Tuesday, December 14, 2010

A financial fresh 2011

Make 2011 a year in which you’ll organize your financial matters. Whether it’s investing more for the future or simply paying off debt, set a goal.

Here are some key ideas when setting up S.M.A.R.T financial goals:

Specific

Specific goals will help you keep laser-focused. Whenever you need to make a financial decision, ask yourself: “Does this work toward my financial goal?” If you’re considering curbing spending, make a spontaneous-purchase goal limit. For example, in our family we use the “two-week rule”. For any purchases over $200, we take two weeks to consider the item before we buy it. For instance, if I just happen to stumble upon a great pair of shoes, but I wasn’t planning on purchasing them, I’ll take two weeks to consider the purchase. Usually the two weeks passes and I’ve forgotten about them, which means I didn’t really need them and it would have been a waste of money.

Measurable

Breaking down your goal into key measures and tracking it helps you achieve your goal. The goal does not need to be complicated. For example, you may want to set a regular investing goal. Many people set a goal of saving 10% of their pay each pay period. You can then work to set up automated withdrawals from your bank account so that as soon as you get paid, the 10% savings comes straight out of your account. This can help make the goal attainable.

Attainable

When you develop goals that are important to you, you start to figure out ways to make them happen. You’ll find your attitude and habits start to change and your goals become attainable.

Realistic

Your goal is probably realistic if you truly believe you can achieve it. There are also logistical things you’ll need to consider.

One simple way to get out from under a debt load is to consider refinancing your debt into your mortgage. Is this goal attainable for you? Ask yourself these questions: What is the value of my home versus the current balance on my mortgage? Is there equity available to pay out debt?

If you do have equity available, pick up the phone and call a local mortgage broker who can help you determine the next step in the process.

Timely

Set a time frame for when you want to achieve your goal. If you’d like to save $5000 in a tax-free savings account, for example, set a deadline for yourself in achieving this goal. You may also want to break the goal down into increments, which will help you attain the goal.

Use the same principals in setting up your financial goals as you would any other goal you have in your life. The beginning of the year is a great time to revisit what you did the previous year and make improvements for the coming year.

Friday, December 3, 2010

Include a financing condition when you put an offer on a home

Even if you've been pre-approved for a mortgage, I recommend having a financing condition.

Whether you're selling a home and moving into another, or you're buying your first home the financing condition protects you should there be a deficiency in the collateral (the house you're buying).

There are several things that could come up if you don't have a financing condition, here's an example of one:

If you have a 20% down payment, most lenders require an appraisal of the property. The appraisal is ordered by the mortgage broker who contacts a Certified Real Estate Appraiser (CRA) to do the work.This is a third part who evaluates the value of the home. With a 20% down payment most lenders to not insure the mortgage against default, therefore the lender wants to confirm market value. If the appraiser, assess the property for less than the value on the offer you've made, the lender will only give the mortgage based on the appraised value. The impact is that you may be short of funds on closing if you haven't discussed this in advance.

Don't feel the pressure to buy a house without a financing condition, even if you've been pre-approved.

Tuesday, November 30, 2010

I'm on the fence - variable or fixed

After returning from the Canadian Association of Accredited Mortgage Professionals (CAAMP) conference in Montreal last week, I'm on the fence about recommending a fixed- versus a variable-rate mortgage (VRM). Benjamin Tal of CIBC World Markets notes that over the next five years the savings of a VRM won't be as great compared to a fixed-rate mortgage. How do you determine what's the right mortgage for your financial situation? I believe it comes down to two criteria, here they are:

1. Are you choosing a variable rate mortgage now because of the low monthly payment? If this is the case than a VRM is not the right choice. The main reason to choose a VRM is that over the next two years you want to accelerate the payments on the mortgage and pay down as much principal as possible. Because the prime rate is low and will continue to be until likely the end of 2012, now is your chance to pay down your mortgage.

2. Are you nervous about interest rate fluctuations? If you're nervous about rates or don't have the time to follow what's happening with interest rates, a nice low three- or five-year fixed rate mortgage is always a good option.

Tuesday, October 5, 2010

A low mortgage rate that’s too good to be true – you’re probably right

When you notice a low mortgage rate that stands out in an advertisement, ensure you do some research before you make a commitment to a mortgage. The low rate up front usually means that you need to sacrifice other features that can help you down the road.

The mortgage market is a competitive business. It seems that everyone wants your business! The banking psychology is that once a chartered bank has your bank account or mortgage – they can count on getting more business from you. Sometimes banks see mortgages as lost-leaders. Brokers have also become increasingly competitive – primarily because in the last few years many people have entered the business for the wrong reasons.

My recommendation is that if you need to make changes to your mortgage ensure that you work with someone who has been recommended to you. You’ll also want to look at the track record and years of experience – even if they work with a bank.

Here are a couple of tips to ensure that you get a good mortgage that will help you financially.

1. Extremely low rates often mean sacrifices in other features of the mortgage. Often the mortgage will not have as robust pre-payment options or it may be more difficult to change down the road. Because the financial institution is giving you an extremely low rate, they want you locked-in for the term of the mortgage and they’re not letting you out of it unless there’s a large penalty to pay. Read the fine details and understand them.

2. Ask how the banker or the broker makes their money. Don’t be shy. The individual should have a clear answer to how the money is made on your transaction. This will give you a clear picture of why the rate is being charged. Sometimes bankers need to make their targets for the month. Brokers on the other hand may need the money for their own personal interests rather than keeping yours first.

Wednesday, July 28, 2010

Carrying more than you like on credit? Try wrapping your debt into your mortgage

Many individuals and families that I’ve recently met in my mortgage practise are still digging out of the recession, with unexpected debt. As the economy grew between 2004 and 2008 at a high pace, many manufacturing and labour workers relied on overtime income as a part of their regular pay. This is also true for white-collar workers where bonuses became expected as an income supplement.

We’ve been in an economic recession for almost a year-and-a-half and many sectors still haven’t recovered. A turn-around in manufacturing and more job prospects is expected; however, growth in the future will be slower and gradual.

If you’re carrying debts that total more than $15,000 outside of your home mortgage or a car loans/leases, you should consider refinancing that debt into your mortgage. The two benefits include a decrease in your monthly carrying costs and improved household cash flow. It’s also a great time to look at a family budget and understand what you can reasonably expect for income versus the expenses you have.

Here’s a summary of things you need to consider:

You’ll need 20% equity in your home

A good place to start is to determine what equity you have in your home. It’s best to look into refinancing if you have at least 20% equity in your home. At this point you have enough equity to refinance some debt but there will be a default insurance premium that you’ll need to pay. If you’re revolving debts plus your mortgage, and mortgage-related refinance costs equal less than 80% of the value of your home, you likely won’t have to pay the default insurance premium. The value of your home will be determined by an independent appraisal because banks and lenders want to ensure that you are not overleveraging the new mortgage loan that they’re giving.

Know your penalty costs

Call your mortgage lender or broker and they will help you determine the penalty costs. If your mortgage is with a traditional chartered bank, most good mortgage brokers have access to those lenders and can help you get the penalty cost, even if you did not get the mortgage through them originally. They will have you sign a “client consent” form which gives them the authority to call the lender on your behalf and ask the correct questions so that an exact penalty cost can be determined.

No fee refinances are available

Some wholesale banks that mortgage brokers work with will offer no-fee refinances. If there is no change to the title of the mortgage, a title-closing company can be used in place of a lawyer. The main benefit of this is that there are no legal costs. Some lenders will also pay up to $2000 worth of penalty costs. The only thing you may need to pay is the cost of an independent appraisal which is normally less than $300.

Monday, April 19, 2010

Things you need to know for the next six months in real estate

I'm getting right to the point here...a quick snap shot of things to consider for the next six months if you're interested in real estate...


A prime rate that’s “back-to-normal”

The prime rate has been artificially low throughout the recession. The Bank of Canada has kept their policy rate low to help stimulate activity in the economy. When interest rates are low, money is cheap to borrow, and consumers and industry spend. Now that things are getting back to normal, the Bank of Canada will move its policy rate. The increases in the rate will begin in mid-summer and continue. The forecast for the prime rate is an increase of 2% over the next year to year and a half. This adjustment is a reaction to the continued improvement in the economic outlook.

Fixed rates are moving up, buy why not variable rates?

Fixed-rate mortgages are based on the bond market which forecasts the outlook for future inflation. Because of the predicted improvement in the economy, inflation is expected to kick-in. The recent increases in fixed rates are a predictable move given that the Bank of Canada key policy rate will move up in mid-summer. The increase in rates does not mean that inflation will be a problem, but that we are moving out of the recession and into a marketplace where growth is slow and steady.

Smart real estate investing – it may not be smart

Over the past two years many have lost money in their traditional financial investments. With the strength in the real estate market, we’ve seen a strong movement to buy rental properties. Why have prices been so high in real estate investment properties? It’s because interest rates are so low. Low rates give rise to low mortgage payments, which in return justify higher prices in investment properties. Recent changes in the lending guidelines for real estate investing, such as a 20% down payment requirement, will help eliminate investors who may not have enough capital to cover changes to future interest rates. In my own investing, I normally watch what the mass market is doing and do the opposite. A herd mentality in any type of investment leads to unprofitability. It's always a good time to invest in real estate by keeping the fundamental of positive cash flow the goal.

Private mortgage investments

If your financial investments have suffered in the last two years and you are looking for a more conservative investment with a good rate of return, I believe private mortgage investing is an option worth exploring. As mortgage-lending guidelines have tightened, there are still borrowers who are willing to pay a higher interest rate, in order to consolidate debt or purchase a home. Private mortgages can balance the need for borrowers and real estate investors. The higher the risk, the higher the rate-of-return for investors. When considering if a private mortgage is a good investment ensure you work with a reputable mortgage broker who has experience in this area and can advise you on both the benefits and the risks of each private mortgage investment.

Tuesday, February 16, 2010

Changes in mortgage lending shouldn't stifle prudent borrowers

The Minister of Finance announced changes to mortgage lending aimed at helping Canadians with borrowing against their homes. The changes shouldn’t stifle borrowers who have been good with their money. Here’s a commentary on each of the changes slated to come into effect on April 19, 2010.

Mortgage lenders will qualify borrowers on a five-year fixed rate mortgage, even if they want a variable-rate mortgage

In the last three years variable-rate mortgages have increased in popularity because the interest charged on variable-rates has been lower than fixed-rate mortgages. In my practise, nearly 35% of clients choose variable-rate mortgages. Understanding the risks associated with variable-rate mortgages can help people make good financial choices. This changes proposed mean that the majority of Canadians will be shielded against some of the rate increases that will occur in 2010 to the prime rate. By being more conservative and qualify mortgage borrowers on higher interest rates, the likelihood of running into problems with making mortgage payments in the future will be less. A slight adjustment in the qualifying rate shouldn’t discourage borrowers since I find that most borrowers don’t want to be house poor and are conservative in budgeting for their mortgage payments anyway.

Refinances up to 90% instead of 95%

Although the default insurance premium guidelines allow borrowers to refinance to 95% of the value of their home, I’ve had a hard time finding any lenders that would allow this anyway. Certainly in Guelph and Wellington County, homes under $250,000 are holding their value and in some cases appreciating considerably because of the demand in homes for first time home buyers and investors. If home prices are to soften in 2011, the ability to refinance a home to 90% instead of 95% will allow these borrowers to have more equity left in their homes should they decide to sell within three to five years.

20% down payment on rental properties

Guelph is a hot market for real estate investing because of the driving force of student rental properties. The government will be requiring a 20% down payment on rental properties in order to insure them against default. Ensuring that a borrower has a good down payment, means the landlord has more at stake in the property. Many people in the last year have wanted to get into owning rental properties because they believe they can make a quick buck. Buying real estate is a get rich slowly plan. There are creative ways to work around the 20% down payment, which can still make sense. These will be available for people who have good credit and a history of managing their money.