Be Mortgage Smart

35 Year Amortization Option Ending

The government has set March 18 as the last day for 35 year amortizations. Key points to be aware of:

1. Lenders will likely stop accepting applications for 35 year amortizations in advance of the March 18 cut off.
2. Approved deals that close after March 18 can still have 35 year amortizations as long as the deal is approved by CMHC/Genworth prior to the date (assuming the lender accepts the deal)
3. Longer term amortizations on conventional deals (greater than 20% down payment) will remain an option with many lenders. In fact 40 years is still available.
4. Porting/moving a mortgage to a new property upon sale of an existing property is not impacted as long as new money is not required. If new money is required then a blended amortization may be an option. However taking the new mortgage with a max 30 year amortization may also be required.
5. This change is great news. The biggest mistake the government made was extend amortizations from 25 years in the first place. Expect that in the future we will see it pulled back to 25 years.
6. Prices will adjust (slowely) to the new amortization. While not so much when supply is low and demand is high, but as we move to a more balanced or a buyer's market, prices will adjust. I don't believe this will happen until the full effect of the shorter amortization is implemented - likely the fall/winter 2011 market.

 

Here is the full announcement:

Release: Department of Finance tightens CMHC rules

 

• For the second time in twelve months, the Department of Finance tightened rules on residential mortgages to help slow the pace of household debt accumulation. Changes include shortening the amortization period to 30 years (which had already been shortened from 40 to 35 years in 2008), withdrawing CMHC insurance of home equity lines of credit (HELOC), and a reduction in the maximum refinance percentage from 90% loan-to-value to 85%. Changes to the amortization period and the refinancing ratio will take effect March 18 and the HELOC change will take effect April 18, 2011.

 

Key Implications

 

• The amortization change may alter the quarterly profile of housing market activity as some sales are pulled forward by households to pre-empt it. But the impact is not expected to be large, nor does it lead us to alter our annual forecast. Existing home sales were already forecast to weaken by about 8% compared to 2010, and prices to slip by a modest 1%. On aggregate, our calculations suggest that 20K sales (annually) may be impacted by the amortization change, with the average price likely to weaken a further percentage point. However, while the last few months of data represented upside risk to our December forecast, today’s measures put our forecast back on track.

 

• The other two changes are more likely to impact consumer durables and housing-related spending. Fro instance, household usage of HELOCs is mostly directed towards renovations, vehicle purchases, and debt consolidation. Yet, on that front as well, the impact is not expected to be large. Our macroeconomic forecasts already embedded a significant slowdown in household debt accumulation and consumer durable spending. The withdrawal of HELOC insurance may cause some substitution toward more traditional mortgages, but very few financial institutions insure their HELOC portfolios.  As such, the change is unlikely to register significantly on the aggregate lending scale. Moreover, less than a fifth of refinancing deals are high loan-to-value (LTV >80%), and lowering the LTV threshold to 85% likely impacts less than a tenth of refi loans through lower amounts and/or alternative vehicles. All said, aside from some distortion on the timing of some heavily credit-dependent activities, the policy changes do not alter our forecasts.

• In terms of monetary policy, this helps take some pressure off the Bank of Canada (BoC).  With all the talk about the non-sustainable pace of household debt accumulation, there was speculation about whether or not the BoC would consider hiking interest rates for reasons not directly related to its inflation-targeting mandate. Such speculation can be put to rest for the time being, and we can go back to focusing on the inflation outlook.

50 / 50 Mortgage - Hedge Your Bets

Up until the last couple of weeks I haven't been a fan of the 50/50 mortgage (details below). However every mortgage type has it's place and time. If it wasn't for the Bank of Canada's re-affirmation that Prime rate will stay where it is until mid 2010 (a whole other topic) and the fact that after a recent bump in rates from historical lows at the beginning of June (3.79 to 4.49% in 2 weeks) and now a bit of a downward trend, for the moment a 50/50 can make sense... IF you have someone that will tell you when to pull the trigger to lock-in the variable portion.

Hybrid mortgages – also known as 50/50 mortgage products – include an equal mix of fixed-rate and variable-rate components within your single mortgage. This means you get the best of both worlds – the security of fixed repayments with the flexibility of a variable rate.

Although there was a time in recent years when mortgage experts considered a variable rate mortgage as the obvious choice to save mortgage consumers money over the long term, with fixed rates remaining near historic lows, fixed makes more sense to me. But with prime said to stay low for the better part of a year, a 50/50 mortgage may be a great alternative for you.

In essence, since it’s extremely difficult to accurately predict rates over the long term, a 50/50 mortgage offers interest rate diversification, which can help reduce your level of risk.

If you opt for the Dominion Lending Centres 50/50 Balanced Mortgage, half of your mortgage is locked into a five-year fixed rate and half is at a five-year variable rate. You can lock in your variable-rate portion at any time without paying a penalty. As well, each portion of the 50/50 mortgage operates independently – like two separate mortgages – yet the product is registered as only one collateral charge.

The 50/50 mortgage product is well-suited to a variety of borrowers, including those who:

• Would normally go fully variable but are afraid prime rate is at its bottom
• Aren’t comfortable being locked into a fully fixed rate
• Can’t decide between a fixed or variable mortgage

Some features of the 50/50 mortgage include:

• 20% annual lump-sum pre-payment privileges
• 20% annual payment increase ability
• Portability (the option to transfer your existing loan amount to a new property without penalty)

As the 50/50 option is a fairly new offering, according to a recent study by the Canadian Association of Accredited Mortgage Professionals (CAAMP), 5% of Canadian mortgage holders have 50/50 mortgages compared to 28% with variable-rate mortgages and 68% with fixed-rate mortgages. But many experts believe the 50/50 mortgage is quickly gaining momentum.

If you have any questions about the 50/50 mortgage product and whether it’s right for you, feel free to give me a call so we can discuss your options. If you know anyone purchasing a home, refinancing or renewing their mortgage, suggest they give me a call for a brief chat to determine if a 50/50 mortgage makes sense for them.

As my variable rate clients know, they get the calls to pull the trigger and the advice to consider every time rates look like they are going to make a major move upward. This advice is key to being successful with any mortgage that is variable. Few brokers and NO banks offer this level of commitment.
Greg

Five Ways to Boost your Credit Score

 Leading up to the holidays is the perfect time to think about things like improving your credit score and consolidating debt. After all, the holidays are a joyous time that should not be overshadowed by financial woes. And even if your credit score is good, these tips may make it even better. After all, the better your credit score, the fewer hurdles you’ll have to overcome when looking to renew or refinance your existing mortgage, or obtain a new one.

Following are five steps to a speedy credit score boost:

1) Pay down your credit cards. The number one way to increase your score is to pay down your cards to 30% of their limits. Revolving credit like credit cards seems to have a more significant impact on your score than car loans, lines of credit, and so on.

By paying down your cards to 30%, you are leaving a big gap between what your limit is and what you owe – a move that is very favourable to increasing your credit score.

2) Limit the use of your 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 paid it all off the next month.

By being more accountable of your spending on a daily or weekly basis through the use of a budget, you can keep those cards below the magic 30% mark.

3) Check your limits. If your lender is slow to report your monthly transactions, this can have a big impact on how another lender may view your file. Make sure everything is up to date. Old bills that have been paid can come back to haunt you.

Some financial institutions don’t even report your maximum limits. As such, the credit bureau is left to only use the balance that’s on hand. The problem is, if you consistently charge the same amount each month – say $1,000 to $1,500 – it may appear to the credit-scoring formula that you’re regularly maxing out that card.

You could go on a wild spending spree to raise the limit, but a more sensible solution would simply be to pay your balance down or off before your statement period closes.

When making payments online, do so about a week before the period closing date printed on your latest statement to ensure the payment is received on time – it can take up to five business days for a payment to be received. This won’t raise your reported limit, but it will widen the gap between your limit and your closing balance, which should boost your score.

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

5) Don’t let mistakes build up. Dispute any mistakes or situations that may harm your score. If, for instance, your 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.

As always, if you want to talk about your credit score or consolidating debt, I'm here to help.
Greg