A secured credit line is a mortgage

I’ve blogged about this before, but it bears repeating because it seems that people are still not being properly advised: when you get a secured credit line, it is legally a mortgage. It will be registered on title to your house. It will have to be paid in full when you sell or refinance. And it will affect your ability to get any further financing on your house.

Secured credit lines can be a great way to have access to cheap credit, but be aware of what they are.

Get divorced already

I’ve seen it too many times – someone separates from their spouse, but never gets divorced and never does a separation agreement because they don’t have kids and “it doesn’t matter”. Except, it does matter.

If you are legally married with no separation agreement, your spouse will inherit your entire estate if you don’t have a will. If you want this to happen, then go ahead; do nothing. But this is probably not what you want.

Of all of the clients I’ve had come to my office, bewildered at their sudden inheritance, I’m quite certain that none of them expected to inherit, and I’m also quite certain that their former spouses did not want them to inherit. Further, I’m quite certain that their former spouse did not want them arranging their funeral and burial, but that’s also what legally happens.

Don’t assume you know the law. Don’t assume that what you want to happen, will. If you are no longer with your spouse, get divorced, or get a will. Better yet, get both.

How do you own your house?

If you own a property with another person, there are two ways of sharing ownership: joint tenancy, or tenancy in common.

Joint tenants have a common undivided interest in the entire property; that is, everyone owns the whole thing in common with everyone else. This means, in practice, that the last person left alive gets the whole property, because there are survivorship rights.

Tenancy in common means that each owner owns a percentage share, whether equal or not, depending on the decision at the time they took title. On death, each owner’s share passes to their estate.

Whether you own as joint tenants or tenants in common depends on several factors. If you are buying with your spouse, out of joint family funds, then you may be more inclined to joint tenancy. If you are buying with a business partner or friend, or with a partner you are about to move in with for the first time and are investing unequal shares, you may be more inclined to tenancy in common.

You should also note that, at any time, a joint tenant can sever the joint tenancy and make their share in common – and can do this with no notice to the other owner(s).

Before you buy, you should have a conversation with your lawyer about the best way for you to take title.

Who is entitled to inherit under your will?

Ontario is a jurisdiction where there is broad testamentary freedom. What that means is that, beyond some basic rules, you can leave your estate wherever you want. If you are legally married (not common law), you have to consider your spouse’s rights. If you have minor or dependent children, you have to consider their rights. And if you financially support someone, even if they are not related to you, they may also have a claim on your estate. Beyond that, you can leave whatever to whoever.

Leaving your estate to one niece and not the other? Totally fine. Cutting out adult, independent children and leaving everything to charity? A-OK. You are always best to consult a lawyer before making a decision that could be controversial, especially if the beneficiaries will need to get along with people who were cut out, but you have no legal obligation to leave an inheritance to someone who doesn’t have a clear right to it.

How do you know you’re ready to buy your first home?

With prices going up and down, and mortgage rules getting increasingly tight, it can be difficult to know when it is the right time to buy, especially if you’re buying for the first time. Here are some signs that it’s time for you to jump into the market:

  1. You have a reliable source of income. If you still aren’t sure where your next paycheque is coming from, or how much it will be for, it’s not the right time, unless you have enough saved to not need a mortgage.
  2. You have saved at minimum 5% of the purchase price, plus extra for closing costs and unexpected repairs in the first six months of home ownership. The closer to 20% down payment you get, the less you have to pay in default insurance, so having a healthy down payment can actually save you money. Having at least your down payment means you aren’t borrowing even more toward the purchase, and you will need to cover your own closing costs, which will likely include at least some land transfer tax. The more you have saved, the more you will save. Don’t rush in until you’re ready.
  3. You don’t have significant other debts. You don’t want to be house poor – and if you have a lot of other debts, you will be. If you have a lot of debt, you may want to wait until you’re in better financial shape.
  4. You’ve spoken to a professional (mortgage broker or agent) and have a sense of all of your monthly expenses for the house you’re looking at, as well as all of your closing costs. You need to be prepared before taking this leap.
  5. If you need to have someone co-sign the mortgage, you have an exit plan to get them off within five years. With mortgage rules tightening up daily, expecting all first-time buyers to be able to buy alone may be unrealistic. However, you don’t want to leave your parent or other co-signer on title forever. If you need help, have a good plan in place to be able to qualify for a mortgage on your own by your first renewal.

Who should you name as your executor?

I recently wrote about choosing a local executor. Today, I’d like to talk more generally about who to choose as an executor.

Many people default to a spouse, with an adult child or sibling as an alternate. If you don’t have a spouse, adult child, or sibling, and your parents are no longer living or unsuitable for any reason, or you simply want an alternate to one of those options, who do you have left?

There is no legal requirement that your executor be related to you, so if you have a friend who you trust, that is always an option. Beyond that, you can ask a professional advisor, though some are prohibited from acting and some simply do not feel comfortable doing so.

Another option is a trust company. Most banks have trust arms that will act as executor for a fee. The benefit to using a trust company is that they won’t die, and so will be around in the event of a long-term trust within your will.

When choosing your executor, you should think about what work will need to be done. Do you have young children, and a potentially long-term trust? Do you have complex assets, or assets outside of Ontario? Do you have a complicated distribution within your will? If you are choosing a friend, have you discussed it with them to ensure they are comfortable acting?

Choosing an executor is not an easy decision, but choosing carefully is one of the most important things to do for your estate.

How to make your mortgage approval disappear

If you have applied for a mortgage, you usually want to go ahead with it. This is especially true if you are using a mortgage to finance a purchase of a new home. Sometimes, things about the mortgage will change between application and closing – if you get a variable rate mortgage, for example, and rates go up. Sometimes, however, something you do affects the mortgage and causes issues on the day of closing. Here are some things not to do once your mortgage has been approved:

  1. You change your employment. Whether it is to a new job, or changing your hours or payment structure, if your employment changes, you could jeopardize your approval. Always speak to your bank or broker before doing this if it will happen before closing.
  2. You take on more debt. Don’t buy a car, borrow significant amounts on a credit line, or let a credit card go overdue. A change in credit will definitely affect your mortgage.
  3. You co-sign someone else’s loan. Even if the debt isn’t yours, if it will show up on your credit check, your mortgage lender won’t like it.

Before you take any financial action that could affect a mortgage you can’t afford to lose, check with a professional advisor.

The farther away your executor is, the harder it is for your estate

We live in a very mobile society. Many of us have parents, siblings, or children who live in different provinces or different countries. For many aspects of our daily lives, it doesn’t make much difference, other than the difficulty in having regular visits. For estates, however, it makes a huge difference.

In Ontario, the courts have the right, at any time, to require an executor to pay a bond – basically, an insurance policy – to cover up to twice the value of the estate, in order to ensure that the beneficiaries are protected in the event that the executor disappears with the estate money. In practice, courts rarely ask for an estate to be bonded when the executor lives in Ontario. The further away the executor lives, however, the more difficult it gets.

If your executor lives in another province in Canada, usually they’ll be okay. If they live in a Commonwealth country, maybe they’ll be okay. If they live anywhere else – and that includes the United States – they will almost certainly be required to get a bond. This will result in increased costs to your estate, and will also make the entire administration take significantly longer.

If you have no one else, then by all means, pick an executor who lives further away. But if you have options, it is always better to pick Ontario resident executors.

Selling with a power of attorney

If you need to be away when your house is for sale, or if you become incapacitated or physically unable to sign paperwork, it is possible to sign by way of a power of attorney.

If you have an existing Continuing Power of Attorney for Property, this can be used to sell your home. If not, you can either create a new one, or sign a Limited Power of Attorney for Property that deals just with the specific property you are selling.

Either way, the power of attorney is registered in the local Land Registry Office so that it can be referenced on the sale document. You will need the original power of attorney; a copy will not do. Your lawyer will also likely want to talk to you, or to a doctor if you are incapable, to be sure that it is being used appropriately.

If done properly, powers of attorney can make a sale go much more smoothly in difficult situations.

Want to help the government pay its bills?

Then don’t do a will. In fact, don’t get any professional advice at all.

I regularly see issues in the way clients have things set up – whether that is how they are on title to real estate, beneficiary designations on investments, etc. Even if it’s just a matter of a will making it easier to avoid having to go through the probate process, if you have a will, you are likely to pay less in estate taxes.

Get a will, In the long run, you’ll save money.