CategoryMortgage News

Posted February 24, 2011 Mortgage News

TD and RBC CEO’s income $11million each for 2010…

Are the BIG SIX Bank CEO’s that good?

It’s that time of the year again… when Bank CEO salaries have to be reported… TD’s CEO Ed Clark earned $11.3million on profits of $4.6billion in 2010, RBC’s CEO Gord Nixon pocketed $11million. Congratulations….! Staggering numbers considering that we are just coming out of (hopefully) the worst recession ever… click here for more on Bank salaries.

So what’s the problem?

There has been so much publicity about how strong our Canadian Banking system has been through this recession…. And yes, it’s true.. we have held it together very well. But was it that our Bankers were that smart or just that far behind the times??

It has been said that Canada is always 5 years behind the U.S. Ever heard that saying? Well, it’s true for many things, including Banking and Financial Services… In 2006, we saw the introduction of 30, 35 and then 40 year amortization mortgages. We also saw $0 money down mortgages….. Interest only mortgages!! 107% loan to value financing!!!

These products were beginning to gain some popularity in Canada.. but then in October 2008, the U.S. mortgage crisis hit… and all the new products were pulled from the shelf. Imagine if these products were introduced to Canada 5 years earlier…. Imagine how many of us would have been affected…. Don’t be fooled into believing that it was our Banking system that saved us…

Look, the plain truth is that we got lucky… we were a bit slow to embrace these products… and that’s really our infamous Canadian conservatism coming out… It’s got nothing to do with our Bankers being that much smarter… It’s got everything to do with you, the general public, the average Canadian, not taking to change quickly…. This is the real reason we didn’t suffer a worse fate.

How much did mortgage penalties contribute to Bank Profits?

Here’s a bit of math to play with…. Statistics tell us that on average, Canadians move or refinance their mortgage every three years…. The stats also tell us that approximately 75% of all mortgages are in a fixed rate term… I would venture to guess that probably 95% of those are in a 5 year fixed rate…. Okay, so now let’s look what the average penalty would cost you to break your mortgage…

And today, I have another example that I will share with you… it’s about a young couple that needed some help…. (I get these almost daily, by the way)….

A $250k mortgage with a 5.15% rate with 28 months til maturity… The penalty quote to break the mortgage was $11k... I gave some advice and helped to get it down to $8k... That penalty still works out to over 7 months interest. Can you say ka-ching!! The Banks have made an absolute fortune on the backs of unsuspecting Canadians….

The Govt and the Banks should tighten credit card rules

Last November, the Banks pressured the Federal Govt to tighten mortgage lending, to make it harder to take a Variable Rate Mortgage… to make it harder to refinance your debts into a mortgage…. The results are bad for Canadians.. we now have to take a 5 year fixed rate mortgage in many cases… we now have to keep our higher interest credit card debt, loans, and other debt…. Canadians are being forced to keep these higher interest debts while Banks increase their profit margins… Here’s a great article about Household Debt..

By the way, there are no rules for giving out a credit card…

Posted February 18, 2011 Case study

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 February 15, 2011 Interest rates

Bank of Canada action not always prudent or correct…

Have to share this article giving us some history on the accuracy of the Bank of Canada (BOC) interest rate forecasts… This should get you thinking a little the next time you hear the BOC forecasts…. Take a look at this Historical Rates chart.. look at the Bank Prime section… You will notice some trends of rates hikes followed by rate drops…

We aren’t saying BOC rates will fall anytime soon… it’s clear the rate will go up…. but there is no straight line increase if you look back in history… Increases are followed by decreases…

-1992.. the BOC erred and raised rates thinking the economy was strong but they quickly retreated and reversed those increases after realizing it was too much, too soon.

-1995…the Quebec referendum year… remember that? I do.. I bought a house that year… and interest rates went up 1.00% overnight after fears of a Quebec ‘YES’ vote was more than possible… but then rates dropped like a rock and remained low for several years…

-2000….another recession… the dot.com, dot.bomb error of hi-tech stock greed… rates had climbed in 1998 and 1999 but dropped in 2001 and remained low once again…

-2008…the U.S. mortgage crisis… the worst Global recession since the Great Depression of the ’30s…. we saw BOC drop the rate to a modern-day record low…Bank Prime was 2.25%…

-2010…the BOC kept it’s promise to raise rates and increased the rate by 0.75% over a 3 month span to 3.00%….

-2011…. ????? the BOC is expected to raise rates by as much as 1.00% this year, and another 1.50% next year, according to the RBC Economist…. Did the BOC raise rates too quickly? Can our economy absorb these increases? Questions that won’t be answered for a while…

It doesn’t mean you have to sit and do nothing

But this doesn’t mean you have to stand by and be a spectator. By keeping informed with historical trends and understanding your own personal situation, you can be in control…. Understand where you fit in… Is Fixed rate better for you now? Does Variable Rate still make sense for you? Can you handle the potential increases that are coming? A good Mortgage Broker can help guide you to the right answer… Remember, it’s your mortgage, your payment…your decision.

Posted January 28, 20112 Comments Consumer Debt

Personal debt level up…uhh, wait.. maybe we made a mistake?!

As you know, I have been very critical about the data that was being put out over the past few months regarding Canada’s personal debt levels.. We were being bombarded with reports and comments about our spending habits… I found it hard to believe that we could go from conservative nation to a casino nation in just a few years…

Sure, there is more debt…. Outstanding mortgage balances topped $1trillion for the first time… but we seemed to be growing at a moderate pace, year over year.. We didn’t have the 20% to 30% increases in real estate prices that we saw in 1987-89, or like our neighbors in the U.S. over the past decade. Meaning there was less chance of a housing bubble or crash.

And what about our assets….? It was hard to find any report about our net worth or assets… There was one report from Ben Tal, Senior Economist CIBC, that didn’t get much notice but we reported it here on December 3rd… here are some of those stats…

-there are 12.5million households in Canada…31% rent, 69% own..

-of the 69% that own, 39.9% have a mortgage and 28.9% have no mortgage.

-69% of homeowners with a mortgage have more than 20% equity in their homes… only 30% have less than 20% equity in their homes.

click here for the full story..

And now for the real stats

Personal debt to disposable income ratio has been reported at 148%… This figure has been recycled more than that gift bag from the wine store you received at Christmas…. and just like that gift bag that gets passed around from friend to friend, it comes with a different bottle… or in this case, different figures and opinions.

Let see how you like this vintage…. Some new reports just came out that should ease our concern about our personal debt levels and average net worth. “Average household net worth has risen to an impressive six times the size of disposable income, up from an average of five times in the 1990s.” That’s a quote from BMO’s Senior Economist, Sal Guatieri… read more here.

What’s this? You mean Canadians are actually investing their money and not spending it frivolously like the Federal Govt has been telling us for the past several months?

It gets better…

Here’s a little more info from CIBC Bank.. Those figures had to do with the personal tax refunds we were getting last year because of the stimulus packages…. “Household debt in the third quarter grew at the slowest pace in nine years, while in the last month for which there is data — October 2010 — it was the softest in 15 years.” read more here.

That’s right, WE ARE SPENDING LESS AND OUR ASSETS ARE GROWING FASTER THAN IN THE 1990’s. … But how can this be? The Federal Govt has been telling us that our personal debt levels are at dangerous levels… and they had to change mortgage rules to slow our spending habits….. Any of this make sense to you?

Here’s an article from Ellen Roseman from The Star that says Canada’s Stock Market has outperformed the U.S. markets for the past 7 years… and we are poised to outperform them for the next 10 years….

Feel good about yourself Canada….. Keep investing… keep borrowing and spending wisely….

Posted January 25, 20112 Comments Consumer Debt

January credit card offers, new mortgage rules and Canadians buying U.S. real estate…

There’s been lots of reaction to the latest round of Mortgage rule changes… it’s been just over a week since the changes were announced and I’ve had some time to digest these changes but something just isn’t making sense.

At the same time, my December credit card bills have started to come in…..and because it’s January, I’m also getting those preapproved credit card offers…. I can even skip a payment with some of my credit cards… Isn’t that convenient?

This made me wonder….I decided to ask some simple questions like, “who will be affected?”… and “who will benefit?”. Here’s what I have come up with…

First, here’s what a few Experts think…

Jim Murhpy, President of Canadian Association of Accredited Mortgage Professionals, says ‘Debt Fears are overblown’…. and here are the stats to back it up. One stat that really stood out for me was that 79% of Canadians are in a 5 year fixed rate mortgage… that means 79% of Canadians are not at risk of interest rate hikes…

(as an aside, I still like Variable rate mortgages with their low interest rates and the historical data that clearly shows Variable outperforming Fixed rate….but if the govt wants us to be ‘safe and secure’ in our mortgage, then this stat should make the govt feel more comfortable)….

On January 10th, 2011, Bank of Canada’s own Deputy Governor, Agatha Cote, said that debt growth in Canada was slowing… So hold on here….On the one hand, we are spending like kids in a candy shop.. but on the other hand, our spending has slowed…. Mixed message? … So what’s really going on?

I’m going to change the subject for a minute…. but read on as you will see this is all related….

Canadians are buying U.S. real estate like never before

There was another great article last week that showed Canadians are the largest foreign buyers of real estate in the U.S. accounting for 23% of all purchases? WOW! And in border towns like Ellicottville, New York, a local real estate broker said Canadians accounted for 50% of sales…. read more here.

These stats and buying patterns are showing me something… Our mortgage arrears are below 1.00%… this is an unbelievably low number.. Click here to see what our U.S. neighbors are saying….. Hmmm, maybe we are borrowing wisely? Maybe we are borrowing to invest? Isn’t this a good way to spend our money?

If the govt wants to slow personal debt levels, then why not impose qualifying rules on borrowing unsecured lines of credits, credit cards and loans? After all, mortgage balances are around $1trillion… but Credit card purchases totaled $260billion...! Remember this number.

Who is really affected by the new Mortgage Rules?

Simply put, there are 3 new Mortgage rule changes:

1- Amortization maximum is 30 years, down from 35 years and down from 40 years in 2008. 2- Refinances will be reduced to 85% loan to value, down from 90% and down from 95% just 2 years ago. 3- Secured lines of Credit will no longer be insured, meaning the maximum is 80% loan to value.

1- 30 year Amortization.… First time home buyers, Self-employed, contract employees are just some of the people that will be affected.. More Canadians are becoming self-employed or are on contract employment… This group of individuals doesn’t get a steady pay cheque… I would always recommend that this group take the longest amortization possible….Not to have a mortgage forever, but to ensure they have options and flexibility during times of uncertain income… I would also recommend they set their payments based on a 25 year amortization or shorter… The longer amortization just means you could always reduce your payment to the lowest possible amount if and when needed.

This change will also make it a little harder for some Canadians to qualify for a mortgage… If you think this is good you need to remember last year, the government changed the rules that made it mandatory for all mortgages with less than 20% down to qualify at the Bank POSTED 5 year fixed rate (if you were considering a shorter term or a Variable Rate mortgage). Many Banks are using this policy even if you have more than 20% down payment. In effect, many of us are being forced into a 5 year fixed rate mortgage…. and which product do banks make the most profit on? You guessed it… 5 year fixed rate mortgages…. read here for a little more insight.

Rental property Investors will also be affected. Let’s face it, company pension plans are a thing of the past for most of us… (sometimes I wish I had a government job)… So what’s someone without a company pension supposed to do? RRSP you say? Well, if your RRSP is anything like mine, then you are better off going to the racetrack or Las Vegas …. At least you’ll have a good time spending it. Real estate has been a proven winner over the last 10, 20, 40, 100, 300 years and probably longer…. The rents are usually indexed with cost of living and over time, the mortgage is eliminated giving you income and an appreciating asset. Last year, the govt got out of lending on rental properties with less than 20% down… It’s now a little harder to buy that investment property…

2- Refinances to 85% loan to value… Just one year ago, we were able to refinance our homes up to 95%… This options was not used by many… Then it was reduced to 90%… now it’s 85%… This won’t affect many of us but it will affect some.. Most people refinancing up to 85% or 90% were doing so to consolidate higher interest debt or to cover some emergency expense. How is this helping to lower our personal debt levels? This move will just force us to carry and borrow with those higher interest rate products… (are seeing a pattern here?)

3- Secured lines of Credit or Home Equity Lines of Credit (Heloc) are no longer available over 80%… This change really doesn’t affect many of us as most lenders stopped offering this product long ago and even when it was being offered, the costs were prohibitive. This is a non-event.

Who will benefit from these new Mortgage rules?

So who really benefits from making it harder to qualify for a mortgage? The answer is simple… Canadians will be forced to carry more debt on their credit cards, unsecured lines of credit and other high interest rate products… There are NO rule changes or policies in place for these products… Don’t forget, credit card purchases totaled around $260billion last year…. In case you’re wondering, the total outstanding mortgage balances in Canada is around $1trillion.

The new rules won’t slow the credit seeker from getting another credit card and buying that new surround sound stero or hot tub or new car, etc..

So why did the government choose to make even further changes to mortgage rules? The answers are obvious to me but I will let you decide.