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CategoryMoney saving tips

Giving up the Bank Kool-aid.

Big six banksRecently, 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

O’Leary only wants Fixed rate mortgages…really?

CBC News did a report about Renting vs. Buying, earlier this week.. And it featured Kevin O’Leary and Amanda Lang, two well-known TV personalities….Ok, we covered Rent vs. Own in great detail just a few months ago…  And I also talked about using your home as a retirement fund, earlier this week in my Baby Boomer 10 year retirement plan article.. But this isn’t what I want to talk about…  I want to talk about some comments O’Leary made about Fixed Rates, during that report.

UNPOPULAR COMMENTS AGAINST O’LEARY

I’m taking a chance by speaking out against Kevin O’Leary.   But I must speak up regarding something as important as this…   So here it goes…

O’Leary is starting a new mortgage company….Congrats!  I’m sure he’ll do well.    He said his company would ONLY offer Fixed rate mortgages because Mr. O’Leary doesn’t believe ANYONE should be in a Variable Rate mortgage…. he went on to say that because Fixed Rates are so low, you would have to be insane to stay in a Variable Rate…Hmm.. well, if you are one of my clients then you know how absurd this statement is…

2008-09 MORTGAGE HISTORY LESSONS

Over 80% of my clients are, or have been in a Variable rate mortgage… Most of them enjoyed rates of Prime less 0.75% or better… some even had Prime less 0.90%..and for a while, they enjoyed rates as low at 1.35%!!!  During the 2008-09 recession, we were inundated with TV and Media personalities telling us to lock into a 5 year Fixed rate mortgage because of the sub-prime mortgage crisis and stock market crash…  You remember that?  I do… and I recommended clients do the opposite..  take short-term mortgages until the dust settled on interest rates…  This WAS NOT the popular advice…  It was panic time…. but that’s when you need to remain calm and review the facts…

Fortunately, most of my clients didn’t listen to the media and followed my advice.   I recommended several different products… 6 months, 1 year, 2 year, 3 year and even the short-lived 3 yr Variable rate… In ALL cases, it was the right product choice…. It was the best option at the time for that particular client…My clients have saved $$thousands each and every year through my advice!

(historical fact… Variable rate mortgages have been a cheaper way to finance your home in over 88% of time…Professor Milevsky study.) 

TODAY’S STRATEGY

Unfortunately, new Variable rate products aren’t priced as well today…. This is probably that other 12% of the time….And although I am not recommending Variable rates today for most borrowers, it still might be the right product for some…  To say everyone should get out of their Variable rate is just bad advice!  The GOAL IS TO PAY THE LEAST AMOUNT OF MONEY TO OWN OUR HOMES!

My criteria for choosing Fixed over Variable depends on many factors but here are 3 things I pay close attention to:

1-Variable rate pricing not as attractive.. the best Variable rate today is Prime less 0.35% (3.00% less 0.35% = 2.65%)…..

2-Fixed rates are at historical lows (just over 3.00%).

3-the spread between 5 yr Fixed and Variable should be over 1.00%…today it’s less than 0.50%.

Add all of this up and it’s an easy choice today….I cannot recommend Variable Rate for most NEW mortgages….

THIS DOESN’T MEAN YOU SHOULD GET OUT OF YOUR VARIABLE RATE!!!

If you have a Variable rate of Prime less 0.75%, I would stick with that… that’s 2.25%…  why start paying over 3.00%?   There is no forecast for immediate rate increases…   And this is where I am very concerned…. We have a very well known TV personality that comes out and says everyone should lock into a Fixed Rate mortgage…. I’m sure the BANKS would love to see you out of a 2.25% mortgage and into a 3.00%+ rate.   I completely disagree with O’Leary.    There is no ‘One size fits all’ mortgage.   Everyone is different and has different needs…   I’d be very careful about listening to anyone that wants to pigeon-hole all Canadians.

BEWARE THE TV EXPERTS…  Just a final note….  How many times have you heard ‘Rates are going up soon’ in the last 4 years.?  You must lock into a Fixed Rate…    I hear it everyday…. and if my clients listened to these ‘Experts’ they would have been out of their Prime less 0.75% Variable rate and into a 4.00%, 5.00% or even 6.00% fixed rate mortgage!   Those that have listened to the facts have done extremely well.   There isn’t a crystal ball… it’s not magic, it’s simply viewing the mortgage landscape, current economic trends, monitoring inflation rates and paying attention to govt and policy makers… I really don’t watch the news or listen to any media or TV personalities.   I just look at the facts and present them here.

As always, if you have any comments or questions or would like to know what strategy is best for you, give your mortgage broker a call.. or call me if you don’t have a broker.  I’d be happy to help.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

 

Bridge Loans…your bank hates them but they can be a great financial tool when buying….

Bridge loans are short-term loans that bridge the gap between two different closing dates.  More commonly used when an existing homeowner sells their home, and buys another home, with two different closing dates.   But bridge loans have become a very popular way to take possession of that new home while it’s empty for 2 or 3 weeks to allow for renos.   Best of all, it’s really inexpensive!

In the past, most homebuyers would have their selling and buying dates match.   It’s always been a bit of a juggling act as you have to pack your moving truck and unpack it, all in less than a day.   Somehow, everyone manages to get it done… but you talk about one of the most stressful days in your life….moving ranks right up there!   Throw in some kids, maybe a dog, and a house full of stuff and you have a real chore on your hands….

More buyers are taking a more relaxed approach.   Bridge Loans are gaining in popularity.. It allows for a more relaxed move over a 2 or 3 day period… or in the case of renos, maybe 2 or 3 weeks.    It’s certainly less stressful and could even save you money if you are doing a bigger reno…(contractors could end up charging you a little more if they have to deal with a family living in the house during renos).

Let’s take a look at one example on how much Bridge Financing works and what it costs…

In this example we’ll use a couple that sold for $400k.   Closing is November 1.   There is an existing mortgage of $250k.    They bought another house for $600k.   Closing is November 22.  They will spend $50k in renos for a new kitchen and bathroom.   They want a $450k mortgage to cover renos, closing costs and take out some money for personal use.   Here’s how the Bridge loan works:

  • Bridge loan amount would be $150k… we calculate this by taking the Purchase price ($600k) less the new mortgage amount ($450k).
  • Rate of interest will vary but it’s around Prime plus 2.00% (today’s prime rate is 3.00%).
  • Lender admin fees range from $250 to $500.
  • Legal fees vary depending on Lender and Lawyer… $200 to $400.
  • Interest costs are $20.55 per day.  Total interest would be $287.70.
  • Overall total cost of the Bridge Loan would be between $737 and $1200 depending on your lawyer’s legal fees and Lender admin fees.

Some qualification, limitations and risks when getting a Bridge Loan.

  • Bridge Loans are only offered by the mortgage provider for your new home.  It’s a product most Banks don’t like to offer as there is really no profit for them.  They get nervous about the possibility of your existing home not closing.   There is some exposure and risk to the Bank… it’s limited but it’s there.
  • Your lawyer will be required to provide an undertaking to register a mortgage if the sale of your existing home collapses (that’s not a common occurrence but it can happen).
  • Speaking of sales… you must have entered into a firm sale on your current home to qualify for a Bridge Loan.
  • Lenders will only offer a Bridge Loan equal to the down payment required for your new home.  This amount cannot be greater than the equity remaining in your current home.
  • There is also the option of obtaining Private Lender bridge financing but this is more expensive and should only be considered as a last alternative.

Standing back and looking at the big picture, I think most of us would be happy to pay $700 to $2,000 for sake of being able to have an empty house for 2 to 4 weeks to do a clean up or reno, etc.

If you need more info on how Bridge loans work or need help with a situation, call me anytime.  Always happy to help.

Steve Garganis

steve@mortgagenow.ca

416 224 0114

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

Scotiabank to buy ING….how will this affect you?

Earlier this month, ING Groep, the Dutch financial services giant, announced they were looking to sell their Canadian and UK operations in order to raise cash.   ING received a $10billion euro bailout from the Dutch govt during the 2008 Financial crisis and they want to start paying it back.

It didn’t take long to find a buyer for the Canadian operations.  Scotiabank will buy the Canadian division of ING for around $3billion.   The press release hinted at some good news for the Canadian public.  Scotiabank will continue to run ING as a separate entity.  For mortgage clients, this is mainly good news…. but we do have some concerns… Continue reading “Scotiabank to buy ING….how will this affect you?”

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