's position is different and each person will require a different solution. While some mortgage agents might try to push the same product to all of their clients, Tried and True Mortgages does the opposite.
We listen to our clients and ask the appropriate questions to know what is right for them. We like to build with lego and piece together each solution as opposed to building with bricks - in other words - one size fits all.
For example, let’s take a look at someone who wanted to reduce their interest rate and consolidate some debt. Let's call them Bill. Bill had a mortgage in the $650,000 range and unsecured debt in the $30,000 range. The main issue Bill had was not that his income was too low or that his home didn't have equity, it was that his credit score was not as high as needed, so he thought.
In Bill's case, we didn't tell him he was approved as soon as we met him, as you hear on the radio. We listened to Bill's situation and conducted a thorough understanding of his circumstances. At first glance, Bill's situation was a tough one. The large mortgage payment along with the monthly unsecured debt was creating a negative cash flow situation and causing a lot of stress on him.
After careful assessment, even with a credit score in the 600s, we were able to provide Bill with a couple of solutions that would consolidate his debt and increase his cash flow.
The initial scenario was as follows: $145,000 income, $650,000 mortgage, and $30,000 in unsecured debts. Monthly debt payments in the $4,000 range. After filling your tank with gas and paying for food and income taxes, you can see how this would have been a tight situation. Even with a $145,000 income, Bill still had a negative cash flow of -$1,100.
Here's what we did. We assessed which loans/debts were the most important to payout. There are times when you don't want to pay out a specific loan. For example, the most common loan that should be left out would be a low-interest student loan. This is why we always like to piece together the solution based on an individual client’s needs, and not on a one-size-fits-all basis.
After determining what should be paid out and what should stay, it was necessary to identify a lender that would be suitable. In Bill's case, his credit score was damaged because of his high balances. In a way, this worked in our favour. Bill didn't have any weaknesses in his credit score due to missed payments, so we were able to explain to the lender that after these debts are paid out, his score will be well over the 700 mark within six months.
We gave Bill the following options:
1. Consolidate all of his unsecured debts into a secured line of credit.
OR
2. Consolidate all of his debts into one large mortgage component, amortized over 30 years.
Before Bill could say yes to either, he had one concern - a concern common among those refinancing and a concern we agree should not be overlooked.
He was concerned about his pre-payment penalty. The lender we were able to get Bill approved with was not the same lender he was currently with. Unfortunately, that lender didn't give him the approval and their rates were much higher. In these cases, your mortgage broker needs to have the flexibility to work with multiple lenders. If they don't have that flexibility, you could be in trouble.
In Bill's case, the payout penalty, plus all additional fees from the previous lender, totalled approximately $6,000. While this is a large penalty, like I said earlier, we have to use lego pieces, and not bricks. One of the benefits of looking at each situation this way is that we don't think of the small picture. We always look at mortgage financing using the big picture and what is the best long-term solution.
$6,000 is no small amount. It's nothing like you hear in the newspaper of the $20,000 paid by some, but it is still a significant amount. That's why I asked myself the following - how would paying this prepayment penalty still be advantageous to Bill?
Let's go back to the original numbers. Bill was bringing in $145,000 and had a cash flow of -$1,100. We added up his expenses, along with his new mortgage from option 2, which included the payout penalty and debts. The result? Bill's monthly debt payments went down to approximately $2,533 and his monthly cash flow went from -$1,100 to a positive $400 with the mortgage amortized over 30 years. This might not seem like much to some, but to Bill, this was the difference between going on a vacation that year and going into bankruptcy.
$6,000 was a small price to pay in relation to the change in cash flow for Bill that would save him more than $6,000 over the next 5-year term. Not only was he saving money, but he now had the peace of mind knowing that if he wanted to go on that trip, buy that new gadget, or save for his future, he could. Bill couldn't believe the numbers and jumped at the opportunity to save. Done deal.
Think you're in a similar situation and there's no way out? Give us a call or send us an email and we'll be sure to find the correct lego pieces to build your solution.
Questions/Comments?
Give us a shout in the comment section or find our contact details on the main page of our website at www.triedandtruemortgages.ca
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