RRSP, RESP, TSFA or Mortgage prepayment? Which has the best returns?

HOW TO GET THE MOST OUT OF YOUR MONEY

Trying to decide what’s the best move can be difficult…. and I must admit, this is not an easy subject to tackle.   There are so many opinions…. But it’s important enough that I’m going to put my 2 cents in.  My final recommendations are listed at the bottom if you want to fast forward…

First, let’s come to an understanding that we are all different and have different needs…. you must ask for professional opinions and make up your own mind. Having said that, I think that for me, this is actually a very easy decision. Read the rest of this entry »

CMHC forecasts a healthy housing market for 2012-13…. but fixed mortgage rates have started to climb.

CMHC issued a report that says the economy will expand at a moderate pace over the next few years, as reported in The Spectator.  The Bank of Canada should also keep it’s trend setting rate low until mid 2013.    This means Variable mortgage and secured lines of credit rates will remain low.

The report also says the average house price in Canada is expected to hit $368,900 this year.  But, a closer look at the Greater Toronto Area market shows that house prices are climbing much faster.   A lack of supply and a pent up demand, together with record low interest rates are fueling price increases.   Reports of homes being sold above asking are popping up outside of Toronto.. including Milton, Georgetown, Oakville, Burlington and Hamilton.

If you’re in the market for a home, my advice would be to not wait til the Spring market.  The market is now.  Experienced realtors are telling me they have priced a 5% increase in the first 2 months of 2012.  Waiting could cost homebuyers $18,000 or more.

FIXED MORTGAGE RATEShave started to climb.  Earlier this week we saw RBC and TD pull their special mortgage rate offers…   BIG SIX Banks don’t like to compete in the wholesale mortgage market with mortgage brokers… when these 2 banks realized no other BIG SIX bank was offering this rate, they quickly withdrew the offer…   read this article...  the BIG SIX banks are calling a truce?   What does that mean…?  Don’t you want your banks to compete?  And that last paragraph by BMO’s Frank Techar is priceless.. “We went to 2.99 per cent to draw attention to the benefits of having a mortgage with a maximum amortization of 25 years”.   This does make me a laugh a little… BMO’s NO FRILLS mortgage was a way to gain market share and entice borrowers into a restricted and closed mortgage product…  Mortgage Brokers already had access to this rate and a NO FRILLS product through another lender… but it’s not a great product and the restrictions are costly…Most brokers will not recommend or even offer this product to their clients.

The ripple effects of this ‘truce’ are that wholesale mortgage rates have started to climb… ING and National Bank have also increased their rates.  This could be temporary but if the Greeks get their act together and the U.S. economy starts to improve, we will see rate hikes….  My advice is get your mortgage preapproval now…. These are historical low interest rates…  I’m not sure they will be here for much longer.

 

$600billion, $250billion, 2.99%, $1.5trillion… numbers to watch in 2012

$600billion….Recently, we heard that there was another crisis looming in the mortgage industry.  Last week, we saw CIBC make headlines when their wholesale lending division, Firstline Mortgages, made drastic changes to the lending policies, which included pulling out of the self-employment and new-immigrant lending programs. They also reduced their maximum mortgage limits.

So what happened?  Why did Firstline Mortgages make these changes?  Firstline told us this was in reaction to a report stating Canada’s self-employed and new-immigrant mortgages shared similarities with the U.S. Subprime mortgages.    But maybe there was another reason…  Shortly after this report, we got news that CMHC was approaching their mortgage limit.   The report said CMHC ‘s total insured portfolio was $541billion as of the end of Sept 2011.  The last increase was in 2008 when the govt raised the limit from $450billion to $600billion.    But now it remains uncertain if or when the govt will raise that limit… So now we have lenders and bankers wondering how this will affect the supply of mortgage insurance.. so, what do they do?  They cut out some of the less popular mortgage programs…  Nice, huh?

$250billion….But we are forgetting the private mortgage insurers.  Genworth Financial has stated they have plenty of capacity before they reach their govt approved $250billion limit (this limit is expected to increase to $300billion in a few months).  The only challenge for private insurers like Genworth, is that the govt only guarantees up 90% of it’s insurance to the lenders…. but 100% for CMHC .   This could case lenders to seek higher returns on their mortgages, meaning potentially higher interest rates…

 

2.99%….Remember that 2.99% No Frills rate special last month?  I can’t help but wonder what the executive boardroom was like when they saw their mortgage department come out with this rate…  at a time when the govt was clearly trying to cool the housing market and slow consumer borrowing…  It’s early in the year, but this has to go down as one of the most ill-timed moves of 2012…  Congrats BMO mortgage dept!  You did bring No Frills products to the forefront.  And this gave us a real opportunity to point out the shortcomings of this product..

$1.5trillion…Last years, we heard that personal debts levels had hit record highs.  Numerous articles and reports are telling us that we are borrowing too much.  Yes, it’s true, outstanding mortgage balances topped $1trillion for the first time in Canada.  That means $500billion of non-mortgage personal debt it out there.   And that number bothers me more than the mortgage balance.   Mortgage rates are at historical lows… home ownership and property investments should be encouraged.   But borrowing for new TVs, cars, computers and other items, should be discouraged.   We have to make a distinction.   GOOD DEBT VS BAD DEBT.  There is a difference.  Let’s not group all this debt in one category…

 

Major lender cuts out self-employed and new immigrant lending programs

THE SKY IS FALLING AT CIBC?

On Tuesday, CIBC’s wholesale lending arm, Firstline Mortgages, announced drastic changes to their lending policies.   They will no longer participate in self-employment and new-immigrant lending programs.  These programs made it possible for Canada’s growing self-employed and new-immigrants to get a mortgage at discounted interest rates.

click here for The Star’s report featuring some of own personal comments.

HERE’S WHAT REALLY HAPPENED

The move by Firstline seems to have come immediately after 2 recent reports…  First, CMHC said they are reaching their $600billion cap limit on the amount of mortgages CMHC can insure.   Currently sitting at $541billion, as of the end of 2001.  (I think this is the real reason for Firstline’s lending changes.. a more thorough explanation is below).   But next, a Bloomberg news report was released, earlier this week quoting a 152 page OSFI report (by the way, I searched OSFI and couldn’t find that report).   The article drew comparisons between the US sub-prime mortgage lending and Canada’s self-employed and new immigrant lending programs.

Let’s get something straight… Canadian lending policies are NOT like the US sub-prime policies.  Not even close!  The US sub-prime mortgages were granted to people with poor credit history, they lent up to 125% of the value of the home, amortizations went up to 50 years, they offered interest only payments, appraisals were not always required, they offered low interest teaser rates for 1 to 2 years, they offered Variable rate mortgages with no payment adjustment even if rates went up….  We don’t have theses features or options in Canada…. To suggest that our lending practices are similar is not accurate and has to be corrected…or proven… (there was time when similar mortgages were made available to Canadians this only lasted a few years from 2006-08 and this only accounted for less 5% of all mortgages during these years)

In Canada, we have much stricter lending policies that is in keeping with our conservative reputation….. And let’s not forget, the Fed govt has made 3 major changes in the past 3 yrs… making it tougher to qualify for a mortgage.

-maximum amortization reduced to 30 years maximum.  -refinances were cut to 85%  loan to value.  -business for self without traditional income confirmation will need to put 10% down payment, instead of 5%.

We really don’t need any more tightening.  The record low interest rates are helping to drive the real estate market.  Once rates go up, the values will level off and maybe even drop.

And by the way, if you think this is a small segment of the population, guess again.   The Canadians Association of Accredited Mortgage Professionals (CAAMP), estimates that 13% of the country is self-employed.    (to further clarify, a self-employed person is anyone that is paid in full and then must deduct and pay their own income taxes.)   Being able to reduce your taxable income is part of the benefit of being self-employed…Remember, these people don’t have pension plans and usually don’t qualify for Unemployment insurance…  

New immigrants are a big part of what has made our country the best place in the world, to live in.   In 2010, there were over 250,000 new immigrants that came to Canada.   These are people, anxious to work, wanting a better life…..wanting to spend and borrow…helping our economy grow.   And as a former Senior Lending Manager with a major bank, I can attest to the fact that granting new immigrants a mortgage has always been considered a low risk loan.   Most new immigrants would give up their right arm, before not paying their mortgage.

BANKS HAVE TAPPED INTO CMCH PORTFOLIO INSURANCE FOR YEARS

You bought a house, you put down 20% or 25% and you didn’t have to pay CMHC or Genworth hi-ratio mortgage insurance.  Congrats…!  But did you know that your mortgage might still be CMHC or Genworth insured?   That’s right.  Banks and other financial institutions have been buying and paying for CMHC insurance through portfolio insurance.  This makes the mortgage a secure investment for the Banks.  If you default, the loan is guaranteed by CMHC, a Crown corporation.  Soveriegn debt.  You can’t get any more secure than than.   It also takes the mortgage off the Bank’s books and frees up more capital for other investments.

Here’s a thought… CMHC is a Crown corp that is there to help Canadians own a home… well, maybe they should take a look at the % of mortgages that are 85% loan to value or higher…this number isn’t as high as you might think.

Remember these stats from January 2011?

-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.

And we also know that last year, the total outstanding mortgage balance in Canada topped $1trillion for the first time in history….. You could say that CMHC has a very well secured book of business….

Come on CMHC, let’s make insurance available for those Canadians that need it…  it seems the Banks have found a way to eliminate all their risk when it comes to lending money…but we know they keep all the rewards and profits (how else do you explain $billion profits through the 2008-09 recession and beyond)   Maybe it’s time to increase that $600billion limit… There doesn’t appear to be any arrears problem with mortgages either… last I heard, we were at around 0.43% for mortgages in arrears more than 90 days.

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