Tuesday, May 25, 2010

The End is Near for Record Low Variable Rates!

With the beautiful weather we had over the weekend, there is no doubt that summer is here. Along with the beginning of summer comes the end of the Bank of Canada’s commitment to keep its Overnight Rate, which in turn affects the Bank Prime Rate, at a record low of 0.25% (Prime is currently at 2.25%). Although the B of C had originally committed to leaving its Rate unchanged until the July announcement, at its last announcement it all but guaranteed that the rate will be increasing at its next announcement on June 1st.

Hopefully those of you who have been enjoying huge savings month after month over what you would have been paying in fixed rate mortgages have been disciplined and done something with that savings...either put it down as lump payments or put it aside and invested it. If you haven’t, don’t worry, it’s not too late. Prime has never increased by more than 0.25% at a single time so that means in all likelihood, those paying the going rate of 1.75% (Prime minus 0.50%), won’t see a big jump in your monthly payments and will still be saving plenty over fixed rates. So, start doing something with that savings!

What remains to be seen is what will happen during the B of C announcements over the next year or two. That will be what really determines if being in a variable rate mortgage will have been the wise move over being in something fixed. The Big 5 Banks are all forecasting the Overnight Rate will be increasing by a little over 1% by the end of 2010 and around 3% by the end of 2011. Those are significant increases...the only problem I have with those numbers is that the Banks’ more profitable products are fixed over variable so could they be creating a little fear in consumers to lock into something fixed and not assume the risk that is variable. I’m not saying they’re wrong, I’m just looking at the whole picture of why they are forecasting such significant increases. In my opinion (I’m not an economist, just someone with an opinion), the B of C promised to keep the rate low to stimulate the economy. Now that the economy has picked up, they can’t just hit the accelerator on their rate and assume the economy will react favourably. I believe the rate will go up over time but slowly as the B of C will have to measure the impact to the economy with each increase to ensure the economy can sustain its growth despite rising rates.

Over the last year or so I think the huge discount seen in variable rates has likely attracted consumers who were historically “fixed” borrowers and as a result they saved themselves money. Now that those rates are going to start increasing, it will be interesting to see how the tides shift or if they shift back to fixed rates either for new borrowers or variable borrowers who become nervous about the idea of rates increasing and want to lock into a fixed rate. The good news is there are still excellent fixed rates available. Whatever the result, the fact that the low rates has attracted more borrowers to variable rate mortgages is a great thing because it has opened up peoples’ eyes to the fact that there are lots of mortgage options out there besides the 5-yr fixed that the Banks always lead with.

Whatever your preference, ensure that when it’s time to shop for a mortgage or a renewal, that your mortgage professional shows you all the options so you can make an informed decision for what’s best for you.

Friday, May 14, 2010

Budgeting Towards Homeownership

Transitioning from renter to homeowner is one of the biggest decisions you’ll make throughout your lifetime. It can also be a stressful experience if you don’t plan ahead by building a budget and saving prior to embarking upon homeownership.

Budgeting is a core ingredient that helps alleviate the stress associated with money issues that can sometimes arise if you purchase a home without knowing all of the associated costs – including down payment, closing expenses, ongoing maintenance, taxes and utilities.

The trouble is, many first-time homeowners fail to carefully think about their finances, plan a budget or set savings aside. And in this society of instant gratification, money problems can quickly escalate.

The key is to create a realistic budget based on your goals. Track your spending and make your dollars go further by sticking to your budget once it’s in place. Budgeting offers a step-by-step formula for figuring out how to best save your hard-earned money to invest in homeownership.

Start by listing your household income, then your household expenses, and review your spending habits. All of this can be done on a pad of paper or on a computer spreadsheet.

Keeping receipts for everything that you purchase will enable you to accurately keep track of where your money is going each month so that you can review and make necessary changes to your plan on an ongoing basis.

Examine all areas of your life from entertainment to the type of food you buy, where you buy your food and clothes, and how and where you travel. Also look at your spending personality and make necessary adjustments. Are you a saver, a splurger, a spontaneous shopper or a hoarder? Become smarter with your money and avoid impulse buying.

If you find you’re spending a lot of money in one area, such as entertainment for instance, set aside a reasonable amount each month and prepare to stop spending money in this area once your budget has been exhausted.

If you can set your budget solidly in place before you head out home or mortgage shopping, you will be far more prepared to purchase your first home.

Following are three top tips to help you prepare for the purchase of your first home:

1. Set up a savings account. You can deposit a predetermined amount into this account each pay period that you will not touch unless it’s absolutely necessary. This will enable you to put money aside for a down payment and cover closing costs, as well as address ongoing homeownership expenses such as maintenance, taxes and utilities.

2. Save up for big-ticket items. As you accumulate money in your savings account, you will be able to also save for specific purchases to help furnish your home – avoiding the buy now, pay later mentality, which can have a negative impact on your credit when you’re seeking mortgage financing.

3. Surround yourself with a team of professionals. When you’re getting ready to make your first home purchase, enlist the services of a licensed mortgage professional and a real estate agent. These experts are invaluable to you as you set out on the road to homeownership because they help first-time buyers through the home purchase and financing processes every day. They will be able to answer all of your questions and set your mind at ease. A mortgage professional has access to multiple lenders, can show you what all the financing options are and can help you get pre-approved for a mortgage so you know exactly what you can afford to spend on a home before you head out house hunting, while a real estate agent will be able to match your needs with a house you can afford. Both parties will negotiate on your behalf to ensure you get the best bang for your buck. And, best of all, these services are typically free. They will also be able to refer you to other reputable professionals you may need for your home purchase, including a real estate lawyer and home appraiser.

You only have one chance to do the right things financially to set yourself up to purchase your first home. It’s easy to overextend yourself and not so easy to dig yourself out of it. Take the time, budget properly, do it right and you’ll be better off in the long-run.

Wednesday, May 5, 2010

Choosing Your Mortgage Amortization

Selecting the length of your mortgage amortization period – the number of years it will take you to become mortgage free – is an important decision that will affect how much interest you pay over the life of your mortgage.

While the lending industry’s benchmark amortization period is 25 years, and this is the standard that is used by lenders when discussing mortgage offers, and usually the basis for mortgage calculators and payment tables, shorter or longer timeframes are available – to a maximum of 35 years.

The main reason to opt for a shorter amortization period is that you will become mortgage-free sooner. And since you’re agreeing to pay off your mortgage in a shorter period of time, the interest you pay over the life of the mortgage is, therefore, greatly reduced.

A shorter amortization also affords you the luxury of building up equity in your home sooner. Equity is the difference between any outstanding mortgage on your home and its market value.

While it pays to opt for a shorter amortization period, other considerations must be made before selecting your amortization. Because you’re reducing the actual number of mortgage payments you make to pay off your mortgage, your regular payments will be higher. So if your income is irregular because you’re paid commission or if you’re buying a home for the first time and will be carrying a large mortgage, a shorter amortization period that increases your regular payment amount and ties up your cash flow may not be the best option for you.

Your mortgage professional will be able to help you choose the amortization that best suits your unique requirements and ensures you have adequate cash flow. If you can comfortably afford the higher payments, are looking to save money on your mortgage or maybe you just don’t like the idea of carrying debt over a long period of time, you can discuss opting for a shorter amortization period.

Advantages of a longer amortization

Choosing a longer amortization period also has its advantages. For instance, it can get you into your dream home sooner than if you choose a shorter period. When you apply for a mortgage, lenders calculate the maximum regular payment you can afford. They then use this figure to determine the maximum mortgage amount they are willing to lend to you.

While a shorter amortization period results in higher regular payments, a longer amortization period reduces the amount of your regular principal and interest payment by spreading your payments out over a longer timeframe. As a result, you could qualify for a higher mortgage amount than you originally anticipated. Or you could qualify for your mortgage sooner than you had planned. Either way, you end up in your dream home sooner than you thought possible.

Again, this option is not for everyone. While a longer amortization period will appeal to many people because the regular mortgage payments can be comparable or even lower than paying rent, it does mean that you will pay more interest over the life of your mortgage.

Still, regardless of which amortization period you select when you originally apply for your mortgage, you do not have to stick with that period throughout the life of your mortgage. You can always choose to shorten your amortization and save on interest costs by making extra payments when you can or an annual lump-sum principal pre-payment. If making pre-payments (in the form of extra, larger or lump-sum payments) is an option you’d like to have, your mortgage professional can ensure the mortgage you end up with will not penalize you for making these types of payments.

It also makes good financial sense for you to re-evaluate your amortization strategy every time your mortgage comes up for renewal (at the end of each term of your mortgage, whether this is three, five, 10 years, etc.). That way, as you advance in your career and earn a larger salary and/or commission or bonus, you can choose an accelerated payment option (making larger or more frequent payments) or simply increase the frequency of your regular payments (ie, paying your mortgage every week or two weeks as opposed to once per month). Both of these features will take years off your amortization period and save you a considerable amount of money on interest throughout the life of your mortgage.