The larger the downpayment, the lower the mortgage rate should be. The more capital the applicant has into a property, the less risk there is to the lender, right? Wrong! Why less downpayment gets you a lower mortgage rate!
In today's do it yourself world from DIY renovations, DIY buying & selling homes, DIY investing, DIY looking for the lowest mortgage rate....is this the end of mortgage brokers?
Recently there have been a few articles in the media regarding mortgage brokers and banks:
- Money Sense: The Future of Independent Mortgage Brokers
- Mortgage Broker News: Client Uses Twitter to Challenge TD Bank
- Globe & Mail: Your Bank Mortgage: Is It Fair Or Does It Suit Your Needs?
As a mortgage broker, believe it or not, I am arguing for the need of a mortgage professional arranging the financing for a homeowner for the following reasons:
A mortgage professional provides different mortgage products and options to suite homeowners' needs. Here are 3 examples:
1. Young Family
A couple are expecting children and their income will be reduced to one income, cash flow is important for them in the near future. Hence, a mortgage product with 35 year amortization would be beneficial with generous pre-payment and increased payment options to help them catch up once they go back to two incomes.
2. First Time Home Buyer & Real Estate Investor
First time home buyers buying with 5% downpayment but have the intention of renting their existing home in 4-5 years time frame once they move up the homeownership ladder. A good option to consider is a 10 year fixed mortgage to set the cost of borrowing and eliminate the need for the first time home buyers to requalify their first home as a rental property in 5 years time frame at higher interest rates which would restrict their ability to qualify for their next home.
3. Business Owner
Self employed who wants to access their home equity as they pay down the mortgage without the hassle of qualifying. An option to consider is a re-advanceable mortgage where as the mortgage principal is paid down, the secured line of credit increases by the paid principal amount providing additional secured equity if needed by the homeowner
Clearly, one size does not fit all. 5 year mortgage term is the most recommended product, I wonder why?
Mortgage Terms & Fine Print
This is very important since I believe the majority of homeowners sign without really knowing what they are signing for. Per the article mentioned above (Client uses Twitter to Challenge TD Bank), it is probable the client didn't know what the mortgage restrictions (penalties) were. Either he didn't ask or the mortgage professional did not explain the details. Many homeowners focus on lowest rate (What's Your Lowest Rate?) without considering the mortgage product fine print which could cost them thousands of dollars on the back end. This is a result of confusing lowest rate as saving money.
When choosing a financial planner or advisor, one wouldn't choose based on the price of mutual fund or stock on that specific day, they would choose based on the plan they provide and one's belief in the planner's ability to execute the plan. As for mortgages, a homeowner gets a quote, signs the paperwork and doesn't hear till mortgage renewal time or they might they get an offer for a credit card, mutual fund or chequing account in the mail. Why would a homeowner choose their asset advisor any different from their debt advisor? What separates the true mortgage professional from the "application filler and rate quoter" is providing a sound strategy to help the homeowner achieve their financial goals. One wouldn't give a financial planner $50,000 and talk them after 5 years, so why would one borrow hundreds of thousands of dollars and not expect a proactive approach?
Professional Mortgage Brokers
I hope I have laid out the case why mortgage brokers are needed. A word of caution: there are good and bad mortgage brokers. To find a mortgage professional ask lots of questions of the mortgage broker or banker regarding the mortgage options, terms, fine print and strategy. To get a copy of the 4 questions one should ask when shopping around for a mortgage, go to: Shopping Around Questions
There is never a dull moment in the Canadian mortgage landscape with new rules introduced by the Minister of Finance and OSFI, Office of Superintendent of Financial Institutions. I want to state upfront that I support these changes with the exception of reducing secured lines of credit (HELOCs) from 80% to 65% of home values. Canada's housing market has been very hot since the credit crunch of late 2008 and the house prices to income ratio gap has grown significantly due to stimulus low mortgage rates. I want to clarify what families will be facing in 2016, 2017 and beyond. Today's 5 year fixed rates are in the low 3's (3.09%-3.19%) which are fantastic. However, the extended period of low interest rates will be followed by periods of high interest rates due to the following:
- Focus will turn from stimulus in the global economy to combating inflation due to excessive stimulus (money printing and quantitative easing) since 2008
- Cost of borrowing will increase due the European credit crisis which will only intensify as Italy & Spain (3rd & 4th largest economies in Europe) deal with their debt issues. As you recall, in late 2008 when Lehman Brothers collapsed, money (capital) disappeared from the market, creating a supply issue and variable mortgages went from primes less 0.75% to prime plus 1% in a short period of time
I want to share the following numbers to help you see where I am going:
Family household income (pre-tax): $100,000 Income tax bracket: 45% Mortgage amount: $400,000 Interest rate: 3.09% Mortgage amortization: 30 years Monthly payment: $1912 Renewal Rate in 2017: 5.5% (an increase of 2-2.5% over 5 years is very reasonable based on historical data and the above stated issues) Mortgage payment at renewal: $2103 (increase of $416 per month)
Some would assume taking on an additional $416 per month in 5 years is doable. Let's dissect a little further:
In order to absorb $416 of additional mortgage payment, the family's pre-tax income has to increase by $9,000. That might sound reasonable , however, it's equivalent to getting 2.5% raise every year for the next 5 years. The economy is not in the greatest condition: not many companies are hiring, some are cutting back and the reality is keeping a job nowadays is great news. Furthermore, the increased cost of living (property taxes as municipalities deal with their debt and deficit issues, gasoline which affects goods prices, higher hydro rates....) will eat away into a family's affordability. I didn't mention that children cost more as they grow up!
This blog post is a reality check. We have been drunk for too long on cheap money. Plan for the long term and understand how future events should play into your decisions today. This is a golden opportunity to consider long term mortgages such as a 10 year fixed.
To get more information please visit: www.10YearFixedMortgages.com
Whether you agree or disagree with me, I would love to hear from you.
Lately, I have been dealing with an increasing number of clients who are deciding not to sell their home. They are choosing to keep their existing property by turning in it into an investment property and using the proceeds of the refinance to buy a home. Since the financial credit crunch in late 2008, more Canadians are skeptical about the markets, are worried about having enough to retire and are looking for alternative ways to diversify their investments. A greater number of homeowners, after reviewing the numbers, are deciding to refinance their existing home up to 80% of its current market value, take advantage of today's historic low interest rates and rent the property. Here is real example that I did for a client who owns a condo in downtown Toronto.
Condo value: $350,000 Mortgage amount: $280,000 (80% loan to value) Mortgage amortization: 30 years Mortgage interest rate: 3.29% Mortgage term: 5 years Annual appreciation: 2%
There are two items to pay attention to in the above chart: 1/ initial equity is $70,000 and after 5 years based on 2% capital appreciation and utilizing the inflation hedge mortgage strategy, 2/home equity is at $135,771. By having the tenant paydown the mortgage and adjusting the mortgage payment gradually for higher interest rate environment, the home owner almost doubles their money in 5 years. Imagine the financial freedom a fully paid off investment property would create.
If you are interested in finding out how to turn your current home into an investment property and use your home equity to buy a home, please contact me.
Variable mortgages up to late summer of 2011 were very attractive due to the large discount off prime at that time (prime less 0.75%). Many homeowners and real estate investors took advantage of getting a variable mortgage on their home or real estate investment properties. The mortgage product is portable and assumable which means the homeowner or real estate investor can port (transfer) the mortgage to a new home as long they qualify and it's done within a certain period of time between selling one property and buying another (typically 90 to 120 days). As for being assumable, the mortgage can be taken over by the buyer should they qualify. There is a catch however when porting a variable mortgage. Unless the exact mortgage amount is transferred over to the new property, lenders will reset the rate to whatever the market rate is at that time. Here is an example, let's say the borrower got a variable mortgage at prime-0.75% and the balance at the time of moving is $250,000. They are buying a home which will require the mortgage amount to increase to $300,000. The borrower can consider 2 options:
- Port the mortgage of $250,000 and obtain a line of credit for the difference, in this case $50,000 in order to maintain the prime-0.75% on the variable mortgage
- Obtain a new $300,000 variable mortgage at today's rates (prime-0.1% to prime+0.1%) with the same lender without incurring a penalty
In the above case, it's clear that keeping the mortgage at prime-0.75% is a wise option. It's important to understand the fine print of the mortgage and and discuss the available options with your mortgage professional.
As for the blog post title, yes variable mortgages are portable, but with a catch!
To discuss your personal mortgage financing situation, please contact me.
Have you recently shopped for a mortgage? Were you trying to choose the lowest available rate? Many Canadians shop based on "lowest rate" and I don't blame them. When was the last time a homeowner sat down with a mortgage broker or banker to discuss a strategy for their mortgage? I'm sure you will understand where I'm going with this, let's say you have $50,000 to invest:
- How would you go about choosing a financial planner?
- Would you choose a financial planner based on the stock/mutual fund price on that day?
- How will you choose which financial planner gets to manage your investments if all them have the same stock/mutual fund price?
I believe the majority of people choose their financial planner based on their belief the planner can deliver the proposed strategy that will achieve their long term goals.
Now let's go back to mortgages, let's say you receive 3 different rate quotes which are exactly the same, how will you choose who will get the privilege of managing your debt? If you have an asset manager shouldn't you have a debt manager?
I believe that a mortgage professional is ought to provide more than filling out applications and quoting rates. They should provide a well executed strategy to achieve your desired mortgage freedom, a mortgage product that fits your changing lifestyle and a mortgage term based on current and projected economic conditions.
A stock is chosen by a day trader by timing the market whereas a mortgage is a vehicle to achieve your financial freedom.
To discuss your personal mortgage financing needs, please contact me.
Keep in mind the next time you are looking for a home or an investment property in a city, to take a look at job creation activities such as companies relocating or expanding, infrastructure investment or a city that is diversified in multiple industies. Afterall, having all the city's eggs in one basket is risky!
To discuss your personal mortgage needs, please contact me.
Toronto and GTA's real estate values have increased significantly over the last 10 years. The prices continue to increase as the global economy struggles to emerge out of the slowdown since late 2008. There are 2 factors that can negatively affect the housing market in Toronto, GTA as well as Canada: Interest rate and/or unemployment spike.
For the last 3 years, Canadian homeownerns and real estate investors have enjoyed historically low interest rates which have resulted in record sales and prices. Interest rates have remained low to stimulate consumer spending and promote GDP growth. As Canadians reach record debt levels (approximately $1.50 of debt to $1 earned), Canadians are running out of steam for further debt accumulation. Many Canadians have fixed mortgages in the 3.3%-3.8% and variable mortgages at the prime minus level.
In order to save the global economy from a depression, governments around the world took on aggressive stimulus (printing money) since late 2008 which will result in high inflation sometime in the future. As inflation becomes the primary objective of governments, interest rates will have to rise to control and moderate inflation. Canada is already experiencing high inflation numbers, however the Bank of Canada is choosing to keep its benchmark rate low due to the uncertainty originating out of Europe.
A spike in interest rates would effect Canadians since mortgages will renew at higher interest rates and unsecured loans would cost more. Based on August 2011 data, the affordability index in Toronto for 2 storey homes and bungalows is at 61.4% and 51.9% respectively (http://goo.gl/8rK5B). If one assumes that an income earner is taxed at 40%, it means that in order to buy a 2 storey or bungalow in Toronto, 2 incomes are required. Condos are a more affordable option in Toronto at 34.2%.
A spike in interest rates which diminish the ability of many to qualify for a mortgage especially insured since qualification is based on posted rates. Demand would therefore be reduced since less buyers can qualify for a mortgage.
The main point to take away from this post is to have a plan regarding mortgage/debt paydown and plan to renew ones mortgage at a 6% level. For more information, click here.
My next post will discuss unemployment spike.
Mortgage brokers promote dealing with 20 or more lenders. However, many homeowners only recognize the big 6 banks they have seen on street corners. So who are these other lenders that brokers promote? In Canada, approximately 25% of homeowners use the services of a mortgage broker. These lenders are Canadian owned and operated, but choose to fund their mortgages through the broker channel to cut overhead costs on "brick and mortar". Afterall, having full-time salaried employees with benefits cost money, not to mention the costs of operating a bank branch. Due to the reduction of expenses for the "non-bank" lenders, they tend to pass on the savings to borrowers through lower rates.
What are The Risks of Dealing With Non-Bank Lenders?
There is a mis-conception, especially after the financial credit crunch in late 2008, that borrowers will lose their homes if the mortgage is funded by a non-bank lender. This is absolutely not true. The risk is assumed by the lender since they are the ones giving out their money with the understanding the borrower will repay the mortgage on time. Also, keep in mind these lenders function under the Canadian Government rules and laws.
Why Should I Choose a Non-Bank Lender Over A Bank?
You don't have to. A non-bank lender is an option that is presented by your mortgage professional to consider. Other important factors to consider when choosing a lender are:
- How is the mortgage penalty calculated?
- If I decide to lock in, do I get the posted or discounted rate (typically 1.5% difference)?
- What features are built into the mortgage (pre-payment, increased payment, portable, assumable...)?
- What are the fine print terms that I should be aware of?
- Who & how will my mortgage be managed? Afterall, getting a mortgage is one thing but working with someone who will oversee the mortgage and optimize it to reduce overall interest is another skill (click here for inflation hedge mortgage strategy)
Bottom line, if you pay your mortgage on time no on will take your home away! This is Canada afterall.
To discuss your personal mortgage financing situation, please contact me.
A client approached me a few weeks back with interest of getting pre-qualified for a mortgage to buy their first home. During our initial meeting, we discussed their goals, where they see themselves in 5 years and cash flow projections based on mortgage interest rates over the next 5 years. One of the questions I ask, is how the person's credit score is. The client stated they had no outstanding debt with very little credit card balance that is paid off every month. Once all the necessary information was gathered, a credit check was completed and I was shocked to what I saw in their report. There was an outstanding student loan which showed delinquency for over 21 months which literally had destroyed the client's credit score and history. I contacted the client to notify them of the issue and they were surprised to hear there was a balance since they stopped receiving a bill after they moved to their new address. They had thought the loan was paid off. Unfortunately, the outstanding balance was minimal but had accumulated lots of interest over the 21 months.
In this case, the client will have to re-establish their credit and show 2 years of good credit history to qualify for a mortgage at a decent mortgage interest rate. There are other alternatives, but are more costly.
By checking your own credit score annually from Equifax (http://goo.gl/5xqCP) these type of issues would be resolved. Similar to a medical annual check up, an annual credit check is important to verify there aren't any errors or items that need to be addressed immediately. The cost of checking your credit score is $24.95.
To discuss your personal mortgage financing needs, please contact me.
We have experienced low mortgage rates since the financial credit crisis in late 2008. The purpose of the low rates is to stimulate consumer spending which will result in economic growth and recovery out of the recession. In the last few weeks, there have been talks regarding the European debt crisis and how similar it looks like the 2008 credit crisis. It started with Ireland and Greece, which are considered small economies in Europe. The credit crisis talks have shifted to Spain and Italy which are large economies. As Germany and France continue to bailout their Euro zone counterparts, they accumulate more debt. There were talks last week that France is in financial trouble which resulted in a stock market sell off among other bad economic news. The bottom line there is a storm brewing in Europe which will come to fruition sooner or later. This uncertainity has resulted in bond yields dropping to historic lows which will result in lower fixed mortgage rates.
There are now possibilities the Bank of Canada might hold or even consider cutting its benchmark rate (which sets prime rate) to stimulate the Canadian economy just in case Canada gets dragged into a slowdown due to what's happening in US & Europe. This means continued low rates for the foreseeable future.
So What You Might Ask?
The concern with even lower interest rates, is creating more demand in the Canadian real estate market. This is good news for first time home buyers since the affordability requirements will drop, however, more bidding wars might result (I can only comment on Toronto's real estate market since this is where I conduct my business) and some would lose out. Canadian household debt is already at an all time high and taking on further debt could result in an unpleasant consequences for all (http://goo.gl/zzcDH). The lower rates will pull the future demand into the present and leave a void in the future. The other concern is Canadians getting used to these low mortgage rates and not plan for higher interest rate environment when mortgages renew in a few years from now.
Finally, taking on debt with a responsible plan to pay if off can be a good thing. However, taking on debt and not planning for higher interest environment will have dire consequences.
To discuss your personal mortgage financing situation, please contact me.
It has been a roller coaster for the last few days in the market! There has been a lot happening over the last month or so in the global economy which has resulted in some serious volatility in the market (stocks & bonds).
The majority of homeowners, unfortunately, get a mortgage from their local branch, set the payment and forget about it till renewal. I call it "set it & forget it" approach. Since 2008, there has been a lot volalitility which is anticipated to continue as the western economies deal with unprecedented levels of debt. Here is a number to put things into perspective: Between today and September 1, 2011, European countries have to pay 57 billion euros of interest! These numbers will have a huge impact on the recovery of Europe, not to mention the US which is dealing with its own fiscal challenges.
Why Should You Care?
A mortgage, whether it is for a home, cottage or rental property is an investment vehicle. Similar to one's RRSPs, which I am sure lots of Canadians are now reviewing on a daily basis, a mortgage needs to be reviewed on a regular basis to optimize it for what's happening in the economy. This means someone overseeing the mortgage, notifying the borrower when to adjust the mortgage payment to reduce the mortgage amortization and save thousands of interest dollars as well as adjusting the mortgage for renewal at a higher interest environment. These low rates will not be around forever. The beauty of all this after mortgage funding service, is it comes at no cost to the borrower from a mortgage professional, believe it or not. Unfortunately, the majority of homeowners don't utilize this free service.
This is a great opportunity for Canadian homeowners to take advantage of this low interest rate environment and set up a plan to achieve mortgage freedom and save thousands of unnecessary interest dollars. Afterall, it is your hard earned dollars!
To discuss your personal mortgage finance situation, please feel free to contact me.