What Was That Lender's Name Again?
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.
Are Mortgage Interest Rates Dropping?
My Commentary On What The Bank Of Canada Said Today
What's Your Best Interest Rate?
Typically, one asks for the best mortgage rate when looking for a mortgage. In this video, other questions to be considered are discussed to help one decide since a mortgage is an investment vehicle not a commodity.
Where Is Prime Rate Going?
Is That The Best Rate You Have?
In today's competitive mortgage market, there is lots of "lowest interest rate" and "best mortgage rates" advertising in the media. I even saw a jeweler offering mortgages!! Is the best rate really what's best for one's situation?
Asking for and making a decision strictly on lowest rate is similar to someone walking into a financial planner's office and asking for the lowest MER mutual fund. Mortgages are investments and need to be chosen based on where the economy is currently, what's expected to happen with interest rates over the next few years (inflation, job creation and global factors), personal and financial situation and borrower's risk tolerance. The fine print of the mortgage such as compounding, prepayment priviliges, increased payments, portability, assumability and how the penalty is calculated are important features to be understood upfront prior to commiting to a mortgage product. It's unfortunate that homeonwers have been programmed to get the lowest rate, set the payment and not look at the mortgage till renewal time. There are significant opportunities in optimizing the mortgage to reduce the amortization and build significant equity in a shorter period of time if the mortgage is managed properly by a professional.
The next time you are in the market for a mortgage whether you are buying a home or an investment property, renewing, or refinancing, please email me to send you a checklist of factors to consider in choosing what's right for you and your family.
Please contact me should you have any questions regarding your mortgage.
What Drives Variable Rate Mortgages?
My previous blog post discussed factors driving fixed rate mortgages. What about variable rate mortgages?Variable mortgages are driven by prime rate (which is based on Bank of Canada's benchmark rate) and the discount a lender would provide. For example, 5 year variable mortgage at prime less 0.75%.
The benchmark rate, is set by the Bank of Canada on eight set dates annually. Bank of Canada targets inflation around the 2% level, if inflation is higher then the benchmark rate is increased to control inflation and in cases where there is low inflation (or deflation), the benchmark rate is lowered to stimulate consumer spending and business investments due to the low cost of borrowing.
What does the dollar have to do with prime rate?
Canada's benchmark rate cannot be at a much higher level than the US benchmark rate since a substantial difference between the two would drive foreign investors to buy the Canadian dollar and appreciate its value. A stronger Canadian dollar would reduce Canada's competitiveness by making Canadian products more expensive therefore reducing exports and slowing economic growth. The US economy has and will continue to experience tough and slow economic recovery. The US Federal Reserve will keep its benchmark rate low to stimulate the economy, create jobs, promote consumer spending and increase housing demand through low interest rate environment. With the upcoming US elections in 2012, the US will keep rates low to aid re-electing the current president (historic data shows in re-election years US interest rates are kept low). This low US interest rate environment will exert more pressure on the Bank of Canada not to increase the Canadian benchmark rate aggressively till the end of 2012 which makes variable interest rates favourable. Having said that, the Bank of Canada will have to increase the benchmark rate to control inflation and high consumer debt levels, however it will be gradual. My prediction is 0.5% increase for this year.
For your personal mortgage review, please contact me.
What Drives Fixed Rate Mortgages?
Since January of this year, fixed rate mortgages have been volatile (see chart below) with many increases followed by decreases whereas prime rate (which affects variable mortgages) has been stable over the same period of time. What drives fixed interest rates to be this volatile?
Fixed rates are driven by the bond market. Bond yields decrease with bad news such as the recent Japanese natural disaster and the Libyan crisis. These events which occured in mid March resulted in lower fixed rates for a short period of time. On the other hand, news such as higher inflation and positive job creation drive up bond yields since investors move their money into the stock market and for bonds to be attractive for investors, they would have to provide a higher yield (ie. fixed rates would increase).
Good economic news with respect to job creation, lower number of Canadians filing for unemployment insurance, US economoy creating jobs and trimming its deficit, result in increased bond yields and therefore higher fixed rates.
In my opinion, the number one risk over the next few years as the global economy recovers is inflation. Governments spent billions of dollars to stimulate the economy by providing liquidity into the market which has to be paid for by the taxpayers eventually. High inflation would drive up fixed rates accordingly.
To review your personal mortgage situation, please contact me.
What Determines Your Credit Score?
680, 783, 621.....How are these credit scores calculated? There are 5 factors that determine credit score. Here is a breakdown of each factor:
- Payment history (35%): What's your track record? Have you missed any payments? Have you made your payments on time?
- Amounts owed (30%): How close are you to maximizing your limit? Staying under 65% would not negatively affect your credit score.
- Length of credit score (15%): Having a credit card or line of credit for a long period of time helps establishing a good track record assuming no payments have been missed.
- New credit (10%): Are you applying for credit cards, retail store cards regularly? Are you applying with 5 lenders for a mortgage? Continuously looking for new credit is a negative.
- Types of credit (10%): Healthy mix of credit cards, retail accounts, lines of credit and car loan/lease.
For mortgage lenders, credit scores above 680 are considered excellent, there are cases where some lenders require a 700+ for self employed clients. For a copy of "Understanding Credit Score" report which provides detailed information on improving and maintaining your credit score, please click here.