As the New Year approaches many Canadians are curious about what’s in store for their finances in 2012? For individuals considering borrowing money in the coming year, the timing is great!

On December 6th the Bank of Canada (B.O.C.) left the over night lending rate unchanged again. This overnight rate has been at 1% since September 2010 and doesn’t appear to be going anywhere soon. The B.O.C. consensus is that the global economy, in particular Europe and China, is expected to be weaker next year – and that should result in low borrowing rates.

In addition, the central banks have recently agreed to lower the interest rate at which they lend each other money by .5%, in the efforts to make borrowing easier. This is a very rare move on their part and only considered when economic stimulus is a must. The current Canadian financial systems is functioning relatively well, yet our economic growth is expected to be moderate in 2012 with inflation forecast to decline. Keep in mind that the major pressure to increase interest rates is when inflation becomes a concern and exceeds 2% in any given year. Estimates are that inflation should not be a concern for another 2-3 years so that is great news!

The knowledge that interest rates are not likely to increase any time soon creates some interesting mortgage questions for 2012. Canadian consumers have been programmed by Banks to choose a 5-year fixed mortgage with little explanation as to why. Meanwhile, it’s financially responsible for mortgage clients to understand the new mortgage products and lenders recently introduced to the marketplace and available to them.

With no immediate pressure to lock in your mortgage, we are concluding a “convertible” mortgage may make the most sense for 2012. A “convertible” mortgage allows the consumer to change their mortgage to another term at anytime, with no penalties. This flexibility is paramount, allowing you to avoid being stuck with an unwanted mortgage.

As your Mortgage Planner, my responsibility is to ensure you know if and when to convert for free to a better mortgage term advice most Bank branches are not set up to provide. The most common “convertible” mortgage has been the 5-year variable mortgage (V.R.M.) that can easily be converted at any time, to a fixed mortgage term. The V.R.M. has had a very low interest rate until just recently.

In our opinion, today’s V.R.M.’s are currently over-priced. Over the past 10 years V.R.M.’s were typically priced at prime less .75%, while today the best discounts appears to be prime less .2% or 2.8%. The 1-year convertible mortgages is at about 2.85% and is a logical choice until fixed mortgage rates settle down, and V.R.M.’s become heavily discounted again in the future. As far as choosing a fixed term today, we would suggest that a 3-year fixed at 2.99% or 10-year fixed at 4.29% is more practical then a 5-year fixed at 3.29%.

The bottom line for 2012 is that it will be a good year to buy a property, renovate, or reposition your current obligations more efficiently. Difficult economic times require that Canadian consumers become more financially literate so that they can plan for a more prosperous future.

Happy Holidays,

Jay

Borrowers often find they need to break the term of their mortgage to plan for major life events such as renovations, sending children to school or moving to a larger home.

SAVE yourself costly penalties, pay LESS interest and enjoy LOWER payments!

1. 1. You are potentially saving a penalty of $1,944** if you were to break your mortgage in year 4 of a 5 year term.
2. 2. You get a lower interest rate.
3. 3. By the end of the 4^th year you will have paid off more principal and you will have paid less interest.

You will have paid $965 more towards paying down your mortgage principal!

You will have paid $2,902 less in interest payments!

Your total 3 year payments will be almost $1,945 lower!

4 Year Fixed vs. 5 Year Fixed Term Payment Comparison

Assumptions:

• 4 Year rate of 3.09% vs. 5 Year rate of 3.39%.
• $250,000 mortgage amount with monthly payment at a 30 year amortization.
• Calculations compare the results at the end of the 4^th year between a 4 year fixed term vs. a 5 year fixed term mortgage. (Source:  D+H Filogix Express Calculator – Mortgage Analyzer)

**Penalty for fixed rate mortgages:

• Penalty is the greater of 3 months interest or IRD* for fixed rate mortgages.  The calculation for IRD is $881.05 based on an original rate of 3.39% and remaining term of 12 months at a rate of 2.99%.  The 3 months interest calculation is $1,943.64.  The 3 months interest penalty would be charged in this scenario.

* IRD (Interest Rate Differential) is a penalty that may apply if you pay off your mortgage prior to the maturity date, or pay the mortgage principal down beyond the amount of your prepayment privileges.  The IRD calculation used by mortgage lenders may vary and this may not be applicable to all scenarios.

The bad news is that all international economies will struggle throughout 2012. The current lingering Euro-Crisis, combined with low domestic consumer confidence, will likely result in no significant interest rate increases until 2013.

The good news is that low interest rates will make things more affordable for all of us, and will also allow the GTA real estate market to maintain reasonable sales momentum. Ultimately, we would all prefer a better economy even if it meant interest rates needed to be marginally increased.A more difficult choice for 2012 is what mortgage to choose. Most Canadian mortgage rates are at an all-time historic low; generally speaking, the cost to borrow is now 3%. It’s no secret that the 5-year variable mortgage has performed best since it was widely introduced in Canada about 15 years ago.

This mortgage relies on interest rates rising and falling within a reasonable range, resulting in less interest paid over a longer period of time. Variable mortgages are also convertible, which allows the borrower to switch their mortgage early without penalties. Also keep in mind that the Bank of Canada usually only adjusts a variable rate mortgage by .25% a few times a year to address any inflation concerns.

These obvious benefits have resulted in huge demand for variable mortgages in recent years. With easy access to more information, an increasing number of consumers have realized it is both safer and cheaper to choose a variable mortgage over a fixed term… a real “no-brainer”. Then the mortgage world changed almost overnight!

Even though there is no hard data or statistics to support choosing a 5-year fixed mortgage over a variable product, lenders, for the most part, prefer that most borrowers do opt for the fixed product. Variable mortgages can be less profitable and therefore, are usually discouraged by lenders.

But borrowers have become more independent thinkers and their growing demand for variable mortgages has resulted in lenders changing variable rate mortgage pricing practically overnight so they may be more profitable quickly.

The days of borrowers enjoying variable mortgages at “prime less something” are over – and probably for a very long time. The new world is one in which 5-year variable mortgages will be priced at Bank prime (currently 3%). So if you are lucky enough to have a variable mortgage at “prime minus something”… hang on to it!

For mortgage newcomers, there is the burning question: “Should I choose a 5-year variable at 3% or a 4-year fixed at 3%?” Currently there is no significant difference between fixed and variable interest rates… so why take any chances on a variable mortgage in a potentially increasing interest rate environment?

Why not go with a fixed mortgage – at least temporarily – at the same rate as a variable, and then return to a variable mortgage at renewal, when the interest rate spreads likely return? And then there’s the 10-year fixed mortgage – currently at an all-time low of 4.75% – which may prove to be a bargain in the long run.

All these choices are good ones, and all these mortgage rates are cheap! Having said that, now more than ever, it is imperative that we make an informed and comfortable choice for each individual borrower. Let’s talk about you, your expectations, and marry you with the mortgage that makes you most happy! .

As our summer holidays wind down, the fall real estate and financial markets tend to go into higher gear. Autumn appears to be a season where we all start paying closer attention to our financial goals.Real estate values in the GTA keep on rising… moderately, but rising nonetheless despite recent economic woes in the U.S. and Europe. Our housing market has been sustained by recent lower unemployment, steady immigration, and mortgage rates that are expected to stay low for the foreseeable future. Remember that even if rates begin to gradually rise next year, they are still considered low… ask your parents! It appears that a combination of all these factors has created a more “balanced” market where supply and demand seems to be more in sync.

Recently, the bond market had generated some “crazy” low five-year fixed rates, as low as 3.25%, which is an all-time historic low. Yet this does not mean we should all stampede to go with a fixed term. Variable mortgage rates are not based on the bond market, but are based on what the Bank of Canada (BOC) feels should be done to keep the economy in balance.

The BOC meets eight times a year to address inflation, productivity, and the general health of the economy. In a normal market they usually adjust the Prime rate (which variable mortgages are based on) a couple times a year to either stimulate, or cool off the economy. I think we can all agree that there’s no hot economy in sight that needs to be cooled down, and Canadian economic growth is moderate, therefore interest rate reductions are not required. Expect this overnight rate to be flat for a few years to come making a variable mortgage a very attractive choice.

Despite the interest rate, variable mortgages tend to be safer than fixed mortgages because you can change to another mortgage term for free anytime. Conversely, fixed rates lock you down with huge discharge penalties to get out of them early. You likely know someone right now who is upset about the discharge penalty on their fixed mortgage. You also know someone who is absolutely thrilled that they stuck with a variable mortgage and did not waver even though at times interest rates were rising… am I right, or am I right?

The information age has made variable mortgages even more popular than ever. Now anyone can browse online to quickly determine which mortgage may best suit them, where in the past we oddly enough only relied on our Banker’s advice… how much sense does that make? The internet has made us all more financially literate, which may not be the best thing for a mortgagee (the lender). I believe where our parents’ generation was coached to take a basic five-year fixed mortgage, our children’s generation will instinctively choose variable mortgages.

Now that so many borrowers are opting for five-year variable mortgages, the mortgagees (lenders) needed to change their pricing and tactics. To be profitable, all mortgagees have cut back on the discounts they were giving on variable mortgages. Prime less .9% no longer makes financial sense for them, where prime less .5% makes them the profit they need to keep shareholders happy. Generally speaking, mortgagees tend to promote a closed fixed term, which is more profitable for them. A fixed mortgage may be good for you and a variable mortgage may be good for you, but don’t let someone else make that decision for you. Do your research and understand where your money is going and why? Having the lowest interest rate does not translate into paying less interest. Usually there’s more savings in the mortgage terms, privileges and strategy.

My responsibility is to provide all the resources you need to build a solid “Mortgage Plan” and a better financial future.

All the Best – Jay

By now, you have heard that Canada Finance Minister, Jim Flaherty, has initiated further changes in the mortgage industry, that will take effect March 18, 2011. This is an effort to reduce the exposure consumers have to household debt, based on recent statistics.

Firstly, the maximum amortization period will decrease from 35 years to 30 years for government backed mortgages (when buyers have less than 20% down payment). This should only increase a typical monthly mortgage payment by about $35-$40 per $100,000 borrowed, when comparing a 35 to 30 year amortization.

Second, Flaherty has announced he will decrease the maximum amount you can refinance against your home, from 90% to 85%. This may impact consumers looking to consolidate debt or take equity out for investment.

Lastly, he is withdrawing government insurance on lines of credit, secured against homes- which were previously allowed up to 90% loan to value. This product is not widley used due to the insurance premium applied to a product one may, or may not, use, and as a result, should not affect the market by much (secured credit lines will still be available to 80%LTV)

The positives out of this are that these changes may have led, and continue to lead, the Bank of Canada (BoC) to keep interest rates low for a while (today’s BoC annoucement confirmed NO prime rate change, leaving Variable Rate Mortgages and Credit Lines untouched!). Also, obviously, a more responsible lending and borrowing environment.

However, some will feel this tightening may reduce financial flexibility in the short run, and potentially flatten the upcoming spring real estate market. 

So, at the present, we’ve been given about 2 months before the changes take place…anyone looking to refinance, or purchase a home should consider this short window of opportunity to firm up any plans they may have. We have yet to hear how this may or may not affect conventional mortgage lending (consumers buying or refinancing with 20% or MORE equity), but should know, and will advise, in the near future.

Feel free to call with any questions on how these changes may affect you and YOUR mortgage plans…

Despite starting 2011 with a tragic Junior Hockey loss to Russia … the rest of the year looks quite promising for Canada. The GTA housing market performed surprising well in 2010, and 2011 home sales are expected to almost mirror those of last year.

Since the real estate bottom hit in 2008 there’s been a slow climb back up to levels and conditions similar to 2003-06, meaning a more balanced supply and demand environment. Canada Mortgage and Housing (CMHC.ca) is expecting flat prices for the GTA with slight value appreciations in the 905 area codes. The overall 2011 housing projections for Canada is referred to as “Decent volumes without dramatic movements”.

Is 2011 a good time to buy? Timing when to buy a home is very tricky business and there’s no crystal ball that can help. In my opinion you are buying a home for you and your family which is very difficult to put on a spreadsheet. I would suggest you venture into real estate with expectations of living in pleasant surroundings for a reasonable amount of time, subsequently I am confident your home value will appreciate as did your parents before you.

Conversely, if you plan to occupy a new home for only a year or two you may be challenged in realizing any profit considering property value increases in 2012 are expected to be less then in 2010 and 2011. If you are prepared to speculate short-term on real estate … I can only wish you good luck!

Is 2011 a good year to borrow?  Didn’t you hear the sky is falling? Interest rates are going up and we should all be very afraid! You don’t have to be a financial guru to understand that currently we are spoiled with crazy low interest rates and that as the economy gradually improves over the next five years (it won’t happen overnight) that all of us should be paying more normal mortgage rates around 5-6%.

Keep in mind that regulators do not allow lenders to calculate your debt obligations on current rates. When securing a variable rate mortgage at 2.2% the mortgage provider is required to use an interest rate of over 5% when determining your budget or comfort zone … this is an excellent Government safety net to avoid future “payment shock”. Let me remind you as well, that 5-6% is historically an amazing mortgage rate and if you doubt that just ask your parents.

Finally, there’s no doubt it is prudent to be diligent about spending habits and tolerance to debt. Currently there are 52 Canadian mortgage lenders ready to throw themselves under the bus to give you a big mortgage at a great rate, but without proper preparation you may be venturing into something that you will regret later.

Lenders are lenders, they are not like financial planners who build you a short and long-term budget that suits your family’s expectations. My responsibility is to first build a “Mortgage Plan” that makes sense to you, and after we would determine which of the many lenders is best suited to fund that plan?

Let me remind you that the best rate is not enough to save significant money. Many don’t realize that .2% on a $300,000 mortgage will save about $500 per year, all of us should be making mortgage maneuvers that will save us a heck of lot more than that! Let’s connect, and together we’ll explore how to save more on your existing or next mortgage.

I’m sure you heard that in October we had an inflation spike that was unexpected and likely not sustainable. There is still a lot of international economic uncertainty in many unsettled markets like Ireland and the U.S. so I would not be too concerned about consumer prices rising anytime soon.

In fact, the recent inflation jump was primarily a result of energy prices and the newly introduced HST. Even with this recent news, the Bank of Canada has indicated that it is not entertaining any interest rate increases until late 2011 or early 2012.

Let me remind you that fixed rates are based on bond prices that can be very volatile and jump around unexpectedly, yet they are not good indicators on what is going on with the underlying economy as a whole.

Conversely, the Bank of Canada overnight rate is far more predictable, stable, and mirrors movement in the overall economy, and for this reason we see it change typically by 0.25% about 2-3 times a year…and this is the rate variable mortgages are based on. Even if mortgage rates climb gradually over the coming years, the math still favours choosing a variable mortgage over a fixed term.

Please click on the link to view a debate regarding Fixed vs. Variable

Since the collapse of the U.S. housing market a few years ago, the concern of a “Housing Bubble” here has regularly made front-page news.

Let’s start by keeping in mind that for most homeowners their home is to be enjoyed and lived in for years to come, and is not merely a source of income by speculating that housing values will appreciate in the short term.

If we examine the 1989 bubble, there are clear indicators that speculators relied on short-term gains as a primary income source, which resulted in artificial and unsustainable rising home values. More recently, the U.S. collapse was primarily a result of very aggressive and irresponsible mortgage lending policies that allowed practically anyone to own a home.

In today’s Ontario real estate market, the environment is different; wages are increasing, immigration is up, speculators are few, employment is rebounding, and lending regulations are strict.

I believe we all can agree that home prices cannot appreciate at the rate they have over recent years, but these five factors alone should result in a more balanced real estate market and will keep a housing bubble from happening.

The moderate growth we will likely experience in the GTA will be grounded by some sound economic fundamentals… so far so good. To learn more about the current economic conditions, an excellent resource is the CMHC website where an army of Government economists diligently update Canadian housing trends.

And what if we did see a 20-30% drop in home values? That would ensure low interest rates for a long time and I know all borrowers would love that! If you plan on moving you could buy more house for your family and with greater appreciating potential in the future.

There is no real concern if you are selling and buying in the same market unless you are a short-term speculator… otherwise, a drop in home prices is often the best opportunity to make your move!

Fixed mortgage rates have been dropping in recent weeks (3.69%) which will also help sustain a healthy fall real estate market. Variable rate mortgages (2.05%) still work out mathematically better even if rates gradually rise over the next 5 years. Finally, the mortgage lending regulations in Canada do not allow lenders to approve mortgages on the current low rates.

The household income must support a mortgage as if the interest rate was approximately 6% creating a payment shock buffer should rates rise significantly in the future. It is clear that in Canada our regulators will continue to be far more prudent than our neighbours to the south and therefore I see no “Housing Bubble” on the horizon.

I would be glad to connect you, or anyone you know, with the most current mortgage conditions so that everyone can make more informed decisions.

Today the Canadian government announced a number of interesting steps to try and support the long-term stability of Canada’s housing market in an effort to encourage home ownership for Canadians.

The Government will adjust the rules for government-backed insured mortgages as follows:

• Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.

• Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. This will help ensure home ownership is a more effective way to save.

• Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.

These adjustments to the mortgage insurance guarantee framework are intended to come into force on April 19, 2010.

There are a bunch of miscellaneous fees that come with getting a mortgage known as closing costs.

Some of these fees may be negotiable and some are set.  They can cost thousands of dollars so it’s important that you budget for them appropriately.

Planning for these costs ahead of time will also remove any surprises or difficult last minute hurdles when purchasing a home.

Mortgage Insurance

If you get approved for a high ratio mortgage, you will have to pay mortgage insurance provided by the Canada Mortgage and Housing Corporation, Genworth Financial Canada or AIG.

This will range anywhere from 0.5 percent to 3.15 percent of the total loan amount.

This protects the lender and ensures the loan will be repaid even if the borrower (you) defaults. The insurance fee is determined by a formula so there is no room for negotiation. Typically it’s capitalized onto your mortgage .

Property Appraisal

Lenders have the option to require a property appraisal of your prospective home. They may also choose the professional appraiser to determine the market value of the property.  Generally a real estate appraisal will cost approximately $250.

Most banks will require an appraisal of the property prior to granting a mortgage.  In the case of hi-ratio mortgages, the application fee of $165 includes a market value appraisal.

Land Transfer Tax

A land  transfer tax is exercised by some provinces on all property transactions. It is usually determined as a percentage of the total cost of the property. Some municipalities, like Toronto, have also legislated land transfer taxes.

Goods and Service Tax

GST is charged on all new homes and condominiums, but if you pay less than $450,000 for a property than you may be eligible for a rebate.

Keep in mind that GST will also be charged on services related to closing costs like legal fees.

Legal Fees

Legal fees typically cost about 1.25 percent of the price of an average house. You’ll need to hire a lawyer to assist with the legal details of home ownership transfer, preparing all the mortgage documentation, and searching the title of the property.

Generally these fees are deducted from the mortgage loan itself.

Property Survey

Most lenders require an accurate survey of the property you are purchasing to ensure it’s in accordance with all relevant by-laws and zoning.

The sellers agent will often provide a copy of the survey but if not you will be required to provide one.  Surveys usually cost anywhere from $200 up to $1000.

As an alternative to a survey, the majority of lenders will accept proof of title insurance which will cost about $250.

House Insurance

Proof of insurance against fire and damage is usually required by the lender before or at closing before giving you the loan.  Try and shop around for a good policy.

While these fees may come as an afterthought for many home buyers caught up in the excitement of their purchase, they are critical to get squared away so your home buying experience is everything you wanted it to be – smooth.

Make sure when you are budgeting for your mortgage that you take these fees into account because they add up.

When you decide on a mortgage planner, they will be able to help you with understanding these fees better and hiring professionals to help make the details less stressful.

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