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Report shows Canadian borrowers are too complacent…don’t drink the koolaid.

That’s what a report in the latest Bank of Canada Review had to say…    This article in the National Post sums it up well…  “Simply put, borrowers are often complacent and end up paying more than they should.”

This is exactly the reason I started this site…..To make you an informed borrower. Like the review said,  “consumers have different preferences and skills when shopping and bargaining for a mortgage and where lenders maximize profits based on observing these preferences and skills.”

So, how does the average Canadian borrower know if they are getting the absolute best rate or the right mortgage product?  Is there a better product with a different Bank, Financial institutions or other Lender?  How do you know if you aren’t speaking with an unbiased professional that doesn’t work for any one bank?  For me, there is only one sure way to know you are getting a highly competitive mortgage product…..You must deal with a Mortgage Broker.

Here’s another quote from the Bank of Canada Review…  “Canadian lenders appear to be extremely slow to pass on changes in the Bank Rate to their customers.”  I’m sure this comes as no surprise to most of us.

Never forget that the Banks are a business… and they are here to make a profit… It’s imperative to seek unbiased, market neutral advice…..  A Bank Mortgage Specialist just can’t be neutral or unbiased….They can only offer one set of products…  I save the best for last….

A Mortgage Broker helps to ‘creates competition’ as the report said.

Hopefully, this site will keep you informed and awake…Don’t settle for the status quo….

Posted Case study

The Big Six have all raised their rates now…

A look at locking into a Fixed rate

By now, you’ve heard that Fixed Mortgage rates have gone up by 0.55% since November…5 year fixed is currently sitting at around 4.04% vs 3.49%.  (these are best broker rates…the best retail bank rates are 4.39%)…. Let’s take a closer look at what this will cost you.

On a $200,000 mortgage with a 25 year amortization, your monthly payment goes up by $58.89 or about $3,500 over a 5 year period.    That’s quite a bit of money…. and this probably gets a lot of us thinking about locking into a 5 year fixed rate….But is this the right strategy for everyone?

For some of us, it will make sense to take a 5 year fixed rate… this is not a bad option for those on a tight budget, pension income, or just can’t sleep at night thinking about rates…  make sure you are locking in for the right reason…

A look at NOT locking into a Fixed rate

Current Variable is 2.25%….  A $200,000 mortgage with a 25 year amortization has lower monthly payments by $185.16.  Okay, I know what you’re thinking and you’re right… this rate will not remain the same for 5 years.. In fact, we know it’s probably going to go up.   So it’s difficult to calculate exactly how much you would save or lose by sticking with a Variable rate…  History shows us Bank Prime goes up and down around 2 to 3 times a year….Look at this chart of Historical Rates. The RBC is forecasting for Bank Prime to go up by 1.00% this year and another 1.50% next year!!  (not sure I agree with this forecast).     If you like flexibility, are willing to tolerate rate movements, and want to take a calculated risk of floating your rate, then Variable could be a great option for you.

Is Variable rate more stable than Fixed rate?

The media keeps telling us mortgage rates are going up.. they will skyrocket….So why are people still considering Variable Rate mortgages?   We looked a little deeper and found some interesting trends…

-From Oct 2008 (the month of the U.S. Mortgage crisis) to Oct 2009, the Bank of Canada only changed Bank Prime 4 times…This was the worst recession since the Great Depression of 30’s….and yet Bank Prime only changed a handful of times….

-the BOC raised rates in 1992 because they thought the economy was strong enough to handle… they quickly lowered them but it was a little late as the economy staggered for another few years… this pattern has repeated itself on more than one occasion…most recently, 2010…

-the BOC forecasted that interest rates would skyrocket in mid to late 2010… they were wrong…

-Variable rate has historically been 1% to 3% lower than fixed rates.

Conclusion….Variable rate moves less often than Fixed rates… And yes, it’s more stable if you measure stability by rate movements… But there will be movement.. and maybe that’s what makes Variable rate a choice for only 25% of Canadians…  Us Canadians are a conservative bunch, or so our rep goes….  And by the way… The Banks would LOVE to have everyone take a 5 year fixed rate.. these are the most profitable mortgage products for them…. Keep that in mind…

Posted Case study

Listen to the Professor about how to save money.

Professor Moshe Milevsky is regarded as one of Canada’s leading Financial Experts… He’s written several books on building and preserving your wealth.  He’s also done several studies on debt and mortgages.   (make sure to visit his site here)

One of my favorites, and one of his best case studies, called “Why these eggs belong in one basket”, was about a strange phenomenon that seemed unique to Canadians.   We seem to take the rule of diversification and apply it to our debts.   We would rather have a mortgage, a credit card, a car loan, a line of credit, etc…when we should really be looking at consolidating these debts into the lowest possible interest rate.

He concluded that a typical family with $95,000 in total debts, with $2,700 in the bank, is losing about $1,000 per year by diversifying their debts instead of consolidating.   Now apply that to your own situation…. maybe your debts total $300,000 or more, how much are you losing per year?  $3,000, $4,000 per year or more?

I have my own opinion on why, we Canadians, do this… it must have something to do with our being so conservative….  Our parents taught us to pay off our mortgage first… get rid of that mortgage…. This is good advice… but somehow we thought it was okay to buy that car with a loan or a lease.. after all, everyone finances their car, right?   And then there’s the Home Shows on TV… ah yes… We must have the latest in home decor…etc.. you get the picture…Symptoms of the ‘must have now’ generation (a subject for another day).

The Federal Govt thinks Personal Debt levels will go down if we change Mortgage Rules….  By making it harder to get a mortgage, we will slow personal spending habits… My advice is to listen to the Professor…  Take your debt, roll it into your mortgage, pay less interest and save money… It’s really that simple…

Should we encourage home ownership or renting?

I found this article about the effects of making it harder to buy a house….. Here’s one of the statements that got me thinking..  “Rather than buy a home for half a million, many are moving out of the community to rent, or living rent free with their parents and buying all this junk.” I wonder how true this is.   I must admit, I know several people that are living at home in their 30’s, 40’s and even longer…. They don’t seem motivated to buy a house.

Final message is that Debt Consolidation is not a dirty word.   It’s good money management.

Posted 20 Comments on CMHC, Genworth double charge…. did you pay twice and not know it? Case study

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.

Posted 88 Comments on Mortgage Penalties exposed…. an in-depth study reveals unjust penalties. Case study

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. Continue reading “Mortgage Penalties exposed…. an in-depth study reveals unjust penalties.”