It seems like a lot of people got really excited when the Royal (now matched by a number of others) dropped their mortgage rate by 0.15% last Thursday.
Any time rates or prices drop, it’s great for buyers, but this one isn’t anything to get excited about. It’s a rate drop for new mortgages and not a drop in the prime rate. So if you’re on a variable rate mortgage, it’s not likely your bank will drop your payment starting next month. Even if they did, it’d amount to $5.60 on a $250,000 mortgage. If they choose to drop your line of credit rate, you’d save $1.20 a month on an average $36,000 credit line.
Any tiny drop in rates isn’t going to rescue the housing market in 80% of the country. What needs to change is the mortgage stress rules that force borrowers to qualify for sticker rates when their actual rate will be about two percent lower. That rule certainly makes sense in overpriced housing markets.
It was designed to slow down the market. But what it’s done is not only slow it down, but stop it, and then shrink it in a big way. Toronto sales down 16% last year, as well as prices – Vancouver sales down 32%. Overall, sales are down 47% and mortgage applications are now at a 22-year low. One of the big banks’ mortgage applications are down by half over a year ago.
Is THAT what the goal was? The desire to own a home hasn’t changed, but the ability has. Now there are many signs that the federal government is running scared – and should be.
The stress test might still have a purpose but should be set by postal codes so the slow housing markets don’t keep getting killed. Plus, we’re pretty much done with rate increases. Sure, there might be one or two more, but we’re much more likely to have a recession in the next year than to have another huge wave of inflation with the corresponding rising rates.
It’s an old stat, but someone buying a home spends an additional $10,000 in everything from furniture to painting, renovators to appliances. None of that happens if the housing market has grinded to a halt. And I still maintain that there are tons of younger people who would love to get into the housing market but can’t. And if they don’t buy an entry level home, the people selling those can’t move up when they can’t sell…and none of the dominos to a healthy housing markets move!
George Boelcke – Money Tools & Rules book – yourmoneybook.com
Not nice of some of the big no-service banks to once again take advantage of us. Not nice – but expected. One of them is Scotiabank, who passed on 0.15% of the quarter point decrease last week. I just saw a number of line of credit statements…they’re not the only ones.
On a positive note, the Okanagan right now has some of the lowest mortgage rates in the country. Prospera Credit Union has a five year variable rate of 2.05%. If you want a fixed rate – and you should – it’s 2.65% posted rate, and profit sharing and rebate. Plus, you get to deal with a credit union and not the banks, and that’s the biggest bonus.
Over the past year there have to be about 50 million vehicle recalls of various sizes and degree of danger. That’s a staggering number, led by 30 million recalls for defective airbags, and tens of millions from General Motors.
The problem is that these recalls have to get to the vehicle owners and have to be fixed. Some are minor, but lots of others are safety issues that have caused a lot of fires and deaths. If you purchased a new vehicle, the manufacturer has your information and you’ll get a recall letter. That’s required by law. If you’ve moved, they do not have your address, so you’ll need to go to a dealer – any dealer – and get them to update your address.
If you purchased a used vehicle, they have no idea who you are, or how to reach you! You need to let your car’s manufacturer know that you own one of their vehicles. Whether it’s for a current recall or for one down the road! You can take your registration to a dealer and ask them to put it into the manufacturer’s system – NOT just into the dealer’s service department data base. And never give them your phone number or email address. You don’t want junk mail and solicitation – you want recall information. When you’re at the dealer they can also pull up any existing recalls right on the spot.
An alternate plan is to just do a google search for your manufacturer in Canada. That’ll give you their website and a customer contact phone number that should be able to do the same thing.
However, the most urgent thing you need to do is to check your vehicle for recalls – now! Here is the link to Transport Canada, or you can just search: “Transport Canada safety recall” and you’ll get to the website. The site doesn’t need a serial number, just the year, make and model.
I recently received an email from a lady asking if there is still a point in paying down her mortgage when house prices don’t seem to be increasing.
It’s a very good question. However, she’s confusing the mortgage with the value of her house. They really aren’t connected. The mortgage is the DEBT owed – the value (up or down) is what it can be sold for. The difference is what comes out in cash equity when it’s sold. In a perfect world, the mortgage is tiny – the value is high. So what’s cashed out on sale is huge equity. Or if the mortgage balance is still high and the value hasn’t gone up much – the difference between the two is a much smaller amount of equity.
The value is what you can sell the house for. The mortgage balance determines the cheque you’ll actually get if you sell.
The difference between owing and value is your equity. If you pay down the mortgage – the equity increases. That takes work and money. If you just pay the regular mortgage, equity builds slower. On the “value” side of the house – that is a second increase, but one you can’t control much, as it’s the market and what a buyer is prepared to pay.
All of us, hopefully, will pay off the mortgage. It’s just a question of whether it’s double or triple the original amount when interest is added for 25 years, or whether it’s much quicker and thus, much less interest, by paying weekly payments (that takes about seven years off) or adding a lump sum whenever you can.
She’s right in that it’s the last debt that should be paid as it’s the lowest interest rate. It shouldn’t even happen before paying off a car or credit card. But for someone that’s debt free, except the house, it then becomes a choice. Invest extra money, or pay off the house – or both.
For over six years now we’ve heard that there’s an imminent massive housing price correction. I guess all these ‘predictors’ will eventually be right if you just keep saying it every year. In 2014, prices increased an average of 6% while the Bank of Canada predicted a 30% correction. In 2010, the Economist warned of a 25% reduction but prices increased 6.8%.
Predicting the housing market is a game you’re bound to lose, just like trying to time the stock market. Pay down your mortgage and invest a little money each and every month. If you’re not retiring today, or not selling your house this week – watch all those investment shows for entertainment value, and not specific advice to your financial situation.
When your mortgage is up for renewal you’re a free agent. At that point, you’ll have no penalties to move your mortgage somewhere else and most places will cover the cost of your appraisal and legal fees in order to get your business.
A friend was in that position and was given the posted (insanely high) renewal rate for five years. She was told: Yea, that’s the best we can do. One phone call later and she had a rate half a percent lower. She called back her big bank and was told by the same lady: OK, we’ll match that. Another day with another lender and she received an email that they’d do it for a full percent less. Again, she went back to her big-five bank who indicated they’d also match that!
But rather than going to the lender who gave her a full percent off, she stayed with the big bank! TWICE they obviously wanted to take her for a ride at an inflated rate. Yet she ended up giving them the business? That’s just so wrong in so many ways. Well, it’s easier was her response. Easy? They tried to shaft her.
I don’t have an answer, but I’m quite sure that businesses who offer a better price, product or rate up front will stop doing so if we don’t end up supporting them and just use them to hold others accountable.
If you’re a homeowner, it looks like interest rates will stay low for at least the next year or so. According to a new Bank of Montreal economic study there isn’t a reason to expect higher rates anytime soon. That’s great news if you have a lot of debt, especially a mortgage or line of credit.
Right now, you can get around a 3% fixed five year mortgage. That’s incredibly low and worth taking advantage of. In a few years, when people are paying five to eight percent rates, you’ll look back and wonder how they every dropped this low.
Your credit card rates are insane anyway and a move in rates won’t impact them much. But you have to know that rates will rise and get back to some kind of historical averages. The place where that can become a real problem is with two really large debts that most people tend to carry: their mortgage and line of credit.
Lines of credit are set off prime rate, or prime plus one or two percent. They’ll change monthly so a change in interest rates will hit you immediately. And it’s likely that your balance is such that you can’t readily pay it off when rates do rise, so be carefully.
For your mortgage, low rates give you the opportunity to lock them in. If you’re up for renewal in the next year or so, you should really really consider a five year fixed term. That’s assuming you’re not moving in that time, that you’ll shop around, and don’t settle for the posted retail rates. Right now you can get close to a 3% fixed rate!
If you’re considering selling a low rate also helps the value of your home. Most people look at the payment they need to make more than the price of the house. Assuming they have a down-payment, and can afford $1,500 a month, the buyer can afford a purchase price of around $310,000. If your house is way above that, the buyer won’t qualify and can’t buy it. If rates move to 6%, that same buyer can now only afford a purchase price of around $235,000.
A three percent change in interest rates reduce what any buyer can afford by $75,000. That means fewer people can afford your home and it’s likely that prices will come down as fewer buyers can afford what’s out there. Your house hasn’t gone bad, it’s just that a prospective buyer can only qualify for the same payment, but that extra $75,000 goes towards interest and not the principal.
Gotta love the low rates if you’re a buyer or have a mortgage. But what goes down must come up.
Ah, to be a first time homebuyer. I remember back how excited I was to finally get to own my own home. Well, the bank owned it, but I got to live in it. That the payments will go on beyond most of our lifetimes wasn’t something that was going to dampen my enthusiasm.
But there are also a ton of traps and insights that are really worth knowing to save a ton of money and grief. Unfortunately, most people get their information from friends or family. They certainly mean well, but most aren’t any smarter on the subject than the buyer.
This past month, a family member joined the ranks of newly minted homebuyers. So I’m near the end of tons of e mails, feedback, phone calls, and suggestions. Most of it you can have for $20 in the It’s Your Money book if you drive over to Mosaic, but here are some of the bigger traps, tricks and savers. And most apply to anyone who is already a homeowner with a mortgage:
Shop around for your mortgage: Convenience and ignoring that advice comes with a high interest rate. My relative ended up at 3.09 for a 5-year term and $7,200 under where he started. I also applied at ING Direct on-line. It’s not an easy site and I was really surprised their rate wasn’t competitive. But that changes almost week to week and you do need three quotes.
Take a long-term fixed rate. Rates will go up, and when they do, an extra $200 or so a month will kill most anyone’s budget.
Do whatever you can to get to a 20% down payment. I know that’s asking a lot, but in this case, an extra $15,000 down payment is a saving of $3,400 CMHC mortgage insurance. With interest, that’s $6,700 over the term of the loan.
Set up a separate savings account with two or three months of living expenses. He managed to be able to set aside two months and it’ll let him sleep a lot better knowing he always has two months of savings set aside – just in case.
Borrow as little as possible from your RRSP – you can certainly borrow some of your down payment from yourself, but you do have to pay it back, which just gives you another debt and more payments, or it’ll be taxed each year. I got him down from $20,000 to $15,000. Less money now but big thanks down the road – I guarantee it.
Stay away from money from relatives. Better to borrow from your RRSP than family. If it’s a gift – that’s great, and a blessing. If it’s a loan, don’t do it. Family dinners will never taste the same and it’ll come with judgments and questions. My relative already had a slight taste of that, even before possession.
The week of closing you’ll need a lot of money. The biggest source of trouble is when buyers don’t realize the money they need at closing. Then it goes on a credit card and that balance will now be around for years since they’ve also now got the mortgage payments. You’ll need to budget:
-$800 for home insurance….my relative shopped the two best places and saved $200 and was smart enough to take a high $5,000 deductible.
-$1,000 or so for the lawyer – again, shop around – the lawyer the no-service bank recommended was $300 higher than others. It’s just paperwork, so cheap is great!
-About one months’ payment for interest adjustment to cover the first months’ interest
– Some money for the moving expenses
-And definitely some money for the first months’ repairs and purchases. Nobody moves into a new home without needing at least $1,000 of stuff right away.
My relative did it the right way: He waited and waited until he could afford it, AND he has some money set aside for the inevitable. His shopping around and being smart has saved him $19,400 so far. His house purchase will be a blessing. Thousands of people don’t do those things, and it quickly turns into a nightmare. Do it the right way – it’s worth it, and I can’t wait for Tuesday’s possession date.
Two weeks ago we talked about the risk of variable rate mortgages, in an environment where you have to know rates will start to jump up, vs. a fixed rate mortgage. Weren’t we smart, since five days later, the banks raised their five-year rates by 0.6%. And that’s just the start – stay tuned for more increases.
The story had a number of people ask some questions. So here are some of the notes of what you should keep in mind:
On a current fixed mortgage, the bank has guaranteed the rate, but you have signed for a penalty to get out of it. That is normally three months of interest, or something called an interest differential. That is the today rate vs. your rate right now, and takes the difference of what the bank would now be out if you just kept going.
The longer you have left on your current term, the higher that amount. Rough rule of thumb is that two years left or more, it probably won’t make sense to re-mortgage to today’s lower rate. If you have a year or so left, it’d be the three months of interest as a penalty.
But will paying this penalty and getting the chance to do a new mortgage save you money? That depends on what the saving in the rate is from your current mortgage to what you can negotiate today. It also depends on how long you intend to stay in your home. If you’re moving in the next year, there’s no way you’ll save money, you’ll just pay the penalty and won’t be around long enough to get the benefit of the lower rate. If you intend to stay in your home for a number of years, the savings will start to add up quickly.
What you need to do is:
-Get the amount of the penalty. There’s no cost to get it, but at least you’ll know.
-Your bank will offer you a blended rate. They’ll take the penalty and include it in your new mortgage payment. That may be what you can do, but don’t start there. Blending it in is not the same as shopping around for what may be a much better rate in the first place!
-Always get three quotes, and make one of them from the credit union. Their rates are the same or better, AND you will get money back at the end of the year through profit sharing, since you will be a member, not just a customer! For me, that’s like getting a quarter of a percent refunded each year.
-Lenders will guarantee a rate in writing for 60 days. That will let you shop around while you are protected on today’s rates, should they jump again! It does not mean you’re committed, or on the hook. It’s just a guarantee if you want to take advantage of it.
-Negotiate! You will always be able to get around ¾ to one full percent off their posted rates. Remember that posted rates are like the sticker price of a car – and who pays that?
-If you have a variable rate and want to fix it, or want to re-do your mortgage to a lower rate, you have to get the quotes and be prepared to take your business elsewhere.
-Yes, you can negotiate the penalty amount if they get to keep your business. I had a rental property with Scotiabank a decade ago. They wouldn’t budge on the three month penalty when I sold. But that meant they lost my principal residence mortgage. They made $1100 in penalty fees and have lost out on over $40,000 of interest income, because I walked. That didn’t make sense to me, but I got a great deal at the credit union for an hour of work.
-Last, but not least: When your lender says they “can’t” negotiate on the penalty, or the rate on a new mortgage, that’s just not true at all. Can’t means won’t! Remember that or it will cost you a lot of money. Yes they can, with approval of a manager, or even a regional manager. No does not mean no!
If you’re a homeowner and have a mortgage, the next few minutes could save you tens of thousands of dollars, or create a financial nightmare for you in the next two or three years or so. It’s up to you, but let me explain:
I’m looking at a national newspaper ad that has been running over and over again across the country, from one of the big banks marketing adjustable rate, or variable rate, mortgage loans. While the rate is really low, you have to remember that it is not a fixed rate, it will adjust when rates change, and that risk or gamble is entirely yours.
For most of us, it’s critical that you remember that your best interest rate is always your worst mortgage. That’s simply because YOU are taking on all the risk of rising interest rates. Right now, rates are at or near the lowest they’ve ever been. When rates change, where do they have to go? It has to be a rate INCREASE, and your mortgage loan will rise right along with it.
Right now, there are literally millions of families in the U.S. that can attest to that, because they took the mortgage gamble and did not choose a fixed rate. As a result, they just couldn’t afford the payments when rates started to increase. The rough rule of thumb is that every $100,000 you owe will jump your payment $70 for a one percent rate increase. So if you owe $200,000, that’d be $140, and if you owe $200,000 and rates go up two percent, that’s about a $280 higher payment a month.
Now, a bunch of economists in the same room couldn’t agree on what day it is today. And with that in mind, you need to remember that none of us have a crystal ball. But we do know for a fact that rates will go up sooner or later. BMO Capital Markets did a research report in December that predicted rates will rise by four percent between this year and 2012. Others believe we’ll be at current rates for another year or two. I don’t have the answer, just the heads up, and some options.
Gary Marr is a national financial writer. He had a column last year claiming his biggest mistake when he was younger was to take a fixed-rate mortgage. For him, and most of his readers, that’s great. He has the monthly cash-flow and income to ride out any rate increases and not feel the pain. But when we talked about the poll a few weeks ago, that more than 60% of families live paycheque to paycheque, tell me where those families are supposed to find another $200 to $400 a month? Should those families gamble on the temporary low rates, or take the sure thing and have a fixed rate mortgage?
Debt and credit are not about logic, they’re way more about emotions. It isn’t logical to charge something on a 20% credit card. Is it logical to finance a car for seven or eight years just to get a slightly lower payment than a four-year loan? Does it make sense to go to a payday lender at 400 plus percent, or to finance that “don’t pay for six months” when two-thirds don’t pay it off, and the rate is around 30%? Or is it logical to take that line of credit, gambling our home as collateral, and pay interest only, knowing we’ll be paying that for the rest of our lives?
None of that is about logic, or we wouldn’t do it in the first place. So I would suggest that the last thing most of us on a budget need is to have more uncertainty with our largest debt and our biggest monthly payment. The math makes an adjustable rate a better deal today, and for another year or two. If it were only about math and logic, wouldn’t we all be debt free?
I don’t have the answers. But I do know that knowledge is power and when we know all of our options, think ahead and consider the consequences, both good and bad, we’re light years ahead of 90% of the world. And when we’re informed we won’t turn our dream home into a nightmare mortgage down the road.
It only seems appropriate at this time of the year to focus on some good news in the world of finances and credit. So, in no particular order, here are eleven positives that are worth sharing or repeating:
Credit & debit cards: This was the year that our volume on debit cards exceeded that of credit cards. And according to a study just released, our raw charge volume on credit cards is also down 12% to the end of September. It’s always great news when we spend money we have, instead of borrowing it!
Mortgage rates: If you refinanced, you already know that you got some of the lowest rates in a generation – even more if you negotiated properly. And it looks like those low rates may stay for another three or six months. We’ll talk about that in January with some critical things you need to know and get ready for.
Just released is a Harris poll: In the current slowdown, or tail-end of the recession, two-thirds of us still intend to decrease our already reduced restaurant and entertainment spending. Put that together with this morning’s Bank of Canada release that our savings rate is 4.7%, and I’m very happy that we’re saving more and spending less.
In that same vein, using the slogan of one of the big no-service banks, you’re richer than you think, our net worth increased by $141 billion in the second quarter of the year. It is also expected to be the same or more for the third quarter, as our retirement savings and investments bounced back big-time, and home values started to creep up again. Don’t make that out to be permission to spend stupid again, but it’s great news when our savings, homes, and investments grow.
Let’s face it, gas prices are a big dent in our wallets each month. Last week, the government owned Mexican oil monopoly paid $1 billion to hedge prices for 2010 at a $57 a barrel level. They didn’t buy oil, they bough insurance contracts that they’d get at least $57 a barrel. Since it’s in the $70 range right now, it looks like some very smart producers think there’s about a 20% drop coming next year.
Some potential good news is that the federal government is looking into the huge fees that merchants, and ultimately you and me, pay on credit and debit card transactions. IF they have the guts to act, it’ll help us all, as merchants will more than likely pass on the fee savings in a prteey competitive climate.
If you remember, in October we talked about almost two-thirds of us living paycheque to paycheque, and that being broke is a choice. At that time I offered to work with anyone who is sick and tired of being broke. So right now, there are three families in Kelowna who are on the way to becoming debt free and a special shout-out to them.
The recession appears to be over, at least on paper, in the U.S. and here in Canada. The great news is that we dodged a big bullet and didn’t have nearly the collapse the U.S. had, and continues to have. Even better news is if, and that’s a big if, we learned the painful lessons of millions of Americans, and a ton of business that went under: Debt doesn’t pay, you cannot borrow your way to wealth, and too many payments will collapse your finances sooner or later.
One financial obligation most of us have is our cell phone. The great news is that three new second-tier cell phone companies are starting up in the New Year. Guaranteed, that’ll result in a big drop in our cell contracts. If your contract is up, or about to expire, do NOT sign another three year contract and get trapped. Leave it month by month until these three are in the market. In Canada, we are way overcharged on our cell bills. In the U.S. right now, it’s $40 a month for unlimited long distance, unlimited calling minutes, and texting! Compare that to your bill. Now, if you have an I-phone, I can’t help you – you can afford a phone that’s ten times more than my monthly bill, and you’re not going to get a break.
Can it be good news that some people are going to jail? You bet. There were a number of late-night infomercial people that finally got charged. They’re off the air and no longer conning people. I’ll share some of the details with you in January.
Cash-back from your banking: Last week, millions of us received our profit sharing from the credit unions we deal with. Great news all around: Great service, you’re a member/owner, better rates, AND profit sharing. Mine was just under $400 out of $42 million from Servus Credit Union. In the Okanagan, Interior Credit union shared $4 million with 30,000 members.
I wish you a very merry Christmas, focused on the real spirit and meaning of Christmas!
George Boelcke, CCP