Sniff...sniff...can you smell that? Spring is definitely in the air! With near record temperatures in the GTA this week it definitely feels like Spring is here. Along with the inevitable arrival of Spring comes a very busy real estate market. It seems like every day I see new “for sale” signs posted on the lawns in my neighbourhood and just as fast as they go up it seems the “sold” signs are just as quick to follow. With action in the real estate market, there is obviously also action in the mortgage market. As such, it seems like a good time to give some tips to pay down mortgages quicker for all those folks moving into new homes, taking on potentially bigger mortgages or just for people looking to become debt-free quicker.
Mortgages in Canada are generally amortized between 25 and 35 year terms. While this seems like a long time, it doesn’t have to take anyone that long to pay off their mortgage if they choose to do so in a shorter period of time. With a little bit of thinking ahead, and a small bit of sacrifice, most people can manage to pay off their mortgage in a much shorter period of time by taking positive steps such as:
• Making mortgage payments each week, or even every other week. Both options lower your interest paid over the term of your mortgage and can result in the equivalent of an extra month’s mortgage payment each year. Paying your mortgage in this way can take your mortgage from 25 years down to 21.
• When your income increases, increase the amount of your mortgage payments. Let’s say you get a 5% raise each year at work. If you put that extra 5% of your income into your mortgage, your mortgage balance will drop much faster without feeling like you are changing your spending habits.
• Mortgage lenders will also allow you to make extra payments on your mortgage balance each year. Just about everyone finds themselves with money they were not expecting at some point or another. Maybe you inherited some money from a distant relative or you received a nice holiday bonus at work. Apply this money or even part of it to your mortgage as a lump-sum payment towards your mortgage and watch the results.
If making lump payments or increasing your payments during the term of your mortgage isn't something you think you'll do, it's important to let your mortgage professional know that upfront. Lenders have started to offer products with names like "No Frills", which offer lower prepayment privileges (eg. 5% per year as opposed to 20%) in return for a lower rate. So, that little bit of planning can save you money even without having to to make any extra payments.
By applying these strategies consistently over time, you will save money, pay less interest and pay off your mortgage years earlier!
Friday, March 19, 2010
Friday, March 12, 2010
Regulation Overkill!!!
Sorry folks, this is going to be a long one. A few weeks ago I posted an entry an about some proposed government changes to mortgage insurance regulation and at the time had mixed feelings about it. I think my opinion has changed....significantly!! At the time there was some ambiguity in the changes that have been clarified by the Feds and in my opinion they are definitely detrimental to the Canadian mortgage market.
The initial announcement stated that all borrowers with a loan-to-value ratio greater than 80% taking terms of five years or less, whether variable or fixed would have to qualify at the five-year fixed rate. This would ensure that if borrowers were taking shorter fixed terms or variable terms that in theory if rates go up over the course of the term, they would be able to carry a larger debt-load and there would be less of a payment shock. The ambiguity is that the announcement didn’t say WHAT five-year rate would be used to qualify. After all, there are posted rates, special rates, discounted rates, broker rates...you get the jist. Well, they cleared up the ambiguity by explaining that it’s the chartered banks five-year posted rate (or the contract rate, whichever is greater) that will be used. The chartered banks’ five-year posted rate right now is 5.39%. This is the rate you’ll see on their websites and renewal statements and I’d be very surprised if anybody still pays these rates. The flipside is the discounted rates available in the broker world. I’m not talking specials or quick closes or anything like that, I’m talking about straight-up, five-year, 120-day rate hold rates, which right now are at 3.79%. So, for people taking a 3-year variable at 1.75% (currently) or a 4-year fixed at 3.69%, they need to qualify at 5.39%!! Most people don’t know that prior to this announcement, variable mortgages were qualified at the 3-year fixed rate so there was already some protection built in but the 5-year posted? Can you say EXCESSIVE!?!? Here’s where it gets even more annoying...for anyone taking a 5-year or greater fixed rate, they will be qualified at the contract rate. So they would qualify at the 3.79% mentioned above for five years. That means a borrower looking at a 3-year mortgage which is currently at 3.35% would have to qualify at 5.39% but someone looking at a 5-year fixed would qualify at 3.79%. Ultimately for anyone borrowing at a loan-to-value of greater than 80%, they just had most of their choice taken away. The difference in buying power between qualifying at the contract rate and the posted rate is huge. That means in order to maximize buying power, borrowers are forced to go at least with the five-year fixed. It’s like the high-ratio market has stepped back 25 years where there was hardly any choice available.
Another forthcoming regulation change that managed to slide through that I didn’t mention in my previous post is a change that will affect small business owners. There is a high ratio program available right now that allows small business owners to qualify for mortgages using non-traditional means of proving their income. That means not using T4’s and tax returns to prove their income. Instead, they’ve been able to use an option called stated income to declare what their “real” income is as opposed to what they make on paper. In these cases, the lenders and insurers would assess the reasonableness that a borrower makes what they say they make. Makes sense since one of the goals of small business owners is to minimize their taxes and ultimately the income they make on paper. Since this works in a negative way for mortgage qualification, the above program was set up to help those borrowers. Until now, they’ve been able to borrow up to 95% of the value of the property. As of April 9th 2010, they will only be able to borrow up to 90%. Might not seem like that big of a deal but one of the things common amongst all small business owners is the desire to make your money work as much as possible for you. That additional 5% down payment is money that could be working in other ways for them, like growing their businesses. The other element to this change that has an even greater impact in my opinion is that it used to be that the length of time you were in business was irrelevant, after April 9th, if you’ve been in business for more than 3 years you won’t be able to take advantage of this program. So, anyone in business more than 3 years will have to prove their income or in other words, use what they report as income on their personal tax returns. This change has huge impacts on small business owners who will ultimately have to put more money down on their purchases instead of being able to leverage themselves and use their cash for more productive things.
Now that the changes are more clear, I truly believe they’re excessive. I understand that the Government is doing what they think is best to protect against what happened to the mortgage industry in the US. However, even at our most aggressive point, we were never even close to what the US mortgage system was like. They had 125% mortgages and the 2/28 mortgage. For those of you who don’t know what that is, it’s the product that essentially caused the US turmoil. Where our government is trying to defend against the payment shock of increasing rates, US lenders actually built the shock into the product. It went like this, lenders were selling 30 year mortgages to clients that had a low, teaser rate for the first two years then after two years it would go up by sometimes 4-5% for the remaining 28 years. The craziest part of it was that lenders were qualifying clients at that low, teaser rate and telling them not to worry about the higher rate after two years because “of course” property values will go up in those two years at which point you can refinance and never have to deal with those higher rates. Well guess what happened when property values didn’t go up...people couldn’t afford the higher payments and the sh!t started hitting the fan. The point is our system is so much more conservative than the US system yet the Government seems to think it needs to over-regulate us to protect us from ourselves. The ironic thing is that they think they’re protecting us from a potential housing bubble when there are no signs of there actually being one. Except, with borrowers buying power being reduced, sellers won’t be able to sell their homes at the prices they’d like, ultimately driving the overall market down and creating a mini-bubble.
The initial announcement stated that all borrowers with a loan-to-value ratio greater than 80% taking terms of five years or less, whether variable or fixed would have to qualify at the five-year fixed rate. This would ensure that if borrowers were taking shorter fixed terms or variable terms that in theory if rates go up over the course of the term, they would be able to carry a larger debt-load and there would be less of a payment shock. The ambiguity is that the announcement didn’t say WHAT five-year rate would be used to qualify. After all, there are posted rates, special rates, discounted rates, broker rates...you get the jist. Well, they cleared up the ambiguity by explaining that it’s the chartered banks five-year posted rate (or the contract rate, whichever is greater) that will be used. The chartered banks’ five-year posted rate right now is 5.39%. This is the rate you’ll see on their websites and renewal statements and I’d be very surprised if anybody still pays these rates. The flipside is the discounted rates available in the broker world. I’m not talking specials or quick closes or anything like that, I’m talking about straight-up, five-year, 120-day rate hold rates, which right now are at 3.79%. So, for people taking a 3-year variable at 1.75% (currently) or a 4-year fixed at 3.69%, they need to qualify at 5.39%!! Most people don’t know that prior to this announcement, variable mortgages were qualified at the 3-year fixed rate so there was already some protection built in but the 5-year posted? Can you say EXCESSIVE!?!? Here’s where it gets even more annoying...for anyone taking a 5-year or greater fixed rate, they will be qualified at the contract rate. So they would qualify at the 3.79% mentioned above for five years. That means a borrower looking at a 3-year mortgage which is currently at 3.35% would have to qualify at 5.39% but someone looking at a 5-year fixed would qualify at 3.79%. Ultimately for anyone borrowing at a loan-to-value of greater than 80%, they just had most of their choice taken away. The difference in buying power between qualifying at the contract rate and the posted rate is huge. That means in order to maximize buying power, borrowers are forced to go at least with the five-year fixed. It’s like the high-ratio market has stepped back 25 years where there was hardly any choice available.
Another forthcoming regulation change that managed to slide through that I didn’t mention in my previous post is a change that will affect small business owners. There is a high ratio program available right now that allows small business owners to qualify for mortgages using non-traditional means of proving their income. That means not using T4’s and tax returns to prove their income. Instead, they’ve been able to use an option called stated income to declare what their “real” income is as opposed to what they make on paper. In these cases, the lenders and insurers would assess the reasonableness that a borrower makes what they say they make. Makes sense since one of the goals of small business owners is to minimize their taxes and ultimately the income they make on paper. Since this works in a negative way for mortgage qualification, the above program was set up to help those borrowers. Until now, they’ve been able to borrow up to 95% of the value of the property. As of April 9th 2010, they will only be able to borrow up to 90%. Might not seem like that big of a deal but one of the things common amongst all small business owners is the desire to make your money work as much as possible for you. That additional 5% down payment is money that could be working in other ways for them, like growing their businesses. The other element to this change that has an even greater impact in my opinion is that it used to be that the length of time you were in business was irrelevant, after April 9th, if you’ve been in business for more than 3 years you won’t be able to take advantage of this program. So, anyone in business more than 3 years will have to prove their income or in other words, use what they report as income on their personal tax returns. This change has huge impacts on small business owners who will ultimately have to put more money down on their purchases instead of being able to leverage themselves and use their cash for more productive things.
Now that the changes are more clear, I truly believe they’re excessive. I understand that the Government is doing what they think is best to protect against what happened to the mortgage industry in the US. However, even at our most aggressive point, we were never even close to what the US mortgage system was like. They had 125% mortgages and the 2/28 mortgage. For those of you who don’t know what that is, it’s the product that essentially caused the US turmoil. Where our government is trying to defend against the payment shock of increasing rates, US lenders actually built the shock into the product. It went like this, lenders were selling 30 year mortgages to clients that had a low, teaser rate for the first two years then after two years it would go up by sometimes 4-5% for the remaining 28 years. The craziest part of it was that lenders were qualifying clients at that low, teaser rate and telling them not to worry about the higher rate after two years because “of course” property values will go up in those two years at which point you can refinance and never have to deal with those higher rates. Well guess what happened when property values didn’t go up...people couldn’t afford the higher payments and the sh!t started hitting the fan. The point is our system is so much more conservative than the US system yet the Government seems to think it needs to over-regulate us to protect us from ourselves. The ironic thing is that they think they’re protecting us from a potential housing bubble when there are no signs of there actually being one. Except, with borrowers buying power being reduced, sellers won’t be able to sell their homes at the prices they’d like, ultimately driving the overall market down and creating a mini-bubble.
Wednesday, March 3, 2010
Are rates going to go up?
Hands down, without question, nothing even comes a close second...this is the question I hear the most. I’m not sure if it’s that people really wonder or if they just want me to say “no” or “I don’t think so” to give them some sort of comfort. My standard disclaimer is always that nobody can predict with absolute certainty, and then I launch into my opinion. By nature I’m not a good liar, in fact I’m probably honest to a fault. I’m certain there are a lot of people out there in my position who would tell potential clients whatever it is they want to hear, in order for them to become clients. I’m not sure why anyone would do that but everyone has their own approach and that just isn’t mine. My approach is always complete honesty, providing my own opinion and for the most part always erring on the side of caution. The advice I give borrowers always provides the risks involved in a very clear way so an informed decision can be made. It’s a long-term relationship and I can’t understand why anyone would compromise that relationship with dishonesty. Short-term thinkers I suppose.
Back to the topic at hand, rates. Are they going to go up? The question to me isn’t if but when. Of course they’re going to go up. They’re at record lows and the economy is showing some positive signs. Sure, we might see fixed rates stay around the same level or dip a tiny bit through a competitive spring market but by and large, they are going to go up. The Bank of Canada yesterday announced once again no changes to their Overnight Rate of 0.25%, which in turn causes Prime to remain at 2.25%. This is not a surprise since the B of C has been saying since 2009 that they intend to leave things the way they are until end of Q2 2010. The reality is that the Real Estate market has been driving the economy for the better part of a year so to increase rates would be like pouring water on the fire that’s providing you with enough warmth to stay alive. Now that other economic indicators are showing positive signs, what do you think is going to happen at the end of Q2? My money is on the B of C increasing their overnight rate. I’m not talking by a lot, they’ve never raised it by more than 0.25% so it’s a good bet that’s what will happen. I believe they will need to be very cautious about increases since too much too fast could be very detrimental. As for fixed rates, different economists have been saying different things about fixed rates for some time now. Some say they’re going to increase before the B of C increases the Overnight Rate and some say it won’t be until the Fall but the common theme is the word “increase”. Everybody agrees rates are going to go up but nobody knows when.
My advice to anyone who prefers variable mortgages has been to take advantage of your low payments now, put some of that savings aside because rates are going to go up at some point and having a little extra put aside will help. For those who favour fixed rates, if you’ve been sitting in a variable waiting for the right time to lock into something fixed or are considering refinancing, consider doing it sooner rather than later. I’m not saying you need to do it tomorrow, but waiting too long might cost you. Same goes for people with renewals in the next few months, make sure you get your rate holds now!
Back to the topic at hand, rates. Are they going to go up? The question to me isn’t if but when. Of course they’re going to go up. They’re at record lows and the economy is showing some positive signs. Sure, we might see fixed rates stay around the same level or dip a tiny bit through a competitive spring market but by and large, they are going to go up. The Bank of Canada yesterday announced once again no changes to their Overnight Rate of 0.25%, which in turn causes Prime to remain at 2.25%. This is not a surprise since the B of C has been saying since 2009 that they intend to leave things the way they are until end of Q2 2010. The reality is that the Real Estate market has been driving the economy for the better part of a year so to increase rates would be like pouring water on the fire that’s providing you with enough warmth to stay alive. Now that other economic indicators are showing positive signs, what do you think is going to happen at the end of Q2? My money is on the B of C increasing their overnight rate. I’m not talking by a lot, they’ve never raised it by more than 0.25% so it’s a good bet that’s what will happen. I believe they will need to be very cautious about increases since too much too fast could be very detrimental. As for fixed rates, different economists have been saying different things about fixed rates for some time now. Some say they’re going to increase before the B of C increases the Overnight Rate and some say it won’t be until the Fall but the common theme is the word “increase”. Everybody agrees rates are going to go up but nobody knows when.
My advice to anyone who prefers variable mortgages has been to take advantage of your low payments now, put some of that savings aside because rates are going to go up at some point and having a little extra put aside will help. For those who favour fixed rates, if you’ve been sitting in a variable waiting for the right time to lock into something fixed or are considering refinancing, consider doing it sooner rather than later. I’m not saying you need to do it tomorrow, but waiting too long might cost you. Same goes for people with renewals in the next few months, make sure you get your rate holds now!
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