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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Written by a senior lecturer at Harvard Business School and author of Too Big to Save? How to Fix the US Financial System, this article is interesting in the way that it lays out a series of lessons to the American public, while at the same time making a reasonable argument as to why our Canadian housing market has survived.

People like Garth Turner would love to have you believe that our credit practices are the similar to that of out American counterparts. He uses phrases such as “Canada’s version of sub prime” to scare the heck out of potential buyers and support his “the sky is falling” real estate predictions. The fact is that our credit practices are completely different, and Robert Pozen recognizes this. Garth, pay attention!

Take a look at the three reasons Pozen thinks our system is better.

First, Canadian banks routinely require home purchasers to make down-payments of at least 20 per cent of the purchase price of their home. Even in the government programmes to help low-income families buy their first homes, the minimum down-payment is still 5-10 per cent of a home’s price. With substantial personal net worth at risk, Canadian homeowners are very reluctant to default on their mortgages.

Second, in Canada, when a homeowner defaults on a mortgage, the homeowner is personally liable for any deficiency that remains after a foreclosure and sale of the home. Suppose a Canadian buys a luxury apartment for $800,000 with a $640,000 mortgage, and later defaults on that mortgage. If the bank forecloses on the mortgage and sells the apartment for only $600,000 the Canadian will be personally liable for $40,000 (the $640,000 mortgage minus the $600,000 sale price).

Third, Canada does not provide a tax deduction for interest paid by homeowners on their mortgages. By contrast, US law allows Americans to deduct the interest on the mortgages for their principal residence as well as for their vacation homes. Moreover, US law allows homeowners to deduct the interest on ”home equity” loans. These loans are typically second mortgages used to pull out some of a home’s equity built up over the years

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The good news.

The Bank of Canada will probably keep its benchmark interest rate at a record low tomorrow and repeat a pledge to leave it unchanged through June.

The target rate for overnight loans between commercial banks will remain at 0.25 percent, where it’s been since April, according to all 26 economists surveyed by Bloomberg. The decision will be announced tomorrow at 9 a.m. New York time.

Economist predictions.

Carney will probably raise the key rate to 0.75 percent in the third quarter and to 1.5 percent by the end of the year, according economists surveyed by Bloomberg News. A separate survey for the U.S. shows economists don’t expect the Federal Reserve to raise its benchmark rate to 0.75 percent until the fourth quarter.

Low mortgage rates helped push existing home sales to a record in December, the Canadian Real Estate Association said Jan. 15. The average five-year mortgage rate was 5.49 percent last week and 5.25 percent in May, the lowest since 1951.

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While the report is a little bit more logical than the “rates are going up, everyone is F**KED” mentality of the media right now, I’m not to sure how it will be received. I think there will be a large majority pointing to the economist who wrote the report as having a vested interest in taking an everything is okay stance. On the other hand, a logical well thought out analysis like this is needed to calm the mortgage holding community. If he is right, and employment rises higher, we probably have little to worry about even if rates do rise. On the other hand, if we have a double dip recession, we could be in for a lot of trouble.

What do you think, is this report a little bit to conservative?

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The company’s offering was very impressive, at first. I literally watched one Monday evening as more than 20 people handed over in excess of $3,900 each, to become a member of the company’s mentorship program. It was clear that people who attended their seminars believed that the company had the knowledge to help make each of them millionaires.

*Before I go any further however, let me make one thing perfectly clear – I have no knowledge of anyone who joined this company or invested with this company either making or losing any money. Although I assume that there will be quite a few who lose a substantial amount of money with this company.*

The problem I had with this company was as follows. They promised to help clients pay off their mortgage in as little as seven years, based on a strategy that I taught them (and they modified) less than a week before they started promoting the program on television, radio, and in the newspaper. A weeks worth of knowledge is hardly enough time for them to portray themselves as experts the way in which they did. The strategy involved leveraging people’s homes and using the money to invest in what they considered to be a highly secure investment, but realistically was a highly risky investment. The investment vehicle they were using were secured second and third mortgages against residential properties that the company owned.

These mortgages are where my biggest problem resided. When I began to ask questions of the company’s owner, who at the time I had unlimited access to, I began to more often than not find myself in front of the gatekeeper instead of the owner who actually had the answers to my questions. When I began to ask the gatekeeper the same questions, I was met with the same canned answers that were being given to clients. “So and so has this many years experience, owns this many properties, knows what they are doing, etc.”

Well the fact of the matter is, the owner of the company did know what they were doing, and that was convincing people to leverage their homes to lend mortgages to the company at below market interest rates. Not only that, but the properties they owned often had more money borrowed against them than what the property was actually worth. How did this happen? The company convinced their small, un-knowledgeable, private lenders who had borrowed nearly all of the equity from their homes on the promise of high returns, that the houses they were lending on were actually worth what the city tax assessment valued them at. In other words, the company borrowed from people who didn’t know any better, because the banks sure as hell were not going to lend them the money! At the time, houses were consistently selling for less than what the city valued properties at. In many cases $500,000 houses the company owned, which the city valued at $600,000, had $575,000 to $650,000 worth of mortgages on them.

If a house is worth $500,000, and has $500,000 worth of mortgages on it, and you lend the owner another $100,000, how secure is your money? The answer is not secure at all. Why? Because those who lent the original $500,000 are in line ahead of you to get their money back if the homeowner ever defaults. If you lent them $100,000 all the company would have to do is default on the loan, and they would walk away with your money and all of the equity in your house. My thought, anyone who tries to convince you to leverage your house, so they can buy more houses, should be shot. Not only is this incredibly risky, it is downright stupid.

Here is the kicker though, it took me almost two years and many title searches to figure out what that company was doing. I work in finance, have an economics degree, and understand mortgages better than anyone. If I didn’t understand what this company was doing at the time, how could the clients who had far less knowledge than I understand? The answer is they couldn’t, and they didn’t, because they were duped into risking all they had in an investment scheme that was designed to have them fork over their money with as little objection possible.

Don’t get caught in the same situation.

Go to the Alberta Securities Commission website for details on how to prevent yourself from being scammed by real estate investment companies.

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