Experian study shows that 30% of US Consumers improved their credit score in 6 months

In a study of US consumers from January to June 2007, it was found that 30% of US consumers were able to increase their credit score by 50 points over a 6 month period. This shows that it is possible to bring up your score significantly over a short period of time by making wise credit choices.

Credit scores can influence your ability to obtain a mortgage at favorable terms since it is a measure of your credit risk. Your credit score will determine what interest rate you pay on your mortgage, how much you need as a down payment and the repayment terms of your mortgage. Individuals with a very low credit score may not even qualify for a mortgage.

The study also found that:

• 41 percent of the U.S. population showed no change in their credit score from January to June 2007
• 2 percent of the U.S. population had their credit score improve by 51 to 100points from January to June 2007, whereas 3 percent of U.S. consumers saw their score drop 51 to 100 points during the same time period
• Nationwide, 23 percent of consumers had their credit score drop up to 50 points from January to June 2007
  

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If you’re looking to purchase a home within the next few months, you must make sure that you have the best credit score possible. I offer free one-on-one consultation on how you can increase your score. Raising your score takes time so start now!

Firstline’s Double Presidential Mortgage

Studies have shown that US interest rates tend to come down during a presidential election. Canadian interest rates tend to follow the same pattern.

Because of this, Firstline, a subsidiary of CIBC,  developed a product that matures on Nov 1, 2012. This will allow borrowers the possibility of renewing their mortgage when rates are at their lowest - two US presidential elections from now. Firstline’s interest rate on this product is very competitive at 6.00%.

4 Ways to Paydown Your Mortgage Quicker

1) Pay your mortgage bi-weekly or weekly – Most mortgage lenders allow you to make payments weekly or bi-weekly. By choosing either of these options, you’re effectively making one extra monthly payment each year. That’s because there are 26 bi-weekly payment periods, as opposed to 12 in a monthly payment plan. As a result, your 25 year mortgage is fully paid in 21 years.

2) Make extra payments – Making extra payments will also help you pay down your mortgage quicker. If you were to make one extra monthly payment each year on your 25-year mortgage, you would pay down your mortgage in 21.25 years.

3) Take a longer amortization programme and set-up an RRSP investment plan – This strategy requires a different mindset. Once your RRSP investments equal your mortgage, you could say that you’ve effectively paid off your mortgage.

a. Instead of taking our a 25 year amortization mortgage, you could take out a 40 year amortization mortgage. The payments on a 40 year mortgage will be lower than the 25 year mortgage. You then invest the difference in a savings plan to purchase RRSP investments. Assuming a modest rate of return of 8% p.a. on your investments, you would have enough RRSPs to pay off your mortgage in 20.5 years.

4) Make your mortgage tax deductible (i.e., The Smith Maneouvre) – You goal with this strategy is to convert your home mortgage to tax deductible debt. This will lower your taxes and generate perpetual tax refunds for you. You never pay off your mortgage since this will be a source of tax write-offs. However, once you have investments equal to your mortgage balance, you effectively have paid off your mortgage.

a. Assuming a modest return on investment of 8%, the Smith Maneouvre calculator shows that you would have paid your mortgage in approx. 20 years.  If you are able to achieve a 10% rate of return, you would pay off your mortgage in 18 years.

You could choose one strategy or a combination of the above strategies. To determine the right strategy, be sure to consult a professional.

Bank of Canada Leaves Key Interest Rate Unchanged

The Bank of Canada announced this morning that it will leave its key interest rate unchanged, as anticipated by most economists.

In its statement the Bank commented that its current key policy rate “is consistent with achieving the inflation target over the medium term.” The Bank forecasts that the Canadian economy will grow by “2.6 per cent in 2007, 2.3 per cent in 2008, and 2.5 per cent in 2009,” and that inflation will “return to 2 per cent in the second half of 2008.”

As a result of this decision, lending institutions in Canada are expected to keep their prime lending rate steady. However, people looking for a new variable-rate mortgage should note a recent mortgage rate trend – pricing on this type of mortgage has been adjusting upwards in recent weeks. Existing variable rate mortgages do remain unchanged but new variable borrowers are paying more.

If you would like to discuss how current trends in mortgage rates impact the best mortgage strategy for you, contact me at (604) 506-0397. I can obtain a mortgage pre-approval if you’re wanting to buy a home – with a “rate hold” of up to 120 days, you will know how much you can afford.

Top 5 New Developments for 2007

1) AIG Mortgage insurance products - For a long time, the mortgage insurance market had been dominated by CMHC and Genworth. With only two major players in the market, there wasn’t very much innovation and competition in the industry. AIG’s entry has been a catalyst for change in the industry. AIG brought in higher loan amounts, high-ratio mortgages for rental properties, 3% down payment mortgages and 5% down low down payment mortgages. Bridgewater Bank was the first lender to offer AIG insured products. AIG’s insurance is currently available mainly through non-bank lenders such as Firstnational, Firstline, AGF Trust

2) 40 year amortization - Given the high home prices in the Metro Vancouver area, the 40 year amortization mortgage is quickly becoming the standard amortization for mortgages.

3) 20% conventional mortgages - For many (not all) lenders, mortgages with 20% down payment/equity do not require mortgage default insurance anymore.

4) High-ratio investment property mortgages - Up until the Summer of 2007, investors needed at least 25% down payment to purchase an investment property. Now, it is possible to purchase an investment property with as little as 10% down payment. CMHC recently announced that they will insured investment properties without a downpayment. However, a lender has yet to announce that they will participate in CMHC’s zero down rental programme.

5) US Sub-Prime Meltdown - Canada’s subprime market has been hurt by the US Subprime problems. Lenders have tighted up, pulled back or increased their interest rates.

Variable rate mortgages are now priced at Prime less 0.50%

It’s getting harder to sell a variable rate mortgage (VRM) these days. A few months ago, you could get a variable rate mortgage at Prime less 0.90% (or even 0.95%). Now, all but a few lenders have bumped up their rate to Prime less 0.50%.

We have the US Subprime crisis to thank for this. Investors (who purchase these asset backed securities) are now thinking that there’s more risk to these securities than original thought. Consequently, they want to get a higher yield for this.

With the prime rate at 6.25% and the discount at 1/2 percent, a (new) VRM holder will be paying 5.75%. That’s not much of a discount to the current 5 year rate of 5.79%. That’s a far cry from when VRMs were at 3.0% compared with the 5 year mortgage rate of 5.4% in July of 2004. With no strong pressure for interest rates to drop, a VRM is, in my opinion, not an attractive proposition anymore.

Of course, there are other options besides at 5 year term mortgage (which most people seem to automatically take). If you really want peace of mind, you may opt for a 7 year mortgage at 6.0% or a 10 yr mortgage at 6.2%. The premium is quite small for a much longer term.