CategoryMortgage Tips

Posted December 17, 2012 Case study

Fed govt, BIG SIX BANK’s pushed us into Fixed rates!…part 1 of 2.

VARIABLE RATE MORTGAGES WERE THE BEST OPTION

For years, I’ve promoted the merits of Variable rate mortgages vs Fixed rates. To me, it was a no-brainer. Historical stats showed that you would save over 1.00% on your mortgage, per year, every year (some years had savings of over 3.00%!). Do the math… That works out to $1,000 to $3,000 per year for every $100,000 of mortgage.

And for years, the BIG SIX BANKS, the Bank of Canada, the Federal govt and other fear-mongers pointed out that Variable rates fluctuated and your rates would change and possibly go up…

If you were able to block out these warnings, do a little research, then you may have been lucky enough to enjoy the huge savings that Variable rates gave us over the last 15 years… Fortunately, over 80% of my clients listened to my advice and chose Variable rate. But even at the height of Variable rate popularity, just 45% of Canadians were ever in a Variable rate product at any one time. Today, it’s less than 15%.

In 2008, the U.S. sub-prime mortgage crisis hit. Financial markets were in turmoil. New Variable rate mortgages were either pulled from the shelf or were priced so high as to make them an unattractive option (prime plus 1.00% with some Banks).

BEGINNING OF THE BANKS HIGHER PROFITS

The Banks actually liked this. After all, the most profitable mortgage product is the 5 year Fixed rate. Not hard to figure out. The lower the interest rate, the less the Bank’s make. This became a great opportunity for the Banks to reduce their Variable rate exposure… And so began the great campaign to force us into 5 year fixed rate mortgages. (by the way, these inflated Variable rate prices only lasted around 6 months…we’re not back to the good old days of Prime less 0.90% but anything at Prime less 0.50% or better is worth a look….it’s worth noting for the record that I still didn’t recommend 5 year fixed rates to my clients during this time… I recommended shorter term fixed rates ranging from 6 months to 3 years and then went back to Variable rate… history has shown that this was the right strategy).

Starting in late 2008, and continuing today, Bankers would call, email or write letters to their Variable rate mortgage clients to warn against higher rates coming… and they should consider locking into a 5 year fixed rate mortgage. There were many reasons given… a bad economy… uncertainty in the financial markets… or my favorite, a special rate offer (it was special alright! Lol!!)… And the media jumped in too. TV, radio, newspapers, major news websites…how many times have you have heard the warnings about rising mortgage rates??…or record personal debt levels?? This created an even higher level of uncertainty and fear… Mr. Potter would be proud!

Think about it… The Banks were strongly recommending that Variable rate clients go from a rate of 3.25% or better, and into a 5 year fixed rate of 5.50%!!? (November 2008). And the worst part about all this is that hundreds of borrowers listened and did it… and have regretted it ever since!!! Where’s your Banker now?…

watch for part 2 of 2… FED GOVT, BIG SIX BANK’S pushed us into Fixed rates!… tomorrow!

Getting a mortgage today? Speak with a Mortgage Broker…and think twice about sticking with your BANK…. you could just save yourself $thousands.

As always, I welcome your comments and questions. Let me know if I can help.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

Posted November 9, 201211 Comments Interest rates

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

Posted October 17, 201214 Comments Money saving tips

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

Posted October 10, 20124 Comments Mortgage Products

Mortgage Life insurance… what’s this all about?

You’ve bought a house… you’re arranging the mortgage financing… and now your broker or banker starts talking about life insurance or mortgage life insurance….. sound familiar? Choosing the wrong coverage could cost you dearly.

Today, we’ll clear up some things very important but often overlooked subject.

Does anyone really enjoy talking about life insurance? I don’t, but we must understand what this product is all about…and why you shouldn’t just waive the coverage.

Life insurance and mortgages go hand in hand. After all, for most of us a mortgage is the biggest debt we’ll ever have. And if you should exit this world before that mortgage is paid off, the only thing you want to leave behind are good memories, not a big mortgage payment.

Mortgage Life Insurance or Creditor Insurance as it’s more commonly known with the finance world, is insurance that covers your mortgage balance as of the time of death. This is not my favorite insurance product but it does have it’s place and it can be used temporarily by most of us. Here are some good and bad points about the product:

THE GOOD

it’s group insurance, meaning it’s easier to qualify for as there are less questions asked.
coverage can be instant, as of the mortgage approval.
it’s good short term coverage until you get a more comprehensive analysis done. (I can’t tell you how many clients took this insurance temporarily but continue with the policy for years…. we all love to procrastinate when it comes to insurance).
for smokers or those in less than great health or poor lifestyles, this could be a good option.
this insurance can be cancelled at any time.

THE BAD

your coverage decreases as you pay the mortgage down… but your premiums remain the same.
it’s more expensive than most other forms of life insurance such as term policies.
speaking of term insurance, your coverage remains the same throughout the 10, 15 or 20 year term that you choose, making this a more enviable product.
mortgage life products are not underwritten at the time of application but only at time of death… and your claim can be denied even if you had been paying the insurance premiums for years…
your BANK loves mortgage life insurance. At renewal, when you’re 5+ years older, they will use this against you to get you to sign their renewal… meaning you may not be able to shop for the best mortgage rates! (Don’t think the BANKs don’t know this.. as a former banker, we were encouraged to use this sales tactic).

HOW TO BENEFIT

Take the mortgage life insurance, speak with your insurance advisor, get your needs reevaluated, get better coverage elsewhere if possible, then cancel the mortgage life insurance.. Yes, in other words, use mortgage life insurance as a temporary coverage…. And please get your insurance needs looked once in a while.. at least every 5 years.

If you have any comments or if you need help finding a reputable insurance advisor, call me. I’m always happy to help.

Steve Garganis

416 224 0114

steve@mortgagenow.ca

Posted August 1, 2012 Mortgage Tips

‘Stock investing is dead’, says World’s largest Bond fund manager.

For those of you that have made little or negative returns on your mutual funds and stocks, this statement might sound familiar. Bill Gross is a founder and managing director of PIMCO, They manage over $1.7trillion of securities. His latest Investment Outlook paper had some very strong statements.

He says the historic 6.6% return on the stock market is more of a ponzi scheme. And we shouldn’t expect the stock market to keep up with the real cost of living. WOW!… strong words, but coming from someone who manages more money than several countries GDP, we should pay some attention.

So if stocks and mutual funds aren’t cutting it and aren’t going to cut in the future, where do we turn? There was no clear answer given in Mr. Gross’ article. But maybe it’s time to look elsewhere… There is one investment that has proven to stand the test of time. Real Estate. Real estate doesn’t have to appreciate in value to generate a positive return…but of course, it usually does. How’s that you say? Well, let’s take a close, but simplified look.

If you bought a property for $300k and put a $60k or $70k down payment, rented the house out, and paid your mortgage off in 20 or 25 years (by the way, the average time to pay a mortgage in Canada is between 12 and 17 years), you would own a tangible asset worth $300k. And let’s not forget the rental income that just keeps being generated each and every month, year after year…. We can use any number for this but a realistic rent on a $300k property would be in the $1300 to $1600/mth range. But remember, rents go up with inflation… so we should also expect rents to increase with cost of living. And if they don’t increase, then inflation isn’t an issue…

Yes, the first 5 years or so, may not see a positive cashflow.. maybe even a negative one… but any loss could be written off against your income… and eventually, you would be in a positive position as your mortgage balance decreases.

Real estate investments scare most of us. We don’t understand what’s involved. We imagine the worst… the possible tenant from hell, that doesn’t pay for 6 months or destroys your property….or buying the money pit and having major repair bills, or mortgage rates going up making our payments unaffordable. But in reality, if you are careful with your property selection, put the time in to manage and watch your property, and are careful with tenant selection, you will be with the majority of investors that see their investment perform well… you will build equity in your property as the mortgage gets paid over time. And hopefully, the value of your property will only go up…

Maybe it’s time to invest in something we can see, touch and take care of…. instead of a piece of paper like stocks shares or mutual funds. There’s a growing number of Canadians that are fed up with the stock market and mutual funds… fed up with paying 2% management expense ratios or 6% deferred sales charges only to come out with a negative return…. How may of us have been forced into mutual funds or stocks because we’ve been told to invest into RRSPs to reduce our taxes and invest for retirement? Has that formula really worked for anyone? If you want to look at something different but certainly not new, then take a look at real estate… you may be pleasantly surprised.

If you need help with understanding mortgages and how financing an investment property works, please feel free to contact me. I’m always happy to help.

Steve Garganis