Mortgage 101 – Don’t Wait to Fix Your Credit

Clinton and Dan talk about how refinancing can help Canadians manage high indebtedness, consolidate debt, and reduce monthly payments.

Dan Ahlstrand
And welcome back to Mortgage 101. I’m Dan Ahlstrand. This is Clinton Wilkins. Clinton, before the break, we teased that we were going to discuss refinancing, and I can tell you, being at the office here the last few weeks, that there are a lot of people who are looking to refinance their mortgages. I imagine it’s the result of them perhaps not locking in for longer terms at the end of the pandemic.

Clinton Wilkins
I don’t know if it’s rate-specific, Dan. I think if anything, it’s more around a high level of consumer indebtedness right now, and I think that not just indebtedness, but I think it’s also a result of property values really increasing and people having equity in their properties. The one trend that I’ve seen lately is I’ve seen a lot of existing clients whose credit has actually taken quite a nosedive, and I really don’t understand 100% why that’s happening. I think partially, I think they feel some stigma, or they feel bad about what’s going on with their situation, but there were like two or three even this week that I saw that if they had just reached out to me 30, 60, 90, 120 days before, they would have been in a lot better situation, and I think it would have been the difference between us getting them approved with a prime lender and now them having to go with an alt lender to get their situation cleaned up, and I don’t know why. I think we’re very open. We do annual reviews with our customers, and we’re sending them all kinds of communication. But I think there is a lot of stigma around having some financial hardship, and I think there’s also stigma sometimes about refinancing. We refinance people midterm literally all the time, and I think sometimes we are refinancing people that are still in very, very low interest rates. Like, I see sometimes consumers at like 2% interest rates, and I’m breaking those mortgages early to go into an interest rate at like 4% because it makes financial sense for them depending on what’s going on with their situation. But I will say overall, we see it in the news. We hear it. Canadians are at an all-time high level of indebtedness, and I think a refinance for a lot of those consumers could make sense.

Dan Ahlstrand
Tell me about the process, Clinton. If I am in a situation as you described, and I’m looking to perhaps try and find my way out of it, how does it work?

Clinton Wilkins
So the first thing is you should know how the math works. Now you don’t need to do the math yourself. Luckily, you can go to an unbiased mortgage professional to do it. But we’re just going to do some easy math, so our listeners can understand how a refinance could work. Let’s say your property value is 500,000. The maximum amount that you can refinance up to is 80%. So 80% of 500,000 would be 400, and then from that 400,000, we need to pay down any of your secured creditors. So, a mortgage line of credit, if there’s any secured credit card on there. So, any of the secured creditors will have to get paid out from that 80%. So, let’s say you owe 300,000, for example, secured. That means that you would have $100,000 to work with to potentially pay out unsecured creditors, or do any improvements to the property, make investments, maybe give a gift to your family member for a down payment on another property, or buy another property yourself. So the CliffsNotes version is you can refinance up to 80%, but from that 80%, whatever is secured already needs to be paid out, and then the difference is what you have basically new money available. However, that is going to be dispersed.

Dan Ahlstrand
Is it a lengthy process?

Clinton Wilkins
I would say on average a refinance takes about 60 days from an application process to funding. We can move it along very quickly, like maybe we can get it done in 30 days or less. But sometimes it’s the consumers who are not able to move as quickly. Like maybe they don’t have their income documents together, or maybe we need an appraisal. It takes time to get that booked. But overall, it’s usually around 60 days to get a transaction funded. Sometimes shorter, sometimes longer, and oftentimes that time frame is being dictated by the customer; we want to make sure the customer finds it to be a smooth transition or smooth transaction. We want to make sure that we are meeting them where they need to be in terms of their time frame.

Dan Ahlstrand
We know it’s difficult times. We know that it seems every time I go to the grocery store, my bill is higher. We know that families are struggling these days given the economy; that’s why I think, and he touched on it earlier. The communication piece is so vital: to try and catch these things before they become problems.

Clinton Wilkins
Yeah, definitely catch it early, communicate early, and sometimes that’s even within the household. Open your mail, know what you owe, make a plan, make sure you’re making your minimum payments, and I would recommend even on those minimum payments,s make them automatic. So many credit cards now offer automatic payment where they’ll just debit your bank account and make sure that minimum payment is being made. It’s great if you can pay your credit card off every month, but chances are, if you’re in a high level of indebtedness, you’re not paying it off. Make the. On payment at minimum, ensure that balance is under the limit. And obviously, the further under the limit you can make it, the better. I hear from consumers to say, “Well, my credit card offered me a credit limit increase. I didn’t take it. Well, your credit score would have been higher. Higher limits and lower balances are always the way to have that kind of better credit score, so if they’re offering you more, if you can be responsible and not spend all that additional limit, take the balance or the limit increase and keep that balance low.

Dan Ahlstrand
It’s tough times out there, right? So any little bit helps.

Clinton Wilkins
Every little bit helps, and if you’re trying to improve your credit, I really recommend you start doing some credit monitoring. You’ve had a couple of bumps in the road; I think it’s great. There are two credit agencies in Canada. One is Equifax, and the other one is TransUnion. And there are a couple of free apps that our listeners could download. They’ll probably try to do some marketing to you and try to sell you something, but you’re getting the app for free, and it’s trusted. I actually use them both myself. There’s Borowell, which brings in the data from Equifax, and there’s Credit Karma, which brings in the data from TransUnion. So those are two free apps that I’d recommend. You can monitor your credit, and I guess in turn they’re going to try to sell you maybe a credit card or something, but you don’t need to buy it. Stay strong. You don’t need another credit card, probably, unless you’re really trying to rebuild your credit, and then they will give you some recommendations. They’re going to monitor your credit. I think once a week they’re going to update your score, and it doesn’t impact your score. It’s not going to hurt your score by them monitoring it. They’re bringing the data in from the soft side of the bureau, and they’ll give you an idea of where you score in your region. So in Atlantic, they’ll they’ll they’ll show you how you score compared to your peers and how you’re going to score compared to the rest of the country as well.

Dan Ahlstrand
Are the two numbers vastly different?

Clinton Wilkins
Equifax only has data from really the last six years. They’re always rolling on six years. TransUnion keeps all of the good data forever. So if there’s bad stuff, it falls off after six years. But all the good stuff, it keeps going for a long time. So if you’ve had credit for more than six years and you’ve had good credit, typically TransUnion will have a higher score. If you are only having credit for the last six years, I would say they’re maybe similar, and in some cases, maybe Equifax has a higher score. So one being higher, one being lower is not unusual, and they have different scoring and modelling data. So we can sometimes see as much as maybe 100 points in the difference, and sometimes they actually have different data than the other one. For example, I find TransUnion is a little bit more sensitive and will bring in maybe more data points than Equifax will. For us, we always pull Equifax first. Some lenders will then pull TransUnion, but primarily in the mortgage industry, Equifax is the number one credit bureau that we’re looking at.

Dan Ahlstrand
When it comes to refinancing, obviously, when you refinance your mortgage, then your payment’s going to change, right?

Clinton Wilkins
Yeah, it might change, might be increasing, and maybe decreasing depending on obviously how much you borrow and what that interest rate is and what the amortization is. So I think sometimes when we’re refinancing people’s mortgages, their payments are actually going down, and I would say that’s by and large the outcome because I think right now people are wanting longer amortizations, and I think they want to bring down their overall payments. Like, I saw a consumer today who wanted to do a refinance, and we were able to refinance. I think up to like 600,000 or something like that, and we paid off some consumer debt. Their payments,s between their existing mortgage payment and their debt payments, literally went down $2,000 a month. Like, that was a big one. Did their payments go in half? Not quite in half, but there was a huge reduction in their overall payments, and this was like a single lady. And, for me, helping her with this transaction is essentially putting her in a much better financial position, and she’s able to have a little bit of breathing room and start living her life a little bit. And the reason that people sometimes get in over their heads is that, I think, oftentimes we just think, oh, they have a spending problem, or they have delusions of grandeur, or they want everything like now. Not always the case. Sometimes people have health issues. Sometimes they go through a matrimonial breakdown. Maybe they have job loss. There are so many reasons why people’s finances can be impacted, and I think that’s why, in the mortgage finance industry, we have to be empathetic to that, and we have to ask a lot of questions. And I’m not asking questions sometimes to be nosy. I want to ask the questions to be able to put people in the best financial position and to make sure my recommendations match where they are, and to really put them on the best path.

Dan Ahlstrand
Again, communication is important, and it’s vital here. Would you ever consider refinancing to renovate? Say before you wanted to sell.

Clinton Wilkins
That happens, but I always say to people, if you’re renovating before you sell. Just don’t bother, and I think a realtor would probably concur with me. The reason is that maybe the renovations that you’re going to do aren’t going to be what someone else wants, and if you’re going to renovate, why not renovate for yourself? I see these folks all the time who ask, ” Why didn’t you renovate five years ago, and at least you could have enjoyed those renovations? Renovating just before you’re going to sell and have someone else enjoy it, I think I wouldn’t bother. To be honest, I would rather sell, not do the renovations, and then let someone else do it the way that they want to do it. Will you renovate and sell for the top dollar? Yes, but again, it’s a risk. What happens if the renovations you do someone doesn’t like, and it’s not going to actually increase the property value as much as you thought it was going to? I think if you’re going to do renovations before you sell, talk to a realtor first to get their opinion on what you could sell it for as is, and then what you could sell it for post-renovation. So I think that would be an important place to start.

Dan Ahlstrand
Want to get the best bang for your buck, right?

Clinton Wilkins
Always the best bang for your buck, and certain renovations are going to give a higher return than others. Overall, I think some renovations maybe will give you more than $1 per dollar increase, but some maybe not as much.

Dan Ahlstrand
We’re going to take another break, and then we’re going to wrap up this week’s and this month’s edition of Mortgage 101. We’re back in minutes.