Choices. Fixed or variable? Which is best for you..

Vancouver Metro, September 13, 2012
By Ylva Van Buuren

Differences. Your decision will be based on cash flow, financial personality, and long-term goals.

Which type of mortgage should you go with: A fixed or variable rate mortgage?

With a fixed mortgage, explains the Financial Consumer Agency of Canada, the interest rate you pay to borrow the money (and the mortgage payments you pay regularly) are set for the entire term. On the other hand, a variable mortgage has an interest rate that fluctuates with prime and can change during the term.

A fixed rate mortgage traditionally has a higher interest rate, says David Smith, a mortgage broker and partner at Oriana Financial, Toronto. However, interest rates are so low right now that the spread between the variable and the fixed is not very great.

But there are other differences that can help you decide:

Your Need to Know

Do you want to know exactly what you owe on your house at the end of the term? A fixed mortgage shows you the interest and principal payments from start to finish.

Keep in mind that most financial institutions offer a fixed rate variable mortgage, too – which means you have a variable interest rate but your payments do not change for the term. What does change, explains Brenda Hiscock, a member of Advocis, the Financial Advisors Association of Canada and a certified financial planner with Guilfoyle Financial Planning Inc., is how much of each payment is interest and how much is used to pay down the principal – as the interest fluctuates with prime. “The mystery lies in what the balance will be at the end of the term.”

Your Financial Personality

A fixed rate mortgage is predictable and safe from any interest rate uncertainty while a variable rate mortgage requires a certain ongoing vigilance, says Smith. “Will the prime go up? Should you lock in or not?” You have to be prepared to stay on top of interest rates with a variable rate mortgage.

Cash Flow

A variable mortgage can make sense for people who have good cash flow. You can lock in at any time for three years or more, says Hiscock, and you have the cash flow to accommodate future increases and payments if that is the case.

Long-germ Goals

How committed to the property you are can determine whether you want to lock into a long-term fixed rate or not. With interest rates at record lows, it is likely they will go up in the future. These days, says Smith, we can do a 10-year fixed mortgage for less than four percent … locking in for that period might be an option for you.

Quick tips for boosting credit..

Planning ahead to ensure your credit is healthy before applying for a mortgage can translate into a better mortgage rate and product – which can save you significant money throughout the term of your mortgage.

Following are five steps you can use to help attain a speedy credit score boost:

1) Pay down credit cards. The number one way to increase your credit score is to pay down your credit cards. Revolving credit like credit cards seems to have a more significant impact on credit scores than car loans, lines of credit, and so on.

2) Limit the use of credit cards. Racking up a large amount and then paying it off in monthly instalments can hurt your credit score. If there is a balance at the end of the month, this affects your score – credit formulas don’t take into account the fact that you may have paid the balance off the next month.

3) Check credit limits. If your lender is slower at reporting monthly transactions, this can have a significant impact on how other lenders may view your file. Ensure everything’s up to date as old bills that have been paid can come back to haunt you. Your best bet is to pay your balances down or off before your statement periods close.

4) Keep old cards. Older credit is better credit. If you stop using older credit cards, the issuers may stop updating your accounts. As such, the cards can lose their weight in the credit formula and, therefore, may not be as valuable – even though you have had the cards for a long time. You should use these cards periodically and then pay them off.

5) Don’t let mistakes build up. You should always dispute any mistakes or situations that may harm your score. If, for instance, a cell phone bill is incorrect and the company will not amend it, you can dispute this by making the credit bureau aware of the situation.

 

Federal government announces changes to mortgage financing requirements

Ottawa – January 17, 2011. The federal government announced this morning three changes to the rules for government-backed insured mortgages.

First, the government will reduce the maximum mortgage amortization period from 35 to 30 years. Second, the maximum amount of the value of a home that can be re-financed will drop from 90 per cent to 85 per cent. And finally, government insurance will no longer be available to financial institutions wishing to insure home equity lines of credit.

“These are prudent measures that promote responsible lending practices and further strengthen our internationally recognized mortgage finance system,” Jake Moldowan, Board president said.

The adjustments to the mortgage insurance guarantee framework will come into force on March 18, 2011. The withdrawal of government insurance backing on lines of credit secured by homes will come into force on April 18, 2011.

Click here to view the government’s announcement.

Is the time right for a re-finance?

By David Rees, TD Canada Trust

If you have already bought a home within the last 2 years, or if you have done a re-finance in the last 2 years, you may be in a position to potentially save tens of thousands of dollars. If you chose to go with a VARIABLE rate mortgage in the past 2 years, you are likely in a mortgage that has very little, if any, discount on it. In fact, you may even be in a Variable rate mortgage that is Prime PLUS a certain percent.

For example, about 1 ½ years ago, Variable rate mortgages were at Prime PLUS .80%. That would mean that today, your current Variable rate mortgage is 3.80% (Prime currently being 3%).

As the global economy began to turn around and borrowing flowed more readily, the discounts for Variable rate mortgages deepened and Prime MINUS mortgages came back into the market. Today, it’s possible to obtain a Variable rate mortgage at Prime MINUS .70% – that’s a full 1.5% difference compared to 1 ½ years ago!

What could this potentially mean in dollars? Well, on a mortgage of $300,000, based on Prime PLUS .80%, you would pay approximately $44,000 in interest over the next 4 years (assuming your mortgage funded 1 year ago, and thus, have 4 years left on a 5 year term).

On that same mortgage, based on today’s Variable rate of Prime MINUS .70%, you would pay approximately $28,000 in interest over the next 4 years. That’s a savings of $16,000 in interest. Additionally, not only would you be saving money every month in interest, but you would also lower your monthly payment.

While it’s true that there will likely be a penalty to get out of your existing mortgage, on a Variable interest rate mortgage, it is typically only a 3 month’s interest charge. So, again, using the example of a $300,000 mortgage, 3 months interest would be approximately $3000 – so you would still end up saving a significant amount of money.

If you are in a FIXED rate mortgage, you are likely to face a penalty called the ‘Interest Rate Differential’ which can be a considerable amount, in which case it may not be worth while to refinance. But, if you are in Variable rate mortgage, it would be very prudent to consider further investigating your options on re-financing and talk to your lender – it will be worth your while.

David Rees is a Mortgage Specialist with TD Canada Trust. He has been in the financial services industry since 2005. He specializes in all residential real-estate secured transactions, including new home (project site) purchases, re-sale home purchases, re-finances, equity take outs and investment properties. If you have any mortgage related questions, please feel free to contact David any time @ 778.217.0624 or david.rees@td.com

Setting The Record Straight

By David Rees, TD Canada Trust

Earlier in the year, the Canadian government announced that new lending rules would come into effect as of April 19th, 2010. At the same time, our local BC government was set to introduce the HST only a few months later, on July 1st, 2010. The combination of the new rules and the introduction of the HST were misunderstood by many consumers and the result has been much confusion about home finance requirement and what implications the HST may have on the purchase of a home. Let’s take a closer look.

How much of a down payment do I need to purchase my new home?

Contrary to what you may have heard or believe yourself, you still only need as little as 5% down to purchase! Many clients I assisted this summer were under the belief that the new Government changes increased the required down payment to 10% – simply not true. If you are an EXISTING home owner, the maximum you can re-finance your EXISTING property is up to 90% of the value of your home (or 10% left in equity). However, any NEW PURCHASES still require only as little as 5% down. So yes, it’s still affordable to get into the market!

How much more will it cost for my home now that HST has been introduced?

I can’t tell you how many times I have spoken to client’s that were under the impression that the HST would add a substantial amount more to the price of a home. Again, contrary to popular belief, the effect of the HST on RE-SALE (homes that have been previously lived in) is negligible. The HST tax is ONLY charged on services that are associated with the sale of a property (legal fees, home inspectors, conveyance fees). The effect of this tax in association with these services is negligible when looking your actual cost of the house itself! The HST IS, however, charged on NEW HOMES (homes that have never been lived in, or homes that have had a substantial amount of renovation work done). In this case, there is still a rebate that can be applied for on new homes up to a purchase price of $525,000 (up to a maximum rebate of $26,250).

Some minor misunderstanding with major implication for home buyers!

David Rees is a Mortgage Specialist with TD Canada Trust. He has been in the financial services industry since 2005. He specializes in all residential real-estate secured transactions, including new home (project site) purchases, re-sale home purchases, re-finances, equity take outs and investment properties. If you have any mortgage related questions, please feel free to contact David any time @ 778.217.0624 or david.rees@td.com

Mortgage Basics 101

By David Rees, TD Canada Trust

What type of mortgage to choose? Fixed or variable? Open or closed? 5 year or 3 year? Mortgage or Line of Credit? Left or right? Ok, so that last one is not typically an option, but with all the different finance options, choosing the right type of mortgage may feel like a daunting task. But does it really have to be so confusing?

The foundation to answering some of the above questions really lays in your own personal plan and what you envision in the short term future – say up to 5 years. Are you planning on staying put for a while, or is your purchase just a temporary short term move? (i.e. less than 5 years).

Do you plan on coming into a win-fall of money? Is there the potential of putting large amounts of money onto the mortgage? I had a client who knew he was going to be receiving a rather large inheritance check within the year, so we had to ensure that the mortgage he got into allowed more than the normal pre-payment policies.

How comfortable are you with risk? Do you want to go to sleep at night knowing exactly what your mortgage payments will be, or are you comfortable with a little variance, knowing that you could pay less one month, but potentially more another?

Answering the above questions is a good place to start to narrow down what type of mortgage product you are best suited for. Once you have nailed this, it’s best to talk to a specialist who can guide you towards which product is best for your individual needs, based on these answers. As for each mortgage product, there is certainly much more to know, but don’t be overly concerned about the details at this point. It’s easy to get confused trying to understand everything and it’s really not necessary to understand it all. I find that as a home buyer moves through the process, the most pertinent, important details for that client, and their situation, come to the light and become clear; but they must first take just one step at a time with a qualified specialist to assist them along the way – that is all that is necessary!

David Rees is a Mortgage Specialist with TD CanadaTrust. He has been in the financial services industry since 2005. He specializes in all residential real-estate secured transactions, including new home (project site) purchases, re-sale home purchases, re-finances, equity take outs and investment properties. If you have any mortgage related questions, please feel free to contact David any time @ 778.217.0624 or david.rees@td.com