Episode 42 - Divorce, Debt & Secrets Lenders Don’t Tell You: Sabeena Bubber on Protecting Your Estate
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In this insightful episode of Your Estate Matters, Nicole and Greg welcome Sabeena Bubber, veteran mortgage broker and founder of The Divorce Circle.
Sabeena unpacks practical wisdom from her decades in the mortgage industry, tackling topics like how mortgages impact estate planning, what happens to real estate debts when someone passes away, and the growing complexities of blended families and divorce on property ownership.
Learn the differences between mortgage insurance and personal life insurance, discover the truths about reverse mortgages, and hear Sabeena’s essential tips for preserving financial stability and building a legacy. Whether you’re planning your estate or navigating big life changes, this episode offers valuable guidance you won’t want to miss.
Nicole 00:00:02 Hello and welcome to Your Estate Matters with your host, my colleague Greg Brennand and myself, Nicole Garton of Heritage Trust.
Greg 00:00:09 Your Estate Matters is a podcast dedicated to everything estates, including building and preserving your legacy.
Nicole 00:00:16 If it's estate related, we'll be talking about it. We're having the conversations today that will help Canadians protect their families, their assets and their legacies tomorrow.
Greg 00:00:35 With us today is Sabeena Bubber, a mortgage broker with Xeva mortgage. With over 30 years of consumer mortgage and finance experience, Sabeena has helped clients right across Canada. She has served over 3000 clients and funded over $1 billion of mortgages in her career. Sabeena is committed to finding solutions for her clients that go beyond just getting a good interest rate. She is a specialist reading fine print and loves to help clients get the mortgage product that best suits their needs. Sabeena helps you with your financial health so that you can create your own wealth. She believes in establishing long term relationships with her clients. She is more than happy to help you secure a single mortgage, but gets really excited about giving you mortgage advice for life.
Greg 00:01:26 Sabeena, thanks for being with us here today to talk about mortgages and estates. Could you please tell us about yourself and your journey towards becoming a top mortgage broker?
Sabeena 00:01:35 Well, thank you for having me today. I am having a fan moment because I am a fan of the podcast, so I'm really excited to be here today. I have been a mortgage broker for almost 25 years, and I've been recognized as one of the top 75 brokers in Canada, a woman of influence and as well recognized in the CMP Hall of Fame. I've also been nominated for Mortgage Broker of the year for the sixth nomination. So I'm kind of like the Susan Lucci of the Mortgage Broker Awards and nominated for Excellence in Philanthropy for my work in an organization called Brokers Who Care. I also founded The Divorce Circle, which brings information and resources to people going through divorce and separation, helping them to become financially empowered to find out who their team should be. Their divorce team should be because it's more than just finding a lawyer. It's finding the people that will help you get from beginning to end.
Sabeena 00:02:24 Go from WI to me and find balance in the end.
Nicole 00:02:28 Right? So how do mortgages impact estate planning?
Sabeena 00:02:32 Well, when it comes to when somebody passes away and there's real estate, sometimes there's a mortgage on that property. So the outstanding debt will reduce the value of that property because regardless of whether that person is not there anymore than the debt still has to be paid regardless. So there's obligations for the survivors. So if there's another person on title and on that mortgage, then it becomes that person's responsibility to pay that mortgage when the first one passes away. When that mortgage comes up for renewal, often the lender will require that person to qualify on their own in order to keep that mortgage. Which can create an issue. If that person doesn't qualify, so then they might be forced to sell the property. There's also potential tax implications if there's no surviving parties that own the property. After probate goes through and the heirs decide to keep the property, there can be capital gains implications based on the value at the time it was inherited.
Sabeena 00:03:29 And if they wait longer in terms of when they sell it.
Nicole 00:03:32 So Greg and I administer a lot of estates where there's outstanding mortgages and we end up negotiating with lenders.
Greg 00:03:39 Yeah, it's quite common. And what you don't see a lot of surprisingly is mortgage insurance. I see it on very few estates.
Sabeena 00:03:48 Yeah. Mortgage insurance is an interesting conversation. So I don't necessarily believe in having mortgage insurance that's tied to the mortgage itself, because it's a declining benefit. So say, for example, you take out a $500,000 mortgage and there's 300,000 remaining at the time that the person passes away. Well, only the 300,000 is paid off. And often they don't underwrite the policy at the time. So they could find out that they're not eligible to have the mortgage paid off due to preexisting health conditions. So when I'm talking to people about ensuring their biggest asset, which I firmly believe is the most important thing you should do when you have such a large asset, is to obtain an independent insurance policy from an independent broker, where they underwrite the policy and make sure that you qualify for it and you decide the terms of that policy.
Sabeena 00:04:42 So depending on your age, depending on what your estate plan is, you want to make sure that you're able to deliver that plan to the heirs in the way that you want. So if you're turning 65. Before that mortgage is paid off. Maybe a whole life insurance might be more suitable for you than a term insurance, so that no matter when you pass away, that insurance will pay off the debt.
Nicole 00:05:07 So in an absence of insurance, which unfortunately is a lot of people, a lot of family members wonder what happens. Like say, mum or dad still has a mortgage on their house and they pass away and you know, it's going to be six months to a year before you can sell that house. What happens to that mortgage and who's responsible?
Sabeena 00:05:26 Well, the estate is responsible to pay the mortgage during the time that you're waiting for it to pass through probate. And then if they don't qualify to take over the mortgage after the title has transferred, then they would be forced to sell it.
Greg 00:05:40 And I think what we're seeing lately is the financial institutions are foreclosing very quickly compared to five years ago. You know, you could get a mortgage saying it's in an estate and it's being probated and it'll be sold. And they were just happy to carry along the missed payments if you were in a liquid. And now we've had some three months and the person owns 80% equity and you say, why would you foreclose on that? That seems very strange to me. And it speaks to the condition of some of the market right at the moment.
Sabeena 00:06:14 Yeah, a lot of lenders don't base anything on equity anymore. It really comes down to finances when it comes to if there's missed payments, they want to ensure that they get their funds back, even if they're foreclosing on an estate which.
Greg 00:06:29 Well, and the defense for that in B.C. would be to put a renter in. But then that's a problem too.
Sabeena 00:06:36 The banks often say we are not property managers, so they're not interested in bearing that expense of putting a renter in to pay the bills.
Sabeena 00:06:45 And whoever the heirs are should make the payments, but often they don't have the capacity to pay those in addition to their own debts, especially in in the Lower Mainland when people are already burdened with high payments.
Nicole 00:06:56 Right, Regan? I have noticed that. So as professional executors in the past, when someone's passed away and there's some mortgage outstanding, and certainly when there's a lot of equity, we'll often say the lender, you know what, we're going to get probate. It's going to take us a few months. We're going to immediately list the property for sale. There's no risk to you receiving the loan because there's maybe 80% equity. And in the past, we were able to negotiate a reasonable deal with the lender. And just like Greg said, it's really interesting. Even with relatively small sums owing, the banks are increasingly more assertive in enforcing that. And I think it does go to show that maybe they are more conscious of their loan portfolios and their risk appetite or ability to hold loans without payment is It's definitely reduced.
Nicole 00:07:47 Even in the last six months, I would say we've noticed a difference.
Greg 00:07:49 Yes, I would suspect it's the regulator.
Sabeena 00:07:52 I was just going to say that it's probably the regulator that doesn't want the banks showing that on their book, because it does affect their numbers and they may not. When people are looking at the numbers for the banks, they may not be looking at why those mortgages are in default and the questions aren't being asked that, oh, this, these are estate sales. It's more regulation and just how the numbers look for the banks on the books. If it's a consistent practice across all the banks, it's likely the regulator that's pushing for that.
Greg 00:08:19 Now, are there strategies for ensuring that a mortgage doesn't become a financial burden on heirs? And how can life insurance or estate planning help other than what we've already discussed?
Sabeena 00:08:29 Well, again, mortgage, life insurance or just life insurance periods so that the heirs can decide how to distribute those funds, whether they be mortgage funds, whether it be to maintain the payments until the property sells.
Sabeena 00:08:43 It's better to have control over it. There's the difference between term life insurance and whole life insurance. I'm a strong believer in whole life because it allows your, you know, people are living longer. So being able to pay off any outstanding debts, past 65 is, is a great thing to do. Making sure that you're well is up to date, making sure that your property title and mortgage are aligned with the will and everything else so that it makes for a smooth transition and that there's clarity. Something I see is that a lot of people don't communicate their estate plans with their heirs. And I think the number is like maybe 15 to 20% of seniors actually communicate to their children what the plan is, which can often leave the kids not understanding what was intended to be for them, how it was going to be structured.
Nicole 00:09:37 So how are joint mortgages are cosign loans dealt with in terms of estate administration.
Sabeena 00:09:44 If you're a co-signer or joint on a mortgage, you are responsible to make those mortgage payments.
Sabeena 00:09:50 I often recommend that if that mortgage is not up for renewal, just continue to make the payments before you notify the bank of that. Otherwise they will ask you to qualify immediately to have it transferred. Sometimes that's not possible because you have you have got your mortgage with the same place where you've got all the bank accounts. So you have to manage it. If you can't demonstrate that you qualify, then the bank will ask you to repay the loan or go elsewhere. Maybe you have to look to alternative lending sources. This is often the case with maybe a non earning spouse. And just because there's a life insurance payout, it might not be enough. Or you know, there's no income to support it. And often or if it's if you're in a situation where you've got a two income household and one person has passed away, that one income may not be enough to qualify for that remaining mortgage. You don't want your partner and children to be having to move out after a sudden death or something like that.
Sabeena 00:10:46 You want to make sure that you make those plans well in advance. Just because you're young doesn't necessarily mean that the unexpected can't happen.
Greg 00:10:56 So if somebody passes away with an outstanding reverse mortgage, we all see those on TV. How does that impact their estate and their beneficiaries?
Sabeena 00:11:04 So let's talk about what a reverse mortgage is before we start the conversation. Reverse mortgages are for people over the age of 55, more commonly over the age of 60, where they borrow against their equity and their property to pay out their current debt and sometimes use that equity as a monthly income supplement. Or perhaps they've taken equity out to give an early inheritance to younger family members. Since people are living longer, there are no monthly payments on reverse mortgages. The interest accumulates over time. And if you look at the models, people are like, oh, well, that's a negative equity situation. If you look at the appreciation of real estate over time versus the interest that accumulates, you're still in a with most reverse mortgages, you're still in a positive growth situation in terms of the equity, the balance of that reverse mortgage has to be paid upon the owner's death.
Sabeena 00:11:55 So if there's still a owner left in the home, then the mortgage automatically goes to that person and they do not have to requalify. So that's the benefit of that. And if both owners have passed away, then the balance has to be repaid. So either the heirs qualify for a traditional mortgage to pay that mortgage off, or they sell the property and pay off the reverse mortgage that way.
Greg 00:12:21 But because of the sort of the age group of people that typically take reverse mortgages, is there any insurance available with that product?
Sabeena 00:12:30 Generally, no, no, no, it's very hard to get any sort of life insurance after 65.
Nicole 00:12:37 What percentage of equity can people borrow in a reverse mortgage. And are the interest rates higher than they would be in a traditional HELOC or mortgage.
Sabeena 00:12:46 That's a great question. The amount of equity you can borrow is a formulation based on the age of the youngest borrower. With some reverse mortgage companies, even the sex of the youngest borrower matters, and then the property value and the location of the property, the type of property.
Sabeena 00:13:04 So is it a detached home? Is it a row like a townhouse? Is it a condo? All those things will affect how much you can pull for equity. So the younger you are, the less amount of equity that you can get from your property. And then as you age, you can apply for increases in that limit based on, say, you're 60. When you get the mortgage at 65, you'll qualify for a little bit more and so on and so forth. What was the other question?
Nicole 00:13:33 Are there interest rate differentials of that product versus a traditional mortgage.
Sabeena 00:13:37 So with the interest rate differential between a traditional mortgage and a reverse mortgage, the reverse mortgages tend to be higher than what people are paying for current bank rates. And the reason for that is the bank that's taking on the reverse mortgage is deferring the realization of that interest until that borrower either goes into a care home or passes away, so they don't get that interest for some time, and they're hedging that over what could be ten, 15, 20 years before they see any of that interest.
Sabeena 00:14:07 So there is a premium for that, which some people often are surprised with.
Nicole 00:14:11 So reverse mortgages kind of have a bad name. Is that fair? I think there is a perception out there that there are somewhat predatory of older people, as have things changed, or was that a was that a misapprehension that people had.
Sabeena 00:14:26 It was a misperception based on reverse mortgages in the US, which were predatory. People were not getting equity out of their homes. Some were forced to sell with Canadian reverse mortgages. They are federally regulated. The institutions that offer them are banks. They're not the big six banks, but they are banks that specialize in reverse mortgages. So they are regulated and they have to have a no negative equity guarantee. A borrower is never forced from their home if the balance is more than the equity, which is rare because of the formula that they use for how you can access the equity. That's how they create that no negative equity guarantee. They limit how much you can access in equity.
Nicole 00:15:08 That's interesting because we have so much volatility right now with, you know, so many economic factors. I know in Toronto there was potentially even 25% drops of value. So it'll be interesting to see how that might change with variable property values.
Greg 00:15:26 So for properties left to multiple heirs but there's still a mortgage on it, what are the options for the beneficiaries.
Sabeena 00:15:33 The beneficiaries have to collaborate on how they want to deal with the mortgage. Will they collectively pay that mortgage until they can obtain a new mortgage collectively to pay it out? Or would they just sell the property and divide the proceeds? Often we see when there's multiple heirs, the property is sold and divided among the heirs.
Nicole 00:15:54 What are the considerations if you're thinking of home equity for estate planning, particularly if you're thinking of taking out equity for pre inheritances?
Sabeena 00:16:04 People are living longer. So many seniors are considering taking those reverse mortgages or loans against their property to provide an early inheritance. I actually met with a 99 year old borrower the other day who owes her daughters some money because they have been funding her care costs and some of her living expenses, because her pensions are not enough to pay for everything anymore, and she wants to repay her daughters, and she wants to have those monthly supplements come from the equity in the home.
Sabeena 00:16:38 So it's in that particular instance, it was a family discussion. It was sitting around the table with a cup of tea and having a discussion as to whether you know how that fit in with the needs of the kids and everything like that, and then grandkids and great grandchildren.
Greg 00:16:53 So as opposed to a reverse mortgage, how would a refinancing play a role in estate planning, particularly for the aging homeowners who want to simplify things for their heirs?
Sabeena 00:17:04 It can put everything into one place. As I said, seniors are living longer, so often their pensions are not enough to cover all those debts, whether it be mortgage payments, any debts. They've accumulated lines of credit, and it takes away those payments so that they can live comfortably and actually enjoy their retirement instead of feeling stressed by retirement. We've had some borrowers that have decided to retire, but they're self-employed and they still have mortgages, so they've been able to use reverse mortgages to pay off their current mortgage and take an early retirement or, you know, just have that benefit of not having to make those payments and have that stress because not everybody has traditional salaried jobs.
Sabeena 00:17:46 so those self-employed borrowers tend to tend to suffer a little bit. So those products work well for them.
Nicole 00:17:53 So we understand you specialize in divorce refinancing. Is that right?
Sabeena 00:17:57 That's right.
Nicole 00:17:58 So how did divorce and the increase in blended families complicate estate planning, particularly for real estate assets?
Sabeena 00:18:06 It can create a lot of complexities, especially when you talk about blended families and that kind of thing. You have to consider. First of all, once you're getting a divorce, you have to redo your will and consider what you want for your half that you've walked away with. If you have real estate, are you making your mortgage payments using child support and spousal support. What is the term of that? Child support is usually only payable until your child is 19, and the mortgage is usually for 30 years. So there's a financial plan and an estate plan around that to determine how you're going to manage that. And then if something happens to you, what do you want for your children? Do you want to have that mortgage paid off? The real estate retained? Do you want the real estate sold off? And that money just goes to the kids in British Columbia with the property values the way they are.
Sabeena 00:19:01 a lot of people want to have that real estate retained because, you know, ten, 15 years, when your kids are ready to buy, it'd be better for them to have that real estate already in place than to have lost that time in the market and that appreciation over time. There's a lot of considerations on that front in terms of just redoing your estate, talking to a lawyer, talking to a financial planner, creating a team around new goals and new initiatives. And then also if you have a blended family. How the blending of those families really comes to what does it mean for your new partner? Do you need a prenuptial agreement that protects your children? All those types of things.
Greg 00:19:44 They're mortgage products or financial tools that can help heirs keep a family home, rather than selling it to pay off estate debts.
Sabeena 00:19:53 If an heir to a property wants to take over a mortgage, they have to qualify for that mortgage. There's a huge misperception that if there is a lot of equity in a property, that somebody can get a home equity line of credit or a home equity loan, those home equity products are still qualified based on your capacity to pay.
Sabeena 00:20:13 Equity products disappeared with the financial crisis. So they don't the banks can no longer do equity lending. So there has to be a demonstrated capacity to pay to deal with that. Otherwise, again, you're in a situation where you have to pay off the mortgage. If you are planning to rent the property, perhaps that rental income can be used towards contributing your capacity to pay, but you still have to qualify for that.
Nicole 00:20:41 So with rising real estate prices and aging homeowners, are you seeing real estate being used to transfer generational wealth?
Sabeena 00:20:49 Yes, I'm definitely seeing that transfer of generational wealth. Also, seeing younger kids combine homes with parents where as the parents are aging and need more support, where the kids are selling off their real estate, mom and dad or one or the other are selling off theirs, and they're combining all of that into one home and all living together in the same home. That means that there's got to be some. Obviously, Vancouver is great because we have the suites available with a lot of detached homes.
Sabeena 00:21:21 So often that's appealing for those generational homes, but again, need to have a clear plan on what happens when that person passes away. Will you still qualify for that mortgage when she's not here, when she or he or not here? And what is the plan for any other siblings that are not living in the home as well? Has to be considered within that. So a clear plan clearly written out and everybody's on board to begin with, can save from a lot of litigation costs and that kind of thing, when maybe somebody who's not living in the home might feel like they're disadvantaged in a way.
Greg 00:21:55 For those who want to leave their home to their children but still need financial flexibility at a home, equity loans, reverse mortgages or other tools come into play.
Sabeena 00:22:06 I think I kind of answered that on the last question. But yeah, the home equity, again, is not a guarantee of getting a loan. So qualification and demonstrating a capacity to pay are important. Reverse mortgages are great tools for equity-based lending because you do not have to qualify for that.
Sabeena 00:22:27 You just have to demonstrate on a reverse mortgage that you have enough income to pay the home insurance. And if there's a strata property, then pay your strategies. So often your CPP and AP is enough for that. And so there's not a qualification for that type of equity lending. And with reverse mortgages, even though they are higher interest rates, you do have the option to pay that interest during the mortgage. So if you just because you don't have to make payments on it, it doesn't mean you don't need to. So you don't have to wait for that interest to accumulate on that balance. If you're an heir, you want to make the interest payments. You can also prepay that mortgage every year by up to 10% to bring the balance down. So it's still a vehicle that's available for people that don't have income, but feel that they can make those payments without being forced to.
Greg 00:23:17 I think a lot of people were probably under the assumption reverse mortgages were only dealt with a death fully paid off, but not that there was some prepayments that might be available.
Sabeena 00:23:26 It still has a lot of flexibility, which is great. So if, for example, like when you have somebody who's got outstanding mortgage debt come across this quite a bit because there's, you know, especially with the cost of living lately, it's been quite challenging for seniors to manage the cost of living with the pensions that haven't changed. So they've accumulated debt now paying that off. They still have a capacity to pay something. And they may choose that. They want to pay something so they can to minimise the impact to the estate, because all those debts still have to be paid from the estate once that person passes away. So putting it in a situation that won't affect their credit and allows them to live more comfortably as it's a great, great tool.
Nicole 00:24:07 What about deferring property tax. Like who is able to do that and is that common.
Sabeena 00:24:13 So with a reverse mortgage if there are deferred taxes on the title at the time we're doing the reverse mortgage, then the deferred taxes have to be paid out because the deferred taxes are in first position.
Sabeena 00:24:24 So the mortgage has to go into first position once the mortgage is advanced. That person can continue to defer their taxes after that.
Nicole 00:24:32 But who's able to defer tax and what interest rate does the government charge on the outstanding taxes?
Sabeena 00:24:40 I think after age 65, you can defer taxes, but in some situations you can defer taxes. If you've got dependents at home and you've got younger kids at home, there's a lot of scenarios in which you can defer taxes against your property, but the bank has to approve it. So there are some banks that have what they call like a total equity plan or something that consumes the entire title of the mortgage. So it's a collateral charge of title. So sometimes those banks won't allow you to defer taxes because they don't know about that tax balance when they're giving credit facilities within it.
Nicole 00:25:16 And what about insurance? Are you noticing changes in the ability of people to insure properties and and what are the banks having to say about that?
Sabeena 00:25:24 Insure for life insurance or insure property insurance. Property insurance.
Sabeena 00:25:29 There are some situations where it's getting challenging to get property insurance. There's some strata that have if there's flooding or water issues. Sometimes there can be issue with that. When it comes to strata insurance. There can also be challenges with homes where we're just trying to remember what the situation was, where the particular lender on title was not on a specific list. So when we're talking about private mortgages, sometimes the insurance companies won't lend with certain private lenders.
Greg 00:26:00 Yeah. We've seen it also, very difficult for homes that have been vacant for greater than two years. There's a few insurers that will do it, but you have to look for them even if they're being inspected and kept up.
Nicole 00:26:14 So yeah, we see the unusual situations where what was the one where I think it had been empty for ten plus.
Greg 00:26:20 20 or 20 years, 2 to 2 strata penthouses.
Sabeena 00:26:24 Oh, really?
Greg 00:26:25 Yeah. Eunuchs had a situation.
Sabeena 00:26:27 So we said, yeah.
Nicole 00:26:28 We got some interesting inquiries into some insurance companies. That's one of the interesting things about our role as administrators, as we see a lot of the unusual circumstances.
Sabeena 00:26:39 And there's also a location like if it's in a floodplain, that can be an issue for insurance. There's different there's so many different property types that are just uninsurable or very challenging, or you pay a lot of money for insurance. I recently had a situation where in a generational home where the kids were running a small business out of the place, but they did not have commercial insurance, so they were denied home insurance because it became evident that they were running their business out of their home, like getting packages delivered and burden, that kind of thing. And they didn't have. So they ended up having to get an expensive home insurance policy. A commercial policy it was a lot.
Nicole 00:27:17 We have a home in Palm Desert and we got dropped by our insurance company, so we are scrambling.
Greg 00:27:25 You can imagine the problems in California. Yeah, right. For those for homes that were burned down, it'll be very hard to get insurance. What advice would you give to somebody who wants to use real estate as a key part of their legacy, but isn't sure where to start?
Sabeena 00:27:41 Understand why you want to have what your goal is.
Sabeena 00:27:45 Understand your short term and your long term goals. Being a real estate investor is not necessarily about property flipping. That can be a really dangerous game. Educate yourself, but don't just use ChatGPT and Google. Get proper advisors. So a proper mortgage broker or financial planner lawyer that can help you determine the right path. Whether you want to go with residential real estate. Commercial real estate. If you're buying investment properties. Understand what your financing options are. Understand what the tax implications are. Understand any ownership structures like how you're going to structure it and what your long term plan is. Think about the long term from day one. That's a huge one. So a lot of people worry about cash flow when it comes to investment properties, because if you're with the rental income versus the property values, most properties don't cash flow when it comes to that. But if you consider that shortfall you have in a rental property, for example, that you're paying out of pocket every month, would you be able to have the same amount if you invested that money on a monthly basis? Would you have the same amount of money at the end of 25 years as you would if you had that mortgage paid off in 25 years in that capital asset? That's appreciated.
Sabeena 00:29:00 So you have to think about those scenarios, and then also consider how you want to transfer that to your children and your heirs. And how you would minimize the tax implications for them. And making sure that all those things are stipulated in your will and communicating with your heirs to. I think it was actually in one of your podcasts where we were talking about seniors in their 70s aren't necessarily sharing that information with their kids because they like to hang on to the property and it's their baby, and they want to do that thing. And I think communication between heirs and parents and all that stuff needs to be well communicated. So the transition is easy and everything is done smoothly. And again, I can't emphasize enough insurance life, not only life but disability too is if you've got a shortfall of payments that you're making, you want to make sure that your insurance is going to cover you. Your if you have employment insurance or if you have disability insurance through your employer and you have a long term disability, you're not going to get 100% of your income anymore.
Sabeena 00:30:01 So having a top up of insurance would be important. One out of five people are diagnosed with cancer these days. So what happens if you're the one that gets that call and you're going to be dealing with being off work periodically for a period of time. So having all insurances, you can't buy it when you need it, but it's really important.
Nicole 00:30:19 So it used to be in the past if you bought real estate certainly in Metro Vancouver area, that there was certainly appreciation and it was it's been a part of people accruing wealth. But it seems with the headwinds of inflated property values, maybe in interest rates, have things shifted and or do you see people moving away from home ownership?
Sabeena 00:30:44 My philosophy is it's not about timing the market. It's about time in the market. So some people luck out like they bought pre 2020. Market was soft in 2019. And then they bought. And then their property value just went up in a matter of two years. And it's maintained that for the most part, but really for people, the longer you're in the market.
Sabeena 00:31:07 So again, think about your long term goals and not worry about these market fluctuations because they will settle out in the end. And if it's an investment property somebody's paying that mortgage for you. If it's your property, you are paying that mortgage and paying and building your own equity regardless of the value. And you're not hanging your hat on your value every day. If you are paying rent, your rent is 100% interest. You get no build of wealth, no build of equity whatsoever. So just be in the market is the biggest tip.
Nicole 00:31:37 So what about young people today that it feels insurmountable? What do you advise them?
Sabeena 00:31:42 Start small. We're not all entitled to live in a single detached home, but if we start early enough, we can get there. I'm building towards that, and it's a combination of income and equity build over time. So if you start small and you think maybe you only we do have the stress test in Canada. So you have to qualify at 2% above the contract rate.
Sabeena 00:32:03 So if you can't afford more, pay more against your mortgage, build that equity by paying it down. And that equity growth will help you to jump up to the next property. I have the philosophies that if you think you can afford that next property, start making your mortgage payments as if you're already there. And while you're waiting to either qualify for that or get the funds you need together, whatever it is that's holding you from doing that, move right now. You're paying off your mortgage faster and building equity. So that jump is it's easier.
Nicole 00:32:36 So you mentioned a stress test. What is that?
Sabeena 00:32:39 it was a guideline put out by the government that in order to get a mortgage, you have to qualify at 2% above the contract rate. And then there's also the benchmark rate.
Nicole 00:32:50 Which does that mean 2% of a contract rate.
Sabeena 00:32:52 So if you're getting charged 4.5% on your mortgage, then you would have to qualify as if you were paying 6.5%. So when we had the pandemic and interest rates were extraordinarily low, 2% above the rate was still not a reasonable amount.
Sabeena 00:33:09 So they have it's the higher of 2% above the contract rate or the benchmark rate. And the benchmark rate is 5.25%. So people who got mortgages at 1.86 or 2% were not qualifying at those rates. They were qualifying as if they were paying 5.25%. And that's why when inflation came and hit us hard, a lot of people didn't lose their homes because they qualified as if they were paying five and a quarter. And so when the stress test came in in 2018, there was a lot of noise around, do we need this? This is not necessary. But then that time of inflation proved to us that the stress test is a good measure. And it's okay to have it. I don't think we'll ever see it go away.
Nicole 00:33:57 Final thing is that is it a lot harder to borrow if you're self-employed versus if you've got a traditional employment job?
Sabeena 00:34:04 Absolutely, yeah. We look at two year history and we look at what you're paying taxes on. So for example if your business is making and also it depends, are you a sole proprietor or are you incorporated.
Sabeena 00:34:17 Sometimes we can use some of the income within your corporation, but it depends on whether you're showing a positive net income year after year. And if your company is growing, if your company is shrinking, then no, but we can't use your gross business income to qualify you. We're using the net amount that you're paying income taxes on. So if you're writing your income down to nothing or drawing very little personal income out, it's going to affect your ability to get a mortgage.
Greg 00:34:42 How can our listeners find.
Sabeena 00:34:44 You, Sabeena I'm also at Instagram. My Instagram handle is @SabeenaB, and I also have my website, the Divorce Circle, DivorceCircle.ca
Greg 00:34:56 Thank you.
Nicole 00:34:57 Very much. Yes, Sabeena, thank you so much for sharing your wisdom and knowledge.
Sabeena 00:35:00 You're welcome. Thanks for having me. You're welcome.
Nicole 00:35:04 This podcast is for informational purposes only and should not be considered individual, legal, financial, or tax advice. Make sure to consult the advisor of your choice to advise you on your own circumstances.
Nicole 00:35:18 Thank you for joining us for this episode of Your Estate Matters. If you like this podcast, make sure to follow it on your podcast platform of choice.
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