Three Big Mortgage Complaints

When it comes to complaints about banking products, mortgages are second only to credit cards.

That’s according to the banking Ombudsman’s (OBSI’s) recently-released annual report, which lists three of the most common grievances from mortgage customers.

“We are seeing a lot of complaints related to mortgages…” Brigitte Boutin, Deputy Ombudsman, Banking Services said in the report. Those complaints revolve mainly around mortgages prepayment penalties and pre-approvals, but it seems that mortgage portability has also “become a bigger issue.”

The Big One: Penalties

The Ombudsman sees a constant stream of borrowers protesting their bank’s prepayment charges. Those complaints are usually dismissed after an appropriate investigation, with a finding that the bank did nothing wrong.

OBSI says:

“When investigating mortgage prepayment penalty cases, we examine the signed agreements between the client and the bank and review the accuracy of the penalty calculation.

We also look at the manner in which the client was informed of the penalty before they proceeded with the mortgage transfer.”

A common claim by customers is that they were not told how the bank calculates its mortgage prepayment charges. Frequently the problem stems from the comparison rate changing before the borrower can pay off the mortgage.

The comparison rate is the rate the bank compares to your rate, to judge the interest rate differential, or IRD (i.e., determine the difference between your rate and the rate the bank can supposedly lend at today, for your remaining term).

Timing is key. If you’re 2.5 years from maturity, for example, the comparison rate might be the three-year fixed rate (say 3.04%). If you’re 2.49 years from maturity—one day closer—the comparison rate might be the two-year fixed rate (say 2.59%). The actual comparison rate used can increase the IRD and lead to unexpectedly high penalties.

In any case, with all the prepayment regulations nowadays, lack of disclosure is getting harder to argue. In one case on its website, OBSI found that: “The fact that the client was not told all the specifics of the calculation did not change the fact that he had the necessary information to make an informed decision.” OBSI ruled in favour of the bank in that instance.

Portability Caveats

“People sometimes take for granted that their mortgage is portable before selling their home,” Boutin said in the report. “It’s interesting – we’ve seen cases where the bank refused portability because the borrower’s financial situation no longer met the bank’s lending criteria. However, the client was able to get approved somewhere else right away.”

She raises a key point that all borrowers should be aware of. Given that the property is the lender’s security, you can’t move your mortgage to a different home without the lender’s consent.

Porting requires a whole new application process, documentation and approval. Failing that approval, people with closed mortgages have little choice. They can either not move or they can pay the lender’s penalty (potentially thousands of dollars) to discharge the mortgage and find other financing.

Boutin adds: “A bank can refuse to transfer a mortgage from one property to another because the client’s situation has changed and we can’t force a bank to lend money when its lending criteria is not met.”

She advises: “…Read the terms in your mortgage agreement carefully. Check if there are certain criteria related to portability and check if you meet your lender’s criteria before deciding what to do.”

Common portability considerations include:

• the amount of time the lender gives you to port
• the rate the lender gives you if you “port and increase” (add more money to the mortgage)
• the lender’s policy on bridge loans (commonly needed when your new purchase closes before your sale)
• the type and location of property the lender will lend on, and
• the types of income the lender allows (e.g., key, for example, if you become self-employed and can’t prove income in the traditional manner).

Pre-Approvals

“…We’ve seen an increased number of files relating to mortgage pre-approval,” Boutin notes. “Banks may not verify everything in detail when they pre-approve a mortgage. Then, when people go to finalize a mortgage, the bank will ask for more information and for supporting evidence of what was previously disclosed.”

“Sometimes that new information will lead the bank to change financing terms or refuse financing altogether. People can then get caught, especially if they removed the condition for financing on their offer to purchase a home.”

I’ve written about pre-approvals many times and continually hear cases where people thought they were unconditionally approved, but hadn’t even provided income and down payment documentation. Often it’s a matter of the mortgage adviser not clearly explaining that pre-approvals are rarely fully underwritten (including by the default insurer, when the down payment is less than 20%).

“A pre-approval document indicates certain conditions that need to be met,” adds Boutin. “Be careful that you’ve given the right information to your bank and that your documents match (emphasis ours) what you provided at the beginning of the mortgage process.”
 -Robert McLister

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Is your car lease keeping you from buying a home?

Getting a mortgage can be difficult. Sometimes, to increase the odds of being approved or to qualify for a larger loan, prospective borrowers will pay down debts or eliminate existing loan obligations. Often, the process for doing so is simple, but there’s one type of financing that could trip up your efforts: a car lease. Here’s a breakdown of why — and what you can do to so avoid any snags.

What’s Your Debt-to-Income Ratio?

When you apply for a mortgage, a broker is going tally up all of the monthly payments you make on existing obligations, including credit cards, student loans, personal loans, car debts and other mortgages. That number gets measured against your income. This debt-to-income ratio helps determine your monthly mortgage payment. (So does your credit score. You can see where yours currently stands by reviewing your credit scores, regularly, on Equifax.ca.) Sounds easy and simple enough, right?

Well, the concept is, but if more than 25% of your income is already going towards debts, you may not be able buy as much home as you think. When you have other existing obligations, your ability to borrow can be reduced tremendously. That $300 per month car lease, for example, can be severely hampering your buying power.
Mortgage Tip: Remember, lenders will use only what you’re obligated to pay on existing loans in calculating your debt-to-income ratio. Choosing to pay more on your debts can be a good financial move, but mortgage lenders generally don’t give you any benefit for choosing to do so.

Why a Car Lease Can Trip You Up

Unlike an auto loan, a car lease can be trickier to workaround if you’re trying to pay off debt to qualify for a mortgage. Let’s say your credit report shows a car lease payment at $300 per month. There is a balance on the credit report of $6,000 due, which is the remainder of the lease. If you had a car loan with these exact terms, you could write a cheque to pay off the $6,000 obligation. Case closed.

Unfortunately, that option doesn’t apply to a car lease. You can give the car back and pay the $6,000 balance that is due. However, to qualify for a bigger mortgage, the lender will need to verify there is no obligation due for car. If you give the car back, the mortgage lender may ask what you’re going to drive instead — especially if there is a commute time from where you work to where you plan on residing.

Should you find yourself in this predicament, here are some options to consider.

• Call your car dealer. You can ask if they have any specific options for getting out of the lease. You’ll need to make it crystal clear that you must be out of the lease obligation completely.
• Transfer the lease to someone else. Your mortgage lender should be OK with this option as long as you can show and verify the obligation is completely out of your name and that there is no obligation associated with it. You can search online for options if your car dealer doesn’t have any transfer suggestions.
• Pay out. Give the car back, pay the balance due and either buy a new vehicle in cash, removing any debt-to-income ratio predicament or finance a car that has a lower monthly payment. The key here is that the payments need to be reduced or totally removed if you want to maximize your buying power.
• Consider your priorities. A great deal on your car lease may not matter if you are serious about buying a home, plain and simple. Ask yourself: Is the car more important than the house?

Paying Off Debt for a Mortgage

Paying off debt to qualify for a mortgage usually needs to be documented in the following ways.

• Money used to pay off the obligation cannot come from the reserve requirement your lender almost certainly has. Lenders usually want you to have at least three to four mortgage payments in the bank, called reserves, as a cushion when granting your loan request.
• You’ll need to produce a paper trail showing money leaving your bank account and going to the creditor to pay off debt or a provide copy of the canceled cheque to show you no longer owe the obligation.

All of these steps may seem unnecessary and overly repetitive, but they are a by-product of the current mortgage lending world. Remember, stringent underwriting requirements help to ensure lenders are making good loans and, more importantly, that you can actually afford the house you are looking to buy.

Are you serious about buying a home? Call or email me to review your options. Home ownership may be closer than you think.
Steven Porter is a licensed Mortgage Agent with Mortgage Architects, and Accredited Buyer Representative (ABR) and Seniors Real Estate Specialist. Steven can be reached at 1-905-875-2582, Email steven.porter@mtgarc.ca or apply online at www.1800Mortgages.ca

Should you rely on a broker for a great mortgage?

If you visit different mortgage broker websites, you’re bound to come across wording like this: “We work with over 50 lenders to serve you better.”

The idea is that having more lenders to choose from when shopping for a mortgage improves your odds of getting the best deal. But is more really better and is it enough to rely on a broker to contact lenders on your behalf – or should you call around yourself?

Access to multiple lenders is a key benefit that brokers like to promote. However, the pool of banks that brokers have access to has shrunk since 2007, when Bank of Montreal, Canadian Imperial Bank of Commerce, ING and others began exiting the independent broker market. Those banks feel they can profit more by selling mortgages directly to customers.

Furthermore, most brokers don’t compare every available lender. Maritz Research found that 90 per cent of the typical broker’s volume goes to just three lenders. That’s partly because some brokers feel more comfortable in knowing a few lenders well, versus many lenders superficially. It’s also because brokers often get preferential rates and service – like better turnaround time – from their primary lenders.

Yet another reason, in certain cases, is self-interest. Lenders pay financial incentives to brokers who send them a certain amount of volume. Such incentives can be a conflict of interest if they lead a broker into recommending a less competitive mortgage.

When a broker deals with just three lenders, he or she might as well be a sales rep for those companies. There’s nothing necessarily wrong with that – if the lender has the best mortgage for the customer, but that’s not always the case.

One way to avoid brokers who don’t shop around sufficiently is to deal with an established and experienced high-volume broker, someone who isn`t as pressured to send a set amount of volume to a particular lender. These brokers are typically found high up in Google’s local search results, due to their longevity, referrals and professionally-run businesses.

In a perfect world, it would be easy to find a broker who shops all lenders objectively, even lenders that don’t pay brokers. Unfortunately, most brokers don’t have the time or technology to closely track the rates, terms and guidelines of 50-plus lenders. And brokers, like bankers, like to get paid and seldom recommend outside lenders.

So if you truly want to shop all major lenders, you’ll need to do your own legwork. If you’re getting a new mortgage, you must:

Contact these non-broker lenders yourself: RBC, BMO, CIBC, HSBC, ING, Manulife Bank, PC Financial

Go direct or use a broker to get quotes from these lenders: Scotiabank, TD Canada Trust, National Bank, Industrial Alliance, Desjardins and the major credit unions

Use a broker to get quotes from wholesale lenders like First National, MCAP, Street Capital, Home Trust, Merix Financial, ICICI Bank, CMLS, MonCana Bank, Radius Financial, RMG Mortgages, AGF Trust, B2B Bank, Xceed and others.

In short, you’ll never truly know all the deals out there unless you take matters in your own hands and contact dozens of lenders. However, you need to be sure it’s worth your time. You might save another 0.05 or 0.10 percentage points off a great bank or broker rate by shopping yourself (that’s about $49 savings per $100,000 of mortgage per year).

But the legwork could literally take hours of asking the right questions and negotiating with all the key lenders. And if you inadvertently pick a lender with onerous fine print, the cost of that lender’s restrictions could easily outweigh any upfront rate savings.

Using rate comparison sites for leverage is another strategy. The problem there is that rate sites typically don’t reveal all the limitations of a mortgage (e.g., penalty calculations, porting rules and mortgage increase policies, to name a few). So you still need advice or lender feedback to find the ideal mortgage at the absolute lowest possible rate.

Even if you plan to get your mortgage directly through a bank – like 57 per cent of Canadians do – contacting a broker might work in your favour. At worst, you’ll get market and rate intelligence that you can use to your advantage at the bank. At best, the broker may find you a flexible product that costs less, and/or suggest a strategy that saves you interest.

And, brokers have dozens more options than any single lender, which gives them access to cut-rate pricing, easier approvals for people with special situations (eg. self-employed or with bad credit history), lower penalties for breaking a mortgage early, and more choice of features, like pre-payment privileges, linked credit lines and the ability to extend your term before the mortgage comes due, penalty-free. (Banks too have unique features not available through brokers. Examples: BMO’s Cash Account, TD’s HELOC and Manulife’s One account.)

Comparing dozens of lenders on your own can be educational, but it takes considerable effort and some know-how. If you know what questions to ask, that extra effort can lead to a slightly lower upfront rate. I’ll list the essential questions in a future column.

Just remember this. The cheapest rate doesn’t necessarily equal the least money out of pocket. Things like costly payout restrictions, lender refinance policies and accelerated payoff privileges can add or subtract thousands from your total borrowing costs.

In practice, most Canadians lead busy lives and are content to let a banker or broker find them a mortgage that’s “good enough.”

But if you have the spare time and truly want the best deal, you can engage a broker to shop for you, and call the non-broker lenders yourself and cross reference your quotes with a rate comparison site. And while you’re at it, don’t be afraid to get a second broker opinion.

by: Robert McLister editor of CanadianMortgageTrends.com

Recent changes to the RRSP Home Buyers Plan

With the federal government's Home Buyers' Plan, you can use up to $25,000 of your RRSP savings ($50,000 for a couple) to help finance your down payment on a home.

To qualify, the RRSP funds you're using must be on deposit for at least 90 days. You must also provide a signed agreement to buy or build a qualifying home.

The best part is the withdrawal is not taxable as long as you repay it within a 15-year period. The payback amount is at least one-fifteenth a year of the amount you withdrew from your RRSP. So make sure you set up an automatic monthly, bi-weekly or even weekly contribution to your RRSP, to ensure you do not miss any repayments!

Advantages

Using your RRSP's as a downpayment may be a great option as you have the ability to draw from some of your existing resources and it might possibly allow you to accumulate the 20% down payment needed to avoid having to pay default insurance premiums. Even if you already have enough money for your down payment, it may make sense to access your RRSP savings through the Home Buyers' Plan.

For example, if you have already saved $25,000 for a down payment and assuming you still had enough "contribution room" in your RRSP for a contribution of that amount, you could move your savings into an RRSP at least 90 days before your closing date. Then, simply withdraw the money through the Home Buyers' Plan. The advantage? Your $25,000 RRSP contribution will count as a tax deduction this year. Use any tax refund you receive to repay the RRSP or other expenses related to buying your home. But remember, you will have to pay that amount back to your RRSP over the next 15 years.

Considerations

It's very important to your overall plan that both the pros and cons of this strategy be reviewed. There are a number of questions you should be asking yourself about this strategy:

• Will you repay the requirement amount each year?
•  Is it the right time to cash out your RRSP (i.e., this depends on the investments and rate of return you are getting on your current investment)? 
• Is it worth forgoing the future tax sheltered growth potential of your RRSP in favour of reducing the mortgage amount (including default insurance premiums, total interest costs, etc.)

Canadian real estate market outlook 2015

Sooner or later mortgage rates will rise and house prices will start to moderate. Why this is the year the market will finally start to turn. Buy a house. Don’t buy a house. Soft landing. Crash landing. As we start the new year, the question on everyone’s mind is: What can we expect from Canada’s housing market?

Once again, experts agree that housing affordability is stretched, historically low interest rates will rise, and housing prices will drop. Rewind 365 days and you could be reading a forecast for 2014. But this time the experts agree: prices really will fall and it’s got everything to do with the recovery of the global economy.

Now, if the global economy were a ballgame we wouldn’t be in the World Series. Oil prices are depressed and Europe is still struggling with its credit crunch. But things are slowly improving in the U.S. and within Canada, and the important teams are still in the game: our employment rate is stable, oil prices are not (yet) low enough to cause real concern, and exports have picked up as the value of our dollar has dropped. All this leads most economists to believe we’ll see slightly higher bond and mortgage rates and a nation-wide cooling of the housing market over the next couple of years.

Robert Hogue, senior economist with RBC Bank, says he believes the coming year will be “a moderating phase for the market with a soft landing in 2016.” Hogue predicts national home prices will actually rise 1% or maybe 1.5% in 2015, as buyers race to get in the market before mortgage rates increase, after which prices will fall later in the year. “It’s one of the reasons why 2014 was such a strong year.”

But he cautions home owners: “Canada’s real estate market really is a multi-headed beast. It’s essentially very strong in Toronto, Vancouver and Calgary, but it’s balanced or soft in the majority of other markets.” As such, he predicts we’ll see a cooling of the three biggest markets by the end of the year in response to small mortgage rate hikes starting mid-year.

Now, if the prime rate were to climb from its current 3% level to 5% or 6% over the next year or two, many Canadians could find themselves in deep trouble, says Hogue. But he isn’t sure we’ll see rates shooting up that fast any time soon. Until recently, analysts and policy makers considered 5% to be the neutral or natural interest rate. It was the rate that allowed full employment, a stable inflation rate, and a sustainable growing economy. But Hogue, along with economists from Morgan Stanley and analysts from the C.D. Howe Institute, believe that the “new neutral rate” has actually dropped.

The primary reason is the impact baby boomers continue to have on the national economy. As boomers continue to age and leave the workforce, Canada can expect a slowing of the labour market, which will depress productivity growth, limit the economy, and suppress potential inflation, explains Hogue. “If the new normal is markedly below what we’re used to, then we won’t see as much downward pressure on housing prices,” he says.

The impact of demographics doesn’t stop there. According to a new report by Benjamin Tal, deputy chief economist with CIBC, analysts have been seriously underestimating the number of new immigrants in Canada. New immigrants account for 70% of the country’s population growth and about half are between the ages of 25 and 44—the key demographic that leads to household formations. According to Tal the under-estimated increase in the number of home-buying immigrants in Canada will help to offset a slowing economy, created by the boomer generation. “Immigration, itself, won’t be able to change this trajectory, but it will help to offset it,” explains Tal.

But David Madani from Capital Economics isn’t convinced. “Every good economist knows that immigration always fluctuates and it’s never prevented a housing cycle in the past.” He’s also not convinced that builders are out of the weeds when it comes to supply and demand. While he agrees that absorption rates are close to historical long-term averages, he’s confident that the market will suffer. “There are too many one-bedroom condo units being built when demand shows a need for family accommodation.”

So what’s a regular home buyer to do? The best advice is prepare for the worst, but if you’re ready to jump in and you can afford it, waiting for prices to fall might not be the best idea. Ted Rechtshaffen, president and CEO at TriDelta Financial, advises against trying to time the market in general. “It’s not about prices or the mortgage rate, it’s whether you can truly afford to own the home.” This means calculating whether or not you could still afford your monthly payments even if mortgage rates increased to 4% or 5% a few years from now. It also means deciding whether or not you can stomach a housing price drop. While many economists are predicting a 10% drop, the correction could be as great as 30% in some Canadian markets.

Of course, your home is more then equity and capital. It’s the place you spend time with friends and family, and the place you build memories. “Life and lifestyle is just as important,” says Rechtshaffen, so as long as you can afford your payments, “don’t be too concerned about the correction.” - by Romana King

The Myth of the Property Ladder (A Warning to Young Canadians)

Parents are great, they spend thousands of dollars and countless hours on their children and get almost nothing in return. Joking aside, my point is that parents usually mean well. There is one area however where I believe Canadian parents are leading their precious children astray, real estate.

The property ladder refers to when buyers attempt to get their first house, where they can than save up and subsequently trade up to a better house. The whole idea, is just to get on the first rung and according to baby boomers you'll be on your way. But just as getting good grades and a good University degree was once a sure fire way to success in the past, what worked for one generation might not work for the next.

Real Estate for most young Canadians is a leveraged investment. Well not just leveraged, but very leveraged. My generation is quick to scoff at the executives from the financial crisis who ran investment banks at sky high debt to equity ratio's of 20:1+. Yet, they think nothing of putting 5% down on a house (which of course is the exact same amount of leverage). A measly 5% drop in house prices and you are wiped out. That's if you can even put 5% down in the first place. Many can't. This is where the parents step in. 

Beyond the emotional push to buy a first house with the common (yet ridiculous argument) of "why pay somebody else's rent?"  I have seen many of my friends' parents routinely gift the 5-20% of the down payment of their first house. No, they are not just giving them free money but rather giving them the money on the condition of a house purchase (and saddling them with massive mortgage debt). It's kind of a like a drug dealer offering free cocaine but only once you get addicted. It's a terrible system so why do parents do it?

The biggest reason is because it worked very well for them.  There is a very stark difference however that will dramatically effect these housing returns going forward: interest rates.   Baby boomers have ridden a three decade wave of falling interest rates. This low cost of financing has lead to the record high price to income ratio. With the end of quantitative easing in the US these low rates are very possibly coming to an end. (Remember Canadians' don't have 30 year fixed mortgages, they reset after 5 years for most people.)

This house price to income ratio chart on the right is from a September 2014 Bank of Canada presentation. Note that although it once cost just a little over 2x your annual income to buy a house, now it is 5x. 

What is actually most disturbing about this chart  though is not the record high number but the linear trend line that CMHC was so kind to add. The price to income ratio over time will revert to its mean. If it didn't, you would have house prices continue to outpace incomes and consume well over take home pay. That's what makes this dotted black line so deceptive. To the casual observer (say the CMHC board which has a deep conflict of interest with its ties to the construction and finance industry) it makes it seem like 'everything is on track' when in reality the dotted line should stay relatively flat over time. Charlie Munger would probably call it 'bullshit graphing' or something along those lines. Anyways, if this graph were to revert to any where near its historical level there would be big problems for Canada and its record high debt binge.

Moral of the story to Canadian millennials: Don't let ma and pa get you unknowingly hooked on the debt cycle, a mortgage will ultimately be your debt, not theirs. Borrow accordingly or better yet, rent until prices make sense. - by hardcore value

Today's Most Desirable Home Features

Housing trends and styles are changing constantly. Today, more than ever, buyers have a strong sense of what they want in a home. 

Today’s desirable home features depend greatly on the type of buyer.  Buyers can be divided into two main groups. The first group are first-time buyers which is pretty self-explanatory. The second group are the move up buyers, which are looking to move into a home that addresses the shortcomings of their existing home. They aren't necessarily second-time buyers but they are often people that have out grown their current home. Buyer age is also a main factor in deciding the desired home features.

This article focuses on what is hot in the housing market today. Whether you are planning on renovating, selling, or you are looking for a new home, this information will help you make choices that will contribute to both your real estate enjoyment and investment.

Home Exterior

Today, stone and stucco are very popular choices. Brick is the standard material used with mass builders, but the more customized and trendy homebuilders are using stone and stucco on a more frequent basis.

Floor Layout   

Bungalows are hot nowadays. Excessive floor level changes are no longer popular as people desire to live on one or two levels.

Room Sizes

Room sizes have been gradually increasing for a number of years. Buyers tend to place the most importance on three key rooms: the kitchen, family room and master bedroom. You can expect to see these three rooms continue to increase in size over the next 10 years while rooms such as the living and dining room are likely to get smaller or disappear altogether. Many new homes scrap the living room and instead incorporate that space into the family room or the 'Great' room.

Buyers still, ideally, desire four bedrooms in their home and would like, if possible, two living areas. One of the living areas can be the recreation room in the lower level (basement).
A master bedroom on the main floor is ranked very important for buyers 65 and older. A two-car garage with ample storage area and a main floor laundry area is desirable for move-up buyers.

Kitchen and Bathrooms 

The kitchen is becoming the hub of the house. The most desired features for the kitchen include: an abundance of counter space, a butler’s pantry, deep drawers and two sinks. Stainless steel appliances are also very popular today, and in the upper end market, appliances concealed as cabinetry are very chic.

Large kitchens with an island and counter tops made of granite or marble are very desirable for move up buyers. However, this must be matched with stylish kitchen cabinets.

Luxurious bathrooms with a separate tub and multiple shower heads; pedestal sinks and large mirrors; an overall spa like feeling; attached dressing rooms and a place to sit are all desirable features. Master suite soaker tubs and whirlpools are still desirable for many home buyers, but not as important as other features.

Energy Efficiency 

With the green movement becoming more popular, energy efficient appliances, high-efficiency insulation, eco-friendly treatments, and environmentally smart building plans are among the "green" features touted in homes.

Tech-readiness 

Satellite and internet wired along with multiple phone jacks are what people want in today’s technology world. With today’s busy lifestyles relaying heavily on technology, even a day or two without high speed internet could be a major inconvenience.

Home Office 

Today, many people would much rather have home office space than a formal dining room. Many employers are seeing the business advantages of allowing employees to work from home. As well, many people are using work from home opportunities to help supplement income because of work shortage or as an opportunity to make money online.

Outdoor Living Space 

The popularity of outdoor spaces continues to grow. Patios, deck, exterior lights, fenced yard and fire pit extend the outdoor living space at home and make a great extra feature.

Other Notables

Some other notable features that home buyers consider very important when buying a home include central air conditioning, recessed lighting, hardwood flooring, energy efficiency and the potential to turn a profit should they decide to sell their home in the near future.

Today’s buyers are looking for a little luxury and features and treatments that are the highest quality their price range will permit.

Copyright 2014 Canada Realty News
Posted by, Steven Porter, Mortgage Advisor - steven@stevenporter.ca

2 Reasons to Switch Mortgage Providers at Renewal Time

 If you’ve ever renewed a mortgage before, chances are you’ve at least entertained the idea of switching mortgage providers. Switching providers is often the best choice, for two reasons: new lenders can usually offer you the best mortgage rates, as well as better prepayment options. The differences in these numbers from one lender to the next may seem insignificant, at first, but waiting until you find the best options can save you thousands of dollars in interest charges over the course of a mortgage term. Here’s why you should make the move:

1. Switch for a Better Mortgage Rate

Let’s say you purchased a home for $400,000, made an $80,000 down payment (20%) and took out a $320,000 mortgage amortized over 25 years. After 5 years, you need to renew, but your existing mortgage provider says the best they can offer you is another 5-year fixed rate of 3.89%. At that rate, your monthly mortgage payment would be $1,664 and you’d pay $48,975 in interest over 5 years.

If, instead, you had shopped around for a better rate/product for you, you could’ve found a 5-year fixed rate of 3.19% with a new mortgage provider. At that rate, your monthly mortgage payment would be just $1,343 and you’d pay $41,060 in interest over 5 years. By switching to a new provider, you could’ve saved $7,915 in interest during your 5-year mortgage term.

2. Switch for Better Prepayment Options

The second reason to consider switching mortgage providers at renewal time is if another lender can offer you better terms and conditions, with prepayment options being among the most important of them. Most lenders will let you increase your monthly mortgage payment amount once each year, but the amount you can increase it by often varies from lender-to-lender. The bigger the allowable increase, the more you can potentially save.

Example: 10% vs. 20% Prepayment Options

Let’s say you bought a $300,000 home, put $85,000 down and took out a $215,000 mortgage amortized over 25 years. If your current mortgage provider offered you a 5-year fixed rate of 3.79%, your monthly mortgage payment would be $1,107 and, over 5 years, you’d pay $37,880 in interest.

If, however, you decided to take advantage of your current provider’s prepayment options, you could increase your monthly payment amount by 10%:

$1,107.00 x 10% = $110.70

$1,107.00 + $110.70 = $1,217.70

If you did that just once* at the beginning of your new 5-year term, you’d pay just $37,229.22 in interest; that’s $650.78 less than if you had stuck with the original payment amount.

Now, if we assume you found a new mortgage provider who offered the same mortgage rate (3.79%) but a 20% prepayment option, your monthly mortgage payments could go up to:

$1,107.00 x 20% = $221.40 

$1,107.00 + $221.40 = $1,328.40 

If you increased it just once* at the beginning of your new 5-year term, you’d only pay $36,576.01 in interest; that’s $653.21 less than if you had stayed with your current provider and taken advantage of their 10% prepayment option, and $1,303.99 less than if you had done nothing.

*Remember that you could potentially increase your payment amount once each year and save even more, but we kept it simple for this example.

How to Make the Switch

If you find a new mortgage provider with an offer you’d like to accept and switch over to, you’ll need to submit a formal application, not unlike the one you originally submitted for your previous mortgage term. Keep in mind that the qualifying criteria may differ from lender-to-lender, so a new provider will likely require certain types of documentation with your application, such as proof of homeownership, employment and home insurance.

When your application is approved, the new provider will ask your existing provider for something called a Payout Statement. The statement outlines information regarding your current mortgage, including the outstanding balance as of the renewal date—this is the amount the new provider will use for your mortgage application.

Just before the switch is made, you’ll have to meet with the new provider again, to pay any outstanding fees for this new mortgage. These fees can include, but aren’t limited to, an appraisal fee, legal fees for signing the new agreement, a mortgage transfer fee and a discharge fee.

The entire process can seem a little daunting, but this is a great example of why it’s smart to work with mortgage brokers. Not only can a mortgage broker shop around for the best mortgage rate/product for you, they’re experienced in the process of switching providers and are happy to guide you through the process.

So, while the renewal slip your existing provider pops in the mail may seem tempting, it’s worth making an appointment with a broker and seeing what kind of offer they can find you. Just remember to give yourself lots of time: if you wait too long and your current mortgage term passes its maturity date, your existing provider will automatically renew you for another term.

5 Important Things You Must Know Before You Invest in Property

With extremely high returns on investment, it’s no wonder why more and more people today are hopping on the bandwagon, expecting to make a fortune from buying and renting property.

Just look around you and you’ll probably find a few friends, colleagues or relatives investing in property. That’s how big the market is today.

Before you plonk your hard-earned money on a piece of real estate, bear in mind that property investment is not a decision to be made on impulse – especially if everybody’s doing it.

There is a substantial amount of information that you should research and a sensible strategy to adopt if you ever want to be successful.

According to Robert Kiyosaki’s Rich Dad Real Estate Advisor, Ken McElroy, there are 5 important things you must know before you decide upon your investment.

First of all, you must know the type of property you want to invest in:
The choices can range from residential to private housings, commercial property, or even land that is waiting to be developed. You need to know the type of property you’re interested in before you can even think about financing, and other areas in the investment process.

The second thing you must know is the geographic area of your property:
According to Ken, this is called “Level 1 Research”. This level determines whether you want to invest in property within your state, city, or somewhere else in your country. Level II and III Research narrows that decision down to even greater detail, concentrating on the particular housing estate in which you want the property to be located.

The third thing you must know is your financing strategy:
How are you going to pay for your investment property? Small properties are usually paid for completely, but bigger properties typically require investors or a major loan from a bank. There are banks that will even loan you the money for smaller properties as long as the real estate has a proven record of profitability.

The fourth thing that you must have is a team:
Do you have a team of professionals who can help you manage the work involved in your investment? Typically, your team should include an accountant, mortgage broker, lawyer and a property manager. Later, you might also want to welcome on board architects, engineers, surveyors and tax consultants.

The final thing you must consider are the necessary costs for repairs even before the property can begin to earn a profit:
The value of your property is affected by the state of its interior and you will have to consider arranging for minor or major repairs before you can lease it out and get a return on your investment.

With these 5 important things in mind, you can then build a solid foundation for your investment strategy and avoid the risks that beginner investors commonly make.

Request a FREE, Hot List of Cashflow Properties with pictures and descriptions in Halton Region. Visit www.HaltonInvestmentProperties.com to request your copy.

This article is based on the teachings of Rich Dad Real Estate Advisor, Ken McElroy

Why Are Real Estate Practitioners Paid On Commission?

  How the commissions (the fee real estate practitioners "earn" for selling a house), came into being and what the future will bring.

Several years ago The GBR Business Report ran a story on real estate commissions. It discussed how the commissions (the fee real estate practitioners "earn" for selling a house), came into being and what the future will bring.  It goes without saying that the way the real estate industry is structured, and the way practitioners are paid is a bit of a mystery, particularly when you factor in that what is "the norm" (even though commissions are purportedly "negotiable"), is taken for granted until you're facing the possibility of selling a house.  Perhaps sharing some insights on the way we got to where we are today will give you a better appreciation for this side of the business, likewise, will shed light on why an agent earns his/her keep in such a way and from whence the practice originated - keeping in mind that its very nature is referred to by many practitioners as a "feast or famine" way of making a living (and that's not far from the truth for many!).

The "standard" commission as we've come to know it today, came into practice in the 1940s, when local Realtor boards came together to "fix" the rates their members could charge for services leading to the sale of real estate. Some of the practices prior to this "re-organization" were fraught with dishonesty and abuses of all sorts, particularly towards the ill-informed consumer, who would sometimes be the victim of deceptive practice, such as "net fee" arrangements, or paying a hefty "flat fee," and in the worse of the cases, unsuspecting and trusting consumers would sign over the property on a type of arrangement where payment would come after certain events, leading to these machinations. While the practice of a unilateral percentage of the sale price quickly became the norm, (the fee is a cost to the seller, typically), there have been onslaughts on this practice by people and companies that literally don't buy into this arrangement, e.g., folks who would rather do-it-themselves avoiding a commission, or companies that cater to these types, where they charge some type of consultant fee or a minimal brokerage for a minimalist menu of services (a breakdown of some of the typical services a full-service broker provides under the "traditional" model).

However, before we get away from the backdrop of why the fee that an agent expect might not appear apropos to the consumer, let's first review what any good agent does to earn his keep - besides putting up a For Sale sign and waiting for the buyer to buy your house.

• Marketing: Includes advertising, promotion, traditional, i.e., Multiple Listing, and via the internet. This is a critical component in a good agent's arsenal, s/he has all the tools in place to adequately promote the property to the most-likely buyer (group) from which to elicit the best and highest offer your property can command, and you should expect (from the research done beforehand) -- leading to a sale.

• Representation: Includes advocacy for your best interest, knowledge of pricing strategies - insuring that you are fully apprised of factors affecting valuations; consulting on financial and fiscal implications of the transaction; advising on best financial and fiscal options given your circumstances; insuring compliance with mandated ordinance and due diligence obligations, e.g., completion of disclosures, inspections, and the likes; all the while keeping your interest at the forefront to insure a smooth sale.

• Research: Includes investigating the competition, the market trends, and factors influencing the sale and appeal as it relates to the circumstances, e.g., sellers sell for a variety of reasons, and a good representative takes these reasons into account; also, depending on local and regional norms, recommends strategies to enhance the marketability of the property to specific target groups, i.e., staging, videos, open house, tours, etc.

• Negotiations: Includes making the best case on your behalf for what you expect in price and terms, particularly if the research is thorough, and confirms your entitlements. Handle the actual agreement(s) to buy/sell between you and the buying party, insures that the terms are both clear and understood, and adhered to by all concerned.  Generally works to make sure your end of the bargain is being met in as much as can be done with and through other parties, etc.

Additionally, with the advent of complex and time sensitive transactions, e.g., short sales, foreclosures, and the likes, the agent also negotiates with the lien-holders, achieving an effective transition and insuring compliance with even more burdensome activities and processes as are typical in such sales. 

• Transactional Management: Once a buyer has been secured, in a "typical" sale (as opposed to a short sale), there will be a plethora of steps and coordination of processes, e.g., disclosures, signatures, inspections, appraisals, evaluations of financing applications, further negotiations of anything that is uncovered along the way, escrow and title issues, insuring all timelines are adhered to, etc. During this task and time sensitive stage, there is a delicate balancing act to get thing right and on time. Conversely, if things are not in line, the agent steps in to make things right - with your best interests and intent (as stipulated in the agreement) at the forefront, among other things.

These and many other tasks are the domain of a good agent and agency. If anything is typical of the process is that there is nothing so standard that one can lump any sale into an "average sale".  Yes the standards are there, otherwise there would be no standards across the board, but, each transaction has unique qualities that require a seasoned practitioner's expertise, if not know-how to address.  Now that you have a slightly better perspective of what an agent does to earn his/her keep, let's continue with the topic at hand.

The original intent of the Realtors was to "standardize" the fees in order to prevent abuses and/or disparity in the way practitioners would be compensated.  However, in 1950, the U.S. Supreme Court declared this violated antitrust laws, so they adopted "suggested fees," however, that too met with an unfavorable response. The Department of Justice sued in the 1970s effectively nixing that as well, setting the Realtors up to make commissions "implicit," yet the local bureaus or departments of Real Estate, governmental regulators, mandated that all commissions be negotiable.
This leads us to modern day real estate. There are numerous studies showing that the average commission rates across the country remain fairly consistent at about 6%, although market conditions impacts on this rate slightly. As of late, with the advent of internet model companies where they offer huge incentives, there have interesting results.  While these companies aim to make enough of an impact on buyers and sellers to win them over with those incentives, they have yet to show a profit or to be viable alternatives to the traditional agent.  Furthermore, these cyber companies offer very little in the way of actual person-to-person dealings, relying instead on algorithms and the sorts, and leaving much to be desired for the consumers' experience.

There will continue to be an evaluation of the way real estate is sold, however, one thing can be sure, whenever two parties come together on anything of such importance -- like buying a house, unless there is unanimity in this event, there will be room for misunderstanding or disagreements, and such muses.  As such, an agent, if for only this reason, serves as a good buffer to allay concerns and insure compliance, and ultimately the sale.  Now the question is, what is that worth to you (on top of all the other tasks and responsibilities outlined previously)?

And, unlike what some say that an agent isn't worth as much as whatever percentage you are able to negotiate, one thing is certain, if you're dealing with a true professional, and not a neophyte, you'll soon discover that this person is your best resource for a variety of things, not the least of which is installing a for sale sign to get the house sold!

Originally posted on CA by J.Mario Preza