The Burn Your Mortgage Podcast: How Failing to Consult with a Mortgage Broker is Borderline Personal Finance Negligence with Rob Carrick

Full Transcript

Sean Cooper
Rob, how are you doing today?

Rob Carrick
I'm doing very well Sean, how are you?

Sean Cooper  
I'm pretty good. Thank you, really excited to chat today, especially with someone like yourself who's been writing about personal finance, real estate and mortgages for many years. So honored to have you on the show. And I'm excited to get your insight into some of these topics here. 

Rob Carrick  
Glad to be here Sean.

Sean Cooper  
Great, perfect. So let's get started by talking about one of your books here, a book that I read myself. I mean, I know that you've written several books here, but just wanted to talk about your specific book, How Not to Move Back in with Your Parents, you discussed a number of interesting topics in the book there. I mean, fortunately, I don't have time to discuss all the topics today.

But I mean, certainly it is an excellent book to read for any of the listeners who have had the opportunity to read it just as a younger person there. 

Sean Cooper  
But yeah, I just wanted to discuss so the topics that you covered in the book are a couple topics. In particular, maybe your opinion has changed since you've written the book there. But the first topic that I wanted to discuss and yeah, maybe you could just quickly mention your book and what it's about. But the first topic I wanted to discuss was the Bank of Mom and Dad, and just how that's changed over the years and what that term means.

I mean, I guess originally, it was giving money. But yeah, maybe we could just talk a bit about that. And you mentioned in the book how it's evolving, and how it doesn't necessarily have to be monetary, like it could be living at home rent free, stuff like that. So I'd be interested to get your take on that, Rob.

Rob Carrick  
Well, the Bank of Mom and Dad when I first started writing, my book was more about parents helping their kids cover some expenses when they graduated and hadn't quite found a job yet. So it could have meant having kids move back home, keeping them on the family cell phone plan, paying our car insurance, that sort of thing. Now, it's become something quite a bit more substantial. I mean, to me, the Bank of Mom and Dad is primarily about financing their kids home down payments. 

Rob Carrick  
So we've seen billions of dollars go from parents to their adult kids to help them buy houses in the form of down payments. And my latest research tells me that this pay come on the dad's duties do not end there, and that their parents are also helping the younger kids cover higher mortgage costs, renovations, all that sort of stuff that comes with owning the house, they helped buy those now they're helping with cost to own the house. So the Bank of Mom and Dad is a very busy bank with a lot of lines of business these days. 

Sean Cooper  
Wow, very interesting. I guess with the high cost of real estate, that definitely has a big thing to do about it. And what do you think about the whole concept of living inheritance as well? Do you think? What do you think is contributing to that? Do you think it's a bit of both that baby could just briefly talk about like living inheritance, I guess the whole idea that parents would like to see their adult kids actually enjoy that their wealth while they're still alive, as opposed to getting like cash windfall when you don't really need it as much later on in life.

Rob Carrick  
Yeah, I definitely think there's more open mindedness to giving your adult kids money while you're alive. And you can see them enjoy it and your grandkids enjoy it and that sort of thing. I think we need to recognize, though, that a lot of families just don't have this wealth to pass down in this way. So it is a very niche sort of thing. It's just that, you know, I think it's got a lot of prominence, because yes, houses are expensive. And parents are concerned about that. And they're concerned about their kids, not ever getting into the market. And so they're finding money.

So sometimes it's an early inheritance. Sometimes parents are going into debt, using their lines of credit to help their kids and sometimes they're dipping into their own savings. So there's a variety of ways and one of them is the living inheritance. And I actually think it's a great idea, why not be alive to watch people enjoy the money you're going to give them?

Sean Cooper  
No, I agree completely. I guess it's just kind of a balancing act. You don't want to go into so much debt that you make it difficult for yourself as a parent there. So yeah, I mean, I'm all for it as well. Just be careful. And because I've heard some stories with parents literally taking on way more debt they can afford. So yeah, definitely. It's nice to want to help your kids but just make sure that you're not putting yourself in too much of a financial hole there either. So perfect. Thanks for sharing your thoughts on that there. 

Sean Cooper  
And the next topic that I wanted to discuss that you talked about in your book, there are top mortgage tips for first time homebuyers. I mean, you don't have to talk about 10 tips or anything like that, but maybe the first one or two or three that come to mind there if you'd like Rob.

Rob Carrick  
Well, I think that the lesson we've learned about home buying in the past few years is that affordability is so important. There used to be this idea like up until recently that you push your affordability to the max to buy a house and that the house will go up in value and that will validate anything you do any struggles you have will be okay because your house is rising in value, and it's going to be a great investment.

And we've seen some volatility in home prices, and I make no predictions about whether they're going to go up, down or sideways. But I think the froth is gone. And I think we're getting back to a much more rational market, which is a good thing for everybody involved. 

Rob Carrick  
But I think what we've learned is that you have to live here, and now with a house. And it's not all about how much it's going to increase in value. So I strongly suggest that new buyers think about maybe a little bit less than they can afford, you don't need to push it to the maximum.

In fact, it's probably bad for your finances to do so. And you know, people who push it to the max and now their mortgage payments are going up because they have to renew at higher rates. It's putting a lot of pressure on households, and owning a house should be at least a little bit comfortable. And if you can't make it comfortable, you need to reevaluate what you're buying. 

Rob Carrick  

Could you find something cheaper? Could you move to a cheaper place? Could you consider a smaller house? Could you consider a townhouse, maybe a condo, there's always options for getting into the market, but managing the costs a little bit. And I really think that the most important thing a young buyer can do is not bite off more than they can chew. The banks will lend you more than you can comfortably carry. If you have a lot of other expenses in life, the banks know you're going to pay your mortgage first. And so they'll give you a fair amount of money, I would say take a little less.

Sean Cooper  
No, that's great advice. Like certainly just because the bank will or mortgage broker they worked with says you can afford to spend this amount on a property a million dollars, say, definitely sit down and look at your individual budget. Because what the stress test doesn't cover is extra expenses that you might have, especially like someone's expenses, if they're a single person or a couple with children, I mean, those situations can be totally different. And you can actually spend more on a property if you have children with the Canada child benefit. 

Sean Cooper  
But it doesn't take into account all the extra expenses that come with it there because children are lovely, but they can definitely be very expensive in the early years there. So it's important to sit down and look at your individual budget. And just make sure that these payments, the mortgage payments and the other expenses of the property are going to be affordable for the long term. So yes, thanks for that great tip. And was there a second tip that you wanted to share by chance?

Rob Carrick  
Well, I would encourage people to think really hard about whether they want to go variable rate or fixed rate, the borrowing environment is changing rapidly these days. And as we're speaking in late November, it's starting to look like interest rates have peaked. It's not a guarantee by any stretch, inflation could flare up again, it's kind of dismissed that possibility. But if rates are peak, attention is starting to swing more back to the variable rate mortgage.

But variable mortgages were great for decades, it was the best choice period. But I think that there's a lot to be said for a nice little fixed rate. That gives you three, four or five years of complete peace. 

Rob Carrick  
You know what your rate is, you're paying your mortgage, you have no concerns about what's happening in the broader world. And I think there's some value in that, you know what, it's not necessarily the cheapest rate is the most comfortable rate. And if a fixed rate lets you cross off your mortgage as a thing to worry about, then I think there's some value in that. And I've talked to mortgage brokers recently, and a lot of them are pointing to the three year fixed rate as being a nice combination between not locking in for too long, and getting a reasonable rate by today's standards. And they sort of call that a bit of a sweet spot.

Sean Cooper  
No, I agree completely. And especially as a first time home buyer if I just had the peace of mind that having a fixed rate can be helpful as well, like, again, this isn't everyone's experience and comfort levels are different there. But just find as a first time home buyer, it could be stressful to have a variable rate.

So this isn't like a specific rule of thumb or anything like that. But I would maybe suggest like when you're more experienced, you've had your mortgage for a bit maybe consider going over to a variable rate there because yeah, what especially when you're owning a property for the first time, there can be a lot of surprise expenses that you may not have anticipated and if your mortgage payment is fluctuating because have a variable rate that can just kind of add a bit more stress to your daily life there and that actually transitions perfectly to our next topic here. 

Sean Cooper
So speaking of home ownership, there are a number of expenses that you may not anticipate when you're buying a property there I mean, you've heard you speak in person there Rob about like some of the drain issues and other things I'll let you mentioned it yourself there but maybe you can just talk about some of the surprise expenses of home ownership that for first time homebuyers may not anticipate when buying a property there.

Rob Carrick
I think the thing that nothing prepares you for when you buy the house is the sudden repair costs. Now you grow up in a house or a home or some sort of thing I know you see there's a dripping top or you are the light bulbs burned out or a light fixture isn't working anymore. But when you own the property, you've got all kinds of different systems in there, you've got heating, you've got the plumbing, you've got the roof, and they're going to fail on you. And it's not unusual to move into your first home and have something going very quickly. It's like you're welcome to the club moment.

Rob Carrick  
And I think what you rapidly learn is that when these little things go wrong in your house, it's usually increments of $100, and often getting up into 1000s of dollars. So I think you will want to hold back a little bit of money when you move into your new home if you can, as a real repair fund. And if it's even $1,000, I think that will provide a lot of peace of mind. So when a plumber comes in, he says, oh, it's gonna take a couple of hours. And my rate is like, you know, $100 an hour or whatever it is.

And you think, Okay, I got cash to cover that it's not a big deal. So I would say repair costs are going to be right up in your face pretty soon. And they will probably be more expensive than you imagined before you bought the house.

Sean Cooper  
Great. I'm just curious, how would you suggest that somebody prepare for that there? Would you suggest holding back some money from the downpayment or having a line of credit or a combination of both? What would be your suggestion?

Rob Carrick  
I think holding back $1,000 from the downpayment and say, putting it into a high interest savings account, and just calling it my home repair Fund is a great idea, even 500 bucks, if that's the best you can do, I think it's going to take the edge off when you have to call a plumber, or an electrician, or foundation specialist or a roofer or whatever. And you get a quote and you see how much you're dealing with to think that you have some of this money in cash is great. 

Rob Carrick  
I mean, I would not want to see people use a line of credit just to pay for home repairs, like that sort of thing, you should be able to cover that sort of thing and strive. It's a big project for me. And if you're putting a new roof on, that may require you going into debt for a short period of time.

But I think that, you know, people's budgets today are more stretched than they've ever been. And I just think there's probably not a lot of slack in there to cover a fairly big repair bill. So have you had it in a savings account? I think that would be a de-stressor for you as a new homeowner.

Sean Cooper  
No, I agree completely. I'm just curious. Are there any other surprise expenses for first time homebuyers that come to buy that? What about the idea of basically using the inspection that you do to budget for future repairs there rather than just being surprised? Like, oh, I need a new roof? Like, what are your tips for kind of tackling and planning for those big expenses there? Would you suggest having some sort of savings account just for maintenance and repairs that you're anticipating in the future years, like placing the windows and roof and stuff like that? How do you personally tackle that? And what would you suggest for homeowners?

Rob Carrick  
You mentioned the home inspection report. And I think a lot of buyers in some of the competitive high priced cities probably never got a home inspection when they bought in the past three, four or five years and my brother in law's a home inspector and I've had my home inspected every home I bought, even the condo we live in now has been inspected, I wouldn't buy a place without having that done.

So I'm a big believer in it. And one of the benefits, as you pointed out, is that they sort of say, Okay, I see you got a roof on there, and it looks like it's gonna need to be replaced in a few years. And I can see that you've got your furnace at 18 years old. And the lifespan for that kind of furnace is usually 20 years. 

Rob Carrick  
So you're right, it gives you sort of a timetable in your mind where you're going to need to spend, you know, X amount on a roof and X amount on a furnace. And that's going to be in two years, three years, five years, whatever. Yeah, I think it's great to budget for it. But you know, I think everybody's budgeting for so many things these days. I just wonder how many budgets and envelopes or savings accounts we can juggle for all these different purposes.

So yeah, if you can put money away for the furnace, you know, you're going to need it in the next five years, I think that's great. But I think most households are going to think well, I'm going to need that money for 50 Other things before the furnace repair happens. 

Rob Carrick  
So I think you're going to need to sort of have a game plan for finding the five or $10,000 You're going to need when these repairs come up. So it might be if you're in a certain line of business, it might be your annual bonus. It might be your tax return. It might be the money you get from making an RRSP contribution. I don't know but you're gonna have to figure out when that comes up. How are we going to pay for it? 

Rob Carrick  
The home inspector will help you understand how much the costs are going to be and then it's up to you to sort of figure out where the money will come from your credit card is not really a very good answer. And your line of credit isn't a really good answer either because line of credit interest rates today are much, much higher than they were three four years ago and it's not comfortable to carry them anymore. So it's like a way out. We'll find the cash to pay for these repairs, you need to strategize.

Sean Cooper  
A great tip. Thank you very much. So, yes, switching gears from expenses, you wrote an excellent article a few years ago called Don't Judge a Bank's Mortgage by Its Hyped Up Rate. Yeah, it's an excellent article there. I'll be sure to link to it in the show notes here. But yeah, and the article you wrote, don't buy the hype for the best mortgage deals as defined by low rates and favorable terms, the mortgage broker failing to at least consult a broker is borderline personal finance negligence. That's pretty strong words there. 

Sean Cooper  
But yeah, maybe you can just talk about the whole hyped up rate thing, and how it can be a bit deceiving in terms of penalties and other things when I mean, not to pick on the big banks or anything like that. But yeah, kind of like saying, like, if you're gonna buy a vehicle, you just don't go and buy the cheapest vehicle on the lot like who would do that? Or when you're planning a vacation, like, don't just go to the cheapest place possible, you're probably not going to end up having a very good vacation there. But yes, if you could just talk a bit about what you talked about in the article when it comes to the penalties and other things like that. 

Rob Carrick  
Sure, when I wrote that article, the banks were just like, fighting each other to get the lowest rates out there. And they were advertising all these low rates, which by today's standards sound almost miraculously low. I mean, I think, in that column, I think there was one bag that had some kind of promotional 1.99% mortgage rate. And that's just a distant memory. But the point I was making is that there's more to the mortgage than the rate. And I think the next biggest factor is what are the penalties for breaking the mortgage.

And in the industry, I've spoken to a lot of mortgage people who told me that it's not unusual to break a mortgage, you know, people move their jobs and change whatever. 

Rob Carrick  
They're selling the house before the mortgage renewal, and they need to break the mortgage. And the penalties charged by the banks are vastly higher than many alternative lenders. And so you really want to find out, what's the rate? What's the penalty? And also, what are the prepayment privileges? You know, people are really wired into that right now, because they're renewing their mortgages at much higher rates, and they're thinking, What can I do to get my payments down? And one way is to make a lump sum payment against the principle, but different issuers of mortgages have different rules and different limitations on how much you can pay down. 

Rob Carrick  
So I would think that you want to compare the prepayment privileges, how much can I pay down in a lump sum? Can I double up payments as well? And then you want to compare the penalties if you break the mortgage, and then you want to compare the rates, the lowest rate, especially with houses expensive, they are now is vitally important. But it is not the only thing and I think, the low rate with terrible penalties and not much in the way of prepayment privileges, that's maybe not the best bargain.

Sean Cooper  
I agree completely. And yeah, just following up on the point about consulting with a mortgage broker, and it being borderline financial negligence, if you didn't, I mean, many people think, Oh, I'm going to take out a mortgage, I'm just going to go to the bank, like I've had a relationship with the bank ever since I was younger, like I had my first savings account than checking account with the bank. Maybe you had a student loan or something like that there. So yeah, maybe we can talk about how there are different options out there besides the bank. And just the benefits of working with a mortgage broker? 

Rob Carrick  
Well, sure, you know, the banks are big on relationships. And they value mortgages, as the anchor has a relationship with a client. So they would be very keen on having you bank with them and more or with them and invest with them. But the mortgages, you know, the mortgages are like many hundreds of 1000s of dollars. And so it's a very lucrative line of business with them. And they know that people trust them. Banks have a high trust level in Canada, we've got a very solid, small number of coast to coast banks. And I think people have a high trust level there. But I think the banks don't always offer the best rate or the best terms. 

Rob Carrick  
And if you want to know how competitive your bank is, the obvious answer is to consult a mortgage broker and mortgage brokers work with many different lenders, and they can give you many different looks in terms of what your mortgage would look like. And I think you really do have to get multiple quotes for a mortgage. I mean, it's the most expensive thing you're ever going to buy most likely. And I think you want to get the best package of rates and terms and you may get that from your bank, but I think you definitely want to double check. And often your bank offers you something and you say, Okay, I'm gonna go check around and you make some inquiries you find out that's not the best rate or the best tricks.

You can go back to your bank sometimes and say, Look, I found a better deal elsewhere and often your bank will match it or come close to matching and so you win by shopping around whether you stay with your bank or not.

Sean Cooper  
But I guess further to what you said, you also have to consider the big bank penalties as well, because I guess you mentioned that the stats show that quite a few people, over half of Canadians actually end up breaking the mortgage. So I guess it's important to consider the whole picture there, because sure the bank might match the rate. But if you end up with a penalty in the five figures later on, are you really saving any money?

Rob Carrick  
Yeah, true. You mentioned that the number of people who break a mortgage and a colleague of mine coincidentally has been trying to find out where the stats on that come from, because I've seen some pretty surprising numbers suggesting that quite a few people.

Sean Cooper  
Like, seven out of 10 I've heard.

Rob Carrick  
Yeah, frankly, I have trouble believing that. But I don't really know what the right number is. I do accept that a lot of people break. But I wouldn't want to overdramatize this and say you're probably going to break your mortgage, because I think you're probably not going to break it. But nevertheless, life is complex, and people move and they change their minds and circumstances change. So having a reasonable penalty in your back pocket if you need it. I think that's somewhere.

Sean Cooper  
I agree completely with that. So perfect. Well, thanks for sharing your thoughts on that. And yeah, just want to finish off the conversation by talking about a new way for first time homebuyers to save towards purchasing their home the First Home Savings Account. And yeah, just wanted to get your thoughts on it versus like the RRSP home buyer plan. And I'm sure you've studied it a lot. And you know the ins and outs of it, maybe you want to share some interesting things about it that make it superior to the RRSP home buyer plan as well.

Rob Carrick  
Yeah, I definitely think that FHSA first home savings is where you want to start your savings for a home. But you can only put $40,000 into it, or you can only put $8,000 A year into it. So that's not going to be enough, really, so then you might want to use the RRSP home buyers program on top of that, but the FHSA is a great instrument. And I think there's almost no downside to having one because if you don't buy a house, then you just put the money in your RRSP. So there's not really a downside.

So in essence, all of this money you've been putting in the FHSA to buy a house, you change your mind, if you don't think you'll ever buy us, all of a sudden, you realize I've done a lot of work for my retirement savings. And that's a big plus for younger people. 

Rob Carrick  
So I think even if you just put a little money here and there into an FHSA, the money will grow tax free, and you can take it out to buy a first property tax free. And you also get a tax deduction for making the contribution like you do with an RSP. So in some ways, it's like a combination of some of the best features of RRSPs. And the best features of TFSA is and like I say, I've not seen anyone present a great argument for not bothering with FHSAs. I think if you have any ambitions to own a house, to open one up and put as much as you can, and you don't have to max out anything is better than nothing.

Sean Cooper  
And the cool thing is you can use the FHSA in combination with the RRSP home buyer plan originally, there's some confusion around that topic, but it's been clarified. So you can use the together and something cool as well as you can actually like if you have over $35,000 in your RRSP that you are planning to use towards the homebuyer plan, you can transfer it doesn't have to be actually a contribution to the FHSA, you could transfer over $1,000, from your RRSP over to the FHSA to to utilize that there if you don't have the money available. 

Sean Cooper  
And yeah, I just find the FHSA as a lot more flexible because with the RRSP home buyer plan, there's a rule that like when you contribute money, you can't withdraw it within 90 days. But the FHSA doesn't have a rule like that. So like you said, I can't think of a good reason not to use it, it's probably not going to cover all of your down payment.

But I would say to start there first, because this is a lot more flexible. And like you said, it combines the best of both worlds of the RRSP and the TFSA. And the one with the FHSA. 

One more benefit of the FHSA is that with the homebuyer program, you have to pay the money back into your RRSP. But you don't have to repay the FHSA. So using it as a savings vehicle, you take the money out, you buy your house, and you're done with the RRSP home buyers program, you're going to be repaying that over the next 15 years in most cases. And that can be a financial obligation that maybe some people didn't expect. 

Sean Cooper  Yeah, thanks so much for mentioning that, Rob. Because yeah, that's a big one, like the early years of home ownership can be so expensive. And I mean, I'm not sure if you have any stats or you've I'm sure you've spoken to people but yeah, I just find those years are so expensive. And again, I'm not sure if there's stats available, but I'm sure quite a few people don't actually repay the money in installments over the 15 years. They just don't bother to do that because life just gets too expensive there. So yeah, not having that obligation to pay it back. and extra steps involved. I mean, it's not a ton of work or anything like that, but just not having to worry about that. I definitely think the FHSA is superior in that sense there. 

Sean Cooper  
Okay, perfect. Well, thanks so much for joining me today. It was a pleasure speaking with you. Thanks for sharing your thoughts on real estate, personal finance and mortgages and guests. It was great chatting with you today, Rob.

Sean Cooper  
Good chatting with you, Sean. Take care.

Sean Cooper  

All right, sounds good. Thanks for listening to another episode of the Burn Your Mortgage podcast. Besides being a podcast host, I’m also an independent mortgage broker. If you or anyone you know, family, friends, co workers or neighbors could ever use any unbiased mortgage advice or a second opinion, feel free to reach out. Email me at sean@burnyourmortgage.ca or call or text me at 647-867-3711 for a free mortgage consultation.

Also, be sure to head on over to www.burnyourmortgage.ca and sign up for my free weekly newsletter. As a small token of my appreciation, you’ll be able to download my ultimate mortgage checklist on choosing the perfect mortgage.