Deciphering The BoC's Hieroglyphics

When it comes to the future of interest rates, the Bank of Canada (BoC) is cryptic. It rarely comes right out and says what it’s thinking because that could disrupt financial markets.
Instead, the BoC plants clues in its public statements.

In yesterday’s rate announcement, for example, the BoC removed the word “eventually” from its commentary that rates will rise. When questioned about it today, Governor Mark Carney laughed it off. The market took that as a clue that rates may jump sooner than expected.
The common wisdom today is that the overnight rate will gently rise until it nears the “neutral rate.” *
But that’s not a given, says Carney, at least not in the next year or so.
"You cannot mechanically assume that because the output gap...(will close)…that the bank's target interest rate will be back at neutral, however you define neutral,” he said.
That’s because economic risks could remain, including a high Canadian dollar, a languid U.S. recovery and potential European debt defaults.
If you decode that, says RBC economist Dawn Desjardins, it means the BoC is likely "prepared to maintain a lower than neutral policy rate."
BMO economist Douglas Porter agrees. He says the BoC’s language affirms that “rates are highly unlikely to approach so-called neutral (i.e., somewhere between 3% and 4%) perhaps until well into 2013, and potentially even later on.”
By the way, the Bank of Canada doesn’t announce what it considers to be a neutral policy rate. Economists can only speculate. Current estimates of “neutral” range from 2.5-4%—with approximately 3.00-3.25% being somewhere near consensus.
This all boils down to one thing, say analysts: The probability of rates skyrocketing anytime soon is minimal.
Granted, current rates are "exceptionally stimulative,"as Carney puts it, but that’s been warranted in order to maintain what little economic momentum we have.
Carney also went out of his way to emphasize that yesterday’s rate announcement refers only to "some" of the “considerable monetary policy” being removed. In other words, the Bank is not contemplating aggressive rate increases.
That is exactly what variable-rate mortgagors want to hear.

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*  The neutral rate is the rate level which, over the long run, keeps inflation near the Bank of Canada’s 2% target.

Mortgage Secrets from an Independent Mortgage Planner

If you are buying a house or refinancing your mortgage, the siren song emanating from your local bank branch can be mighty tempting. It’s just so darn convenient, and with all of those TV and radio ads featuring happy people reassuring you that your bank has only your best interests at heart - what’s not to like? Well…your available options for one…and certainly their terms and conditions…and maybe the rate – but hey, I hear that some branches are now giving away free donuts on Fridays, so at least there’s that.

All kidding aside, borrowers who partner with experienced independent mortgage planners gain access to a wide range of solutions that no single bank/lender will ever be able to offer. In today’s post, I’ll give you examples of mortgage options that you probably didn’t know you had, and that you aren’t likely to come across if your local branch teller doubles as your mortgage advisor.  

Terms and ConditionsThere are differences in the terms and conditions offered by the Big Five Banks versus those available at smaller lenders. The bottom line is that Big Five mortgage contracts are full of little clauses and conditions that have the potential to pull significant amounts of money out of your wallet over time. Examples include: inflating your prepayment penalty charge by using posted rates instead of contract rates, registering your mortgage as a collateral charge and convincing you to register a charge for 100% of the value of your property on title (terrible idea!), compounding variable-interest rates monthly instead of semi-annually, and then offering you lousy rates at renewal and hoping you won`t notice. Only an independent mortgage planner with access to the broader market will help you steer clear of these tricks and traps.

Equity LendingIf you are self-employed, there are reputable lenders who will loan you 80% of the value of a property with little or no formal confirmation of your reported income. You usually need to have been self-employed for a minimum period of time and your line of work has to pass the smell test (expect underwriter scepticism to take over in the $70 to $80k range). You also need to have a strong credit history. Furthermore, properties will always be subject to full appraisals, and mortgage rates will often be higher than the best available (but not unreasonably so).
As an aside, this type of lending is controversial and when done wrong, can lead to substantial lender losses. But it’s been available in the Canadian market for quite a long time and it’s about the closest thing we have to risk-based pricing. Done right, equity lending turns ‘no’ into ‘yes’ for borrowers who represent reasonable overall credit risks, and it rewards lenders handsomely for their marginally increased loan exposure.

Investment Property FinancingWhen CMHC stopped insuring high-ratio rental properties, it also opened up the conventional part of the market to more subjective underwriting (because the crown corporation’s guidelines no longer acted as an unofficial mainstay). Today, borrowers will find a significant variance in the way rental properties are underwritten, and partnering with the right mortgage planner can help you gain flexibility with income, expenses, vacancy rates, zoning, and more detailed aspects, like whether or not investment properties can be held in a corporation. Rental investors are well-advised to explore the wide range of mortgage options that are available to them across the lending spectrum (and experienced independent mortgage planners make great tour guides). As with most types of lending, slight changes in the circumstances from one case to the other can mean that one lender offers a much better deal - and it is by no means always the same lender.

Extended AmortizationsMost people think that amortization periods are now limited to a maximum of thirty years, but if your down payment (or built-up equity) is greater than 20% of the value of your home, that’s not the case. Independent mortgage planners have access to lenders who still offer amortizations as long as forty years. For borrowers who want to free up cash flow, this added flexibility can make a world of difference. To put this increased flexibility in perspective, a $300,000 fixed-rate mortgage at 4% that is amortized over thirty years will require a monthly payment of $1,427, whereas that same mortgage amortized over forty years has a monthly payment of only $1,248.
Extended amortizations can also be used to help you qualify for a larger mortgage amount, and if you’re determined to pay off your mortgage faster, you can set your scheduled payment using a shorter amortization period once you have passed the qualification stage. In the example above, if all else is equal, that extra ten years of amortization will increase the maximum mortgage amount you can qualify for by $43,000 – and extended amortizations can be had in combination with some of the best rates in the market.     

Relationship and AdviceDespite all of the advertising campaigns suggesting that your bank wants to be your buddy, you have a much better chance of forming a lasting relationship with an experienced independent mortgage planner. For starters, it takes time and sacrifice to build a successful independent practice and that means we’re in this for long haul, so if you need more advice a few years down the road, we’ll still be around to pick up the conversation where we left off. In contrast, you might have already noticed that the faces at your local bank branch change quite often.
Also, independent planners often have advanced training in financial planning or general finance, and we demonstrate our high level of commitment by working in the context of your long-term financial plan upfront, and by continuing to offer you an educated view of what’s happening in the interest-rate markets after your deal closes. Simply put: you are long term clients, not transactions.
The success of this approach has not gone unnoticed, and the Big Five have countered by dramatically increasing the size of their mortgage sales forces in a very short period of time, a strategic response that has focused on quantity - you will have to judge the quality for yourself. (Please note: I do not want to impugn all bank mortgage specialists; there are some good ones, but it’s no accident that the best among them usually convert to independent planners once they get established.)
The bottom line is that in the Canadian mortgage market, shopping around will usually save you money, increase your flexibility and get you better terms and conditions. The money saving point was recently confirmed by a Bank of Canada (BoC) report called “Discounting in Mortgage Markets”. Surprisingly, the BoC’s research showed that people with higher incomes and asset bases were more likely to pay higher rates if all is else was equal – and the main reason was that this group assumed that their bank would automatically provide the best offer and as such, they didn’t test the wider market. The report concluded that in the end “loyal customers pay more”.
None of this information will come as a surprise to the many first-time home buyers who are using independent mortgage brokers at a record rate (48%, according to the 2011 CMHC Mortgage Consumer Survey). Word has gotten around among that group. It is repeat buyers, refinancers and renewers who are lining the banks’ pockets and missing the many benefits that unbiased, independent advice can provide.
A final point to clarify: Even though I think there is a need for better disclosure, I’m not anti-bank. In some cases, borrowing from one may be your best option; but if you end up at a bank after partnering with an independent mortgage planner you’ll know it’s because they won your business fair and square, not because it was convenient or because you were lured there by their seductive advertising.

RRSP First-time Buyer Exceptions

Question:  I heard that I'm not considered a first-time buyer for the RRSP Home Buyers' Plan (HBP) if me or my spouse have owned a house in the past five years. Are there any exceptions to this rule?




Answer:  Yes. You can still qualify as a first-time buyer under the Home Buyer's Plan if...

from January 1 of the fourth previous year (i.e., 2006) until 31 days before withdrawal, you:

• Did not own a house that you occupied as your primary residence; and,
•  Did not make a spouse's (or common-law partner's) owner-occupied home your principal residence.

As this suggests, you can rent your primary residence while owning one or more rental properties, and still be considered a first-time buyer under the RRSP Home Buyers' Plan.
Even if you or your spouse owned a principal residence in the last 4-5 years, you can still withdraw funds under the HBP if you:

• Have a disability and are buying a home that is more accessible or better suited to your needs
• Buy a home for a close family member with a disability, and that home is more accessible or better suited to the needs of that person
• Give the funds to a close family member so they can buy a home that is more accessible or better suited to their needs.

Here's the definition of a close family member and other relevant details: HBP Link.

Think about your Options- Not just Rate

 It would seem that consumers put far more attention into the options, make and model of the car they would like to buy then they do regarding their financial wellness. Do you buy that new vehicle based solely on price alone? No you don’t, so why would you shop for your single largest investment, your mortgage, based on price alone?

Is it really a surprise that Canadians have managed to rack up 1.5 trillion dollars worth of debt?
It’s not about rate, in fact, rate alone can end up costing you more in the long run. It should be about the total cost of home ownership over the term of the mortgage. Mortgage products can differ from institution to institution and all with varying options built within the mortgage product itself i.e. prepayment options, penalty calculations, due on sale clause, registration, etc… Let me share a client story.

I had a couple referred to me and they were looking to purchase a new home and selling their existing residence. Upon speaking with their existing lender, it was determined that my clients were unable to port their mortgage (meaning take the mortgage with them to the new home). This is because the mortgage they signed for was not portable as per the “due on sale close”. To make a long story short, their only option was to incur a penalty to payout the existing mortgage and take out a brand new mortgage. This could have been avoided if the clients main focus wasn’t “rate”. That said, perhaps the situation could have been avoided had they have had the right advice. Planning is important and as the saying goes, if you’re failing to plan, you’re planning to fail.

It’s important that you do your due diligence and get advice from a professional and preferably someone independent of all institutions (i.e. Mortgage Broker, Financial Planner, Insurance Broker, etc…). I say this because if you are seeking advice from someone loyal to one institution, you may receive biased advice. Proper planning with ongoing proactive management can make the difference between comfortable retirement or no retirement, which would you prefer? In the case of your mortgage, ongoing, proactive mortgage management will dramatically lower your total cost of home ownership. 
It’s time consumers become more diligent about their finances.  Start taking your mortgage financing more seriously and get a plan in place today!

A Mortgage is kinda like piloting a plane....... Say What????? Read on!

Purchasing or refinancing your home is like taking an airline flight cross country. When you start your trip, you have no idea how the trip will go. Neither does the pilot! You could run into ALL types of turbulence, or you could have a smooth flight and land on time. Certainly, the pilot will try to use his or her experience to navigate around storms and go for the smoothest flight plan, but if they're honest, they can't promise a turbulence-free trip. Their job is simply to get you to your destination in the least time and with the least aggravation while keeping you informed throughout the trip.

My role is "the pilot" of your plan. My job is to assist you in getting your mortgage for the lowest cost, in the least time, with the least aggravation. I can't promise you there will be no turbulence but I can promise that I will use my experience and expertise to take you on the smoothest flight that I can. And if we hit turbulence, I won't bail out on you!  I will be your teammate throughout the flight until I get you safely to your destination.

See the different types of turbulence below.

Turbulence! The Lender:   Borrower does not qualify because of a late addition of information.   .                 Lender requires, at the last minute,an appraisal    The Buyer:     Wasn’t completely honest on the application.        Submits incorrect tax returns to lender.    Source of down payment changes.   Job change, illness, divorce or other financial setback    Comes up short on money they stated they had.   The Seller:      Illness, divorce, etc.   Home has hidden or unknown defects that are subsequently discovered Home inspection reveals average amount of small defects that the seller is unwilling to repairRemoves chattels/fixtures from the premises that the buyer believed was included.        Is unable to clear up encumbrances or liens.   Seller did not own 100% of property as previously disclosed. Seller thought getting partner’s signatures were “no problem”   – but they were.  Seller leaves town without giving anyone Power of Attorney.  Seller delays the projected move-out-date.   The Appraiser:    The appraiser is not local and misunderstands the market.    No comparable sales available.   Appraiser delays (too busy, etc.)   Makes important mistakes on appraisal or brings in value too low.   The Home Inspector:   Overly picky with the condition of the property and ‘scares’ the buyer. Infuriates the seller by comments made.      Makes mistakes and misrepresents the property’s deficiencies or good points. The Realtor(s):     Delays access to property for inspection and appraisals.   Unfamiliar with their client’s financial position – do they have enough equity to sell, etc.  Does not get completed paperwork to the lender in time.  Inexperienced in this type of property transaction.  Takes unexpected time off during transaction and can’t be reached.     The Property:   County will not approve septic system or well.  Home was misrepresented as to size and condition.   Home is destroyed prior to closing. Home is uninsurable for homeowners insurance. Property incorrectly zoned. Portion of home sits on neighbours property. Unique home and comparable properties for appraisal difficulty to find.   The Lawyer: Fails to obtain information from beneficiaries, lien holders,title companies, insurance companies, or lenders title companies, insurance companies, or lenders manner.Lets principals leave town without getting all necessary signatures.Incorrect at interpreting or assuming aspects of the transaction and then passing these items on to all parties such as lenders, buyers & sellers.Loses paperwork.       Incorrectly prepares paperwork. Does not pass on valuable information fast enough. Does not coordinate well so that many items can be done simultaneously. Does not bend the rules on small problems.                                       Does not find liens or any title problems until last minute.  Lender does not properly pre-qualify the borrower. Please remember- This is my opinion and these examples are just that- "examples". My experience and knowlegde will be invaluable in any situation as outlined- as I always say- there's more to it than rate!