John and Melanie - this is the real thing!

I love sharing success stories from my clients. This story is the "real deal". Jonathan Sloot* and Melanie Grose* came in to see me about a year ago. They were living in a small house, and they needed more room. However, their current house made a perfect rental property. They came to me with the idea of keeping their current home, and buying a bigger more "family-like" house.

I was really impressed with Jonathan's and Melanie's financial discipline. They had done a really great job at keeping their amortization short on their current home and paying down on their mortgage. They had a a lot of equity tied-up in the house. I showed them how to release it through a secure-line-of-credit and that became the down payment on their new home. We also looked at the cash flow of their current home, which was to become the rental. We wanted to be sure the rents covered the expenses, plus the mortgage. 

Here's what they said about the experience,  

"We went to see Sandra because we wanted to purchase another home to live in and keep our old home as a rental property.  Although there was equity in our current home, we were unsure on how to release the equity and piece together the plan.  Sandra laid-out the strategy in a clear way that we could understand what would take place. She negotiated the mortgages for us and got us better rates than our own bank could. We basically came in and signed the initial paperwork and Sandra and her team took care of the rest"

*permission was granted by Jonathan and Melanie to share their names and story. 

Mortgage Changes: Where things are going wrong

We've seen an incredible tightening of mortgage lending in the last year. In an effort to slow the housing market to prevent the same issues the U.S faces, the Canadian government has worked to make it more difficult to qualify for a mortgage. This change would result in less people qualifying to buy a home and cool a possibly over-heated housing market.

The main change often referred to is a decrease in the amortization of mortgages from 40 years to 25 years. Only five years ago, I was qualifying people using 40-year amortizations. Now on high-ratio mortgages, (or mortgages where borrowers put less than 20%) amortizations have been shortened to 25 years. On mortgages where there is at lease 20% equity in the home, the majority of lenders are offering 30-year amortizations.

Shortening amortizations has had two major effects: 1) On average people can qualify for about $40,000 less in a mortgage and; 2) it has forced people to pay down on their mortgage principal. While I agree it's important to be fiscally responsible, there are consequences to this tightening.

In Guelph and the surrounding area, home prices continue to rise. It's becoming more and more difficult for first-time home buyers to purchase a decent place to live within a reasonable budget. As a result, the rental market for residential homes has increased, spurring a buying spree of residential homes for rent. As a real estate investor myself, I see the benefits of owning rentals but I believe that we'll see a major exodus in the next five years; real estate investing is not as passive of an investment as the equities market.

While some aspects of mortgage lending have been tightened other areas have relaxed. When The Mortgage Centre (Guelph) first opened almost 15 years ago, we were approving mortgages based on the debt ratio calculations of the Gross Debt Ratio (GDSR) and the Total Debt Service Ratio (TDSR). These debt ratio maximums compare one's gross family income to the carrying costs of the home (GDSR) and the out-side debt one may have (TDSR). With the recent mortgage changes these debt ratio requirements have actually relaxed.

As a result, I see people taking from one debt source to pay down on another debt source. For example, using their lines of credit to pay on their mortgages (should there be a short-fall for that mortgage-payment period). An often-overlooked aspect in the U.S housing market crisis is the period of growth before the crash, which was based on consumer spending. George Bush is often recognized as encouraging Americans to "spend their way out" of the recession. With the current debt-ratio guideline in Canada opening, are we doomed for the same?

In closing, it may be time to revisit how the current mortgage lending policies are really affecting Canadians and what could be done to improve on a model that's envied by the world!

If you have any questions about your own mortgage situation please call my at 519-763-3900 ext.1001 or e-mail at lastovic.s@mortgagecentre.com.

I would also value your comments!

How to negotiate a better mortgage rate for yourself....

Everyone who needs a mortgage wants the best rate on the current market. However a good rate is only one way to save money on a mortgage.  Adjusting payment schedules, creating flexibility on the amortization or paying-out consumer debt are cost-saving strategies too often overlooked by most people.

Focusing only on the mortgage rate and finding a rate that’s “too-good-to-be-true,” often leaves people paying more fees in the future.

Banks and brokers work mortgage interest rates differently. The chartered banks have posted and discounted rates. If you decide to work with a bank, then the rate negotiation is up to you.  It’s almost like buying a used car and negotiating the price - you’re never really sure what the best price really is. Negotiating your mortgage with a bank can be as frustrating as haggling for a used car…and that’s where a mortgage broker can help.

There are several seasoned mortgage brokers in Guelph that have strong reputations for helping their clients find the best combination of rates and features. At The Mortgage Centre (Guelph), we’ve built a team with such standing. If you trust your mortgage broker to do their job, they’ll find a good mortgage that combines a low rate while still giving you the features you need to save money and meet your financial goals.

Recently I worked with a group of investors in negotiating a commercial mortgage with their own bank and saved them nearly 0.5%. That may not sound like a lot but it was for a million-dollar loan, saving the clients $5000 per year in interest. Whether it’s a commercial mortgage or one for your home, let someone else who knows the mortgage market negotiate on your behalf.

I always keep my pulse on the mortgage market and check www.cannex.com to ensure my rates are competitive. I would encourage you to do the same!

I'd love the hear how you negotiated a better rate for yourself. Please leave a comment!

Wondering why fixed rates are up but not variable?

 Here's a great explanation on why fixed rates are going up. 

I've been receiving panic calls from clients regarding their variable rate mortgages with the concern that their rates where climbing. Variable rate mortgages are priced off of an institution's prime rate (which can be impacted by the Bank of Canada overnight lending rate), which is a different indicator than the bond market.

Thanks to www.canadianmortgagetrends.com for the below article!

 

 

Yields, Swap Rates & Fixed Rates — Higher Yet Again

Bond yields have been going vertical.
By early Thursday, the 5-year yield—which influences long-term fixed rates—was up as much as 20+ basis points in less than 48 hours. That's an unusual move and it was driven by optimistic economic comments from the U.S. central bank.
This spike in yields has led dozens of lenders to announce fixed rate increases. The most notable today was RBC, which is boosting certain discounted fixed rates by 20 basis points on Monday.
But it’s not only bond yields that are flying. So is the 5-year swap spread, and that also has mortgage rate implications.

Swaps Basics
A “swap” (interest rate swap) is an agreement to exchange two different types of interest payments:  fixed-rate payments and floating-rate payments. Financial institutions buy swaps to hedge interest rate risk and lock in profits.

A simplified example of hedging: A bank with 5-year fixed mortgages receives fixed-rate payments from borrowers. That same bank also has short-term deposits. If short-term rates rise, the bank would have to pay higher rates to depositors, but be left with the same fixed rate payments from its mortgages. To solve that problem, the bank buys a swap that lets it receive floating-rate payments (at a higher rate than it has to pay out to depositors). In exchange, the bank must give its fixed-rate payments to the swap seller.

Why swaps matter
The difference between the 5-year swap rate and the 5-year government yield is called the "swap spread."
When the swap spread gets wider, fixed mortgages can become more expensive to hedge, other things being equal. That often happens when bonds sell off and yields soar. Lenders then pass along that added cost to borrowers.
Here’s a chart of the swap spread from earlier Thursday. As you can see, it has been making new relative highs.

(Click to enlarge)

Swap spreads may continue to widen if Canadians rush to lock in low rates. In that scenario, banks would have even more fixed-rate mortgages to hedge in the swap market.
It’s hard to say how long rising yields and widening swap spreads will exert upward pressure on rates. So if you need a mortgage in the next 180 days, call your broker or banker soon for rate hold. Some protection is better than none, and you can always cancel a rate hold if needed.

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Money-saving advice on renewing your mortgage

Being proactive with your mortgage renewal is the best way to ensure you get the most competitive rate possible.Your financial institution or mortgage lender will send you a renewal notice one to two months prior to the mortgage renewal. My recommendation is to seek the advice of a broker six to four months in advance. This is especially relevant in the current market place as rates are forecast to increase.

How does this work? Mortgage brokers work with lenders that can hold the interest rate on a mortgage for four to six months, which guarantees the rate. Once you've submitted an application we track interest rates on a weekly basis, so if rates decrease as you get closer to your mortgage renewal we can make a downward rate adjustment. Mortgage brokers work with multiple lenders so if another institution happens to have a more competitive rate, we can switch the rate hold to that institution. Your bank will not call you and suggest you go see another lender because their mortgage rate is more competitive. That's one of the benefits of working with a mortgage broker.

Mortgage brokers are also motivated by different factors than banks. Both parties are in the business of making money… however mortgage brokers have the flexibility and authority locally to make the right decisions for their individual clients. When I describe the difference between brokers and banks to my clients, I term my industry as the "Walmart of the mortgage world." Let me explain… when you buy something from Walmart the product is often deeply discounted because they buy 1000's of the same product making their unit costs lower. Walmart deals in volume, much like a mortgage broker does.

Your bank branch is like a mortgage boutique. Because they may only be buying 100 mortgages per month they have to price them accordingly (normally at a higher rate, unless you beg them to give you a deal). Mortgage brokers don't have a posted mortgage rate and a discounted rate like banks do. We only work on the discounted market rates which vary slightly. Conversely, a bank has a posted rate and they decide how much of a discount you'll get off of your mortgage. Clients benefit from using a mortgage broker because they don't need to negotiate the interest rate. When that's the case you can ensure your mortgage is setup in the most financially beneficial way possible. You can plan for the liability enabling you to pay it off within your financial goals.

Remember there's more to mortgages that just the interest rate. Getting a rate locked in by a mortgage broker four to six months before your mortgage renews will help you get the best available rate on the market. This is especially critical because we are in an increasing mortgage-rate environment.

I'd love to hear your experiences on renewing your mortgage with a bank or a mortgage broker! Please e-mail me at lastovic.s@mortgagecentre.com or visit my blog at www.lastovic.s@mortgagecentre.com and offer your comments. If you're on twitter you can follow me @Sandra_lastovic.