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Protecting Your Credit Through a Divorce

Diane Buchanan • Nov 14, 2019

No secret here, divorces are challenging, there are a lot of things to think about in a short amount of time. Although finances are often at the forefront of the discussions as it relates to the separation of assets, managing and maintaining personal credit can be swept to the side to deal with later. And unfortunately, this can be devastating as you try to rebuild your life down the road.

So, if you happen to be going through or preparing for a divorce, here are a few things you can do to ensure you make it through with your credit intact.

Manage Your Joint Debt

If you have joint debt, you are both 100% responsible for that debt. Your responsibility for that debt continues even if the debt has been allocated to be paid by your ex-spouse in the divorce settlement. A divorce settlement doesn’t mean anything to the lender.

The problem here is if your ex-spouse falls behind on their payments; if the debt has your name on it, your credit report will be negatively impacted for the next 6 – 7 years.

What you need to do is go through all your joint credit accounts and if possible, cancel them and have the remaining balance transferred into a loan or credit card in the name of whoever will be responsible for the remaining debt. You should not have any joint debts remaining.

It’s also a good idea to check your credit report about 3 – 6 months after making the changes to ensure the changes were made. It’s not uncommon for reporting errors to take place.

Manage Your Bank Accounts

Just as you should separate all your joint credit accounts, it’s a good idea to open a checking account in your name and start making all your deposits there as soon as possible. You will want to set up the automatic withdrawals for the expenses and utilities you will be responsible for going forward in your personal account.

At the same time, you will want to close any joint bank accounts you have with your ex-spouse and gain sole access to any assets you have. It’s unfortunate, but even in the most amicable situations, money (or lack thereof) can cause people to make bad decisions, you want to protect yourself by protecting your assets. The last thing you want is for your ex-spouse to drain your bank account.

In addition to opening new accounts, chances are your ex-spouse knows your passwords to online banking and might even know the pin to your bank card. While you’re opening new accounts, take this time to change all your passwords to something completely new, don’t just default to what you’ve always used.

Setup New Credit in Your Name

There might be a chance that you’ve never had credit in your name alone, or that you were a secondary signer on your ex-spouse’s credit card. If this is the case, it would be prudent to set up a small credit card in your name. Don’t worry about the limit, the goal is to just get something in your name alone, down the road things can be changed, and you can work towards establishing a solid credit profile.

If you have any questions about managing your credit through a divorce, please don’t hesitate to contact me anytime. As a mortgage expert, understanding how credit impacts your ability to borrow money in the future is what I work with every day.

DIANE BUCHANAN
 Mortgage Broker

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Lowering Your Overall Cost of Borrowing

By Diane Buchanan • 01 May, 2024
If you’re like most Canadians, chances are you don’t have enough money in the bank to buy a property outright. So, you need a mortgage. When you’re ready, it would be a pleasure to help you assess and secure the best mortgage available. But until then, here’s some information on what to consider when selecting the best mortgage to lower your overall cost of borrowing. When getting a mortgage, the property you own is held as collateral and interest is charged on the money you’ve borrowed. Your mortgage will be paid back over a defined period of time, usually 25 years; this is called amortization. Your amortization is then broken into terms that outline the interest cost varying in length from 6 months to 10 years. From there, each mortgage will have a list of features that outline the terms of the mortgage. When assessing the suitability of a mortgage, your number one goal should be to keep your cost of borrowing as low as possible. And contrary to conventional wisdom, this doesn’t always mean choosing the mortgage with the lowest rate. It means thinking through your financial and life situation and choosing the mortgage that best suits your needs. Choosing a mortgage with a low rate is a part of lowering your borrowing costs, but it’s certainly not the only factor. There are many other factors to consider; here are a few of them: How long do you anticipate living in the property? This will help you decide on an appropriate term. Do you plan on moving for work, or do you need the flexibility to move in the future? This could help you decide if portability is important to you. What does the prepayment penalty look like if you have to break your term? This is probably the biggest factor in lowering your overall cost of borrowing. How is the lender’s interest rate differential calculated, what figures do they use? This is very tough to figure out on your own. Get help. What are the prepayment privileges? If you’d like to pay down your mortgage faster. How is the mortgage registered on the title? This could impact your ability to switch to another lender upon renewal without incurring new legal costs, or it could mean increased flexibility down the line. Should you consider a fixed rate, variable rate, HELOC, or a reverse mortgage? There are many different types of mortgages; each has its own pros and cons. What is the size of your downpayment? Coming up with more money down might lower (or eliminate) mortgage insurance premiums, saving you thousands of dollars. So again, while the interest rate is important, it’s certainly not the only consideration when assessing the suitability of a mortgage. Obviously, the conversation is so much more than just the lowest rate. The best advice is to work with an independent mortgage professional who has your best interest in mind and knows exactly how to keep your cost of borrowing as low as possible. You will often find that mortgages with the rock bottom, lowest rates, can have potential hidden costs built in to the mortgage terms that will cost you a lot of money down the road. Sure, a rate that is 0.10% lower could save you a few dollars a month in payments, but if the mortgage is restrictive, breaking the mortgage halfway through the term could cost you thousands or tens of thousands of dollars. Which obviously negates any interest saved in going with a lower rate. It would be a pleasure to walk you through the fine print of mortgage financing to ensure you can secure the best mortgage with the lowest overall cost of borrowing, given your financial and life situation. Please connect anytime!

Fixed-Rate or Variable-Rate Mortgage?

By Diane Buchanan • 24 Apr, 2024
If you're looking to buy a new property, refinance, or renew an existing mortgage, chances are, you're considering either a fixed or variable rate mortgage. Figuring out which one is the best is entirely up to you! So here's some information to help you along the way. Firstly, let's talk about the fixed-rate mortgage as this is most common and most heavily endorsed by the banks. With a fixed-rate mortgage, your interest rate is "fixed" for a certain term, anywhere from 6 months to 10 years, with the typical term being five years. If market rates fluctuate anytime after you sign on the dotted line, your mortgage rate won't change. You're a rock; your rate is set in stone. Typically a fixed-rate mortgage has a higher rate than a variable. Alternatively, a variable rate is not set in stone; instead, it fluctuates with the market. The variable rate is a component (either plus or minus) to the prime rate. So if the prime rate (set by the government and banks) is 2.45% and the current variable rate is Prime minus .45%, your effective rate would be 2%. If three months after you sign your mortgage documents, the prime rate goes up by .25%, your rate would then move to 2.25%. Typically, variable rates come with a five-year term, although some lenders allow you to go with a shorter term. At first glance, the fixed-rate mortgage seems to be the safe bet, while the variable-rate mortgage appears to be the wild card. However, this might not be the case. Here's the problem, what this doesn't account for is the fact that a fixed-rate mortgage and a variable-rate mortgage have two very different ways of calculating the penalty should you need to break your mortgage. If you decide to break your variable rate mortgage, regardless of how much you have left on your term, you will end up owing three months interest, which works out to roughly two to two and a half payments. Easy to calculate and not that bad. With a fixed-rate mortgage, you will pay the greater of either three months interest or what is called an interest rate differential (IRD) penalty. As every lender calculates their IRD penalty differently, and that calculation is based on market fluctuations, the contract rate at the time you signed your mortgage, the discount they provided you at that time, and the remaining time left on your term, there is no way to guess what that penalty will be. However, with that said, if you end up paying an IRD, it won't be pleasant. If you've ever heard horror stories of banks charging outrageous penalties to break a mortgage, this is an interest rate differential. It's not uncommon to see penalties of 10x the amount for a fixed-rate mortgage compared to a variable-rate mortgage or up to 4.5% of the outstanding mortgage balance. So here's a simple comparison. A fixed-rate mortgage has a higher initial payment than a variable-rate mortgage but remains stable throughout your term. The penalty for breaking a fixed-rate mortgage is unpredictable and can be upwards of 4.5% of the outstanding mortgage balance. A variable-rate mortgage has a lower initial payment than a fixed-rate mortgage but fluctuates with prime throughout your term. The penalty for breaking a variable-rate mortgage is predictable at 3 months interest which equals roughly two and a half payments. The goal of any mortgage should be to pay the least amount of money back to the lender. This is called lowering your overall cost of borrowing. While a fixed-rate mortgage provides you with a more stable payment, the variable rate does a better job of accommodating when "life happens." If you’ve got questions, connect anytime. It would be a pleasure to work through the options together.
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