Consider Refinancing and to Reduce Interest Expenses

What a difference a year makes.  After a spike in interest rates starting in July 2008, home buyers were of the opinion that rates were going through the roof.  To avoid risk, many home buyers locked in their mortgage at the 5 year fixed rate between 5.7 – 5.9%.  As we see now, rates have softened significantly and will stay there for some time.  It therefore makes sense to re-evaluate whether it makes sense to switch to a lower interest rate mortgage.

Breaking a mortgage will result in a prepayment penalty to your current lender.  The question that needs to be answered is whether the savings from the lower interest rate mortgage is enough to cover the penalties and any closing costs.   I’ve run into several cases where it there were significant benefits to switching to a lower rate mortgage.   Here is one such scenario:

• Mortgage amount – $341,000
• Term – 5 yr term with 4 yrs remaining on mortgage, 35 year amortization
• Interest rate at 5.7%.
• Prepayment penalty of $10,000 (approx.)

The borrower had 2 options in this case – switch to a 4 yr term mortgage at 4.39% or get a variable rate at 3.8%.  Here is the total interest he would pay over the remaining 4 years of his mortgage based on these terms:

• 4 yr term – $59,263
• Variable rate mortgage – $50,037
• Stay at the current mortgage for the next 4 years – $75,500

The client saves $25,463 (or $75,500 less $50,037) by switching to a variable rate mortgage.  The net savings is $15,463 (or $25,463 less $10,000 penalty).

Interest Rate Forecast Update

With the 1/2% drop in the Bank of Canada’s overnight rate, the next question is whether there is still room to lower rates further.   According to some of the major banks, yes, there is.  Here’s what some of they are saying:

• CIBC World Markets – CIBC’s economists are forecasting another 1/2% drop in the BoC’s overnight rate.
• TD Bank – Another 1/2% reduction for 2009
• RBC – This bank forecasts interest rates to remain the same for 2009
• BMO – BMO newsletter indicated that rates cuts are still a possibility

Fixed rates have dropped as well.  A standard fixed rate is around 4.39% – 4.54%.  If you have locked-in late last year when rates were at its peak, it may benefit you to refinance at current lower interest rates.  Be sure to discuss your options with your mortgage professional.

Reasons to Refinance Your Mortgage

A recent study by the Canadian Mortgage and Housing Corporation (CMHC) showed that 71% of mortgage holders refinanced their mortgage prior to the expiry of their mortgage. There are many reasons why you should refinance your mortgage.

Here are my top 5 reasons:

1) To lower your interest rate or to lower monthly payments

This is an excellent reason to refinance your home. It may be that you locked in your mortgage at a higher interest rate. Perhaps, the interest was higher at the time. You should be aware that there is a cost to breaking your current mortgage and starting a new one with a new lender. Your current lender will probably have a pre-payment penalty. A professional at BC Mortgage will need to evaluate your transaction to determine whether the savings of the lower interest rate is greater than the costs of breaking your current mortgage.

Alternatively, you may feel that your mortgage payments are difficult to maintain. If this is the case, you may benefit from extending the amortization on your mortgage. It may be possible to extend the amortization to 35 years for an insured mortgage or even 40 years for a conventional mortgage (i.e., a mortgage with 20% equity).

2)  Your lender has left the mortgage business

You may have obtained a mortgage through a sub-prime lender, many of which have closed shop. If you took out a mortgage with Accredited Home Lenders, GE Money, GMAC, HSBC Finance or Xceed Mortgage, etc., you need to come in and discuss your situation as soon as possible. When your mortgage is up for renewal, these lenders will not be able to provide you with an automatic renewal. It is important that we review your situation so that when your mortgage is due an alternative lender can be found. This may mean that we work with you to bring your credit score up so you can qualify with another lender. Another major advantage is that there may be an opportunity to lower the interest rate on your current financing.

3) To consolidate debts into your mortgage

Debt consolidation allows you to incorporate your unsecured debts into your mortgage. The objective of a debt consolidation mortgage is to lower your interest costs and spread out the payments into a more manageable monthly cost.

For example, if your home is worth $300,000 and your mortgage is $200,000, you have equity of $100,000. You can increase your mortgage to pay off your credit cards. If you have good credit, it may be possible to take out as much as 95% of the value of the home. The additional money can be used to paydown your credit cards. This the interest rate on a mortgage is lower than any other debt.  Secondly, with a mortgage, your payments will be lower since the payments can be spread over the life of the mortgage (say, 35 or even 40 years amortization).

Click here to learn more about debt consolidation

4) To renovate your home

If you want to spend a significant amount of money on improving your home, you may be able to take out a lot more equity than you realized! BC Mortgage can advise you through this process. Both insurers — Genworth and CMHC, will insure new mortgages which are “topped up” for this purpose, and the total of your current mortgage and the new funds exceeds 75% of the current home value. Not all improvements are eligible, however. Pools and spas are typical “over-improvements” which may not qualify for a high-ratio equity take-out. Of course, if the total requirement is less than 75% of your home’s current value, you should have little trouble getting the “top up” you need — regardless of the degree of luxury you plan to add.

5) To take equity from your home

Of course, there is a myriad of other reasons why you may want to do an Equity Take-Out (ETO) mortgage. A common reason is to shore up your family’s finances. With the credit crunch and a possible recession, it is prudent to buffer your cash reserves. If you own a business, this makes a lot of sense since it is always easier to obtain financing when you don’t need it. If you apply during a business down turn, you may not get the mortgage you want.  Secondly, if the value of your home drops, the amount you will be allowed to borrow will be reduced. For individuals, this is also true since a job loss will make it difficult to refinance your mortgage with favorable terms and conditions.

Crossing the Mortgage Renewal Minefield

When your mortgage is about to come up for renewal, you need to make sure you know all of your mortgage options.  Better yet, you should have a clear idea of what mortgage strategy is best for you.

Why the need for a strategy?
There’s a simple reason.  When renewing your mortgage, you’re most likely in a different financial position than when you first obtained the loan.  As our financial and life circumstances change, so does the mortgage that is best for our needs and goals.

Getting married, additions to the family, receiving an inheritance – these are all major life events that can have an impact on which mortgage makes sense.  In fact, most of us have questions as our mortgage nears renewal:  Should I go with a variable or fixed mortgage?  What about taking some of my home’s equity and using it for renovations or investments?  How can I be sure I’m getting the best rate?

Secondly, with the current financial turmoil, it makes sense to re-evaluate whether you need to shore up your cash reserves.  Remember – the best time to borrow money is when you don’t need it.  If you are in business and are expecting a downturn, this is the time to be thinking of taking equity from your home.  The same is true for people who may have to face the prospect of a lower income or job loss.      The wrong time to take out equity is when you lose your job or when the property value drops.

The “strategy” to avoid
At mortgage renewal time, don’t be too quick in just signing the renewal form and returning it to your current lender.  If you do so, you could be paying a higher rate, and end up with a mortgage product that might not be best suited to your interests and in some cases untold thousands in lost opportunity.  That’s really no “strategy” at all!

You better shop around…
Canadian mortgage holders are becoming more savvy.  More and more, homeowners are shopping around to get a better rate when their mortgage comes up for renewal.

However, working on your own, you could apply to perhaps two or three financial institutions and select from their in-house mortgage offerings.  A better approach is to talk to a mortgage broker – we can “shop” your application to an extensive line-up of lenders who offer a wide range of mortgage options.

Most importantly, we can offer expert advice on a customized mortgage strategy to ensure you are taking full advantage of the many mortgage options on the market in Canada.  We will also negotiate with lenders on your behalf to make certain that you get an extremely competitive interest rate.

Thinking of switching?
For those who are thinking of switching their current mortgage to another lender to get a better interest rate, most lenders now offer “no cost or low cost switches.”  This can be a smart way to reduce your interest costs.

Think of your mortgage renewal as an opportunity – to get the most from your financing.  With a little advice, and a strategy in place, you’ll be confident that your mortgage is meeting your needs – now and in the future.

Mortgage Strategies to Control Your Consumer Debt

Consumer debt can come from many sources, such as credit cards, department store cards, car loans or other personal loans – with many Canadians paying much more in interest costs than they need to be.

Increasing equity in homes can offer a possible solution for homeowners burdened by high-interest consumer debt. While personal debt levels continue to rise, so too does the equity that many have in their homes, which opens a range of options to dramatically reduce one’s interest cost burden. Here are two common strategies for homeowners:

Home Equity Line of Credit

Another mortgage option for homeowners which offers greater flexibility is a Home Equity Line of Credit – or HELOC – which allows you withdraw funds as needed.

The advantage here is that you can put a HELOC in place and charge up when needed, then pay down the line of credit, never needing to re-qualify, provided payments are kept up-to-date.

Your payments fluctuate depending on current interest rates and the outstanding balance over the month, with interest-only payment options available. A HELOC can be convenient for paying off higher interest debts, as you withdraw and pay (relatively lower) interest on only what you need.

Mortgage Refinancing

Refinancing a mortgage can give you the opportunity to consolidate higher-cost borrowing with lower-cost mortgage financing – potentially allowing you to save significantly on overall borrowing costs.

With a lower interest rate on a refinanced mortgage, some borrowers decide on a lower monthly payment to improve their cash flow, while others choose to pay off the loan sooner, saving them money over the long term. What’s more, mortgage refinancing offers a plan to reduce your debt – after the elapsed amortization period, your balance is zero.

With Canadians now carrying increasing amounts of high-interest debt such as credit card balances and personal loans, how best to manage one’s borrowing costs is a concern for many. Talk to your Invis Mortgage Consultant – you may be surprised to learn how much you can save with the right debt management strategy.

Mortgage Solutions for Seniors: Reverse Mortgage vs. HELOC

What are the financing options for seniors?  It depends on the situation.   For those who still have income (pension income included), it may be possible to obtain a home equity line of credit (HELOC), irregardless of age.  With a HELOC, you can draw on the mortgage until you reach the limit approved by the financial institution.   If you are using this strategy to fund your living expenses, your final objective must be to sell and downsize within a few years.  Eventually, you will hit the limit of your HELOC and you will have no more funds to draw on for living expenses.  At this time, you will need to sell your home if you cannot afford to pay the interest on the HELOC.

If you don’t plan (or want) to sell and/or your income is not sufficient to qualify for a mortgage, you need to consider a reverse mortgage.   With a reverse mortgage, it is possible to obtain up to 50% of the value of the property.  The loan does not have to be repaid unless you sell the home.  The amount that is loaned does not depend on your income or credit rating.  It depends on the your age,  the type of property (e.g., single detached, townhouse, condo) and location of the home.  Of the three criteria, your age is the probably the most important factor.  For example, a person who is 60 years old can expect to be approved for a maximum of 15% of the home value while someone in their seventies may get 30% of the value of the home.

You should consider a reverse mortgage if:

1. You plan to stay in that home for a long time
2. You cannot qualify for a tradtional mortgage or HELOC
3. You don’t want to repay the debt

The downside to a reverse mortgage is the interest rate.  The interest rate starts at 8%.   You may also expect to pay a set up fee of approx. $2000 (legal and appraisal fees).  While the interest rate may be on the high side, you may be able to offset some of the costs by investing the proceeds of the mortgage and generating some tax deductible interest expenses.  A good financial planner can explain this strategy to you.

Lastly, you should also explore the option of downsizing.  Be aware that there are significant costs to downsizing such as realtor fees, transfer tax, moving costs to consider.

What Features To Look For in a Variable Rate Mortgage

With interest rates poised to drop over the next few months, variable rate mortgages have been gaining popularity. For individuals looking to purchase or refinance their mortgage, it is important to understand what features to look for. Here are the top three:

1) Ability to lock-in your mortgage and the lender’s best interest rate - Most lenders allow you to convert your variable rate mortgage to a fixed (i.e., locked-in) mortgage. However, not many lenders guarantee whether you will get their best interest rate or their posted rate when you convert. You need this guaranty. Rates can sometimes move quickly so you don’t want to have to haggle with your lender for their best rate (which could be up to 1.5% lower than the posted rate) when rates are moving up. At this point in time, your options are limited since it can be costly to switch to another lender.

2) Introductory rate - Some lenders offer mortgages with an introductory rate. There are pros and cons to taking a mortgage with an introductory interest rate. Your payments are lower initially, then increase after a few months. To some, this is a benefit. However, there is a cost to this. I’ve had the opportunity to review a major bank’s introductory rate offer. For this scenario, the borrower was offered an introductory rate of Prime less 1.01 for the first 90 days and Prime less 1/4 for the remainder of the term. My offer was a variable rate at Prime less 0.6%. I compared the total interest cost of each offer and it turns out that the mortgage with the introductory rate would cost the borrower approx. $3200 in interest over 5 years.

3) Interest Rate Compounding – Standard mortgages are compounded on a semi-annual basis (in simple terms, interest is charged on interest every 6 months). There are some variable rate mortgages where the compounding is monthly. Monthly compounding is more costly.

Getting the best mortgage is all about getting the best advice. This is advise you can only get from your mortgage broker.

With Rates Dropping, Should You Consider Switching To A Variable Rate Mortgage?

Year 2007 was a crazy year for interest rates. The economists just couldn’t get it right. During the first half of the year, economists were expecting rates to drop. However, by July 2007, the trend reversed quickly. Due to strong economic indicators and higher inflation rates, interest rates shot up by 1/2% in a span of 2 months and another 1/4% after another month. The best 5 year discounted mortgage rate reached 5.99% sometime in October 2007. Many home buyers sought the peace of mind of a fixed (locked-in) interest rate mortgage.

We now know that rates are on the decline as the full effects of the US subprime mortgage mess is now being felt. The Bank of Canada has already dropped their overnight rates twice (by 1/2 percent) during the past 60 days. There are expectations that interest rates may go down by another 3/4%. If this happens, you can expect the prime rate to drop to 5% and the variable mortgage rate to 4.5% (assuming a mortgage priced at prime less 1/2%). Does it make sense to consider switching to a variable rate? Let’s run the numbers.

Let’s assume you have a $350,000 mortgage at 5.99% and there is still 5 years to go on your mortgage. Over a 5 year term, you would pay total interest of $101,810.86. If you were in a variable and rates dropped to an average of 5.0%, your total interest paid over 5 years would be $84,761.94. This is a savings of $17,048.92. If rate dropped even lower to an average of 4.5%, your total interest savings will be even higher at $25,655.12. This savings have to be weighed against any prepayment penalty your lender will charge you.

If you need clarification, please do not hesitate to contact me.

Obtain a Tax Refund On Your Home Purchase Using Your RRSPs

The Federal Home Buyer’s Plan allows first time home buyers use up to $20,000 of their RRSPs for the purchase a home. For a couple, the amount is doubled to $40,000. If you are in the market today, making use of this privilege may allow you to obtain a significant tax deduction. The optimum time to make use of this benefit is before February 29, 2008. A contribution before this date will allow you to obtain the deduction on last year’s income resulting in a tax refund.

Say, for example, you make a $40K investment in an RRSP today and you are in the 30% marginal tax bracket. You would could obtain a tax refund cheque for $12000 (or 30% of $40K). This is nothing to scoff at.

Be sure to consult your financial adviser before proceeding with any investment. Please call me if you need more information or clarification.

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.