Multi Part Mortgages

One of the things I see is people with a mortgage at a bank and it sits in multiple pieces, different amounts at different rates, maturing over the next 1 - 5 years.  In a recent case I think they had 5 or 6 components.  There was the ever present Line of Credit (LOC) and then a variable and 4 fixed rates.  Sort of cool in the sense that it diversifies your debts over time and you are not subject to renegotiating it all at the same time when rates are high.  Conversely, you are not able to renegotiate when rates are at record lows.
This client was definitely in need of an overhaul and there was tons of room for savings even with the penalty factored in.  Without doing the work it is hard to know if making the change is a good choice or not.  I would never advocate change that is not beneficial, but I am a big advocate for checking out your options.
If you are not into absorbing any sort of penalty regardless of the savings, then at least make an effort to renew each segment so that it next come due at about the same time as other segments and eventually the goal would be to have them all on the same schedule.
This helps in 2 way

1. You are renewing at shorter terms which are often cheaper and if you maintain the same payment level you are paying the debt down faster
2. Eventually everything comes due at the same time and you can now stand on a stronger footing with your bank when negotiating rates, because the penalties are no longer holding you back from leaving and getting a better deal elsewhere.

If you could save $20,000 dollars over the next 5 years would it be worth sitting down for an evening and doing the math?  Or call me and see if I can help you find options that suit you better.

Financial Review - Your Mortgage is part of a bigger plan

My focus is mortgages, but when I am discussing mortgage options with clients I also need to discuss or inquire about other aspects of their financial goals. 

• Do they need to increase cash flow in the short term to get a car paid off or a credit card paid down faster?  
• Do they need to consider refinancing in order to consolidate debt?  
• Are they thinking of moving or renovating in the next 1 - 5 years?  

If the answer is yes to any of these questions, or others, then we need to rethink what type of mortgage would best suit them.  They might need a loan where they can increase payment easily once the car or credit card is paid off.  They may need to go for a shorter term because they are planning to move in 3 years, or are considering it.  They may be considering a renovation and the current interest rates and home improvement incentives might move the plans up on the agenda so they may opt to refinance now and get started on the home improvements sooner and so they can enjoy the home they dream of.

There are so many things that can change in our lives every year and each one affects our finances, it might be more money available and what to do with it, or it might be a new purchase that costs a bit more than expected.   

I will not tell you how to invest your money, I am not licensed for that, but I can help you plan out options and how your mortgage fits in to those plans.  Whether it is using RRSP refunds to pay down debt or mortgage, or using funds to by an investment property rather than deal with the stock markets, mortgage financing is a very cheap way right now to achieve your goals.

I am not a big advocate for digging a bigger debt hole, but I do think there are times when using the equity in your house for something that has a real value or long term benefit may be worth exploring.  If we do it right you may even be debt free faster.  Getting the debt in the right place and making it as cheap as possible can help manage your money in a way that will set you up for the long run.

There are so many questions that people need to ask themselves before they sign the mortgage renewal form or go blindly out looking for "the best rate."  A home is a place to live and an investment, make sure it is working for you from every angle.

Title Insurance

No, I do not sell title insurance it can be bought either directly through the insurance company, but most people get it through the lawyer on closing when they buy a house.

So why am I writing about it?

Well I was at an interesting seminar yesterday given by a lawyer who made some really interesting points about getting title insurance and he highlighted why it is so cheap.

Given that I mostly write about money things let me get to that part first.  The big thing is that it is not like other insurance, there are no ongoing payments it is a one time purchase and it covers you for as long as you own the house.  The cost does vary depending on the value of the home, but it is still pretty cheap.  If you get it when you buy your home the net cost is actually around $100 for an average home.  The reason I use the term net it because it can be higher than that, but when you get it it means the lawyer does not have to make a few searches which you would have to pay for if you decide against buying the insurance.

We know it is cheap but what does it do?


Well with luck, like any insurance, you will never need it, but for those who do it is probably the best buy of their lives.  It can save a fortune in legal costs, time and hassle and just straight up money.  The big things it can protect you from are title or mortgage fraud.

Title fraud is when someone assumes your identity, or forges a power of attorney and then sells your house/property without your knowledge.  The buyer is almost always a legitimate buyer, but clearly you did not sell the property, the problem then is the fight in court to get it back with all the associated costs.  Under Bill 152 you cannot loose your property to fraud but you still have to go to court to get access to the public restitution process.

Mortgage fraud is similar, someone takes on your identity and puts a mortgage on your property and walks away with the money and you are on the hook for the debt.  The first sign of this having happened for most people is when they get a letter in the mail thanking them for their mortgage business.   If you get this letter and did not do a new mortgage recently then do not ignore it you have a battle ahead.

In both cases the title insurance company takes care of everything.  They fight the battle to reclaim the title and with the mortgage they pay it off and then deals with the fallout.

The people who are most vulnerable, but anyone with a property is a potential target, are the more expensive houses (the fraudster can get a bigger mortgage) and people who go away for long periods during the year.

Other nice aspects include:

•  It eliminates the need to update the survey on the property if a neighbour builds on your property or there are other related issues the insurance company takes care of things.

• It covers you in a purchase situation if the vendor, who has committed to paying the taxes or the water bill etc.  fails to do so and you find out after the completion of the sale.

I used to think that if I had a mortgage or a line of credit on the house that this would protect me, but I understand now that the fraudster would pay out any of those loans, and just take out the bigger mortgage and take the difference.  It made me want to go back and check to see if I had the insurance.

If you have bought a home recently then the odds are your lawyer discussed title insurance with you, but if you bought it a long time ago chances are you do not have it and if not you might want to revisit the idea. 

Refinancing - Things to consider

Refinancing is considered for many reasons

1. Debt consolidation and bringing down the cost of debt 
2. Taking out equity to do home renovations or buy hard to mortgage properties 

 The one some people forget is

     3.  Getting a cheaper rate before the existing mortgage comes due

Today I am going to focus on this one.

What if you got into a 5 year fixed rate mortgage 3 years ago, in September 2008 ING’s rate was 5.45%. Today you can get a 4 year fixed rate at 2.99% and a 5 year fixed at 3.39%.

Depending on the size of your mortgage those numbers represent some pretty big savings. So what do you do?

a) Wait and see the mortgage through and hope things are still low when you are ready?

b) Call up your lender and find out what the penalty would be and see if adding that to the refinanced mortgage at the lower rate would save you money?

c) b) + think about my plans for the next 5 years and decide if you might also want to renovate now, or if you are planning to move at some point.

My answer is usually c). The most important thing to do is to make sure you know what the plan is with regards to the house. If you are moving, then you probably do not want to do much more than fix it up enough to sell it. If you are planning to stay then you should consider reviewing any projects that you were thinking about to see if now is the right time to put them in while the money is cheap.

If it fits the life plan to consider the refinancing then the next step is to make sure you have the timelines in place. Once you know which course of action you are going to take then you need to decide if you are taking equity out for the changes, or just going for the better rate. Let’s face it if you can make the payments at 5.45% then 3.39% is a snap.

Assume the mortgage was $200,000 when you got it with a 25 year amortization

At 5.45% your monthly payments would be around $1,215

Now three years into your mortgage you decide to switch to a new deal and want to have the house paid off at the same rate as before then look what happens.

At 3.39% with 22 years to pay off the loan your payments would be $1,007, Assuming pre-payment penalties of $5,000 and costs to do the deal at $1,000 (legal etc.) then you have a monthly savings of $208 and an interest savings of $54,862.

The rule of thumb tends to be if interest rates are 0.5% or greater than your current rate then it is at least a good time to consider your options. It may not be right for every deal, but it might be worth the time to work it out.

Step outside the bank for new ideas

Where do you go for a mortgage? Most people will say “my bank.” Many might haggle a bit or the more adventurous might check out one or two other banks to see if they can get a better rate, then go back and get “their bank” to match it and consider it a win, without comparing the fine print.

That shows a great deal of loyalty to a company that charges a lot of fees and makes money off your money and did not offer you the best deal the first time.

So where else can you go? Well there are other lenders out there that are actually keeping rates low and fighting for your business, but if you are not looking you will not find them.

Who are these other mortgage lenders? They do every day mortgages like yours and they also have a range of specialties, but bank competitors include firms like Merix, Street Capital and many others. These firms have billions of dollars in mortgages and are keeping the banks on their toes. They offer innovative products. And there is no messing around with higher “posted rates.” This latter part is particularly valuable when comparing variable rate mortgages.

Why does posted matter when we are talking variable?

Well many customers ask me if they can lock in the rate if they get nervous about where variable is going. The answer is always yes, but the difference is this. Let me use my own example. I had my mortgage at one of the banks, it was a great product at a crazy rate so why not take it, but when it came up for renewal they had changed the terms and I could not match the rate and get the prepayment options I wanted (I am ever hopeful). The bank told me that if I wanted to lock in then TODAY I could get X% off the posted rate, but in a year's time I could not be guaranteed that I would get X% off. Frankly, at that point they had me locked in so to leave would cost a penalty so I thought what was there incentive to give me X% off, and even the lender said it could be worse. So I moved to a lender where the fixed rate is always at a discount to bank posted and I feel I have the protection from facing too big a jump if I decide to lock in.

These alternative lenders get their money from investors and banks. They have excellent business models and good mortgages that they offer to consumers through the broker channel at great rates. Some other lenders help people with poor credit or unusual properties, other specialize in commercial or storefront. There is a world of choice. Open a new door by talking to an independent mortgage agent and find out how you win.

Collateral Charges

What a hot summer.

Of late I have found myself trying to explain collateral charges to people and what the pros and cons of them are. The main reason is that one of the big 5 banks registers all loans against homes as collateral charges and not as a mortgage. (There are a range of legal differences.) The bank is obviously selling the pros of the deal. In an effort to win business I also point out the cons, but obviously I can sell a collateral charge type loan as well. The trick is whether it is right for the client.

The main "trick," is that with a traditional mortgage when the term is up a borrower can shop and switch lenders and the main cost is about $200-300, processing fee that the new lender may even pay. It is quick easy and pretty low to no cost. If a borrower wants to move a collateral charge, for the most part they will find it is treated as a refinancing deal, so there will be things like legal costs, possible appraisal costs and a few added hassles. Totally doable, but the thing is that many people will see this as a deterrent and stay put. Do you think they will be offered the best deal at renewal with such a higher barrier to exit?

In an effort to educate I have added a PowerPoint Presentation to my linked in site. http://www.linkedin.com/in/andreameynell that tries to explain some of the basics about mortgages. I hope you will stop buy and go through it.

I will also now be attempting to post to the blog a little more often than every other year as I think I have now found better ways to share it than having it hang out unconnected in cyber space. Let me know what you think after a few more posts. In the meantime if there are any burning questions or issues you have around mortgages, or if there are some real estate questions I might be able to help you with, remember I am not licensed for real estate, I will certainly give you the best information I can or point you to a great resource.

As the holiday season approaches, everyone is gearing up, filling their calendars and shopping carts. Despite many economic concerns there also seems to be an air of normalcy to it all, which keeps things positive. I am certainly looking forward to the parties.

Toronto real estate statistics for resale homes in the first half of November are down over last year, but overall the market is still up over last year on year-to-date sales. Whatever is going on in the world Toronto housing values seem to still be climbing and a mortgage on an average priced home remains affordable in the GTA. Stats Can has indicated that weekly income is up 4.3% from a year earlier, which is great news for the people working.

The chaos in Europe has reared its head a little higher again recenlty with the Irish bailout plans, and the Globe has an article that talks about the implications at a very high level of this for the EU. When Canada used to mull more loudly about single currency with the US there were those who balked, basically as much as it might have helped with trade in good times, did we really want to be on the hook for their debts in bad? This is what is happening in Europe and such things really do affect global markets.

There are pundits calling for inflation and deflationary times, so all the downsides are covered by someone. At the moment though it does not look like we are going to see rate increases any time soon which is great for variable rate holders. The bond markets though are rolling up and down and fixed rates are changing and have done some interesting shifts in the last couple of weeks. For example 5 year posted rates went from 5.19% to 5.44% and now seem to be getting back to 5.19%. Discount rates sometimes lead and some times lag these changes, but even at the recent peak of 5 year discount at 3.89% we are still well below the historic norms or even the rates 3 years ago (5.7%). So life is till pretty good for buying or borrowing to renovate, invest etc.. or just pay debt down faster.

There is one issue I have run across from time to time with first time buyers and sometimes it involves the balancing act of figuring out when to get and and whether to "settle for something," instead of getting the perfect spot right a way. This is always a tough call and the last part really depends on what is available when you are looking.

The money part can be even trickier. I cannot tell people what they should do, but here is something I often raise for them to consider. Do you buy something you can afford now, even if it is not quite "it?" Or, do you save and wait for the next pay increase and try again later? In a down or flat market this is a no brainer, save and come back, but in a rising market you have to start asking yourself the following:
1) Can I save faster than the value of property is increasing? If not then you will fall further and further from your target?
2) Will the next pay increase be enough to carry the bigger mortgage needed?
3) Will interest rates keep me in the same market if I come back later? Or, will I be able to borrow less and therefore still be in a less than perfect place?

I do not think anyone should get over their heads, and some people do not want to compromise and all that is fine, but my view is that if you buy then at least you can move later and you are buying and selling in the same market and your home's value may have kept you in the game.

It is sort of like the stock market most people cannot time that either, but if you plan on staying then at least you are in your own home and one presumes that is why you went shopping in the first place.

Good luck and call me if you have any questions.

If you or anyone you know are talking about renewing a mortgage, taking out equity to renovate or consolidate debt, are thinking of buying a cottage, or are considering using the equity in the house to buy a boat, then please call or refer them to me. I will make sure that you or they get the right deal.

Keep well.