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Wednesday, August 31st, 2016

Hows your Mortgage War Chest?

Hows your Mortgage War Chest?

Would you walk a tightrope without a net? Skydive without a quality parachute? Rock climb without a harness?

Then why do so many people go into a mortgage without emergency funds? Any honest mortgage broker will tell you this is a bad idea. It’s a metaphorical extreme sport if you will.

Simply, the thrill of extreme sports aren’t worth it if something goes wrong. Conversely, becoming a first time buyer sooner probably isn’t worth it if it causes you to lose everything down the road. This is regardless of whether you have access to low mortgage rates or not.

Taking out a mortgage without any extra savings can pose a substantial risk.

What happens if you: lose your job, experience a decrease in income, unexpectedly run into medical issues or a divorce?

Most people don’t expect such misfortune, but its worth it to be prepared. According to a survey from CIBC, about 40% of Canadians who hold mortgages don’t have any emergency funds.

For someone in this situation, any unexpected expense in the thousands of dollars could quickly lower them into hot water. If unsure, a quick phone call with Vancouver mortgage broker can help you figure out exactly how much cash you should be stashing.

Fortunately, foreclosures are not that common. This is more due to people’s resourcefulness when times get tough than anything else. If being removed from your home by a court official isn’t high on your bucket list, you’re not alone. Most individuals will resort to just about anything (stealing, begging, borrowing, getting a second job, selling assets or running up their credit cards) in order to avoid such a situation.

Unfortunately, credit card interest isn’t cheap. It can take quite awhile to pay down your credit card debt at 20% interest if you’re dealing with a large amount. This makes financing your home in such a way, pretty undesirable. An unfavourable situation involving debt consolidation probably follows for anyone using a strategy that involves tapping into multiple credit cards.

Borrowing funds from friends and family is also not a great option for a lot of people. Firstly, it may not be available when you need it. Secondly, it can put a lot of strain on relationships.

Liquidating assets is an option, depending on what you’re holding, how fast you can get rid of it, and any tax implications that may result.

Due to the downsides of the above options, using a home equity line of credit (HELOC) becomes a pretty favorable way to source funds. Credible sources show that about 34% of Canadians holding mortgages have access to a HELOC. If you are interested in learning more about a home equity line of credit, you need only contact your local trusted mortgage broker in Vancouver.

“Over the last decade, lines of credit have replaced emergency funds in the Canadian economy,” says the president of Tudor Mortgage Corporation, John Parker.

For a lot of people, it makes more sense to pay down their mortgage if they have extra funds, than to invest those funds in something that earns a low rate of interest. Typically, mortgage prepayments provide a better return than a secure investment that only earns 1% or 2% interest.

Mortgage pre-payments combined with a home equity line of credit also let you re-borrow your funds in the event of an emergency.

HELOCs are one of the principal reasons that so many Canadians with mortgages don’t have contingency funds.

Unfortunately, HELOCs aren’t available to everyone; a down payment greater than 20% is required. For many individuals, HELOCs also require an uncanny amount of discipline. Don’t use that line of credit for a hot tub or flatscreen TV!  A mortgage broker in Vancouver BC can make an individualized assessment of your situation and recommend an option that is good for you.

Those who don’t have access to HELOCs would be wise to save a few months worth of mortgage payments, in the event that unexpected expenses arise. Though, this is less important for those with large stable streams of income.

Obviously, your actions depend on your own individual circumstances, as is always the case.

If you do need to shore up funds for a few extra months before buying a home, this probably isn’t an issue in today’s housing market.

Prices in most Canadian locales aren’t likely to skyrocket in the very near future. Just ask any honest mortgage broker.

 

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