CategoryMortgage Products

Posted July 26, 2012 Interest rates

2.89% 5yr fixed rates are available… but are those offers legit…?

You’ve heard the saying, “there are no free lunches”…. or “if it sounds too good to be true, it usually is”.… I’m not sure how these sayings got started but they probably came from a bad experience… My favorite is, “the problem with things that are free, is that they cost too much”.… These sayings can be applied to most things in life… including your mortgage.

Recently, I’ve seen a growing number of websites and radio ads offering these so-called “great mortgage products” at 2.99% and now 2.89% for 5 yrs… A number of readers have asked me if these offers are legit? Here’s what I tell them…. Hope you find this useful…

In short, the rates are real but the product offerings come with too many strings attached for my liking….. things like the rates are for CMHC insured mortgages only… or the rates are only held for 30 or 60 days….you can’t pay the mortgage off for the first 3 years…. limited prepayment privileges…..prepayment penalties are far higher than other mortgages….you lose your ability to negotiate a rate if you have to refinance the mortgage.

These product have, and can, end up costing you more in the end. This is why you won’t see me promoting or advertising these rates.

A CLOSER LOOK AT WHAT THESE PRODUCTS ARE ABOUT

In trying to capture market share, some Lenders have created products with slightly lower rates… Ok, I like that part of it…. BUT, they come with inferior terms and restrictions…… and this is where you could end up paying big time, on the back-end of these mortgages. You’ve seen my previous articles about $20k, $25k, and $30k in mortgage penalties….. This is what makes these products and other NO FRILLS mortgages a bad option…and why I refuse to endorse them.

Let’s face it, the first thing most of us look at is the price… If I said you can buy and iPad for $200, or a 65″ Plasma TV for $500, you would keep listening… In the case of mortgages, we look at rate… 2.89%…. But hopefully, you keep asking questions. 9 times out of 10, you would probably find out there is a catch….. Maybe you have to buy something else, or the make and model is older or of a very poor quality, or the sale was only for a limited time, or it’s a refurbished model, etc…. You get the picture…

In most cases, those offers are just bogus. The headlines are there to catch our attention… They want to entice you…to get you in the front door or to make that phone call, or to click that link on your computer….The seller is hoping that either 1 out of 10 will not ask too many questions and take the product… or they will shift you into another product… The old bait and switch…. That’s how most of this type of advertising works. It’s a numbers game…

And it isn’t any different with mortgages. But the problem with mortgages is that we are talking about a very complex financial product. A mortgage is a loan agreement, a legal contract that will bind you for 5 years, in most cases. The loan is secured by your house. Think about that… You are putting up your home as security… you better understand all the terms, obligations, limitations, restrictions, privileges….. most importantly, look at how much it will cost you to exit this product.

Here’s where I have a BIG problem with these flashy ads…. in most cases, the borrower doesn’t even know what questions to ask… They can’t get all the required info in order to make an informed decision. We saw a great example of this earlier this year when BMO offered their 2.99% NO FRILLS mortgage… only, they didn’t market it that way… they called it a Low-rate mortgage… Quite a play on words. They made it sound like they were doing us a favour by pushing people into these mortgages… but as my readers know, the limitations to this product can and will prove costly for a large number of borrowers…. which is why I gave that product a huge thumbs down.

For those seeking my opinion and advice, I suggest you take a good hard look at these offers…. ask questions…. you’ll probably end up being part of the “9 out of 10 group” that asked too many questions and saved themselves from a mortgage disaster.

Should you need my help or advice, feel free to contact me anytime. steve@mortgagenow.ca or 416 224 0114.

Steve

Posted June 2, 20121 Comment Fun news

More dumb Bank ads.. but they won’t fool us.

Are you watching the Stanley Cup playoffs? Year of the underdogs… I’m a huge hockey fan and although my favorite teams are out of it, I’m still watching… and I’m still willing to put up with the commercials… but some of these ads are rubbing me the wrong way.

Like most TV ads, the truth can be exaggerated… Take the Old Spice commercial… “I will have big muscles and cool hair”…. have you seen that one? My son loves it… makes me laugh too….

But when we’re dealing with something more important, like your money and your mortgage, the truth shouldn’t be cryptic…. The ‘BIG SIX BANK’ ads, bother me… I’ll explain.

A few years ago, during the Olympics, RBC hit us with a commercial that showed a young couple searching for homes.. Their RBC mortgage rep recommended they split their mortgage “part variable and part fixed… to save money.” Remember that one? click here to view it. I strongly criticized this product and the so-called advice because it didn’t make sense to break up the mortgage…. Fast forward to today…. My criticism was well justified….Anyone that listened to my warnings would have saved money… Anyone that took this RBC product lost out… Clearly, that was NOT the right product to ‘save money’.

This year it’s BMO….We can’t seem to escape these ads. How does it go again? .. A young couple are shopping for a home, walk through the bedroom and into the closet, when they magically appear in the BMO BLUE ROOM with a BMO Banker…

They want to pay their mortgage faster… Have no fear, the BMO Banker is here to the rescue with their pearls of wisdom… The Banker says, “we can help…by restructuring your payments and getting you into a low-rate fixed mortgage, you’ll pay your mortgage off sooner“… Wow! That’s GREAT!! The young couple are excited… Cue the music!!

Now let’s decode this cryptic message… ‘restructuring your payment’…. What could the Banker possibly mean? No mystery folks… It means you must increase your payments. Yes, that’s all it means…There is only one way to pay your mortgage faster…. increase your payments or make at least one lump sum payment annually… click to here to read about the bi-weekly payment myth.

The Banker continues and says ‘…..getting you into a low-rate fixed mortgage, you’ll pay your mortgage off sooner’. This must be some magical product… it sounds great…! Uh, no.. guess again. Let me give you the straight goods…… BMO refers to their NO FRILLS mortgage as their ‘low-rate mortgage’. That’s quite misleading if you ask me. So once again I am issuing a STRONG WARNING. For the record, this is probably the worst mortgage product you could ever take, in my opinion. It’s just slick marketing…

You can’t pay the mortgage out for 5 years, without selling your home…..meaning you can only refinance with BMO but there is no obligation for BMO to give you the any future discount, let alone the best discount…..you have limited prepayment options…… and let’s not forget, the infamous BIG SIX Bank penalty calculation….we’ve seen how this one has cost borrowers $20k, $30k and even $40k in penalties!.. click here to read more about how BIG SIX Banks calculate penalties.

The Banks have deep pockets and spend hundreds of $$millions on ads… It’s up to the little guys, like me, to tell it like it is… Hey, I won’t promise you good looks and cool hair, but I can promise you to tell it like I see it… There are better mortgages available… Better terms, rates, privileges and options and ultimately, these better options will SAVE you money on your mortgage. That’s our goal… to pay the least amount of money to own our homes. Don’t get fooled by a flashy low rate… Rate is important but it isn’t everything. These aren’t opinions, these are facts. Just do some research or speak with an unbiased professional. Speak with a Mortgage Broker.

As always, let me know if I can help… and feel free to send this article to someone you think could benefit from it…

Steve Garganis

steve@mortgagenow.ca

416 224 0114

Posted April 7, 2012 Consumer Debt

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…!

Posted March 30, 2012 Interest rates

Mortgage wars end?…only for the BIG SIX Banks…

March 29th, 2012 is going to be remembered as the day when the BIG SIX Banks ended their Mortgage War. Well, at least for now. Rates are up around 0.50% at Retail Branches of the BIG SIX Banks. (don’t worry, Mortgage Broker rates haven’t gone up that much and are lower than any of the so-called discounted or special rates advertised by the BIG SIX Banks.)

In what was an unprecedented, public fight for your mortgage, the BIG SIX Banks pulled down their pants and showed how low they can really go with their rates. We saw BMO come out with their 2.99% NO FRILLS mortgage… ( a product we wouldn’t recommend to anyone due to it’s restrictions, limitations and penalty calculations). Unfortunately, too many borrowers don’t look beyond the rate and have signed on for this product.. They will have to deal with the consequences in the years to come.

RBC fired back with a pretty good rate of 2.99% for 4 years… It didn’t have the restrictions or limitations but it still had that unfair penalty calculation. RBC also took some public shots at the BMO product, through the media and their own website. It was great to see some real competition take place among our BIG BANKS. There is always a winner in this war. You the borrower.

TD, Scotiabank, National Bank and CIBC all followed with a similar 4 year fixed rate at 2.99%. But they still had that same penalty calculation formula I absolutely don’t like.

“Canadian lenders appear to be extremely slow to pass on changes in the Bank Rate to their customers.” Anyone remember that quote? That’s a direct quote from the Bank of Canada review entitled ‘Competition in the Canadian Mortgage Market’.

Here’s another one from the same report “borrowers who use a mortgage broker pay less, on average, than borrowers who negotiate with lenders directly”.

The good news about all this rate war stuff is that we saw even better mortgage products being offered through the Mortgage Broker channel. Remember these quotes the next time you are shopping for a mortgage.

Posted March 23, 2012 Interest rates

The Star reports BMO suggests it’s time to lock into fixed rates…. well, maybe..

I had a discussion with The Toronto Star’s Susan Pigg about Fixed and Variable rates. Click here to read my comments in this article.

In short, BMO Captial Markets says it’s time to lock into a Fixed rate…. Well maybe, but I would caution anyone that had a BMO variable rate mortgage to think twice about locking into BMO’s well publicized 2.99% 5 year NO FRILLS mortgage. This product has limitations and restrictions that make it impossible to get out of the mortgage without selling your home. There are better options out there… you can get a great rate without sacrificing your options and privileges.

You also have to factor in the infamous BIG SIX BANK penalty calculation. We’ve written about this before. This could cost you dearly should you wish to refinance or have to pay the mortgage out before maturity. We have seen numerous cases of Bank prepayment penalties adding up to 12, 14, 18 and 20 months worth on interest. That’s right, 20 months worth of interest. Don’t get held hostage by your mortgage provider.

If you have a Variable Rate mortgage that is price at Prime less 0.50% or lower, I would stick with it… If you are higher than this or if you mortgage is coming up for renewal, then you should consider a Fixed Rate mortgage… And the only reason to consider Fixed rates is because they are priced so close to what a Variable rate could be had for today… Best Variable is around Prime less 0.25%… that’s 2.75%. Best 5 yr Fixed with ALL FRILLS is around 3.19%…

But before you make any decision, please speak with an unbiased advisor, like a mortgage broker…. Find out which product is right for you… Everyone is different and we all have different needs. There are so many unadvertised specials these days…. Your Mortgage Broker can access these products and also help explain the differences in penalty calculations and why this should be looked at more closely, even it you don’t think penalties apply to you…