Homeowners: Don’t be caught flat-footed when interest rates rise

ROB CARRICK

The Globe and Mail

 

 

Low borrowing costs are creating a spoiled generation of homeowners who have never experienced the adversity of rising interest rates.

Renewing a mortgage? Just contact your lender to find out how much less you’ll be paying. A report issued Wednesday by a group representing mortgage brokers found that people renewing in 2012 and early 2013 nailed a rate that was, on average, 0.91 of a percentage point below what they paid previously. Seventy-nine per cent of people renewing got a lower rate, while 6 per cent had no change.

Fifteen per cent of renewers had to pay more, but don’t worry too much about them. “For borrowers who saw their interest rates increase at renewal, the increases were minor for most,” the Canadian Association of Accredited Mortgage Professionals (CAAMP) said in its report.

Bulletin for people buying homes today: If you opt for the very popular five-year fixed rate mortgage, you will pay a higher rate on renewal. That you can bank on.

We live in a low-growth world for now, and that puts minimal upward pressure on interest rates. But history clearly shows economies don’t endlessly go in the same direction, be it down, up or sideways. According to TD Economics, the yield on the five-year Government of Canada bond, a pricing benchmark for five-year mortgages, will rise from current levels around 1.3 per cent to 1.9 per cent in 2014, 2.6 per cent in 2015, 3.4 per cent in 2016 and 4.1 per cent in 2017. That’s a projected threefold increase over the next four years.

The CAAMP report’s main thrust is that the tougher mortgage-lending rules introduced by the federal government last summer will curtail housing starts, slow the resale housing market and cost jobs. But it also works hard to suggest that the big run-up in mortgage debt over the past few years is of no great concern.

One reason is that borrowing costs have been falling. CAAMP’s study says the average interest rate for a homeowner’s mortgage has fallen to 3.52 per cent from 3.64 per cent a year ago. Today, the average rate on a renewal is 3.15 per cent; for homes bought in the past 14 months or so, the average rate was 3.22 per cent.

Mortgage rates have more or less declined for the past 30 years, but most of that can be explained as the reversal of a surge to absurdly high double-digit rates caused by rampant inflation. It’s the mortgage rate decreases of the past five years that lull people into thinking interest rates are an uncertain but basically benign variable in deciding to buy a home.

Baby boomers who owned homes in the late 1970s and early 1980s know about the adversity of rising interest rates. Bank of Canada data show the posted five-year mortgage rate jumped from 10.25 per cent to 21.75 per cent over a three-year period (1978-81). With inflation in Canada now running at 0.4 per cent, rates hikes like that are unimaginable.

Rates will rise, though. What happens then to homeowners who have only known low mortgage rates? CAAMP did a survey in January, 2012, that concluded homeowners have “very substantial room to absorb higher interest rates.” But the ability of people to keep paying their mortgages is not really in question if rates rise. All mortgage lending is based on the assumption that if people are financially stressed, they will pay their mortgage first.

Pay your mortgage at the expense of savings? That’s not my warning of what’s coming for rate-hike virgins, but rather a summing up of the current financial situation for many Canadian families as portrayed in some numbers issued Wednesday by the Certified General Accountants Association of Canada.

A survey commissioned by the association found that three in 10 households find it tough to save money because they’re so burdened by day-to-day expenses. One-quarter of households never or almost never manage to save money, and 80 per cent said they may dip into their savings in the next three years. This is not a strong foundation for defending against rising interest rates.

Still, there’s some reason for optimism on how families will cope with higher rates. CAAMP’s data suggest that close to one in five mortgage holders made a lump sum payment in the past year, and that a similar number voluntarily increased their mortgage payments.

Shrink your mortgage balance as much and as quickly possible. That’s how you prepare for the adversity of higher interest rates.

15 Things You Should Give Up To Be Happy

World Observer, Online


Here is a list of 15 things which, if you give up on them, will make your life a lot easier and much, much happier. We hold on to so many things that cause us a great deal of pain, stress and suffering – and instead of letting them all go, instead of allowing ourselves to be stress free and happy – we cling on to them. Not anymore. Starting today we will give up on all those things that no longer serve us, and we will embrace change. Ready? Here we go:

1. Give up your need to always be right. There are so many of us who can’t stand the idea of being wrong – wanting to always be right – even at the risk of ending great relationships or causing a great deal of stress and pain, for us and for others. It’s just not worth it. Whenever you feel the ‘urgent’ need to jump into a fight over who is right and who is wrong, ask yourself this question: “Would I rather be right, or would I rather be kind?”Wayne Dyer. What difference will that make? Is your ego really that big?

2. Give up your need for control. Be willing to give up your need to always control everything that happens to you and around you – situations, events, people, etc. Whether they are loved ones, coworkers, or just strangers you meet on the street – just allow them to be. Allow everything and everyone to be just as they are and you will see how much better will that make you feel.

“By letting it go it all gets done. The world is won by those who let it go. But when you try and try. The world is beyond winning.” Lao Tzu

3. Give up on blame. Give up on your need to blame others for what you have or don’t have, for what you feel or don’t feel. Stop giving your powers away and start taking responsibility for your life.

4. Give up your self-defeating self-talk. Oh my. How many people are hurting themselves because of their negative, polluted and repetitive self-defeating mindset? Don’t believe everything that your mind is telling you – especially if it’s negative and self-defeating. You are better than that.

“The mind is a superb instrument if used rightly. Used wrongly, however, it becomes very destructive.” Eckhart Tolle

5. Give up your limiting beliefs about what you can or cannot do, about what is possible or impossible. From now on, you are no longer going to allow your limiting beliefs to keep you stuck in the wrong place. Spread your wings and fly!

“A belief is not an idea held by the mind, it is an idea that holds the mind” Elly Roselle

6. Give up complaining. Give up your constant need to complain about those many, many, maaany things – people, situations, events that make you unhappy, sad and depressed. Nobody can make you unhappy, no situation can make you sad or miserable unless you allow it to. It’s not the situation that triggers those feelings in you, but how you choose to look at it. Never underestimate the power of positive thinking.

7. Give up the luxury of criticism. Give up your need to criticize things, events or people that are different than you. We are all different, yet we are all the same. We all want to be happy, we all want to love and be loved and we all want to be understood. We all want something, and something is wished by us all.

8. Give up your need to impress others. Stop trying so hard to be something that you’re not just to make others like you. It doesn’t work this way. The moment you stop trying so hard to be something that you’re not, the moment you take of all your masks, the moment you accept and embrace the real you, you will find people will be drawn to you, effortlessly.

9. Give up your resistance to change. Change is good. Change will help you move from A to B. Change will help you make improvements in your life and also the lives of those around you. Follow your bliss, embrace change – don’t resist it.

 “Follow your bliss and the universe will open doors for you where there were only walls” Joseph Campbell

10. Give up labels. Stop labeling those things, people or events that you don’t understand as being weird or different and try opening your mind, little by little. Minds only work when open. “The highest form of ignorance is when you reject something you don’t know anything about.” Wayne Dyer

11. Give up on your fears. Fear is just an illusion, it doesn’t exist – you created it. It’s all in your mind. Correct the inside and the outside will fall into place.

 “The only thing we have to fear, is fear itself.” Franklin D. Roosevelt

12. Give up your excuses. Send them packing and tell them they’re fired. You no longer need them. A lot of times we limit ourselves because of the many excuses we use. Instead of growing and working on improving ourselves and our lives, we get stuck, lying to ourselves, using all kind of excuses – excuses that 99.9% of the time are not even real.

13. Give up the past. I know, I know. It’s hard. Especially when the past looks so much better than the present and the future looks so frightening, but you have to take into consideration the fact that the present moment is all you have and all you will ever have. The past you are now longing for – the past that you are now dreaming about – was ignored by you when it was present. Stop deluding yourself. Be present in everything you do and enjoy life. After all life is a journey not a destination. Have a clear vision for the future, prepare yourself, but always be present in the now.

14. Give up attachment. This is a concept that, for most of us is so hard to grasp and I have to tell you that it was for me too, (it still is) but it’s not something impossible. You get better and better at with time and practice. The moment you detach yourself from all things, (and that doesn’t mean you give up your love for them – because love and attachment have nothing to do with one another, attachment comes from a place of fear, while love… well, real love is pure, kind, and self less, where there is love there can’t be fear, and because of that, attachment and love cannot coexist) you become so peaceful, so tolerant, so kind, and so serene. You will get to a place where you will be able to understand all things without even trying. A state beyond words.

15. Give up living your life to other people’s expectations. Way too many people are living a life that is not theirs to live. They live their lives according to what others think is best for them, they live their lives according to what their parents think is best for them, to what their friends, their enemies and their teachers, their government and the media think is best for them. They ignore their inner voice, that inner calling. They are so busy with pleasing everybody, with living up to other people’s expectations, that they lose control over their lives. They forget what makes them happy, what they want, what they need….and eventually they forget about themselves. You have one life – this one right now – you must live it, own it, and especially don’t let other people’s opinions distract you from your path.

CMHC keeps shrinking business as Ottawa limits housing-market exposure

TARA PERKINS - REAL ESTATE REPORTER

The Globe and Mail

       

Canada Mortgage and Housing Corp. is continuing to shrink its business, as the government seeks to reduce its exposure to the housing market.

The amount of insurance that the Crown corporation had in force ticked down by $3.5-billion, to $562.6-billion, during the first three months of the year. The figure falls as consumers pay down insured mortgages and rises when CMHC sells new insurance.

CMHC wrote only $8.2-billion worth of insurance during the first quarter, compared to nearly $19-billion in the same period a year ago. The number of units of housing that it insured fell 54 per cent, from 114,045 in the first quarter of 2012 to 52,078 in this latest quarter.

The decline comes as the government has forced the Crown corporation to dramatically reduce the amount of bulk, or portfolio, insurance it was selling to banks. Banks can buy bulk insurance to cover large swaths, or portfolios, of mortgages with low loan-to-value ratios (high downpayments) that weren’t previously insured.

Mortgage insurance is mandatory when a consumer has a down payment of less than 20 per cent, and sales of that core product have also fallen since Finance Minister Jim Flaherty tightened the mortgage insurance rules last July. The changes that he made, which included cutting the maximum length of an insured mortgage to 25 years from 30, were designed to take some steam out of what he feared might have been an overheating housing market. His changes also effectively eliminated the ability of consumers to refinance high loan-to-value mortgages.

CMHC said that insurance volumes to cover new mortgages fell by about 23 per cent, while refinance volumes were down by 69 per cent. Bulk or portfolio volumes sunk by about 98 per cent.

Meanwhile, the volume of insurance that CMHC sells to cover multi-unit residential buildings (including nursing homes, retirement homes and apartments) rose 5 per cent.

Borrowers are 'flocking' to fixed rates

By Robert Matas, Special To The Province
www.theprovince.com


big break: 'One of the first times in history' when it's cheaper

First-time homebuyers looking for mortgage financing have rarely had it so good. Mortgages are available for about three per cent. Homebuyers were paying 21.75 per cent interest on their five-year mortgages in the summer of 1981.

People now entering the housing market have another big break. Homeowners can have the security of fixed rates and anticipate paying less over the term of the mortgage than they would with variable rates.

"We're thinking it might be one of the first times in history where it might make sense to go fixed. Looking at the objective data, it may be cheaper," said Kerri-Lynn McAllister of RateHub.ca, a website that compares mortgage rates and offers a referral service to lenders and mortgage brokers.

Ryan McKinley, a mortgage development manager at Vancity, said homebuyers are "flocking" to fixed rates.

Seventy-nine per cent of those who took on a new mortgage last year went for fixed interest rates, according to the Canadian Association of Accredited Mortgage Professionals. At RateHub, 85 per cent of the inquiries in February were for fixed rates.

For variable interest rates for mortgages, keep your eye on Canada's key interest rate. It goes like this:
The Bank of Canada determines an overnight lending rate at which the large banks borrow and lend one-day funds among themselves.

The banks lend funds to their most credit worthy customers at what is called the prime lending rate. Lenders set the variable rates they charge for a mortgage at plus or minus prime, depending on their strategy to attract investors.

Inflation is a crucial factor affecting rates. The Bank of Canada closely monitors the inflation rate and increases the overnight lending rate when concerns are raised.

A higher rate increases the cost of borrowing money. But when inflation is low, the overnight lending rate is kept low in an effort to stimulate the economy by lowering the cost of borrowing. The overnight interest rate has been unchanged for about 2½ years as inflation hovers at one per cent or less. Analysts predict a rise in the overnight lending rate possibly later this year or early in 2014. Once the prime rate increases, variable interest rates would rise.

The overnight lending rate is currently at one per cent. The prime lending rate is three per cent. A list of rates for a five-year variable mortgage on RateHub in mid-March starts as low as 2.6 per cent (prime minus 0.4 percentage points).

Typically, when the economy is booming, investors are more interested in equities than in bonds. The demand for bonds drops, leading to lower bond prices. A drop in prices leads to an increase in bond yields.

But as the economy struggles as it has been since 2008, investors turn to bonds. Increase in demand boosts bond prices and lowers yields. Fixed rates drop as bond yields shrink.

The listing of fixed rates for a five-year mortgage begins as low as 2.70 per cent. When inflation increases and the Bank of Canada hikes the overnight lending rate, a hike would be followed by an increase in variable rates. At that point, a homeowner with a fixed-rate mortgage, taken out this month, would be paying less than someone with a variable rate that bounces up.
 

Statistics show a variable-rate mortgage usually costs less over the life of the mortgage than a fixed-rate mortgage, although fluctuations may cause some sleepless nights as mortgage holders worry about covering possible increases in monthly payments.

"It used to make a lot more sense to go variable, even up to a year ago," said McAllister of RateHub.
But the spread between fixed and variable rates currently is minimal and once interest rates increase, the advantage of variable-rate mortgages will disappear, she said.

McKinley of Vancity advises first-time buyers to look at more than rates. Don't just go with the lowest rate, he said, because posted rates do not tell the full story. Check out conditions, fees and penalties.

Most lenders are prepared to negotiate a discount on posted rates, McKinley said. In addition, some institutions, including Vancity, allow homeowners to split their mortgage with a portion at a fixed rate and the remaining amount at a variable rate.

Flaherty’s Recent Mortgage Comments…in Context

Rob McLister, CMT
CanadianMortgageTrends.com


On May 14, Finance Minister Jim Flaherty was questioned by Julian Beltrame of Canadian Press (CP) about the need for additional mortgage restrictions. Flaherty replied:

"I'm not going to intervene in the mortgage market, I don't need to."

When that quote hit the wires, the mortgage industry breathed a collective sigh of relief. Just days before, news had broken that OSFI was considering new limits on amortizations for those with 20%+ down.

But we have since obtained a transcript of that May 14 CP interview, and there is more to Flaherty’s comments.

“Basically, [Minister Flaherty] was referring to insured mortgages,” said Department of Finance spokesperson Stéphanie Rubec.

As such, it appears that new restrictions on uninsured (conventional) mortgages are not off the table. And, what those might be are anyone’s guess. There’s been speculation that:

• maximum conventional mortgage amortizations might be cut to 25 years, or
• conventional amortizations may be left at 35 years but borrowers may have to qualify at (i.e., prove they can afford) a 25-year amortization
• 5-year fixed borrowers may have to start qualifying at a higher rate, like posted rate (currently they can be qualified at the actual—i.e., “contract”—rate.

There is no indication that any of these things will happen, or are imminent. But we know for certain that some policy-makers in Ottawa still aren’t confident that housing/mortgage risk is contained.

Flaherty told CP’s Beltrame, “…I’m satisfied by where we are in terms of insured mortgages, but the Superintendent of Financial Institutions has (the) independent responsibility to watch the financial institutions to make sure that they’re not taking on too much risk.”

“…OSFI’s concern is that some banks may be taking on too much exposure. This has nothing to do with insured mortgages.”

“…What I think the superintendent is looking at is their entire portfolio and what’s insured and what isn’t insured.”

Flaherty added, “I’m also pleased to see some other moderation in new house construction, and in the demand for mortgages. I think these are healthy developments, because we were beginning to see some indications of the beginning of a bubble.”

Despite the above, Kathleen Perchaluk, Press Secretary for the Office of the Minister of Finance, tells us, “…No announcements from the Department of Finance related to uninsured mortgages are planned.”

On May 11, OSFI stated, “We are...doing some preliminary consultation with financial institutions. We are working to determine the desirability of some (mortgage) changes given current conditions in housing markets and recent trends in household indebtedness.”

As reported here previously, OSFI says that further uninsured mortgage changes would be subject to a public comment period. That would take some degree of time. But Flaherty was clear: “…If the superintendent (of OSFI) has some concern about the banks’ books…she’ll take the necessary action.”

Would shorter amortizations make the housing market safer?

Rob McLister
Special to The Globe and Mail


Canada’s banking watchdog seems intent on stamping more risk out of the mortgage market.

The latest idea being floated by The Office of the Superintendent of Financial Institutions (OSFI) is to limit amortizations to 25 years for homeowners who have put down 20 per cent of the purchase price or more. The current maximum is 35 years.

If this rule is enacted, OSFI would be targeting a minority of borrowers. According to the latest data from the Canadian Association of Accredited Mortgage Professionals (CAAMP), of all the buyers from 2008 to 2012 who got a mortgage with over 20 per cent equity, 24 per cent chose an amortization of more than 25 years.

Skeptics contend that long amortizations are used mostly to shoehorn over-leveraged borrowers into homes they can’t afford. A 2012 Altus group study contradicts that. Only one in five purchasers said they chose extended amortizations because: “This was the only way I could qualify for a mortgage.” And only a minority of those 20 per cent would be at risk of missed payments.

In my experience, conventional borrowers most often use 26– to 35-year amortizations for cash management purposes. These people could readily afford a 25-year mortgage but prefer the payment flexibility of a longer amortization.

Without question, some long-amortization borrowers blow their payment savings on consumables. That’s their prerogative. But many others are productive with these extra funds, using them to:

• Invest in higher-returning assets
• Pay down higher-interest debt
• Fund education or childcare expenses
• Provide supplementary cash flow while on maternity leave
• Top up RRSPs
• Pad a contingency fund (especially useful for commission earners with volatile income)
• Invest in their own businesses
• Pay medical expenses
• Finance value-added renovations or preventative-maintenance projects
• Maximizing income property cash flow
• Provide payment relief in case rates soar by the time they renew

In all of the above scenarios, borrowers taking 30– to 35-year mortgages can make extra payments to trim their effective amortization. And that’s exactly what many do.

In 2011, for example, a CAAMP survey found that borrowers paid off their mortgages in just two-thirds of their original amortization. Extended amortizations haven’t been around that long but there’s every reason to believe people will also pay them down ahead of schedule. In fact, those choosing 35-year mortgages predicted they’d be mortgage-free in just 24.7 years on average, according to the survey.

It’s unknown how regulators came up with the idea to limit conventional mortgage amortizations. Some speculate it’s to reduce overall leverage in the banks’ mortgage portfolios. Others think the Finance Department is looking for new ways to cool housing activity – since record home prices are interfering with its plan to induce a “soft-landing.”

Either way, added amortization restrictions would weigh further on Canadian real estate. I asked CAAMP economist Will Dunning for his take on how much. Here’s what he said: “Would an OSFI ban on extended amortizations reduce home sales? Yes. But can we quantify the impact? No.”

For what it’s worth, I’ve heard ballpark estimates that the move could cut home sales by at least 5 per cent, and that’s probably not significantly off. But is adding another housing barrier advisable in the face of already flagging homes sales, mortgage volume and housing starts? That question may be academic if policy-makers have already decided to act on this issue, which they sometimes do despite plans to consult the public.

Keep in mind that most mortgages with at least 20 per cent down (a.k.a. “conventional mortgages”) are uninsured. Lenders take virtually all the risk, which means taxpayer exposure is negligible.

Moreover, homeowners with considerable equity on the line do not default in significant numbers. They find a way to pay their mortgage and preserve their net worth – and the roof over their head.

Even homeowners with interest-only home equity lines of credit (HELOCs), which have “unlimited” amortizations, default in miniscule numbers. Only 18 out of 10,000 credit line holders (this includes unsecured credit lines) are delinquent on their payments, says TransUnion. That’s even fewer than the 0.33 per cent who are behind on their mortgages. (Note: HELOC delinquency rates are partly reduced because people can borrow from their own HELOC to make their minimum payments.)

Cutting back low-ratio amortizations is therefore not a major risk reducer. Someone with 20 per cent down and a 30-year amortization will amass almost 30 per cent equity when their first 5-year term renews (based on their original property value). That provides ample cushion if home prices tumble, and just 2.7 percentage points less equity than if they chose a traditional 25 year amortization.

Another factor to remember is that higher interest rates make it harder to get approved for a mortgage. If rates soar by renewal, people who must qualify with a 25-year amortization could be forced to renew with their existing lender, despite better terms elsewhere.

Of course, it’s hard to defend someone using a long-amortization to buy a house they can barely afford. That’s why some advocate making conventional mortgage applicants qualify at 25 years, while allowing them to set their actual payments based on a lengthier time-frame. Given the utility of longer amortizations, that’s far more reasonable than killing them altogether.

Robert McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at VERICO intelliMortgage, a mortgage brokerage. You can also follow him on twitter at @CdnMortgageNews.

A Young Home Buyer’s Mortgage Primer

by My Life ROI, Getting the best Return on Life


This guest post was inspired by MLR’s recent update on his home purchase. As a guy in my early 20s, I’m getting ready to purchase a home myself, and the fact that I work for an internet mortgage information services company has given me some interesting firsthand experience with the lender side of the transaction.

I want to expand on what MLR introduced a month ago and offer a few home buying pointers that I’ve gleaned from my line of work. These points are intended to help you be intentional about leveraging your mortgage and your home for financial success.

But first, let’s talk about bread.

Everyone knows how to walk into a grocery store and buy bread. Centuries of marketplace development, mass consumer input, and a lifetime of incremental firsthand experience combines to make the bread purchasing process simpler for you than it’s ever been. But as much as your neighborhood market would like you to believe that their prices and their quality are the best in the world, the truth is that there’s still room to apply a bit of sweat equity to the transaction and get a better deal.

With some work, you can probably find better bread at lower prices elsewhere. And this is bread we’re talking about, not a sophisticated financial instrument like a mortgage. As much as it may seem that the mortgage application process is streamlined to assist consumers who have no clue what they’re getting themselves into, you’re setting yourself up for failure, or, at best, minimal success, if you don’t do it right.

Set Yourself Up For Success

You’re not buying a home. You’re buying an investment portfolio, and you’re funding the portfolio with a mortgage. What does this mean for you?

1. Know what you’re doing.

Don’t try to use debt to get ahead unless you know what you’re doing and you understand the costs involved. You don’t need to be an economist, but you need to have a strong sense of where you are and where you’re going, financially. Take the time to do some calculations. Make sure you’re ready to purchase a home.

Reread MLR’s Back from the Dead post, in which he spends a paragraph or two detailing the money he’s saving as a homeowner. You think this happened by accident? As with all things, calculate the costs involved before you move forward.

The best way to monitor your financial situation is through effective budgeting. Read the linked article. If you haven’t completed all of the steps outlined there, you’re probably not ready to buy a home. And that’s just a place to start. Talk to a trusted mentor or financial professional and discuss your options.

Don’t buy a home for social reasons. It might be nice to own a home, but unless you’ve got a family of five and you need the room to expand, your home is a financial product.

2. Every lender is different.

The first and most important part of taking on a mortgage is finding the lender or mortgage broker that offers the best rate on the investment. Most lenders offer similar rates. But similar does not mean identical, and closing fees and loan terms differ. The speed with which a given lender can close your loan makes a difference, too.

MLR’s Note: When I was going through my process to get pre-approved for a lender, I can tell you, I was quoted very similar rates, but my expected cost varied wildly. Between some charging points, lock in fees for the rate, appraisal fees, etc… some lenders with a slightly lower rate wound up being much more expensive.

Compare lenders and the mortgages they offer. You can check out current mortgage rates provided by multiple lenders at Lender411.com, Bankrate.com, LendingTree.com, or any other major internet mortgage site. For the sake of disclosure, be aware that I work for Lender411.com.

3. Get preapproved, not prequalified.

Prequalification is a meaningless thing. It’s an unofficial guess as to how much money you’ll be able to borrow. The guess is made by a lender who has received nothing more than a verbal statement from you regarding your own income and credit history. Prequalification won’t give you any financial backing to negotiate with.

Preapproval is different. It’s like applying for the loan in advance. Lenders will look at tax returns, pay stubs, bank statements, and your official credit report to determine what loan amount you’re qualified to receive. You’ll receive an official preapproval document that carries real financial weight. With this in hand, sellers will be willing to negotiate with you and you’ll close your loan much faster.

4. Avoid mortgage insurance.

Private mortgage insurance (PMI) is required for all conventional mortgages and Federal Housing Authority (FHA) mortgages in which the borrower purchases less than 20% of the equity of the home at closing. In other words, if you don’t make a 20% down payment, you’re going to have to pay for PMI. How much does PMI cost? It depends on the cost of your home, but you can expect to pay at least $50 or $60 per month, or $5,000 or more over the life of the loan.

The best way to avoid PMI is to make the 20% down payment. But many young home buyers can’t do this. The next best thing to do is to make at least one if not two additional mortgage payments each year toward the principal balance of your loan. This will build your equity faster than otherwise.

If your mortgage has a longer term length or you’re making minimum payments or, horror of horrors, missing payments now and then, it will take longer to gain the 20% equity required to eliminate the PMI. The best thing you can do is manage your mortgage well and make additional payments to bring down the principal.

5. Don’t take out an adjustable rate mortgage.

An adjustable rate mortgage gets you a low initial introductory rate for a brief fixed period. If you’re able to refinance into a low fixed rate before this period is over, it’s possible to use an ARM to your advantage. But most of the time, an ARM is a bad idea.

Please, just don’t get one. This may sound a bit dramatic, but unless you have a good idea of where the mortgage marketplace will be in seven years when your rate begins to adjust, you’re asking for uncertainty at best and financial terror at worst. Get a mortgage with a fixed rate.

6. You can negotiate closing costs.

Negotiation is a wonderful thing. Just about every closing expense you’ll have to pay, from the rate lock fee to the broker commission, is negotiable to some extent. Your success will vary depending on the lender you’re working with and your negotiating abilities. Here’s a list of a few fees you may be able to negotiate lower.

• Origination fee. This is simply the lender’s profit. Profit can always be negotiated, though you may not have much leverage to bargain with.
• Assumption fee. This one doesn’t apply in every case, but if you’re assuming a mortgage of a previous borrower, many lenders will charge you an assumption fee. Assumptions don’t cost lenders any additional money, which makes this fee unnecessary.
• Appraisal fee. This is the worst. Many lenders will charge you for the appraisal even after you’ve paid for it yourself. It’s just standard practice. Keep careful records and watch out for this.
• Mortgage insurance application fee. Exactly what it sounds like. Any private mortgage insurer worth working with will waive this fee. If your lender is charging it to you, dig deeper and find out why.
• Document preparation fee. Sometimes this fee is used to hire an attorney to review certain documents, but most of the time, it’s charged for no reason at all.

This list of closing costs and fees hosted on Zillow.com is pretty extensive and will give you an idea of the various costs you may have to cover at closing.
Oh, and MLR’s post reminded me of one more thing…

7. An emergency fund is a wonderful idea.

One missed payment on your mortgage will destroy your credit score, and there’s no better way to hinder your future financial success than a poor credit score. As in MLR’s case, it’s better to make a smaller down payment and retain an emergency fund than to pay everything you can up front.

MLR’s Note: I went back and forth with myself over this dilemma. In the end, having a year of living expenses in my bank account as a safety net is worth the bit in PMI I will pay for a few years. Because I have that safety net, I am paying additional on top of my mortgage to accelerate paying down the mortgage and get rid of PMI.

Be intentional about your mortgage.

This is really the point. Remember the bread story. Even with a product as simple as bread, you can save money if you take the time to research your options and do it right.

A mortgage is a tool you can employ to your advantage if you’re willing to be intentional about using it for financial success.

Why use a TMG Mortgage Professional

The Top Ten Reasons

Get independent advice on your financial options.

As independent mortgage professional, I’m not tied to any one lender or range of products.  My goal is to help you successfully finance your home or property.  I'll start by getting to know you and your home ownership goals.  I'll make a recommendation, drawing from available mortgage products that match your needs, and I will decide together on what's right for you.

Save time with one-stop shopping.

It could take weeks for you to organize appointments with competing mortgage lenders — and I know you'd probably rather spend your time house-hunting!  I work directly with dozens of lenders, and can quickly narrow down a list of those that suit you best. It makes comparison-shopping fast, easy, and convenient.

I negotiate on your behalf.

Many people are uncertain or uncomfortable negotiating mortgages directly with their bank. Mortgage Professionals negotiate mortgages each and every day on behalf of Canadian homebuyers.  You can count on my market knowledge to secure competitive rates and terms that benefit you.

More choice means more competitive rates.

I have access to a network of major lenders in Canada, so your options are extensive. In addition to traditional lenders, I also know what's being offered by credit unions, trust companies, and other sources.  And I can help you take care of other requirements before your closing date, such as sourcing mortgage default insurance if your down payment is less than 20% of the purchase price.

Ensure that you're getting the best rates and terms.

Even if you've already been preapproved for a mortgage by your bank or another financial institution, you're not obliged to stop shopping!  Let me investigate to see if there is an alternative to better suit your needs.

Get access to special deals and add-ons.

Many financial institutions would love to have you as a client, which is why they often offer incentives to attract creditworthy customers.  These can include retail points programs, discounts on appliances, shopping clubs, and more.  I do the math on which offers might be worth your attention when it comes to financing or mortgage insurance — so you get the perks you deserve.

Things move quickly!

My job isn't done until your closing date goes smoothly.  I'll help ensure your mortgage transaction takes place on time and to your satisfaction.

Get expert advice.

When it comes to mortgages, rates, and the housing market, I'll speak to you in plain language.  I can explain the various mortgage terms and conditions so you can choose confidently.

No cost to you.

There's absolutely no charge for my services on typical residential mortgage transactions. How can I afford to do that?  Like many other professional services, such as insurance, mortgage brokers are generally paid a finder's fee when I introduce trustworthy, dependable customers to a financial institution.  These fees are quite standard and nearly industry-wide so that the focus remains on you, the customer.

Ongoing support and consultation.

Even once your mortgage is signed and paperwork is complete, I am here if you need any advice on closing details or even future referral needs. I am happy to be of assistance when you need it.

30 tips to reduce your debt

By Jill Buchner
www.canadianliving.com


Trying to gain control of your finances? Here are 30 awesome tips to help you reduce your debt.

Whether it’s credit card bills or a line of credit, many of us are carrying debt and trying to get control of our finances. In fact, a recently released report shows that the average Canadian’s nonmortgage debt is up $739 since the first quarter of 2012, totalling $26,768 – the highest per-person debt level since the credit bureau started tracking the data in 2004.

The key to turning those numbers around is to make lifelong spending changes, rather than quick, dramatic ones that won’t last, says Laurie Campbell, CEO of Credit Canada Debt Solutions, a nonprofit organization that provides families with credit counselling. She compares the process to a diet. "You often hear about people who have lost huge amounts of weight only to gain them back again. It has never resonated as a lifestyle change," she explains. Here are 30 ways to lose your debt – and keep it off.

1. Write down your goals
"The main thing is that you have got to commit," says Campbell. Sit down and identify specific goals, then write them down.

2. Shop around for an interest rate
Put your debt somewhere cheap, but make sure it’s reputable, says Amanda Mills, a financial therapist at Loose Change in Toronto. "Shop around for an interest rate just like you would shop around for shoes." Make some calls and let your bank know you’re looking for a lower interest rate. "Usually the bank wants to keep you, so they’ll offer you one."

3. Build your 'savings' social networks
Start building up your online social networks to find savings, suggests Anna Waters, founder of the Canadian deals community Bargain Moose (bargainmoose.ca). "Search for your favourite stores on [Facebook and Twitter] and have a read of what they have to offer." Also check out Waters' Twitter account, @bargainmoose, to get info on Canadian stores offering deals on items such as food and clothing.

4. Pay bills on time
Here’s a tip from TD Canada Trust: Use your bank account’s features to help pay bills on time. Getting the bills delivered electronically and setting up automatic payments can help you avoid incurring late charges and damaging your credit rating.

5. Never pay full price
"Never pay full price," says Patricia White, executive director at Credit Counselling Canada. When making a big purchase (such as a computer), negotiate to get additional items (such as software or a warranty) at a lower price or even thrown in free.

6. Ask for marked-down prices on big-ticket items
When you are buying big-ticket items, such as cars, appliances and furniture, ask if the store has any display or older models with marked-down prices, suggests The Smart Cookies' Guide to Making More Dough (Vintage Canada, 2009).

7. Use your loyalty points on things you need
Save up loyalty points for something you need and remember to redeem them when you reach your goal, recommends Minnow Hamilton, a mother of two and cofounder of SavvyMom.ca.

8. Think before you buy
Before making a large purchase, ask yourself whether that money would make a better investment elsewhere – in your child’s RESP, for example. "Business and financial planning are exactly the same," says Arlene Dickinson, CEO of Venture Communications and costar of "Dragon’s Den." "You have to ensure you are putting your dollars to the right use and that you’re investing in areas with the most reward and potential."

9. Only shop for groceries once a week
Shop for groceries only once a week and always bring a list to avoid buying things you don’t need, says Tanya Silvonen, a home economics teacher in Saanichton, B.C. "I write my grocery list on one side and the meals that I want to make on the other side." Toward the end of the week, plan soups, stews and dishes like shepherd’s pie to use up leftovers.

10. Switch to an accelerated biweekly mortgage payment plan
Switch from a monthly to an accelerated biweekly mortgage payment plan, advises Jackie Woodward (the Mortgage Girl), a mortgage specialist at TMG The Mortgage Group in Edmonton. When you're paying every 14 days (every time you get a paycheque), two months of the year you will be making three payments instead of two, helping you pay off a little more without even missing the money. Add an extra prepayment of $100 each month and you can cut a 25-year mortgage down to 17 years.
11. Turn outgrown kids stuff into cash
Sell the things your kids no longer use – clothes, toys, whatever – to a resale store for cash or store credit, or post items online on eBay or Craigslist.

12. Do you really need that gym membership?
Check out your municipal fitness facilities before renewing your gym membership. You could find free or discounted access to aerobics classes, tennis courts, swimming pools and other recreational facilities.

13. Never pay full price again
Don’t settle for paying the regular price on flowers, computers or appliances, says Steve Schaffer, CEO of Offers.com, a website for finding online promotions and coupons. He says you can usually find discounts of at least 10 percent on these items online.

14. Get free financial advice
Get free financial advice. Nonprofit companies such as Credit Canada Debt Solutions offer financial counselling, and many companies provide a similar service through their employee assistance programs.

15. Focus on small cost-cutting measures at home
Focus on small cost-cutting measures at home. Install a low-flow showerhead and shorten the time you spend in the shower. If your family sticks to four 15-minute showers a day using a low-flow showerhead, you can bring the cost of bathing down from $625 per year to $177, according to Hydro Quebec.

16. Do you really need a car?
Consider what it really costs to own a car. Look at using car-rental or car-sharing options (such as zipcar.ca and autoshare.ca) instead of owning a vehicle. And, although public transit may cost well over $1,200 a year, that can be just a tenth of the cost of owning a car when you factor in gas, insurance, parking and maintenance costs.

17. Sell those unused gift cards
Turn gift cards you’ll never use into cash. At cardswap.ca, you can exchange unwanted gift cards, or buy new ones to get 10 to 40 percent off at stores where you shop.

18. Limit credit card use
Lower the limit on your credit card, says Brenda Tye from Oshawa, Ont., who dug herself out of $20,000 worth of debt. She suggests not using any credit cards if you can.

19. Research credit card features
Comparing the rates and features (such as cash back) of different credit cards can help you find the right match for you. Visit fcac-acfc.gc.ca and click on Credit Card Tools.

20. Borrow books at the library
Get a library card. The same books, DVDs and magazines that you have been spending hundreds of dollars on can be borrowed without spending a dime. Just remember to return everything on time to avoid overdue fines.
21. Spend less each day
Spend $1.50 less each day, suggests Community Financial Counselling Services in Winnipeg. Not buying that coffee, bottle of water or chocolate bar will add up to $45 a month or $548 a year.

22. Use coupons
Take advantage of coupons. You can find them online,
in stores, on receipts – anywhere, says Lina Zussino, cofounder of GroceryAlerts.ca in Victoria. Stay motivated to use them by calculating your savings at groceryalerts.ca/coupontracker. In less than four months, Zussino saved $800.

23. Ask for discounts
Ask for discounts. Write to companies and inquire if they can help you buy their products for a little less. You’ll likely get discounts worth more than the average coupon.

24. Try to clear your credit card debt
Check out the payment calculator at fcac-acfc.gc.ca to compare different ways to clear your credit card bill. Paying $100 a month on a $1,000 bill with an 18 percent interest rate will allow you to be debt-free in 11 months – and pay $700 less than if you were to make the minimum payments, which would mean 10 years of paying off your debt.

25. Go shopping in your own closet
Instead of hitting the mall for new clothes, reinvent some of those old favourites that have seen better days, suggests Phillip Bloch in The Shopping Diet: Spend Less & Get More (Gallery, 2010). "Sometimes it’s about altering an outfit with easy solutions, such as changing the buttons on a blouse or taking the sleeves off a sweater."

26. Do basic home repairs and renos yourself
Learn how to do some basic home repairs and renos yourself, encourages Deanna Marcy, a stay-at-home mom and creator of the blog moneysavingmomcanada.com. She recommends taking advantage of free sessions offered at big-box stores that teach everything from weatherizing your home to installing ceramic tile.

27. Review your financial goals monthly
Review your financial goals once a month to see your progress. Go to cewc.ca/financial-calculators and use the Benefit of Spending Less calculator to see the return you can get from your new good habits.

28. Save, save, save
Start saving – even when you're in debt. "It’s a muscle that needs to be flexed," says Mills. "You need to learn how to do it." Set up an automatic withdrawal to help yourself save without even thinking about it.

29. Consolidate debt
Try to put all of your debt in one place, but don't reduce your payment, says Stephanie Holmes-Winton, an advisor, radio columnist and CEO of The Money Finder (themoneyfinder.ca) in Halifax. When your debt is spread out over a bunch of accounts, it’s hard to monitor. "If you can unify a line of credit, three credit cards and a mortgage in one place, you can focus more easily on paying them all off," she says. "And when you see it shrinking, you’re more motivated to keep on track."

30. Go on a cash diet
"Go on a cash diet for at least 30 days," says Holmes-Winton. Take out an agreed-upon amount of cash each week (on the same day, no advances and no exceptions!) and use it for the controllable expenses, such as groceries, eating out, kids’ activities and entertainment. It’s easy to spend money without thinking about it when you use plastic. Seeing the money come out of your pocket can be a real wake-up call. 

Slowdown? Nearly half of Canadian home owners eager to buy property

Roma Luciw

The Globe and Mail

 

 

Undeterred by record-high housing prices and bolstered by low borrowing costs, nearly half of Canadian home owners plan to buy a property in the next five years, although intentions vary sharply from city to city, a poll released Wednesday has found.

According to a Bank of Montreal survey, 45 per cent of Canadian home owners surveyed this spring are looking to buy a place in the next five years, a level that did not change from the fall of 2012. The percentage of home owners planning to buy in the next year also remained stable, edging 1 per cent higher to 7 per cent.

Canadians in Calgary were least eager to buy, with intentions there dropping by 13 points from the fall of 2012 while those in Atlantic Canada were the most eager, with buying intentions rising 15 points. Intent to buy among home owners in Vancouver climbed by 5 points and in Toronto by 2 points.

Bank of Montreal economist Sal Guatieri attributed the perception of improved affordability to rising incomes. “Job growth has been decent in the last year, so income has been rising,” he said in an interview. In addition, he noted that the runup in house prices is slowing.

“In Calgary, house prices have picked up... because people are moving to that city and taking advantage of the oil sands,” he said. “Valuation is pretty good in Calgary,” he added, where house prices have gone through a correction after peaking in 2007.

However, Mr. Guatieri said that in the detached home markets in Vancouver and Toronto, affordability remains an issue and high prices are forcing buyers into the condo market. Prices in Vancouver have dipped recently, he said, but for most people it is still “very pricey” to buy something in that city.

House prices hit an average national record high of $380,588 in April, according to the latest data from the Canadian Real Estate Association.

Despite fears of a major slowdown similar to the one that triggered a recession in the United States, there are signs that Canada’s housing market is headed for a soft landing. Sales this spring are forecast to edge higher, putting an end to years of frenetic activity and huge price gains.

“The housing market in most regions is still very affordable, because of low interest rates – that is why people are still buying,” Mr. Guatieri said. “Going forward, we expect prices to stabilize. And of course cities that are richly priced, they are vulnerable to price corrections.”

John Andrew, a real estate professor at Queen’s University in Kingston, Ont., said the high cost of real estate transactions make it unlikely that nearly half of all Canadian home owners will make a move in the next five years.

“A lot of people do not realize how high the fixed costs of moving really are,” he said. Once you factor in real estate commission fees, lawyer costs, land transfer taxes as well as the cost of the actual move, it adds up to a “staggering number.”

And although interest rates are still low, they might not be five years from now, Prof. Andrew added.

The online interviews of 1,008 Canadian home owners conducted by Pollara for BMO in February asked them about intentions to do with buying or selling their primary or secondary properties, price expectations, and mortgage affordability.

Here are some of the findings: 16 per cent of those polled plan to buy a larger home as their primary residence while 21 per cent plan to buy a smaller home; 15 per cent plan to move within their current neighbourhood while 12 per cent intend to move to a more expensive one and 7 per cent to a less expensive one; 10 per cent plan to buy a recreation property like a cottage; 10 per cent plan to buy an income property to rent to tenants and 6 per cent intend to buy an investment property to flip.

Lastly, 10 per cent of home owners plan to sell their home and move to a rental property, retirement community or in with family, according to the poll.

Among those surveyed, 7 per cent expect house prices will fall over the next year, 32 per cent said they will stay the same and 53 per cent said they expect them to rise. The remainder said they did not know.

The BMO survey also asked home owners if they have cut back their spending or dipped into their savings to make their monthly mortgage payments. It found that the number of people who needed to do so has fallen 10 points from last fall to 45 per cent this spring.

Most Canadian homebuyers unwilling to enter bidding wars

Beacon Reporter AB
Beacon News


Majority of Canadian homebuyers would rather walk away than enter bidding war

The majority of Canadian homebuyers (72 per cent) are unwilling to enter a bidding war when making an offer, says a new report from BMO Bank of Montreal.

However, 39 per cent of first-time Canadian homebuyers are willing to pay beyond a home’s asking price, compared to 28 per cent of total buyers.

“It’s essential Canadians keep their emotions in check when shopping for a home and avoid over-extending themselves as a result of a bidding war or by purchasing a home they cannot realistically afford,” says Laura Parsons, BMO mortgage expert.

“One of the most effective ways to do this is to work with an expert well in advance to build a budget and determine what is financially appropriate.”

Bidding wars were most likely to happen in Toronto, Vancouver and Calgary, where sellers said they would intentionally underprice their home to spur competition.

As average home prices across the country continue to rise, most Canadian homebuyers are hesitant on paying more than the asking price.

Across the country, prices have seen single-digit increases over the past year.

The average home sale price in Canada is currently $378,532.

“Regina, Winnipeg and the Hamilton area have led the way in home price increases over the past year, while Victoria saw a 7.5 per cent decline,” said Robert Kavcic, BMO senior economist.
BMO gives a few tips for families looking for a new home:

• Stress-test your budget: Stress test your financial budget using a mortgage payment based on a higher interest rate. If rates rise even 1 per cent, you will need an additional $126 per month on a $200,000 mortgage.
• Live within your means: Stick to the “one-third” rule to ensure you’re living within your means. Total housing costs (mortgage payments, property taxes, heating costs, etc.) should not consume more than one-third of overall household income.
• Think carefully about fixed versus variable rates: While variable rates mortgages have been a winning strategy over the long term, fixed rate mortgages (currently near historic lows) come with the peace of mind of being insulated against rate increases.
• Consider choosing a shorter amortization: The shorter the life of the mortgage, the less you pay in interest. Choosing a maximum 25-year amortization helps households build equity in their home faster and save thousands in interest costs over the life of the mortgage. For example, on a $400,000 mortgage at a 5 per cent interest rate, choosing a 25-year amortization can save upwards of $70,000 in interest.

Loyalty doesn’t pay when it comes to mortgage renewals

By:Adam Mayers, Personal Finance Editor, TheStar.com


A Bank of Canada study found that loyal bank customers don’t get best deal when they renew mortgage. People who switch and first-time buyers do.

Everyone you deal with would like you to believe there are rewards for your loyalty.
 

They may offer a better price, a bundling discount, or less tangible things like superior customer service. Sometimes your loyalty is rewarded and sometimes it isn’t.
 

The best way to figure out which is which is to become better informed about your choices. Compare prices and features, read the fine print on contracts and keep an eye on developments in the news. In this respect, the Internet has been a great leveler. The products are all on display in the online shop window. You can poke around, ask questions, figure out where you want to spend your money and negotiate a price.
 

The biggest investment most of us make is in a home. So if you can shave just a little off the cost of a mortgage, you can save thousands in interest payments.
 

Here, you’d think that loyalty would work in your favour — the more services you have with a bank, the better the deal. But, that’s not true according to evidence in a Bank of Canada paper called Discounting in Mortgage Markets. The 2011 study by three economists looked at a sample of Canadian insured mortgages between 1999 and 2004 to figure out who got the best rates.
 

The economists found that people who switch banks get a better deal than existing customers, because new customers offer the banks an opportunity to sell more products. Existing customers assume they will automatically get a better deal because they’re loyal, but don’t. They don’t bother to shop around because they assume they’ll get the best rate so, lacking ammunition, the discount may not be much. Those least likely to shop around are affluent, possibly because they’re happy with the full service they get from a bank and are willing to accept higher rates in exchange.
 

The study also found that mortgage brokers find the best rates . Mortgage brokers are paid by the lender, not the customer, but aren’t confined to one lender’s products. Their business is very competitive, so the pressure to find the very best rates is high. The study noted that brokers “are a significant factor driving discounts,” reducing the cost of a mortgage on average by 17.5 basis points.
 

As a group, first-time buyers do well because they are more likely to have shopped around, have tight budgets and so fight for every basis point. They’re a higher risk group for a bank because they have so much debt, but over time the bank can sell them more services. So they get good deals.
 

“Lenders are more willing to offer discounts to younger borrowers in return for future expected profits,” the study says.
 

Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals, an industry group, isn’t surprised by the finding.
 

About a quarter of Canadian mortgages are done through a mortgage broker, but the portion of new buyers who use brokers is a much higher 40 per cent, he says. First-time buyers tend to be younger, more comfortable using the Internet and social media for research, and like shopping around, he says. They are also less loyal and happy to try new things — like a mortgage broker — if it gets them what they want.
 

“We don’t do as well with renewals,” Murphy says. “Your lender sends you something in the mail, you’ve paid off some principal, the new rate looks pretty good, so you say OK.
 

“But you should shop around. Just because a bank offers you a rate doesn’t mean it’s the best one.”

You remember when your mother said you should do your homework? She was right.

4 easy ways to reduce your mortgage costs

By:Madhavi Acharya-Tom Yew, Personal Finance writer, TheStar.com


When it comes to saving on your mortgage, making pre-payments and shopping around at renewal time are good ideas

Christina and Darryl George have a mortgage, but that doesn’t keep them from saving for their next one.
 

The Georges live in a two-bedroom condo across from High Park. In the next couple of years, they hope to buy a house west of Toronto.
 

They plan to use the equity they’ve already built up in the condo towards their next home. They want to save even more so they can make a bigger down payment. But that’s not the only reason.
 

“We want to make sure we have enough to fix the roof or the backyard if necessary, the kinds of things you don’t have to worry about in a condo,” Christina says.
 

When it comes to saving on your mortgage, there are lots of ways to cut your interest costs, such as making pre-payments and shopping around at renewal time. The best way to save is by borrowing as little as you can. The best way to do that is by making as large a down payment as possible.
 

For instance, say you’re purchasing a home for $200,000. With a down payment of 20 per cent, or $40,000, your monthly mortgage payment would be $930.57, according to the mortgage payment calculator at the Canada Mortgage and Housing Corp. Your interest cost will be $119,170, at an average interest rate of 5 per cent, amortized over 25 years.
 

But, if you can put down 25 per cent, or $50,000, your monthly payment would be $872.41 and your total interest cost would be $111,722 — a savings of about $7,400.

Most mortgages offer pre-payment privileges that let you pay an extra 10 to 25 per cent, per payment or per year. Those payments go directly to the principal and can take years off your mortgage, but few people take advantage of it.
 

“The reality is that, on that $200,000, people don’t have $30,000 or $40,000 lying around at the end of the year, and they think a small amount won’t dent anything,” says David Stafford, managing director of real estate secured lending at Scotiabank.
 

“But slow-and-steady wins the race. You don’t have to make major lifestyle changes or gargantuan transaction amounts, in this market with these rates, to have a big impact.”
 

Think of it this way: Financial planning experts say that, when it comes to saving for retirement, it’s best to start early and save often, even in small amounts.
 

The same principle applies to money that you owe for 25 or 30 years, Stafford says. “That extra payment goes to the principal, yes, but if you think about where that dollar gets applied, it’s the last dollar. It’s the one you’re going to pay interest on for 30 years.”
 

To illustrate the impact of small changes, here’s another simple example using a $200,000 mortgage amortized over 25 years at an average rate of 5 per cent.
 

Simply changing from monthly payments to accelerated bi-weekly payments will pay off the mortgage about four years sooner, with an overall savings of more than $25,000 in interest.
 

Also consider this advice: If your mortgage is up for renewal and you’re paying rates from five years ago, get the current lower rate, but don’t be in a hurry to change your payment.
 

For instance, if you’re renewing a mortgage from five years ago and your rate is 5.75 per cent and your payment on a $200,000 mortgage was around $1,200, at today’s rates, it would drop to about $900.
 

“If you can keep making the $1,200 payment, keep going, because, every payment, you’ll be whacking an extra $300 off your mortgage balance. You could literally take years off your mortgage in the next five years,” he says.
 

It’s typical for first-time homeowners to shop around to get a good rate on their mortgage, but that advice also applies when your mortgage is up for renewal.
 

People may not realize how much they can save by shopping around, says Alyssa Richard, chief executive officer and founder of RateHub.ca
 

Canada Mortgage and Housing Corp.’s 2011 Mortgage Consumer Survey found that 88 per cent of homeowners stick with their lender upon renewal. That may not mean they’re getting the best deal, Richard says.
 

“At renewal time, some lenders send a letter in the mail that says, your mortgage is coming up for renewal, sign here. The bank has posted rates, but may not list the lowest the rate on the market. When they get you into their office, they have some bargaining power there.”
 

Research from the Bank of Canada found that new bank clients receive larger discounts than existing clients.
 

When the Georges bought their condo last year, they opted to go with a variable rate mortgage of 2.25 per cent. “We decided to stick with variable and it’s been good so far. We can lock in any time if we want to,” says Christina, 25.
 

They are also making accelerated bi-weekly payments. “That way we can save a lot on interest,” she says.

When it comes to location, what do home buyers value most?

Roma Luciw

The Globe and Mail

 

 

When my husband and I bought our home eight years ago, location was a major determining factor. Not only was it close to a large beautiful park, it was five blocks from a commercial strip where we could buy groceries, eat out, or go see a movie.

Best of all, it was near public transit, so we could get by with owning one car – and neither of has to endure driving to work during the hellish rush-hour commute.

Well, it turns out that living near public transit is a low priority for many other Canadians. A Bank of Montreal poll released Thursday found that the safety of a neighbourhood is the most important feature of a home’s location, chosen by 63 per cent of those surveyed.

The online survey of 2,000 Canadians, conducted by Pollara between Feb. 25 and March 5 of this year, found that living on a quiet street was a priority for 43 per cent, having good neighbours was listed by 30 per cent, having a short commute to work was chosen by 28 per cent and being near family and friends was ranked high by 25 per cent.

Being near stores and restaurants was a priority for 23 per cent while being near public transit was chosen by 19 per cent.

First-time home buyers, however, expressed different priorities. For example, having a short commute to work was more important to them (34 per cent versus 28 per cent for the national average), as was living near public transit (28 per cent versus 19 per cent).

Meanwhile, living on a quiet street was less important to them than to repeat buyers (30 per cent versus 43 per cent), as was having good neighbours (21 per cent versus 30 per cent).

John Andrew, a professor at Queen’s University’s school of urban and regional planning, said “safety” is not something buyers normally pay attention to, in part because information on things like break-ins and violent crimes is not available at neighbourhood levels and “perceptions of safety and crime are notoriously inaccurate.”

What doesn’t surprise him, however, is the divergence between how first-time home and repeat buyers rated their priorities.

Commuting time is a big factor for first-time home buyers because they, by definition, are buying less expensive homes that require longer commuting times, Prof. Andrew said. “Older, wealthier people buying their second, third or fourth home can typically buy their way out of the commuting problem, at least to a considerable extent.”

“Conversely, older people value a quiet street more because the younger first-time home buyer can’t even hope to buy a house on a quiet street, so they don’t worry about it much. They just hope to not commute 2.5-plus hours a day to and from work,” he added.

My husband and I certainly wanted to a avoid a long commute to work. And there are, of course, some downsides to where we live. Traffic spikes in summer months when people flock to the park, and our neighbours to one side are renters who couldn’t be bothered to clean up the garbage scattered by raccoons, rake the lawn or fix the dilapidated porch.

But when I need to pick up some milk, make an emergency trip to the pharmacy or just take the kids for an ice cream cone, I love that I can do that easily and quickly on foot.

Canada’s banks could be on the hook to bail out CMHC if disaster strikes

By John Greenwood

 The Financial Post

 

 

One major factor behind Canadian banks being the envy of the financial world is that they get so much help from the federal government.

But there may be strings attached to that security — one analyst is predicting that the big banks could actually get hit with the bill in the unlikely event that Canada Mortgage and Housing Corp., which insures about $560-billion worth of the country’s mortgages, ever needs to be bailed out.

John Reucassel, an analyst at BMO Capital Markets, said in a recent note to clients that the banks could have to pitch in and support the agency that now supports them, in the event that the CMHC went bust.

“It appears to us that the CMHC is reasonably well capitalized and positioned to meet the challenges from a housing slowdown,” Mr. Reucassel said in his May 10 comment. “However, investors may be concerned that, in a severe downturn, Canadian banks may either a) need to recapitalize the CMHC; or b) absorb some of the losses.”

He prefaced his thoughts by noting that the banks are responsible players when it comes to mortgages and there are many checks and balances built in to the market aimed at weeding out risky borrowers. But the fact that Canadian consumers are sitting on record debt is a risk in itself, rendering them vulnerable to a potential rise in interest rates or unemployment.

How could it happen that banks are called upon to help the CMHC?

The banks are incredibly well protected. Let’s start with mortgages, the banks’ biggest single asset. Between them the big six have more than $960-billion of real estate related lending on their books, of which more than half is covered by default insurance issued by the CMHC, a government entity. The banks get paid, no matter what.

Now let’s turn to the other side of the balance sheet: Customer deposits. They’re guaranteed as well, by the Canada Deposit Insurance Corp. up to $100,000. So even if the institution has a reputation for taking risks, that won’t be a concern for millions of Canadians, because they know their money will be safe. True, lenders pay the premiums but as a Crown Corp., the CDIC is backstopped by — you guessed it — the taxpayer.

So unlike virtually every other business, big chunks of both the banks’ assets and their liabilities are guaranteed, protected from the risk that management might make a mistake.

Then of course there’s the promise of a government bailout if things go wrong for the banks. That support has always been expected but it became official earlier this year when the banking regulator designated all six lenders as “systemically important,” or too big to fail. To be fair, plenty of other countries have similar guarantees for their own too-big-to-fail lenders. But there are few places where the too-big-to-fail list encompasses virtually the entire banking industry, as it does here.

The banks have benefited handsomely from this arrangement, spinning off stellar earnings going back decades, but now some observers are starting to raise questions.

The main concern is around the impact of the CMHC. Critics worry that it’s massive presence in the mortgage market — roughly 62% of home loans in Canada are insured — has helped drive the recent run-up in prices. And given that the CMHC guarantee insulates banks from losses, some analysts say that it may have provided incentive to loosen up on credit standards. If that is indeed the case, then there is a risk that if the housing market goes into a serious correction, the CMHC could be overwhelmed by losses, leaving taxpayers on the hook.

For their part, the banks and the CMHC have always denied that such risks might exist, arguing that the government insurer is well capitalized with a stellar track record. But amid growing fears about not just the health of Canadian real estate but also the wider economy, both sides of the debate are beginning to look at what-if scenarios that might play out if housing goes into reverse and mortgage defaults start to pile up.

In a worst-case scenario, Mr. Reucassel’s argument goes, the government could require the banks to chip in and help out a battered CMHC through a tax or some other kind levy.

“In our view, if the CMHC requires recapitalization, then the banks would be subject to some manageable tax, or fee, over an extended time period to recapitalize the CMHC.”

New to Canada Home Buying Tips

by Jennifer Goldberg
LendingMax - Mortgage solutions for Canadians


Home Buying Mistakes Newcomers Make

Avoiding common home buying mistakes can make your transition to Canada that much easier

When Charles Waterman was finally able to purchase his first home in Canada, he was thrilled. “It was a feeling of accomplishment and satisfaction,” says the native Barbadian. “It gave me a sense of pride to live among other homeowners in Toronto.”

 

Now a real estate agent with Royal LePage, Waterman helps other new Canadians become homeowners. In his line of work, he’s seen immigrants make the same errors as they search for their first property. Here’s his advice on how to avoid common mistakes new Canadians make when entering the real estate market.

Relying on outdated information

 

It’s a great idea to ask friends and family living in Canada for advice on the home buying process, but keep in mind their knowledge may be out of date. “Many new Canadians rely on information from friends and family that have lived here a long time, not current information,” says Waterman. “Several years ago, new immigrants had to put down 35 per cent on a home, but today mortgage insurance allows new Canadians to put down as little as 5 per cent.”

 

Familiarize yourself with current mortgage regulations by contacting a local mortgage professional before starting your home search.Citizenship and Immigration Canada’s website is also a good source of up-to-date information for new home buyers.

Overlooking benefits to new Canadian home buyers

 

There are several assistance programs available to new Canadian home buyers. For example, the federal Home Buyers’ Plan allows first-timers to withdraw up to $25,000 per year from a Registered Retirement Savings Plan (RRSP) to put towards the purchase of a home. “A new Canadian home buyer can deposit funds into an RRSP for 90 days before buying a home and receive a tax benefit,” Waterman says.

 

Newcomers may also be also eligible for the First-Time Home Buyer’s Tax Credit, as well as other assistance programs that make buying a home more accessible.

Thinking it’s too hard to build credit history

 

“You can find a house you love and even if you have the money to put towards a down payment, you need to have established credit in Canada in order to qualify for a mortgage,” says Waterman. Some financial institutions don’t acknowledge international credit reports, which can make it difficult for newcomers to secure a Canadian credit card when they arrive. However, there are steps you can take to build your credit history in Canada. Demonstrate your financial reliability by opening a Canadian bank account and using it regularly. Paying down department store credit cards, car leases and other small loans also help show lenders that you’re able to make consistent payments.

Assuming a Canadian mortgage is out of reach

 

“New immigrants may believe that they’re unable to get a mortgage at all because they haven’t worked long enough in Canada,” Waterman says. But that’s not always the case. According to research conducted by Genworth Canada, more than half of new immigrants polled had successfully purchased a home within three years of arriving in Canada. If you have proof of a steady job, you moved because of a job transfer, or you’re working in the same field as you did in your home country, you may be eligible for a mortgage sooner than you think. Contact a local mortgage professional to discuss your options.