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Ask the Expert: Should I prepare myself for higher interest rates?

Rates may be at historic lows however, with big banks raising fixed rates and reducing variable-rate discounts, you need to be ready to pay more. As seen in REW.ca

Q: I’m easily able to make payments on my mortgage at the moment as my rate is so low. I saw that the Bank of Canada didn’t cut its overnight rate last week, and that some banks are actually raising interest rates. Should I be prepared for higher interest rates, and if so, what is your advice?

A: Interest rates are still at historical lows, and we keep hearing for years that interest rates are going to rise. If anything, interest rates have dropped.

The Bank of Canada was considering dropping the overnight rate. However, on Wednesday’s announcement they have decided to maintain the overnight rate at 0.5 per cent. Since the Canadian dollar has already fallen sharply and a rate cut could have imprudently triggered a currency rout. There is a great deal of concern about household debt, and another rate cut would add to the risk by encouraging excessive borrowing.

So does this mean that we should stop thinking about rising interest rates? Not at all. It is important to be proactive and prepare yourself for higher interest rates.

The following are some tips that can help you.

  1. income-reportPay down your mortgage faster

To ensure that you don’t over-leverage yourself when interest rates do eventually increase, start by making larger or more frequent payments and make lump-sum prepayments when possible towards your mortgage. This will help you by lowering your principal so you will pay interest on a smaller amount in the future.

  • Consider making a lump-sum payment. Most lenders allow you to pay up to 10 to 20 per cent of your mortgage without a penalty annually. The prepayment amount is applied directly to the principal balance, which will help you save money.
  • Changing your payment frequency is a great way to pay off your mortgage faster. While most people might not have extra money to put a lump-sum payment every year, you can save money by paying the same amount per month and just simply splitting your mortgage payments throughout the month to semi-annual, bi-weekly or weekly payments.

Below is a chart showing how paying more often pays off.

table pay off mortgage faster

(Calculations based on a mortgage amount of $450,142 with a five-year fixed rate of 2.64% and a 25-year amortization.)
  1. Pay down other debt

pay-off-credit-cardsIf you are only making minimum payments on your credit card, it would be a good idea to start paying more. If you are unable to come up with the money to increase your payments, start a budget or see where you can tighten your existing one, cut spending and start paying down your credit card debt with the money you save.

If you are living beyond your means, it won’t get any easier later on. It is better to become proactive, instead of getting in a tighter situation later, especially when interest rates start rising. If you are looking at buying a home, calculate what the payments will be with a higher interest rate and see if you would be comfortable making those payments in the long run. If not, purchase a property of lesser value.

  1. Refinance

If your mortgage is coming up for renewal in the next two to three years, it is worth checking out if you are eligible to refinance now and take advantage of the lower interest rates. Also, if you have equity in your home, this is a great opportunity to pay off some debts and increase your monthly cash flow. Even if you have to pay a penalty for refinancing prior to the end of the term, it could help you save money in the long run. Talk to your mortgage expert to explore the options and see if it makes sense.

  1. Have a contingency fund

imagesQ8W8929HIf you are concerned about higher interest rates when your mortgage comes up for renewal, start working on it now. It’s a good idea to start a contingency fund that can be used to cover the increase in mortgage payments or use that fund to make a lump sum payment on your mortgage. If you are on a variable mortgage, figure out what would be your mortgage payments if you had a fixed rate and put that extra money aside. By making small changes in your daily spending you can save more money in the long run.

  1. Seek professional advice

Having a close relationship and working with your mortgage expert 83834073frequently can help offset some of the stress and confusion. Your mortgage expert can help educate you in areas you might not be familiar with and can help you be prepared for when interest rates do start increasing.

If you are worried if you will be able to afford your home when interest rates increase or if you want to find out how you can save money, give me a call at 778.893.0525 to speak about your options.

 

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Fraud Alert #1: What Happens with Mortgage Fraud – and Why You’re Not Safe

In the first of a two-part series on fraud, outline the red flags for mortgage fraud. As seen in REW.ca

Nowadays, with the amount of information that is shared on the internet and social media, identity theft and Ponzi schemes are happening regularly. Homeowners are taking the necessary steps to protect one of their largest investments, which is their home.

The last thing you want to worry about is yet another way to lose your hard-earned money. But as a homeowner, you need to be aware of crimes on the rise, known as mortgage fraud and real estate title fraud.

In this first part, we will look at mortgage fraud and “straw buyer” schemes.

trap,  catch

Mortgage Fraud

Some borrowers may think that providing false documents and making false statements is not a big deal. However, the Criminal Code clearly states that obtaining funds, including mortgages, by providing false information is a crime.

The most common type of mortgage fraud involves a criminal obtaining a property, then increasing its value through a series of sales and resales involving the fraudster and someone working in cooperation with them. A mortgage is then secured for the property based on the inflated price.

Here are some red flags for mortgage fraud:

  • Someone offers you money to use your name and credit information to obtain a mortgage.
  • You are encouraged to include false information on a mortgage application.
  • You are asked to leave signature lines or other important areas of your mortgage application blank.
  • The seller or investment advisor discourages you from seeing or inspecting the investment property you are purchasing.
  • The seller or developer rebates you money on closing, and you don’t disclose this to your lending institution.

“Straw Buyer” Schemes

Another kind of mortgage fraud is the “straw” or “dummy” homebuyer scheme. For instance, a renter does not have a good credit rating or is self-employed and cannot get a mortgage, or doesn’t have a sufficient down payment, so they cannot purchase a home. They, or an associate, approach someone else with solid credit. This person is offered a sum of money (can be as much as $10,000) to go through the motions of buying a property on the other person’s behalf – acting as a straw buyer. The person with good credit lends their name and credit rating to the person who cannot be approved for a mortgage for a home purchase.

Other types of criminal activity often dovetail with mortgage fraud. For example, people who run “grow ops” or meth labs may use these forms of fraud to “purchase” their properties.

It’s important to remember that if something doesn’t seem right, it usually isn’t – always follow your instincts when it comes to red flags during the home buying and mortgage processes.


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Is the Rate the Most Important Factor in a Mortgage?

With ultra-low interest rates all over the news, it’s no wonder that’s what people focus on. But they shouldn’t. As seen in the REW.ca.

It is interesting that, time after time, when you ask someone “What is the most important thing about a mortgage?” they respond by saying “the rate”. This was exactly the answer we got at a networking event last week when we asked that question.

DiscountThe reason why people focus on “the rate” is because that is the only thing you hear on the news. Last week, it was all over the news that both BMO and TD announced that they have dropped their five-year rate. Then the talk around the watercooler is “What is the rate on your mortgage?” or “I just got 2.74 per cent for five years”. There are other lenders that mortgage experts work with that have being offering lower rates than that for weeks.

But it’s not about “the rate” – or it shouldn’t be. While the rate is an important component of a mortgage, it is not the main thing you should focus on. You should be focusing on what is the best mortgage for your individual needs that provides a great rate but most importantly the best terms and conditions.

By understanding mortgage terms and what they mean in dollars and cents, you can save the most money and choose the term that is best suited to your specific needs.

So What Should You Consider When Looking for a Mortgage?

  • Pre-payment penalties.

All closed mortgages have the pre-payment clause that says that is you pay off your mortgage before the end of the term, you would have to pay a penalty calculated based on the greater of the IRD (interest rate differential) or the three-month interest penalty. However, there are some lenders that they are offering lower rates and in addition to the above penalties they are also including a 2.5 per cent to 3 per cent penalty (depending on the lender), which ever one is greater. In addition, since there is no magic formula to determine the penalty, each bank has its own calculation formula. Most banks determine the rate you pay based on the posted rate minus the discount you receive. However, at the time to calculate the pre-payment penalty they use the posted rate.

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  • Pre-payment options.

The pre-payments without penalty clause is one of the conditions that can save you thousands of dollars over the life of your mortgage. This clause allows you to make payments on the principal of your loan, or increase the amount of your periodic payments (monthly, bi-monthly, etc.) without a penalty. Each lender has different programs for pre-payments, they usually vary from 10 per cent to 20 per cent. For example, you can pay any amount within the approved percentage of the original value of your mortgage, or increase your periodic payments once a year, without paying a penalty. Many people don’t take advantage of this clause because it is generally difficult to save the extra money to make additional lump sum payments, but they can certainly increase their payments up to 20 per cent. By doing this it will help you reduce your amortization period and pay more money toward principal than interest.

  • How your mortgage is registered – collateral or conventional mortgage.

o   With a conventional mortgage, the amount you are borrowing (property value minus down payment) is the amount that’s registered. But with a collateral mortgage, the amount that’s registered is 100-125 per cent of the property value, and the lender has both a promissory note and a lien registered against the property for the total registered amount. The advantage of a collateral mortgage is easy access to credit. Since the mortgage is already registered for a larger amount than you need to buy the house, you can access additional funds in the future without any extra steps or legal fees. However, there are also several downsides of collateral mortgages especially if you are putting less than 20 per cent down payment. The reason being is that with the current mortgage rules you are not able to refinance your mortgage unless you have more than 20 per cent of equity in your home. Therefore, unless your home dramatically increases in value in the next five years you will not be refinancing anytime soon.

o   Free transfers or switches to a new lender when your term is up aren’t usually available. Most other lenders don’t like the fine print and restrictions of collateral mortgages and won’t accept them unless they’re a refinance, which costs you legal, discharge fees and possible appraisal fees.

o    You could end up paying a higher interest rate at renewal. If your collateral mortgage makes it difficult to switch lenders at renewal, you don’t have the ability to shop around for the best rate. That could end up costing you up to 1 per cent more on your mortgage rate.

QAsignpost-wide386Therefore, before you sign on the dotted line, make sure that it is clearly explain to you what are the terms and conditions of the mortgage you are getting. If you are not comfortable with the answers you are getting or if they are not taking the time to explain the details of the mortgage take a step back.

That is why it is important that you work with someone that you trust, feel comfortable with and know that they are looking out for your best interest. Mortgage experts have access to multiple lenders – including banks, credit unions and other lenders that only work with brokers – which will ensure that we find the best mortgage for your individual needs. After all, we work for you and not for the banks.


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How Much Does Mortgage Rate Really Matter?

A great discounted rate on your mortgage is worth nothing if it’s going to cost you thousands in penalties down the line. As seen in REW.ca.

More often than not, borrowers are fixated on their mortgage rate because it’s the one aspect of their home financing they know to ask about. But it’s important to look beyond the mere rates and look into the bigger picture surrounding what is significant when it comes to your specific mortgage needs. It is important to compare apples with apples.

If we dollarize the difference between 2.99 per cent and 3.04 per cent, for instance, it works out to an additional $2.66 in your monthly payment per $100,000 of your mortgage. Over the course of a five-year term, this culminates into just $159.60 per $100,000.

While “no-frills” mortgage products typically offer a lower – or more discounted – interest rate (like the 2.99 per cent used in the example above), when compared with many other available products, the lower rate is really their only perk.

The biggest problem with looking at rate alone is that you may end up paying thousands of dollars in early payout penalties if you opt for a five-year fixed-rate mortgage, for instance, and then decide to move before the five years is up.

No-frills mortgage products won’t let you take your mortgage with you if you purchase another property before your mortgage term is up – for example, portability is not an option with this product. Portability is an important option that could save you money over the long term if the home of your dreams is within your reach before your mortgage term is up and rates have risen, which they have a tendency to do over a five-year period.

This type of product is only plausible for those who have minimal plans to take advantage of benefits that will help pay off your mortgage faster – such as pre-payment privileges including lump-sum payments and increase your mortgage payments between 15 and 20 per cent without penalties.

imagesQ8W8929HOther things to consider is whether you are getting into a collateral mortgage or a conventional mortgage. Unfortunately, many people don’t realize they have a collateral mortgage until it comes time to renew and they don’t have the flexibility they need.

It’s understandable why these products may seem appealing. After all, not everyone feels they have the extra cash to put down a huge lump-sum payment. And who needs a portable mortgage if you’re not planning on moving any time soon?

But it’s important to remember that a lot can change over the course of five years – or whatever term you choose for your mortgage. You could get transferred, find a bigger house, have children, change careers, separate from your spouse, etc. Five years is a long time to be anchored to something.

Many people won’t sign a cell phone contract for longer than two years that they can’t get out of, so why would they then sign a mortgage for five years that they can’t get out of?

The thing is, you can still obtain great mortgage savings without giving up the perks of traditional mortgages. For starters, many lenders are willing to offer significant discounts if you opt for a 30-day “quick close.”

And there are many other ways to save money. For instance, by switching to weekly or bi-weekly mortgage payments, or by obtaining a variable-rate mortgage but increasing your payments to match those of the going five-year fixed rate, you will be ahead of the typical discount of a no-frills product before you know it and you won’t have to give up on options.

Banks don’t give anything away for free – they are there to make money. That’s why it is essential to discuss the full details surrounding the small print behind the low rates. It’s also important to take into account your longer-term goals and ensure your mortgage meets your unique needs now and into the future. As mortgage experts will help you find that balance by finding the best mortgage for you.


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Thirteen things you need to know BEFORE renewing your mortgage.

With mortgage rates still dropping and new products on the market, don’t sign that renewal letter, say experts Jorge and Alisa Aragon. As seen in REW.ca 

Is your mortgage coming up for renewal? Don’t be too quick to sign that mortgage renewal letter. More than 70 per cent of Canadian mortgage holders do just that, and what is the usual result? A higher rate and a mortgage product that might not be best suited to their interests.

Experience has shown that the “Big Banks” send their mortgage renewals out at a posted rate. Lenders are counting on the fact that most homeowners are too busy to ask questions or to inquire about getting a better rate. Don’t let this happen to you!

You should recognize that you are now negotiating from a position of strength as your renewalmortgage principal has dropped and in most cases your home value has increased. Lenders see you as a lower risk borrower and consequently you should be getting the best rates available. That may not happen if you simply sign the renewal document provided by your existing lender.

Rather, let the lenders compete for your business to be sure you do in fact get the best mortgage possible.

The following are some things you need to consider before you renew your mortgage.

  • Mark your calendar or digital organizer for four months before your renewal. On that date, start re-evaluating your needs to see what type of mortgage is likely to fit best this time. Start researching the market for products, features, interest rates, lenders and interest rate trends. If this sounds like too much work and you are leaning toward simply signing your bank’s offer when it arrives, ! Instead, take the  easy route and let a mortgage expert do all the work for you, for free. Start taking action on your renewal 120 days (four months) in advance.
  • If you do nothing else, simply pick up the phone when you receive your bank’s renewal notice, thank them for the interest rate they have offered and ask them if they can bring it down a little. In most cases, they will say yes. Of course, you should wonder, “If I can get a lower rate by simply asking for it, imagine how much better rate and features I could get if I had a mortgage expert playing hardball with several competing banks!” Ask for a lower rate.
  • See renewal as a time to start over. So much may have changed in your life since you first took out your mortgage. It would be foolhardy to lock yourself into exactly the same mortgage at an unnecessarily high rate just because your bank doesn’t want to take the time to provide a financial review and make a more current recommendation. And don’t think this has to take up a lot of your time. Mortgage experts can perform a full review in a few minutes, whenever and wherever is most convenient for you.
  • Attractive new mortgage products and features may be available that you’re not aware of. New mortgage products are being introduced all the time. Not only do some offer better rates, they may also offer better pre-payment options, cash backs, amortizations, accelerated payment schedules, investment opportunities and more. But you will never know if you simply sign up for more of the same.
  • The rate market may have changed dramatically. When you first took out your mortgage, you may have gone variable because rates seemed to be continually dropping. But what if the economy and interest rates have shifted in the meantime, as they have recently? Maybe it’s time to consider locking in so your payments don’t start creeping up month after month. But you will never know if you simply sign up for more of the same.
  • You are not obliged to renew into the same kind of mortgage, nor are you obliged to stay with the same bank. When your mortgage term is up, all bets are off. Nobody owns you. Sometimes people feel loyal to a lender since the lender was good enough to lend you the money, you owe them your business. In reality, it’s a business transaction like any other. If the lender isn’t giving you the best rate, product, features and service, you have every right to take your business elsewhere. Of course, shopping around for the best alternative can be confusing and time consuming, so go to a mortgage expert to do all the legwork, comparisons and negotiation for free.
  • You can negotiate and play one bank off another. Again, don’t feel you are being disloyal by asking for a better deal or shopping around. Of course, you won’t be able to negotiate very effectively if you try to fit it within the 30-day window your bank gives you. This is another reason to start early. And it’s also a another good reason to use a mortgage expert – seasoned negotiators who know exactly how far to push each bank to get you the best deal.
  • If you can, pay down the principal. Renewal is a great time to put a lump sum down on your mortgage. There are no limits to how much you can pay. And since it goes straight toward your principal, even a modest amount can dramatically reduce your amortization and total interest costs.
  • Renewal is the best time to refinance. If you are thinking about taking out equity from your home for renovations, investments, children’s education, debt consolidation, etc., do it at renewal time. Since your mortgage term has ended, there are no early payment penalties, which can save you thousands of dollars.
  • Rate isn’t everything, but it’s tremendously important. Accepting your bank’s first renewal offer is like leaving money on the table. You can do better by shopping around yourself, and you can do MUCH better by letting a mortgage expert shop for you. Shaving a point off your rate can save tens of thousands of dollars over the life of your mortgage.
  • Don’t be scared off by fees to switch lenders. Your existing lender may tell you there’s a discharge fee if you move your mortgage. But don’t worry. Most lenders let you include the discharge fee into the new mortgage and it’s a minimal cost considering how much you can save in interest.
  • Make sure switching lenders is worth it. In almost every case, it’s very much worth your while to switch lenders if that’s what it takes to get a mortgage and rate that fits your needs best. However, keep in mind that moving to a new lender involves some extra steps. Since it’s a new mortgage, you have to go through the application process again, proving your income and getting your credit checked. In some rare cases, the tiny amount you would save by switching lenders may not be worth all this extra work. But even in these cases, it’s definitely worthwhile to have a mortgage expert review your situation and shop the market for you. A reputable broker who is looking after your best interests will tell you if it is optimal to stay with your existing lender.
  • Even if you get a lower rate, keep your payments the same. Sure, with a lower rate, you could enjoy lower payments and increased cash flow. But if you keep your monthly payments the same as they were when your rate was higher, you will pay off your mortgage sooner and be well on your way to financial security.

So if your mortgage is up for renewal, talk to a mortgage expert, who will be happy to provide you with a free consultation by reviewing your current situation and ensure you get the best rate and terms available.


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It does matter how your mortgage gets registered – collateral or conventional

Many people are unaware that there are two basic types of mortgages: conventional and collateral. With a conventional mortgage, the amount you’re borrowing (property value minus down payment) is the amount that’s registered. But with a collateral mortgage, the amount that’s registered is 100-125% of the property value, and the lender has both a promissory note AND a lien registered against the property for the total registered amount. Most credit unions such as Vancity register their mortgages collateral while TD Canada Trust and ING Direct switched to collateral mortgages in 2010.

The advantage of a collateral mortgage is easy access to credit. Since the mortgage is already registered for a larger amount than you need to buy the house, you can access additional funds in the future without any extra steps or legal fees.

But there are also several downsides of collateral mortgages:

– Free transfers or switches to a new lender when your term is up aren’t usually available. Most other lenders don’t like the fine print and restrictions of collateral mortgages and won’t accept them unless they’re a refinance, which costs you legal and possible appraisal fees.

– You could end up paying a higher interest rate at renewal. If your collateral mortgage makes it difficult to switch lenders at renewal, you don’t have the ability to shop around for the best rate. That could end up costing you up to 1% more on your mortgage rate.

Obviously, it’s very important for you to know up front whether you’re getting into a collateral mortgage or a conventional mortgage. Unfortunately, many people don’t realize they have a collateral mortgage until it comes time to renew and they don’t have the flexibility they need. We would be more than happy to help make sure this doesn’t happen to you!