While most of the media has figured out far to late that these issues have arisen, the Vancouver sun has a good article about why interest rate isn’t the best factor to use to select a mortgage. Read the highlights below.

These reasons in part are why we encourage our clients to deal solely with big banks. While the explanations in this article are basic, we provide a much more sophisticated analysis, delving deeper into individual lenders and their specific issues, big banks included. One thing to note, there is a high likelihood that your broker will dismiss these issues, or be completely unaware of them.

Rate should never be the only thing a homebuyer looks at but it often is, said Feisal Panjwani, senior mortgage consultant with Invis — Feisal & Associates Mortgage Consulting in Cloverdale.

“There’s lots of lenders out there who may have great rates but rate is not the most important thing,” Panjwani said. “You’ve got to look at everything.”

as rates rise, terms like portability and assumability will become more important, he said

Portability lets you take your mortgage with you if you sell your home and buy something new. That could mean a lot if rates have gone up significantly, Panjwani said. Some lenders only let you port the exact amount remaining in the first mortgage so if you need more funds you may have to take out a second mortgage, which would be at a higher rate, or do what’s called a “blend and extend” where money is added to the existing mortgage and the going rate is averaged with the existing lower-rate mortgage. But in the end, a borrower whose mortgage is portable should end up with a rate lower than the current market rate at the time of the new purchase.

Assumability is another perk in times of rising rates. Assumability lets the buyer of your property assume your mortgage, provided they qualify with your lender. So if your mortgage rate is below the market rate at the time you sell – which will be the case if rates go up between the time you buy and the time you sell – then having a cheap mortgage to offer along with the house can be quite attractive to potential buyers, Panjwani said.

“If the rate is below market, the purchaser would likely be willing to pay more money for the property,”

For the full story click here

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Thankfully at least one media outlet is trying to clarify the confusion caused by the increase in fixed interest rates. With headlines like “Era of low interest rates come to an end,” the media has completely misguided Canadians. The fact is that the Bank of Canada rate has remain unchanged. In fact, there is a good chance we will see those same fixed rates that went up last week, hedge back down slightly as banks try to compete for market share.

What I find interesting is that the competition bureau is going after the thousands of real estate brokerages for collusion, yet two banks last week colluded in a drastic increase in interest rates after sitting of their heels for the past three weeks when interest rates should have been rising gradually. It seems as though the competition commissioner has a hard on for realtors, perhaps because of her own personal experience, but is willing to turn a blind eye to the government regulated banks.

See the explanation of last weeks interest rate moves below.

The rise in mortgage rates at three of the big banks comes at a time when the Bank of Canada’s benchmark lending rates have remained unchanged since early 2009.

The Bank of Canada’s “overnight rate,” the rate at which Canada’s banks can make short-term loans to one another, was set at .25 per cent in March of 2009.

The Canadian Bankers Association said many consumers are confused by the relationship between the central bank and commercial banks. The Bank of Canada’s rates have very little to do with mortgage rates, the association says.

Mortgage rates are based on a number of variables. Banks must balance the amount they charge in interest with the amount they pay on consumer savings accounts. As the price paid on account interest rises, mortgage rates will also rise.

Banks also use other investments as yardsticks for mortgage rates. If a secure investment, such as a Canada Savings Bond, is paying three per cent annually, an investment such as a mortgage must be priced higher to cover for the risks involved and to ensure that the bank makes a profit.

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Read the following study, and note all of the times in history where rates were rising and a variable rate mortgage was still a better alternative. Also note that the two times in history a fixed rate has been a better choice was when prime rates (variable) were higher than fixed rates, this is far from the circumstances which we find ourselves in now.

You can find the study here

Furthermore, Garth Turner, as polarizing and sensationalistic as he is gave a good assessment a couple of days ago.

But the big question I was asked today: what should you do about your mortgage?

The bankers will be on the phone to you soon ‘suggesting’ you lock in, ‘for your own protection.’ Have none of it, if you are in a cheap VRM. We know why the lenders are saying that, since they count on scores of people now rushing in to voluntarily increase their payments. Once again, they play the emotional card, consistently suggesting actions counter to the best interests of Canadians.

A prime-minus VRM is a gift. Keep it. The Bank of Canada rate would have to soar by more than 200 basis points (2%) by Christmas for you even to consider locking in. And even then you would be saving money staying variable. In fact, the typical prime minus one half borrower would be better off staying put until the prime mushroomed almost 4% above current levels. You’d still be paying less a month.

And a prime rate of 6.25% is not going to happen for two, three or perhaps four years. Any sooner and you could mop up the economy with a Swiffer.”

If you want my opinion on the subject you can sign up to receive posts from asknolan.com directly to your inbox, and I will include the chapter from my book that discusses just this topic in a couple of days.

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Last week the media was emphasizing a strong market and price increases, this week the news is all doom and gloom. Given that the media pays such a major role in our sensitive real estate market, it is no surprise that they are reporting the news that will create a better story a couple of months down the road.

Shifts in reporting almost always mean a shift in the market, the question becomes, which direction will it go?

The Vancouver Sun reported

Canada’s hot housing market now cooling off

‘Clear signs that some self-correcting mechanisms are starting to take over, says noted economist’

The once red-hot housing market — which several observers warned last month was in danger of turning into a bubble — is showing signs of losing steam as new listings climb and affordability begins to tighten, data released Monday indicate.

The Globe and Mail took a slightly different aproach and reported

Homeownership gets more costly

the anticipated and gradual rise in interest rates indicates that affordability is likely to gradually get worse as rates return to normal levels,” said Robert Hogue, RBC’s senior economist.

Time to start watching things a little bit closer again.

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A good friend said this to me on my on my 24th birthday, after I complained about the gift my girlfriend at the time had bought me. Being the superficial girlfriend that she was, she had bought me a shirt which I had explicitly told her that I did not like, but that she loved. I would later breakup with said girlfriend after she had to think about whether she wanted to attend my grandmother’s burial.

Ex-girlfriend story aside, my friend had a good point. Every year on our birthdays we celebrate “our day”. The day where everyone makes a fuss about us because we are yet another year older. Woohoo. What few people fail to consider is just how special that day is. A birthday, for most of us, is a sign that we have made it through yet another year unscathed. Most of us remain sheltered, continue to have the ability to put food on the table, and remain able bodied. My friend clued me into the fact that this celebration should come with the recognition that others may not have been so fortunate, which is why for the last three years I have given back on my birthday.

Until now I have given silently. Three years ago I made an anonymous donation to a good friends cancer treatment fund. Two years ago I sent a few dozen books overseas. Last year I took a truck full of clothing to the Mustard Seed.

This year however, I am going to give publicly. Today I will donate 10 meals worth of food to the Mustard Seed. Anthony Robbins has his Turkey Brigade, consider this my Birthday Brigade.

I am welcoming you to join me if you feel so inclined. You may either do so on your own by making an online donation to the Mustard Seed, or if you would like to use the Paypal Donate Button below, I will make the donation for you.

As an added bonus, if you use the Paypal button, you may designate in the add instructions to seller field whether you would like a copy of my books Golf Balls Don’t Float, Forget Your Mortgage, or both.

Please note that I will not keep a penny of the money to pay for the books, and you can donate any amount that you wish, these are my birthday gift to you.

Kind regards,

Nolan Matthias

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The gist of the new rules is that it won’t be as easy to
teeter at the top of your lending limit; the government
thinks homeowners should have a bit of equity hedge
and a realistic expectation of what they can pay each
month. Most Canadian homebuyers are already managing
their mortgages according to these standards anyway,
although some new and very leveraged buyers could be
affected. Real estate investors and speculators may notice
these rules the most, which take affect April 19, 2010.

Here’s the quick rundown on what’s new:
Think five-year, fixed-rate. Whatever kind of mortgage
you eventually decide on, the new rules say that you must
qualify for a standard five-year, fixed-rate mortgage. What
you choose, of course, is up to you and your mortgage
planner; you may opt for a shorter term and /or a lower
rate. While the government has said this test will help
homebuyers prepare for higher rates, most lenders
were already qualifying homeowners on the three-year
fixed rate. As a result this shouldn’t affect too many
homebuyers. Buyers who don’t qualify for the five-year,
fixed rate will need to downsize their expectations on
how much home they can afford. Based on a 5%
downpayment, 35-year amortization, and a home price
of $300,000, a buyer would need about $7,400 more in
annual income to qualify under the posted five-year fixed
rate versus the three-year rate.

Protect at least 10% of your equity. Refinancing your
home to pay down high-interest debt is still a smart
strategy to save interest in the long term. There are
common sense limits to using your home as a piggy
bank, of course, and now the new rules dictate that you
must protect at least 10% of your equity, up from 5%.
Where this could cause a problem is with those who are
overextended on high-interest debt. They may no longer
be able to payout all of these debts and get on a sounder
financial footing with a lower payment and less interest
costs. Depending on their reasons for having a high debt
load these clients may end up in a bad credit situation
or bankrupt. While the mortgage planners at Mortgage
Architects have been offering credit and debt counselling
to their clients for years, more people may now be in
need of this service.

You need 20% down on an investment property. This
is a change that primarily affects investors. If you’re not
personally living in a property that you own – such as a
second home or a rental property – you will now need a
minimum downpayment of 20%, up from 5%. Investors
used the 5% rule to leverage their mortgage for tax
purposes: so they could write off more interest against
their rental income. This could slow speculative real
estate purchases, for instance buying new properties with
the intention of flipping them later, which is common in
the condominium market.

While we are looking at rising rates in the future, the
housing market remains healthy. These upcoming changes
are unlikely to affect the majority of Canadians, although
there could be a flurry of activity before April 19 – as
homebuyers take advantage of the last few weeks of the
existing rules by moving up purchases and refinances.
If you think the new rules could affect you, call an
experienced mortgage planner right away.

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The changes seem to have been well thought out, changing the down payment required on rental properties, the loan to value one can refinance to, and the qualifying rate for adjustable rate mortgages.

I think Flaherty did a great job in assessing the products that needed to be eliminated from the insurer package. I have long believed that if you could not afford to put 20% down on a revenue property, you could not afford to own one. See the changes below.

—-
From Reuters

NEW RULES

* Borrowers must qualify for a five-year fixed-rate mortgage, even if they opt for a lower variable rate. Banks and insurers typically assess the borrower’s gross debt service ratio — the cost of financing their home relative to their income — and their total debt service, which includes total debt payments relative to income. Currently, they use either the fixed-rate, or the greater of the variable rate and the prevailing three-year fixed rate.

* Lower the maximum amount a homeowner can withdraw when refinancing a mortgage to 90 percent from 95 percent of the value of the property. The government wants to encourage home ownership as a savings tool so is limiting this type of financing, which allows borrowers to lower their equity in their home.

* Increase the required down payment to 20 percent from 5 percent for insured mortgages obtained for purchasing speculative housing investments not occupied by the owner. Borrowers buying a property they intend to live in that also includes rental units will not be subject to the 20 percent rule.

* The rules that did not change, despite some speculation they might, were the maximum 35-year amortization period and minimum down payment of 5 percent for regular home buyers who plan to live on their properties.

MORTGAGE INDUSTRY

* Innovation began in Canada’s mortgage industry in 2006, including longer amortization periods and higher loan-to-value ratios. Although the number of high-risk, or subprime, mortgages remains low relative to the United States, Ottawa intervened for the first time in 2008 to tighten mortgage insurance rules.

* Canadian law requires banks to obtain mortgage insurance on loans where home buyers make down payments of less than 20 per cent, which are considered high risk. The borrower generally pays for the mortgage premium, which is added to the mortgage payments.

* Most mortgage insurance is provided by the state housing agency, Canada Mortgage and Housing Corp, and is backed by the government. The government also backs private mortgage insurers’ obligations to lenders, subject to a deductible. (Reporting by Louise Egan, editing by Peter Galloway)

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I think the Bureau has a tough fight on their hands. The fact is there is plenty of competition to the MLS, Commfree, Welist, Kijiji, Facebook Marketplace, and the several hundred newspapers and magazines that exist across the country. There are a lot of ways to market a property without the use of a realtor. A realtor however, being a professional service, should have a certain minimum standard which they must abide by. The most effective way to do this is to create a minimum standard in order to access a proprietary system. I think CREA is well within their rights to limit access to realtors only in order to promote professionalism in the industry. Tearing apart this system would only encourage lack of professionalism in the industry, and would further induce realtor bashing by those who sell FSBO.

What most who criticize realtors forget is that there is a lot more involved with using a realtor than just having your property information inputted and a sign put up. A good realtor is a good negotiator, will have knowledge that no amateur could possibly ascertain without years in the business (think that you know it all if you want, if you don’t do real estate full time and think you know how to properly sell a house then you are ignorant, there is simply too much to know to figure it all out in one transaction. Take for example FSBO, if you had to look up that acronym that isn’t even relevant to the sale of a house, just think of all the other complicated important terms you are probably unaware of but that could cost you hundreds of thousands of dollars), and has the assurance of the brokerages, local boards, and regulators to back them up. Yes, this means if a realtor screws up and costs you say, $100,000 there is a simple remedy. If you screw up however, selling your own home, good luck with the legal battles. The cost of lawyers alone will likely make any possible positive outcome not worth the time and effort, and may even bankrupt you.

Using a realtor is about more than just marketing, it is about using a professional service to do something the lay man is not qualified to do. They are your heart surgeon, your dentist, your optometrist, your certified financial planner, your car mechanic, and your airline pilot.

Oh, and by the way, a realtor can charge whatever they want. They can charge $1 or $10,000, which is what makes the industry competitive. What the competition bureau is challenging is the minimum level of service. And to think, I thought the competition bureau was in the business of creating higher standards for consumers.

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It turns out that the presenter on that day was not a representative of Robert Kiyosaki himself, but a Canadian firm who’s reputation is shady at best.

CBC marketplace this week aired a 30 minute segment on the company, their scam, how they lure consumers and their deceitful tactics. What they describe with their hidden cameras and analysis is exactly what I saw two years ago at a seminar put on by the very same group. While I cannot be sure that the presenter was the same, I can assure you the presentation was. Whats worse, I recently had a client who had attended one of these seminars try to convince me that she knew more about mortgage financing using an almost identical line to this presenter. That client is about to get herself into a world of financial trouble.

Don’t just think this is an issue isolated to Rich Dad Poor Dad either. That same company I talked about last week with the shady mortgage scheme, well they also give presentations that are very similar to the ones described in CBC’s video. Not only that, but that company has all kinds of awards and recognitions from independent sources who much like the consumer are also unaware of their deceptive practices.

You can view the CBC Marketplace report here.

PS. I do recommend Robert Kiyosaki’s book in my book club section. Why? Because it is a really good read with a lot of really good information in it!

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My colleague from Ontario, and someone whom I truly admire, Peter Majthenyi discussed long term versus short term rates with the Globe Investor. I have done my own research as to whether fixed or floating is the best option right now, and have written a chapter on it that you can preview soon by signing up for the F Your Mortgage privileged information list. It turns out the benefits of fixed vs. floating have little to do with rising rates, and more to do with another little known factor that you can read about by signing up. You can also get the Dirty Little Lender Secrets Chapter.

See what Peter and another Ontario broker have to say about long and short term rates below.

“There’s not a right or wrong choice,” replies Peter Majthenyi, a mortgage planner with Mortgage Architects in Toronto. “It’s capturing the temperament and risk tolerance of the client.”

These days, those of Mr. Majthenyi’s customers who prefer a locked-in rate are commonly going with 10-year mortgages at 5.3 per cent. That compares with his best rates of 3.79 per cent for a five-year mortgage and 1.95 per cent for a variable-rate loan.

With a 10-year mortgage, you’re entirely insulated from the coming cycle of interest rate increases. Over that period, Mr. Majthenyi notes, your income will rise and you’ll pay off a lot of the interest on your mortgage. At renewal time, you should be in a good position to make higher mortgage payments if need be.

The 10-year rate of 5.3 per cent seems high in comparison with current five-year rates, but it’s reasonably attractive if you look at the past decade. The average five-year rate posted by the big banks over that period was 6.78 per cent, according to Bank of Canada data. If we discount that rate by 1.5 percentage points, we get a real-world average, five-year rate of 5.3 per cent.

To give the other side of the argument about long-term mortgages, let’s hear from mortgage broker Jim Tourloukis of Advent Mortgage Services in Unionville, Ont. He points out that the higher rate for the 10-year mortgage would potentially cost hundreds of dollars more per month.

“That’s a big insurance premium to pay,” he said. “Peace of mind is important, but you can get that with a five-year mortgage.”

Worried that you’ll have to renew at much higher rates in five years’ time? Mr. Tourloukis said you can work around this by jumping into a one-year mortgage on renewal.

You can now get a rate of prime minus 0.1 to 0.3 of a percentage point. The net result for some borrowers is that they could chop their rate by a full percentage point if they were to break their current mortgage.

Mr. Tourloukis said it can be cost-effective to do this, thanks to a quirk in mortgage fine print. The penalty for breaking a variable-rate mortgage is three months’ interest – period. With fixed-rate mortgages, lenders charge the greater of three months’ interest or an “interest rate differential” (IRD) that compensates them for interest lost as a result of you breaking your mortgage.

Lots of people have tried to break existing mortgages and been deterred by astronomically high IRDs. Mr. Tourloukis said it’s plausible that someone who took out a $300,000 variable-rate mortgage last May might face a penalty of something like $2,200.

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