Canadian Banks May Ignore Future Rate Cuts

Bloomberg recently confirmed that many of the major Canadian banks are seriously considering ignoring the upcoming potential rate cut by the Bank of Canada.

TD Chief Economist Don Drummond said that “Toronto-Dominion Bank and other lenders may not match an expected interest-rate cut by the Bank of Canada next week.” If this decision were to hold true, this could seriously undermine the policy makers ability to revive our Canadian economy based on the slowdown in the United States. Drummond goes on to say “The reality is that there’s nothing given by law that we have to match the bank’s rate, and our prime should be related to our costs”. Wow.

 Your Take-Away: There is no question that this decision could play a serious role in the overall strength of our economy. After all, if the major Canadian banks are more concerned with protecting their own pockets and not as much concerned with the Canadian economy as a whole, that could leave a deep scar in the mind of both the Canadian Consumer and even the Bank of Canada.

Now more then ever, we as Canadians need to be educating ourselves on what is happening around us so we can be best prepared to handle the issues we are and will be forced to deal with.

Until next time, have a Terrific Thursday!

Chris & Elisseos

The Prime Rate is Down Again

The Bank of Canada just lowered the overnight lending rate, but what does that mean for you?

The most important news of late is the fact that the Bank of Canada reduced their overnight lending rate to 4.25%.  In turn, mortgage lenders have also decreased their prime lending rate to 6.00%. How does this affect the average borrower? Well, if you have a fixed rate then it does absolutely nothing. If you have a variable rate, then you should see a reduction to your interest rate by .25%.

Your Take-Away: If you will be closing a mortgage over the next four months, you should seriously be considering a variable rate product since there is indication from the Bank of Canada that further rate reductions may be needed early in the New Year.  The increased pressure to continue to reduce rates comes from the hope that Canada will be able to minimize the damage that the higher Canadian dollar and the U.S. credit crunch have had on the economy.

We’ve said it before, and we’ll say it again, don’t just assume a fixed rate is the only way to go.  Talk to a Professional and determine if you are a candidate for a variable rate, it may save you $100’s if not $1,000’s of dollars over the next few years!

Until next time, have a Magnificent Monday.

Elisseos & Chris

Beware of Banks Offering to Pay Land Transfer Tax

Both BMO and TD Canada Trust have announced that they will pay the land transfer tax for their new clients, within specific criteria.

On the surface, this offer sounds like a great deal to a Canadian consumer, but as you’ve undoubtedly heard “If it’s too good to be true, it probably is”.  In most cases, but not necessarilly all, the banks will in fact pay for your land transfer tax up to a maximum amount, but they will also generally charge you a higher interest rate to do so.  If you don’t want to pay that interest rate, then you won’t have your taxes paid for you.

Your Take-Away: This is an appealing offer to anyone, especially those of us in the midst of a move with the potential of a new tax taking a large portion of our planned down payment. That said, if you are entertaining this offer, make sure you read the fine print and don’t simply just opt for the apparent “freebie”.  You may end up having your land transfer taxes paid on your behalf, but if you run the numbers, you are probably actually paying for them yourself over the course of the next five years based on the additional interest you will be responsible for.  After all, when have you ever known the major banks in Canada to just “give money away”?

Although this offer is very appealing, don’t stop shopping the market to look at what is available to you at this time, and don’t just assume it’s a great deal.  It very well may be, but in most cases, you may be getting hosed over the course of next five years.

Until next time, have a Fantastic Friday.

Chris

Bond Rates and Their Effect on Mortgage Rates

Today’s bond rates demonstrate the mortgage rates should be on the decline.

My reasoning stems from current Canadian bond markets as this is where mortgage lenders borrow money to lend to their clients. If we look at the last number of years leading up to the U.S. credit crunch, we will consistently see a premium of anywhere between .90% and 1.25% above the bond market yield. If we take a look back at the 5 year bond in the middle of April in 2007, we notice that it was trading around 4.15%. The accompanying 5 year fixed rate at most lending institutions was 5.25%; a difference of 1.10%.

Your Take-Away: If we closely look at today’s 5 year bond we will notice that it’s yield has dropped to 3.781% and the accompanying best rate on a 5 year closed mortgage has increased to 5.94%. A difference of 2.159%. That is almost double what we are accustomed to. If we were to take out the temporary risk premium due to the credit crunch issues in the U.S. we would expect that the 5 year rate should be in a range of 4.681% to 5.031%. Does it make sense to be locking into a 5 year fixed term or for that matter any fixed term at this time? In our opinion, no chance.

The decision is ultimately yours and depends on more variables then simply trying to time the market.  That said, now is as good a time as any to seriously consider a variable rate mortgage.

Until next time, have a Terrific Thurday.

Elisseos

Interest Rates On Their Way Down?

An article at reportonbusiness.com states that many analysts are calling for a reduction in the Bank of Canada rates.

Ted Carmichael, Chief Economist at JP Morgan Securities in Canada says “We now expect that the Bank of Canada will need to cut its policy rate by 25 basis points on each of its next four decision dates through April.” Amazingly enough, that would bring the rate all the way back to 3.5% from its current status of 4.5%.

Your Take-Away: It is a near impossibility to predict with 100% certainty that the Bank of Canada will in fact drop rates four consecutive meetings in a row, but if you look at the current dollar and our weaker then normal economy over the past two quarters, it is at least believable.  If you are looking to set up a new mortgage or refinance your existing mortgae, this may be your best opportunity to go with a variable rate.  History says that variable rates provide a lower overall interest cost then fixed rates, and the next six months or so could prove that point even more clearly.

Again, talk to a Professional to determine if a fixed or variable rate is best for you and your specific situation.

Have a great weekend!

Chris & Elisseos

New Land Transfer Tax Explained

The new land transfer tax is an extremely hot topic for residents of Toronto, and for good reason too.

This new tax can and most likely will have a significant impact on cash flow, down payments, and even things as simple as furnishings for those Toronto residents who purchase their home after January 1st, 2008.  It is interesting to note that Toronto is the only city with two home buying taxes, we have the highest land transfer taxes in Canada, and the second highest in North America.  That shouldn’t sit well with many Toronto residents at all.

Your Take-Away: To some readers, this new tax is verging on offensive, but it can be hard to know how much of a real impact it will have on Torontonians.  To put it in perspective, an average two storey home sells for approximately (approximate being the key word here) $400,000 in Toronto.  Just for being a Canadian, your existing land transfer tax will cost you $5,475 and with the new Toronto land transfer tax, your total bill jumps to a whopping $10,200.  That means this new Toronto tax alone has a $4,725 price tag.  Pretty hefty.

One thing to be aware of is that this new tax does have a grandfather clause which means that if you were to buy a new home  prior to December 31st, 2007 you will be exempt from this new tax regardless of the closing date. 

If you are looking to buy today, it may make sense to buy before New Year’s Eve…it could save you thousands of dollars!

Until next time, have a Fantastic Weekend

Chris and Elisseos

The Truth About Mortgage Insurance

It scares me to think that many Canadians believe that Mortgage Insurance issued through major banks in Canada is comparable to personally owned life insurance for the purpose of protecting their mortgage.

I have built numerous relationships with a number of Mortgage Broker’s and Clients based on my passion to help Canadian home owners truly understand why owning Mortgage Insurance through their lending institution is a decision that should seriously be reconsidered. Consider the answers to these three questions:

  1. Why would you insure your life with a company who chooses themself as the Beneficiary?
  2. Why would you risk a claim not being paid out by allowing the insurance company to underwrite at claim time, as opposed to when you purchase the insurance policy?
  3. Why would you pay more on a monthly basis for a truly inferior insurance policy with less benefits?

Your Take-Away: If any of the three questions above spark a hint of doubt in your mind, invest the time to do a bit of research and obtain a life insurance quote for the balance of your mortgage. In summary, buying a personal life insurance policy for the purpose of protecting your mortgage provides you with:

  1. A policy that you actually own
  2. Savings of upwards of 25% and more
  3. The ability to choose your own beneficiary
  4. Upfront underwriting, not claim time underwriting

In my opinion, there is no reason that one would consider the alternative option and own their mortgage insurance through their lending institution, and I’m confident that you will come to the same conclustion if you do the research yourself and don’t just take my opinion as fact.

Until next time, have a terrific Tuesday!

Chris

Is Your Home an Investment?

An article was published today in the Financial Post making the statement that “Your Home is Not an Investment”.

We agree with this statement for two specific reasons.  The first is that an investment will generally have a “tangible value that can be exchanged for cash”. Although it can be argued that this is true for your principal residence, the only way you can “access” that cash is to sell your home and then buy a less expensive home and thus bank the difference. The second reason is that most investments are “held with the purposes of generating a gain, creating cash flow or both”. Despite the growth that most homes will generate, that cash is rarely accessible until or unless the next purchase is smaller then the value of your current home, thus creating a surplus.

 Your Take-Away: In our opinion, your principal residence is the place you call home and where you create lasting memories with your family. Relying on your home as your primary investment is not a wise decision as  your liquidity factor is minimal if not entirely non-existent. If you want to pay your mortgage off early for the purpose of becoming debt free to create additional cash flow which can then be redirected towards your investment portfolio, great. Just consider the benefit of making your annual lump sum deposit towards your mortgage into your RRSP first, and then using your tax refund towards your annual mortgage pre-payment privilege.

Again, each situation is very unique and this is not a “one size fits all” strategy. Talk to a Professional before deciding if this makes sense, but definitely take a serious look at whether the above points make enough logical sense to consider viewing your home as an investment in a different light.

Until next time, have a great day!

Chris

Use Your Home Equity to Invest in Real Estate

Thanks to the appreciation in real estate over the last 5 years, owning an investment property may be closer to reality then you think.

This may be common knowledge to some potential investors, but there are a number of key benefits to owning an investment property.  To name a few, you can a) create a predictable monthly cash flow b) enjoy capital appreciation on the entire value of the home and not only on your initial investment c) have someone else pay down your mortgage for you d) enjoy the tax deferral of your capital appreciation over the long run while taking advantage of tax write offs each year. When compared to a retirement vehicle, you can see how real estate has similar characteristics and can be used very effectively in conjunction with your current retirement plan.

Your Take-Away: Using the equity in your principal residence is the most cost effective method of borrowing money to invest in Canada, and the recent market fluctuations have given otherwise cash strapped Canadians the opportunity actually own their first piece of investment real estate.  However, don’t throw caution to the wind and forget that there is a level of risk involved in owning real estate. Make sure you ask yourself if you are someone who is capable of dealing with the possibility of disgruntled tenants, or the ongoing maintenance that rental properties require. If so, then you may just be the next person who takes the leap of faith and buys their first real estate investment.

Your mortgage for a property is an entirely different discussion, so please ensure that you talk with a Professional Mortgage Consultant before you make a decision of this nature.

Until next time, happy investing.

Elisseos

BoC Leaves Lending Rates Unchanged

The Bank of Canada met earlier today and decided to leave key interest rates at a stand still.

According to the current market conditions we are seeing in both the US and Canada, the Bank of Canada believes “that the current level of the target for the overnight rate is consistent with achieving the inflation target over the medium term.”. That’s good news for those of us looking to borrow money in the next couple of months, but that doesn’t mean that staying on top of our current mortgage strategy is not necessary either.

Your Take-Away: Variable rate discounts from a variety of lending institutions have been decreasing over the past week or two. Although key lending rates are not on the rise as of today, it may feel like they are to those of us who believe in the value of a variable rate mortgage. If you are looking to restructure your current mortgage or are purchasing a new home within the next few months, this would be a very good time to take a serious look at whether a variable rate or fixed rate mortgage would be best for your current situation.

Enjoy the rest of your day.

Elisseos

← Previous Page — Next Page →