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18 Aug

How your car may be costing you thou$and$ on your mortgage.

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Posted by: Brian Marling

March 2011

This article is provided by Brian Marling, Accredited Mortgage Professional, of Neighbourhood DLC – Canada’s #1 Mortgage Team  905.372.7222

Let me start off this month by stating unequivocally that I am not against purchasing new vehicles… WHEN YOU CAN AFFORD IT. Ahhh, there in lies the determining factor from my perspective – affordability.  And how is a car related to your mortgage?? Read on.

The question of whether it’s better to lease or buy a vehicle is a common dilemma. And do you buy or lease a new or used vehicle? The answer depends on the specifics of your situation.

It’s important to realize that many consumers overburden themselves with car leases or loans they simply can’t afford (despite what you were told). While most of us require a vehicle to get to and from many destinations throughout the course of any given week, we don’t need a high-end vehicle to serve this purpose. And if it’s about the new car smell, well get over it – they make spray for that now.

Leases and purchase loans are simply two different methods of automobile financing. One finances the use of a vehicle while the other finances the purchase of a vehicle. Each has its own benefits and drawbacks.

When making a lease-or-buy decision, you must, therefore, look at your financial abilities in terms of your debt ratios. And if you’re unsure about how leasing or purchasing a vehicle will affect your ratios, it’s best to call me prior to making your decision.

 

When you buy, you pay for the entire cost of a vehicle, regardless of how many kilometres you drive. You typically make a down payment, pay sales taxes in cash or roll them into your loan, and pay an interest rate determined by your loan company based on your credit history. Later, you may decide to sell or trade the vehicle for its depreciated resale value.

When you lease, you pay for only a portion of a vehicle’s cost, which is the part that you “use up” during the time you’re driving it. You have the option of not making a down payment, you pay sales tax only on your monthly payments, and you pay a financial rate, called a money factor, which is similar to the interest on a loan. You may also be required to pay fees and a security deposit. At lease-end, you may either return the vehicle or purchase it for its depreciated resale value.

As an example, if you lease a $20,000 car that will have, say, an estimated resale value of $13,000 after 24  months, you pay for the $7,000 difference (this is called depreciation), plus finance charges and possible fees.

When you buy, you pay the entire $20,000, plus finance charges and possible fees. This is fundamentally why leasing offers significantly lower monthly payments than buying.

Another option is to save and pay cash for a good used vehicle. Many can be purchased now for under $10,000. This is my personal preference – to own outright with no payments. I have better things to do with my money than make payments on a depreciating so-called asset that will always lose money and never recoup the original cost.

What does this have to do with my mortgage?

One of the keys to remember when you’re looking to purchase a home and obtain a mortgage or refinance an existing mortgage is that, if you overspend on a vehicle, it affects your debt ratios and may restrict or negate your mortgage financing ability. I have seen this numerous times where people have simply overspent on vehicles. If your gross income is $35 or $40 thousand a year, why would you be driving a vehicle that costs $40-45 thousand dollars?? Does that make any sense at all? Long after the thrill is gone those $500 dollar payments just keep on comin!

And here is where it really costs you…it’s called opportunity cost. Because you have overspent on vehicles you may be unable to take advantage of todays awesome mortgage rates because your TDS (Total Debt Servicing ratio) is too high.. All of your debt payments go into the mix when lenders look at financing or re-financing your home. Depending on your gross income and the amount of equity in your property, if your car payments are too high they may be keeping you from much better mortgage rates which would possibly save you thousands in interest costs.

These are the kinds of things we discuss on a daily basis with our clients – hopefully before mistakes are made. As Mortgage Professionals we care about your entire financial picture and offer expert advise designed to help you become debt-free as soon as possible and on your way to creating real wealth.

Because Neighbourhood DLC is Canada’s Largest Mortgage Team, we can offer you the absolute best products, service, advice & pricing. Call me today, Brian Marling 905-372-7222 for a Personal & Private consultation.

Here at Neighbourhood not only do we provide Award Winning Service and the best selection of mortgage products in the country, but we also offer our Free Financial Fitness Seminars and have added Personal Financial Coaching for those who truly desire a change but would like some assistance along the way. If you don’t change something then don’t expect different results.  As always you can call us anytime to discuss how we may be able to help you.

At Neighbourhood, & the home of the Brian Marling Mortgage Team, we are concerned for the total well-being of our clients. That’s why we are taking the years of experience from our award winning office and offering a series of FREE Seminars to our clients and their friends & families and to the public at large. The seminars, entitled ‘Financial Fitness’, will be offered free of charge and will cover all the secrets of successful personal financial freedom.  If interested please call our office at 905.372.7222 to reserve your spot as seating will be limited.