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?
Why Fixed Rates Move So Much?
Are You Ready For 6%?
Today's mortgage rates remain to be extremely low due to the uncertainity in the global market (risk of Greece defaulting), anemic job creation in the US and massive government debts and deficits. In Canada, we have been lucky not to experience the pain of our neighbours to the south or across the pond in Europe. Fixed mortgage interest rates are hovering in the mid to high 3% which are historically low. Over the last 25 years, fixed rates average around 6% (see chart below which shows posted rates. Typically, there is 1.5% difference between posted and discounted)
It is important to budget ahead for the time when mortgages are up for renewal at the 6% level. Inflation hedge strategy, is a pro-active plan where the mortgage is reviewed annually and adjusted according to the projected renewal rate. This strategy saves the borrower thousands of interest dollars and accelerates paying down the mortgage principal. At renewal, the borrower's mortgage balance is reduced and adjusted for higher interest rate environment eliminating any payment shock.
For variable mortgage holders, the savings are even greater, since the mortgage is paid at the fixed interest rate level which contributes more monies towards paying down the mortgage principal.
For your personal mortgage review and inflation hedge analysis, please contact me.
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.
Why Everyone Should Have A Re-Advanceable Mortgage?
What's a re-advanceable mortgage? Typically, homeowners get a mortgage on their home or investment property and should they need to access their home equity for investment or personal reasons, they would have to break the mortgage, pay a penalty and legal fees to refinance their mortgage. A great way to continuously access their equity, homeowners can get a re-advanceable mortgage.
The homeowner will need to have 20% equity in their home. Based on qualifications, a mortgage up to 80% of the appraised value can be obtained and split into a fixed or variable mortgage with a line of credit. As the homeowner pays down the mortgage principal, the line of credit increases by the principal amount for a total of 80%. This product can be obtained on primary residence and one rental property.
Example
Home value: $400,000
80% mortgage: $320,000
Mortgage portion: $300,000, line of credit portion: $20,000
As the mortgage principal is reduced, eg. $319,500, the line of credit increases to $20,500. Another benefit of this product is the homeowner does not pay interest on the line of credit until funds are borrowed which allows the homeower to aggressively paydown their mortgage knowing that all the available principal would be accessed via the line of credit.
For your personalized mortgage review, please contact me.
Do You Really Need A Mortgage Broker?
When meeting a potential client, one of the first questions I ask is: "Have you worked with a mortgage broker in the past?" Here are statistics based on Maritz research completed for Canadian Association of Accredited Mortgage Professionals (CAAMP) in 2010:
- 25% of Canadians arrange their mortgage with a mortgage broker
- 40% of first time home buyers arrange their mortgage with a mortgage broker
- 33% of Canadians have a good or full understanding of the services provided by mortgage brokers
Working with a professional mortgage broker who holds an accredited mortgage professional (AMP) designation can provide the following to a homeowner:
- Access to various lenders (options with respect to products)
- Discounted rates based on volume of business placed with lenders
- Unbiased advice on products depending on client's goals and personal situation (5 year terms do not make sense sometimes)
- Mortgage management strategy after funding
Some might argue that dealing with their institution is the way to go. Here are items to consider when negotiating with your lending institution:
- Is the employee loyal to me (the client) or employer who pays their paycheque?
- Does the product being presented to me make sense for my personal situation or is it what's most profitable for the institution?
- Will the employee manage my mortgage and let me know what's happening in the market that could affect my mortgage?
- Am I getting options with an explanation of pros & cons of each option?
- Am I being told to shop around and they will match what I get? Is so, do they deserve my business if I am doing their work? Shouldn't they offer me the best deal upfront to earn my business?
- Are the fine terms being explained to me? And what type of costs I might incurr due to the terms in the mortgage?
Working with a professional mortgage broker does not cost money to the client as the broker is compensated by the lenders they place the mortgage with. The mortgage broker's loyalty is with the client, since happy clients refer their family, friends & colleagues.
When deciding which mortgage broker to work with, consider the following:
- Length of time in the business and whether they are in the business full time
- Do some research on the net to find out more about them
- Ask for references from previous clients
- Ask how will they manage your mortgage once it is funded to reduce the total cost of homeownership
- If they promise "best rates and work with 20+ lenders" run away
And the most important factor, is work with someone you trust, share similar values and connect with. Afterall, our homes are the largest investments we make in our lives.
To discuss your mortgage options please contact me.
Why Having A Portable Mortgage Can Save You Money?
For the past few years, we have enjoyed historically low fixed rates (3.4% - 4%). Many homeowners have taken advantage of these rates and locked in for a 5 year term. As the economy has stabilized and is in a growth mode, fixed rates have started and will continue to increase as more jobs are created and inflation picks up pace.
What is a portable mortgage?
A portable mortgage allows the homeowner to move the mortgage with them to their new home as long as they qualify (good income & credit). This feature saves the homeowner thousands of penalty dollars by avoiding the need to break the mortgage.
Personal and family situations from having a family, moving due to a new job or moving to a bigger home may happen within 5 years. Having a portable mortgage is important to avoid paying a penalty.
The next time you are about to get a mortgage whether you are a first time home buyer or acquiring an investment property, ensure your mortgage is portable.
To discuss your personal mortgage or answer questions regarding mortgage financing, please contact me.
Will You Qualify For A Mortgage After March 18?
Today, Finance minister Jim Flaherty announced the following:
- Effective March 18th, mortgage amortizations will be reduced from 35 years to 30 years
- Effective March 18th, homeowners can refinance their homes up to 85% of its market value from current 90%
- Effective April 18th, government will not longer insured home equity lines of credit
Here are the good news:
- Minimum downpayment requirement of 5% was not changed for buying a home
- Self employed homeowners refinance was not lowered from 85% (per last year changes)
- 100% of condo fees will not be used in mortgage qualification (currently 50% of condo fees are used)
- For real estate investors, there will be more rental demand due to the difficulty in qualifying for a mortgage
- Canadians will own their homes faster and pay less interest
The bad news:
- It will be difficult to qualify for a mortgage if you are a first time homebuyer due to the reduction of amortization to 30 years
- Homeowners with debt outside their mortgage who want to improve their cash flow situation will be limited to 85% of their home value
The result of the new rules is the creation of an active real estate market for the next 2 months. These changes will have minimal impact on real estate investors as 20% downpayment is the requirement and self employed homeowners who require 10% downpayment to purchase a home.
I have two concerns as we move forward with these changes:
- What will happen to homeowners who bought their homes at zero down with 40 year amortization at renewal? Will they be forced to renew with current lenders at higher rates since they can't move their mortgage to another lender?
- How will homeowners qualify for a mortgage when posted rates climb up to 7-8% as the global economy improves in the next few years?
Finally, we should be grateful that we live in Canada where the pendulum never swings too far one way or the other and we have escaped the great recession fairly well.
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:
- 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.
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.
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.....