Should I Purchase Mortgage Life Insurance?
I recently read an article by Talbot Boggs of the Canadian Press (June 30, 2010). Though I agreed with most points made in the article, I disagree with the suggestion that a borrower should purchase mortgage insurance as an option if offered by the lender.
Firstly, the mortgage balance will be declining but the insurance premium will remain consistent, hence over time, the borrower will be receiving less. Secondly, if you decide to port (move) your mortgage to another lender when the term is up, the insurance will not be transferable.
I propose that if a borrower wishes to have the additional security offered by insurance (and I totally agree) then an insurance policy outside of the mortgage contract should be considered. This insurance can be a fixed term or whole life policy.
There are several advantages to this strategy:
Firstly, the policy is with the borrower and stays with the borrower no matter who holds the mortgage.
Secondly, the borrower can pick an amount that is appropriate to their situation. He or she does not have to purchase an amount to pay off the full mortgage.
Thirdly, the amount of payout from the “life” insurance remains consistent.
Finally, and probably most importantly, in the event of the demise (death) of the borrower, cash from the policy will go to the beneficiary. The beneficiary, who often is the spouse, will have money to make mortgage payments, pay utility bills, buy food, etc. for the family while they get their life adjusted to the new situation.
It makes no sense to have a debt free house if the hydro, water, gas and telephone are disconnected. This is a morbid subject, but it needs to be considered by all borrowers.
P.S. Be sure to obtain competitive quotes from a few life insurance agents before committing.
Jeffery Moses
Baby Boomers & Old Age Pensions
The year 2011 will mark a milestone event. Next year will be the first year that members of a special demographic bulge in society, known as Baby Boomers, will start to turn age 65. At this age a person qualifies to receive Canada’s Old Age Security Pension. For years now this group of individuals, born between 1946 and 1964, has been studied as to the anticipated effect their aging will have upon our society.
Corporate North America has marketed to the anticipated wants and needs of Baby Boomers for decades. Why wouldn’t they? According to some statistics, Baby Boomers currently control over 80% of personal financial assets and represent about 50% of all discretionary spending. In general, this group loves to travel and enjoy life. However, it has been noted that many Baby Boomers have become complacent with regard to their personal debt levels. As retirement years approach, trying to balance current wants and needs against the debt servicing requirement for past financial excess might become a challenge for some Canadians.
These are the same challenges that our corporations and governments are currently facing. Today, both our federal and provincial governments are being forced to deal with past budgetary excess while simultaneously trying to find and fund policies that will lead to sustainable job creation. Meanwhile, corporate Canada is also dealing with their past years of over leverage and excess. In a recent luncheon speech, the Governor of the Bank of Canada pointed out that the “global recovery will not be smooth.” Retirement expectations for many have changed to include working longer, part-time retirement, or the addition of self-employed business income. During the years prior to your retirement it would be very prudent to take a hard look at your overall financial situation. For many clients this will involve seeking good independent financial council.
If you find that you are faced with the need to reduce excess personal debts, here are ten recommendations:
1. Always pay off your debt with the highest interest rate first.
2. Establish a realistic budget that allows for principal debt repayment.
3. Set both short and long term goals.
4. Review your progress regularly and reward your successes.
5. Make the application for debt restructure/consolidation while you are still employed not when you retire. The approval process will be much easier while you are working and have a higher income.
6. Consider refinance options. A refinance of your mortgage to consolidate high interest and/or unsecured debt can greatly lower your overall borrowing cost and improve your cash flow.
7. Give consideration to what your shelter needs truly are. Perhaps selling your current residence and buying a lesser valued property might place you in a much stronger financial position.
8. Do not consider selling your house or re-mortgaging to consolidate your debts until a careful cost benefit analysis is done.
9. Always remember that the payments you make on personal debt are being made with after-tax dollars. You have to first earn the money, pay taxes on it, and pay the interest due on your debt before you can see a principal reduction.
10. Most importantly, be truthful with yourself and your partner or spouse about your finances.
Paul E. Croy
“Much Ado About Nothing”
It’s been over a year of media focus on the potential end of historically low levels of Canadian interest rates. This week, it might be appropriate to quote the words of Mr. William Shakespeare, much ado about nothing, as the Bank of Canada recently decided to increase the Bank Rate by only 0.25%.
This increase was probably the single most anticipated and talked about increase ever witnessed in Canadian history. Many people originally anticipated a full half percentage increase, but recently almost every financial analyst expected the 0.25% increase that raised the prime rate at most Canadian banks to 2.5%.
Had Mark Carney, the Governor of the Bank of Canada, failed to raise rates this would have caused more of a concern as financial markets want certainty and predictability. After months and months of dealing with mortgage client’s concerns, this increase simply became a non-event. It was also very interesting to note that some mortgage lenders actually decreased their five-year mortgage rates shortly after the Bank of Canada rate announcement. Financial Institutions need to have certainty established in the long term trend of market interest rates before they can become truly competitive in their mortgage rate pricing.
In contrast to Mr. Shakespeare’s play, Much Ado About Nothing, which is a comedy, the Bank of Canada’s decision on interest rates is very serious business that effects a great cross section of our society. From small home based businesses to the construction industry and manufacturing firms, all feel the effects of the Bank’s Canadian Interest Rate Policy. Along with the value of our Canadian dollar, our Canadian family standard of living is affected too. The Bank of Canada is very aware of this fact as they attempt to balance the need to fight inflation while at the same time trying to grow our economy.
The bottom line looking forward is that we are going to see a slow and gradual increase in interest rates and this should not be a surprise to anyone. For clients still on floating rate mortgages, this may be a good opportunity to consider increasing your mortgage payment thereby accelerating your repayment and decreasing the amortization on your mortgage. This would also prepare you for slightly higher interest rates in the future while at the same time taking advantage of our still very low mortgage interest rates.
Paul E. Croy
Benefits of a Broker
Just like a travel agent, searching for the best fares, seat sales and connections to get you to your destination, a mortgage broker searches for the best interest rates and terms to complete your purchase transaction.
These are the benefits of using a mortgage broker:
- DISCUSS – I will discuss your mortgages needs with you and prepare your application for presentation to lenders.
- EXPLAIN – I will explain the mortgage approval process. I will obtain a mortgage commitment, lock-in the best rates and terms, and provide you with a pre-approval so you can confidently look for your new home.
- INFORM – I will inform you about the costs associated with arranging a mortgage. These may include: appraisal and survey fees, property transfer taxes, municipal tax adjustments, and, if applicable, CMHC premiums.
- RESEARCH – I will research the market for the best interest rates and terms available. This includes special discounts and rates, available only through mortgage brokers.
- PRESENT – I will present your application to the lenders most likely to approve your deal. I will highlight the strengths of your application in a manner that will be favorably viewed by lenders.
- NEGOTIATE – I will negotiate on your behalf. I work for you, not the lender.
- ADVISE – I will advise you about the terms, rates and details of each mortgage lender’s offer, in order to help you make the most suitable financing choice.
Financial institutions will only offer you their own mortgage product. A mortgage broker is able to mix and match different products from a variety of institutions in order to meet your particular mortgage requirements.
Financial Institutions offer lower rates, special discounts and a wider variety of mortgage products through mortgage brokers. Mortgage Brokers are a better way for banks and other major lenders to deliver their products to new customers and lower retail banking costs. The savings are then passed along to you.
Mortgage brokers are motivated to get the job done for you. We get paid only when you’re satisfied and your mortgage is funded. Last but not least, in the case of most residential mortgages, the lender/bank pays our fee.
Chris Pahl
A Shoe Short Story
My wife truly loves a good pair of shoes. Over the years she has built a fine collection of well over 100 shoes; I’m sure that there are much larger collections hidden away in other people’s home closets! The interesting point is that as much as she may love the look of shoes, her daily choice selection is normally based on comfort.
For most people, getting into a mortgage is much easier than getting out of it if they find that they have made the wrong choice. Making the wrong choice can be a source of stress with potentially large financial and emotional costs to be paid. The mortgage you select should be comfortable and flexible, fitting with your lifestyle expectations. It is very important that your mortgage leaves some financial room for you to still be able to enjoy the things in life that are important to you. Feeling ‘mortgage poor’ can be somewhat like being forced to walk a long distance in the wrong pair of shoes.
It is important to spend time up front looking at the economic realities of your cash flow prior signing your mortgage documents.
What I would recommend for many clients is to try living within a budget based on the proposed mortgage payment prior to committing to it.
Paul Croy
Interest Rates on the Rise?
The Bank of Canada has signaled that they do not expect to hold present interest rate levels past the end of June…..
See the March 11, 2010, Business Week article, Canada January New Home Prices Rise 0.4%, Seventh Straight Gain
We are presently enjoying the lowest interest rates seen since the Korean War, and the only thing we can absolutely count on is that rates will inevitably rise. The ‘experts’ cannot seem to agree on when or by how much, but the varied opinions range upwards to an increase of 2.0% – 2.5% by the end of 2011.
I believe that now is the time to become pro-active and ensure that you take advantage of the present interest rate environment. Do you wish to explore the possibility of ‘renegotiating’ an existing mortgage? Would you like to ‘lock-in’ an interest rate for an upcoming purchase? Does your mortgage ‘mature’ in the next few months? Fixed rate vs. variable rate?
Our mortgage professionals are your best source for mortgage advice and can explain all your available options.
Walt Neufeld
What term mortgage should I choose?
Historically, the shortest term mortgage (ie. 6 month terms for 25 years) has been the least expensive route when financing your home.
Floating has been less expensive than fixed mortgages as institutions do not have to build in a hedge to offset interest fluctuations.
Longer terms provide stability against interest fate fluctuations as well as not having to deal with the paperwork and the stress of numerous renewals.
Here are some questions that you should consider:
1) Are you able to tolerate interest rate fluctuations and do you have the temperament to not worry about them?
2) What do you think interest rates are going to do?
3) What are your personal plans? Do you have a growing family and need more space? Are the kids leaving home and you want a smaller place? Is there a chance you can be transferred? (ie. I think I will be transferred in 3 years so I want a 3 year mortgage.)
My advice is to take a mortgage that fits your needs. Talk to your banker, accountant, lawyer, mortgage broker, etc. There is wisdom in much counsel.
Rory Campbell
Changes to Lending Guidelines for Insured Products
Jim Flaherty, Canada’s Minister of Finance, announced new lending guidelines for Canadian Mortgage and Housing Corporation (CMHC) backed mortgage loans in a recent announcement.
The new rules are as follows:
1. All borrowers must qualify for a mortgage using the five year fixed rate regardless of the term chosen.
2. When refinancing a home, Canadians will only be able to refinance up to 90% of the value instead of the previous 95%.
3. If you want to purchase revenue property CMHC will no longer insure you. You’ll need to put 20% down to take out a conventional mortgage.
These changes will take effect April 19, 2010.
What does this mean to the consumer who is presently trying to qualify for the maximum mortgage amount? I would recommend putting your plans in motion for purchase or refinance before the rapidly approaching deadline.
See the Government of Canada Department of Finance website for more details
Chris Pahl
Use RRSPs as a Down Payment…
This program allows the home purchaser(s) to borrow up to $25,000 from their RRSPs. They do not have to pay tax or interest while using the funds as part or all of their down payment. This also applies to the spouse or partner allowing as much as $50,000 to be put towards the down payment.
To qualify, the following criteria must be met:
- Participants must be either first time home buyers or cannot have owned a home for four years plus a day.
- The loan must be paid back to the RRSP over 15 years. The first payment is due within the year that the funds were borrowed and 1/15 of the loan must be paid back annually.
- Participants must be residents of Canada.
- The property must be owner occupied.
- Funds being drawn from the RRSP must have been invested for at least 90 days.
This program has proved both helpful and popular with many Canadian home buyers. Be sure to consider this option when buying your home.
Len Shorkey
Video: Who Borrows from a Mortgage Investment Corporation and Are the Rates Higher?
Walt Neufeld answers the question, “Who Borrows from a Mortgage Investment Corporation (MIC)?”. He also discusses the rates for borrowers and explains why the rates may be higher.
