This is a topic I’ve talked about in the past and will continue to because I think it’s a very important one. People don’t invest money and forget about it. Wise investors constantly monitor the performance of their investments to ensure they are getting the best returns for their money. So why would people not do the same with their mortgages? We pay a lot of interest over the life of our mortgages, wouldn’t you want to pay less if you could? I’m not saying you need to look at your mortgage details vs. the market daily, weekly or even monthly but at least once per year and most certainly at renewal time. In my opinion, anyone that simply signs a renewal notice that comes in the mail and returns it without looking at the market is likely throwing money away. I think people are so uncomfortable with the thought of that much debt or the little amount of principal that gets paid down every year that they do their best to ignore their mortgage as much as possible so it doesn’t “bother” them. Again, throwing money away. Below is an article that ran recently in the Financial Post...a good read....
Andy Holloway, Financial Post • Friday, Jun. 11, 2010
While about 80% of Canadians visit a doctor at least once a year to help ensure they remain physically healthy, the number of people who check their financial health by regularly reviewing their mortgage is far less.
Plenty can change in someone’s life in a year, never mind during the standard five-year mortgage a lot of Canadians sign up for. A career change, kids, retirement or newfound money or it could be that such a major event is on the horizon. All can affect the type of mortgage that fits just right.
“A lot of people don’t like to face up to it but, doing an annual financial check-up is a very smart thing to do,” says Peter Aceto, CEO and president of Toronto-based ING Direct Canada. “Managing your financial lifestyle is just as important as managing your diet and exercise.”
Aceto says people often just wait for a renewal letter before they look at their mortgage, and even then they’ll likely send the contract back without considering if it is meeting their current needs because they feel changing providers or the terms is futile. But they should put just as much thought into a renewal or a review as they did when they signed the initial deal.
Kelvin Mangaroo, founder of RateSupermarket.ca, which compares mortgage rates and brokers across the country, agrees. “Canadian consumers tend to become complacent about their mortgage payments and they could be saving a lot of money.” He says home owners should annually review three main things: their current and expected future risk profile and net income as well as rates.
For example, the more adverse you become to risk, the less likely a variable mortgage will be right for you. Aside from comparing rates, Ratesupermarket.ca has a few other online tools that can help consumers figure if a change is a good thing, such as a mortgage calculator and a mortgage penalty calculator that will show how much you can expect to pay to break your existing mortgage. You can also sign up for e-mail alerts that tell you when rates change.
Rates are an obvious thing to pay attention to. If they’re going up, make sure you can make the higher monthly payment that may come at renewal time, or lock into a fixed rate if you’re on a variable. If rates are dropping below your existing rate, you might want to refinance or renew early.
“You’re making a commitment to be mortgage free in 25 years so you should have a longer term view of what interest rates will look like over that period, says Aceto. “Make sure you’re comfortable with them and comfortable making those payments.”
Even though banks are in the business of getting as much interest from you as they can, many will allow people to pay a lump sum of the principal on the mortgage’s anniversary and increase their monthly payments. An extra $100 a month on a standard $200,000 mortgage could save almost $18,000 in interest and shorten the amortization period by about four years, according to Aceto.
Paying down your mortgage faster may seemingly put a crimp into your future finances if something happens and you need the money — unlike, say, putting it into a tax-free savings account or other low-risk liquid investment. But many financial institutions have a re-advance clause that allows you to retrieve some of the money spent accelerating mortgage payments, says Peter Veselinovich, vice-president of banking and mortgage operations at Winnipeg-based Investors Group.
Of course, it may become more difficult to get those funds back if there is a dramatic downward change in housing values and you haven’t built up enough equity. But that’s where understanding your entire financial situation, not just your mortgage, can help. “Most of us don’t like to think about debt, says Veselinovich. “It’s just something that somehow comes up and ends up as part of our personal balance sheet and we make payments.”
Even something simple such as making renovations could affect the type of mortgage desired. For example, topping up or refinancing an existing mortgage can pay for renovations, providing you’re comfortable with a blended interest rate. If you’re buying a new home, you may be able to port your current mortgage. Or maybe you just want to consolidate higher-interest unsecured debt into your mortgage. “Rolling that into your mortgage can significantly save on interest costs and that will help you get out of debt sooner,” says Feisal Panjwani, a Surrey, B.C.-based broker with Feisal & Associates under the Invis Inc. umbrella.
A mortgage can also help you become more tax efficient if you’re thinking of investing in a business, buying a rental property or putting some money into mutual funds or the stock market. That’s because the interest paid on money borrowed on a principal property can be written off against revenue from those investments.
But the biggest reason for making changes to your mortgage mid-stream may be because it could be a lot easier to do something before your situation changes. “Making changes to your mortgage before you go into a new venture or before you retire would allow you to qualify much easier rather than waiting for your mortgage to come up for renewal,” says Panjwani.
Monday, June 21, 2010
Wednesday, June 9, 2010
Have You Considered Opting for a 50/50 Mortgage?
Like the potential savings of a variable rate mortgage but uneasy about the potential rate fluctuation? Prefer the safety of a fixed rate mortgage but think you’re willing to take a little risk for the potential savings of a variable rate? Hybrid mortgages – also known as 50/50 mortgage products – include an equal mix of fixed-rate and variable-rate components within your single mortgage. This means you get the best of both worlds – the security of fixed repayments with the flexibility of a variable rate.
Although there was a time in recent years when mortgage experts considered a variable-rate mortgage as the obvious choice to save mortgage consumers money over the long term, with fixed rates remaining near historic lows, a 50/50 mortgage may be a great alternative for you.
In essence, since it’s extremely difficult to accurately predict rates over the long term, a 50/50 mortgage offers interest rate diversification, which can help reduce your level of risk.
If you opt for a 50/50 product, half of your mortgage is locked into a five-year fixed rate and half is at a five-year variable rate. You can lock in your variable-rate portion at any time without paying a penalty. As well, each portion of the 50/50 mortgage operates independently – like two separate mortgages – yet the product is registered as only one collateral charge.
The 50/50 mortgage product is well-suited to a variety of borrowers, including those who:
• Would normally go fully variable but are afraid prime rate is at its bottom
• Aren’t comfortable being locked into a fully fixed rate
• Can’t decide between a fixed or variable mortgage
• Savvy first-time homebuyers
Some features of the 50/50 mortgage include:
• 20% annual lump-sum pre-payment privileges
• 20% annual payment increase ability
• Portability (transferring your existing loan amount to a new property)
There are also hybrid mortgages available that offer different blends than 50/50. These are best suited to those people who are willing to actively manage their mortgage. The mortgage, up to 80% of the value of the house, can be split in whatever percentage the borrower prefers, between fixed rate, variable rate and line of credit. As the principal is paid down, the available amount on the line of credit goes up. Each portion of the mortgage carries different rates and the variable and line of credit portions are tied to the Prime Rate so they can fluctuate. Not for nor borrowers who want to know what their payment will be every month for the next five years but great for those who want a little bit of flexibility from their mortgage.
Ask your mortgage professional for more information if you think a hybrid mortgage may be right for you.
Although there was a time in recent years when mortgage experts considered a variable-rate mortgage as the obvious choice to save mortgage consumers money over the long term, with fixed rates remaining near historic lows, a 50/50 mortgage may be a great alternative for you.
In essence, since it’s extremely difficult to accurately predict rates over the long term, a 50/50 mortgage offers interest rate diversification, which can help reduce your level of risk.
If you opt for a 50/50 product, half of your mortgage is locked into a five-year fixed rate and half is at a five-year variable rate. You can lock in your variable-rate portion at any time without paying a penalty. As well, each portion of the 50/50 mortgage operates independently – like two separate mortgages – yet the product is registered as only one collateral charge.
The 50/50 mortgage product is well-suited to a variety of borrowers, including those who:
• Would normally go fully variable but are afraid prime rate is at its bottom
• Aren’t comfortable being locked into a fully fixed rate
• Can’t decide between a fixed or variable mortgage
• Savvy first-time homebuyers
Some features of the 50/50 mortgage include:
• 20% annual lump-sum pre-payment privileges
• 20% annual payment increase ability
• Portability (transferring your existing loan amount to a new property)
There are also hybrid mortgages available that offer different blends than 50/50. These are best suited to those people who are willing to actively manage their mortgage. The mortgage, up to 80% of the value of the house, can be split in whatever percentage the borrower prefers, between fixed rate, variable rate and line of credit. As the principal is paid down, the available amount on the line of credit goes up. Each portion of the mortgage carries different rates and the variable and line of credit portions are tied to the Prime Rate so they can fluctuate. Not for nor borrowers who want to know what their payment will be every month for the next five years but great for those who want a little bit of flexibility from their mortgage.
Ask your mortgage professional for more information if you think a hybrid mortgage may be right for you.
Tuesday, May 25, 2010
The End is Near for Record Low Variable Rates!
With the beautiful weather we had over the weekend, there is no doubt that summer is here. Along with the beginning of summer comes the end of the Bank of Canada’s commitment to keep its Overnight Rate, which in turn affects the Bank Prime Rate, at a record low of 0.25% (Prime is currently at 2.25%). Although the B of C had originally committed to leaving its Rate unchanged until the July announcement, at its last announcement it all but guaranteed that the rate will be increasing at its next announcement on June 1st.
Hopefully those of you who have been enjoying huge savings month after month over what you would have been paying in fixed rate mortgages have been disciplined and done something with that savings...either put it down as lump payments or put it aside and invested it. If you haven’t, don’t worry, it’s not too late. Prime has never increased by more than 0.25% at a single time so that means in all likelihood, those paying the going rate of 1.75% (Prime minus 0.50%), won’t see a big jump in your monthly payments and will still be saving plenty over fixed rates. So, start doing something with that savings!
What remains to be seen is what will happen during the B of C announcements over the next year or two. That will be what really determines if being in a variable rate mortgage will have been the wise move over being in something fixed. The Big 5 Banks are all forecasting the Overnight Rate will be increasing by a little over 1% by the end of 2010 and around 3% by the end of 2011. Those are significant increases...the only problem I have with those numbers is that the Banks’ more profitable products are fixed over variable so could they be creating a little fear in consumers to lock into something fixed and not assume the risk that is variable. I’m not saying they’re wrong, I’m just looking at the whole picture of why they are forecasting such significant increases. In my opinion (I’m not an economist, just someone with an opinion), the B of C promised to keep the rate low to stimulate the economy. Now that the economy has picked up, they can’t just hit the accelerator on their rate and assume the economy will react favourably. I believe the rate will go up over time but slowly as the B of C will have to measure the impact to the economy with each increase to ensure the economy can sustain its growth despite rising rates.
Over the last year or so I think the huge discount seen in variable rates has likely attracted consumers who were historically “fixed” borrowers and as a result they saved themselves money. Now that those rates are going to start increasing, it will be interesting to see how the tides shift or if they shift back to fixed rates either for new borrowers or variable borrowers who become nervous about the idea of rates increasing and want to lock into a fixed rate. The good news is there are still excellent fixed rates available. Whatever the result, the fact that the low rates has attracted more borrowers to variable rate mortgages is a great thing because it has opened up peoples’ eyes to the fact that there are lots of mortgage options out there besides the 5-yr fixed that the Banks always lead with.
Whatever your preference, ensure that when it’s time to shop for a mortgage or a renewal, that your mortgage professional shows you all the options so you can make an informed decision for what’s best for you.
Hopefully those of you who have been enjoying huge savings month after month over what you would have been paying in fixed rate mortgages have been disciplined and done something with that savings...either put it down as lump payments or put it aside and invested it. If you haven’t, don’t worry, it’s not too late. Prime has never increased by more than 0.25% at a single time so that means in all likelihood, those paying the going rate of 1.75% (Prime minus 0.50%), won’t see a big jump in your monthly payments and will still be saving plenty over fixed rates. So, start doing something with that savings!
What remains to be seen is what will happen during the B of C announcements over the next year or two. That will be what really determines if being in a variable rate mortgage will have been the wise move over being in something fixed. The Big 5 Banks are all forecasting the Overnight Rate will be increasing by a little over 1% by the end of 2010 and around 3% by the end of 2011. Those are significant increases...the only problem I have with those numbers is that the Banks’ more profitable products are fixed over variable so could they be creating a little fear in consumers to lock into something fixed and not assume the risk that is variable. I’m not saying they’re wrong, I’m just looking at the whole picture of why they are forecasting such significant increases. In my opinion (I’m not an economist, just someone with an opinion), the B of C promised to keep the rate low to stimulate the economy. Now that the economy has picked up, they can’t just hit the accelerator on their rate and assume the economy will react favourably. I believe the rate will go up over time but slowly as the B of C will have to measure the impact to the economy with each increase to ensure the economy can sustain its growth despite rising rates.
Over the last year or so I think the huge discount seen in variable rates has likely attracted consumers who were historically “fixed” borrowers and as a result they saved themselves money. Now that those rates are going to start increasing, it will be interesting to see how the tides shift or if they shift back to fixed rates either for new borrowers or variable borrowers who become nervous about the idea of rates increasing and want to lock into a fixed rate. The good news is there are still excellent fixed rates available. Whatever the result, the fact that the low rates has attracted more borrowers to variable rate mortgages is a great thing because it has opened up peoples’ eyes to the fact that there are lots of mortgage options out there besides the 5-yr fixed that the Banks always lead with.
Whatever your preference, ensure that when it’s time to shop for a mortgage or a renewal, that your mortgage professional shows you all the options so you can make an informed decision for what’s best for you.
Friday, May 14, 2010
Budgeting Towards Homeownership
Transitioning from renter to homeowner is one of the biggest decisions you’ll make throughout your lifetime. It can also be a stressful experience if you don’t plan ahead by building a budget and saving prior to embarking upon homeownership.
Budgeting is a core ingredient that helps alleviate the stress associated with money issues that can sometimes arise if you purchase a home without knowing all of the associated costs – including down payment, closing expenses, ongoing maintenance, taxes and utilities.
The trouble is, many first-time homeowners fail to carefully think about their finances, plan a budget or set savings aside. And in this society of instant gratification, money problems can quickly escalate.
The key is to create a realistic budget based on your goals. Track your spending and make your dollars go further by sticking to your budget once it’s in place. Budgeting offers a step-by-step formula for figuring out how to best save your hard-earned money to invest in homeownership.
Start by listing your household income, then your household expenses, and review your spending habits. All of this can be done on a pad of paper or on a computer spreadsheet.
Keeping receipts for everything that you purchase will enable you to accurately keep track of where your money is going each month so that you can review and make necessary changes to your plan on an ongoing basis.
Examine all areas of your life from entertainment to the type of food you buy, where you buy your food and clothes, and how and where you travel. Also look at your spending personality and make necessary adjustments. Are you a saver, a splurger, a spontaneous shopper or a hoarder? Become smarter with your money and avoid impulse buying.
If you find you’re spending a lot of money in one area, such as entertainment for instance, set aside a reasonable amount each month and prepare to stop spending money in this area once your budget has been exhausted.
If you can set your budget solidly in place before you head out home or mortgage shopping, you will be far more prepared to purchase your first home.
Following are three top tips to help you prepare for the purchase of your first home:
1. Set up a savings account. You can deposit a predetermined amount into this account each pay period that you will not touch unless it’s absolutely necessary. This will enable you to put money aside for a down payment and cover closing costs, as well as address ongoing homeownership expenses such as maintenance, taxes and utilities.
2. Save up for big-ticket items. As you accumulate money in your savings account, you will be able to also save for specific purchases to help furnish your home – avoiding the buy now, pay later mentality, which can have a negative impact on your credit when you’re seeking mortgage financing.
3. Surround yourself with a team of professionals. When you’re getting ready to make your first home purchase, enlist the services of a licensed mortgage professional and a real estate agent. These experts are invaluable to you as you set out on the road to homeownership because they help first-time buyers through the home purchase and financing processes every day. They will be able to answer all of your questions and set your mind at ease. A mortgage professional has access to multiple lenders, can show you what all the financing options are and can help you get pre-approved for a mortgage so you know exactly what you can afford to spend on a home before you head out house hunting, while a real estate agent will be able to match your needs with a house you can afford. Both parties will negotiate on your behalf to ensure you get the best bang for your buck. And, best of all, these services are typically free. They will also be able to refer you to other reputable professionals you may need for your home purchase, including a real estate lawyer and home appraiser.
You only have one chance to do the right things financially to set yourself up to purchase your first home. It’s easy to overextend yourself and not so easy to dig yourself out of it. Take the time, budget properly, do it right and you’ll be better off in the long-run.
Budgeting is a core ingredient that helps alleviate the stress associated with money issues that can sometimes arise if you purchase a home without knowing all of the associated costs – including down payment, closing expenses, ongoing maintenance, taxes and utilities.
The trouble is, many first-time homeowners fail to carefully think about their finances, plan a budget or set savings aside. And in this society of instant gratification, money problems can quickly escalate.
The key is to create a realistic budget based on your goals. Track your spending and make your dollars go further by sticking to your budget once it’s in place. Budgeting offers a step-by-step formula for figuring out how to best save your hard-earned money to invest in homeownership.
Start by listing your household income, then your household expenses, and review your spending habits. All of this can be done on a pad of paper or on a computer spreadsheet.
Keeping receipts for everything that you purchase will enable you to accurately keep track of where your money is going each month so that you can review and make necessary changes to your plan on an ongoing basis.
Examine all areas of your life from entertainment to the type of food you buy, where you buy your food and clothes, and how and where you travel. Also look at your spending personality and make necessary adjustments. Are you a saver, a splurger, a spontaneous shopper or a hoarder? Become smarter with your money and avoid impulse buying.
If you find you’re spending a lot of money in one area, such as entertainment for instance, set aside a reasonable amount each month and prepare to stop spending money in this area once your budget has been exhausted.
If you can set your budget solidly in place before you head out home or mortgage shopping, you will be far more prepared to purchase your first home.
Following are three top tips to help you prepare for the purchase of your first home:
1. Set up a savings account. You can deposit a predetermined amount into this account each pay period that you will not touch unless it’s absolutely necessary. This will enable you to put money aside for a down payment and cover closing costs, as well as address ongoing homeownership expenses such as maintenance, taxes and utilities.
2. Save up for big-ticket items. As you accumulate money in your savings account, you will be able to also save for specific purchases to help furnish your home – avoiding the buy now, pay later mentality, which can have a negative impact on your credit when you’re seeking mortgage financing.
3. Surround yourself with a team of professionals. When you’re getting ready to make your first home purchase, enlist the services of a licensed mortgage professional and a real estate agent. These experts are invaluable to you as you set out on the road to homeownership because they help first-time buyers through the home purchase and financing processes every day. They will be able to answer all of your questions and set your mind at ease. A mortgage professional has access to multiple lenders, can show you what all the financing options are and can help you get pre-approved for a mortgage so you know exactly what you can afford to spend on a home before you head out house hunting, while a real estate agent will be able to match your needs with a house you can afford. Both parties will negotiate on your behalf to ensure you get the best bang for your buck. And, best of all, these services are typically free. They will also be able to refer you to other reputable professionals you may need for your home purchase, including a real estate lawyer and home appraiser.
You only have one chance to do the right things financially to set yourself up to purchase your first home. It’s easy to overextend yourself and not so easy to dig yourself out of it. Take the time, budget properly, do it right and you’ll be better off in the long-run.
Wednesday, May 5, 2010
Choosing Your Mortgage Amortization
Selecting the length of your mortgage amortization period – the number of years it will take you to become mortgage free – is an important decision that will affect how much interest you pay over the life of your mortgage.
While the lending industry’s benchmark amortization period is 25 years, and this is the standard that is used by lenders when discussing mortgage offers, and usually the basis for mortgage calculators and payment tables, shorter or longer timeframes are available – to a maximum of 35 years.
The main reason to opt for a shorter amortization period is that you will become mortgage-free sooner. And since you’re agreeing to pay off your mortgage in a shorter period of time, the interest you pay over the life of the mortgage is, therefore, greatly reduced.
A shorter amortization also affords you the luxury of building up equity in your home sooner. Equity is the difference between any outstanding mortgage on your home and its market value.
While it pays to opt for a shorter amortization period, other considerations must be made before selecting your amortization. Because you’re reducing the actual number of mortgage payments you make to pay off your mortgage, your regular payments will be higher. So if your income is irregular because you’re paid commission or if you’re buying a home for the first time and will be carrying a large mortgage, a shorter amortization period that increases your regular payment amount and ties up your cash flow may not be the best option for you.
Your mortgage professional will be able to help you choose the amortization that best suits your unique requirements and ensures you have adequate cash flow. If you can comfortably afford the higher payments, are looking to save money on your mortgage or maybe you just don’t like the idea of carrying debt over a long period of time, you can discuss opting for a shorter amortization period.
Advantages of a longer amortization
Choosing a longer amortization period also has its advantages. For instance, it can get you into your dream home sooner than if you choose a shorter period. When you apply for a mortgage, lenders calculate the maximum regular payment you can afford. They then use this figure to determine the maximum mortgage amount they are willing to lend to you.
While a shorter amortization period results in higher regular payments, a longer amortization period reduces the amount of your regular principal and interest payment by spreading your payments out over a longer timeframe. As a result, you could qualify for a higher mortgage amount than you originally anticipated. Or you could qualify for your mortgage sooner than you had planned. Either way, you end up in your dream home sooner than you thought possible.
Again, this option is not for everyone. While a longer amortization period will appeal to many people because the regular mortgage payments can be comparable or even lower than paying rent, it does mean that you will pay more interest over the life of your mortgage.
Still, regardless of which amortization period you select when you originally apply for your mortgage, you do not have to stick with that period throughout the life of your mortgage. You can always choose to shorten your amortization and save on interest costs by making extra payments when you can or an annual lump-sum principal pre-payment. If making pre-payments (in the form of extra, larger or lump-sum payments) is an option you’d like to have, your mortgage professional can ensure the mortgage you end up with will not penalize you for making these types of payments.
It also makes good financial sense for you to re-evaluate your amortization strategy every time your mortgage comes up for renewal (at the end of each term of your mortgage, whether this is three, five, 10 years, etc.). That way, as you advance in your career and earn a larger salary and/or commission or bonus, you can choose an accelerated payment option (making larger or more frequent payments) or simply increase the frequency of your regular payments (ie, paying your mortgage every week or two weeks as opposed to once per month). Both of these features will take years off your amortization period and save you a considerable amount of money on interest throughout the life of your mortgage.
While the lending industry’s benchmark amortization period is 25 years, and this is the standard that is used by lenders when discussing mortgage offers, and usually the basis for mortgage calculators and payment tables, shorter or longer timeframes are available – to a maximum of 35 years.
The main reason to opt for a shorter amortization period is that you will become mortgage-free sooner. And since you’re agreeing to pay off your mortgage in a shorter period of time, the interest you pay over the life of the mortgage is, therefore, greatly reduced.
A shorter amortization also affords you the luxury of building up equity in your home sooner. Equity is the difference between any outstanding mortgage on your home and its market value.
While it pays to opt for a shorter amortization period, other considerations must be made before selecting your amortization. Because you’re reducing the actual number of mortgage payments you make to pay off your mortgage, your regular payments will be higher. So if your income is irregular because you’re paid commission or if you’re buying a home for the first time and will be carrying a large mortgage, a shorter amortization period that increases your regular payment amount and ties up your cash flow may not be the best option for you.
Your mortgage professional will be able to help you choose the amortization that best suits your unique requirements and ensures you have adequate cash flow. If you can comfortably afford the higher payments, are looking to save money on your mortgage or maybe you just don’t like the idea of carrying debt over a long period of time, you can discuss opting for a shorter amortization period.
Advantages of a longer amortization
Choosing a longer amortization period also has its advantages. For instance, it can get you into your dream home sooner than if you choose a shorter period. When you apply for a mortgage, lenders calculate the maximum regular payment you can afford. They then use this figure to determine the maximum mortgage amount they are willing to lend to you.
While a shorter amortization period results in higher regular payments, a longer amortization period reduces the amount of your regular principal and interest payment by spreading your payments out over a longer timeframe. As a result, you could qualify for a higher mortgage amount than you originally anticipated. Or you could qualify for your mortgage sooner than you had planned. Either way, you end up in your dream home sooner than you thought possible.
Again, this option is not for everyone. While a longer amortization period will appeal to many people because the regular mortgage payments can be comparable or even lower than paying rent, it does mean that you will pay more interest over the life of your mortgage.
Still, regardless of which amortization period you select when you originally apply for your mortgage, you do not have to stick with that period throughout the life of your mortgage. You can always choose to shorten your amortization and save on interest costs by making extra payments when you can or an annual lump-sum principal pre-payment. If making pre-payments (in the form of extra, larger or lump-sum payments) is an option you’d like to have, your mortgage professional can ensure the mortgage you end up with will not penalize you for making these types of payments.
It also makes good financial sense for you to re-evaluate your amortization strategy every time your mortgage comes up for renewal (at the end of each term of your mortgage, whether this is three, five, 10 years, etc.). That way, as you advance in your career and earn a larger salary and/or commission or bonus, you can choose an accelerated payment option (making larger or more frequent payments) or simply increase the frequency of your regular payments (ie, paying your mortgage every week or two weeks as opposed to once per month). Both of these features will take years off your amortization period and save you a considerable amount of money on interest throughout the life of your mortgage.
Monday, April 19, 2010
New Mortgage Regulations in Effect.......
Poof...just like that and it’s harder to qualify for a mortgage or at least you’ll qualify for less than you would have a week ago. The new government regulations have completely gone into effect as of today. Here is a brief snapshot of what they look like:
• 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 is meant Canadians prepare for higher interest rates in the future.
• Lower 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 (investment properties).
Another change that went into effect on April 9th that didn’t get much attention:
• Self-employed borrowers are now limited to borrowing 90% of the value of their homes and can only have been in business for less than 3 years to in order to qualify for CMHC’s self-employed program.
I won’t get into how limiting the self-employed changes for small-business owners will be. It wasn’t like the old rules made it all that easy. The change I’m still most curious about is the change in qualification criteria (1st point above). The jist of it is that if you take out a five-year fixed mortgage, you qualify at the rate you’ll be paying, which currently is in around 4.49%. If you take a variable mortgage or a fixed mortgage of less than five years you qualify at the Bank of Canada 5-yr rate, currently at 5.85%...soon to be 6.10% on Wednesday. So, if you’re looking at a variable mortgage that’s charging 1.75% right now, you need to qualify at 6.10%. That means your income needs to be approximately 25% more than it did last week in order to qualify for the same mortgage or, where a family earning $90,000/year would have qualified for a mortgage of $350,000, they will now only qualify for a mortgage of $265,000. However, if they choose a five-year fixed mortgage, they will qualify for $310,000. What this means is for a lot of people, not all, an element of choice has been taken away. Where people were starting to see that there was more out there than five-year fixed mortgages, we’re now going to back to that being by far the most popular choice. Is it a coincidence that the five-year fixed just happens to be the most profitable product for the banks? Is it also a coincidence that the leaders of our banks have closed-door meetings with the Minister of Finance and the Bank of Canada? I’ll let you decide. You can probably guess what I think.
There is a slight bit of silver lining. The above changes are for high-ratio (greater than 80% loan-to-value) mortgages, although the banks have implemented the changes to their conventional mortgages (less than 80% loan-to-value). However, some lenders in the broker market are still following the old rules of qualification for conventional mortgages. So, for those of you with less than an 80% loan-to-value, you still have some choice if you go through a broker but if you still deal with a bank, you’re more than likely going to be jammed into a five-year fixed mortgage.
The ironic part is that the government thinks that what they're doing will help consumers by ensuring that if rates go up, they will still be able to afford their payments, lowering the level of default. However, what they are also doing is creating the bubble that they claim to be trying to protect us against since homebuyers won't be able to qualify for as much, which will eventually drive down the cost of real estate.
• 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 is meant Canadians prepare for higher interest rates in the future.
• Lower 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 (investment properties).
Another change that went into effect on April 9th that didn’t get much attention:
• Self-employed borrowers are now limited to borrowing 90% of the value of their homes and can only have been in business for less than 3 years to in order to qualify for CMHC’s self-employed program.
I won’t get into how limiting the self-employed changes for small-business owners will be. It wasn’t like the old rules made it all that easy. The change I’m still most curious about is the change in qualification criteria (1st point above). The jist of it is that if you take out a five-year fixed mortgage, you qualify at the rate you’ll be paying, which currently is in around 4.49%. If you take a variable mortgage or a fixed mortgage of less than five years you qualify at the Bank of Canada 5-yr rate, currently at 5.85%...soon to be 6.10% on Wednesday. So, if you’re looking at a variable mortgage that’s charging 1.75% right now, you need to qualify at 6.10%. That means your income needs to be approximately 25% more than it did last week in order to qualify for the same mortgage or, where a family earning $90,000/year would have qualified for a mortgage of $350,000, they will now only qualify for a mortgage of $265,000. However, if they choose a five-year fixed mortgage, they will qualify for $310,000. What this means is for a lot of people, not all, an element of choice has been taken away. Where people were starting to see that there was more out there than five-year fixed mortgages, we’re now going to back to that being by far the most popular choice. Is it a coincidence that the five-year fixed just happens to be the most profitable product for the banks? Is it also a coincidence that the leaders of our banks have closed-door meetings with the Minister of Finance and the Bank of Canada? I’ll let you decide. You can probably guess what I think.
There is a slight bit of silver lining. The above changes are for high-ratio (greater than 80% loan-to-value) mortgages, although the banks have implemented the changes to their conventional mortgages (less than 80% loan-to-value). However, some lenders in the broker market are still following the old rules of qualification for conventional mortgages. So, for those of you with less than an 80% loan-to-value, you still have some choice if you go through a broker but if you still deal with a bank, you’re more than likely going to be jammed into a five-year fixed mortgage.
The ironic part is that the government thinks that what they're doing will help consumers by ensuring that if rates go up, they will still be able to afford their payments, lowering the level of default. However, what they are also doing is creating the bubble that they claim to be trying to protect us against since homebuyers won't be able to qualify for as much, which will eventually drive down the cost of real estate.
Wednesday, April 7, 2010
Fixed Rates Increase and Create the Biggest Fixed-Prime Spread in 30 Years
Well, the smoke has finally cleared after the fixed rate increases from last week. The biggest single-day jump in fixed rates in 14 years created record volumes at lenders as borrowers rushed to get applications and pre-approvals in before the hikes took effect. What also resulted from the increase is the biggest Fixed-Prime spread in 30 years. The spread (difference) between discounted 5-year fixed and 5-year variable mortgage rates is currently about 240 basis points.
Based on estimates (there is no record of historical pricing on discounted fixed and variable rates), that is one of the biggest spreads in a very long time. The only historical data that is kept is the between the posted 5-year fixed rate to prime rate, the spread between the two right now is 360 bps.
That’s the biggest spread in the last 30 years (based on monthly data from the Bank of Canada).
Technically, today’s posted Fixed-Prime spread is tied with the 360 bps reading we saw last summer. The difference is that variable rate discounts last summer were nowhere near the P - 0.50% we have today.
To put it another way, today's plump Fixed-Prime spread indicates what many already know: fixed rates are selling for a major premium over riskier variable rates...or is it that variables are selling at an extremely deep discount? It is likely the spread will close when the Bank of Canada starts increasing its Overnight Rate early in the summer as is widely anticipated. Some analysts are expecting the Overnight Rate to increase from 0.25% now, to 1.25% by the end of the year. Even with that “big” of an increase, variable rates still stand to be below 3% compared to the discounted 4.35% 5-yr fixed rates that are available now.
This is meant to be some food for thought rather than predictive but consider this; if you look back to 1980 for cases where there’s been a 2%+ fixed-prime spread, prime rate has never averaged more than 1.75% higher in the five years that followed.
Will 2010-2015 be the first such instance? Time will tell. But one thing’s for certain, today’s fixed rates are trading with a huge built-in “insurance premium,” and the 2.40 percentage point edge gives variables a big head start as we move into the next rate hike cycle.
Based on estimates (there is no record of historical pricing on discounted fixed and variable rates), that is one of the biggest spreads in a very long time. The only historical data that is kept is the between the posted 5-year fixed rate to prime rate, the spread between the two right now is 360 bps.
That’s the biggest spread in the last 30 years (based on monthly data from the Bank of Canada).
Technically, today’s posted Fixed-Prime spread is tied with the 360 bps reading we saw last summer. The difference is that variable rate discounts last summer were nowhere near the P - 0.50% we have today.
To put it another way, today's plump Fixed-Prime spread indicates what many already know: fixed rates are selling for a major premium over riskier variable rates...or is it that variables are selling at an extremely deep discount? It is likely the spread will close when the Bank of Canada starts increasing its Overnight Rate early in the summer as is widely anticipated. Some analysts are expecting the Overnight Rate to increase from 0.25% now, to 1.25% by the end of the year. Even with that “big” of an increase, variable rates still stand to be below 3% compared to the discounted 4.35% 5-yr fixed rates that are available now.
This is meant to be some food for thought rather than predictive but consider this; if you look back to 1980 for cases where there’s been a 2%+ fixed-prime spread, prime rate has never averaged more than 1.75% higher in the five years that followed.
Will 2010-2015 be the first such instance? Time will tell. But one thing’s for certain, today’s fixed rates are trading with a huge built-in “insurance premium,” and the 2.40 percentage point edge gives variables a big head start as we move into the next rate hike cycle.
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