How To Position Your Mortgage Today?

We have heard the governor of Bank of Canada, Mr. Carney, over the last few weeks talk about high level of Canadians household debts and his concern of homeowners getting used to the low rate environment. The concern as the global economy recovers (especially US & Europe), there will be a rate "snap back" to normal levels where homeowners would experience a payment shock. Here are facts to consider:

• US Federal reserve prime lending rate is between 0% and 0.25% and will continue at these levels until unemployment numbers improve and GDP growth accelerates. In my opinion, these rates will stay around this level well into the next presidential elections in November 2012.
• Bank of Canada prime lending rate is at 1% and the bank is reluctant to have a large difference with the US Fed rate since international investors would buy the Canadian dollar which would increase its value, slowing down exports and negatively affecting Canada's economy.

Taking the above into consideration, prime rate would probably be at the same level or slightly higher until the early part of 2012.  This favours a short term variable mortgage where the borrower would benefit from the lower rate and the borrower can negotiate a new product in 2.5 to 3 years based on the economic conditions where possibly bigger discounts to the prime might be available.  An important factor to take into consideration is to set the variable mortgage as one is paying for a fixed mortgage, where the difference in payment pays down the principal reducing total amortization and saving thousands of interest dollars.

Finally, it is important to make a decision based on your personal financial situation since cash flow for a first time home buyer is different from a self employed homeowner which is different from a family with 2 kids who are in daycare.

For information about inflation hedge strategy and how to position your mortgage, please contact me.

Why Getting The Lowest Mortgage Rate Might Not Be The Best Thing

"What's your best mortgage rate?" I hear that all the time from inquiring clients.  Mortgages are like investments (mutual funds): depending on the client's tolerance for risk and 3-5 year financial and family plan, each mortgage product has its pros and cons.  Today's homeowners typically ask for 5 year "best mortgage rate", however very few question why 5 year is the only term they ask for. This is an actual story that happened 2 weeks ago: a client's mortgage renewal came up and after meeting with them to understand their financial situation and their wishes to pay off the mortgage in 6 years, I recommended a short term (2.5 year) variable product.  They mentioned they wanted to shop around for "best mortgage rate".  They were provided with a mortgage that was 0.1% less than the one I offered. After deciding to move forward with the lower cost mortgage, they discovered the product's minimum amortization is 16 years and has a very restricted increased payment privileges (no pre-payment allowed).  Realizing there is more to mortgages than rates, they came back and moved forward with my recommendations which achieved their desired goal of being mortgage free in 6 years.

It is important when getting a mortgage to consider the following factors over 3 to 5 year span:

• What will your cash flow situation be?
• Do you plan to buy a rental property or a cottage?
• Do you plan to be self employed?
• When do you want to be mortgage free (specific date)?
• Any plans to renovate the home?
• Will you need to access your home equity?
• Do you have children who will be attending post-secondary schools?
• Do you plan to invest into RRSPs & other retirement vehicles?

The next time you give me a call to ask: "What's your best rate" and I answer with "I would love to help you, but let me ask a few questions" I hope you understand.

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:

1. Payment history (35%): What's your track record? Have you missed any payments? Have you made your payments on time?
2. Amounts owed (30%): How close are you to maximizing your limit? Staying under 65% would not negatively affect your credit score.
3. 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.
4. 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.
5. 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.

Use Inflation To Pay Off Your Mortgage

Today's mortgage rates are at historic lows due to the sluggish global economic conditions.  However, as the global economies recover and grow, interest rates will rise to their normal average.  For example, 5 year fixed rates nowadays are in the mid 3% range, however the average over the last 25 years is around 6%.For illustration purposes, here is an example:

Mortgage of $250,000 at 3.5% amortized over 25 years with a monthly payment of $1,248.18. If the homeowner sets the payment and forgets about it till renewal time, the monthly payment will increase by $288.01 per month (assuming the renewal rate is at 6%).

By adjusting the mortgage payment to absorb the payment shock over 5 years (increase monthly payment by $57.60 every year), at renewal the mortgage balance will be reduced by $7,275.88 and remaining amortization drops from 20 years to 16.12 years saving $58,115.07 for a total saving of $65,390.95 (all figures are after tax dollars).  For someone who is at a 40% tax bracket, they would have to earn $108,984.92 to pay the $65,390.95 interest figure.

Adjusting your mortgage payment for inflation will save thousands of unnecessary interest dollars and shave years off the mortgage.

How Will I Get There?

"I want to retire by the age of 55" I have heard that statement or similar ones many times.  I have always asked the following questions when I hear these statements:

• How will I get get there?
• What's the required monthly cash flow to maintain a certain lifestyle?
• Will I be mortgage free by then?
• If I continue to do the things I am doing now, will I achieve my goals?
• How does inflation affect what I need to live on in 20-25 years?

Making declarations without proper planning results in disappointment when desired outcome is not achieved.

I am holding in conjunction with Angela Galer-Grist, CFP, BMO Nesbitt Burns Investment Advisor, a lunch and learn event to address the following topics:

• Building net worth
• Achieving mortgage freedom earlier
• Building retirement plan
• Minimizing bad debt
• Increasing cash flow
• Getting tax refund

I personally went through this exercise and found it empowering to set my road map to achieve my goals.

If you are interested in attending the lunch and learn, please free to email me or Angela to register.

It's your future.

Building_Futures_Plan.pdf Download this file

What Does My Mortgage Really Cost?

Typically, homeowners do the following steps:

• Get a mortgage
• Set a payment
• Forget about it till renewal

Here is an example: a $250,000 mortgage at 4.5% amortized over 25 years with an accelerated bi-weekly payment will cost $390,066.03 in total ($140,066.03 in interest) and the mortgage will paid off in 21.69 years.  At a 40% tax bracket, a person has to earn $233,433.38 to pay the interest portion of the mortgage!

By putting $750 extra on the mortgage every 6 months, the mortgage will be paid off in 19.08 years and the total interest paid is reduced to $121,449.65 (savings of $18,616.38).

Small steps do make a difference, it's your hard earned after tax dollars.

Variable or Fixed?

 With fixed rates dropping again this week, the question of variable versus fixed is alive again. Let's look at the numbers for the following:

Mortgage of $250,000, amortized over 25 years, term of 5 years, monthly payment.

Option 1: Variable mortgage at P-0.75% (assume prime rate increases by 0.5% every year for 5 years)

Option 2: Fixed mortgage at 3.39%

Results:Variable - balance at renewal $207,625.45

Fixed - balance at renewal $210,124.31

The results show that variable saves $2,498.86. Although variable is less costly, some might find the fixed provides a sense of security due to their personal cash flow situation and no one really knows what will happen to prime rate over the next 5 years.  Keep in mind, with the recent $600 billion quantitative easing move by the US Federal reserve, the Canadian dollar will maintain a high exchange rate, limiting Bank of Canada's appetite to further increase its benchmark lending rate which will push the dollar higher and have a negative impact on Canadian exports. Until the US economy starts to expand and the US Fed Reserve priority shifts from stimulating the economy to moderating inflation, Bank of Canada will be reluctant to have its prime lending rate too far from the US.  Time will tell.....