CategoryMortgage Trends

Posted December 2, 2012 Case study

Giving up the Bank Kool-aid.

Recently, 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

Posted November 6, 20124 Comments Case study

Baby Boomers 10 yr real estate retirement plan

Last week, I was asked to comment on BMO’s Retirement Report which pointed out that more Canadian Baby Boomers are using their home as their retirement fund. The BMO study shows the baby boomer generation were not downsizing like many experts were thinking. But instead, they are buying bigger, more expensive homes. The thinking is that the higher priced homes will grow their retirement fund more quickly and more securely.

Several Financial Experts commented on this study…. mostly offering negative reviews about this retirement strategy….. including BMO… you know, eggs in one basket, diversification, that sort of thing… there is merit in the statements but I really don’t agree with the negative spin….. Here’s a link to my quotes about the “10 year plan” in The Star.

The 10 year plan has grown in popularity over the last 5 years as we’ve seen the value of our RRSPs or other investment drop in value. It’s capitalizing on real estate values going up over the long-term. It’s really simple to understand….

THE 10 YEAR RETIREMENT PLAN

Here’s an example of what one couple did….Let’s say you’re between the ages of 35 and 55.

You own a home worth $500k.
You have a $300k mortgage., but you can afford to buy a $700k home.
Your new mortgage is $500k.
You are committed to keeping that home for 10 years….and you can afford the payments..
In that 10 years, the goal is to pay down your mortgage by at least half, if not more. (a realistic goal considering the average Canadian pays off their home in 12 to 17 years).
if your home goes up by 5% each year, on average (and this is probably a realistic number looking back at historical values), then your home should be worth $1.14million.
the 10 year timeframe is critical… we want to give enough time to live through any up or down real estate market…

Using the example above, in 1o years you should have a mortgage of $350k or less and house worth $1.14millon… that’s $790,000 of equity in your home. Oh, and it’s all Capital Gains Tax Free….

Does it sound too easy or too good to be true? It’s really not… take any 10 year period in history… work out your own stats… This is reality…

By the way, the couple I’m referring to are real… they are actual clients of mine. They bought their home in 2007 for $850k… They have paid down their mortgage to $300k…this is way ahead of schedule…(the low interest rates have helped)…. The value of their home today is approximately $1.5million. They have $1.2million in equity today. They estimate the home will be worth $2million in 5 years… but even if it isn’t, even if the property is only worth $1.2million 5 years from now, I’d say they’ve done pretty well, wouldn’t you agree?

And for those that prefer stocks and bonds, then stick with those investments… There isn’t one good strategy… This plan is less exciting and probably a little boring… but I like boring when it comes to my money and my retirement…

This plan isn’t for everyone. You need to be comfortable with debt and understand real estate…. and you need to commit to owning real estate for 10 yrs (it doesn’t have to be the same house.. you can move)…

If you need help with this plan or just want more info to help understand it, give me a call anytime.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

Posted September 25, 20121 Comment Mortgage Rates

Listings down, prices up…. housing bubble?

Latest housing stats show listings are down, sales are down… but prices are up, only slightly…. and houses aren’t on the market as long. They are selling faster. Doesn’t sound like a bubble to me. More like a soft landing.

This is exactly what the govt had in mind when it changed mortgage rules a few months ago and made it tougher to qualify for a mortgage. It’s still too early to say if these changes are just right or went too far….. We’ll need another 6 months or so to see the full effect. Best guesses are that the housing market could slow by 5%. But I haven’t seen that happen… In the Greater Toronto area, we are still seeing multiple offers and sales go above asking price…. The interesting stat for me is the fewer number of sales… We’ll be watching that stat… fewer sales over an extended period of time will stop any price increases…

This also means we should expect interest rates to remain low. The Bank of Canada will be under less pressure to raise rates with a flat housing market. Throw in the U.S. Fed’s announcement last week that they were going to keep rates the same until 2014-15, and we have the perfect setting for low rates.

RECORD LOW INTEREST ARE STILL HERE…. WHY AREN’T WE TALKING ABOUT THIS?

Speaking of low interest rates… Here’s some advice… before you put your plans to buy on hold, you should remember that we are still enjoying historically low interest rates. 5 year fixed rates at 3.09%… Variable rates at 2.65%..!! This is a fact that so many of us tend to ignore…. maybe it’s just too boring to talk about. I’ll make it more exciting…

A $400k mortgage will carry for $1912/mth based on today’s 3.09% 5 yr fixed rate…….Wanna wait for house prices to fall and save some money? Ok, but you should also expect interest rates to rise… lower house prices are caused by higher interest rates and higher unemployment… We don’t expect higher unemployment so we must attribute any house price drop to a rise in interest rates……a look back at the last housing crash in 1989 showed interest rates went up to 11% and 12% just before the crash….. make sense so far?

This is where so many of us stop thinking or analyzing…Cashflow and affordability are probably just as important or more important than rate, mortgage balance, purchase price, etc… if you aren’t comfortable with the payment, you will run into problems…. By the way, affordability is still VERY good according the RBC affordability index.

REAL MORTGAGE MATH SHOWS TRUE COST OF WAITING TO BUY

Let’s continue….Let’s say rates go to more normal levels… we’ll use 5% interest rates.. That same $400k mortgage will cost you $2326/mth.…. and if you wanna adjust the mortgage size by $40k because house prices should fall 10%, okay… a $360k mortgage at 5% will cost you $2094/mth... That’s still $182/mth more… and let’s also not forget, that you may have lost 1, 2, 3 or more years of not paying a mortgage down…. Did you know you will pay your mortgage down by around $10k per year in the first 3 yrs alone?

Real Estate isn’t always a great investment, but it usually makes more sense to buy, hold and enjoy, than it does not to buy and rent…. And with interest rates at record lows, it’s even easier to make that recommendation. Stop listening to the pessimist that say the sky is falling or the world is ending… If we listened to them, we would be renting for the last 10+ years… for that’s how long they have been saying house prices are inflated and need to drop…..

As always, if you aren’t sure where you fit in or what’s best for you, feel free to contact me to discuss… Your questions and comments are welcome.

Steve Garganis

steve@mortgagenow.ca

416 224 0114

Posted September 19, 2012 Mortgage News

Mortgage Broker vs. Mortgage Specialist

Getting calls on this topic once again so I thought I’d clear the air on this very important topic. So what’s difference? They both arrange mortgages…. and both can offer advice and product select, right? WRONG!!!. The differences are a plenty….I’ll cover the more relevant ones here.

I’ll start with the a quote from a recent Bank of Canada study that tells the story very clearly: “… borrowers who use a mortgage broker pay less, on average, than borrowers who negotiate with lenders directly.” click here for the entire study.

I can probably stop writing after that statement but I wanted to point out a few more things:

A Specialist works for one Bank or a single Lender. They are employees of the Bank or Lender. They can only offer you one brand of products.
A Broker is independent. They are not employees of any Bank or Lender. They can offer products from several different Lenders.
More Lenders competing for your business means betters terms and rates.
A Specialist isn’t required to be licensed to arrange mortgages. There are no standards for educational requirements (although most Lenders do provide some in-house training).
A Broker must successfully complete a Provincially regulated Broker course and continue to maintain their good status to keep that license.
A Broker can provide unbiased advice. They work for you, the borrower.

Look, you wouldn’t ask Burger King who makes the best burgers and expect them to say Harvey’s? So why would you ask a Bank Mortgage Specialist to tell you which Lender has the best mortgage product for you? Enough said.

Banks and Lenders are great suppliers of money, but they can’t give unbiased advice. They can only offer you their products…and they will try to charge the highest rate possible… but that’s okay. They are a business. And they will always try to maximize the profit for their employer, the Bank.

If you would like to compare mortgage products and rates, call your Mortgage Broker.

Don’t have one?, then call me. I’d be happy to help.

Steve Garganis

416 224 0114

Posted September 13, 2012 Mortgage News

HELOC’s capped at 65% but some exceptions still apply..

Earlier this month marked the beginning of the end of 80% loan to value HELOCs. Several Banks and of the Financial Institutions began to cut back the maximum LTV from 80% to 65% as per OSFI’s regulations. But there are a few loopholes in the new rules….

The good news is that existing HELOC clients don’t have to worry.. these changes don’t apply to them. OSFI is allowing them to keep their HELOCs at 80%….
Only OSFI regulated Financial Institutions are affected… Provincially regulated FI’s aren’t affected… Credit Unions don’t fall under OSFI’s rule… there are still some Credit Unions offering HELOCs to 75% and even 80% loan to value.
Some of the Banks are still offering a combination of a HELOC and a mortgage of up to 80% ltv as long at you have at least 15% of your balance in an amortized payment schedule, and not interest only payments.

There is more good news… The BIG SIX BANKS can’t offer you an 80% LTV HELOC but the credit unions can… Maybe Canadians will start to seek other Lenders……They may finally discover that there much better options out there. Watch for the Credit Unions to take a chunk out of the BIG SIX BANK mortgage pie.

Not sure where you fit in? Call me for details.

Steve Garganis

416 224 0114