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Shop carefully for mortgage | personal In jury

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“Most people consider a mor-
tgage as a large debt they must
assume to enable them to buy a
home,”? said a certified general
accountant (CGA) who advises
clients on real estate investments.

“But astute investors also real-
ize that in a rising real estate
market, a mortgage represents le-
verage: enabling them to make 2
large profit on a small amount of
their money. And because any
profit on a principal residence is
still tax-free, this benefit becomes
even more attractive.’

The CGA gave a simple exam-
ple to illustrate the principle of
leverage.

Let’s say you have $10 of your
own money and borrow $90. You
invest the $100 and it grows to
$125. That $25 profit represents a
gain of 25% on the $100.

But you put up only $10 of
your own money. So the $25 prof-
it on your $10 works out to a gain
of 250%. Of course, if your $100
investments drops io $75, you
then suffer a loss of 250% on
your $10.

When you buy your own home,
you get a reasonable shot at some
profit — over the long term, said
the CGA. “So it’s important to
recognize the role a mortgage
plays in giving you a chance to
make that profit.”

The CGA offered some
guidelines when you are looking
for your first mortgage or face a
renewal.

’ (1) Find the most flexible mur-
tgage at the most competitive
price.

 *‘Never before has there been
_such a wide variety and choice of
mortgages and options,”’ said the
CGA. “Short-term, long-term,
open, closed, weekly payments,
pre-approved, rate guarantees,
transferability -— it’s like a
supermarket.

“The key is flexibility. You
want to be able to pay off the
mortgage quickly if you have ex-
tra funds. You want to be able to
refinance if rates drop. But you
also want protection in case rates
rise.’’

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Naturally, you want this flex-
ibility at a competitive price. And
the rate itself should be com-
petitive.

The CGA suggested you write
down ahead of time what’s im-
portant to you. ‘‘For example, if
you expect an inheritance to come
through in the near future and
plan to use the money to pay off
your debts, the mortgage should
allow you to make a lump sum
payment with little or no penal-
ty.’”

(2) Take on oniy a mortgage you
can comfortably afford, both now
and in the future.

Look at your present income
and expenses to see how much of
a monthly payment you can af-
ford. Don’t forget to allow for
property taxes and any additional
costs of owning a home. Your
lender will tel! you how much of a
mortgage that monthly payment
will provide.

“‘Look at both your present and
future income,"’ stressed the

ily, or is laid off and can’t find
another job?

“Think about setting up the
mortgage based on one income;
use the second income to make
extra payments as well as RRSP
and other investments. Then, if
the second earner’s income stops,
you know you can still manage
the mortgage.”’

(3) Pay off the mortgage as quick-
ly as possible.

Ask yourself: ‘‘Can I earn as
high a rate of return — after tax
— as the rate I am paying on my
mortgage?”’ If the mortgage rate
is 11%, few people can earn 11%
— after tax — as easily and safely
as paying off the mortgage.

“The savings can be substan-
tial,’ said the CGA. You pay
$188,759 interest to retire a 25-
year 11%, $100,000 mortgage. But
if you choose a 20-year amortiza-
tion, you pay only $143,754 — a
saving of $45,000. You can cut
the interest bill by 24%, and your
monthly payment is only 5.5%
higher ($1,015 vs. $962).

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