Mortgage cost today is $1380/mth for every $300k… and sharing high net worth secrets.

percentageFixed mortgage rates went up this week on the wholesale market.   Only about a 0.10% increase…  We are still way below 3.00% for 5 yr fixed rates. Hey, that’s pretty good!  (watch for the media to blow it out of proportion soon.. they seem to love feeding on negativity).

Thought I’d share some quick numbers..    Did you know that a $300k mortgage will still carry for $1380/mth?   And that’s with a 25 yr amortization.  If we go to a 30 year amort, the payment drops to $1221/mth.

Let’s increase the mortgage to $400k.. payments are $1840/mth and $1628/mth for a 25 and 30 year amortization, respectively.   Hey, these are still incredibly low mortgage rates.   Anything under 4.00% should be considered a gift.  (I’ll get into what Canada’s wealthy are doing in a few moments) Read the rest of this entry »

Mortgage rates hit all-time lows….it all adds up to record savings too.

graph trend downMortgage rates are still low… In fact, they are at record lows…  5 year fixed rates for qualify products can be found at 2.89%… some No Frills products are at 2.79% (stay away from these products)..   Put another way, for every $100,000 of mortgage you borrower, your payment is $468/mth.

Compare this with the average 5 year fixed rate for the past 25 years being over 7.00% and you have huge potential savings.  That same $100,000 mortgage would cost you $700/mth… That’s a $232/mth difference.  No wonder more Canadians are buying homes, buying rental properties or tapping into their equity to invest. Read the rest of this entry »

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…!

When opportunity knocks…open the door.

It’s March, 2012.   How will you look back at this month in 5 years time?    There are certain dates in history that stand out for all of us.   Some are more personal than others, like the birth of my son, the day I met my wife, my first trip overseas, NHL pro hockey camp, etc.

And then there are dates where I look back at missed opportunities.

-October 1984, I had a chance to buy a waterfront lot on Balsam Lake in Ontario’s cottage country, for $22,000…. now selling for $400,000.   There was a new condo in east Toronto for $82,000 in September 1987…. now selling for $392,000….(and yes, I think I was 5 years old…Lol!)..

-Or how about that semi-detached house at Danforth Ave and Woodbine, in Toronto, for $175,000 in 1990….now selling for $500,000.    More recently, I could have bought a house for $320,000 in 2005, near the water in Burlington, Ontario…..that same house sold for $800,000 last year.

The point it, I think we will look back at March 2012 as the month when the Banks declared mortgage war against each other…  Only in this war, there is a winner… YOU, the consumer, YOU the borrower, YOU the investor.   We are seeing record low mortgage rates.   And they won’t last forever.  In fact, this mortgage war is probably going to accelerate interest rate hikes…  almost like starting a campfire with gasoline soaked wood… It’s burning red hot but it won’t last for long.

With interest rates are record lows, isn’t this the time to borrow?    A $300,000 mortgage will carry for $1196/mth.. and that’s with a 5 year fixed rate term.  Bond yields are climbing… 5 yr bond yields are up to 1.71%.. that’s up 30bps in less than a month… 5 year fixed rates follow bond movement… i think it’s safe to say, we should expect rates to climb in the near future… and the reason they haven’t moved yet is because of the Mortgage wars…

We are hearing the cries by the govt and some bankers, telling us not to borrow too much.  Personal Debt level concerns are plastered all over the internet and media.   But we aren’t seeing many articles telling us how to borrow and invest wisely…. borrow when rates are low instead of borrowing when rates are high… borrow when you qualify instead of borrowing when you don’t… borrow when you don’t need the money…   Isn’t that when Banks want to lend you the money?

We have just seen a draft guideline, Bill B-20,  entered in for review with a May 1st decision date.   These new regulations are aimed at tightening lending rules even further.. and this time it’s targeting Home Equity Lines of Credit..   That’s right, they want to make it even harder to qualify for these products and possibly make the repayment terms more strict…

Opportunity is knocking… answer the door..

Canadians buy $4.9billion worth of Florida property in 2010

Here’s some interesting stats…. According to the Jacksonville Business Journal, Canadians accounted for 39% of all international buyers of property in Florida during 2010…  That’s $4.9billion worth of property purchased by Canadians. Wow, we must have a lot of snowbirds here.!  Or maybe we just have a lot of investors?   Perhaps it’s is a combination of the two.

One thing is for certain, Canadians like Florida…  It certainly has become a popular investment for many.   Who wouldn’t want a sunny getaway in Florida?  The ads are everywhere…condos starting at $30k… houses that once sold for $600k are now selling for $225k.  Clearly, Canadians see Florida as a bargain.

And maybe, just maybe, Canadians aren’t getting into debt for frivolous reasons?… Maybe we are borrowing with these record low interest rates to invest?   Maybe those stats and articles that keep telling us we should be concerned with the ‘high personal debt levels’ of Canadians, are not a true reflection of our spending habits…??

Most Canadian buyers of Florida property are obtaining loans from a Canadian bank.   Borrowing from a Florida bank isn’t easy these days.  That’s why many Canadians will refinance their homes and use the equity to buy their Florida property.

Borrowing to invest is a good thing…. this is known as ‘good debt’….but I don’t think there are any stats that show how much we are actually borrowing to invest…. sure would be nice to know those figures…

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.

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