CategoryCase study

Posted February 3, 2011 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 January 17, 201120 Comments 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 January 4, 201188 Comments 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.”

Posted November 30, 20102 Comments Case study

What mortgage product does your bank want you to take?

Here are some interesting stats…

-A Variable rate mortgage outperforms a fixed rate mortgage in over 88% of the time… According the Milevsky study done earlier this decade and updated in 2008….

-Variable rate mortgages have been at least 1.00% lower than the 5 year fixed rate mortgage over the past 25 years….and on occasion, better by as much as 2.00%.

-Canadians move every 3 years on average…meaning they must either refinance their mortgage or pay it out.

-a Variable rate mortgage has a fixed penalty of 3 months interest.

-a 5 year fixed rate mortgage has a penalty that is at least 3 months interest but has no limit…. and in the past 18 months, we have seen penalties of 6, 10 and even 14 months worth of interest.

-yet, 66% of Canadians have a 5 year fixed rate mortgage…

Is the 5 year fixed rate mortgage really the right product for 66% of Canadians? Can the 5 year fixed rate mortgage be the right product for everyone? Which mortgage product do you think your bank wants you to choose?

By the way, can you guess which mortgage product is the most profitable?…. you guessed it.. the 5 year fixed rate.

Make sure your Mortgage Broker does a needs analysis before they recommend a mortgage product for you…. There is no ‘one size fits all’ when it comes to mortgages…. Ask yourself, ‘who is this mortgage best for’…. my bank or me?

Posted October 28, 2010 Case study

Deloitte report on Mortgage Brokers.. 38% use brokers

Here’s a great report that was put out by Deloitte. The report shows that Canadians rely on Mortgage Brokers more than ever… but not as a last resort.

Unlike the U.S., where mortgage brokers used to account for 65% of all mortgages arranged prior to the October 2008 mortgage crisis, U.S. broker now account for less than 20% of mortgage business.

Here in Canada, 38% of all mortgage originations went through a mortgage broker…. including 44% of First Time home buyers.

With national and provincial organizations like CAAMP (Canadian Association of Accredited Mortgage Professionals) and IMBA (Independent Mortgage Brokers Association), Mortgage Brokers play a vital role in informing and educating borrowers. Mortgage Brokers aren’t just a last resort, they are now viewed as a first choice for getting unbiased and professional advice.

Dare we say it, a mortgage broker helps to create competition….and isn’t competition good for the consumer?