Thursday, December 20, 2007

Are rates going up or down?

In the past couple of days, several lenders have announced mortgage rate increases including CIBC, Firstline, President’s Choice Financial and TD. Other’s may soon follow suit. Why are rates going up you ask? Weren’t they supposed to be going down?

Earlier this month, the Bank of Canada reduced the overnight rate by a quarter of a percentage point. The overnight rate immediately impacts the prime rate, which impacts the rate you pay on a variable rate mortgage. This move was largely precautionary. The very high dollar we were experiencing in the Fall was taking it's toll on our manufacturing and export, and inflation had eased off -- so it made sense to reduce the overnight rate.

Since August, when the U.S. subprime crisis first hit, Canadian banks have been acknowledging that they have some exposure to ACBP's (asset backed commercial paper) -- ACBP's are investments that represents baskets of consumer loans which include U.S. subprime loans. The Canadian government froze trading of ACBP's to avoid panic selling but the problem has not gone away, and it has quietly been putting upward pressure on lending rates. To compensate for losses, banks increase lending rates.

So what does this mean to you? If you are in the market for a property, get a preapproval/rate hold in place good for 120-days to protect you against possible further increases. Even if you would like to go with a variable rate mortgage, the spreads on variable rates could change too, so it's wise to get something locked in as soon as possible. If your mortgage rate is coming up for renewal soon, ask your lender for an early renewal.

Thursday, December 13, 2007

How I learned to recycle

I was the king of garbage. I am not proud of it, but it's true. And when throwing out garbage was in fashion, I was the best at it. Every one or two weeks, I would grab a big green garbage bag and digging deep into our fridge, I pulled out leftover food. Then I went around from room to room, filling up the bag. You name it, it went into the garbage.

And then something changed and suddenly I realized that it become practically impossible to throw out your garbage anymore. City workers drove by my house once a week with a big truck that looked a lot like a garbage truck, but they weren't taking the garbage. The garbage started piling up in my garage and I knew that something had to change.

When I started complaining out loud about how ridiculous it was that you couldn't throw out your garbage anymore, my step-daughter broke down into tears one day and started telling me all about Al Gore and global warming. "If you don't change your ways" she said, "soon we will all be under water". Whether I agreed or not, one thing was for sure -- if I didn't change my ways, we were all going to be under garbage.

Eventually I reformed and now I am now the garbage nazi in my house. Nobody is permitted to throw food in the trash -- it goes straight into the green bin. And today as I carried this very heavy green bin down to the curb, it occurred to me how much food had gone to waste in the past week, and I realized that we probably could have fed double the number of people in our house with the amount of food wasted -- time for another family meeting.

Is it Ethical for Lenders to Offer Stated Income Mortgages?

In the U.S. some people refer to them as 'liar loans'. They are called 'stated income' mortgages and not everyone knows this, but they are also available, and very popular in Canada. With a stated income mortgage, the applicant is not required to provide proof of the income amount stated on the application. Mortgage lenders consider a number of factors when determining the amount of money they are willing to loan -- one of the factors is the amount of income an applicant earns. Even mainstream lenders such as banks offer these types of loans, where proof of income is not required. Why do such loans exist?

It is understood that people can't always prove the amount of income they earn. For example, self-employed people normally try and minimize the amount of income they report for tax purposes. The amount of income reported by a self-employed person may be reasonable from a tax point of view, but lenders know that the net income may not be a good measure of the person's true earnings.

What are the consequences of lending on a mortgage application where you don't know how much the person actually earns? Potentially, they are very serious. From time to time I meet with people who just want to know the maximum mortgage amount they will qualify for. It is very important for any borrower to carefully consider the size of payment they can afford to carry.

Ultimately, it is the borrower’s responsibility to determine what payment they can afford. It is the lender or mortgage broker's responsibility to make the borrower aware of the types of mortgage products available to them, costs and risks.

With a fixed-rate mortgage the rate and payment are fixed for the term of the mortgage – the most popular terms are between one to five years, though you can get a term as long as twenty-five years. At the end of the term, the renewal rate will be based on then current rates. It usually costs more to get a longer term fixed rate mortgage, but you get peace of mind knowing that your payments will remain fixed for the entire term. Variable rate mortgages are tempting because the rate is usually lower than the current fixed rate; however, if the prime rate goes up, the payment may also go up. If you are considering a variable rate mortgage, you need to know that you will be able to make the payment in the event that the rate goes up.

If the borrower is made aware of their mortgage options and they understand the costs and risks associated with the mortgage they are getting, then in my opinion, it doesn't matter what income amount is stated on the application.

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