As is always the case in the world of mortgages, rates are a very hot topic right now. Not just the ridiculously cheap current fixed and variable rates but also where they are headed in the future...something everyone wants to know. Unfortunately, nobody has a crystal ball to predict such things but as you'll see from the article below, the big banks pay out a lot of money to economists to try to predict the future of mortgage rates. What I take from it is that nobody can accurately predict where rates are going and that whatever you read should be taken with a grain of salt.
Reports generated by the big banks always predict huge increases in the very near future, regardless of when that near future is. These "scare" reports often get lots of press and put the fear into people that they need to lock into whatever they can right away and who wins in that scenario? The very people who commissioned those reports. Typically what follows is what we're seeing now, economists retracting their doomsday predictions but garnering less press.
I don't think I have a crystal ball nor do I think I'm smarter than the economists paid by the banks. However, what I typically tell my clients is that the rate market is built heavily upon economic stability. If our economy and the global economy aren't stable, then a rapidly rising rate market will only add to economic volatility...period. Of course the governments predict economic recovery and prosperity for all, that's what keeps them in office. But it's that rosy outlook that partly drives the economists' rate predictions. So if the economic prosperity doesn't work out the way Stephen or Dalton or whoever is doing the talking says it will, then economists have no choice but to pull back on their outlook.
Here is an article from Rob McLister of CMT, that provides great detail on the topic...
Over the past few months, major economists have backpeddled on their rate hike predictions.
Not long ago, the consensus of economists was projecting a July 19 increase. Now, those same analysts aren't looking for a rate bump until this fall...or later.
A slew of factors justify a deferral of rate increases, including:
• A parade of weak economic data from the U.S.—our key trading partner
• Core inflation that remains manageable
• Global economic risks
• Debt-laden consumers that are only cautiously spending
• A U.S. housing market that's double-dipping
• U.S. unemployment that may be structurally and permanently elevated
• A Canadian dollar that is still acting as a brake on our economy.
For reasons like these, TD Bank became the first major bank last week to predict the Bank of Canada would stand pat on rates through 2011. Depending on how the next rounds of economic data look, other banks may follow suit.
Then again, the rate picture can and does change.
BMO says: "...it is too soon to dismiss the possibility (of rate hikes in 2011)."
BoC chief Mark Carney recently said: "...The expectations, both in the medium term and sooner than the medium term, is that rates are not going to stay at these unusually low levels."
For now, here's what the Big 6 are projecting for rates through 2012:
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Latest Overnight Rate Forecast
The Bank of Canada's overnight target has a direct impact on variable mortgage rates.
Bank 2011 2012
BMO 1.50 2.75
CIBC 1.75 2.00
NBC 2.00 2.75
RBC 1.75 3.00
Scotia 1.50 2.25
TD 1.00 2.00
Year-end Avg 1.50 2.50
Chg vs Today +0.50 +1.50
(Figures above are year-end and rounded to the nearest 1/4 point increment.)
Latest 5-Year Government Bond Yield Forecast
Government bond yields drive 5-year fixed mortgage rates.
Bank 2011 2012
BMO 2.93 3.80
NBC 3.46 3.88
RBC 3.30 4.05
Scotia 2.85 3.35
TD 2.70 3.65
Year-end Avg 3.05 3.75
Chg vs Today +0.89 +1.59
(CIBC's 5-year bond forecast was not available.)
Caveats
The above projections should be qualified as follows:
1. With only four Bank of Canada policy meetings to go in 2011, some of the banks may soon defer or pare back on these rate increase estimates.
2. The Overnight index swap (OIS) market, which mirrors BoC rate expectations, tends to predict rate changes slightly better than economists. Currently, OIS prices are implying less than 50% probability of a rate hike this year. The next rate increase is not fully priced in until February 2012 (updated as of Friday's close)! Just a few months ago, the OIS market believed rates would increase on July 19.
3. Long-term rate outlooks have margins of error as big as 1.00% or more, so use them only as a rough guide (more on this below).
Variable-Rate Mortgage Forecast
Bank estimates, if accurate, imply a 4.50% prime rate by December 31, 2012. Prime rate is currently 3.00% and the 10-year average of prime is 4.33%.
Based on an 80-basis-point discount from prime, these forecasts suggest 5-year variable rates in the 3.70% range by year-end 2012. That's slightly higher than today's best 5-year fixed rates.
Fixed-Rate Mortgage Forecast
The banks predict that 5-year bond yields will rise to 3.75% in 18 months. That level would eclipse the 10-year average of 3.61%.
Assuming a typical 125 basis point spread above yields, these forecasts imply that deeply-discounted 5-year fixed rates could hit about 5.00% by year-end 2012.
************
Rate Forecasting In Perspective
The major banks spend millions to formulate accurate interest rate projections. Their economists utilize every data source, academic study, historical backtest, and analysis tool imaginable. Yet, try as they might, their forecasts are far from infallible.
Despite economists' notorious and continuous forecast revisions, long-term rate estimates still provide a useful reference point. Part of their value is in showing what might happen if the world unfolds without global crises and major economic disruptions.
With that reference point as a "base case," these forecasts can be useful for creating amortization models based on future rate assumptions. The key is to incorporate a reasonable margin of error in those models—one that's big enough to account for things like hyper-growth/inflation or the aforementioned economic disruptions.
Other Things to Note: Bank forecasts, like those above, are subject to frequent change. This data is therefore provided only for general interest. Always discuss your needs and risk tolerance with a mortgage professional before acting on any such information.
History has shown that it’s near impossible to accurately predict interest rates long-term, so use these figures at your own risk. That said, while economist projections are often wrong, they remain one of the better sources of educated opinion on interest rates.
“Chg” = the expected change in rates from today. In other words, Chg is the average forecast minus today’s rates. All estimates above are based on the respective year-end, except those of BMO. BMO forecasts the average rates for a given quarter, instead of the rate at the end of that quarter. Because of that, we have averaged BMO's Q4 and Q1 forecasts to estimate the year-end 2011 figure.
Bank estimates are taken from their latest forecasts published online. Overnight rate results are rounded to the nearest 1/4 point, in keeping with the Bank of Canada's standard rate setting increments.
Data Sources: BMO, CIBC, National Bank, RBC, Scotiabank, TD
Tuesday, June 21, 2011
Sunday, May 15, 2011
The Second Opinion...or Second Quote
Your Doctor diagnoses you with an illness, your mechanic tells you that your car needs $XX worth of work done to it...what do you get, a second opinion. A contractor tells you it’s going to cost $XX to finish your basement, a landscaper tells you it’s going to cost $XX for that beautiful new backyard...what do you get, a second quote.
There are so many situations or transactions that happen throughout our lives where we don’t just take what the first person tells us, we seek out the validation from someone else to confirm what the first person has told us. Why should that be any different with your mortgage? We’re in a world where prices are going up every day so we should be doing whatever we can to save ourselves money if possible. Most people wouldn’t take the first quote for a home renovation and say “looks good to me”. Who would pay the sticker price for a new car? So why would people do that with their mortgage.
I’ve written about this in the past but it baffles me that Canadians are so tied to their banks, believing that their best interests are always the top priority. They’re a business and their business is to make money from their customers, period. If your mortgage rate is X%, then they make less money than if your rate was X + 0.25% so what do you think they would rather charge you? I’ve been around the Financial Services industry long enough to know that people typically hold their banks in very high regard and that bond is definitely difficult to break so I’m not about to try to do that. Instead, I encourage people to talk to their banks about their mortgage, they’re probably going to anyways...BUT, let me give you a second opinion with no obligation. Unlike your bank, my compensation is the same whether your rate is X% or X + 0.25% so my top priority is making sure you’re getting the best deal because that creates a happy customer, which is what my business is based on. By getting a second opinion, you will either find out that you can get a better deal elsewhere and save yourself $$$ or you’ll find out your bank is treating you the way they should. Either way you make sure you’re not paying any more than you need to for your mortgage and you’re being given all the right options.
There are so many situations or transactions that happen throughout our lives where we don’t just take what the first person tells us, we seek out the validation from someone else to confirm what the first person has told us. Why should that be any different with your mortgage? We’re in a world where prices are going up every day so we should be doing whatever we can to save ourselves money if possible. Most people wouldn’t take the first quote for a home renovation and say “looks good to me”. Who would pay the sticker price for a new car? So why would people do that with their mortgage.
I’ve written about this in the past but it baffles me that Canadians are so tied to their banks, believing that their best interests are always the top priority. They’re a business and their business is to make money from their customers, period. If your mortgage rate is X%, then they make less money than if your rate was X + 0.25% so what do you think they would rather charge you? I’ve been around the Financial Services industry long enough to know that people typically hold their banks in very high regard and that bond is definitely difficult to break so I’m not about to try to do that. Instead, I encourage people to talk to their banks about their mortgage, they’re probably going to anyways...BUT, let me give you a second opinion with no obligation. Unlike your bank, my compensation is the same whether your rate is X% or X + 0.25% so my top priority is making sure you’re getting the best deal because that creates a happy customer, which is what my business is based on. By getting a second opinion, you will either find out that you can get a better deal elsewhere and save yourself $$$ or you’ll find out your bank is treating you the way they should. Either way you make sure you’re not paying any more than you need to for your mortgage and you’re being given all the right options.
Sunday, April 10, 2011
Why Use a Mortgage Agent?
• My services are free as the lender pays me a finder’s fee.
• Access to interest rates that banks don’t tell you are available saving you $$$$. Since Dominion Lending Centres sends lenders millions of dollars of new business each month, they always offer us the deepest discounts, which I pass that on to you IMMEDIATELY - whether you are purchasing, refinancing or renewing.
• I shop the market saving you time – calling me is like calling over 50 different lenders, including Banks, Credit Unions and Trust Companies – I have access to all of them so I can find you the best deal possible.
• I don’t work for any one lender, I work for you! When dealing with a bank they are looking after the company’s best interest first and yours second. My sole concern is your best interest and overall satisfaction.
• Isn’t it time the Banks compete for your mortgage business? I’ll provide you with some options so you can compare the two – what your bank is offering you and what I am able to offer you, then ultimately you decide which you feel most comfortable with. It never hurts to get a second opinion on the biggest financial obligation you will probable ever have.
• My application process is simple and quick I’ll take some information and then send it electronically to the lenders that I feel are the best fit for your situation; 24 hr turnaround is usual!
• Step By Step I’ll walk you through the process of getting a mortgage step by step, especially if you are a first time homebuyer – it can be daunting.
• I’m available on your terms - day, evening and weekends.
• Large range of products. Such as self-employed, credit challenged, no down payment, cottage/investment properties, line of credit, 2nd mortgages and more.
• I appreciate your business. I will go the extra mile to provide outstanding customer service so you have the best possible financing experience!
• I am a Licensed Expert. Deal with a mortgage expert specializing in mortgages from all lenders not just one.
• Rate Protection. If the rates drop before you close you automatically get the lower rate and if rates go up you have the lower rate locked in.
• Follow-up including Annual Mortgage Check-Ups and Variable Rate Updates – I’ll keep you up-to-date with what’s going on in the market to ensure your mortgage continues to meet your needs until you are mortage-free!
• Access to interest rates that banks don’t tell you are available saving you $$$$. Since Dominion Lending Centres sends lenders millions of dollars of new business each month, they always offer us the deepest discounts, which I pass that on to you IMMEDIATELY - whether you are purchasing, refinancing or renewing.
• I shop the market saving you time – calling me is like calling over 50 different lenders, including Banks, Credit Unions and Trust Companies – I have access to all of them so I can find you the best deal possible.
• I don’t work for any one lender, I work for you! When dealing with a bank they are looking after the company’s best interest first and yours second. My sole concern is your best interest and overall satisfaction.
• Isn’t it time the Banks compete for your mortgage business? I’ll provide you with some options so you can compare the two – what your bank is offering you and what I am able to offer you, then ultimately you decide which you feel most comfortable with. It never hurts to get a second opinion on the biggest financial obligation you will probable ever have.
• My application process is simple and quick I’ll take some information and then send it electronically to the lenders that I feel are the best fit for your situation; 24 hr turnaround is usual!
• Step By Step I’ll walk you through the process of getting a mortgage step by step, especially if you are a first time homebuyer – it can be daunting.
• I’m available on your terms - day, evening and weekends.
• Large range of products. Such as self-employed, credit challenged, no down payment, cottage/investment properties, line of credit, 2nd mortgages and more.
• I appreciate your business. I will go the extra mile to provide outstanding customer service so you have the best possible financing experience!
• I am a Licensed Expert. Deal with a mortgage expert specializing in mortgages from all lenders not just one.
• Rate Protection. If the rates drop before you close you automatically get the lower rate and if rates go up you have the lower rate locked in.
• Follow-up including Annual Mortgage Check-Ups and Variable Rate Updates – I’ll keep you up-to-date with what’s going on in the market to ensure your mortgage continues to meet your needs until you are mortage-free!
Monday, March 14, 2011
Countdown to Change
At the end of the week the mortgage regulation changes announced in January will go into effect. For those of you who haven’t yet heard about the changes, here they are in a nutshell:
1. A 30-year maximum amortization on insured mortgages over 80% LTV (loan-to-value), down from the current maximum of 35 years
2. An 85% LTV limit on insured refinances down from the current maximum of 90%
3. Elimination of government insurance on secured lines of credit (aka., HELOCs)
If you read my original blog post on the topic you’ll know I was a little heated with the changes when they were first announced. My opinion hasn’t changed but I’m a little less hot under the collar about it. Like everything else in life, it is what it is and stewing about it is not going to change anything.
It turns out that the overall sentiment over the changes was quite mixed. One side of the fence where I am, thinking they’re a little harsh and short-sighted. The other side applauding the government’s “proactive steps” in protecting us from ourselves and preventing a real estate market collapse. Whatever your opinion is, that’s fine, everyone’s entitled.
For now, lender underwriting departments are overloaded with applications from people who have listened to their mortgage planners and taken some action while they still have the flexibility to do so. What I don’t look forward to is a few months from now, just like what happened last year when the government took away options...I have a client in front of me who is looking for some financial relief and I have to explain there’s nothing I can do since the government felt it was better that they carry high interest debt instead of being able to access the equity in their homes without having to sell.
I can’t do anything about the changes but what I can do is give a little advice. Be prudent about how you spend your money. Understand what you’re signing when you get a retail store credit card or sign up for “don’t pay a cent” promotion. Seek out trusted advisors for your financial affairs both investment and borrowing, don’t blindly have faith in the person standing across the counter at the bank whose job it is to sell you as many products as possible at the highest rates and costs to you. Lastly, even more important than educating yourselves, educate your children. There is a severe lack of formal education surrounding personal finances in our country and the burden falls on parents to teach their kids. In doing so, don’t assume what works for you will work for them. They live in a different world than you do. “When I was a kid”, teenagers didn’t have credit cards, now they can easily get one with a $5000 limit. Like everything else, teach your kids how to respect and manage their finances and they will be much better off.
1. A 30-year maximum amortization on insured mortgages over 80% LTV (loan-to-value), down from the current maximum of 35 years
2. An 85% LTV limit on insured refinances down from the current maximum of 90%
3. Elimination of government insurance on secured lines of credit (aka., HELOCs)
If you read my original blog post on the topic you’ll know I was a little heated with the changes when they were first announced. My opinion hasn’t changed but I’m a little less hot under the collar about it. Like everything else in life, it is what it is and stewing about it is not going to change anything.
It turns out that the overall sentiment over the changes was quite mixed. One side of the fence where I am, thinking they’re a little harsh and short-sighted. The other side applauding the government’s “proactive steps” in protecting us from ourselves and preventing a real estate market collapse. Whatever your opinion is, that’s fine, everyone’s entitled.
For now, lender underwriting departments are overloaded with applications from people who have listened to their mortgage planners and taken some action while they still have the flexibility to do so. What I don’t look forward to is a few months from now, just like what happened last year when the government took away options...I have a client in front of me who is looking for some financial relief and I have to explain there’s nothing I can do since the government felt it was better that they carry high interest debt instead of being able to access the equity in their homes without having to sell.
I can’t do anything about the changes but what I can do is give a little advice. Be prudent about how you spend your money. Understand what you’re signing when you get a retail store credit card or sign up for “don’t pay a cent” promotion. Seek out trusted advisors for your financial affairs both investment and borrowing, don’t blindly have faith in the person standing across the counter at the bank whose job it is to sell you as many products as possible at the highest rates and costs to you. Lastly, even more important than educating yourselves, educate your children. There is a severe lack of formal education surrounding personal finances in our country and the burden falls on parents to teach their kids. In doing so, don’t assume what works for you will work for them. They live in a different world than you do. “When I was a kid”, teenagers didn’t have credit cards, now they can easily get one with a $5000 limit. Like everything else, teach your kids how to respect and manage their finances and they will be much better off.
Tuesday, February 22, 2011
10 Questions to Ask Your Home Inspector
The purchase of a home is likely the largest financial expenditure you’ll ever make. And getting your home inspected is an essential step in the home-buying process. No one wants to buy a money pit – and once you have signed on the dotted line, there is no turning back. There are enough shows on TV that tell the horrific stories of people who either didn’t get an inspection done by a reputable inspector or they didn’t get one done at all. Don’t let yourself become one of those stories.
The best way to ensure you use a professional home inspector is to seek referrals from your mortgage professional, real estate agent or friends. Since you want to be able to trust your home inspector’s judgement, you have to ensure they’re not part-time home inspectors just trying to make some extra cash on the side, or they aren’t only home inspecting so they can also offer to complete any work for you that you need done on the home. To ensure the job’s done right, after all, the home inspection must not be biased.
The purpose of a home inspection is for the inspector to be able to tell you everything you need to know about the home you’re going to purchase so that you can make an informed decision.
Following are 10 key questions you can ask your home inspector before they’re hired to ensure the inspection will be completed professionally and thoroughly:
1. Can I see your licence/professional credentials and proof of insurance?
2. How many years’ experience do you have as a home inspector? (Make sure they’re talking specifically about home inspection and not just how much experience they have in a single trade.)
3. How many inspections have you personally completed?
4. What qualifications and training do you have? Are you a member of a professional organization? What’s your background – construction, engineering, plumbing, etc?
5. Can I see some references? (Make sure you also check the references.)
6. What kind of report do you provide? Do you take pictures of the house and add them to your report?
7. What kind of tools do you use during your inspection?
8. Can you give me an idea of what kind of repairs the house may need? (Be wary if they offer to fix the issues themselves or can recommend someone else to complete the job cheap.)
9. When do you do the inspection? (Let’s hope they don’t have a day job, and can only do them at night when it’s too dark to see the roof. It’s best to stay away from part-time inspectors.)
10. How long do your inspections usually take?
A quality home inspection is not just a condition in a purchase agreement, it’s your last line of defence to ensure you’re getting what you’re paying for and your potential new home isn’t shiny on the outside and crumbling on the inside. Do yourself a favour and take your inspection very seriously. You’ll thank yourself for it in the long-run.
The best way to ensure you use a professional home inspector is to seek referrals from your mortgage professional, real estate agent or friends. Since you want to be able to trust your home inspector’s judgement, you have to ensure they’re not part-time home inspectors just trying to make some extra cash on the side, or they aren’t only home inspecting so they can also offer to complete any work for you that you need done on the home. To ensure the job’s done right, after all, the home inspection must not be biased.
The purpose of a home inspection is for the inspector to be able to tell you everything you need to know about the home you’re going to purchase so that you can make an informed decision.
Following are 10 key questions you can ask your home inspector before they’re hired to ensure the inspection will be completed professionally and thoroughly:
1. Can I see your licence/professional credentials and proof of insurance?
2. How many years’ experience do you have as a home inspector? (Make sure they’re talking specifically about home inspection and not just how much experience they have in a single trade.)
3. How many inspections have you personally completed?
4. What qualifications and training do you have? Are you a member of a professional organization? What’s your background – construction, engineering, plumbing, etc?
5. Can I see some references? (Make sure you also check the references.)
6. What kind of report do you provide? Do you take pictures of the house and add them to your report?
7. What kind of tools do you use during your inspection?
8. Can you give me an idea of what kind of repairs the house may need? (Be wary if they offer to fix the issues themselves or can recommend someone else to complete the job cheap.)
9. When do you do the inspection? (Let’s hope they don’t have a day job, and can only do them at night when it’s too dark to see the roof. It’s best to stay away from part-time inspectors.)
10. How long do your inspections usually take?
A quality home inspection is not just a condition in a purchase agreement, it’s your last line of defence to ensure you’re getting what you’re paying for and your potential new home isn’t shiny on the outside and crumbling on the inside. Do yourself a favour and take your inspection very seriously. You’ll thank yourself for it in the long-run.
Tuesday, February 8, 2011
Buying the Best Home for You
A few weeks ago I was having a conversation with my mother and she was asking me some questions about my work. The topic of mortgage size came up, and never one to shy away from giving her opinion, she let me know her two cents. Sometimes these types of conversations can be relatively frustrating but if I’m in the right kind of patient mood they can be kind of entertaining since in a lot of ways my mother still thinks it’s 1972. Usually I can get her to reconsider her opinion or at least fake like she is.
In a nutshell, her thinking is that people today are crazy for taking such big mortgages with large loan-to-values and long amortizations. “What’s the matter with buying a starter home and after a few years buying something bigger? That’s what we did.” So I explained to her how sometimes it doesn’t make sense to begin with a starter home since making a move into a larger home is going to trigger costs like realtor fees, land transfer taxes, legal fees and potentially fees to break their mortgage. In the end, the homeowner could be right where they started if not further behind with regards to equity than when they started. With all that in mind, a lot of buyers would prefer to jump at the bigger house to begin with rather than spin their wheels with a starter home. This was one of the conversations that didn’t end with my mother agreeing with me but at least she faked like she did...I think.
The reality is that some people don’t think they are getting into a starter home until they live in the house for a few years and their needs change or they realize in hindsight that they didn’t really think through what all their needs and wants might be. Let’s face it; buying a house can be an emotional and exciting experience so sometimes logic doesn’t show its face. For those people who think they’re buying their long-term home whether as a first-time homebuyer, here are some things to consider in order to ensure it’s a long-term home.
Before you begin searching for a home, it’s always helpful to think about your needs both now and in the future. And if you have any questions about the home-buying process or different types of real estate, you can always ask your mortgage professional or real estate agent for input.
Following are some things to consider when you’re deciding which type of home to buy:
• Location. Do you want to live in a city, town or in the countryside? How long will your work commute be? Where will your children attend school and how will they get there? Are you close to amenities?
• Size requirements. Do you need several bedrooms, more than one bathroom, space for a home office, a two-car garage?
• Special features. Do you want air conditioning, storage or hobby space, a fireplace, a swimming pool? Do you have family members with special needs? Do you want special features to save energy, enhance indoor air quality and reduce environmental impact?
• Lifestyles and stages. Do you plan to have children? Do you have teenagers who will be moving away soon? Are you close to retirement? Will you need a home that can accommodate different stages of life?
New Versus Resale Homes
When thinking about your ideal home, the first thing you should consider is whether you want a previously owned home (often called a resale) or a new home. Here are some characteristics that may help you decide:
New Home
• Modern design. A new home has an up-to-date design that takes into account the latest trends, materials and features.
• Personalized choices. You may be able to upgrade or choose certain items such as siding, flooring, cabinets, plumbing and electrical fixtures.
• Up-to-date with the latest codes/standards. The latest building codes, electrical and energy-efficiency standards will be applied.
• Maintenance costs. Maintenance costs will be lower because everything is new and many items are covered by a warranty. You should still set aside money every year for future maintenance costs.
• Builder warranty. This is a warranty that may be provided by the builder of the home. Be sure to check all the conditions of the warranty. A homebuilder’s warranty can be important if a major system such as plumbing or heating breaks down.
• Neighbourhood amenities. Schools, shopping malls and other services may not be complete for years.
• Extra costs. You may have to pay extra if you want to add a fireplace, plant trees and sod or pave your driveway. Make sure you know exactly what’s included in the price of your home.
Resale Home
• You can see what you are buying. Easy access to services. Probably established in a neighbourhood with schools, shopping malls and other services.
• Landscaping is usually complete and fencing already installed. Previously owned homes may have extras like fireplaces, finished basements or swimming pools.
• No HST. You don’t have to pay the HST unless the house has been substantially renovated, and then the taxes are applied as if it were a new house.
• Possible redecorating and renovations. You may need to redecorate, renovate or do major repairs such as replacing the roof, windows and doors.
Deciding Which Type of Home to Buy
There are many types of homes to choose from and each has its advantages and disadvantages. Think about your needs before making a decision, and don’t forget to look beyond the interior walls. The environment surrounding your home can be as important as the environment within.
Following are some different types of homes from which to choose:
Single-Family Detached – A home containing one dwelling unit that stands alone and sits on its own lot, thereby offering a greater degree of privacy.
Semi-Detached – A single-family home that is joined to another one by a common wall. It can offer many of the advantages of a single-family detached home and is usually less expensive to buy and maintain.
Row House or Townhouse – Many similar single-family homes, side-by-side, separated by common walls. They can be freehold, condominiums or rental units. They offer less privacy than a single-family detached home but still provide a separate outdoor space. These homes can cost less to buy and maintain – but they can also be large, luxury units.
Link or Carriage Home – Houses joined by garages or carports, which provide access to the front and back yards. Builders sometimes join basement walls so that link houses appear to be single-family homes on small lots. These houses can be less expensive than single-family detached homes.
Condominiums or Stratas – A condo or strata is a form of ownership, not a type of construction. They can be high-rise residential buildings, townhouse complexes, individual houses and low-rise residential buildings.
There’s no guarantee you’re going to be making the right decision when buying a home but taking all the possibilities into consideration will make it more likely. So, although you’re excited about moving into your dream home, take your time and weigh your options to increase your odds of making the right decision.
In a nutshell, her thinking is that people today are crazy for taking such big mortgages with large loan-to-values and long amortizations. “What’s the matter with buying a starter home and after a few years buying something bigger? That’s what we did.” So I explained to her how sometimes it doesn’t make sense to begin with a starter home since making a move into a larger home is going to trigger costs like realtor fees, land transfer taxes, legal fees and potentially fees to break their mortgage. In the end, the homeowner could be right where they started if not further behind with regards to equity than when they started. With all that in mind, a lot of buyers would prefer to jump at the bigger house to begin with rather than spin their wheels with a starter home. This was one of the conversations that didn’t end with my mother agreeing with me but at least she faked like she did...I think.
The reality is that some people don’t think they are getting into a starter home until they live in the house for a few years and their needs change or they realize in hindsight that they didn’t really think through what all their needs and wants might be. Let’s face it; buying a house can be an emotional and exciting experience so sometimes logic doesn’t show its face. For those people who think they’re buying their long-term home whether as a first-time homebuyer, here are some things to consider in order to ensure it’s a long-term home.
Before you begin searching for a home, it’s always helpful to think about your needs both now and in the future. And if you have any questions about the home-buying process or different types of real estate, you can always ask your mortgage professional or real estate agent for input.
Following are some things to consider when you’re deciding which type of home to buy:
• Location. Do you want to live in a city, town or in the countryside? How long will your work commute be? Where will your children attend school and how will they get there? Are you close to amenities?
• Size requirements. Do you need several bedrooms, more than one bathroom, space for a home office, a two-car garage?
• Special features. Do you want air conditioning, storage or hobby space, a fireplace, a swimming pool? Do you have family members with special needs? Do you want special features to save energy, enhance indoor air quality and reduce environmental impact?
• Lifestyles and stages. Do you plan to have children? Do you have teenagers who will be moving away soon? Are you close to retirement? Will you need a home that can accommodate different stages of life?
New Versus Resale Homes
When thinking about your ideal home, the first thing you should consider is whether you want a previously owned home (often called a resale) or a new home. Here are some characteristics that may help you decide:
New Home
• Modern design. A new home has an up-to-date design that takes into account the latest trends, materials and features.
• Personalized choices. You may be able to upgrade or choose certain items such as siding, flooring, cabinets, plumbing and electrical fixtures.
• Up-to-date with the latest codes/standards. The latest building codes, electrical and energy-efficiency standards will be applied.
• Maintenance costs. Maintenance costs will be lower because everything is new and many items are covered by a warranty. You should still set aside money every year for future maintenance costs.
• Builder warranty. This is a warranty that may be provided by the builder of the home. Be sure to check all the conditions of the warranty. A homebuilder’s warranty can be important if a major system such as plumbing or heating breaks down.
• Neighbourhood amenities. Schools, shopping malls and other services may not be complete for years.
• Extra costs. You may have to pay extra if you want to add a fireplace, plant trees and sod or pave your driveway. Make sure you know exactly what’s included in the price of your home.
Resale Home
• You can see what you are buying. Easy access to services. Probably established in a neighbourhood with schools, shopping malls and other services.
• Landscaping is usually complete and fencing already installed. Previously owned homes may have extras like fireplaces, finished basements or swimming pools.
• No HST. You don’t have to pay the HST unless the house has been substantially renovated, and then the taxes are applied as if it were a new house.
• Possible redecorating and renovations. You may need to redecorate, renovate or do major repairs such as replacing the roof, windows and doors.
Deciding Which Type of Home to Buy
There are many types of homes to choose from and each has its advantages and disadvantages. Think about your needs before making a decision, and don’t forget to look beyond the interior walls. The environment surrounding your home can be as important as the environment within.
Following are some different types of homes from which to choose:
Single-Family Detached – A home containing one dwelling unit that stands alone and sits on its own lot, thereby offering a greater degree of privacy.
Semi-Detached – A single-family home that is joined to another one by a common wall. It can offer many of the advantages of a single-family detached home and is usually less expensive to buy and maintain.
Row House or Townhouse – Many similar single-family homes, side-by-side, separated by common walls. They can be freehold, condominiums or rental units. They offer less privacy than a single-family detached home but still provide a separate outdoor space. These homes can cost less to buy and maintain – but they can also be large, luxury units.
Link or Carriage Home – Houses joined by garages or carports, which provide access to the front and back yards. Builders sometimes join basement walls so that link houses appear to be single-family homes on small lots. These houses can be less expensive than single-family detached homes.
Condominiums or Stratas – A condo or strata is a form of ownership, not a type of construction. They can be high-rise residential buildings, townhouse complexes, individual houses and low-rise residential buildings.
There’s no guarantee you’re going to be making the right decision when buying a home but taking all the possibilities into consideration will make it more likely. So, although you’re excited about moving into your dream home, take your time and weigh your options to increase your odds of making the right decision.
Wednesday, January 26, 2011
Here we go again....
Last week the Minister of Finance, Jim Flaherty, announced another round of regulations on the mortgage industry. These are in addition to regulations he announced last year around this time http://abbatangelogroup.blogspot.com/2010_02_01_archive.html. I figured I’d give it a few days for the changes to sink in a bit before I shared my comments. It turns out that even after a few days I still can’t wrap my head around the changes...I’ll probably just use a few less curse words to describe my opinion.
For those of you who haven’t yet heard about the changes, here they are in a nutshell:
1. A 30-year maximum amortization on insured mortgages over 80% LTV (loan-to-value), down from the current maximum of 35 years
2. An 85% LTV limit on insured refinances down from the current maximum of 90%
3. Elimination of government insurance on secured lines of credit (aka., HELOCs)
I could probably go on forever with my opinion on these changes but I’ll do my best not to. Changes one and three I don’t think carry a huge impact. The difference on the monthly payment for a $300,000 mortgage is about $100 when looking at a 30-year amortization compared to a 35-year amortization. If a borrower needs that extra $100 in order to qualify for the mortgage, maybe they shouldn’t be getting the mortgage anyways. The HELOC change remains to be seen what lenders will do with their products, if anything so my opinion on that is fairly neutral.
It’s the change to refinance maximums that I feel has the most negative impact. The changes last April lowered the refinance maximum from 95% LTV to 90% and now it’s being further lowered to 85%. I completely understand the Minister of Finance’s position on this...limit borrower’s ability to lower their equity position in their homes, creating a source of savings, rather than as he put it “an ATM machine”. However, I think what he overlooked is the greatest reason why people need to refinance their homes. He made reference to people removing the equity for their homes in order to buy boats and big-screen TVs. While that might be true in some cases, it definitely isn’t the norm in the cases I see. I’ve never had a client refinance their home in order to spend it on something other than home improvements or paying off other high-interest debt. Sure, that other high-interest debt may have been accumulated by purchasing boats and big-screen TVs but to me the issue isn’t what the client purchased, it was that a financial services company was more than willing to provide them with the credit facility to make the purchase in the first place and then carry the balance at a ridiculous rate. So once again the Minister announces changes to mortgage rules but does nothing about the practices of companies granting credit cards with ridiculous limits and unsecured Lines of Credit to anyone with a pulse. In my opinion, if he was to crack down on those predatory practices, there would be less need for people to refinance their homes. But hold on a second, who is it that the Minister looks to for guidance on these types of matters? Oh right, the CEOs of the big five Banks. I can’t imagine why they (the biggest issuers of credit cards and LOCs) would want to limit the ability of their Visa and Line of Credit customers paying 8-20% on their outstanding balances to refinance their mortgages paying less than 4%, especially when more and more of those mortgages are being refinanced with non-bank lenders (he said with a giant stench of sarcasm).
What this creates, in my opinion, is a market where people can obtain as many revolving credit lines as they want and have now been limited as to their options for relief from their debt. So, you can buy a house and leverage 95% of it but if you own a house and want to refinance it, you can only do so to 85%. Hmmm, so if I’m drowning in high-interest payments and don’t have enough equity in my house to dig myself out of it, I can probably sell my house to get the debt relief because the home I purchase can be leveraged 10% more. In the end, I end up worse off from an equity standpoint than I would have been if I had been able to refinance to 90%. Part of the reasoning behind the Minister’s changes was to further prevent our economy (which has shown NO signs of this happening) from having the same bursting housing bubble that the US had a few years ago. Except, once people start catching on that selling their homes could be the only way to get some debt relief, there will be a greater supply of homes on the market being sold by desperate sellers. That sounds to me like a recipe for falling house prices....do you hear that sound of a bursting bubble?
I’m not saying that the changes shouldn’t have been made, believe it or not. I’m saying that there are other ways the same desired outcome could have been achieved and it could have been in ways that would be more beneficial to the client. I’m also saying that the Government should be looking long and hard at all the elements that go into what they deem to be the problem and make more broad changes. It may also be a good idea to not have advisors who have a vested interest in one or more elements of the decision.
I know, I know, I said I would keep this short. However, this is short. I could go on about this for pages and pages! Let me know what you think and if you support the changes. I’d love to hear your opinion.
For those of you who haven’t yet heard about the changes, here they are in a nutshell:
1. A 30-year maximum amortization on insured mortgages over 80% LTV (loan-to-value), down from the current maximum of 35 years
2. An 85% LTV limit on insured refinances down from the current maximum of 90%
3. Elimination of government insurance on secured lines of credit (aka., HELOCs)
I could probably go on forever with my opinion on these changes but I’ll do my best not to. Changes one and three I don’t think carry a huge impact. The difference on the monthly payment for a $300,000 mortgage is about $100 when looking at a 30-year amortization compared to a 35-year amortization. If a borrower needs that extra $100 in order to qualify for the mortgage, maybe they shouldn’t be getting the mortgage anyways. The HELOC change remains to be seen what lenders will do with their products, if anything so my opinion on that is fairly neutral.
It’s the change to refinance maximums that I feel has the most negative impact. The changes last April lowered the refinance maximum from 95% LTV to 90% and now it’s being further lowered to 85%. I completely understand the Minister of Finance’s position on this...limit borrower’s ability to lower their equity position in their homes, creating a source of savings, rather than as he put it “an ATM machine”. However, I think what he overlooked is the greatest reason why people need to refinance their homes. He made reference to people removing the equity for their homes in order to buy boats and big-screen TVs. While that might be true in some cases, it definitely isn’t the norm in the cases I see. I’ve never had a client refinance their home in order to spend it on something other than home improvements or paying off other high-interest debt. Sure, that other high-interest debt may have been accumulated by purchasing boats and big-screen TVs but to me the issue isn’t what the client purchased, it was that a financial services company was more than willing to provide them with the credit facility to make the purchase in the first place and then carry the balance at a ridiculous rate. So once again the Minister announces changes to mortgage rules but does nothing about the practices of companies granting credit cards with ridiculous limits and unsecured Lines of Credit to anyone with a pulse. In my opinion, if he was to crack down on those predatory practices, there would be less need for people to refinance their homes. But hold on a second, who is it that the Minister looks to for guidance on these types of matters? Oh right, the CEOs of the big five Banks. I can’t imagine why they (the biggest issuers of credit cards and LOCs) would want to limit the ability of their Visa and Line of Credit customers paying 8-20% on their outstanding balances to refinance their mortgages paying less than 4%, especially when more and more of those mortgages are being refinanced with non-bank lenders (he said with a giant stench of sarcasm).
What this creates, in my opinion, is a market where people can obtain as many revolving credit lines as they want and have now been limited as to their options for relief from their debt. So, you can buy a house and leverage 95% of it but if you own a house and want to refinance it, you can only do so to 85%. Hmmm, so if I’m drowning in high-interest payments and don’t have enough equity in my house to dig myself out of it, I can probably sell my house to get the debt relief because the home I purchase can be leveraged 10% more. In the end, I end up worse off from an equity standpoint than I would have been if I had been able to refinance to 90%. Part of the reasoning behind the Minister’s changes was to further prevent our economy (which has shown NO signs of this happening) from having the same bursting housing bubble that the US had a few years ago. Except, once people start catching on that selling their homes could be the only way to get some debt relief, there will be a greater supply of homes on the market being sold by desperate sellers. That sounds to me like a recipe for falling house prices....do you hear that sound of a bursting bubble?
I’m not saying that the changes shouldn’t have been made, believe it or not. I’m saying that there are other ways the same desired outcome could have been achieved and it could have been in ways that would be more beneficial to the client. I’m also saying that the Government should be looking long and hard at all the elements that go into what they deem to be the problem and make more broad changes. It may also be a good idea to not have advisors who have a vested interest in one or more elements of the decision.
I know, I know, I said I would keep this short. However, this is short. I could go on about this for pages and pages! Let me know what you think and if you support the changes. I’d love to hear your opinion.
Monday, January 10, 2011
Tips to Keep in Mind Between Your Mortgage Approval and Funding Dates
In light of the new market realities and tightening of credit underwriting standards by both lenders and mortgage default insurers as of late, keep in mind that now – more than ever – it’s important to be careful what you do between the time your mortgage is approved and when it funds. Most people assume that when their mortgage has been approved, it’s a done deal even if it’s months prior to their closing and that’s simply not the case.
A few mortgage lenders and insurers have been doing something lately that they have not done in a long time – pulling new credit bureaus prior to funding, especially if there is a long period between the time of your approval and when the mortgage actually funds.
Following are eight tips to keep in mind between your mortgage approval and funding dates:
1. Don’t buy a new car or trade-up to a more expensive lease.
2. Don’t quit your job or change jobs. Even if it’s a better-paying job, you still are likely to be on a probationary period. If in doubt, call your mortgage professional and they can let you know if this may jeopardize your approval.
3. Don’t change industries, decide to become self-employed or accept a contract position even if it’s within the same industry. Delay the start of your new job, self-employment or contract status until after the funding date of your mortgage.
4. Don’t transfer large sums of money between bank accounts. Lenders get especially skittish about this one because it looks like you’re borrowing money. Be ready to document cash transactions or money movements.
5. Don’t forget to pay your bills, even ones that you’re disputing. This can be a real deal-breaker. If the lender pulls your credit bureau prior to closing and sees a collection or a delinquent account, the best you can hope for is that they make you pay off the account before they will fund. You don’t want to have to scramble to pay off a debt at the last minute!
6. Don’t open new credit cards. Again, just wait until after your funding date.
7. Don’t accept a cash gift without properly documenting it – even if this is from proceeds of a wedding. If you have a bunch of cash to deposit before your funding date, give your mortgage professional a call before you deposit it.
8. Don’t buy furniture on the “Do not pay for XX years plan” until after funding. Even though you don’t have to pay now, it will still be reported on your credit bureau, and will become an issue – especially if your approval was tight to begin with.
While you may not risk losing your mortgage approval because you have broken one of these rules, it’s always best to talk to your mortgage professional before doing any of the above just to make sure!
A few mortgage lenders and insurers have been doing something lately that they have not done in a long time – pulling new credit bureaus prior to funding, especially if there is a long period between the time of your approval and when the mortgage actually funds.
Following are eight tips to keep in mind between your mortgage approval and funding dates:
1. Don’t buy a new car or trade-up to a more expensive lease.
2. Don’t quit your job or change jobs. Even if it’s a better-paying job, you still are likely to be on a probationary period. If in doubt, call your mortgage professional and they can let you know if this may jeopardize your approval.
3. Don’t change industries, decide to become self-employed or accept a contract position even if it’s within the same industry. Delay the start of your new job, self-employment or contract status until after the funding date of your mortgage.
4. Don’t transfer large sums of money between bank accounts. Lenders get especially skittish about this one because it looks like you’re borrowing money. Be ready to document cash transactions or money movements.
5. Don’t forget to pay your bills, even ones that you’re disputing. This can be a real deal-breaker. If the lender pulls your credit bureau prior to closing and sees a collection or a delinquent account, the best you can hope for is that they make you pay off the account before they will fund. You don’t want to have to scramble to pay off a debt at the last minute!
6. Don’t open new credit cards. Again, just wait until after your funding date.
7. Don’t accept a cash gift without properly documenting it – even if this is from proceeds of a wedding. If you have a bunch of cash to deposit before your funding date, give your mortgage professional a call before you deposit it.
8. Don’t buy furniture on the “Do not pay for XX years plan” until after funding. Even though you don’t have to pay now, it will still be reported on your credit bureau, and will become an issue – especially if your approval was tight to begin with.
While you may not risk losing your mortgage approval because you have broken one of these rules, it’s always best to talk to your mortgage professional before doing any of the above just to make sure!
Tuesday, December 21, 2010
The Trouble with Debit Cards
If you’re like just about everyone around you and I’m sure you are, over the last 4-6 weeks you’ve been buying things for an endless list of people and trying to get it done as quickly as possible. More importantly, when you’ve found that perfect thing and taken it to the counter to pay for it, you’ve handed over a piece of plastic to cover the cost. We live in a society of instant gratification and the need for convenience. Unlike our parents or grandparents – who saved up for larger purchases – we are often tempted to splurge on bigger-ticket items simply because we have a debit card in hand when we head out “window shopping”.
And aside from overspending thanks to the advent of debit cards, consumers are also more likely to dip into overdraft, which ends up costing more thanks to fees and interest that banks charge whenever you spend more than you have in your account.
Basically, a debit card works like a cheque. The only difference is that every time you use it, you’re immediately taking money out of your account. That’s why when you overdraw it’s like bouncing a cheque – only worse because, unlike cheques, you probably don’t keep a record of every debit card purchase you make.
You may even make a bunch of small purchases before you realize you’ve spent more than you have. So before you pay for that coffee or lunch purchase with your debit card, make sure you have enough money in your account to cover it.
Revert to using cash for daily expenses...cash controls spending, plain and simple. Using cash to pay for everyday purchases such as coffee, transit, lunch and magazines alerts you to the idea that you’re actually spending real money. You just don’t get the same cautionary sense when you haul out plastic, be it a debit or credit card.
There’s a distinct cognitive event that happens when you handle money – it’s called awareness. Over the counter goes the five dollar bill and back comes a loonie, a dime, two nickels and four pennies.
Did you just add up the change above to determine how much money you have left? Did you think about what that purchase could have been? You see, you are much more conscious of this imaginary purchase than if you had paid with plastic.
Now, add in the awareness of the bills left in your wallet and you become attuned to your temporary wealth, or lack thereof. At the end of the day, what encourages or cautions many consumers about spending is knowing where you stand from a financial perspective. That’s why cash can help control spending. Using cash to pay for everyday purchases alerts you to the idea that you’re actually spending real money.
By allotting yourself a weekly cash allowance for entertainment and everyday expenses – such as that daily morning coffee or weekly movie – you are building a budget around what you can spend on these purchases. And once the money in your wallet has been spent, you have to ensure you fight the urge to withdraw more cash or resort back to using your debit card.
Be realistic about what you typically spend on these items in a week. If you routinely eat out for lunch or stop at Tim Hortons for coffee, count that as well. If you think you’re spending too much on these items, you can then decide to find a less expensive alternative, such as brown-bagging your lunch or making your own coffee.
Let’s say, for instance, that you start the week off with $50 in your wallet and you began to spend it on your purchases. You will see $50 turn into $40, $40 turn into $25, $25 turn into $15 and so on. Every time you look into your wallet, you will see what’s left over from your original $50 and be aware of how quickly your money is being spent. This alone can make you think twice before making a purchase.
Using cash instead of the convenience of debit and credit cards might seem like something out of the stone age but take a look at your parents and grandparents. They have likely never had large sums of debt they carried from month to month and have savings they should be proud of instead of embarrassed by.
And aside from overspending thanks to the advent of debit cards, consumers are also more likely to dip into overdraft, which ends up costing more thanks to fees and interest that banks charge whenever you spend more than you have in your account.
Basically, a debit card works like a cheque. The only difference is that every time you use it, you’re immediately taking money out of your account. That’s why when you overdraw it’s like bouncing a cheque – only worse because, unlike cheques, you probably don’t keep a record of every debit card purchase you make.
You may even make a bunch of small purchases before you realize you’ve spent more than you have. So before you pay for that coffee or lunch purchase with your debit card, make sure you have enough money in your account to cover it.
Revert to using cash for daily expenses...cash controls spending, plain and simple. Using cash to pay for everyday purchases such as coffee, transit, lunch and magazines alerts you to the idea that you’re actually spending real money. You just don’t get the same cautionary sense when you haul out plastic, be it a debit or credit card.
There’s a distinct cognitive event that happens when you handle money – it’s called awareness. Over the counter goes the five dollar bill and back comes a loonie, a dime, two nickels and four pennies.
Did you just add up the change above to determine how much money you have left? Did you think about what that purchase could have been? You see, you are much more conscious of this imaginary purchase than if you had paid with plastic.
Now, add in the awareness of the bills left in your wallet and you become attuned to your temporary wealth, or lack thereof. At the end of the day, what encourages or cautions many consumers about spending is knowing where you stand from a financial perspective. That’s why cash can help control spending. Using cash to pay for everyday purchases alerts you to the idea that you’re actually spending real money.
By allotting yourself a weekly cash allowance for entertainment and everyday expenses – such as that daily morning coffee or weekly movie – you are building a budget around what you can spend on these purchases. And once the money in your wallet has been spent, you have to ensure you fight the urge to withdraw more cash or resort back to using your debit card.
Be realistic about what you typically spend on these items in a week. If you routinely eat out for lunch or stop at Tim Hortons for coffee, count that as well. If you think you’re spending too much on these items, you can then decide to find a less expensive alternative, such as brown-bagging your lunch or making your own coffee.
Let’s say, for instance, that you start the week off with $50 in your wallet and you began to spend it on your purchases. You will see $50 turn into $40, $40 turn into $25, $25 turn into $15 and so on. Every time you look into your wallet, you will see what’s left over from your original $50 and be aware of how quickly your money is being spent. This alone can make you think twice before making a purchase.
Using cash instead of the convenience of debit and credit cards might seem like something out of the stone age but take a look at your parents and grandparents. They have likely never had large sums of debt they carried from month to month and have savings they should be proud of instead of embarrassed by.
Wednesday, December 8, 2010
Closing Costs – Often overlooked, always misunderstood
When buying a new home, closing costs are something everyone has to pay. Unfortunately, they often get overlooked and most homebuyers don’t understand what constitutes closing costs...maybe that’s why they get overlooked.
I think this has to do with lack of education and the fact that nobody really talks about what they are in detail, but rather just refers to them as “closing costs”. I remember when I bought my first house, the realtor didn’t talk about closing costs, the bank rep didn’t talk about closing costs and the lawyer didn’t talk about closing costs until a few days before the purchase was supposed to close and I was told I needed to produce several thousand dollars. What?! Now, of course I’m to blame as well since I didn’t seek out what costs needed to be covered and relied on the professionals I was dealing with to hold my hand through the process. Obviously that didn’t happen. I was naive, but most first-time homebuyers and some experienced homebuyers are too.
Fast forward 12+ years and you can understand why I highlight closing costs to clients at several points through the process. The last thing I want is for a client to be scrambling like I was a few days before closing, trying to cover their closing costs.
In reality, there is more to it than most would think. Here are some of the approximate costs that buyers should be prepared for:
- Legal fees of $1000-$1200 for the purchase with an additional $800-$1000 if they are also selling a home. This includes a title search, mortgage registration and discharge if applicable.
- $300 for a home inspection.
- $250 for an appraisal. In some cases lenders will require an appraisal to verify the market value of the property.
- PST on Insurance premium. If your mortgage is for more than 80% of the purchase price you will have to pay a default insurance premium, which is included in your mortgage. However, the PST on the premium is paid outside of the mortgage.
- Property tax to the vendor. If the vendor has pre-paid their property taxes for a portion of the year where you have ownership, you may be responsible to reimburse them for that portion.
- Land transfer tax. This is the biggie. There is an Ontario Land Transfer Tax and a Toronto Land Transfer Tax. Obviously buyers within Toronto are responsible for both and buyers outside Toronto are only responsible for the Ontario Tax. These taxes are tiered dependent upon the purchase price of the property. Land transfer taxes can add up. For example, the Land Transfer Tax for a $400,000 property within Toronto would be $8200 and $4475 outside of Toronto. A LTT calculator can be found here http://www.torontorealestateboard.com/LTT_splash/ltt_calculator.htm
Some of the above costs like the home inspection and appraisal would be paid for before the rest of the closing costs but I think they are worth noting since they are costs associated with the purchase that should be accounted for ahead of time.
You can see that closing costs can add up quickly. Most lenders use 1.5% of the purchase price as a ballpark estimate. Although this would give you an estimate of what to expect, I highly recommend doing a more accurate calculation. Knowing what your costs will be ahead of time will allow you to plan accordingly to have the money available or incorporate them into your mortgage if you can.
I think this has to do with lack of education and the fact that nobody really talks about what they are in detail, but rather just refers to them as “closing costs”. I remember when I bought my first house, the realtor didn’t talk about closing costs, the bank rep didn’t talk about closing costs and the lawyer didn’t talk about closing costs until a few days before the purchase was supposed to close and I was told I needed to produce several thousand dollars. What?! Now, of course I’m to blame as well since I didn’t seek out what costs needed to be covered and relied on the professionals I was dealing with to hold my hand through the process. Obviously that didn’t happen. I was naive, but most first-time homebuyers and some experienced homebuyers are too.
Fast forward 12+ years and you can understand why I highlight closing costs to clients at several points through the process. The last thing I want is for a client to be scrambling like I was a few days before closing, trying to cover their closing costs.
In reality, there is more to it than most would think. Here are some of the approximate costs that buyers should be prepared for:
- Legal fees of $1000-$1200 for the purchase with an additional $800-$1000 if they are also selling a home. This includes a title search, mortgage registration and discharge if applicable.
- $300 for a home inspection.
- $250 for an appraisal. In some cases lenders will require an appraisal to verify the market value of the property.
- PST on Insurance premium. If your mortgage is for more than 80% of the purchase price you will have to pay a default insurance premium, which is included in your mortgage. However, the PST on the premium is paid outside of the mortgage.
- Property tax to the vendor. If the vendor has pre-paid their property taxes for a portion of the year where you have ownership, you may be responsible to reimburse them for that portion.
- Land transfer tax. This is the biggie. There is an Ontario Land Transfer Tax and a Toronto Land Transfer Tax. Obviously buyers within Toronto are responsible for both and buyers outside Toronto are only responsible for the Ontario Tax. These taxes are tiered dependent upon the purchase price of the property. Land transfer taxes can add up. For example, the Land Transfer Tax for a $400,000 property within Toronto would be $8200 and $4475 outside of Toronto. A LTT calculator can be found here http://www.torontorealestateboard.com/LTT_splash/ltt_calculator.htm
Some of the above costs like the home inspection and appraisal would be paid for before the rest of the closing costs but I think they are worth noting since they are costs associated with the purchase that should be accounted for ahead of time.
You can see that closing costs can add up quickly. Most lenders use 1.5% of the purchase price as a ballpark estimate. Although this would give you an estimate of what to expect, I highly recommend doing a more accurate calculation. Knowing what your costs will be ahead of time will allow you to plan accordingly to have the money available or incorporate them into your mortgage if you can.
Wednesday, November 24, 2010
Mortgage Renewals – BEWARE OF BEING GOUGED!!!
This is something I posted earlier in the year that I think is always relevant and worth re-posting....
Did you know that 84% of all maturing mortgages are renewed with the same lender? 84%!! I find that staggering. Why, you ask? Well, did you also know that at least in the case of the banks, the renewal notices that get sent to you as your mortgage is maturing do not quote their best rates? Surprised...you shouldn’t be.
Why would people renew at a rate that’s not the best available? It’s just like when you walked into the bank to get your first mortgage and the quote you were given was not the best rate. It likely required you to negotiate like crazy to get a rate that still wasn’t the best available. I know, I know, it’s just so easy to sign the renewal notice and send it back and that’s it. Let me draw a comparison. Take a professional athlete who is coming to end of his contract and will be a free agent. Does he simply sign on the dotted line at the end of his contract for whatever the team is offering? Absolutely not!! He tests the free agent market and entertains offers from the open market to find out who the highest bidder will be so he can make as much money as possible. More importantly, he gets an agent to do it for him. The same goes for the world of maturing mortgages. There is a very competitive lender market out there that desperately wants your business and is willing to fight for it. Consumers should be taking advantage of their free agency and that open market to get themselves the best deal possible and save money. And just like in the sporting example, there are agents who are willing to do the shopping for you to get you the best deal. The difference is our services are free to our clients whereas a sports agent charges a hefty fee to their clients.
Most lenders send out their renewal notices 30 days before your renewal. This is by design. The less notice they give you, the less likely you are to switch to a different lender. Don't just sit back and wait for their notice to come in the mail before starting to look at the market. You can get a rate hold up to 120 days out from your renewal. That will protect you against possible rate increases in those 120days and if the rate goes down in that time, you get the lower rate. I always recommend clients get their approval and rate hold as early as possible. Then when their renewal notice comes in the mail they have a choice and the next steps are quick and easy. Getting the "most" out of your mortgage takes active management, not complacency. Over the life of your mortgage you stand to save thousands of dollars by being proactive, instead of reactive.
One of the myths about moving your mortgage to a different lender is that there are huge fees to do it. Although on closed mortgages there are penalties if you want to switch mid-term, if you are at your renewal, there are no big fees or penalties to switch to a different lender. Most lenders will charge $200-$250 and call it an Administrative Charge or Discharge fee but that fee can be included in your new mortgage and would likely pale in comparison to what you would save in interest charges if you change lenders.
If you have a mortgage coming to the end of its term in the upcoming months, give me a call so I can ensure that you’re getting the best deal possible. Just think...you don’t need to do any shopping, negotiating or accommodating the bank’s hours. I’m one phone call away, will do the shopping for you and come to you whenever it fits into your schedule.
At the very least, keep yourself informed so you have as much leverage as possible if you decide to take on the challenge of negotiating with your bank.
peter@theabbatangelogroup.com
647-203-5440
Did you know that 84% of all maturing mortgages are renewed with the same lender? 84%!! I find that staggering. Why, you ask? Well, did you also know that at least in the case of the banks, the renewal notices that get sent to you as your mortgage is maturing do not quote their best rates? Surprised...you shouldn’t be.
Why would people renew at a rate that’s not the best available? It’s just like when you walked into the bank to get your first mortgage and the quote you were given was not the best rate. It likely required you to negotiate like crazy to get a rate that still wasn’t the best available. I know, I know, it’s just so easy to sign the renewal notice and send it back and that’s it. Let me draw a comparison. Take a professional athlete who is coming to end of his contract and will be a free agent. Does he simply sign on the dotted line at the end of his contract for whatever the team is offering? Absolutely not!! He tests the free agent market and entertains offers from the open market to find out who the highest bidder will be so he can make as much money as possible. More importantly, he gets an agent to do it for him. The same goes for the world of maturing mortgages. There is a very competitive lender market out there that desperately wants your business and is willing to fight for it. Consumers should be taking advantage of their free agency and that open market to get themselves the best deal possible and save money. And just like in the sporting example, there are agents who are willing to do the shopping for you to get you the best deal. The difference is our services are free to our clients whereas a sports agent charges a hefty fee to their clients.
Most lenders send out their renewal notices 30 days before your renewal. This is by design. The less notice they give you, the less likely you are to switch to a different lender. Don't just sit back and wait for their notice to come in the mail before starting to look at the market. You can get a rate hold up to 120 days out from your renewal. That will protect you against possible rate increases in those 120days and if the rate goes down in that time, you get the lower rate. I always recommend clients get their approval and rate hold as early as possible. Then when their renewal notice comes in the mail they have a choice and the next steps are quick and easy. Getting the "most" out of your mortgage takes active management, not complacency. Over the life of your mortgage you stand to save thousands of dollars by being proactive, instead of reactive.
One of the myths about moving your mortgage to a different lender is that there are huge fees to do it. Although on closed mortgages there are penalties if you want to switch mid-term, if you are at your renewal, there are no big fees or penalties to switch to a different lender. Most lenders will charge $200-$250 and call it an Administrative Charge or Discharge fee but that fee can be included in your new mortgage and would likely pale in comparison to what you would save in interest charges if you change lenders.
If you have a mortgage coming to the end of its term in the upcoming months, give me a call so I can ensure that you’re getting the best deal possible. Just think...you don’t need to do any shopping, negotiating or accommodating the bank’s hours. I’m one phone call away, will do the shopping for you and come to you whenever it fits into your schedule.
At the very least, keep yourself informed so you have as much leverage as possible if you decide to take on the challenge of negotiating with your bank.
peter@theabbatangelogroup.com
647-203-5440
Sunday, November 7, 2010
Retiring with a Mortgage
Last week there was an article in the Toronto Star that discussed the amount of baby boomers who are putting off retirement or heading into retirement, still having not paid off their mortgage. With 35 year amortizations becoming the norm, most borrowers now, at least at the beginning of their mortgage, are looking at an end to their mortgage that is tickling the age, if not right into what they deem to be the age they want to retire. This isn’t necessarily a bad thing and may in fact end up being the reality. However, this doesn’t need to be the reality. Most mortgages come with flexible pre-payment plans. If you don’t want to be part of the percentage putting off retirement or still with a mortgage when you are retired, take advantage of your pre-payment options. It’s not difficult to calculate the effect that extra payments will have on the life of your mortgage. Talk to a professional, if you haven’t already, to develop your plan to get mortgage-free sooner, rather than later.
Below is the article that appeared in the Toronto Star on October 28, 2010:
Ontario baby boomers are looking to move to smaller homes in retirement. But first they have to pay off the mortgage.
A poll by TD Canada Trust released Thursday says 86 per cent of boomers want a smaller home when they retire. However, even though they say it is important to pay off the mortgage before they retire, it turns out less than half, or 43 per cent have actually done so.
One quarter of those boomers have paid off less than 40 per cent of their mortgage, meaning they have a ways to go before thinking about retirement.
About half says moving to a smaller home will help them save money, while more than a third says the new home, although smaller, will have more luxurious features.
“Moving to a smaller home can allow you to free up assets to put towards your retirement savings or enjoy in other ways,” said Farhaneh Haque, regional sales manager for TD Canada Trust.
Baby boomers are the post war generation born between 1946 to 1964,with the first wave approaching their retirement years. But an uncertain economy and falling stock markets over the last several years have meant that some boomers have had to hold back retirement or refinance their homes to stay afloat.
For their next property, boomers aren’t all rushing to the condo market either. More than half, or 61 per cent say they plan to buy detached. Condos came in second at 24 per cent. Top reasons for a detached house is that boomers still want a back yard and garden and really hate paying condo fees. Condos are popular because they require less maintenance and offer better security, and have amenities such as a gym or pool.
Meanwhile, another third of boomers are planning to buy a retirement property south of the border.
A quarter say “opportunities created by the depressed real estate market have sparked their interest,” according to the poll.
About ten per cent already own a vacation property, but another 12 per cent plan to buy on retirement.
Below is the article that appeared in the Toronto Star on October 28, 2010:
Ontario baby boomers are looking to move to smaller homes in retirement. But first they have to pay off the mortgage.
A poll by TD Canada Trust released Thursday says 86 per cent of boomers want a smaller home when they retire. However, even though they say it is important to pay off the mortgage before they retire, it turns out less than half, or 43 per cent have actually done so.
One quarter of those boomers have paid off less than 40 per cent of their mortgage, meaning they have a ways to go before thinking about retirement.
About half says moving to a smaller home will help them save money, while more than a third says the new home, although smaller, will have more luxurious features.
“Moving to a smaller home can allow you to free up assets to put towards your retirement savings or enjoy in other ways,” said Farhaneh Haque, regional sales manager for TD Canada Trust.
Baby boomers are the post war generation born between 1946 to 1964,with the first wave approaching their retirement years. But an uncertain economy and falling stock markets over the last several years have meant that some boomers have had to hold back retirement or refinance their homes to stay afloat.
For their next property, boomers aren’t all rushing to the condo market either. More than half, or 61 per cent say they plan to buy detached. Condos came in second at 24 per cent. Top reasons for a detached house is that boomers still want a back yard and garden and really hate paying condo fees. Condos are popular because they require less maintenance and offer better security, and have amenities such as a gym or pool.
Meanwhile, another third of boomers are planning to buy a retirement property south of the border.
A quarter say “opportunities created by the depressed real estate market have sparked their interest,” according to the poll.
About ten per cent already own a vacation property, but another 12 per cent plan to buy on retirement.
Monday, October 25, 2010
“Interest”-ing times ahead...
There was a change in the Canadian mortgage industry last week. It was a quiet one, at least from a consumer standpoint, but I believe it will have a big impact down the road. The change, in a nutshell, is that TD Canada Trust has changed the way they register mortgages.
Up until October 18, TD registered their charges the same way other institutions did using a “conventional charge” for the amount of your mortgage. Registering your mortgage is something that you pay your real estate lawyer to do. Under TD’s new process, they are using what is called a collateral charge that is registered at up to 125% of the value of your home. The reason behind the change, according to TD, is to give homeowners easier, cheaper access to the equity built up in their homes.
It is very important to understand that this change does not mean borrowers can access 125% of the value of their homes. The same policies remain in effect, that limit all borrowers to a maximum of 95% LTV for a purchase and 90% LTV for a refinance. What it does mean, is as the value of a borrower’s home increases, if they refinance their mortgage, it will not have to be re-registered, avoiding legal fees. In the case of a refinance, clients will still have to adhere to the 90% maximum LTV policy and re-qualify for the desired amount. For example, somebody buying a house for $300,000 can borrow up to $285,000 (95% LTV) and the collateral charge would be registered for $375,000. If after 3 years, the property value has gone up to $400,000, the borrowers would be able to refinance their mortgage up to $360,000 (90% LTV) and not have to incur legal charges, provided the borrower qualifies.
The ONLY benefit I see for consumers is that they are able to avoid some legal fees, which would make just about anybody happy unless of course you’re a real estate lawyer. The drawback however, is far greater in my opinion and that is a lack of choice. What I mean by this, is there is some limitation at the time of that refinance or a renewal at the end of a term, if a client wants to switch to another lender. You see, other lenders will not accept a TD collateral charge on assignment (if you switch lenders at renewal or mid-term for a better rate), therefore switching lenders either at renewal or refinance will mean incurring legal fees. So, if you’ve got a TD collateral charge mortgage and want to refinance or have a renewal coming up, your choices are to stay with TD or pay legal fees to switch lenders.
The prohibitive aspect I can already see is the way in which it will be positioned. Upfront, I can hear clients being told that registering to 125% means “easier access to equity”. It doesn’t. The property still has to have increased in value and clients still have to qualify for the amount requested, no different than if your mortgage is not a collateral charge. The ONLY difference is that IF you refinance you avoid legal fees...but you also pay whatever rate TD is charging, no opportunity to shop for a better rate. At refinance or renewal, I can hear clients being warned about the fees. As it is, I hear it all the time when clients say their bank told them they would have to pay a “big fee” to do this or a “big fee” to do that without ever quantifying what the fee is or fully analyzing the options. I would fully expect that clients will be told they will incur a “big fee” to go to another lender. In reality, legal fees on average for a refinance are $600-$1000. I’ve even had a client whose lawyer charges $400 for a refinance. That’s the “big fee” you’ll be made to feel scared of. I’m not saying $400 or $600 or $1000 isn’t a lot of money. It is, but it may not be as much as the added interest you end up paying. The real downside for people who aren’t fully aware of their options and are successfully scared of the “big fee” is they will end up paying whatever rate TD is charging, without shopping the market. This is where analyzing your options comes into play. If TD’s 5-year fixed rate is 3.89% but you can get 3.59% at a different lender, it may be worth paying the legal fees to switch lenders. It may not, but at least doing the analysis will help you make an informed decision, rather than being scared of the “big fee” and paying whatever rate is being charged. Either do it yourself or have a professional do it for you, preferably someone without bias as to which lender your mortgage is with.
As always, my opinion is that education is paramount. Understand the conditions of your mortgage and what it is you’re signing. If you don’t understand something, ask for clarification. If you still don’t understand, ask again or ask somebody else. If you feel you’re not getting straight answers, you’re not talking to the right person. And for the love of God, don’t listen to things like “big fees” or “lots of interest” without getting it quantified.
Up until October 18, TD registered their charges the same way other institutions did using a “conventional charge” for the amount of your mortgage. Registering your mortgage is something that you pay your real estate lawyer to do. Under TD’s new process, they are using what is called a collateral charge that is registered at up to 125% of the value of your home. The reason behind the change, according to TD, is to give homeowners easier, cheaper access to the equity built up in their homes.
It is very important to understand that this change does not mean borrowers can access 125% of the value of their homes. The same policies remain in effect, that limit all borrowers to a maximum of 95% LTV for a purchase and 90% LTV for a refinance. What it does mean, is as the value of a borrower’s home increases, if they refinance their mortgage, it will not have to be re-registered, avoiding legal fees. In the case of a refinance, clients will still have to adhere to the 90% maximum LTV policy and re-qualify for the desired amount. For example, somebody buying a house for $300,000 can borrow up to $285,000 (95% LTV) and the collateral charge would be registered for $375,000. If after 3 years, the property value has gone up to $400,000, the borrowers would be able to refinance their mortgage up to $360,000 (90% LTV) and not have to incur legal charges, provided the borrower qualifies.
The ONLY benefit I see for consumers is that they are able to avoid some legal fees, which would make just about anybody happy unless of course you’re a real estate lawyer. The drawback however, is far greater in my opinion and that is a lack of choice. What I mean by this, is there is some limitation at the time of that refinance or a renewal at the end of a term, if a client wants to switch to another lender. You see, other lenders will not accept a TD collateral charge on assignment (if you switch lenders at renewal or mid-term for a better rate), therefore switching lenders either at renewal or refinance will mean incurring legal fees. So, if you’ve got a TD collateral charge mortgage and want to refinance or have a renewal coming up, your choices are to stay with TD or pay legal fees to switch lenders.
The prohibitive aspect I can already see is the way in which it will be positioned. Upfront, I can hear clients being told that registering to 125% means “easier access to equity”. It doesn’t. The property still has to have increased in value and clients still have to qualify for the amount requested, no different than if your mortgage is not a collateral charge. The ONLY difference is that IF you refinance you avoid legal fees...but you also pay whatever rate TD is charging, no opportunity to shop for a better rate. At refinance or renewal, I can hear clients being warned about the fees. As it is, I hear it all the time when clients say their bank told them they would have to pay a “big fee” to do this or a “big fee” to do that without ever quantifying what the fee is or fully analyzing the options. I would fully expect that clients will be told they will incur a “big fee” to go to another lender. In reality, legal fees on average for a refinance are $600-$1000. I’ve even had a client whose lawyer charges $400 for a refinance. That’s the “big fee” you’ll be made to feel scared of. I’m not saying $400 or $600 or $1000 isn’t a lot of money. It is, but it may not be as much as the added interest you end up paying. The real downside for people who aren’t fully aware of their options and are successfully scared of the “big fee” is they will end up paying whatever rate TD is charging, without shopping the market. This is where analyzing your options comes into play. If TD’s 5-year fixed rate is 3.89% but you can get 3.59% at a different lender, it may be worth paying the legal fees to switch lenders. It may not, but at least doing the analysis will help you make an informed decision, rather than being scared of the “big fee” and paying whatever rate is being charged. Either do it yourself or have a professional do it for you, preferably someone without bias as to which lender your mortgage is with.
As always, my opinion is that education is paramount. Understand the conditions of your mortgage and what it is you’re signing. If you don’t understand something, ask for clarification. If you still don’t understand, ask again or ask somebody else. If you feel you’re not getting straight answers, you’re not talking to the right person. And for the love of God, don’t listen to things like “big fees” or “lots of interest” without getting it quantified.
Tuesday, October 12, 2010
Looking Beyond Mortgage Rates
It’s easy to get caught up in the idea that comparing mortgage rates will guarantee you get the best bang for your mortgage buck, especially when rates are at historic lows. While this may be true for particular situations, there are many scenarios where this strategy is not effective. Following are three reasons why it doesn’t always pay to make a decision based solely on rates.
Reason #1
Your long-term plan and risk tolerance should determine which mortgage product is right for you. This product may or may not have the lowest rate.
For instance, there are cases where lenders will offer lower rates for insured mortgages. With insured mortgages, however, you’re charged an insurance premium, which is usually added to the mortgage amount. But if you’re not planning on keeping the property for a long enough time to offset that cost, it may be better to take an uninsured mortgage with a slightly higher rate. The cost difference you will pay with the higher interest rate may still be less than what you may pay in insurance premiums.
As another example, if you prefer to budget for a consistent payment and can’t handle rate fluctuations, it may be better to go with a higher fixed-rate mortgage. If you think current rates are low enough and you will be living in your property for at least five years, it may be wise to also opt for a mortgage with a longer term.
Reason #2
One of the biggest mistakes people make when merely comparing mortgage rates is failing to consider important factors such as prepayment options to help pay off the mortgage faster, whether secondary financing options are allowed, early payout penalties, or what fees are involved.
It’s not enough to simply compare mortgage rates because you have to know what “clauses” are contained within the mortgage deal. There are also a lot of bait and switches out there where rates will be advertised but the fine print details all the potential reasons you may not get that rate. When looking at rates, make sure you ask what rate “you” will get, instead of what the best rate is…they may not be the same.
Reason #3
Lenders can change their rates at any time. As such, if you’re shopping for rates with one lender and then approach another that gives you a lower rate, it’s quite possible that the first lender has also dropped its rates. This is why it’s important to get pre-approved with a lender once you a mortgage that fits your needs. In some cases, you can secure your rate and conditions for up to 120 days.
These are just three reasons why it’s not enough to merely compare mortgage rates. The mortgage rate you may qualify for is also highly dependent on your credit score among other things. In order to get the best mortgage deals, you need to have solid credit.
It’s prudent for everyone to do their rate homework. The better informed you are, the more likely you will make a good decision. Just ensure it’s the whole product and it’s features that are best suited to you and not just the rate.
Reason #1
Your long-term plan and risk tolerance should determine which mortgage product is right for you. This product may or may not have the lowest rate.
For instance, there are cases where lenders will offer lower rates for insured mortgages. With insured mortgages, however, you’re charged an insurance premium, which is usually added to the mortgage amount. But if you’re not planning on keeping the property for a long enough time to offset that cost, it may be better to take an uninsured mortgage with a slightly higher rate. The cost difference you will pay with the higher interest rate may still be less than what you may pay in insurance premiums.
As another example, if you prefer to budget for a consistent payment and can’t handle rate fluctuations, it may be better to go with a higher fixed-rate mortgage. If you think current rates are low enough and you will be living in your property for at least five years, it may be wise to also opt for a mortgage with a longer term.
Reason #2
One of the biggest mistakes people make when merely comparing mortgage rates is failing to consider important factors such as prepayment options to help pay off the mortgage faster, whether secondary financing options are allowed, early payout penalties, or what fees are involved.
It’s not enough to simply compare mortgage rates because you have to know what “clauses” are contained within the mortgage deal. There are also a lot of bait and switches out there where rates will be advertised but the fine print details all the potential reasons you may not get that rate. When looking at rates, make sure you ask what rate “you” will get, instead of what the best rate is…they may not be the same.
Reason #3
Lenders can change their rates at any time. As such, if you’re shopping for rates with one lender and then approach another that gives you a lower rate, it’s quite possible that the first lender has also dropped its rates. This is why it’s important to get pre-approved with a lender once you a mortgage that fits your needs. In some cases, you can secure your rate and conditions for up to 120 days.
These are just three reasons why it’s not enough to merely compare mortgage rates. The mortgage rate you may qualify for is also highly dependent on your credit score among other things. In order to get the best mortgage deals, you need to have solid credit.
It’s prudent for everyone to do their rate homework. The better informed you are, the more likely you will make a good decision. Just ensure it’s the whole product and it’s features that are best suited to you and not just the rate.
Monday, September 20, 2010
Buying vs. Renting
At some point in their lives, most Canadians have probably asked themselves whether it is better to buy or rent. Unfortunately most people look at it solely from the perspective of comparing monthly payments, but there is so much more to it than that. Ultimately, the decision is a personal choice, but it helps to look at ALL the pros and cons of buying to determine whether home ownership is right for you.
Some advantages of buying a home
Owning a home is generally considered to be a sound, long-term investment that can provide satisfaction and security for you and your family.
Each month when you make your mortgage payment, you are building equity in your home.
Equity is the portion of the property that you actually build through your monthly payment versus the portion that you still owe the lender.
At the beginning of your mortgage, more of your payments go toward paying off the interest and less toward paying off the principal. But the longer you stay in your home and the more mortgage payments you make, the more principal you pay off and the more equity you accumulate.
Most mortgages also offer you the option of making additional monthly or annual payments to reduce your principal faster. Some prepayment privileges, for instance, enable you to pay up to 20% of the principal per calendar year. This will also help reduce your amortization period (the length of your mortgage), which, in turn, saves you money.
There is also a tax advantage. If your home is your principal residence, any profit you make when you sell it is tax-free. A home can appreciate – or increase in value – as time passes, building more equity. As you build up equity, it’s usually easier to upgrade to a more expensive home in the future thanks to the profit you’ll make when selling your current home.
As an owner, you can also decorate and improve your home any way you like. Ownership tends to give you a sense of pride and can offer you and your family stronger ties to the community.
If you do decide that home ownership is right for you, it’s important to choose a home you can afford. If you can’t afford to buy your dream home, purchasing a more modest home can be a great place to start building equity that one day may allow you to buy the home of your dreams.
Since we’re currently in a buyer’s real estate market and interest rates have been dropping, now may be an ideal time to enter into home ownership for the first time.
Some disadvantages of buying a home
Since it’s easy to get caught up in the excitement of buying a home, it’s important to remember that home ownership has some additional responsibilities as well.
For one thing, a home can be expensive. Chances are, your monthly payments will be more than what you are currently paying in rent when you factor in such things as your mortgage, property taxes, repairs and general maintenance.
Owning a home ties up some of your cash flow and is likely to reduce your flexibility to move to a new location or change jobs.
While your home might increase in value as time goes by, don’t expect to get a big return quickly. There are no guarantees that your home will increase in value, particularly during the first few years. In the beginning, you could actually lose money if you sell because your home may not have appreciated enough to cover the real estate fees, and moving, renovation and other selling costs.
Real estate is, however, usually considered a good investment over the long term.
When making the decision about whether to buy or rent, it’s important to carefully choose a home you can afford, and then weigh the pros and cons. Millions of people enjoy the rewards of home ownership but, ultimately, it’s a personal decision based on your own priorities.
Some advantages of buying a home
Owning a home is generally considered to be a sound, long-term investment that can provide satisfaction and security for you and your family.
Each month when you make your mortgage payment, you are building equity in your home.
Equity is the portion of the property that you actually build through your monthly payment versus the portion that you still owe the lender.
At the beginning of your mortgage, more of your payments go toward paying off the interest and less toward paying off the principal. But the longer you stay in your home and the more mortgage payments you make, the more principal you pay off and the more equity you accumulate.
Most mortgages also offer you the option of making additional monthly or annual payments to reduce your principal faster. Some prepayment privileges, for instance, enable you to pay up to 20% of the principal per calendar year. This will also help reduce your amortization period (the length of your mortgage), which, in turn, saves you money.
There is also a tax advantage. If your home is your principal residence, any profit you make when you sell it is tax-free. A home can appreciate – or increase in value – as time passes, building more equity. As you build up equity, it’s usually easier to upgrade to a more expensive home in the future thanks to the profit you’ll make when selling your current home.
As an owner, you can also decorate and improve your home any way you like. Ownership tends to give you a sense of pride and can offer you and your family stronger ties to the community.
If you do decide that home ownership is right for you, it’s important to choose a home you can afford. If you can’t afford to buy your dream home, purchasing a more modest home can be a great place to start building equity that one day may allow you to buy the home of your dreams.
Since we’re currently in a buyer’s real estate market and interest rates have been dropping, now may be an ideal time to enter into home ownership for the first time.
Some disadvantages of buying a home
Since it’s easy to get caught up in the excitement of buying a home, it’s important to remember that home ownership has some additional responsibilities as well.
For one thing, a home can be expensive. Chances are, your monthly payments will be more than what you are currently paying in rent when you factor in such things as your mortgage, property taxes, repairs and general maintenance.
Owning a home ties up some of your cash flow and is likely to reduce your flexibility to move to a new location or change jobs.
While your home might increase in value as time goes by, don’t expect to get a big return quickly. There are no guarantees that your home will increase in value, particularly during the first few years. In the beginning, you could actually lose money if you sell because your home may not have appreciated enough to cover the real estate fees, and moving, renovation and other selling costs.
Real estate is, however, usually considered a good investment over the long term.
When making the decision about whether to buy or rent, it’s important to carefully choose a home you can afford, and then weigh the pros and cons. Millions of people enjoy the rewards of home ownership but, ultimately, it’s a personal decision based on your own priorities.
Tuesday, September 7, 2010
Switch After 12 Months?
One of the advantages of variable rate mortgages over fixed rate mortgages is they are easier to get out of...or at least a lot cheaper. To get out of a fixed rate mortgage, you need to pay what’s called an Interest Rate Differential. Ultimately it’s a formula that most people won’t understand, which typically results in a ridiculous penalty to get out of the mortgage. Variable rate mortgages are a little more straight-forward in that the penalty to break them is three month’s interest. Still not a “cheap” exit but there are times where it makes sense to pay the penalty to break the mortgage.
One year ago, people were paying prime rate for new variable-rate mortgages and 18 months ago it was prime + 0.60%. Today, the market is down to prime – 0.70%, or thereabouts.
For those who got their mortgage 12-18 months ago, many wouldn’t even consider refinancing as an option. But, I would argue it could be a very financially smart option.
Let me illustrate.
First, let’s assume our hypothetical borrower has:
• A 5-year variable-rate term
• A $300,000 mortgage amount
• A 25-year remaining amortization
Now, suppose:
• Our homeowner's mortgage is at prime rate (2.75%) today
• She switches to a new variable-rate mortgage at prime – 0.70% (2.05%)
• Prime rate increases 25 bps on Sept. 8
• Rates then stay put until June 2011 (according to most economists)
Here are the results:
• Interest savings: $10,014 (hypothetical over 60 months)
• Penalty: $2,062 (three-months of interest)
• Discharge Fee: $250 (depends on lender and province)
• Net benefit of breaking early: $7,702 (roughly)
Remember, the savings is in the spread against prime so whether prime goes up or down over the remaining term of the mortgage, the savings is the same. For most people, saving thousands over 3-5 years isn’t exactly the worst idea. So, if you’re currently in a variable at prime rate or above, find a mortgage planner to see if it makes sense to switch.
One year ago, people were paying prime rate for new variable-rate mortgages and 18 months ago it was prime + 0.60%. Today, the market is down to prime – 0.70%, or thereabouts.
For those who got their mortgage 12-18 months ago, many wouldn’t even consider refinancing as an option. But, I would argue it could be a very financially smart option.
Let me illustrate.
First, let’s assume our hypothetical borrower has:
• A 5-year variable-rate term
• A $300,000 mortgage amount
• A 25-year remaining amortization
Now, suppose:
• Our homeowner's mortgage is at prime rate (2.75%) today
• She switches to a new variable-rate mortgage at prime – 0.70% (2.05%)
• Prime rate increases 25 bps on Sept. 8
• Rates then stay put until June 2011 (according to most economists)
Here are the results:
• Interest savings: $10,014 (hypothetical over 60 months)
• Penalty: $2,062 (three-months of interest)
• Discharge Fee: $250 (depends on lender and province)
• Net benefit of breaking early: $7,702 (roughly)
Remember, the savings is in the spread against prime so whether prime goes up or down over the remaining term of the mortgage, the savings is the same. For most people, saving thousands over 3-5 years isn’t exactly the worst idea. So, if you’re currently in a variable at prime rate or above, find a mortgage planner to see if it makes sense to switch.
Tuesday, August 17, 2010
Pay Down Your Mortgage or Contribute to Your RRSP?
A fantastic question and like most in the world of finances, the answer won’t be the same for everyone. An old friend of my parents once told me, “keep your mortgage and your RRSP separate, don’t focus on one or the other but rather on both”. Very good advice but not necessarily for everyone or every economic climate. At the time, GIC’s were paying about 10% and mortgage rates were in the area of 6-7% over five years. Makes sense that if you can get a guaranteed return that exceeds your mortgage rate by 3-4% that you max out your RRSP contribution, take the tax deduction and the return on your investment and run. However, fast forward to 2010 when GIC’s are paying 2-3% and mortgage rates are around 4% over five years. The same approach doesn’t seem so appealing anymore. Aversion to investment risk and debt will be the determining of which approach is best.
There was an excellent article in the Toronto Star last week that discusses this topic in great detail. I strongly encourage taking a few minutes to read it to help you decide which approach is best for you http://www.thestar.com/business/personalfinance/article/844358--paying-down-debt-makes-sense
There was an excellent article in the Toronto Star last week that discusses this topic in great detail. I strongly encourage taking a few minutes to read it to help you decide which approach is best for you http://www.thestar.com/business/personalfinance/article/844358--paying-down-debt-makes-sense
Tuesday, August 3, 2010
Mortgage Life Insurance Explained
As part of my licensing requirements, I must offer every client a mortgage life insurance policy.
Mortgage life insurance is simply a life insurance policy on the homeowner which will allow their family or dependents to pay off the mortgage on their home should something tragic happen to them. This is not to be confused with mortgage default insurance, which lenders require to cover their own assets if you have less than 20% equity in your home. Mortgage life insurance is meant to protect the family of a homeowner and not the mortgage lender itself.
While it is nice to think that if you were to pass away your mortgage would be paid off, is it really necessary for you to pay for this service? My wife will tell you that insurance is something I often complain about as I think as a society we are over-insured. Different little bits of insurance here and there that essentially overlap each other because the big picture is not considered.
If you are the primary breadwinner in your home and your death would leave your family without the means to pay for the mortgage, then mortgage life insurance might be a good option. However, take a look at all of your insurance requirements to see what is already being met. Do you already have a life insurance policy? Are you covered through your work benefits? What would be required should there be an untimely death in the family? These are all questions that need to be answered before deciding whether or not you need mortgage life insurance.
Trust me when I say I know what it’s like when you’re at your bank (been there, done that) and they go down their checklist of all the products to try to cross-sell you and they treat you like you’re making a huge mistake if you say “no” to the insurance. If you’ve done your analysis and don’t think you need it, be confident that you’re making the right decision for your family. I have many clients that I deal with that have had their mortgage with a bank with mortgage life insurance and when I ask them why they accepted it, more often than not they don’t have an answer aside from “my banker told me I should have it”. One recent client stands out...she’s single, no dependents, no extended family to speak of, she has about $200k of insurance through her work benefits and she was paying over $100 for mortgage life insurance because her banker told her she should have it. When I asked her who her beneficiary was she didn’t even know.
One of the issues I have with mortgage life insurance specifically is that you’re paying a constant premium to insure a declining sum. As your outstanding mortgage balance drops with your regular payments, you continue to make the same payments to insure it. Does this make sense? While I’m not able to sway clients’ decisions and can explain the pros and cons of mortgage life insurance compared to topping up or taking out a life insurance policy, I always recommend looking at the big picture to ensure that needs are being met on a whole instead of just when it comes to a mortgage.
As always, when in doubt, consult a professional. Just like me, the services of an insurance professional are no cost to you. If you’re not absolutely certain your insurance needs are being met or don’t really know what they are, I strongly recommend consulting a professional.
Mortgage life insurance is simply a life insurance policy on the homeowner which will allow their family or dependents to pay off the mortgage on their home should something tragic happen to them. This is not to be confused with mortgage default insurance, which lenders require to cover their own assets if you have less than 20% equity in your home. Mortgage life insurance is meant to protect the family of a homeowner and not the mortgage lender itself.
While it is nice to think that if you were to pass away your mortgage would be paid off, is it really necessary for you to pay for this service? My wife will tell you that insurance is something I often complain about as I think as a society we are over-insured. Different little bits of insurance here and there that essentially overlap each other because the big picture is not considered.
If you are the primary breadwinner in your home and your death would leave your family without the means to pay for the mortgage, then mortgage life insurance might be a good option. However, take a look at all of your insurance requirements to see what is already being met. Do you already have a life insurance policy? Are you covered through your work benefits? What would be required should there be an untimely death in the family? These are all questions that need to be answered before deciding whether or not you need mortgage life insurance.
Trust me when I say I know what it’s like when you’re at your bank (been there, done that) and they go down their checklist of all the products to try to cross-sell you and they treat you like you’re making a huge mistake if you say “no” to the insurance. If you’ve done your analysis and don’t think you need it, be confident that you’re making the right decision for your family. I have many clients that I deal with that have had their mortgage with a bank with mortgage life insurance and when I ask them why they accepted it, more often than not they don’t have an answer aside from “my banker told me I should have it”. One recent client stands out...she’s single, no dependents, no extended family to speak of, she has about $200k of insurance through her work benefits and she was paying over $100 for mortgage life insurance because her banker told her she should have it. When I asked her who her beneficiary was she didn’t even know.
One of the issues I have with mortgage life insurance specifically is that you’re paying a constant premium to insure a declining sum. As your outstanding mortgage balance drops with your regular payments, you continue to make the same payments to insure it. Does this make sense? While I’m not able to sway clients’ decisions and can explain the pros and cons of mortgage life insurance compared to topping up or taking out a life insurance policy, I always recommend looking at the big picture to ensure that needs are being met on a whole instead of just when it comes to a mortgage.
As always, when in doubt, consult a professional. Just like me, the services of an insurance professional are no cost to you. If you’re not absolutely certain your insurance needs are being met or don’t really know what they are, I strongly recommend consulting a professional.
Wednesday, July 21, 2010
Examining No-Frills Mortgage Products
No Frills mortgages are something that started being offered in the market towards the end of my time on the other side of the fence working at a lender. Being in Product Development, I thought and still do think that these products are a fantastic development.
No Frills mortgages are just what the name implies, bare bones with little to no “features”. Most people view mortgages as being somewhat vanilla and free of features but that’s just not the case. Options like portability, assumability and pre-payment options are all things you pay for in your rate. The different features associated with your mortgage are costs to the lender that they need to hedge against and just as you’d figure, that cost gets passed on to you through your rate. IF you’re not going to take advantage of these options, it doesn’t really make sense to pay for them. Most people have the best of intentions and figure they will use the pre-payment options but in most cases it just doesn’t happen. Even if it does, I always ask clients to evaluate what might be reasonable. If a No Frills mortgage offers 5% per year pre-payment privilege, that’s $15,000 per year on a $300,000 mortgage. If you don’t think you’ll be able to pre-pay more than that per year, then it doesn’t make sense to pay an extra 0.15% on rate to have the option.
This type of product will only seem ideal for you if you have no plans or limited plans to take advantage of benefits that will help you pay off your mortgage faster – such as pre-payment privileges including lump-sum payments.
Essentially, this product is only ideal for those who want fixed payments and have limited opportunities to make lump-sum payments during the first five years of their mortgage; and property investors who need a low fixed rate and are not concerned with making lump-sum payments.
No-Frills products also won’t let you take your mortgage with you if you purchase another property before your mortgage term is up – ie, portability is not an option with this product. Portability is an important option that could save you money over the long term if the home of your dreams is within your reach before your mortgage term is up and rates have risen, which they have a tendency to do over a five-year period.
It’s understandable why these products may seem appealing. After all, during tougher economic times who has the extra cash to put down a huge lump-sum payment? And who needs a portable mortgage if they’re not planning on moving until the market picks up? But it’s important to remember that a lot can change over the course of five years – or whatever term you choose for your mortgage.
No-Frills products represent a great example of why interest rates are not the only important factor to consider when deciding whether to opt for a particular mortgage product. Much like buying a car, you get what you pay for. If you don’t want a car with air conditioning, a stereo, a cup holder, and so on, then you can get the cheapest car going. The key is to evaluate your situation properly and sure you only pay for what you need.
No Frills mortgages are just what the name implies, bare bones with little to no “features”. Most people view mortgages as being somewhat vanilla and free of features but that’s just not the case. Options like portability, assumability and pre-payment options are all things you pay for in your rate. The different features associated with your mortgage are costs to the lender that they need to hedge against and just as you’d figure, that cost gets passed on to you through your rate. IF you’re not going to take advantage of these options, it doesn’t really make sense to pay for them. Most people have the best of intentions and figure they will use the pre-payment options but in most cases it just doesn’t happen. Even if it does, I always ask clients to evaluate what might be reasonable. If a No Frills mortgage offers 5% per year pre-payment privilege, that’s $15,000 per year on a $300,000 mortgage. If you don’t think you’ll be able to pre-pay more than that per year, then it doesn’t make sense to pay an extra 0.15% on rate to have the option.
This type of product will only seem ideal for you if you have no plans or limited plans to take advantage of benefits that will help you pay off your mortgage faster – such as pre-payment privileges including lump-sum payments.
Essentially, this product is only ideal for those who want fixed payments and have limited opportunities to make lump-sum payments during the first five years of their mortgage; and property investors who need a low fixed rate and are not concerned with making lump-sum payments.
No-Frills products also won’t let you take your mortgage with you if you purchase another property before your mortgage term is up – ie, portability is not an option with this product. Portability is an important option that could save you money over the long term if the home of your dreams is within your reach before your mortgage term is up and rates have risen, which they have a tendency to do over a five-year period.
It’s understandable why these products may seem appealing. After all, during tougher economic times who has the extra cash to put down a huge lump-sum payment? And who needs a portable mortgage if they’re not planning on moving until the market picks up? But it’s important to remember that a lot can change over the course of five years – or whatever term you choose for your mortgage.
No-Frills products represent a great example of why interest rates are not the only important factor to consider when deciding whether to opt for a particular mortgage product. Much like buying a car, you get what you pay for. If you don’t want a car with air conditioning, a stereo, a cup holder, and so on, then you can get the cheapest car going. The key is to evaluate your situation properly and sure you only pay for what you need.
Tuesday, July 6, 2010
HST and How it Affects Home Purchases
There always seems to be a certain few questions I always hear when they are a hot topic in the media. Lately the big question has been regarding the HST. The question hasn’t really been what effect it has but rather if there was a lot more activity leading up to July 1st with people trying to make a move before the HST starts.
I attribute the way the question is asked to the fact that people don’t really know what the effect is and just assume it’s bad. The reality is that the HST won’t have the tremendous impact on those looking to make a move as people may think. I think that’s likely true of most things the HST will impact because most people would much rather throw their arms up in the air and curse the Government than educate themselves as to how it will impact their bottom line. Don’t get me wrong, I’m not pro-HST, quite the contrary. What I am is pro-education.
Here are a few things the HST WILL NOT impact:
- Resales – there is not tax on a resale home.
- New Home Purchases – there is no tax on new builds less than $400,000.
- Condo Fees – there is no tax on condo fees.
...and a few things the HST WILL impact:
- New Home Purchases – there will be HST charged on new builds more than $400,000, however builders will include the HST in their “sticker price” so there are no surprises – make sure you read your agreement carefully to ensure this is the case.
- Real Estate Commissions – there will be HST charged on real estate commissions whereas it used to be that only GST was charged.
- Legal Fees - there will be HST charged on legal fees whereas it used to be that only GST was charged.
- Default Insurance – if you make a down payment of less than 20% of the purchase amount, you will require default insurance, which the HST will apply to whereas it used to be only PST.
There’s no doubt the HST has an impact on the Real Estate Market. However, on a typical transaction the impact will be in the hundreds of dollars, not the thousands that I think most people believe. If you’d like to see more of what products and services are affected by the HST, there is a very good list that can be found here http://www.rev.gov.on.ca/en/taxchange/pdf/taxable.pdf
I attribute the way the question is asked to the fact that people don’t really know what the effect is and just assume it’s bad. The reality is that the HST won’t have the tremendous impact on those looking to make a move as people may think. I think that’s likely true of most things the HST will impact because most people would much rather throw their arms up in the air and curse the Government than educate themselves as to how it will impact their bottom line. Don’t get me wrong, I’m not pro-HST, quite the contrary. What I am is pro-education.
Here are a few things the HST WILL NOT impact:
- Resales – there is not tax on a resale home.
- New Home Purchases – there is no tax on new builds less than $400,000.
- Condo Fees – there is no tax on condo fees.
...and a few things the HST WILL impact:
- New Home Purchases – there will be HST charged on new builds more than $400,000, however builders will include the HST in their “sticker price” so there are no surprises – make sure you read your agreement carefully to ensure this is the case.
- Real Estate Commissions – there will be HST charged on real estate commissions whereas it used to be that only GST was charged.
- Legal Fees - there will be HST charged on legal fees whereas it used to be that only GST was charged.
- Default Insurance – if you make a down payment of less than 20% of the purchase amount, you will require default insurance, which the HST will apply to whereas it used to be only PST.
There’s no doubt the HST has an impact on the Real Estate Market. However, on a typical transaction the impact will be in the hundreds of dollars, not the thousands that I think most people believe. If you’d like to see more of what products and services are affected by the HST, there is a very good list that can be found here http://www.rev.gov.on.ca/en/taxchange/pdf/taxable.pdf
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