Are you in the market for a mortgage and you’re not sure which one to take out? In this article we’ll look at the difference between collateral and conventional mortgages, so you can decide which one is the right one for you.

Collateral Mortgages

A collateral mortgage lets you borrow more money than your property is worth. A mortgage lender is able to do that because a collateral mortgage re-advances. This allows you to borrow additional funds as needed without needing your break your existing mortgage contract.

This is accomplished by registering a lien against your property. Lenders will register a lien for up to 125% of your property’s value. For example, if your home is valued at $700,000, you could register a lien for a maximum of $875,000.

When the charge is registered, you can leverage the equity as needed. The simplest way to do that is by setting up a Home Equity Line of Credit (HELOC). HELOCs are a lot like mortgages. HELOCs offer a way to borrow money cheaply, but with even more flexible repayment terms. With a HELOC you’re able to make interest-only payments on your mortgage to minimize your cash flow.

You could also set up a readvanceable mortgage whereby the credit limit on the HELOC increases as you pay down your mortgage. You could use the extra equity to finance home renovations or to buy your next investment property.

Conventional Mortgages

A conventional mortgage is the mortgage you probably already know. When you put down at least 20% on a property, you’re eligible for a conventional mortgage. This is different than an insured mortgage when you put down less than 20% on a property.

Since you are putting down at least 20% on the property, you’re able to borrow at least 80% of its value with a conventional mortgage. The value of your property is based on how much it’s appraised for.

If it’s appraised for more than you paid, you can borrow based on the purchase price. However, if it’s appraised for less, you can only borrow based on the appraised value and you have to make up the rest from your own pockets if you want to still put at least 20% down.

If cash flow matters most to you, the 30 year amortization makes the most sense. Otherwise, if rate matters the most, the 25 year amortization is usually the way to go.

This post was written by Sean Cooper, bestselling author of the book, Burn Your Mortgage. Sean is also a mortgage broker at mortgagepal.ca.

By Sheryl Smolkin

A continuing debate among personal finance pundits is whether you should pay off your mortgage first or save for retirement, particularly in a low risk environment. The fact is you should probably do a little of both as frequently as possible. One strategy some experts advocate is to make an RRSP/SPP contribution and then use your tax return to decrease your mortgage balance, thereby reducing your amortization period and minimizing the total cost of your loan.

But whatever you decide to do, your goal should be to eliminate your mortgage entirely before you retire. By doing so, you will reduce your monthly expenses and minimize the impact the drop in income at retirement will have on your lifestyle.

How much you can pay down your mortgage and when will depend on the terms of the loan secured on your property. That’s why it’s important when you are negotiating or re-negotiating your mortgage to clearly understand the terms and what if any penalties you might incur if you deviate from the prescribed payment schedule.

Here are four ways to pay off your mortgage faster with examples as suggested by the Financial Consumer Agency of Canada:

1. Increase the amount of your payments

One of the ways to pay off your mortgage faster is to increase the amount of your regular payments. Normally, once you increase your payments, you will not be allowed to lower your payments until the end of the term. Check your mortgage agreement or contact your mortgage lender for your payment options.

For example, if John is getting a mortgage of $150,000 amortized over 25 years with a fixed interest rate of 5.45% for five years, minimum monthly payments amortized over 25 years are $911.  If John pays just $50 a month more, it will only take 22.5 years to retire the mortgage and he will save $14,000.

2. Renew at a lower rate, keep payments the same
At the end of your mortgage term, when you renew or renegotiate your mortgage, you may be able to obtain a lower interest rate. Although you will have the option to reduce the amount of your regular payments, you can take advantage of this situation to pay off your mortgage faster. Simply keeping the amount of your payments the same will make you mortgage-free sooner.

Stephanie adopted this strategy when she renewed her $100,000 mortgage after five years and the interest rate dropped from 6.45% to 5.45%. While the lower interest rate would have reduced Stefanie’s monthly payments to $924, she decided to keep the monthly payments at $1,000 in order to reduce the total amount of interest payable over the term of the mortgage.By keeping the monthly payments at $1,000 per month with the lower interest rate for the rest of her mortgage, Stefanie will save over $12,000 and will pay off the mortgage two and a half years sooner.

3. Choose an “accelerated” option for your mortgage payment
You can spend approximately the same amount of money on your mortgage each month and still save money by choosing an accelerated option for making your payments. Most financial institutions offer a number of payment frequency options:

• Monthly
• Semi-monthly
• Biweekly
• Accelerated biweekly
• Weekly, and
• Accelerated weekly

Accelerated weekly and accelerated biweekly payments can save you thousands,  or even tens of thousands in interest charges, because you’ll pay off your mortgage much faster using these options. The reason is that you make the equivalent of one extra monthly payment per year.

Let us assume that Richard has a mortgage of $150,000, amortized over 25 years, with a constant interest rate of 6.45%. If he chooses an accelerated payment frequency equivalent to one extra monthly payment a year, Richard will pay off his mortgage over four years sooner and save more than $29,000 in interest over the amortization period.

4. Making lump-sum payments: Prepayments
A prepayment is a lump-sum payment that you make, in addition to your regular mortgage payments, before the end of your mortgage term. The prepayment reduces your outstanding balance and allows you to pay off your mortgage faster.The sooner you can make the prepayment, the less interest you will pay over the long term, and the sooner you will be mortgage-free.

5. Key things to remember:

• Your mortgage agreement will specify whether you can make prepayments, when you can do so and other related terms or conditions. Read it carefully, and ask your mortgage lender to explain anything you don’t understand.
• If your mortgage lender is a federally-regulated financial institution such as a bank, as of January 2010, it must show your prepayment options in an information box at the beginning of your mortgage agreement.
• Your mortgage agreement may specify minimum and maximum amounts that you can prepay each year without paying a fee or penalty.
• The prepayment option is generally not cumulative. In other words, if you did not make a prepayment on your mortgage this year, you will not be able to double your prepayment next year.
• A closed mortgage agreement may require you to pay a penalty or fee for any prepayment.

By Sheryl Smolkin

You have filed your income tax return and now all you are waiting for is to see your overpayment appear in your bank account. While paying too much taxes and getting it back at the end of the year really means you are giving the Canada Revenue Agency a no-interest loan, the fact is that particularly with interest rates so low, many of us look forward to a windfall every spring. 

Because my husband retired in June 2015, we are getting a nice chunk of money back and we are planning to spend it on a cruise to Australia and New Zealand for our 40^th anniversary this fall. But depending on your age and stage of life, there may be many better places to spend the money than taking an exotic vacation.

Here are some options for you to consider in no specific order: 

Pay off high interest debt
If you have credit card or other high interest consumer debt and can only afford to make minimum payments, double digit interest rates mean the amount you owe is growing instead of shrinking. Consider consolidating your debts a lower rate of interest and paying them down with your income tax return.

Seed your emergency account
Everyone knows somebody who has lost their job or had to stop work earlier than planned due to family illness. Most financial experts suggest you have at least three months’ salary in your emergency fund. This calculator from RBC can help you figure out how much you need. Your income tax return can help you seed or top up an emergency fund.

Pay down your student loan
Canada Student Loans are interest-free for six months after you graduate or leave school. You can choose between a fixed interest rate (where the rate doesn’t change for the duration of your loan) and a variable, or “floating,” interest rate (where it can fluctuate). For Canada Student Loans issued on or after August 1, 1995:

• The fixed interest rate is prime + 5%

• The floating interest rate is prime + 2.5%

The sooner you pay off your student loan, the sooner you can free up disposable income to save for other family priorities like a house or a car.

Pay down your mortgage
The longest running personal finance debate is whether you should use an income tax return or other windfall to pay down your mortgage or contribute to an RRSP or TFSA. Typically if you are paying a higher interest rate than you are earning in a savings vehicle, paying down your mortgage is more advantageous. Also, if at all possible, try to pay off your mortgage before you retire.

Contribute to a TFSA
In 2016 you can contribute $5,500 to a tax-free savings account. Contribution room from previous years can be carried forward. There is no tax deduction for contributions but your principle and any interest accumulates tax free and there is no tax on withdrawals. Also, if you take money out your TFSA contribution room is restored. Using your tax return to contribute to a TFSA allows you to accumulate money for retirement or other major purchases in the years prior to retirement. It is also a good place to park your emergency fund.

Contribute to an RRSP
Are you one of those people who scrambles to come up with a registered retirement savings plan contribution in February every year? By contributing your tax return to your RRSP you will get a head start on this year’s contribution and reach your retirement goals much sooner. 

Contribute to an RESP
Tuition fees alone for Canadian undergraduate programs are currently about $6,000/year and they will be much higher before your young children graduate from high school. College tuition is lower but by the time you add books, living expenses and transportation costs these programs also cost thousands of dollars a year. If you use your income tax return to contribute to a Registered Educational Savings Plan, the money will accumulate tax free and taxes will be paid by the student who will likely have to pay little or no taxes. Also, an annual contribution of up to $2,500 will attract a government grant of up to $500/year to a lifetime maximum of $7,200.

Give to charity
If you donate all or part of your tax refund to an approved charity, you will not only benefit others, but you will get a non-refundable tax credit. If it is the first time you have made a charitable donation you may be eligible for the first-time donor’s super credit  which supplements the value of the charitable donations tax credit by 25%. The FDSC applies to a gift of money made after March 20, 2013, up to a maximum of $1,000, in respect of only one taxation year from 2013 to 2017.

Upgrade your education
You want to upgrade your skills to put you in line for a promotion. You are bored with your current job and want to train part-time for another one. You’ve always wanted to fix your own car or learn a new language. You can use your income tax return to upgrade your education and you may also be entitled to tax credits for the tuition paid.

Invest in your health
Your dental plan does not cover the braces your child needs. You need a new pair of glasses that cost way more than the $150 every two years paid by your medical plan. You want buy training sessions at your gym to reach your fitness goals faster. Your income tax return can be used to invest in you or your family’s health and wellness.

By Sheryl Smolkin

This is the last Best from the Blogosphere for 2015 and I’m taking a break, so the next one will be published on January 25, 2016. We wish all savewithspp.com readers a healthy, prosperous New Year.

As we look back on 2015 and ahead to 2016, there is much to think about. We have a new Federal government, the loonie is at an all-time low and Canadians have extended extraordinary hospitality to Syrians and other refugees from war-torn lands.

Here are some interesting stories we are following:

In TFSA vs. RRSP: How are Canadians saving? I interviewed Krystal Yee (Gen X), Tom Drake (Gen Y) and Bonnie Flatt (Boomer) to find out how Canadians are taking advantage of the tax-sheltered savings vehicles available to them.

In What Sean Cooper Really Achieved By Paying Off His Mortgage In 3 Years Robb Engen from Boomer and Echo tells us that Sean Cooper didn’t just pay off his $255,000 mortgage in three years; he taught us all a lesson in personal branding. Mr. Cooper, a pension analyst by day, mild-mannered blogger by night, took an almost Machiavellian-like approach by achieving fame through mortgage freedom at age 30.

Jim Yee offers some Year End Finance Strategies that will take advantage of ongoing changes to our tax rules. For example, in 2016, the new Liberal government will be lowering the tax rate on the middle income bracket from 22% to 20.5% so those individuals making more than $45,283/year but less than $90,563/year, deferring income to next year might save some tax dollars.

On the Financial Independence Hub, Doug Dahmer writes about the timing of CPP benefits. He says the CPP benefit for a couple can be in excess of $700,000 over their lifetime and the study demonstrates that the difference between starting your benefit at the least beneficial date and starting at the best date can be more than $300,000.

And finally, Rob Carrick at the Globe and Mail offers some thoughts on how to prepare for a frugal retirement. Frugality is assumed to be a virtue in the world of personal finance writing, but on the outside, frugality is sometimes a synonym for cheap. He refers to a blogger on Frugalwoods who argues that making the choice to be frugal is about asserting your independent thinking about money.

Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

By Sheryl Smolkin

There are many excellent articles about the pros and cons of mortgage insurance vs. term life insurance. But every year a new crop of first-time buyers begins their search for a perfect new home, so it seems like a subject worth revisiting.

The purpose of mortgage insurance (also known as mortgage life insurance or creditor insurance) is to pay off the mortgage when you die so your spouse and dependents are mortgage-free and have one less major expense to worry about. If both you and your spouse are working and want to protect each other, both of you need to be insured.

The first major advantage of term life insurance is that it is much less expensive than mortgage insurance.

I obtained quotes on the Cowan Financial Solutions website for standard non-smoker term life insurance for both a man and a woman aged 36 for $400,000 of life insurance for a term of 25 years. The lowest annual quotes were $556 for the man (Assumption Life) and $420 for the woman (Foresters Life), or $976 in total for both. Of course, if you plan to pay your mortgage off more quickly, you can request quotes for a shorter term.

I compared this quote to mortgage insurance information on the TD Canada Trust website. Mortgage insurance premiums are calculated based on your age and the value of your mortgage. There is no discount for non-smokers or women. With a monthly premium of 21 cents per $1,000 for each borrower 36-40 years old, the annual bill for both spouses would be $1,512 (including a 25 per cent discount for two or more borrowers).

But the cost differential is only the tip of the iceberg. After viewing a YouTube video in which Cowan Financial Solutions advisor Rita Harris explains some of the other reasons why term life insurance is a better deal than mortgage protection offered by the banks, I gave her a call to get some additional details.

Here’s what she said:

Protection: When you die, your mortgage insurance is payable directly to the bank. Term life insurance protects more than just your mortgage. Your spouse (or other beneficiary) can use the money as is most appropriate in the circumstances.

Premium Guarantee: The term life insurance premiums and benefits are guaranteed for the life of the policy. Your coverage amount is constant but can be reduced at your request. Premium levels for mortgage insurance can be unilaterally changed by carrier. As your mortgage reduces your coverage goes down but your premiums do not.

Portability: If you take your mortgage to another company, you may lose your existing mortgage insurance and have to re-qualify for new mortgage insurance coverage. In contrast, individual term life insurance is fully portable even if you move your mortgage.

Repayment: You lose all your mortgage insurance coverage when your mortgage is re-paid, assumed or in default. As long as your term life insurance premiums are paid, you can convert your insurance to a permanent plan.

Underwriting: If you buy term life insurance, the insurance company will assess the risk and establish the premiums based on your health at the time the policy is purchased. In the absence of any fraudulent activity, you know your claim will be paid out when needed in accordance with the terms of your contract. Mortgage insurance is subject to post-claim underwriting, which means technically you could be declared uninsurable when you submit a claim.

Moneyville blogger Ellen Roseman’s story about the Feldmans is only one example of a case where a bank initially denied coverage after the fact for medical reasons. CBC marketplace also did a brilliant report called The Mortgage Insurance Game.

So caveat emptor! Remember, mortgage insurance is sold by bank employees who may not be trained to explain the legal intricacies of those insurance products. You could pay premiums and think you are covered, only to realize later you are not.

Do you have tips for people shopping for life insurance in order to protect their mortgages? Share your tips with us at http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card. And remember to put a dollar in the retirement savings jar every time you use one of our money-saving ideas.

If you would like to send us other money saving ideas, here are the themes for the next three weeks:

25-Jul	Telecommuting	Jobs where you can work from home
1-Aug	Vacation	Staycation ideas that can save you money
8-Aug	Garage sales	How to make money on your garage sale