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CategoryConsumer Debt

Shhh…Interest rates are still at record lows… and Canadians are making huge prepayments.

 IT’S OKAY TO FEEL GOOD ABOUT LOW INTEREST RATES

I’m sure this isn’t what our Federal govt wants you to hear.   But it’s true… Fixed rates are in the low 3.00%s….  So why aren’t we feeling good about this?   Why isn’t everyone happy?   Record low interest rates means less interest cost to you… it means low housing costs…It means you are saving money.

A mortgage is the biggest debt most of us will ever have…  We all talk about mortgage rates with our friends, co-workers and family…. It’s a popular subject… But for some reason, we aren’t feeling good about these low rates…  It’s almost like we should be feeling a little guilty, like the cat that swallowed the canary… do you feel like that?

Could it be that we have been beaten to death with negative messages by the Federal Minister of Finance?   Housing Bubble coming!!!…. personal debt levels rising!!… higher interest rates coming…!!   Maple Leafs win Stanley cup (oops, had to throw that one in)… we’ve been talking about these same things for years… yet they haven’t happened!  I’m not saying these aren’t concerns but I think some of these have been overstated without providing enough proof or evidence.

The govt doesn’t want you to borrow at these rates…   They are afraid you would be too irresponsible and would borrow more than you could afford… (never mind the fact that you must qualify at BANK POSTED rates which are 2.00% higher than these wholesale mortgage rates…)

NEW STATISTICS SHOW WE ARE RESPONSIBLE AND NOT SHOWING ANY SIGNS OF TROUBLE

By the way… the strange part about all this “boy that cried wolf” noise from the govt, is that there really isn’t any proof that we are in trouble….  That’s right..  Mortgage Arrears are low and have been low for over a decade… Affordability is better than it was 20 years ago!   (low rates have helped but increases in income have also factored in)…

And how about this stat that just came out….Around 23% of Canadian mortgage borrowers have increased their regular mortgage payments by $400 to $500 per month.  19% are making lump sum payments of around $12,500 per year.   That works out to over $20billion in extra payments towards their mortgages.  Or put another way, over 1 million mortgage holders out of the estimated 5.85million mortgage holders in Canada are paying far more than the minimum payment.   Does this sound like a country of irresponsible borrowers? … (source Financial Post).

Either the govt’s message has sunk in, or there really wasn’t as big a problem as we were led to believe…. I’ll let you be the judge…

But we could be facing a ‘Made in Canada’ problem as this article states… .  With the govt planning to make the biggest changes in history with  mortgage and HELOC lending, they will be affecting a large segment of new borrowers but even more EXISTING borrowers… they will force a large percentage of Canadians to sell their homes, close their businesses or seek higher interest debt….  And why?  What purpose does it serve?  The stats tell us we are fine…

House prices are hot in Toronto but they are cold in the rest of Canada…  The govt is providing a solution to problem that doesn’t exist.

If you aren’t sure if you could benefit from today’s low rates,  or how these proposed new lending changes will affect you, give me a call or send me an email…  I’d be happy to discuss your options.

Steve Garganis

Govt to cut Secured lines of credit to 65% loan to value…

Thursday’s speech by OSFI head, Julie Dickson, at the Toronto Board of Trade, indicates it’s a done deal.  Secured lines of Credit will be capped to a maximum 65% of the value of your home.  “…the guideline does set out some firm rules that all institutions will need to adhere to – specifically that home equity lines of credit – or HELOCS – can have a loan to value ratio no greater than 65%….”

WE’RE MAKING SOME CHANGES…. I MEAN, WE ARE PROPOSING SOME CHANGES…

It was only a few weeks ago that OSFI issued a Draft B-20 guideline, a guideline that is filled with radical changes to mortgage lending rules and policies.    It was supposed to be up for discussion, with a May 1st deadline…. So much for discussion…. it appears the decision was made already according to Ms. Dickson’s speech today…. here’s a copy of that speech… April 5 2012 remarks by Julie Dickson.

90%, 80% AND NOW 65%???… WHEN DOES IT END?

Remember 2007?  It was just a few years ago that CMHC was offering 100% loan to value, interest only payment mortgages.  Back then it was good to borrow at these levels…. And HELOC’s could be had for up to 90% LTV.  Over the past few years, the govt has tightened up mortgage rules in an attempt to reduce access to credit.    Mortgages were amortized for 40 years, then cut back to 35 and now 30 years..  But now the govt believes they need to step in again and limit access to your equity by reducing the Loan to Value limit to just 65%….   I looked back to some historical lending policies and couldn’t find a time when the govt ever imposed a limit of just 65%.   It is unheard of! And it’s going to have a big effect.

SO WHAT’S THE PROBLEM?

OSFI is finding a solution to a problem that doesn’t exist.   I don’t think they realize that Banks have pushed borrowers into lines of credit for years now, as a way of providing easier access to the equity in their homes.    Canadians aren’t buying new TVs or new cars or other luxury items… they are using the equity to improve their net worth by buying investments.   Why is this a bad thing?   Are our defaults up?  NO!  Then what is the problem….?

WHO WILL THIS AFFECT AND HOW?

If you are a self-employed person and ever tried to get a business loan from the Bank, then you know how difficult it can be to get an approval… but even if you do, the repayment terms and interest costs could be a hard stop.   End result is that business idea could remain just that… an idea that never got launched.   One of the more popular alternatives was to access cheap money by borrowing, against the equity in your home.  Mortgages can be great but if you need to borrow, repay and borrow again, then a mortgage can have costly registration fees and penalties.  But through a HELOC,  the repayment terms are great and it’s also a much lower rate of interest than any business credit facility.

Borrowing to invest isn’t anything new.  A HELOC allows you to access YOUR equity at preferred rates.   How about buying a second home or a rental property?  You could use the equity in your home to help with the purchase and HELOCs give a separate accounting which makes reporting to Revcan much easier.

How about borrowing for your child’s education?   Are we going to force Canadians to refinance their mortgages in order access cheap money?   I’m sure the BIG SIX Banks will love to see you break your mortgage and pay their infamous penalties.

END RESULT

Get ready, because you are about to see us pushed into higher interest, unsecured lines of credit (oh yeah, there wasn’t any mention of reviewing these lending policies… that’s because NONE exist!).

Which debt would you pay last…. a mortgage, a secured line of credit or a credit card or unsecured line of credit?    Obviously, it’s the unsecured debts would be last on our list… we will always pay for the roof over our heads…. which is why the defaults are still very low and within very acceptable levels.

We are going to see many Canadians discouraged from investing.. they won’t want to go through the trouble of borrowing with a mortgage…  Congratulations OSFI, you’ve made borrowing more expensive….you’ve made investing for our future tougher than it has to be.

The WINNERS… the BANK…. The LOSERS… you and me, the average Canadian…!

OSFI’s latest proposals will affect every mortgage and line of credit..

Earlier this week we saw a draft guidelines proposed by Brock Kruger from  The Office of the Superintendent of Financial Institutions.  Yes, more tightening of mortgage and secured real estate lending……  To put this in plain language, the proposal will affect almost everyone… it will change how mortgages and secured lines of credit are offered….. in shorty, I think this plan is trying put out a fire that doesn’t exist.  There is no need for the changes.

Draft B-20 just goes too far…..   they target mortgages but also Home Equity Lines of Credit (HELOC).    Most of the media coverage on this has been somewhat neutral.. but finally we have seen one reporter question these proposed changes.  This article by Peter Foster in the National Post was great…   He questions why we need any more changes when our mortgage and banking system is the envy of the world….  There is no emergency, no arrears problem, nothing to indicate our mortgage lending policies are overly generous.

It should be noted that non-bank lenders will not be affected by this… leaving them as a potential winner if these guidelines become policy…

Here’s a link to the entire 18 page draft.

SUMMARY OF THE PROPOSED CHANGES:

Cash back mortgages could disappear.. currently, one could get a mortgage for 95% of the purchase price at Bank posted rates and then get a 5% cashback.  The cashback can be used as the down payment.  ( I don’t see many reasons for applicants to buy with no money down so this isn’t a big issue for me)

-homes would have to be appraised at renewal timethis is just crazy… can you imagine if your property value dropped and the bank asked you to pay down your mortgage at renewal time or even worse, call in your mortgage?  What’ s OSFI trying to do.. force everyone to take a 10 yer fixed rate mortgage?   They have already made Variable Rate mortgages harder to qualify for…. what’s the matter, they don’t want us to pay less interest?  

HELOC’s would have to be amortized meaning NO MORE INTEREST ONLY PAYMENTS...  this one will affect more households and business owners than the OSFI probably realizes… businesses use their homes to finance businesses… that’s been going on for decades… but they aren’t borrowing with no assets.. remember, they are putting up their homes as collateral.. if we start to make it even more difficult for self-employed to obtain financing, this will affect the economy almost immediately.  But how about the 2nd or 3rd time buyer in their 30’s or 40’s that wants to tap into their equity for investments… ?  Are we going to eliminate all interest only payment facilities?  

-HELOC’s maximum would be reduced from 80% to 65% loan to value of your house…. and let’s not forget that just a few years ago we could have obtained up to 90% loan to value through CMHC insured products. Again, just another crazy idea and very radical change in just a few years… where is OSFI taking us?

mortgages would require tighter debt servicing guidelines including fewer exception approvals by your lender…

Mr. Kruger, your intentions may be honorable, but you are not being practical or realistic.   Why have you introduced these proposals?   To reduce access to credit?   To make it more difficult for Canadians to tap into their home equity?   To make it tougher to buy a house?     Whatever you think these changes might do, I can tell you, as a 22 year mortgage industry veteran and industry insider, that these proposed changes will just shrink our economy, force us to take longer fixed rate products resulting in even higher mortgage penalties for the Banks…  It will force us to tap into our credit cards and unsecured, higher interest credit facilities.… It will force business owners to pay more for raising capital… it will discourage investors….

Give this one a rethink… you are searching for a solution to a problem that doesn’t exist.

Consolidate your debts and save money with today’s record low rates.

It’s December 2011, fixed mortgage rates are at historical lows…a 5 year fixed rate can be had for 3.39% and in some cases, even 3.29%.   Does it make sense to refinance your mortgage and consolidate that car loan, student loan, credit card, line of credit or other debt?   The answer is an overwhelming YES!

Compounding interest rates are a killer.  If you have $20,000 or more in non-mortgaged debt, then you should consider consolidation.   Especially with today’s record low interest rates.

Here’s an example of one situation:

 Rate  Balance  Payment
 Mortgage 3.99% $300,000 $1,349
 Car loan 6.00% $24,000 $563
 Credit Cards 18% $10,000 $300
 Line of credit 7% $10,000 $300
mortgage penalty $2,993 $0
 Totals $346,993 $2,512

And here’s what the new situation could look like after consolidating their debts:

 Rate  Balance  Payment
 Mortgage 3.39% $346,993 $1,533
 Car loan $0 $0
 Credit Cards $0 $0
 Line of credit $0 $0
mortgage penalty $0 $0
 Totals 3.39 $346,993 $1,533

So in this example, we are reducing the monthly payment by $979.00.     Let’s take some of that money and put it towards your new mortgage… if you took $500/mth and put this towards your mortgage for 5 years, you would reduce your amortization to 10 years and 7 months.   Clearly, this is worth breaking the mortgage and paying the penalty.

(keep in mind, the penalty could be higher if the lender uses an Interest Rate Differential to calculate the penalty… Always speak with your Mortgage Broker to ensure the penalty is accurate).

 

 

Canadians buy $4.9billion worth of Florida property in 2010

Here’s some interesting stats…. According to the Jacksonville Business Journal, Canadians accounted for 39% of all international buyers of property in Florida during 2010…  That’s $4.9billion worth of property purchased by Canadians. Wow, we must have a lot of snowbirds here.!  Or maybe we just have a lot of investors?   Perhaps it’s is a combination of the two.

One thing is for certain, Canadians like Florida…  It certainly has become a popular investment for many.   Who wouldn’t want a sunny getaway in Florida?  The ads are everywhere…condos starting at $30k… houses that once sold for $600k are now selling for $225k.  Clearly, Canadians see Florida as a bargain.

And maybe, just maybe, Canadians aren’t getting into debt for frivolous reasons?… Maybe we are borrowing with these record low interest rates to invest?   Maybe those stats and articles that keep telling us we should be concerned with the ‘high personal debt levels’ of Canadians, are not a true reflection of our spending habits…??

Most Canadian buyers of Florida property are obtaining loans from a Canadian bank.   Borrowing from a Florida bank isn’t easy these days.  That’s why many Canadians will refinance their homes and use the equity to buy their Florida property.

Borrowing to invest is a good thing…. this is known as ‘good debt’….but I don’t think there are any stats that show how much we are actually borrowing to invest…. sure would be nice to know those figures…

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