CategoryCase study

Posted December 18, 20122 Comments Case study

Fed govt, BIG SIX BANK’s pushed us into Fixed rates!…part 2 of 2.

IT’S NO COINCIDENCE THAT THE BIG SIX BANKS CONTINUE TO REPORT RECORD PROFITS.

The Bankers were onto something. Now if they could only keep Variable rate pricing higher or make it tougher to get a Variable rate mortgage…. In 2010, the Fed govt would help increase those Bank profits…All new Variable rate mortgage borrowers would need to qualify at the Bank posted 5 year fixed rate. The Feds said they had to tighten Mortgage Lending Rules… They had to make it tougher to qualify for a mortgage with fluctuating interest rates to ensure we would not have a ‘housing bubble’ and a ‘mortgage default problem’… This pushed out 5% more borrowers from qualifying for, and benefiting from Variable rates. And by the way, at that time, Variable rates ranged anywhere from 1.50% to 1.95% compared with the best discounted 5 yr fixed rate of 3.89%…..! Anyone seeing a pattern here? (Some stats to remember…Mortgage defaults have been under 0.50% for over 15 years are currently at around 0.33%… this is at or near record lows!!… so where’s the problem??)

This is also when the BIG SIX BANK’S inflated, and unfair mortgage penalty calculation came to light. The lower rates became, the higher mortgage penalties climbed… $10,000, $20,000, $30,000 in mortgage prepayment penalty charges were popping up in mortgage blogs and news sites. Even the media had to jump in and cover some of this… And when Canadians needed a break in their mortgage payments, they were left out in the cold. These inflated penalties made it impossible to get out of their higher Fixed rate mortgages without paying an enormous penalty. Continue reading “Fed govt, BIG SIX BANK’s pushed us into Fixed rates!…part 2 of 2.”

Posted December 17, 2012 Case study

Fed govt, BIG SIX BANK’s pushed us into Fixed rates!…part 1 of 2.

VARIABLE RATE MORTGAGES WERE THE BEST OPTION

For years, I’ve promoted the merits of Variable rate mortgages vs Fixed rates. To me, it was a no-brainer. Historical stats showed that you would save over 1.00% on your mortgage, per year, every year (some years had savings of over 3.00%!). Do the math… That works out to $1,000 to $3,000 per year for every $100,000 of mortgage.

And for years, the BIG SIX BANKS, the Bank of Canada, the Federal govt and other fear-mongers pointed out that Variable rates fluctuated and your rates would change and possibly go up…

If you were able to block out these warnings, do a little research, then you may have been lucky enough to enjoy the huge savings that Variable rates gave us over the last 15 years… Fortunately, over 80% of my clients listened to my advice and chose Variable rate. But even at the height of Variable rate popularity, just 45% of Canadians were ever in a Variable rate product at any one time. Today, it’s less than 15%.

In 2008, the U.S. sub-prime mortgage crisis hit. Financial markets were in turmoil. New Variable rate mortgages were either pulled from the shelf or were priced so high as to make them an unattractive option (prime plus 1.00% with some Banks).

BEGINNING OF THE BANKS HIGHER PROFITS

The Banks actually liked this. After all, the most profitable mortgage product is the 5 year Fixed rate. Not hard to figure out. The lower the interest rate, the less the Bank’s make. This became a great opportunity for the Banks to reduce their Variable rate exposure… And so began the great campaign to force us into 5 year fixed rate mortgages. (by the way, these inflated Variable rate prices only lasted around 6 months…we’re not back to the good old days of Prime less 0.90% but anything at Prime less 0.50% or better is worth a look….it’s worth noting for the record that I still didn’t recommend 5 year fixed rates to my clients during this time… I recommended shorter term fixed rates ranging from 6 months to 3 years and then went back to Variable rate… history has shown that this was the right strategy).

Starting in late 2008, and continuing today, Bankers would call, email or write letters to their Variable rate mortgage clients to warn against higher rates coming… and they should consider locking into a 5 year fixed rate mortgage. There were many reasons given… a bad economy… uncertainty in the financial markets… or my favorite, a special rate offer (it was special alright! Lol!!)… And the media jumped in too. TV, radio, newspapers, major news websites…how many times have you have heard the warnings about rising mortgage rates??…or record personal debt levels?? This created an even higher level of uncertainty and fear… Mr. Potter would be proud!

Think about it… The Banks were strongly recommending that Variable rate clients go from a rate of 3.25% or better, and into a 5 year fixed rate of 5.50%!!? (November 2008). And the worst part about all this is that hundreds of borrowers listened and did it… and have regretted it ever since!!! Where’s your Banker now?…

watch for part 2 of 2… FED GOVT, BIG SIX BANK’S pushed us into Fixed rates!… tomorrow!

Getting a mortgage today? Speak with a Mortgage Broker…and think twice about sticking with your BANK…. you could just save yourself $thousands.

As always, I welcome your comments and questions. Let me know if I can help.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

Posted December 2, 2012 Case study

Giving up the Bank Kool-aid.

Recently, I’ve had several new clients contact me about getting out of their higher rate BANK mortgage… No surprise here… with interest rates reaching new all-time lows, it only makes sense to look into this further…

But I’ve noticed a very familiar pattern developing….See if this sounds familiar:

1-First, you hear about these record low fixed rates… maybe online, from a friend, or from one of my current clients…

2- You contact your Bank to see what they can do…

3-Your Banker gives you 2 options… 1- pay an inflated prepayment penalty (BIG SIX BANKS make you pay for any rate discount) and get into a new 5 yr fixed rate of 3.29% (this is the best advertised rate today by a BIG SIX BANK). OR 2- they’ll blend the penalty into a new mortgage but your rate will be higher… (this never works to your advantage.. there is NO assurance the Bank will offer you the absolute best discounted rate when calculating your new rate.. it’s been a favorite tactic of the Banks for decades…don’t drink this kool-aid… it will cost you $$thousands).

Most of us will stop right there and go no further…We’ve consumed so much Bank kool-aid that it’s turned us into a flock of sheep… But if you’ve started to become immune to the Bank tactics and want to explore further, then read on…

4- You call a Mortgage Broker, maybe me… you discover that today’s best 5 yr fixed rate is under 3.00%… (That’s today’s best 5 year wholesale mortgage rate with NO ADDITIONAL RESTRICTIONS OR LIMITATIONS…It’s important to understand this fine point.) And you discover it’s now worth paying the penalty to get into this new mortgage.

5- Everything is going great… but come payout time, your Banker contacts you… They make a last-minute plea to save your business… Somehow, they miraculously offer to match the Broker rate…

Every heard of this before? What would you do?

Most of my clients, that go through this process, quickly discover who has their best interests at heart. They realize it’s better to deal with ‘rate-setters’ vs ‘rate-matchers’. But oddly enough, I have seen some clients stick with their Bank… Like other addicts, they can’t seem to explain it.. Even after going through the entire mortgage review and approval process (or what I refer to as the Bank detox process). When asked why they stayed, they couldn’t give any logical reason. They just keep going back to the Bank for another fix.

10 years ago, this happened more often. But times have changed. Kool-aid is out. Protein shakes and Red Bull are in. Today’s consumer is more educated… information flows faster. Even the Bank of Canada said “borrowers who use a mortgage broker pay less, on average, than borrowers who negotiate with lenders directly”. (February 2011 entitled ‘Competition in the Canadian Mortgage Market’’).

As always, if you have any questions or comments or are just looking for a better mortgage, please free to contact me anytime.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

Posted November 6, 20124 Comments Case study

Baby Boomers 10 yr real estate retirement plan

Last week, I was asked to comment on BMO’s Retirement Report which pointed out that more Canadian Baby Boomers are using their home as their retirement fund. The BMO study shows the baby boomer generation were not downsizing like many experts were thinking. But instead, they are buying bigger, more expensive homes. The thinking is that the higher priced homes will grow their retirement fund more quickly and more securely.

Several Financial Experts commented on this study…. mostly offering negative reviews about this retirement strategy….. including BMO… you know, eggs in one basket, diversification, that sort of thing… there is merit in the statements but I really don’t agree with the negative spin….. Here’s a link to my quotes about the “10 year plan” in The Star.

The 10 year plan has grown in popularity over the last 5 years as we’ve seen the value of our RRSPs or other investment drop in value. It’s capitalizing on real estate values going up over the long-term. It’s really simple to understand….

THE 10 YEAR RETIREMENT PLAN

Here’s an example of what one couple did….Let’s say you’re between the ages of 35 and 55.

You own a home worth $500k.
You have a $300k mortgage., but you can afford to buy a $700k home.
Your new mortgage is $500k.
You are committed to keeping that home for 10 years….and you can afford the payments..
In that 10 years, the goal is to pay down your mortgage by at least half, if not more. (a realistic goal considering the average Canadian pays off their home in 12 to 17 years).
if your home goes up by 5% each year, on average (and this is probably a realistic number looking back at historical values), then your home should be worth $1.14million.
the 10 year timeframe is critical… we want to give enough time to live through any up or down real estate market…

Using the example above, in 1o years you should have a mortgage of $350k or less and house worth $1.14millon… that’s $790,000 of equity in your home. Oh, and it’s all Capital Gains Tax Free….

Does it sound too easy or too good to be true? It’s really not… take any 10 year period in history… work out your own stats… This is reality…

By the way, the couple I’m referring to are real… they are actual clients of mine. They bought their home in 2007 for $850k… They have paid down their mortgage to $300k…this is way ahead of schedule…(the low interest rates have helped)…. The value of their home today is approximately $1.5million. They have $1.2million in equity today. They estimate the home will be worth $2million in 5 years… but even if it isn’t, even if the property is only worth $1.2million 5 years from now, I’d say they’ve done pretty well, wouldn’t you agree?

And for those that prefer stocks and bonds, then stick with those investments… There isn’t one good strategy… This plan is less exciting and probably a little boring… but I like boring when it comes to my money and my retirement…

This plan isn’t for everyone. You need to be comfortable with debt and understand real estate…. and you need to commit to owning real estate for 10 yrs (it doesn’t have to be the same house.. you can move)…

If you need help with this plan or just want more info to help understand it, give me a call anytime.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

Posted September 20, 2012 Case study

Rent vs Own…which is better?

Rising house prices could make you rethink buying a home.. Could renting be better today? With the average home price in Toronto around $500k and the National average at $356k, renting might look more attractive. And for certain situations, like short-term accommodations and retirement living, it does make sense. But I’m not convinced that renting is right for most of us.

Some simple rules of thumb to remember when buying real estate:

you should plan on owning the home for at least 7 years. This will amortize or spread out any associated expenses with the purchase or sale of your home.
buying for investment should be a long term play.. again, 7 years is usually long enough to take us through any economic cycle of ups and downs.
forgot buying for a quick flip. Unless you are a professional renovator with a deep pockets, don’t try to imitate people on HGTV (yes, it’s another 4 letter word we shouldn’t repeat in public).
don’t buy at your maximum debt servicing ratios…. stretching yourself thin when interest rates are at record lows isn’t smart.
speaking of interest rates…. make sure to qualify yourself with an interest rate of 5.00% or higher.. this is a more realistic rate than today’s 3.09%… just plan for rates to go up… when they do, you’ll be prepared…
we won’t get into buying a rental property here… it requires more explanation.. but for many, it’s an even better investment than buying your principal residence… a topic we will discuss at a later date.

Type in Rent vs Own or Rent vs Buy on google, and you’ll find several recent articles on the subject. This one, from the Financial Post, stood out…. it’s against owning. The article explains that you will be better off, financially, if you rent… They even give an online calculator to prove the point…. Okay, let’s take a closer look at this calculator… Ah, there’s where we have a difference of opinion…. Their calculator assumes you can earn an annual 7.00% Return on Investment outside of Real Estate… And they are using annual house appreciation rate of 2.00%.

Hmmm, how many people have made an average annual return of 7.00% in stocks, bond, mutual funds over the past 5, 10, 15 or 20 years??? Most the people I know are still looking to match the stock market highs of 2000 or recover their investments from the 2008 crash. And using a 2.00% annual appreciation rate for real estate? Come on, let’s get real! Try typing in more realistic numbers like 5.00% investment return and 5.00% house appreciation and see what you get… And that 5.00% investment return is being generous. Real Estate becomes the winning choice…

We also have to factor in the intangibles. Not having to worry about moving because your landlord is selling… and not having to move the kids…. and just plain pride of ownership… There is something to be said for owning your home.. People tend to care a little more about the home they own.

Here’s another article from the Globe and Mail that isn’t against owning but is advocating you save up a larger down payment. I like the philosophy. Wait and save… but don’t wait for house prices to go down… that just hasn’t worked… Timing the market is always a tough thing to do…So even if house prices fall over the next few years, you’ll probably end up spending more on your mortgage as these record low interest rates are expected to go up over the next few years.. Here’s a calculator I found through The Star’s Moneyville. I typed in some numbers using today’s averages… rents, house price, mortgage rate, inflation rate, etc…. the results showed buying would save you over $400,000 over a 25 year period. Try it out.. see how it would fit your situation.

Let me know when I can help.

Steve Garganis steve@mortgagenow.ca

416 224 0114