The Economy and Rates

Welcome to 2012.  We have had a couple of weeks to get used to the New Year and we have gone from spring to real winter in a matter of hours and back.  I am sure we are all back to getting our normal routines in order and hopefully tackling new challenges.

The news from the Bank of Canada is not a huge surprise as rates stay the same and the Prime rate remains at 3%.

I am sure everyone has heard about the deals in the news and while some of them come with some real hitches I cannot argue with the rates.  The interesting thing is that these days the range of rates for mortgage terms of 1 - 5 years and even the variable is 0.44%, so while you might be edging out a slightly better deal at one lender or another on the rate, please remember the fine print also counts for something when it comes to your options down the road.

The really interesting deal right now is a 10 year mortgage at 3.89%.  Talk about stability.  If you are planning to stay put and worried that increased rates in 5 years might make things a bit uncertain then this is the term for you.  Honestly, if you look at historic rates this is an unheard of opportunity.  While it may not be for everyone it is a great option for many.  Here is what Rob Carrick from the Globe had to say.

"Let's get back to the housing market for a moment. The biggest support for prices right now are the low mortgage rates we've been talking about here. When rates rise, that support crumbles. Things could get ugly.

Why consider buying now? Because you can borrow money at 3.99 per cent or a bit less for 10 years. It's like freezing time at the exact best moment ever to finance the purchase of a house. If the price of your home declines, it's bound to be on the rise again a decade from now. Meanwhile, you'd have the chance to put a decade's worth of salary increases to work in ramping up your payments and making periodic lump-sum payments."

So consider your plans and your options.  Note that after 5 years the penalty to break a mortgage is only 3 months interest - just like a variable rate loan.

it would seem the banks may have done the heavy lifting for now on the economy so the rates are holding for now.  Global stability is still not on the horizon and $100/ barrel oil is really going to drain disposable income.

While Canada still seems to be strong, largely related to our resource and financial services sectors.  However our labour market is not doing very much and is pretty flat and the housing market in some areas is showing signs of cooling.  The US economy is looking a bit better but everyone is affected by the events in Europe and even China is slowing. 

In Europe, Germany is seen to be weakening and doubts are being raised about its ability to support the weaker members of the EU, or at least the effects on Germany may be more than expected.  Whatever happens in Europe, they seem to be taking it as slowly as possible.  My main hope is that whatever they decide to do that they keep their minds open to new ideas, since old ones seem to have created the problem and recession and more banks collapsing is still possible.

The effect in Canada though of the low rates may reboot the housing sector a bit, and despite the December over spending many seem to be getting their debts under control.

Fraud - It can affect anyone

I recently did a short course on fraud.  It is part of my continuing education to keep me on top of my game in this business. 

It was quite interesting and borderline shocking.  Canadians and others have long looked at "white collar" crime as less important and of less concern and as a result there are not the policing resources, the sentencing levels or the statistics to help us truly deal with this problem.  One of the interesting facts that came out was that the cost of all forms of fraud in Canada is estimated to be about the same as the drug problem, or between $12 and 38 Billion per year.

To me the worst part of it is that it often seriously hurts people who otherwise stay out of trouble, they are not thugs or drug addicts and yet they can loose their life savings with one bad judgment call. 

The people that perpetrate the frauds are part of organized crime for the most part, and they often use the proceeds of the fraud to help fund their guns and drugs etc..

In 2008 there were 1.7 million victims of identity fraud in Canada and it can cost people a lot of time and money to sort it out and clean up the damage.

While the full breakdown of statistics is not available in Canada the estimated mortgage fraud is about $200 million per year and while the course is not going to tell me how it is done, for obvious reasons, we do know aspects of it.  I have heard tales of people faking powers of attorney and acting for seniors and selling their house from under them.  I know about the "straw man" approach where someone fronts for someone else.  There are tales of bankers, lawyers and yes, mortgage agents all playing a role at one time or another so we all need to be vigilant and make sure we protect our information.

Having title insurance is one way to help protect your home, and you can clear the cache on your computer, keeping your virus protection up to date, shredding documents with key information on them before sending them to recycling, and not looking for easy money over the internet, the mail, the email or over the phone.  The people who run these frauds know which type of fraud is most likely to succeed with which demographic and though we all think it cannot happen to us, the facts show that every age group, gender and education level has been hit at one time or another.


Be careful, do your homework and when in doubt check references or just steer clear.

Stay safe and fraud free and if you suspect you have been had or are being had, do not be embarrassed call the police or RCMP and be part of the solution.

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.