Monday, March 2nd4.0°C
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Finance

Refinance your mortgage?

 
Canadian Mortgage rates are low and could be dropping down in time for the spring market following a drop in the Bank of Canada Rate on January 21 by 1/4% which will save new buyers and those with mortgages up for renewal on their home costs.  If you have a variable rate mortgage your rate will have already been reduced by .15% as most lenders lowered their Prime lending rates in February to 2.85% from 3.00%. With lower rates still to come, does it make sense to get our of your current mortgage and get a lower rate?  There are three questions to consider.
 
1. How much is my penalty?
 
Penalties are part of the mortgage contract signed with your lender and prevent certain actions.  Mortgages with variable interest rates usually only have a penalty equal to three months interest but sometimes there are reinvestment fees.  Fixed rate mortgages are more difficult to calculate and can be several thousand dollars.  Most fixed rate mortgages have a penalty that is usually the greater of three months interest or the interest rate differential.  The Interest Rate Differential (IRD) is the rate used to calculate the loss that the lender would incur to replace the mortgage at today's lower rates.  The IRD is based on the term remaining and the posted interest rate at the time the mortgage was obtained.
 
2.  How can I calculate the IRD penatly?
 
There are online calculators that will ask for all the details of your mortgage including the original rate, balance and term remaining.  These are good approximations but to get a more accurate calculation it is best to contact your lender directly.  Sometimes you can take advantage of an unused prepayment of the principal to reduce the penalty as long as it is not within 30 days of the payout.  This will lower your IRD.
 
3.  Will I save enough money with my lower rate?
 
There are many online calculators which will calculate an approximate penalty and the savings for you.  Usually the rule of thumb is that if you are paying a three month interest penalty because the interest rate differential is lower, than you will usually save money in the long term.  This is especially true if you refinance from a fixed rate mortgage into a variable rate mortgage and keep your higher payments.  There are some cautions such as do you have the money to pay the penalty if it cannot be added to your refinance, and will you qualify for a variable rate mortgage using the government prescribed qualifying rate?
 

For these and further information on saving money on your mortgage please call 250-862-1806 or email [email protected].



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What will Bank of Canada do next?

One of the big questions facing the markets right now is what the Bank of Canada will do next.  One economist believes it will continue to cut.  In a new forecast the HSBC Bank PLC predicts the BOC will cut the benchmark rate again in this quarter to 0.50%, and then again in the second quarter to just 0.25%!

It was just last week that Bank of Canada Governor Stephen Poloz and his colleagues surprised the markets with a cut of one-quarter of a percentage point to 0.75 per cent, fuelling speculation that they could move again.  Mr. Poloz called the cut an “insurance policy” because of the oil price decline and that he was prepared to cut further if necessary.

The HSBC’s chief economist in Canada, David Watt said the Bank of Canada will have to “remain cautious” for the rest of the year. “The Canadian economy is going to be vulnerable through the first half of this year” he added. Before the oil downturn, economists had expected a “re-balancing” in the economy towards exports and business investment, from the consumer spending and housing action that had propelled growth. But now, Mr. Watt said, investment in the oil patch is obviously going to suffer.  Energy companies are already substantially cutting their budgets and commencing layoffs of employees.

Other economists are predicting a second rate cut from the Bank of Canada but as an example, CIBC World Markets expects only a further 0.25% cut to 0.50% and not more.  Still others, Mark Hopkins of Moody’s Analytic, expects Mr. Poloz to hold rates steady for quite some time.  “Given the offsetting impact of the exchange rate and the strength of core inflation, a second rate cut is unlikely but cannot be ruled out,” Mr. Hopkins said in a recent report that predicts the Bank of Canada will keep rates steady into next year.

With the uncertainty over interest rates, of course, come predictions for the Canadian dollar, which has suffered substantially from the drop first with oil prices and now with the latest cut by the Bank of Canada.  Those watching the market believe the Canadian dollar, which rallied over the past two days with oil, will decline further still, to somewhere in the neighbourhood of $0.75. Some economists call for a 71 cent dollar by the end of next year.

Several other central banks are slashing their rates as well – Australia is down 0.25% while Bank Reserve Bank of India, by the way, held rates steady today.

 

It is a great time to be looking at refinancing or renewing a mortgage this spring.  Call today 250-862-1806 for a FREE strategy session to find out if it makes sense for you. Or you can email any questions to [email protected]



Expect record low rates for spring

The Bank of Canada made an unpredicted move by cutting its overnight rate from 1% to 0.75% on January 21.  This is the rate that the Big Banks pay for interest when they borrow money from each other in the overnight market.  This rate in turn reflects the Prime rate which is the rate the Banks lend to their best clients.

The TD Canada Trust said it is not planning on following the Bank of Canada’s rate drop and lowering its Prime lending rate.  The Royal Bank and Canadian Imperial Bank of Commerce are reviewing their rates.  Once one of the Banks lower their Prime rate, most likely the others will follow.

So far the majority of lenders have held off lowering their mortgage rates but industry officials predict rates will drop just in time for the spring housing market. Because the Bank of Canada Government bond yields have dropped below 1% many are predicting interest rates may drop as low as 2.50% for a 5 year term.  The first lender who drops their rate will start the competition in the market and will win a good share of the new mortgage business.

If you have a mortgage coming due this year perhaps you should consider setting up a FREE strategy session to discuss your options.

Please call 250-862-1806 or you can email [email protected]



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Beware of mortgage insurance!

Congratulations! You have the house of your dreams since the vendor accepted your offer and the bank approved your mortgage. What a bank will typically offer you now is its own brand of mortgage protection insurance to protect your family should anything happen to you and pay off the debt it represents. The offer will sound good, especially as there is no medical testing or reporting to be done, but caveat emptor! Be careful you don’t fall victim to one of this country’s worst financial scams: creditor group insurance.

The devil, they say, is always in the details, and creditor insurance has enough of them to ensure that you, the mortgagee, has the dice loaded against you and in the favour of the bank throughout the term of the policy. Why? Because creditor insurance is sold under a group plan by an insurance company to the bank, and so is tailored to the bank’s needs, not yours.

The gross unfairness of this type of insurance was exposed by CBC TV’s Marketplace, which we will discuss below. As an aside, it might be interesting to learn that should you die while carrying a mortgage the bank will actually charge you a penalty for breaking the agreement! The penalty is added to the mortgage that is paid off by the bank’s insurance. This is just one example how the mortgagee has more control over their affairs when insurance to protect a mortgage is provided by a licensed agent.

Here’s a handy list of eight (yes, eight!) reasons why you should never take the bank’s creditor insurance, one of the most lucrative products offered by the banks and the worst deal available for mortgagees.

FIRST REASON. Creditor insurance is declining balance insurance. That is, you will pay the same premium every month, even though any payout will be reduced to match the amount owing on your mortgage. Every mortgage payment reduces your balance, but your coverage will decline accordingly. Sounds unfair? It gets worse; read on!

SECOND REASON. Should you pass away, it’s not your loved ones who will be the beneficiaries. No, siree, it’s the bank! Under the terms of creditor group insurance, you do not have a choice as to whom the payout will go. All rights to designate a beneficiary other than the bank and for any purpose other than paying off a mortgage are lost once you sign up for this money-making scheme of the banks.

THIRD REASON. Your insurance rates are by no means fixed; they could go up at any time. Why? Because creditor group insurance is just that. It’s based on the perceived risk of the group to which you, as the mortgagee, have been assigned by the backing insurance company. If the experience of the group as a whole looks less positive than before, your rates will go up. This is so the bank can protect itself against loss.

FOURTH REASON. Even if you don’t smoke you’ll still pay the same rates as a smoker, which will be higher, of course. Creditor group insurance only considers your age and will not give you a preferred rate based on your actual health history. If you take the bank’s insurance you will pay the same the same as someone who smokes and is in questionable health.

FIFTH REASON. If another bank offers you a better mortgage rate, and you decide to change lenders, then you will lose your insurance coverage. That’s because the bank is the owner of the policy who will cancel it the moment you switch! In such a case you will have to reapply for coverage, which will be more expensive because you will now be older, and even more so if your health has taken a turn for the worse.

SIXTH REASON. Your bank cannot give you professional advice on taking life insurance for yourself, and your family, since banks typically employ few licensed agents.

SEVENTH REASON. Think you’re covered for as long as the term of your mortgage? Then think again, because creditor insurance can be canceled at the bank’s discretion, and you would have no recourse whatsoever. Why would the bank do such a thing? This is because your insurance policy might not fit your bank’s purpose, or overall business model, at some time in the future. Your bank representative may protest long and hard that this would never happen, but the fine print on the agreement will say such a thing is entirely possible.

 

And the greatest reason of all…..

EIGHTH REASON. Your bank may pay no benefit at all should you pass away, because the bank does not conduct underwriting when a policy is written, but rather at the time of death. Incredible as it may sound, the bank will make no attempt at all to gauge the risk of insuring you at the time you decide to opt for their insurance package. This is in sharp contrast to purchasing a policy through a licensed broker whose company will conduct underwriting at the time of application before issuing you a policy.

CBC Marketplace revealed the scam that is bank creditor insurance in its feature, “In Denial”  and described in detail how it works.

Ever had your doctor put a cuff on your arm to measure your blood pressure? Most of us have, but that’s considered a test for high blood pressure. When asked if we have had a test for high blood pressure, though, most of us will respond in the negative. Ladies, have you ever had a Pap test or a mammogram? Men, ever had a PSA test for the health of your prostate? Most likely, you have. Problem is, those are tests for cancer but most people will respond in the negative when asked if they have ever had one. When a claim is made, the banks will go back to those responses and match them against doctors’ records. For what purpose? To use those responses to deny claims. The CBC Marketplace feature said the banks do not reveal what percentage of claims they deny; makes you wonder why.

Because it is so patently unfair, many states in the U.S. have banned post-claim underwriting. Here in Canada just one province has made it mandatory that life insurance be sold by a licensed broker who will not only ensure underwriting takes place at the time of application, but also advise the client on how to respond to health questions, and that is Alberta. This was no easy feat. When the Alberta Insurance Council first tried to implement these regulations in 2001, the banks fought the province tooth and nail, right to the Supreme Court of Canada. It was not until 2007 that the Court ruled in Alberta’s favour, saying the province was within its rights to protect the consumer in this fashion.

The upshot is that it pays to purchase mortgage protection insurance from a licensed insurance professional who is duty bound to keep your best interests at heart. In the same way, it makes sense to apply for a mortgage through a licensed broker, such as Ms. Laurie Baird of Verico Mortgage in whose column this article appears.

A policy owned by a mortgagee (rather than a bank) will have guaranteed rates, a benefit that will remain constant, provide for a beneficiary of your choice, be based on the state of your health, be portable, and can never be cancelled (so long as you pay the premiums, of course!)

 

Article written by Chuck Duerden.

Chuck Duerden is a licenced insurance agent with Septen Financial. He may be reached at [email protected], 250.575.3798. Follow Chuck as Charles Duerden on Facebook, LinkedIn and Twitter.



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About the author...

Laurie Baird is a Mortgage Broker with Verico Complete Mortgage Services. She has been in the mortgage business for 17 years starting as a lender with Royal Trust. She later worked at the Royal Bank as a Mortgage Consultant and 11 years ago became a Mortgage Broker. As a Mortgage Broker she is able to match her clients' needs with a lender who will provide them with competitive rates and products. Laurie has a Bachelor of Education degree from UBC.

Contact her at 250-862-1806 or by fax 712-0209 or visit:
http://www.okanaganmortgages.com/

Visit Laurie's blog at: http://www.okanaganmortgages.com/blog.html




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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet presents its columns "as is" and does not warrant the contents.


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