Inside Online Mortgage

It seems as time goes on, I am getting more and more passionate about consumers working with a mortgage broker instead of the bank. I think this comes from the fact that every week brings new stories from disillusioned clients who realize their bank may not truly have their best interests at heart. Even worse are the ones who are not being treated fairly by there bank and don’t even know it.

The truth is that it is not your bankers fault. A bank itself is not a bad thing, in fact I work with them every day. The issue is where their motivations lie. The person at the car dealership is paid by that car dealership to sell you cars they have, and to sell it at the highest price they can get you to pay for it. They are also incentive motivated to sell you any extras they can such as service plans etc. That person at that car dealership could be a very honorable person working for a very honorable company, but this is still the job he gets paid to do. He does not get paid if he tells you the best car for you is actually manufactured by the guy across the street. He cant really tell you that there is a really great service shop down the street that will do you maintenance for less money.

You banker is the same way.

On the other hand, you have a mortgage broker. Your mortgage broker works for you. He doesn’t typically get paid by you, but he is motivated, and even government regulated to ensure that he provides the best mortgage products and services to meet your needs. He is regulated by the government to not favor a particular product or lender based on compensation differences, and is regulated to make sure he is continually educated to give you the best possible advice.

I think the other reason I get more passionate about this issue, is that i haven’t yet heard a good reason to deal with your bank directly rather than hiring the services of a mortgage broker. I have not seen a person get better pricing, advice, or service by going this way, and most definitely they have fewer available product choices for their borrowing needs.

I recently worked with a client who had been pre-approved by their bank (whose name I won’t mention) at a very low rate. These clients went out and bought a new place based on this pre-approval. Went they went back to show the bank the contract for the new house they purchased, pricing in the interest rate market had increased. The bank told them that their pre-approval could not be honored because they had purchased a new home, and it needed to be a pre-owned home. Their new rate would be 3.64%. There were a lot of strange things about this scenario :

1.Banks would typically prefer a new home with warranty etc. and would never charge a premium for this.
2.The rate that we had available through this bank was 3.29%, there was no reason whatsoever for it to jump to 3.64%.

In the end we took two days to shop the market and moved the clients into a great mortgage rate with a different lender, and they learned the unfortunate lesson about dealing with the bank.

This lesson is this: Your bank, no matter how pleasant is motivated, incented, and evaluated on may different things, and working for you is not their first priority.

Work with an experienced and knowledgeable mortgage broker to ensure someone has your best interests at heart.

I am sending you this update to try to combat the terrible job the media is doing in helping with our Economic recovery as they seem to never want to report the good news as it relates to mortgage rates.

The press isn’t telling you, and the banks aren’t telling you, so I am telling you!

So here are some things you did know:
In the middle of February it was all over the news that there were mortgage rates were going up significantly. Headlines such as “The Days of Low Mortgage Rates May Be Over” and “Mortgage Interest Rates on The Rise” were all over the news.
The Banks posted mortgage rates increased from 5.19 to 5.44% on a 5 year term.
People were panicking.
Here are some things you likely don’t know:
The best 5 year fixed rate mortgage on the market before that increase was 3.89%.
During that time there was a brief period where the best 5 year fixed rate mortgage was 4.04%
Currently the best 5 year fixed rate mortgage is 3.84% and bank posted rates on a 5 year have dropped down to 5.34%
The best 5 year variable at that time prior to February was 2.25%.
The best 5 year variable has continued to be 2.25%.
I have not seen one headline announcing the decreases that have happened since the increases happened in mid February!

In JUNE 2009 and March of 2010 It was all over the news about mortgage interest rate increases, and in February 2011 it was all over the news again. Over the past year there have been plenty of mortgage rate decreases that didn’t make the news, and in actual fact a variable mortgage is significantly less expensive today than it was 1 year ago, and 5 years fixed mortgage are roughly the same, going up and down constantly 10 or 20 basis points all the time.

We are in the best buyers market we have ever been in, and still in the lowest interest rate environment ever! Feel free to forward this to all of your clients!

5 Year Variable 2.25%
5 year fixed 3.84%
Heloc 3.25%

There will be a lot of talk in the next few days about the new mortgage rules announced. Whenever this happens, there is a lot of confusion in the market about what it means. Below I will list what it does and doesn’t mean to answer some of your potential questions:

What it does mean:
Refinancing an existing property will only be allowed to a maximum of 85% of the property value. This is a 5% loan to value reduction.
The maximum amortization on high ratio mortgages has been reduced to 30 years from 35 years.
This does mean that some clients will have a harder time qualifying as their max amortization will be shorter, those who are on the fence should look at getting their purchase done prior to March.

What it does not mean:
People with 20% downpayment or more are not affected at all by these rule changes.
There are no changes to the maximum amortization for people with 20% down payment or equity, maximum is still 40 years.
There are no changes to the required down-payment for home purchases

What it might mean:
Some lenders may choose to implement these changes prior to the March 18th deadline.
Some lenders may choose to reduce amortization even on conventional mortgages (20% dp) even though they don’t need to.

THE CREDIT QUESTION

Your credit score is probably the most important component of your mortgage application because it‘s the primary factor that banks and lenders use to determine your creditworthiness. It tells lenders how likely you are to pay your bills on time, because it reflects every credit card, loan payment and late payment you‘ve ever made – and every bankruptcy or credit problem you‘ve undergone. With so much weighing on this tiny little number, it‘s important to understand what it is, how it‘s calculated and what you can do to manage it.

1. What is a Credit Score?
Canada‘s two credit bureaus, Equifax and TransUnion, are independent companies that make their money from collecting information about your credit history.
Other businesses that utilize the services of these bureaus – meaning, they report to and collect information from them -include virtually every credit card company, loan entity (student or otherwise), car leasing company, utility company, collection agencies and pretty much anyone else you pay money to on a regular basis -
with the exception of your mortgage. For some reason, mortgages aren‘t reflected on your credit report.

The bureaus monitor the activity on a regular basis (typically monthly) and assign a ‘credit score’ to you. This number ranges from 300 to 900, although anything in the 700s is considered to be good. To qualify for credit, you typically don‘t want to be lower than 620, and definitely not lower than 600.

In general, the higher your score, the lower the probability that you will become delinquent on credit extended to you. And while many lenders use bureau scores to help them make lending decisions, each lender will base its decision on more than just the score.

2. What is used to calculate my Score?
While each credit bureau is different, both rely on similar algorithms to determine an individual score. Below is an approximate breakdown:

Payment History (35%): Your credit score will be higher if you pay your bills on time, as opposed to submit late payments – or worse – not pay outstanding debts at all. If you have a poor payment history – meaning, you‘ve missed a payment, declared bankruptcy or had a debt that went into collections – this will negatively affect your credit score. The more time that passes since you‘ve paid the outstanding debt or declared bankruptcy, however, the less heavily this delinquency will be weighed.

Current Debt (30%): Just because you‘ve been approved for a $10,000 credit limit doesn‘t mean you should use it all! The more credit you use, the lower your score will drop. TransUnion recommends keeping your credit card balance below 50% of your allotted limit, and ideally around 30%. With this in mind, if you‘re someone who relies on a credit card a lot, it might be better to implement some spending discipline rather than asking your credit card company to drop that $10,000 limit to $500.

Length of Credit History (15%): The longer you‘ve been proving yourself as a reliable borrower, the higheryour score will be. Someone without a lengthy track record of paying back debts is likely to have a reduced credit score.

New Credit (10%): lf you have a lot of companies viewing your credit report in a short period of time -whether they‘re landlords, credit card applications or mortgage brokers – a red flag will go off at the credit bureau, and consequently lower your score. Regardless of what the reasons are, the bureaus see that activity as a sign of desperation – meaning, you‘re in financial trouble and looking for a way out. Try to avoid applying for every credit card application that comes your way.

Types of Credit (10%): Your credit score is partly calculated based on the types of credit and loans you have – such as credit cards, retail accounts, installment loans, mortgages, and consumerfinance accounts. A healthy mix of all of these types will boost your score.

3. What can I do to improve my Credit Score?
Keeping the above information in mind, below are the most important things you can do to improve your credit score:

Pay your bills on time. If possible, set up automatic payments for all of your regular bills. Many credit card companies also have a service that allows you to automatically pay your minimum balance every month.

Don’t max out your credit cards. If you have a big purchase to make, consider applying for a lower-interest line of credit, or home equity line of credit (if you already own a home).
Choose your credit wisely. While it may be tempting to receive a new iPod – or 100,000 AirMiles -for applying for a new credit card, it‘s not worth the havoc unnecessary credit can wreak on your credit score. Try to limit all new credit applications to those you genuinely need.

Keep an eye on your credit profile. Make sure there are no erroneous charges – and no fraudsters taking over your identity. Both Equifax (www.equifax.ca) and TransUnion (www.TransUnion.ca) allow you to order your credit profile for free on an annual basis. |t‘s wise to order one from each company, since they feature different information.
Be patient. Unfortunately, it can take a while to see the fruits of your credit-improving labors. If you follow the above steps on a consistent basis, however, you‘ll be qualifying for that stellar mortgage rate in no time!

For almost 1 year now I have been hearing people say you should “wait” or “don’t buy” because higher interest rates are going to bring house prices down. I have also heard during that same period that you should lock in your mortgage because rates are going to skyrocket. I thought it would be a good time to look at what has actually been happening….

1. variable mortgage rates are about as low as they have ever been. You may have heard in the news that there was a rate increase at the beginning of June, and therefore have the idea that rates are much higher now than they were a few months ago. Here is what has actually happened:

March 2010 5 year variable rate = 1.9%
July 2010 5 year variable rate – 1.9%

Yes, prime rate went up by 0.25% but the discount that lenders offered on the prime rate increased leaving you the same rate as there was 3 months ago, and a much better rate than there was 6 months ago.

2. Fixed Rates have increased slightly in the past few months, but have actually dropped in the last month.

March 2010 5 year fixed rate = 3.79%
May 2010 5 year fixed = 4.49%
July 2010 5 year fixed rate = 4.19%

The most interesting part about this is that fixed rate mortgages are directly related to the Canada 5 year bond yields. In March the bond yield was 2.9% and today it is 2.44%. What that means is that the economy has not driven the fixed mortgages up, but the banks have chosen to increase the profit that they are making on 5 year mortgages. This is directly connected to why they are trying to drive the market towards switching out of your variable mortgages and lock into a fixed rate.

The truth is that prime rate will rise modestly, with many predicting another 0.25%, but most banks have drastically modified their predictions on the extent that rates will increase over the next couple of years. At the same time we do know that over time housing prices do always rise, and if you are constantly waiting to see if you can time the low part in the market, you are likely setting yourself up for much higher housing costs than if you do something today.

Contact me for further information and discussions regarding your mortgage strategy.

1. If your mortgage term is going to be up for renewal within the next 2.5 years you should talk to me about early renewal. What is just as important as your current rate, is what your rate will be at the end of your term and you may be set up to come out of your term during a period of peak mortgage rates.
2. If you are on a variable that is discounted less than 0.30% you should talk to me about refinancing into a better variable discount.
3. If you are currently on a fixed mortgage that is higher than 4% you should definitely talk to me about the possibility of refinancing.

This question is neverending, and that is probably because the answer is different all the time. Variable mortgage rates, and fixed mortgage rates to not fluctuate in tandem. This means that at any given time the spread between the variable rates and fixed rates can be drastically different. We are currently at a time in history where the spread between fixed and variable is had one of his largest spreads in history. I am not going to argue in this article about whether a person should go fixed or variable, as I typically like to make those assessment based on individual consultations with my clients, and assessing their needs, goals, and personalities.

I would like to show some analysis that i have done recently that may shed some light on this subject. The data below will show a typical BC mortgage with a very low 3.89% (the average is now in the mid 4s) and a best on the market 5 year variable of prime -0.50%. You may be quick to argue “but prime is going up”, and you would likely be correct, which is why I have added some periodic rate increases into my scenario. Notice that there are 5 rate increases of +0.50 every few months starting this summer. This information is based on a basic consensus from economists on what is likely to happen over the next couple of years, and is certainly not optimistic. As you can see from the data, with the same size mortgage, and the periodic rate increases, the variable will still leave you with the least amount of interest paid, and the lowest mortgage balance at the end of 5 years.

Disclaimers:
1. I do not know for absolute certain that variable rates will not increase at a faster, or to a higher rate than what is represented.
2. I do not know that variable rates will even increase that much.
3. Many people will actually not do better than 4.3-5.5 percent range and will actually experience greater savings on the variable.

Please click on this link to view the data:

variable vs fixed

There has been a lot of talk lately about the potential of rising interest rates creating another drop in the Real Estate Market. While I personally do not thing that historical data supports this argument, I would like to explore just how much risk there really is in plunging into the market today, should the economic pessimists prove correct.

I should say that I do believe rates will rise, but I don’t believe they will rise to the point of keeping people from participating in the housing market.

I also believe that even if there was a market decrease due to higher interest rates, the risk of purchasing today is still minimal due to how low the current rates actually are.

The term one needs to consider is “net equity gained”. This means that instead of only factoring the equity gained or lost in the home’s value, it is also worth considering what the costs were in obtaining that equity.

Scenario: We will look at a $400,000 house, and presume that sometime in the near future interest rates go up nearly double, and housing prices drop 10%. We will then look at the difference between purchasing now at the higher price, or purchasing later at the lower price with the higher rates.

Option 1 – purchasing now

As you can see, the actual equity in the home after the price drop is only $65,000 (it started at $80,000). The total payments during a 5 year period to keep that equity is $81,600 so the net equity gained/lost is a loss of $16,226.

Option 2 – waiting until the housing market to drop 10% because rates have gone up to 7%.

Here you see, that although you waited to purchase at the lower home price, your net equity after factoring in the mortgage costs is -$25,000 for the same 5 year period.

When the reduced amount of downpayment required in scenario 2 is factored in, your resulting loss is roughly the same.

Other Considerations:
1. if housing rates don’t drop when interest rates go up, waiting will prove to be a a very poor financial decision.
2. There are too many combination of housing market changes, and interest rate changes to cover here, this is strictly an example.

My conclusion is that I believe there may be more risk in waiting then there is in getting into the housing market today, while housing prices may not have fully rebounded, and interest rates are at record lows.

First of all, I just need to say that I love challenging conventional wisdom. I believe there is always more than one way to look at something, and I enjoy discovering those different ways.

Conventional and usually wise money management thinking would suggest that you are always better off taking bi weekly mortgage payments vs. monthly mortgage payments. I will agree that on the surface this does seem to be a way to gain an advantage on that big goal of paying off the mortgage, I would also like to say that there is maybe more to the picture than that.

First of all, I don’t see my job as simply advising people how to pay their mortgage off quicker. On average people switch mortgages every 3.5 years in Canada due to either moving or refinancing. This means that most of the time, the mortgage that I put people in is not going to be paid off by them unless they pay it out because they sold their property, or because the refinanced with another lender. Keeping that in mind, there are other factors I need to consider, such as:

1. What stage of life are my clients in? (first home, retiring, investing) or (early in career, paying off student loans) or (height of earning potential, retiring)
2. How can i make their mortgage most affordable?
3. How do I ensure that the mortgage they are in has the flexibilities for possible life changes and changes in financial goals?

These are a handful of questions that factor into making a good financial decision, and they also indicate that the best practices of conventional wisdom will not always fit when taking into account these other factors.

So, back to my example of bi weekly versus monthly. I will show you data below that says I can save you approximately the same amount of money on monthly payments as you would with bi-weekly by using some other options available in the mortgage market.

Option 1 – Bi -weekly.
Pros: pay off your mortgage quickly by essentially making an extra monthly payment every year. (bi weekly means 26 payments per year so it forces you to make more payments than simply dividing the monthly payments in half would)

Cons: you have now bound yourself to making more than the minimum payments. There is a good chance you had already budgeted a payment that was comfortable to your current income, and without realizing it, you could be stretching your annual budget.
Benefits: See numbers below:

Accelerate Payments      Monthly Payments
Mortgage amount             $400,000                         $400,000
Interest rate                          4.00%                                 4.00%
Payment                        $881.61 bi-weekly          $1,763.21 monthly
5 year balance                   $360,950                             $370,796

In 5 years (typical mortgage term) using bi weekly payments you will pay off an additional $9846! This seems like a great idea when they show you at the bank. The thing that is not mentioned is that you also made an additional $8815 in payments to accomplish this! Well, at least we did still save $1000, so not bad.

Here is Option2 – Monthly payments using annual prepayment.

Pros: keeps your minimum obligation as low as possible in case of tight finances while still providing the opportunity to make extra payments on your mortgage. (mortgage lenders allow 10-20% annual prepayment of mortgages)
Cons: requires discipline in order to realize the same savings as option 1.

If you use the same monthly payment plan listed above, but put an annual $1800 down at the end of every year you will have made an additional $9000 in payments and gained $9757.26 in principle equity.

Granted you do gain about $200 more doing the bi-weekly way, but for most people, and depending on the stage of life they are in, it may not be worth it.  Option 2 offers nearly the same savings, but adds additional flexibility of letting you decide if you want to make those extra payments.

Well, its that time again when certain interest groups make enough noise that the government decides that it is in their political best interests to make some changes to show that they are listening and doing something about it.

I think it is extremely important to note, that although the things that happen in the US do definitely have an affect on the Canadian economy, that does not mean that there is a problem in Canada. I am of course referring to the banking and lending industry, in which Canada has always maintained completely different standards and lending practices. Canada has always maintained mortgage default rates that are a fraction of our US counterpart’s.

So, here are the changes and what they will mean.

1. 5 year Qualifying Rates

This one is a pretty clear example of government grandstanding. The truth is that most lenders already do this. Essentially they are saying that if you take a variable rate mortgage (currently 1.95%), the banks need to ensure that you will be able to make payments when rates rise. This means that even though you are taking the low variable rate, they will decide how much you qualify by using the 5 year rate instead (curently 3.79%).

This is not a terrible idea, its just not a new idea either.

2. 90% maximum refinancing:

This one I have mixed feelings about. The idea according to the government is that if they stop letting people refinance their homes to 95% of the appraised value then we can ensure that they maintain equity in their homes and it becomes a form of savings. If the average home is around $400,000 then they have essentially reduced your borrowing ability by $20,000.

I am a little bit troubled by the government creating a situation under the guise of “forcing” people to save more money. I am also uneasy about the government forcing people to pay higher interest on consumer debt rather than saving money by taking out the equity in their homes.

I believe this could put people in a situation where they need to sell their home to get out of debt, rather than refinance, and I don’t believe that is good for any part of the market.

I don’t believe that this will have a dramatic effect on the housing market or economy, and i also don’t believe it will have a dramatic effect on preventing the so-called “housing bubble”, so my conclusion on it is why do it at all?

3. The 80% investment property:

This move is clearly the most dramatic of the 3 announcements. The government has decided that people need to have a 20% downpayment in order to purchase a rental property. It was only a little bit more than 1 year ago that you could do this with 0% downpayment, and was changed to 5%. This is an extremely dramatic change and again, I need to question what the value to our economy is by making this move.

This move will have an effect on the real estate market as a large part of that market is people building wealth through purchasing income properties. In fact in the people I know who have built significant net worth, most of them have done so by purchasing income properties with less than 20% down.

The idea is to reduce the real estate speculation that goes on in the market, and prevent people from potentially purchase investment properties that they cant afford.

It will remain to be seen how extensive the impact to the market will be as result of these changes.

The bottom line is to consult a mortgage planner who will work for you to maximize the existing and future rules to your best possible benefit