Personal debt level up…uhh, wait.. maybe we made a mistake?!

As you know, I have been very critical about the data that was being put out over the past few months regarding Canada’s personal debt levels.. We were being bombarded with reports and comments about our spending habits… I found it hard to believe that we could go from conservative nation to a casino nation in just a few years…

Sure, there is more debt…. Outstanding mortgage balances topped $1trillion for the first time… but we seemed to be growing at a moderate pace, year over year.. We didn’t have the 20% to 30% increases in real estate prices that we saw in 1987-89, or like our neighbors in the U.S. over the past decade.  Meaning there was less chance of a housing bubble or crash.

And what about our assets….?  It was hard to find any report about our net worth or assets…  There was one report from Ben Tal, Senior Economist CIBC, that didn’t get much notice but we reported it here on December 3rd…  here are some of those stats…

-there are 12.5million households in Canada…31% rent, 69% own..

-of the 69% that own, 39.9% have a mortgage and 28.9% have no mortgage.

-69% of homeowners with a mortgage have more than 20% equity in their homes… only 30% have less than 20% equity in their homes.

click here for the full story..

And now for the real stats

Personal debt to disposable income ratio has been reported at 148%… This figure has been recycled more than that gift bag from the wine store you received at Christmas…. and just like that gift bag that gets passed around from friend to friend, it comes with a different bottle… or in this case, different figures and opinions.

Let see how you like this vintage….   Some new reports just came out that should ease our concern about our personal debt levels and average net worth.  “Average household net worth has risen to an impressive six times the size of disposable income, up from an average of five times in the 1990s.”  That’s a quote from BMO’s Senior Economist, Sal Guatieri…  read more here.

What’s this?  You mean Canadians are actually investing their money and not spending it frivolously like the Federal Govt has been telling us for the past several months?

It gets better…

Here’s a little more info from CIBC Bank..   Those figures had to do with the personal tax refunds we were getting last year because of the stimulus packages…. Household debt in the third quarter grew at the slowest pace in nine years, while in the last month for which there is data — October 2010 — it was the softest in 15 years.read more here.

That’s right, WE ARE SPENDING LESS AND OUR ASSETS ARE GROWING FASTER THAN IN THE 1990’s. … But how can this be?  The Federal Govt has been telling us that our personal debt levels are at dangerous levels…  and they had to change mortgage rules to slow our spending habits….. Any of this make sense to you?

Here’s an article from Ellen Roseman from The Star that says Canada’s Stock Market has outperformed the U.S. markets for the past 7 years… and we are poised to outperform them for the next 10 years….

Feel good about yourself Canada….. Keep investing… keep borrowing and spending wisely….

January credit card offers, new mortgage rules and Canadians buying U.S. real estate…

There’s been lots of reaction to the latest round of Mortgage rule changes… it’s been just over a week since the changes were announced and I’ve had some time to digest these changes but something just isn’t making sense.

At the same time, my December credit card bills have started to come in…..and because it’s January, I’m also getting those preapproved credit card offers…. I can even skip a payment with some of my credit cards… Isn’t that convenient?

This made me wonder….I decided to ask some simple questions like, “who will be affected?”… and “who will benefit?”.    Here’s what I have come up with…

First, here’s what a few Experts think…

Jim Murhpy, President of Canadian Association of Accredited Mortgage Professionals, says ‘Debt Fears are overblown’…. and here are the stats to back it up.   One stat that really stood out for me was that 79% of Canadians are in a 5 year fixed rate mortgage… that means 79% of Canadians are not at risk of interest rate hikes…

(as an aside, I still like Variable rate mortgages with their low interest rates and the historical data that clearly shows Variable outperforming Fixed rate….but if the govt wants us to be ‘safe and secure’ in our mortgage, then this stat should make the govt feel more comfortable)….

On January 10th, 2011, Bank of Canada’s own Deputy Governor, Agatha Cote, said that debt growth in Canada was slowing… So hold on here….On the one hand, we are spending like kids in a candy shop.. but on the other hand, our spending has slowed….  Mixed message?  … So what’s really going on?

I’m going to change the subject for a minute…. but read on as you will see this is all related….

Canadians are buying U.S. real estate like never before

There was another great article last week that showed Canadians are the largest foreign buyers of real estate in the U.S. accounting for 23% of all purchases? WOW!  And in border towns like Ellicottville, New York, a local real estate broker said Canadians accounted for 50% of sales….   read more here.

These stats and buying patterns are showing me something…  Our mortgage arrears are below 1.00%… this is an unbelievably low number.. Click here to see what our U.S. neighbors are saying…..   Hmmm, maybe we are borrowing wisely?  Maybe we are borrowing to invest?  Isn’t this a good way to spend our money?

If the govt wants to slow personal debt levels, then why not impose qualifying rules on borrowing unsecured lines of credits, credit cards and loans?   After all, mortgage balances are around $1trillion… but Credit card purchases totaled $260billion...!   Remember this number.

Who is really affected by the new Mortgage Rules?

Simply put, there are 3 new Mortgage rule changes:

1- Amortization maximum is 30 years, down from 35 years and down from 40 years in 2008.    2- Refinances will be reduced to 85% loan to value, down from 90% and down from 95% just 2 years ago.   3- Secured lines of Credit will no longer be insured, meaning the maximum is 80% loan to value.

1- 30 year Amortization.First time home buyers, Self-employed, contract employees are just some of the people that will be affected.. More Canadians are becoming self-employed or are on contract employment… This group of individuals doesn’t get a steady pay cheque… I would always recommend that this group take the longest amortization possible….Not to have a mortgage forever, but to ensure they have options and flexibility during times of uncertain income…  I would also recommend they set their payments based on a 25 year amortization or shorter… The longer amortization just means you could always reduce your payment to the lowest possible amount if and when needed.

This change will also make it a little harder for some Canadians to qualify for a mortgage… If you think this is good you need to remember last year, the government changed the rules that made it mandatory for all mortgages with less than 20% down to qualify at the Bank POSTED 5 year fixed rate (if you were considering a shorter term or a Variable Rate mortgage).  Many Banks are using this policy even if you have more than 20% down payment.   In effect, many of us are being forced into a 5 year fixed rate mortgage…. and which product do banks make the most profit on?   You guessed it… 5 year fixed rate mortgages…. read here for a little more insight.

Rental property Investors will also be affected.  Let’s face it, company pension plans are a thing of the past for most of us… (sometimes I wish I had a government job)…  So what’s someone without a company pension supposed to do?  RRSP you say?  Well, if your RRSP is anything like mine, then you are better off going to the racetrack or Las Vegas ….  At least you’ll have a good time spending it.   Real estate has been a proven winner over the last 10, 20, 40, 100, 300 years and probably longer….  The rents are usually indexed with cost of living and over time, the mortgage is eliminated giving you income and an appreciating asset.  Last year, the govt got out of lending on rental properties with less than 20% down…   It’s now a little harder to buy that investment property…

2- Refinances to 85% loan to value… Just one year ago, we were able to refinance our homes up to 95%… This options was not used by many…  Then it was reduced to 90%… now it’s 85%…   This won’t affect many of us but it will affect some..   Most people refinancing up to 85% or 90% were doing so to consolidate higher interest debt or to cover some emergency expense.   How is this helping to lower our personal debt levels?     This move will just force us to carry and borrow with those higher interest rate products… (are seeing a pattern here?)

3- Secured lines of Credit or Home Equity Lines of Credit (Heloc) are no longer available over 80%… This change really doesn’t affect many of us as most lenders stopped offering this product long ago and even when it was being offered, the costs were prohibitive.  This is a non-event.

Who will benefit from these new Mortgage rules?

So who really benefits from making it harder to qualify for a mortgage?   The answer is simple… Canadians will be forced to carry more debt on their credit cards, unsecured lines of credit and other high interest rate products… There are NO rule changes or policies in place for these products…  Don’t forget, credit card purchases totaled around $260billion last year…. In case you’re wondering, the total outstanding mortgage balances in Canada is around $1trillion.

The new rules won’t slow the credit seeker from getting another credit card and buying that new surround sound stero or hot tub or new car, etc..

So why did the government choose to make even further changes to mortgage rules?  The answers are obvious to me but I will let you decide.

New Mortgage rules… let’s make it an annual event!

The Minister of Finance, Jim Flaherty, announced some changes to Canada’s mortgage rules that come into effect March 18, 2011…… these rules apply to hi-ratio insured mortgages… those with less than 20% down payment….

-The maximum amortization is reduced to 30 years from 35 years.

-The maximum loan to value available for refinancing your home is 85%, down from 90%.

-Secured lines of credit (or HELOC’s Home Equity Lines of Credit)  will not longer be insured meaning the maximum loan to value will now be 80%.

Click here for the official government announcement.

Not the first time for mortgage rule changes.

This is becoming an annual event with the Government:

In 2008, the Govt reduced 40 year amortizations to 35 years, eliminated the 100% loan to value mortgages and the interest only mortgages.

In 2010, the Govt brought in some of their biggest changes yet…borrowers would have to qualify for variable rate mortgages or short term mortgages at Bank posted rates…Self employed individuals would now have to qualify with traditional income verification if they were in business for more than 3 years…. Refinancing would be capped at 90% loan to value, down from 95% loan to value… and investment properties or rentals would require a 20% down payment…

(By the way, the govt also announced they would be standardizing mortgage prepayment penalties… we STILL haven’t seen any announcement… Mr. Flaherty, you want to help Canadians?  Change the mortgage penalty calculations!)

Has the govt gone too far?

Apparently, rising personal debt levels are the driving force behind these changes… The govt wants to make sure we don’t borrow more than we can afford…. But with mortgage defaults well under 1.00% (that’s extremely good), why would the govt pick on mortgages?   After all, wouldn’t any Financial Advisor recommend that you consolidate your high interest credit cards, lines of credit, car loans, student loans and other personal debts into a LOWER RATE product?

Why isn’t the government making changes to loans, unsecured lines of credit, credit cards….?   All these products have higher rates of interest and higher rates of default.   Think about this for a minute… we are making it harder for Canadians to take lower interest rate products (mortgages)… Where will they go?   Yes, that’s right… directly to the higher interest rate products…. Credit cards, loans, etc….  (I think I might buy some Bank stock today… or any other financial institution that offer credit cards or loans.)

So let’s see if I’m getting this straight…. we want to stimulate the economy and spending so we’ll keep interest rates low… but we are concerned about rising personal debt levels so we’ll make it tougher to get a mortgage (even though mortgage defaults are extremely low)… but we’ll keep those high interest rate loans, credit credits, etc as is…..  Is this making sense to anyone?

We’ll be sharing more on this latest announcement in the coming weeks…

CMHC, Genworth double charge…. did you pay twice and not know it?

We’ve all heard the saying, ‘necessary evil’….. You know… something that we need or must have but don’t necessary like….  kinda like that cough syrup that doesn’t taste so good but you know you need it to feel better.

Default mortgage insurance is a ‘necessary evil’…. without it, we wouldn’t be able to buy a home with less than a 20% down payment with low interest rates.  But what if you bought a house, paid the CMHC or Genworth insurance….and a few years later you bought a bigger home or you refinanced your house for some home renos or debt consolidation?  Do you have to pay CMHC or Genworth insurance again?  If so, how much will this cost?

A Financial Planner’s story gives new meaning to ‘necessary evil’

One of my reader’s, a Financial Planner, shared a recent experience…. and I must admit, this isn’t the first time I have seen or heard about this happening…His client had a CMHC insured mortgage and then later wanted to refinance the mortgage for some home renos… It appears his client was charged FULL CMHC insurance premiums on the entire mortgage, AGAIN!!   This is not right…. and we call this DOUBLE CHARGING.

A CMHC or Genworth or Canada Guranty insured mortgage can be refinanced with REDUCED insurance premiums charged ONLY on the new funds. It is up to the submitting Lender or Banker to inform the Insurer that the current mortgage is already insured.    Unfortunately, I have seen and heard of other cases where the Banker did not have the experience or knowledge or cared to take the time to inquire if the current mortgage was already insured…  and then went on to simply process the application as a NEW CMHC or Genworth insured loan (Canada Guaranty is fairly new and I have not seen any cases involving them yet)…  And the borrower gets stuck paying the FULL COST again….

How much would a mistake like this cost?

Well, here’s an example and some formulas to follow…

Let’s assume we have someone who bought a house for $350,000 in January 2008 and they required a 95% loan to value mortgage, or $332,500.  They took a 35 year amortization. They would have paid mortgage insurance of 3.15% or $10,473.75 giving them an original starting mortgage balance of $342,973.75 (the insurance gets added to the mortgage and is not payable up front).

Fast forward to today…. their home is worth $402,000…their mortgage balance is approximately $331,149 with a 32 year amortization remaining…. they want to refinance up to 90% of the value of the home…  that would give them $40,200 in new funds and their mortgage would be $361,800 (before insurance)…  The borrower will be charged additional insurance on the new funds only at the rate of 4.65% or $1,869.30.….the new mortgage is $363,669.30.

But what if your Banker didn’t submit your application to CMHC or Genworth as a previously insured mortgage?  What if your Banker sends your CMHC insured mortgage to Genworth or your Genworth insured mortgage to CMHC?   What if you weren’t given credit for the previous insurance you had paid?   Think this can’t happen?  Guess again…it’s happened before and it sounds like it’s happening again.

And now the results of the Banker’s mistake

That same mortgage will cost you $6,813.90 in extra mortgage insurance.  That’s because your banker submitted your application to the insurer as an entirely new mortgage application.   You will be paying new insurance on the entire mortgage….  Here’s the formula:  $361,800 x 2.40% or $8,683.20… your new mortgage is $370,483.20….a difference of $6,813.90…. that’s right….an overcharge of $6,813.90…. and remember, this gets added to your mortgage so you are paying interest on this for 32 years!!… The additional interest will cost you another $4,915 in interest… that’s a grand total of $11,728.90 of unnecessary expense… this isn’t necessary, it’s just evil.

We can only hope that this problem isn’t widespread.   If you’ve experienced something similar then I suggest speaking with your Mortgage Broker to get a review… I would certainly be interested in hearing about it.

Mortgage Penalties exposed…. an in-depth study reveals unjust penalties.

On November 26, 2010, we reported that a good source told us the govt would not follow through on their promise to standardize mortgage penalties until this spring, at the earliest.

On December 15, 2010, we also reported that discounted Fixed mortgage rates were going up but Posted mortgage rates were staying the same… we stated that your mortgage penalty would not decrease as it normally does when rates go up.

We received some inquires about this article.   Questions like ‘shouldn’t my penalty go down if rates are going up?’ and ‘how could a mortgage penalty be more expensive if the Bank’s didn’t increase their posted rate?’

Okay, here’s my shocker statements….  A $200,000 mortgage taken in December 2008 will cost you $16,800 to get out of today…. but 12 years ago it would have cost you approximately $8,340 and even today, it should only cost $11,640.      Got your attention?   Please read the entire report to better understand. Read the rest of this entry »

Bank of Canada dates for 2011

Happy New Year!  Wishing you all the best in 2011….

Here’s the Bank of Canada’s schedule for key interest rate announcements in 2011.

January 18, March 1, April 12, May 31, July 19, September 7, October 25, December 6.

The Bank meets eight times a year to set the Target Interest rate.   This rate directly affects the Bank Prime rate and Variable rate mortgages.  It also affects Fixed rate mortgage indirectly.

Historically, the Bank adjusts this rate up and down between 2 and 3 times a year.   In 2010, we had 3 rate increases of 0.25% each after a full 12 months of no changes.  And most experts were forecasting for even greater rate hikes…   This all changed when the economic recovery stumbled in many parts of the world, raising fears of a double dip recession.

Even today, there is still uncertainty about the economy in many parts of Europe and the U.S.   At home, in Canada, we seem to be doing well….not great, but okay.

This uncertainty is delaying the expected interest rate hikes that so many experts were calling for in 2010….  Best guess now is for rates to remain stable until April or even July.

Enjoy the low rates…!

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