You Don't Need to Cry

Several years ago I had a lady call me and ask me to get her out of her mortgage.  She had a fixed rate mortgage with a home equity line of credit (HELOC) that grew as she paid down her mortgage. I asked her how that was going as many people find they can pay down their mortgages so much faster and they are very satisfied. Her response was not at all happy. She was close to tears.  As her mortgage balance went down and her HELOC increased she would go out and spend more money, on vacations, furniture etc. The result was that after 5 years she had owed just as much now as she did back then. On top of that the person who put her in the mortgage never explained that there was a monthly fee similar to a bank account fee. It wasn’t much but it peeved her that she had not been informed.

  My first question was “ Did the bank rep ask you if you were a spender or a saver?

”no,” she said I’m more of a spender than a saver.”  Now I understood her problem . She was meant to have a regular fixed rate mortgage.  My next question was “ are you paid every two weeks or monthly?  I then showed her an amortization table with monthly payments and bi-weekly side by side and showed her that she could shave 3 ½  years off her 30 year amortization by switching to bi-weekly payments.  What a relief she felt when I was able to put her in a regular mortgage.

    The morale of the story – mortgage brokers ask lots of questions in order to avoid problems in the future. Answer their questions true fully  and you will be happy with the results. 

for more information contact David Cooke - http://davidcooke.ca 

 

The Bank of Canada maintains its Interest Rate

More good news today for people who have variable rate mortgages or lines of credit tied to the Bank of Canada rate. The rate will stay firm once again. 

Here’s the statement from the Bank of Canada rate decision on Wednesday, July 13:

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

The Bank of Canada kept its key interest rate today at 0.5 per cent. 

Inflation in Canada is on track to return to 2 per cent in 2017 as the complex adjustment underway in Canada’s economy proceeds. The fundamentals remain in place for a pickup in growth over the projection horizon, albeit in a climate of heightened uncertainty.

In this context, the forecast for the global economy has been marked down slightly from the Bank’s April Monetary Policy Report (MPR). Global GDP growth is projected to be 2.9 per cent in 2016, 3.3 per cent in 2017, and 3.5 per cent in 2018. In particular, after a weak start to 2016 the US economy is showing signs of a rebound, with a healthy labour market and solid consumption growth. In the wake of Brexit, global markets have materially re-priced a number of asset classes. Financial conditions, already accommodative, have become even more so.

In Canada, the quarterly pattern of growth has been uneven. Real GDP grew by 2.4 per cent in the first quarter but is estimated to have contracted by 1 per cent in the second quarter, pulled down by volatile trade flows, uneven consumer spending, and the Alberta wildfires. A pick-up to 3 1/2 per cent is expected in the third quarter as oil production resumes and rebuilding begins in Fort McMurray. Consumer spending will also get a boost from the Canada Child Benefit.

While the fundamental elements of the Bank’s projection are similar to those presented in April, the forecast has been revised down in light of a weaker outlook for business investment and a lower profile for exports, reflecting a downward adjustment to US investment spending. Real GDP is expected to grow by 1.3 per cent in 2016, 2.2 per cent in 2017, and 2.1 per cent in 2018. The Bank projects above-potential growth from the second half of 2016, lifted by rising US demand and supported by accommodative monetary and financial conditions. Federal infrastructure spending and other fiscal measures announced in the March budget will also contribute to growth.  Despite recent volatility, the Bank expects the underlying trend of export growth to continue, leading to a pick-up in business investment. Higher global oil prices are helping to stabilize Canada’s energy sector and household spending is expected to increase moderately.

The Bank forecasts that the output gap will close somewhat later than estimated in April, towards the end of 2017. Underlying this judgement is the downward revision to business investment, which lowers the profile for both real GDP and, to a lesser extent, potential output.  

While inflation has recently been a little higher than anticipated, largely due to higher consumer energy prices, it is still in the lower half of the Bank’s inflation-control range. Most measures of core inflation remain close to 2 per cent but would be lower without the impact of past exchange rate depreciation. The temporary effects of exchange-rate pass-through and past declines in consumer energy prices are expected to dissipate in late 2016, and the Bank projects that inflation will average close to 2 per cent throughout 2017 as the output gap narrows.

Overall, the risks to the profile for inflation are roughly balanced, although the implications of the Brexit vote are highly uncertain and difficult to forecast. At the same time, financial vulnerabilities are elevated and rising, particularly in the greater Vancouver and Toronto areas. The Bank’s Governing Council judges that the overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate, and the target for the overnight rate remains at 1/2 per cent.

Why a Big Down Payment is Better

First time home buyers look to their families, the media and the Internet for all their information on how to buy a home. As a result they know that they need 5% of the total home purchase price to buy the home of their dreams. While this is true there are a few things that family may not tell you or they may not be aware of. 

    Putting down as much as you can afford is a great idea. We have all heard that mortgage rules are tightening, the economy in Alberta is down  and lenders are being a lot more selective in who they give mortgages to. What you may not have heard is that the mortgage insurers, CMHC, Genworth Financial and Canada Guaranty are also looking at lenders more carefully before approving mortgage default insurance. They are looking closely at employment, credit and how likely you are to stop paying your mortgage. While 5% is the minimum, if you have a few late payments from your college days or a collection from a cellphone company on your credit report, they will think twice about giving you an approval. However, if you put 10% down they will look at your differently. Putting twice the minimum down payment shows commitment. It shows that you have “skin in the game” and are less likely to default on your mortgage. If they are reluctant to approve your mortgage , a higher down payment can sway their decision.

   The second advantage of a larger down payment is lower monthly payments. Let’s face it, when you get into a home , your paid off car will eventually need to be replaced and you will now have car payments and repairs chipping away at your monthly income. If you are newly married, child care expenses, baby furniture and starting an RESP will come up. You may be able to afford higher monthly payments but you will be better off down the road if you have lower payments.

    The third advantage is a lower CMHC premium rate. The bigger your down payment, the lower the risk to the mortgage insurer and the rate that they charge you.  With 5% down you must pay 3.60% on the mortgage balance. On a home purchase of $350,000 this comes out to a premium of $11,970.  

10% down results in a lower premium of $7560 and if you can make a 20% down payment you can avoid mortgage default insurance and pay $0 .

Down Payment	Premium	Amount	Savings
5%	3.60%	$11,970	0
10%	2.40%	$7560 `	$4410
20%	N/A	$0	$11,970

  

Finally, the bigger your down payment the smaller your mortgage balance is to start. As a result you will save lots of money over the term of your mortgage.

A 5% down payment will result in a payment over 25 years of $115,381 of interest. 10% down lowers this to $108,042 and 20% down lowers this to $93,786.

In other words, if you can come up with a 20% down payment you will save over $21,000 in interest over term of your mortgage. This is based on today’s historically low interest rates. I’m sure that sometime over the next 25 years rates will go up to the 5.79% that people were paying 6 years ago and they could go higher.

    In conclusion, if you have a chance to put more money down on the purchase of your new home, you should consider it. You can save money big time by doing so. 

for more information on this and other mortgage topics , visit http://davidcooke.ca or call David directly at 403-836-1201

    

Are you making accenerated bi-weekly payments?

Over the past number of years banks have come up with a rather confusing set of payment frequency options that have left some mortgage clients a bit disappointed 5 years down the road. Rather than the Amortization crushing ‘Accelerated bi-weekly’ plan which a quality Mortgage Broker will discuss with you, clients left to their own devices run the risk of opting for simply ‘bi-weekly’ payments.  Here is the math; Let’s use a $100,000 mortgage amount (to make working out your own numbers simpler) with a 25 year amortization, a 2.74% interest rate and a 5 year term. Monthly Payments: $460.01 Ending Balance 60 months later: $85,043.18 Now let’s calculate bi-weekly payments and the balance remaining at the end of the 5 year term. Bi-Weekly Payments: $212.18 Ending balance 60 months later: $85,043.60 The balance is 42 cents higher.  This is because you did not effectively pay anything extra over the 60 months to the lender.  The sum of the annual payments is identical.  Now let’s insert    the word ‘ACCELERATED’ (bi-weekly) into the equation. Accelerated bi-weekly Payment: $230.00 Ending balance 60 months later: $82,563.13 Ah-ha, now you have a $2,480.47 lower balance, and you have paid $163.87 less interest over the 5 years.  Excellent! How did this happen?  When one opts for ‘accelerated’ in the above scenario, the payment increases by $17.82 per payment, or $463.32 per year.  For a total of $2,316.60 in additional funds going straight to the mortgage balance. The big picture is improved as well, as you have effectively lowered your amortization from 25 years to 22 years and 5 months. Shaving 2.5 years off a 25 year mortgage might not seem huge, but in 22.5 years it surely will make you happy.  Imagine having $460.00 more per month (per $100,000 of mortgage balance) to play with for 2.5 years. If you started with a $300,000 mortgage, then we are talking about $1380.02 per month X 30 which is a total of $41,400.60.  All from one word ‘accelerated’.  If you would like to try this with your own mortgage contact David Cooke , your Calgary mortgage broker at http://davidcooke.ca