Comment on Bank of Canada report

The Bank of Canada came out with the 2 reports this week.  The first as I am sure you have heard is holding interest rates firm so there will be no impact on any variable rate loans people might have.  All good news for those trying to lower their debt load.  The news that came out with the report though, while as careful as ever, does indicate that Canada is doing fairly but global conditions are not looking to help raise the boat any time soon.

In summary, the US is not doing too badly with some forward momentum, Europe is still on the down slope and China and other emerging economies have slowed "somewhat" more than expected.  They also indicate that the rates of growth might be stabilizing, but the "somewhat" makes me think they may be being optimistic.  It is good news that our commodities are holding us up as prices have increased. 

I did like the call for our economy to be at full capacity by the end of 2013.  I also like the dichotomy of talking about our growth is related to consumption and the concern over household debt burden.  I heard a comment on CBC that summed this up well.  They want the people that can afford to build debt to spend and keep the economy going, sort of like the encouragement the US gave people before the collapse, but they also want those who cannot afford the debt to pay it down so we do not collapse.  Somewhere in there I guess there is a happy middle ground of debt where people keep the economy going but do not collapse the system.  This also assumes people are good judges of where that is.  All I can say is that I hope people are getting the advice they need to make good decisions.

The sad news is for our industry is that they expect housing activity to decline from historically high levels and a high dollar to continue. They also expect inflation to get back to the 2% target range by the end of 2013.  The rest of the piece says essentially that they would like to raise rates, but can't. 

So, assuming these very smart people have a handle on things we are not looking at any major mortgage rate changes for the next year or so.  There will be the small ups and downs we have come to see, but we will probably remain in historically low territory for the foreseeable future.   Great news for home buyers and people renegotiating their deals. 

Mortgage Fraud - CMHC provides great information

I could write something up here myself, but I think the CMHC site has a great piece that is worth highlighting. So here is the link and a copy of the piece.  I think the more people that see it the better.  Thank you CMHC.

http://www.cmhc-schl.gc.ca/en/co/buho/plmayomo/plmayomo_004.cfm

Mortgage Fraud

How to Protect Yourself When Purchasing or Refinancing a Home

The promise of “easy money in real estate” can be hard to resist. But consumers who knowingly misrepresent information when buying or refinancing a home could find themselves becoming accomplices to mortgage fraud.

What is Mortgage Fraud?

Mortgage fraud occurs when someone deliberately misrepresents information on a loan application, to obtain mortgage financing that likely would not have been approved if the truth had been known.
There are several different forms of mortgage fraud. One of the most common is when a con artist convinces someone with good credit to act as a “straw buyer.”
A straw buyer is someone who agrees to put his or her name on a mortgage application for a home that someone else will be buying. Mortgage applications for straw buyers also often misrepresent other important information as well, such as their income, occupation and the real source of a down payment. In return for their participation, straw buyers may be offered cash or promised high returns when the property is sold.
While the promise of an easy payday may be tempting, consumers should be aware that in most cases, the fraudsters are the ones who walk away with all the profits, while the straw buyer is left “holding the bag” when the mortgage defaults. Consumers who knowingly take part in these frauds will also be responsible for any shortfall when the property is resold, and could even be held criminally responsible for their misrepresentation.

What Can You Do to Protect Yourself?

To protect yourself and your family from becoming victims of, or accomplices to, mortgage fraud, be an informed consumer. This means:

• Never accept money, guarantee a loan or add your name to a mortgage unless you fully intend to purchase the property. If you allow your personal information to be used for a mortgage, even for a brief period, you could be held responsible for the entire debt even after the property is sold.
• Always know who you are doing business with. If you are buying or selling a home, use only licensed Real Estate Agents and other industry professionals. And never sign anything until you know exactly what you are signing.
• Determine the sales history of any property you are thinking about buying, and consider having it inspected and appraised. Ask for a copy of the land title search.
• Find out if anyone other than the seller has a financial interest in the home. If a deposit is required, make sure the funds are held “in trust” by the Vendor’s Realty company or lawyer / notary.
• Get independent legal advice from your own lawyer / notary. Talk to your lawyer / notary about title insurance and other alternative methods of protection.
• Be wary of anyone who approaches you with an offer to make “easy money” in real estate. Remember: if a deal sounds too good to be true, it probably is.

There are also several simple steps you can take to protect yourself from another common form of fraud: identity theft. These include:

• Never give out your personal information until you know who you are dealing with and how your information will be used. This includes requests for information in person, by mail, or over the phone or Internet.
• Never reply to e-mails or phone calls that ask for your banking information, credit card details, passwords or other personal or sensitive information, particularly if you did not initiate the exchange.
• Review your mail, bank statements and other financial statements on a regular basis to look for any inconsistencies. If you don’t receive a bill on time, follow up with your creditors or service providers.
• Shred or destroy all personal and financial documents before you throw them away.
• Inspect your credit report on a regular basis by contacting Canada’s two credit-reporting agencies: Equifax Canada at www.equifax.ca and TransUnion Canada at www.transunion.ca.

Find Out More

If you suspect that you or someone you know has been the victim of mortgage fraud, contact your local police department immediately.
To find out more about mortgage fraud, visit the fraud prevention section of the Canadian Association of Accredited Mortgage Professionals (CAAMP) website at http://mortgageconsumer.org/protect-yourself-from-real-estate-fraud.

Value of buying whatever the market.

It is interesting, this week I heard from some realtors, one side said things are normalizing and sales will move slower and others remain confident that the hot properties will disappear in days.  I guess really it comes down to what the seller expects in price, bidding war with high expectations or OK with something closer to the most recent sale in the area?

There are more articles out than usual about the state of the market.  The naysayers and the "keep the optimism going" crowds battling it out for the hearts of the public.  I know that any spin can be put on most of the numbers that are out there, but it does seem to me that the drop in sales is real and if prices drop OK.  I do like the piece by Gail Johnson.  Basically it supports buying a home in any market, assuming you are planning to stay.   The interest rates are low and it is a hard deal to beat.

I was thinking about people buying homes in the 70s, since then we have had some pretty mad swings in the market, but think of this example.

If in 1972 someone bought a home in Toronto for $125,000, today, according to the Bank of Canada calculator, that amount would be $685,810.81 (love the pennies), if nothing major is done to that house over all those years other than maintenance, repairs, paint, carpet, roof, new heating and cooling etc.,  the house might be worth some $2 million on the market today.  In the meantime, the family would have had a house to live in, bills to pay and maintenance.  I somehow do not think that the cost of maintaining the home exceeded the $1.31 million markup plus the rent they would have paid had they not bought the house in the first place.   So they would probably come out ahead.  Therefore, I tend to agree, buying a home is worthwhile if you plan to stay, flipping has risks and sometimes things happen that cause people to move for work or personal reasons, but even that might get worked out if the buying and selling are happening in the same up or down market. 

OR Look at things another way.  Allowing strictly for inflation a house bought in 2005 for $450K, would now cost $509,860.47, now the actual value of the house because of the recent boom years means it is probably closer to $630,000, again without major renovations.  It would mean clients would have to save almost $200K in 7 years, now while possible for some not always feasible. 

Why are you considering a home?  What are your long term goals, if you are looking longer term but worried about a drop in the value, then consider houses that can be renovated down the road to accommodate the changing needs of the family.

Inflation & housing

I am sure you have heard that the Fed (US Federal reserve bank) has opened the floodgates of new money to bolster the US economy.  All this in a bid to boost jobs in the US and help the US economy get out of the LONG slump.

The good news is that your stock portfolio should have seen a bump, and interest rates are likely to stay low.  The bad news is  all that money flowing around will have a real cost in the long term.
For the younger people out there inflation, I mean real inflation, might conjure vague memories from economics 101 or some article you might have read in the paper.  The real effect of inflation is significant for the average person.  I am not talking about the target inflation of 2%, I am referring to real double digit inflation.

High inflation means prices go up, but sometimes not everything goes up at the same rate and some things might even drop.  One example was in the US when oil jumped to an all time high of $148 a barrel and house prices dropped 31% in 2008.

So what?

1. Well, often wages do not increase at the same rate as prices for food and fuel so people have less money for discretionary spending, this further weakens the economy because we are not out there buying all the new tech if we need to feed the kids and it is getting harder. 
2. People's retirement plans get hammered.  People might be planning on retiring with a $60,000/year income and that was going to maintain their standard of living.  All of a sudden $60,000 won't cut it, so it is either back to work or significant changes to the plan.  If one is not yet retired it means putting off buying now to save for the more expensive future, either way consumption is down as is standard of living.

 These are other implications but these are significant to most people.

Let us take a real world example of high inflation and while I believe governments and banks will do everything to prevent this level of chaos it has happened before and as we know humanity seems destined at some point to repeat the mistakes. 

For every example out there i am sure there is a "Yeah, but..."  just remember how close the disaster was in 2008.

From wikipedia

Poland, 1989–1990

Poland experienced a second hyperinflation between 1989 and 1990. The highest denomination in 1989 was 200,000 zlotych. It was 1,000,000 zlotych in 1991 and 2,000,000 zlotych in 1992; the exchange rate was 9500 zlotych for 1 US dollar in January 1990 and 19600 zlotych at the end of August 1992. In the 1994 currency reform, 1 new zloty was exchanged for 10,000 old zlotych and 1 US$ exchange rate was ca. 2.5 zlotych (new).

Start and End Date: Oct. 1989- Jan. 1990

Peak Month and Rate of Inflation: Jan. 1990, 77.3%^[56]

 Even something less dramatic than this can have a real impact on people's lives.  We all know there is a cost to everything, or for the scientists, for every action there is an equal and opposite reaction.  It would be great to know what the reaction to all this bailing out is going to be, but quiet preparation is always good.

The Fed has kept up a consistent pace to feed this inflation first in the spring and then this week.  No one has put a date on when this "debt" is going to be paid for all the free money flowing into the European and US markets to bolster what is otherwise pretty depressing news, but most agree it will come.

The upside is we know it is coming and rates are low so what are the 3 big things you can do to protect yourself.   While gold is often talked about and certainly many people flock to gold in uncertain times it is not for everyone.  Number of sites have differing suggestions but here are three fairly common points, note that every strategy has an inherent risk:

1. Invest in the stock market.  Companies are motivated to get the best returns and to find ways to hedge themselves against inflation, just look at the markets post announcement. 
2. Buy a home and fix your expenses as much as possible.  People need a place to live and if they lock in rates before any major increases paying off the mortgage at the lower rate is actually a huge form of savings.  Getting the mortgage paid off before any major increase would be a huge bonus especially if we ever head back to 16% mortgage rates.  (Makes me cringe to think about it, personally I am weighing the idea that if it ever looks like I might actually have to pay anything close to that I will cash out some savings and pay my mortgage down as much as possible to reduce the impact that would have on my monthly cash flow.  Then hope to rebuild the savings from what I am not spending on interest costs.)
3. If you can find inflation adjusted securities you like. Or if you are a sophisticated investor or have one on the payroll follow their best advise, because a high interest savings account or T Bills etc. are not going to give you rates that will let you stay even with inflation let alone move you ahead on your savings goals.

I know the home one sounds self serving, but think about it.  Rents can increase but if you lock in a rate you have stability and savings built in and when the home is paid off other than the standard overhead, taxes, maintenance and utilities, your housing costs are limited.

Consider your options.  I would be happy to discuss how long term fixed rates can help some people and if you are bold we can discuss variable as I do not see any major increase this year or possibly next for the prime rate, some experts have even whispered about a drop, but I am not sure how they would ever manage that.

Collateral Charge

Collateral Charge

A collateral charge is basically a different method of securing a mortgage or loan against your property.

It differs from a standard (traditional) mortgage in some very important ways:

1. Unlike a standard mortgage, a collateral charge is readvanceable — That means the lender can lend you more money after closing without you needing to refinance and pay a lawyer.
2. A collateral charge is non-transferable — It cannot be assigned (switched) to a new lender like a regular mortgage.

In addition, regular mortgages put all of their key terms in a document that's registered with your provincial land title/registry office. A collateral mortgage, however, puts key terms in a loan agreement and is not registered in the same way.

That collateral loan agreement may therefore contain terms that other lenders are not aware of, or might find objectionable. For that and other reasons, lenders don't accept transfers from borrowers with collateral charges. Instead, the borrower must refinance in order to switch lenders, and that entails legal costs.

Collateral charges also allow lenders to do things like change your interest rate, increase your loan amount, and use your mortgage payment to pay down other debts you have with that lender (if you default on those debts).

If you're considering a collateral charge, let me explain the pros and cons before you jump in.

How IRD can change and Penalties get bigger

Do you know how your penalty is calculated?

There was a client who was quoted a penalty of about $6,370 to break her $280,000 mortgage a month ago, yet today, her penalty has ballooned to over $12,000.

How did this happen in the span of a month?

On both penalty quotes, the client is being charged the interest rate differential: the interest lost to the lender for the remainder of the term.

The IRD is based on several factors: the difference between your rate and the rate at which the lender could re-lend the money (the spread), the amount being prepaid, and the time remaining.

Here's how it's calculated:

IRD = spread x balance x # of months left to end of term/12

When she first called the bank to get a penalty quote, she had 42 months left which is closest to a 4 year term. At the time, the bank's posted 4 year rate was 4.64%  & the penalty was calculated as follows:

Client's rate: 3.64%
4 year rate: 4.64%
Client negotiated a GREAT discount of 1.65% when she got the mortgage 18 months ago ( now she's going to pay for it).

You'd think the spread would be the difference between would be the difference between 3.64% and 4.64% (now the bank can EARN an extra 1% by getting the money back early), but, THIS bank takes into account the discount of 1.65% negotiated by the client. They would theoretically lend the funds out based on a rate of only 2.99% "passing along" the 1.65% discount.

spread = 3.64% - 2.99% = 0.65%.

IRD = 0.65% x  $280,000 x 42/12 = $6,370

Easy math, but how does that become over $12,000 a month later.

The spread is based on the rate closest to the remaining term. With only 41 months remaining, the bank now looks at their 3 year rate which is 3.95%.

Client's rate: 3.64%
3 year rate: 3.95%
Don't forget the discount of 1.65%
spread = 3.64% less (3.95%-1.65%) = 1.34%

IRD = 1.34% x $280,000 x 41/12 = $12,819

The additional month that has passed has resulted in a penalty that is almost $6,500 higher than quoted a month ago.

How the IRD is calculated varies between one lender and another.

As a mortgage agent I can help you understand these risks and steer you to lenders who are less "calculating" in how they punish their clients.

Part 2 On paying down your Mortgage Faster

If you really want to make a dent, then aside from simply increasing your regular mortgage payment you can use your lump sum allowance. 

This is for people who are really serious about getting their mortgage down.  If you budget your life and know your expenses and savings goals, or you just know that you have some extra money at the end of the month, or year, then you can opt to put a little more on the mortgage without upsetting your monthly cash-flow. 

This, like any other form of savings takes discipline, but unlike savings it is not as easy to take it out again so it is a much bigger commitment.  The impact can be huge. 

In the last piece I showed you how increasing your regular payments had the combined effect of lowering the balance, reducing the total interest cost and reducing the time you actually have a mortgage.  While this is not great for my business it probably will be great for your future.  Even if your current payment is as low at 1,000/month, think about what that extra thousand can do for you.

The trick for a lot of people though is foregoing what they want today for the future, and in fairness, living life is important so I am not advocating being house poor and not enjoying life, I am suggesting moderation because the debt figures suggest that too many of us are leveraging too far the other way.

Look, if Canada's richest man, when he was alive, could pack a lunch to take to work, then you have to question how someone struggling to pull it all together can justify a regular trip to a fancy coffee place.

So, consider even taking a few lunches to work and putting the savings on your mortgage, topping up your RRSP, or RESP or whatever form of savings make sense to you, every dollar counts. Or put a little on each.

Personally, as you know I hate debt, but of all debts I do understand and appreciate mortgages, not just because I now help people get them, but because they make owning a home possible for so many. 

Next piece is on why I like property.