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Happy New Year, Happy House Hunting

posted on 23rd January 2012

Happy New Year could mean Happy House Hunting

With 2011 firmly planted in the rear view it is time to resolute for 2012.  I am not known for making resolutions, for some reason I have just never bought into the thought of setting some “out there” goal just because the calendar changed.  I have always said that goals and resolutions should be set regularly and evolve as you do. However, when 2011 came a long I decided to stop taking myself so seriously and just have some fun with the whole New Year resolution thing.  I decided to make a resolution that would last the entire year, but no longer if I didn’t want it to.  It wasn’t about losing weight, spending more family time, getting wealthy or any of the “normal” things we hear about, it was just some fun little thing…….. and I can honestly say I made it, I did it, yeah for me!

In preparation for my 2012 resolution I started to ask a few of my friends and acquaintances what they were aiming for.  I got a lot of the same answers you would expect, but then I heard one resolution that really struck home for me.  I heard, “I will stop paying rent”.  After I clarified this meant they were going to purchase a home and not just leave their landlord high and dry without rent cheques I said Hallelujah.

Ask most and they will tell you Location, Location, Location.  Somewhat true I suppose.  What it means to me is don’t buy a home in a bad location.  Ask me and I will tell you Knowledge, Timing, and more Knowledge.  If your goal for 2012 is to become a home-owner you must consider these rules:

1)    Don’t listen to your parents.  Now before I get into trouble with all the moms out there let me clarify my position here.  I love the advice I get from my parents, their wisdom is irreplaceable and it would be foolish to dismiss that wisdom because I told you to.   The reason to not listen to your parents is because things have significantly changed since they purchased their first home.  Government imposed guidelines have changed, lending policies change monthly if not daily and mortgage product options have exploded in the past 5-10 years.  So by all means take their advice and help, but when it comes to specific details of the mortgage or the home buying process make sure you are armed with knowledge of the current situation you are buying in.

2)    If home prices drop and interest rates increase it may cost you more than buying today.  Over-all cost of borrowing is much more important to you than purchase price.  For example:  A $250 000 home may drop in price by 5%, down to $237 500.  Obviously if this happens you have automatically saved $12 500.  If the interest rate of your mortgage is the same on the day your purchase goes through as it was when the home was priced higher then obviously you have been rewarded by waiting for a price drop.  This is perfect timing, and almost impossible to control or predict!  But what if the interest rate was ½ % higher? Your $12 500 savings is actually only $8523.95.  What if the rates increase by 1%? Your savings now is only $2904.21.  Factor in the rent you were paying each month while you waited for this home price to drop and you can easily see you should not have waited.

3)    Work with only those professionals who have walked a mile in your shoes.  In my opinion you should not purchase a home from a realtor who still rents, you should not take financial planning advice from someone who has never invested themselves and you should not get your mortgage from someone who has never had a mortgage.  Now by no means am I saying these people are not professionals, they may very well be just that.  But there is no way for them to understand the emotions of the situation.  In not having experienced that same emotion your transaction could be treated as just that, a transaction.

4)    Before you begin the home shopping process make a list of the things you must have in your new home.  Narrow the list to 3-5 musts, you know, the things that would kill the deal if the home does not have them.  Then add to it the list of other wants.  From this list of wants set your expectations to achieve about 70-80% of the list.  In setting realistic goals your home buying process will be much more enjoyable.

5)    Understand the unique mortgage programs available to you.  There is more to your mortgage just looking for the best interest rate.  What happens to you when your first mortgage comes due, renewal rates are significantly higher and your payment jumps dramatically?  My hedge against inflation strategy is guaranteed to protect you against that.  Or how about working with a Mortgage Planner who has designed a program where you get paid cash at closing.  How would an extra $2000 in your pocket sound?  Use my bundled service program and you could receive just that.  What about the idea of planning to make your home mortgage a future tax deduction?  The Bright Futures program we run will do just that.  Being invested in your overall financial wellness is the number one goal I have for you, that is why our office spends countless hours designing unique programs that allow you to get from point A to point B much sooner.

Happy New Year!

Cory McLean, President

Axis Mortgage Inc.

Know Your Market, not The Market

posted on 18th November 2011

Random Musings

As I sit here ready to write this article I am struggling with what topic to discuss, what topic is going to mean more to you, the consumer.  Should I talk about interest rates or the potential changes to mortgage rules, or the fact that a couple of lenders have exited the Mortgage Broker world?  Maybe I should talk about the difference from one mortgage to the next, all valid topics for-sure, but today I am not going to be that specific, no this is going to be quite random.  My randomness started by doing some research over my past few lunch breaks and coffee shop visits, well o.k., not really research, more like eaves-dropping.  I have been hearing a lot of real estate and mortgage related conversations, interesting conversations, by people who obviously have very little experience, whom are speaking with a great level of confidence, like they have done it a hundred times.  Are these people like many others?  Are they bombarded with media reports about what is right and wrong and what is real or not real?

I have to admit, I am an active tweeter and face-booker, I love the articles and the “knowledge” I gain, but like any media outlet it can be very confusing and overwhelming.  On any given day I can read three articles that may start like this:  #1  CMHC reports a decline in housing starts compared to this time last year.  #2 The Calgary Real Estate Board predicts year over year growth and property value increases.  #3  Is there a Canadian Real Estate Bubble?  Are you confused yet?  I am and this brings me to my first musing.

Understand “your” market, not “the” market

In my opinion there is no market when it comes to real estate, there is only your market.  National averages, CMHC reports, lender forecasts are all interesting articles but if you are making the significant decision to purchase a home, sell a home or take a particular type of mortgage after only consulting with a National entity then you are likely missing the boat.  A large change of home price in Toronto or Vancouver can dramatically change that national average you are so intently following.  When I hear people say they are not going to buy now because we are in a bubble and prices are definitely coming down I can’t help but want to tell them to stop and get knowledgeable of the market they want to buy in.  That market could be as precise and limited to a two bedroom apartment in West Lethbridge.  Yes “your market” can be that small, and to make your decision on a CMHC report based on overall National housing information could lead to the wrong decision.

Walk a Mile

Just recently I participated in the YWCA Walk a mile in her shoes event to raise money for the local YWCA.  I dressed in a skirt (and yes the wind was blowing it up), I had on a string top (that was cutting into my ribs) and wore a long wig (I had to hold the hair out of my face all day) and of coarse I was in bright pink high heels (and yes they hurt my feet and my legs).  I walked the full mile and at the end I knew for that short moment what it was like to be a “lady”.  What did I take from it?  Well first I took great honor in being able to raise funds for a very worthy cause, but I also took from it an understanding.  The next time I am walking with a women who needs to stop due to sore feet, I will gladly stop because I now know what they are experiencing.

Is this lesson I learned applicable to real estate?  Absolutely 100% it is.  If your real estate agent, home inspector or mortgage planner do not own a home how can they possibly know what you are about to go through.  If your Mortgage planner is not experienced with owning revenue property how can they possibly point out things you should be thinking of regarding tax issues, vacancies, cash flows or cap. rates?  Taking the advice of someone who read a book or two, or who has friends that have done it is not likely the basis for your sound decision!  Taking advice from those who understand what you are going to experience is absolutely essential.

The Apex of the spread curve is way tighter than it was a month ago!

 What? What on earth are you talking about?  I am talking about the difference between variable rates and fixed rates, which one is better for you and what this means to your future mortgage product.

If you were to have looked at a line graph a month ago you would have seen a big curve representing a fixed rate and a big curve representing a variable rate.  These curves would have mirrored each other (representing a wide spread) and clearly shown the benefit of a variable rate mortgage.  A month ago many lenders were offering five year variable rate mortgages at prime minus .80% (equal to 2.2% at that time) and offering 5 year fixed rates at 3.79%.  This was a spread of over 1.5% and meant the variable rate was a safe option for many who understand that the Bank of Canada prime rate is not likely to increase for many months to come.

Today is a different story with most lenders now offering variable rate mortgages at prime minus .20% (equal to 2.80%) and fixed rates at 3.39%, this is a spread of only ½% meaning variable rate mortgages are not near as attractive as they were.  The spread, or the graph curve is much tighter.

My final musing:

Crazy rules

I hear so many “rules” when talking to my clients.  You now the one like this:  You should purchase rental properties that yield monthly rent equal to 1% of the purchase price. Well, to put it bluntly if that was the rule there would never be a rental property sold in Southern Alberta.  This would mean you would need to earn $3000 per month on your $300 000 home.  Good luck with that!

Keep those conversations going, stay excited about real estate and do yourself a big favor.  Seek the help of those who are experts in your market and in your community.

MORTGAGE CHANGES CLARIFIED

posted on 25th February 2011

MARCH 18, 2011 IS A “BIG” DAY

By now you have all heard or read something about the Mortgage changes taking effect on March 18^th.  Two of the three changes have garnered much media hype so I think it is very important to show you what these changes really mean to you.  All hype aside let’s take a look at the numbers, after-all that is what you are really concerned about.

The first change has received little attention, likely because it is not going to effect many.  Lines of Credit will no longer be insured by CMHC, Genworth or Canada Guarantee, meaning if you want a LOC secured on your home it can’t exceed 80% of the home value.  There have been a limited number of lenders offering LOC’s over the value of 80% anyways so this change is not likely to have any effect on the Canadian Mortgage market.

The second change will see the maximum refinance value decrease from 90 to 85%.  This means if you are considering doing a refinance to access your home equity or pay off some other debts you will lose access to 5% of your home value.

If you own a home valued at $300 000 you could refinance that up to $270 000 as of today.  On March 18^th you can only refinance up to $255 000.

The third change has garnered the most media hype..  The maximum amortization will be decreasing from 35 to 30 years on all insured mortgages.  Now I have a theory on what will happen to amortizations on un-insured (non CMHC) mortgages and I will discuss that in a separate posting, but for today let’s focus on the insured mortgages.

This decrease in Amortization will significantly effect a number of clients looking to purchase or refinance.

If your gross income is $60 000 annually you would be eligible for a home that carries a combined mortgage payment, property tax payment and heating cost of $1750 per month.  For this illustration the mortgage component is $1475 per month.    Based on the 35 year amortization you would qualify for a mortgage of $334 600.  On March 18^th it would be $310 200.

One of the big misconceptions out there right now is that your mortgage needs to fund before the 18^th.  That is not true.  If we have you approved at a lender and one of the insurance agencies before the 18^th and your mortgage funds within the expiration date of that approval you are protected.  This gives you 22 days to get approved………….so move fast before these BIG changes give you a BIG headache.

ARE YOU AN “AVERAGE CANADIAN”?

posted on 18th February 2011

The following report sheds some light on the state of personal debt loads in Canada.

http://ca.finance.yahoo.com/news/Average-Canadian-family-debt-capress-2855603359.html?x=0

I recently met with a super nice couple who was contributing to the “average Canadian” debt load.  In addition to the mortgage on their home they were carrying over $110 000 worth of personal debt.  This debt consisted of some credit cards, lines of credit, vehicle loan and some commitments to family and other local businesses.  It was costing them over $4000 per month to service this debt.  But it was also costing them their pride and creating undue stress on their marriage.

The debt load had grown to the point where they could not keep up and their credit scores were starting to drop significantly. They needed help.

These clients came to see me on February 4, 2011 and today, February 18, 2011 I can confirm that their lives are so much less stressful…………just in time to enjoy Family Day long weekend.

Due to the fact they had a healthy portion of equity in their home I was able to place them into a new 3 year mortgage.  The new mortgage paid out 100% of the debt they were facing, their current mortgage and left them with a few thousand dollars to set aside as a contingency fund (placed into a interest baring account).  Gone are the days when they need to worry about how to pay the $4000 in payments.

If you, a friend, or family member are living a similar situation please feel comfortable telling your story to a qualified mortgage professional, you too can get your life back and return to being a “below average Canadian”.

The Great Rate Debate

posted on 6th January 2011

Without a doubt the most asked question I hear is “What is your rate”?  Many Mortgage Brokers or Bankers would have a simple answer that includes giving their lowest five-year fixed rate, hoping the rate is good enough to entice the client to give them a shot at writing their mortgage.  As a client I just simply would not accept that answer.

Here is my not so simple answer:  My rate could be different than your rate, and yours most certainly will be different than the next guy.  In order for me to give you an accurate quote on your rate I need to know many things about you.  I need to know about your job security, your income and definitely about your credit score.  I also need to know how soon you need the mortgage and how much down payment/equity you have.  But quite possibly the most important thing I need to know and understand about you is what your plans are for the subject property.

Before I get any farther let me clarify 4 mortgage terms that are often confused.

Closed Mortgage:            This refers to a mortgage that carries a payout penalty if the mortgage contract is broken during the term.  Mortgage contracts can be broken by switching lenders, refinancing or selling your home.

Open Mortgage:            This refers to a mortgage contract that allows you to break the contract during the term and not be faced with a payout penalty.

Fixed Rate:            This refers to a mortgage where the interest rate remains the same for the entire term.  The most popular example of this is a five year fixed mortgage.

Variable Rate:                        This refers to a mortgage where the interest rate is set in conjunction with the Bank prime rate. This prime rate is determined by the Bank of Canada overnight rate and fluctuates according to many economic factors.  The fluctuation in rate may mean fluctuation in your payment.

You could end up with an open or closed mortgage, a fixed or variable rate, but you can’t have an open closed mortgage or a fixed variable rate.

So I get it, rate is what largely determines your payment (along with amortization and compounding factor) and that is what you are concerned about right?  Or you think that is what you are concerned about.  I would suggest you are actually more concerned about your cost of borrowing than your payment………….there can be a huge difference.

Here is a true story of a client I recently did work for:  “Mr. Smith” called me based on a suggestion from a friend, a previous client of mine.  Mr. Smith started by telling me he was interested in a 5 year fixed mortgage (good for him, he knew what he wanted) and then went on to tell me he did not want to waste my time, he had been a customer at his bank since he was a kid and he was wanting to stay with them unless my rate was better.  We had a good conversation about the things to look out for when only shopping for rate; there are pre-payment privileges, penalty calculations and other things to worry about.  He said thanks and would take all that to heart.  We discussed my rate and it happened to be .05% better than the rate his banker gave him.  Good news for me, right?  The next day he called me to say thanks for my time but he decided to stay with his bank because they were now offering .20% better than I was.

Approximately 2 weeks later I get an unexpected call from Mr. Smith.  He was in his lawyer’s office ready to sign his new mortgage and there was a problem.  His new mortgage had a clause in it (that was not disclosed to him by his banker) that made it impossible for him to break his mortgage contract unless there was a bon-a-fide sale.  Never mind a payout penalty, he had a fixed rate, closed mortgage that could not be paid out unless his house was sold! And the sale had to be non-arms length, meaning he could not sell his home to a family member.  He was obviously and rightfully concerned about the fact that he could not refinance or change lenders for the next 5 years even if his then current life situation required him to do so.  In the end the lower rate did not warrant the risk.  Needless to say his banker was clearly not acting in his best interest by not disclosing the true cost of borrowing and his restrictions.  A classic case of Buyer Be Ware!

Another example I see regularly is when your goal for a property is to purchase it, fix it and re-sell it.  The 3 or 5 year fixed mortgage may be the lowest rate (and the one the bank makes it’s most money off of) but if they are closed (and almost 100% of the time they are) they will carry a penalty during the term.  An open mortgage may carry a rate 1-3% higher than the fixed rate closed mortgage but because you are going to own the home for a short period of time the larger rate will be a much less expensive option versus the lower rate/payout penalty combination.

One more example why you must work with a professional that knows more about mortgages than a great rate.  This example takes a fair bit of explanation so please keep your eyes open for an upcoming blog post that will help clarify.  This is almost never mentioned by any banker or broker, because many of them don’t know about it, can’t calculate it, or just simply don’t think it is relevant.

Here it is……………………….Calculation of payout penalties!  The average mortgage in Canada has a life of just over 3.5 years, many clients take a five year fixed, closed mortgage term, meaning they will likely have a payout penalty at some point in their life.  Who cares , you say, everyone knows that penalties are calculated at 3 months of interest, right?  NO, NO, NO.  Penalties are typically calculated at the GREATER of 3 months interest or 3 months interest rate differential (IRD).  This is where further clarification will help……..stay tuned.  The IRD is calculated using factors that differ from lender to lender and many bankers and brokers alike have no idea what factors are being used or how to calculate it .  To put this into perspective:

Lender A offered you a five year fixed rate of 4.79% 3.5 years ago.  This is a closed term.  Lender B offered you a five year fixed rate of 4.79% 3.5 years ago.  This too is a closed term. These mortgage appear to be exactly the same, right?  No.  Today lender A has a payout penalty of  $6754, and lender B has a penalty of  $11 273.  That is nearly $5000 being taken from your pocket.

Do yourself a favor, the next time you are shopping for a mortgage give me a call so we can align your product with your goals.  There truly is more to your financial wellness than rate!