Sniff...sniff...can you smell that? Spring is definitely in the air! With near record temperatures in the GTA this week it definitely feels like Spring is here. Along with the inevitable arrival of Spring comes a very busy real estate market. It seems like every day I see new “for sale” signs posted on the lawns in my neighbourhood and just as fast as they go up it seems the “sold” signs are just as quick to follow. With action in the real estate market, there is obviously also action in the mortgage market. As such, it seems like a good time to give some tips to pay down mortgages quicker for all those folks moving into new homes, taking on potentially bigger mortgages or just for people looking to become debt-free quicker.
Mortgages in Canada are generally amortized between 25 and 35 year terms. While this seems like a long time, it doesn’t have to take anyone that long to pay off their mortgage if they choose to do so in a shorter period of time. With a little bit of thinking ahead, and a small bit of sacrifice, most people can manage to pay off their mortgage in a much shorter period of time by taking positive steps such as:
• Making mortgage payments each week, or even every other week. Both options lower your interest paid over the term of your mortgage and can result in the equivalent of an extra month’s mortgage payment each year. Paying your mortgage in this way can take your mortgage from 25 years down to 21.
• When your income increases, increase the amount of your mortgage payments. Let’s say you get a 5% raise each year at work. If you put that extra 5% of your income into your mortgage, your mortgage balance will drop much faster without feeling like you are changing your spending habits.
• Mortgage lenders will also allow you to make extra payments on your mortgage balance each year. Just about everyone finds themselves with money they were not expecting at some point or another. Maybe you inherited some money from a distant relative or you received a nice holiday bonus at work. Apply this money or even part of it to your mortgage as a lump-sum payment towards your mortgage and watch the results.
If making lump payments or increasing your payments during the term of your mortgage isn't something you think you'll do, it's important to let your mortgage professional know that upfront. Lenders have started to offer products with names like "No Frills", which offer lower prepayment privileges (eg. 5% per year as opposed to 20%) in return for a lower rate. So, that little bit of planning can save you money even without having to to make any extra payments.
By applying these strategies consistently over time, you will save money, pay less interest and pay off your mortgage years earlier!
Friday, March 19, 2010
Friday, March 12, 2010
Regulation Overkill!!!
Sorry folks, this is going to be a long one. A few weeks ago I posted an entry an about some proposed government changes to mortgage insurance regulation and at the time had mixed feelings about it. I think my opinion has changed....significantly!! At the time there was some ambiguity in the changes that have been clarified by the Feds and in my opinion they are definitely detrimental to the Canadian mortgage market.
The initial announcement stated that all borrowers with a loan-to-value ratio greater than 80% taking terms of five years or less, whether variable or fixed would have to qualify at the five-year fixed rate. This would ensure that if borrowers were taking shorter fixed terms or variable terms that in theory if rates go up over the course of the term, they would be able to carry a larger debt-load and there would be less of a payment shock. The ambiguity is that the announcement didn’t say WHAT five-year rate would be used to qualify. After all, there are posted rates, special rates, discounted rates, broker rates...you get the jist. Well, they cleared up the ambiguity by explaining that it’s the chartered banks five-year posted rate (or the contract rate, whichever is greater) that will be used. The chartered banks’ five-year posted rate right now is 5.39%. This is the rate you’ll see on their websites and renewal statements and I’d be very surprised if anybody still pays these rates. The flipside is the discounted rates available in the broker world. I’m not talking specials or quick closes or anything like that, I’m talking about straight-up, five-year, 120-day rate hold rates, which right now are at 3.79%. So, for people taking a 3-year variable at 1.75% (currently) or a 4-year fixed at 3.69%, they need to qualify at 5.39%!! Most people don’t know that prior to this announcement, variable mortgages were qualified at the 3-year fixed rate so there was already some protection built in but the 5-year posted? Can you say EXCESSIVE!?!? Here’s where it gets even more annoying...for anyone taking a 5-year or greater fixed rate, they will be qualified at the contract rate. So they would qualify at the 3.79% mentioned above for five years. That means a borrower looking at a 3-year mortgage which is currently at 3.35% would have to qualify at 5.39% but someone looking at a 5-year fixed would qualify at 3.79%. Ultimately for anyone borrowing at a loan-to-value of greater than 80%, they just had most of their choice taken away. The difference in buying power between qualifying at the contract rate and the posted rate is huge. That means in order to maximize buying power, borrowers are forced to go at least with the five-year fixed. It’s like the high-ratio market has stepped back 25 years where there was hardly any choice available.
Another forthcoming regulation change that managed to slide through that I didn’t mention in my previous post is a change that will affect small business owners. There is a high ratio program available right now that allows small business owners to qualify for mortgages using non-traditional means of proving their income. That means not using T4’s and tax returns to prove their income. Instead, they’ve been able to use an option called stated income to declare what their “real” income is as opposed to what they make on paper. In these cases, the lenders and insurers would assess the reasonableness that a borrower makes what they say they make. Makes sense since one of the goals of small business owners is to minimize their taxes and ultimately the income they make on paper. Since this works in a negative way for mortgage qualification, the above program was set up to help those borrowers. Until now, they’ve been able to borrow up to 95% of the value of the property. As of April 9th 2010, they will only be able to borrow up to 90%. Might not seem like that big of a deal but one of the things common amongst all small business owners is the desire to make your money work as much as possible for you. That additional 5% down payment is money that could be working in other ways for them, like growing their businesses. The other element to this change that has an even greater impact in my opinion is that it used to be that the length of time you were in business was irrelevant, after April 9th, if you’ve been in business for more than 3 years you won’t be able to take advantage of this program. So, anyone in business more than 3 years will have to prove their income or in other words, use what they report as income on their personal tax returns. This change has huge impacts on small business owners who will ultimately have to put more money down on their purchases instead of being able to leverage themselves and use their cash for more productive things.
Now that the changes are more clear, I truly believe they’re excessive. I understand that the Government is doing what they think is best to protect against what happened to the mortgage industry in the US. However, even at our most aggressive point, we were never even close to what the US mortgage system was like. They had 125% mortgages and the 2/28 mortgage. For those of you who don’t know what that is, it’s the product that essentially caused the US turmoil. Where our government is trying to defend against the payment shock of increasing rates, US lenders actually built the shock into the product. It went like this, lenders were selling 30 year mortgages to clients that had a low, teaser rate for the first two years then after two years it would go up by sometimes 4-5% for the remaining 28 years. The craziest part of it was that lenders were qualifying clients at that low, teaser rate and telling them not to worry about the higher rate after two years because “of course” property values will go up in those two years at which point you can refinance and never have to deal with those higher rates. Well guess what happened when property values didn’t go up...people couldn’t afford the higher payments and the sh!t started hitting the fan. The point is our system is so much more conservative than the US system yet the Government seems to think it needs to over-regulate us to protect us from ourselves. The ironic thing is that they think they’re protecting us from a potential housing bubble when there are no signs of there actually being one. Except, with borrowers buying power being reduced, sellers won’t be able to sell their homes at the prices they’d like, ultimately driving the overall market down and creating a mini-bubble.
The initial announcement stated that all borrowers with a loan-to-value ratio greater than 80% taking terms of five years or less, whether variable or fixed would have to qualify at the five-year fixed rate. This would ensure that if borrowers were taking shorter fixed terms or variable terms that in theory if rates go up over the course of the term, they would be able to carry a larger debt-load and there would be less of a payment shock. The ambiguity is that the announcement didn’t say WHAT five-year rate would be used to qualify. After all, there are posted rates, special rates, discounted rates, broker rates...you get the jist. Well, they cleared up the ambiguity by explaining that it’s the chartered banks five-year posted rate (or the contract rate, whichever is greater) that will be used. The chartered banks’ five-year posted rate right now is 5.39%. This is the rate you’ll see on their websites and renewal statements and I’d be very surprised if anybody still pays these rates. The flipside is the discounted rates available in the broker world. I’m not talking specials or quick closes or anything like that, I’m talking about straight-up, five-year, 120-day rate hold rates, which right now are at 3.79%. So, for people taking a 3-year variable at 1.75% (currently) or a 4-year fixed at 3.69%, they need to qualify at 5.39%!! Most people don’t know that prior to this announcement, variable mortgages were qualified at the 3-year fixed rate so there was already some protection built in but the 5-year posted? Can you say EXCESSIVE!?!? Here’s where it gets even more annoying...for anyone taking a 5-year or greater fixed rate, they will be qualified at the contract rate. So they would qualify at the 3.79% mentioned above for five years. That means a borrower looking at a 3-year mortgage which is currently at 3.35% would have to qualify at 5.39% but someone looking at a 5-year fixed would qualify at 3.79%. Ultimately for anyone borrowing at a loan-to-value of greater than 80%, they just had most of their choice taken away. The difference in buying power between qualifying at the contract rate and the posted rate is huge. That means in order to maximize buying power, borrowers are forced to go at least with the five-year fixed. It’s like the high-ratio market has stepped back 25 years where there was hardly any choice available.
Another forthcoming regulation change that managed to slide through that I didn’t mention in my previous post is a change that will affect small business owners. There is a high ratio program available right now that allows small business owners to qualify for mortgages using non-traditional means of proving their income. That means not using T4’s and tax returns to prove their income. Instead, they’ve been able to use an option called stated income to declare what their “real” income is as opposed to what they make on paper. In these cases, the lenders and insurers would assess the reasonableness that a borrower makes what they say they make. Makes sense since one of the goals of small business owners is to minimize their taxes and ultimately the income they make on paper. Since this works in a negative way for mortgage qualification, the above program was set up to help those borrowers. Until now, they’ve been able to borrow up to 95% of the value of the property. As of April 9th 2010, they will only be able to borrow up to 90%. Might not seem like that big of a deal but one of the things common amongst all small business owners is the desire to make your money work as much as possible for you. That additional 5% down payment is money that could be working in other ways for them, like growing their businesses. The other element to this change that has an even greater impact in my opinion is that it used to be that the length of time you were in business was irrelevant, after April 9th, if you’ve been in business for more than 3 years you won’t be able to take advantage of this program. So, anyone in business more than 3 years will have to prove their income or in other words, use what they report as income on their personal tax returns. This change has huge impacts on small business owners who will ultimately have to put more money down on their purchases instead of being able to leverage themselves and use their cash for more productive things.
Now that the changes are more clear, I truly believe they’re excessive. I understand that the Government is doing what they think is best to protect against what happened to the mortgage industry in the US. However, even at our most aggressive point, we were never even close to what the US mortgage system was like. They had 125% mortgages and the 2/28 mortgage. For those of you who don’t know what that is, it’s the product that essentially caused the US turmoil. Where our government is trying to defend against the payment shock of increasing rates, US lenders actually built the shock into the product. It went like this, lenders were selling 30 year mortgages to clients that had a low, teaser rate for the first two years then after two years it would go up by sometimes 4-5% for the remaining 28 years. The craziest part of it was that lenders were qualifying clients at that low, teaser rate and telling them not to worry about the higher rate after two years because “of course” property values will go up in those two years at which point you can refinance and never have to deal with those higher rates. Well guess what happened when property values didn’t go up...people couldn’t afford the higher payments and the sh!t started hitting the fan. The point is our system is so much more conservative than the US system yet the Government seems to think it needs to over-regulate us to protect us from ourselves. The ironic thing is that they think they’re protecting us from a potential housing bubble when there are no signs of there actually being one. Except, with borrowers buying power being reduced, sellers won’t be able to sell their homes at the prices they’d like, ultimately driving the overall market down and creating a mini-bubble.
Wednesday, March 3, 2010
Are rates going to go up?
Hands down, without question, nothing even comes a close second...this is the question I hear the most. I’m not sure if it’s that people really wonder or if they just want me to say “no” or “I don’t think so” to give them some sort of comfort. My standard disclaimer is always that nobody can predict with absolute certainty, and then I launch into my opinion. By nature I’m not a good liar, in fact I’m probably honest to a fault. I’m certain there are a lot of people out there in my position who would tell potential clients whatever it is they want to hear, in order for them to become clients. I’m not sure why anyone would do that but everyone has their own approach and that just isn’t mine. My approach is always complete honesty, providing my own opinion and for the most part always erring on the side of caution. The advice I give borrowers always provides the risks involved in a very clear way so an informed decision can be made. It’s a long-term relationship and I can’t understand why anyone would compromise that relationship with dishonesty. Short-term thinkers I suppose.
Back to the topic at hand, rates. Are they going to go up? The question to me isn’t if but when. Of course they’re going to go up. They’re at record lows and the economy is showing some positive signs. Sure, we might see fixed rates stay around the same level or dip a tiny bit through a competitive spring market but by and large, they are going to go up. The Bank of Canada yesterday announced once again no changes to their Overnight Rate of 0.25%, which in turn causes Prime to remain at 2.25%. This is not a surprise since the B of C has been saying since 2009 that they intend to leave things the way they are until end of Q2 2010. The reality is that the Real Estate market has been driving the economy for the better part of a year so to increase rates would be like pouring water on the fire that’s providing you with enough warmth to stay alive. Now that other economic indicators are showing positive signs, what do you think is going to happen at the end of Q2? My money is on the B of C increasing their overnight rate. I’m not talking by a lot, they’ve never raised it by more than 0.25% so it’s a good bet that’s what will happen. I believe they will need to be very cautious about increases since too much too fast could be very detrimental. As for fixed rates, different economists have been saying different things about fixed rates for some time now. Some say they’re going to increase before the B of C increases the Overnight Rate and some say it won’t be until the Fall but the common theme is the word “increase”. Everybody agrees rates are going to go up but nobody knows when.
My advice to anyone who prefers variable mortgages has been to take advantage of your low payments now, put some of that savings aside because rates are going to go up at some point and having a little extra put aside will help. For those who favour fixed rates, if you’ve been sitting in a variable waiting for the right time to lock into something fixed or are considering refinancing, consider doing it sooner rather than later. I’m not saying you need to do it tomorrow, but waiting too long might cost you. Same goes for people with renewals in the next few months, make sure you get your rate holds now!
Back to the topic at hand, rates. Are they going to go up? The question to me isn’t if but when. Of course they’re going to go up. They’re at record lows and the economy is showing some positive signs. Sure, we might see fixed rates stay around the same level or dip a tiny bit through a competitive spring market but by and large, they are going to go up. The Bank of Canada yesterday announced once again no changes to their Overnight Rate of 0.25%, which in turn causes Prime to remain at 2.25%. This is not a surprise since the B of C has been saying since 2009 that they intend to leave things the way they are until end of Q2 2010. The reality is that the Real Estate market has been driving the economy for the better part of a year so to increase rates would be like pouring water on the fire that’s providing you with enough warmth to stay alive. Now that other economic indicators are showing positive signs, what do you think is going to happen at the end of Q2? My money is on the B of C increasing their overnight rate. I’m not talking by a lot, they’ve never raised it by more than 0.25% so it’s a good bet that’s what will happen. I believe they will need to be very cautious about increases since too much too fast could be very detrimental. As for fixed rates, different economists have been saying different things about fixed rates for some time now. Some say they’re going to increase before the B of C increases the Overnight Rate and some say it won’t be until the Fall but the common theme is the word “increase”. Everybody agrees rates are going to go up but nobody knows when.
My advice to anyone who prefers variable mortgages has been to take advantage of your low payments now, put some of that savings aside because rates are going to go up at some point and having a little extra put aside will help. For those who favour fixed rates, if you’ve been sitting in a variable waiting for the right time to lock into something fixed or are considering refinancing, consider doing it sooner rather than later. I’m not saying you need to do it tomorrow, but waiting too long might cost you. Same goes for people with renewals in the next few months, make sure you get your rate holds now!
Thursday, February 18, 2010
Government intervention....from where I sit....
This week we once again saw the government propose changes to mortgage insurance regulation that will go into effect on April 19th 2010. For anyone who hasn’t seen what the changes will be, here they are in a nutshell:
• All borrowers must meet the standards for a five-year fixed-rate mortgage even if they choose a mortgage with a lower interest rate or a shorter term. This will help Canadians prepare for higher interest rates in the future.
• Lower the maximum amount Canadians can withdraw when refinancing their mortgages to 90% from 95% of the value of their homes. This will help ensure home ownership is a more effective way to save.
• Require a minimum down payment of 20% for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.
Normally I’m not a big supporter of excess regulation by the government but with this one I’ve got mixed feelings. The government is basically trying to protect consumers and lenders from ourselves. It’s hard not to look south of the border and see why Jim Flaherty would want to impose such measures and protect our economy from what happened in the US. With the changes above, borrowers are forced to qualify at a rate that ensures they will still be able to afford their payments should rates rise and they’re also forced to maintain an equity level of at least 10%, which will a) provide an equity buffer should real estate values fall and hopefully prevent homeowners from getting into a negative equity position and b) help Canadians with their “savings”.
I’m all for bolstering the economy and preventing potential disasters down the road. It’s good to have a little foresight, learn from experience and make positive changes. What I have a problem with is the scope of that foresight and the changes they decided to implement. The scope is very narrow and doesn’t take into account all the elements that make up homeowners’ debt. I’ve made mention of this in the past but what about the predatory practices of credit card companies that keep sending notices that they’ve increased your limit until before you know it you have a $30,000 visa limit with an 18% interest rate. Or retail cards that are able to charge 30%?! How many people that were lined up for hours and hours on boxing day at electronics stores bought their computers and big screen TVs on their retail cards and are now paying 30% to finance those purchases? Shouldn’t the government be looking at regulating some of those practices to protect Canadians? Right, the Government effectively controls mortgage insurance in Canada so it’s a much easier change to implement rather than going after big business to pull back the reins.
I see first-hand the amount of people who use their homes as an ATM. As the values go up, they’re constantly removing equity to pay for other things or pay off the debts they’ve accumulated outside their mortgages. Unfortunately, limiting them to how much equity they’re going to remove from their homes isn’t necessarily going to help them. In a lot of cases it will actually hurt them. It means they will likely end up carrying more high interest debt than if they were able to refinance. In my opinion, forcing all possible lenders (mortgage, credit card, retail, etc.) to have more customer-friendly practices would be a much better long-term solution.
The glaring piece I see missing from the Government changes is education. I see the proposed changes like a parent trying to protect their kids by constantly saying “you can’t do this, you can’t do that” without actually explaining why. As a parent I always do my best to explain to my kids why they can or can’t do something so they can learn. They need to understand why and what they’re being protected from so at some point they can protect themselves. If I constantly say “no, no, no” without explaining myself, they’ll never be able to make their own decisions and good ones at that. I’ve said this for years that there is a huge gap surrounding personal finances in our educational system. Kids aren’t being taught how to manage finances. Like so many other things it seems the system leaves that to parents to teach their kids and if anyone has read my previous posts you know where I stand regarding learning about finances from your parents. I know that the Ontario Government has recently expressed that they will be including personal finances in grade-school curriculums in the coming years and I think it can’t be soon enough.
All in all I think the changes are likely a good thing but are only part of the puzzle. If the Government broadens the scope of their efforts, they will have a much greater impact down the road.
If anybody has similar or differing opinions, I’d love to hear them.....
Peter
• All borrowers must meet the standards for a five-year fixed-rate mortgage even if they choose a mortgage with a lower interest rate or a shorter term. This will help Canadians prepare for higher interest rates in the future.
• Lower the maximum amount Canadians can withdraw when refinancing their mortgages to 90% from 95% of the value of their homes. This will help ensure home ownership is a more effective way to save.
• Require a minimum down payment of 20% for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.
Normally I’m not a big supporter of excess regulation by the government but with this one I’ve got mixed feelings. The government is basically trying to protect consumers and lenders from ourselves. It’s hard not to look south of the border and see why Jim Flaherty would want to impose such measures and protect our economy from what happened in the US. With the changes above, borrowers are forced to qualify at a rate that ensures they will still be able to afford their payments should rates rise and they’re also forced to maintain an equity level of at least 10%, which will a) provide an equity buffer should real estate values fall and hopefully prevent homeowners from getting into a negative equity position and b) help Canadians with their “savings”.
I’m all for bolstering the economy and preventing potential disasters down the road. It’s good to have a little foresight, learn from experience and make positive changes. What I have a problem with is the scope of that foresight and the changes they decided to implement. The scope is very narrow and doesn’t take into account all the elements that make up homeowners’ debt. I’ve made mention of this in the past but what about the predatory practices of credit card companies that keep sending notices that they’ve increased your limit until before you know it you have a $30,000 visa limit with an 18% interest rate. Or retail cards that are able to charge 30%?! How many people that were lined up for hours and hours on boxing day at electronics stores bought their computers and big screen TVs on their retail cards and are now paying 30% to finance those purchases? Shouldn’t the government be looking at regulating some of those practices to protect Canadians? Right, the Government effectively controls mortgage insurance in Canada so it’s a much easier change to implement rather than going after big business to pull back the reins.
I see first-hand the amount of people who use their homes as an ATM. As the values go up, they’re constantly removing equity to pay for other things or pay off the debts they’ve accumulated outside their mortgages. Unfortunately, limiting them to how much equity they’re going to remove from their homes isn’t necessarily going to help them. In a lot of cases it will actually hurt them. It means they will likely end up carrying more high interest debt than if they were able to refinance. In my opinion, forcing all possible lenders (mortgage, credit card, retail, etc.) to have more customer-friendly practices would be a much better long-term solution.
The glaring piece I see missing from the Government changes is education. I see the proposed changes like a parent trying to protect their kids by constantly saying “you can’t do this, you can’t do that” without actually explaining why. As a parent I always do my best to explain to my kids why they can or can’t do something so they can learn. They need to understand why and what they’re being protected from so at some point they can protect themselves. If I constantly say “no, no, no” without explaining myself, they’ll never be able to make their own decisions and good ones at that. I’ve said this for years that there is a huge gap surrounding personal finances in our educational system. Kids aren’t being taught how to manage finances. Like so many other things it seems the system leaves that to parents to teach their kids and if anyone has read my previous posts you know where I stand regarding learning about finances from your parents. I know that the Ontario Government has recently expressed that they will be including personal finances in grade-school curriculums in the coming years and I think it can’t be soon enough.
All in all I think the changes are likely a good thing but are only part of the puzzle. If the Government broadens the scope of their efforts, they will have a much greater impact down the road.
If anybody has similar or differing opinions, I’d love to hear them.....
Peter
Tuesday, February 9, 2010
Variable or Fixed...what is the best option?
This is a question I hear A LOT. The answer is that there's no one-size-fits all solution — the ideal mortgage depends largely on your individual circumstances and risk tolerance.
A recent study found that 88 per cent of Canadian mortgage holders saved money by sticking with a variable rate over the past 10 years. But 68 per cent of Canadian homeowners have fixed-rate mortgages. Does this make sense to you because it sure doesn’t make sense to me. If there is historical data that proves one option performs better than the other, isn’t the choice logical?
I believe the biggest reason why the greater percentage of consumers have fixed rate mortgages, is conditioning. We’ve been conditioned by our parents to be conservative with our finances, especially mortgages and we’ve been conditioned by the banks to always look first at fixed rates.
I’ll start with parental conditioning, which has two elements. The first is that by and large, our parents (those that are 60+) were very conservative with their finances and that, if anything, is what they taught us. Now, it’s not their “fault” because that’s what was taught to them by their parents. These are people that lived through World Wars and the Depression, how could they not be conservative and how could that not trickle through the generations? My parents only ever had one mortgage (with a bank) and it was a 30-year mortgage. So, with all that experience, what sort of wisdom do you think they would have to impart on my first step into purchasing a home...go to the bank, the second element in parental conditioning that leads nicely into how consumers are conditioned by the banks.
Hopefully the way I refer to banks in this blog doesn’t lead people to believe I think banks are completely evil and that everyone that works for them are incompetent. On the contrary, I know a lot of people who work at banks and are very good at what they do. When I speak of banks, I’m talking in general and about the truths that I believe make up most of their practices. Having said that, go into a bank and ask them what their mortgage rates are and I’m willing to bet that a very high percentage of the time the first rate they will tell you is their 5-year fixed rate. Why? Is it because that’s the term and option they profit the most on, is it because it’s considered long-term and they know they have you stuck with them for 5 years or is it because that’s just the rate most people ask for so it’s the one they generally lead with? I believe it’s a combination of a lot of things. You can sort of see how it could just be a vicious cycle...we’re conditioned to go to the banks and they’re conditioned to lead with the 5-yr rate. Reality is the banks are in business to make money so they’re going to try to profit from you however they can, whether it’s through selling you their most profitable product or gouging you with high rates. My biased opinion is a mortgage agent is always a better option. We don’t profit from you, we’re paid by the institution we place your business with. Our role is to find you the best product at the best rate. My goal is a satisfied client, who I hope will come to me when it’s time to negotiate their renewal and refer me to the people they know. The banks don’t typically care if you threaten to leave them because they know that at the very same time, someone is threatening to leave the bank next door and will walk right in through their doors. I get that banks for some reason make people more comfortable and that’s fine, all I’m saying is if you choose the bank route, make sure they present you with ALL of the options and not just the 5-yr fixed rate.
On to the question of variable or fixed. Typically when I’m asked the question my answer is that it’s a matter of personal preference and tolerance. Then the follow-up question is what do I have. I usually hesitate to answer that question in fear it be perceived as advice. My role as a mortgage agent is to present all of the options, pros and cons and let clients make the decision that’s best for them. What I think is best for me and my family might not be best for you and yours. What I usually tell people is that it comes down to what will help you sleep at night. If you’re going to be completely stressed with a variable rate mortgage and will stay up worrying about it, then it’s not for you. If you feel easier with the idea of knowing what your payments are going to be for the next 5 years even though you MAY pay more in interest over that term than if you took a variable mortgage, then that’s the best option for you. A comparison I like to draw is with your investment portfolio. Is your portfolio mostly comprised of GICs, Canada Savings Bonds (like my parents advised me to invest in) or low-risk mutual funds? Then more than likely a fixed rate mortgage would be best for you. Do you hold mostly higher risk equity mutual funds or stocks? Then more than likely your risk tolerance would mean you can handle a variable mortgage.
The answer to the question of what I have is variable. It’s what works best for me and my family. Obviously I like the fact that variable rates are much lower than fixed rates at this time. Currently a 3-yr variable is as low as 1.85% whereas a 5-yr fixed is at 3.64%, which is still a fantastic rate. One of the things I prefer about variable rate mortgages is the flexibility. If for whatever reason I decide variable is not for me, I’d be able to lock into a fixed rate with no penalties. If I decide to refinance in order to consolidate debt, remove equity for renos or just take advantage of a lower rate relative to Prime, the penalty to do so, is a fraction of what the penalties are to break a fixed-rate penalty. Here’s an example, I recently had two clients looking to refinance, one had a fixed rate mortgage and the other had a variable rate mortgage. For the fixed rate client, the new mortgage rate would be almost 2% lower than what they were currently paying but with a $10,000+ penalty to break the mortgage, it didn’t make sense to do it. On the other hand, the variable rate client was paying Prime + 0.60% (2.85%) and by breaking their mortgage in favour of paying the going rate of Prime – 0.40 (1.85%), although they had to pay a $2500 penalty to do so, they stand to save $8500+ over the next three years.
If you want to talk about your own situation and what works best for you, I’d be more than happy to show you all of your options.
peter@theabbatangelogroup.com
647-203-5440
A recent study found that 88 per cent of Canadian mortgage holders saved money by sticking with a variable rate over the past 10 years. But 68 per cent of Canadian homeowners have fixed-rate mortgages. Does this make sense to you because it sure doesn’t make sense to me. If there is historical data that proves one option performs better than the other, isn’t the choice logical?
I believe the biggest reason why the greater percentage of consumers have fixed rate mortgages, is conditioning. We’ve been conditioned by our parents to be conservative with our finances, especially mortgages and we’ve been conditioned by the banks to always look first at fixed rates.
I’ll start with parental conditioning, which has two elements. The first is that by and large, our parents (those that are 60+) were very conservative with their finances and that, if anything, is what they taught us. Now, it’s not their “fault” because that’s what was taught to them by their parents. These are people that lived through World Wars and the Depression, how could they not be conservative and how could that not trickle through the generations? My parents only ever had one mortgage (with a bank) and it was a 30-year mortgage. So, with all that experience, what sort of wisdom do you think they would have to impart on my first step into purchasing a home...go to the bank, the second element in parental conditioning that leads nicely into how consumers are conditioned by the banks.
Hopefully the way I refer to banks in this blog doesn’t lead people to believe I think banks are completely evil and that everyone that works for them are incompetent. On the contrary, I know a lot of people who work at banks and are very good at what they do. When I speak of banks, I’m talking in general and about the truths that I believe make up most of their practices. Having said that, go into a bank and ask them what their mortgage rates are and I’m willing to bet that a very high percentage of the time the first rate they will tell you is their 5-year fixed rate. Why? Is it because that’s the term and option they profit the most on, is it because it’s considered long-term and they know they have you stuck with them for 5 years or is it because that’s just the rate most people ask for so it’s the one they generally lead with? I believe it’s a combination of a lot of things. You can sort of see how it could just be a vicious cycle...we’re conditioned to go to the banks and they’re conditioned to lead with the 5-yr rate. Reality is the banks are in business to make money so they’re going to try to profit from you however they can, whether it’s through selling you their most profitable product or gouging you with high rates. My biased opinion is a mortgage agent is always a better option. We don’t profit from you, we’re paid by the institution we place your business with. Our role is to find you the best product at the best rate. My goal is a satisfied client, who I hope will come to me when it’s time to negotiate their renewal and refer me to the people they know. The banks don’t typically care if you threaten to leave them because they know that at the very same time, someone is threatening to leave the bank next door and will walk right in through their doors. I get that banks for some reason make people more comfortable and that’s fine, all I’m saying is if you choose the bank route, make sure they present you with ALL of the options and not just the 5-yr fixed rate.
On to the question of variable or fixed. Typically when I’m asked the question my answer is that it’s a matter of personal preference and tolerance. Then the follow-up question is what do I have. I usually hesitate to answer that question in fear it be perceived as advice. My role as a mortgage agent is to present all of the options, pros and cons and let clients make the decision that’s best for them. What I think is best for me and my family might not be best for you and yours. What I usually tell people is that it comes down to what will help you sleep at night. If you’re going to be completely stressed with a variable rate mortgage and will stay up worrying about it, then it’s not for you. If you feel easier with the idea of knowing what your payments are going to be for the next 5 years even though you MAY pay more in interest over that term than if you took a variable mortgage, then that’s the best option for you. A comparison I like to draw is with your investment portfolio. Is your portfolio mostly comprised of GICs, Canada Savings Bonds (like my parents advised me to invest in) or low-risk mutual funds? Then more than likely a fixed rate mortgage would be best for you. Do you hold mostly higher risk equity mutual funds or stocks? Then more than likely your risk tolerance would mean you can handle a variable mortgage.
The answer to the question of what I have is variable. It’s what works best for me and my family. Obviously I like the fact that variable rates are much lower than fixed rates at this time. Currently a 3-yr variable is as low as 1.85% whereas a 5-yr fixed is at 3.64%, which is still a fantastic rate. One of the things I prefer about variable rate mortgages is the flexibility. If for whatever reason I decide variable is not for me, I’d be able to lock into a fixed rate with no penalties. If I decide to refinance in order to consolidate debt, remove equity for renos or just take advantage of a lower rate relative to Prime, the penalty to do so, is a fraction of what the penalties are to break a fixed-rate penalty. Here’s an example, I recently had two clients looking to refinance, one had a fixed rate mortgage and the other had a variable rate mortgage. For the fixed rate client, the new mortgage rate would be almost 2% lower than what they were currently paying but with a $10,000+ penalty to break the mortgage, it didn’t make sense to do it. On the other hand, the variable rate client was paying Prime + 0.60% (2.85%) and by breaking their mortgage in favour of paying the going rate of Prime – 0.40 (1.85%), although they had to pay a $2500 penalty to do so, they stand to save $8500+ over the next three years.
If you want to talk about your own situation and what works best for you, I’d be more than happy to show you all of your options.
peter@theabbatangelogroup.com
647-203-5440
Wednesday, February 3, 2010
Mortgage Renewals – BEWARE OF BEING GOUGED!!!
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.
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.
Here are just a few of the rates I have available to me right now:
3 Yr Variable = 1.85%
5 Yr Variable = 2.00%
5 Yr Fixed = 3.74%
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
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.
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.
Here are just a few of the rates I have available to me right now:
3 Yr Variable = 1.85%
5 Yr Variable = 2.00%
5 Yr Fixed = 3.74%
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
Tuesday, January 26, 2010
To Refinance or Not to Refinance…That is the Question!
There are a lot of misconceptions about refinancing your mortgage…that it’s only for people who get into financial problems, that you’ll pay a BIG penalty to break your existing mortgage, that it will end up taking longer to pay it off and these are just a few examples.
The reality is that refinancing your mortgage is part of an overall financial plan to manage your debt in the smartest way possible in an effort to minimize the interest you pay and increase your wealth. I like to refer to it as actively managing your mortgage. Interest rates are at historic lows, if you’re locked into even a moderately higher rate, it might make sense to consider breaking your existing mortgage in favour of a lower rate. If you’re carrying high interest debt through unsecured lines of credit or credit cards, it might also make sense. We all have the best of intentions when we buy things on credit, “I’ll just make payments every month for the next year and it will be paid off”. Unfortunately, those good intentions are often not exercised and in most cases the debt continues to grow instead of shrink. Instead of losing the battle with those good intentions, it would make sense to consolidate that debt into your mortgage so that you do begin to pay it down and slash your interest charges. If you’ve been thinking about renovating a kitchen or finishing your basement, why not take advantage of today’s low rates to access some of your home’s equity to finance those renovations and increase its value.
Yes, in most cases there will be a penalty to break your mortgage, sometimes even a few thousand dollars and you will incur legal costs. However, if the savings is greater than the penalty, doesn’t it make sense to refinance? I have a client right now who is considering refinancing and although the penalty is a few thousand dollars, I’ve estimated the savings at five times that much. The penalty and legal costs are incorporated into your new mortgage so there is no immediate cash coming out of your pocket. I know what you’re thinking, “but if I’m just refinancing to take advantage of lower rates, I now have a bigger mortgage that will take me longer to pay off”. Wrong. Even though your monthly payments will be lower, so is your interest rate, therefore more of your monthly payment will be going towards your principal effectively negating the amount that was added to your mortgage. Also, a prudent move would be to take the amount you’re saving in mortgage payments and make lump payments to your principal further cutting the amount of interest you’ll pay over time and the length of your mortgage.
I don’t think managing your mortgage should be any different than your investment portfolio. I don’t know anybody who invests their money and then just sits back and checks up on it every five years or so. If you’re invested in a mutual fund or a stock that is not performing, you sell it and buy something that is. Constantly churning your portfolio in search of higher returns. Your mortgage should be handled the same way…constantly looking for ways to pay less in interest charges in order to increase your wealth and decrease your debt load.
You may not think you can benefit from refinancing, but maybe you can…greatly. Isn’t worth getting a professional to look at it with no obligation or cost to let you know if indeed you can be saving thousands of dollars? Take a look at your current mortgage rate or your high interest credit card rates with balances you’ve carried for more than a year. I have access to variable rates starting at 1.85% and a 5-Yr fixed rate of 3.64% just to give you a few examples. Likely the gap between the rates you’re paying and the above rates could be staggering and you could be saving a bundle.
If you’re interested in a free, no obligation evaluation, let me know. I’d love to help you save some money. It’s time to start actively managing your mortgage rather than sitting back and paying too much in interest.
peter@theabbatangelogroup.com
The reality is that refinancing your mortgage is part of an overall financial plan to manage your debt in the smartest way possible in an effort to minimize the interest you pay and increase your wealth. I like to refer to it as actively managing your mortgage. Interest rates are at historic lows, if you’re locked into even a moderately higher rate, it might make sense to consider breaking your existing mortgage in favour of a lower rate. If you’re carrying high interest debt through unsecured lines of credit or credit cards, it might also make sense. We all have the best of intentions when we buy things on credit, “I’ll just make payments every month for the next year and it will be paid off”. Unfortunately, those good intentions are often not exercised and in most cases the debt continues to grow instead of shrink. Instead of losing the battle with those good intentions, it would make sense to consolidate that debt into your mortgage so that you do begin to pay it down and slash your interest charges. If you’ve been thinking about renovating a kitchen or finishing your basement, why not take advantage of today’s low rates to access some of your home’s equity to finance those renovations and increase its value.
Yes, in most cases there will be a penalty to break your mortgage, sometimes even a few thousand dollars and you will incur legal costs. However, if the savings is greater than the penalty, doesn’t it make sense to refinance? I have a client right now who is considering refinancing and although the penalty is a few thousand dollars, I’ve estimated the savings at five times that much. The penalty and legal costs are incorporated into your new mortgage so there is no immediate cash coming out of your pocket. I know what you’re thinking, “but if I’m just refinancing to take advantage of lower rates, I now have a bigger mortgage that will take me longer to pay off”. Wrong. Even though your monthly payments will be lower, so is your interest rate, therefore more of your monthly payment will be going towards your principal effectively negating the amount that was added to your mortgage. Also, a prudent move would be to take the amount you’re saving in mortgage payments and make lump payments to your principal further cutting the amount of interest you’ll pay over time and the length of your mortgage.
I don’t think managing your mortgage should be any different than your investment portfolio. I don’t know anybody who invests their money and then just sits back and checks up on it every five years or so. If you’re invested in a mutual fund or a stock that is not performing, you sell it and buy something that is. Constantly churning your portfolio in search of higher returns. Your mortgage should be handled the same way…constantly looking for ways to pay less in interest charges in order to increase your wealth and decrease your debt load.
You may not think you can benefit from refinancing, but maybe you can…greatly. Isn’t worth getting a professional to look at it with no obligation or cost to let you know if indeed you can be saving thousands of dollars? Take a look at your current mortgage rate or your high interest credit card rates with balances you’ve carried for more than a year. I have access to variable rates starting at 1.85% and a 5-Yr fixed rate of 3.64% just to give you a few examples. Likely the gap between the rates you’re paying and the above rates could be staggering and you could be saving a bundle.
If you’re interested in a free, no obligation evaluation, let me know. I’d love to help you save some money. It’s time to start actively managing your mortgage rather than sitting back and paying too much in interest.
peter@theabbatangelogroup.com
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