SmartHomeOwners

In my blog article published on April 8, 2010, I strongly supported the use of variable rate mortgages to save interest costs. Now, there has been over a year after the initial article. Have I changed my stand on the choice of the two types of mortgages in Canada?

Let’s re-visit my reasoning noted then:

1. Canadian economy is improving, but not in its best shape yet. Trust what you feel and see, not what you hear from those who are paid to speak.
2. Inflation is still manageable by Bank of Canada. Like in the US, Canadian economy still needs low interest rates.
3. Canadian dollar appreciates more than expected. If this trend continues, our export is going to be in big trouble and we will continue to loose jobs.

These reasons still stand true in light of the current economic environment with further evidence supporting this recommendation.

• “Banks say low interest rates are encouraging customers to stick with less profitable variable-rate mortgages rather than higher-margin fixed ones. And rates aren’t seen rising soon.”

Further more, “… and the margins on the fixed rates are a lot more.”

These quotes are from an article published by Financial Post.

Banks are not making higher profit margins when consumers choose variable rate mortgages than fixed rate mortgages. And, this is why the big banks want you to move to fixed rate mortgages!

• The European and the U.S. debt situations are not over. The U.S. economy has not added much strength – unemployment rate is now at 9.2%. Where do these trends push us to? A slower economy this year and next.

Any economy is not isolated to its own in this highly connected world. Canada is no exception – higher or longer growth without negative impacts from outside is not possible. This is not to blame others for our slow economy. Internal economic stimulus may not last into next year – further reducing economic activities in Canada.

Slower economy will translate slower increase of interest rates by the Bank of Canada. To conclude, choosing variable rate mortgages may well still be the best option to save some hard-to-get cash!

Martin Shao is the President of Valueland Mortgages. Forward your mortgage questions to AskUs@valueland.ca or visit Valueland’s website at http://www.valueland.ca

Current mortgage rates are historically low. Your existing mortgage could carry a higher interest rate than the rate you can get from the market at the moment. Lower rates save you money!

Mortgage Math Work

Now the question is how much the refinance or transfer can save. There are a few simple math steps you can do to find that out.

Step 1:  Your current mortgage amount (M).

This is the base for calculating how much you pay per month on your mortgage. You must know this number. If you are not sure, simply call your lender to this figure.

Step 2: Interest rate for your mortgage (R).

This is the factor determining how much interest you pay per month or year on your mortgage.

Step 3: The remaining years of your mortgage term (Y).

This is the number of years remained for you to stay with your current lender. If you had a five year term mortgage arranged a year before, then, your remaining number of years is four (4).

Step 4:  Total cost of ownership (T).

This is the total interest payable for the remaining term of your mortgage. This is the cost for you to carry the mortgage to its full completion.

A simple math is as follows:

                     T=M*R*Y
 
You can compare a number of senarios to assess true costs of mortgage ownership. The higher amount of T, the less desirable to have. More is worse!

Let’s do an example. The following is what you have:

1. M=$200,000;
2. R=5%;
3. Y=3.5 Years
4. T=M*R*Y=200000*5%*3.5=$35,000.

You are offered a new mortgage from a mortgage broker for the following:

1.  M=$200,000;
2. R=4%;
3. Y=5 Years
4. T=M*R*Y=200000*4%*3.5=$28,000.

From the calculations, you are saving about $7,000 within the 3.5 year period. This is not exact science since you may have paid certain amount of principal, the actual interest may be less than this calculation. However, you comparison would be right since both calculation uses the same method. This gives you a rough idea on the costs of various mortgages.

One a separate blog article, I discussed refinance calculations in an earlier blog article – Time to Refinance Your Mortgage.

I have developed an MS Excel calculator for calculating total costs/benefits for mortgage refinances or transfers. You can download it  here – Mortgage Refinance and Transfer Comparison Tool. You will also factor in the penalty and other costs to arrive at a decision.

To find exact numbers, you want to use professional comparison calculators such as the one on Valueland’s website. Nevertheless, these simple math steps can get you started on the way to save your money.

Martin Shao is the President of Valueland Mortgages. Forward your mortgage questions to AskUs@valueland.ca or visit Valueland’s website at http://www.valueland.ca

Starting from October 18, 2010, TD’s mortgages will be registered as collateral mortgages. Moreover, TD recommends that TD mortgages should be registered for 125% of the property value (i.e., purchase price).

What are the impacts on customers? Here are some advantages and disadvantages of this collateral mortgage registration:

Advantages to customers:

• When a customer needs more money in the future, there is no need to do a re-registration. Refinance will happen within TD under a mortgage loan agreement. This avoids hiring a lawyer for the new registration. It usually costs about $710 for a registration.

Disadvantages to customers:

• On the maturity of the mortgage, a customer may not take this TD mortgage to a different lender for free, even when a customer gets a better deal. (Currently, a regular/conventional mortgage can be transferred freely among most institutions.)
• A customer may not get a secured line of credit or a second mortgage from a different lender even though it is a better deal for the customer. (Currently, a second lender can register a second mortgage or secured line of credit behind a conventional mortgage such as today’s TD’s regular mortgage.)

Advantages to TD Bank:

• It is every business’ desire to keep a customer for as long as possible, i.e., for life. TD has progressed a few inches with this change.

Whether this particular TD change will benefit customers or not depends on customer needs and their respective situations. There is no doubt that TD is trying to lock customers in for life! However, only time will tell if customers welcome this TD’s move.

Martin Shao is the President of Valueland Mortgages. Forward your mortgage questions to AskUs@valueland.ca or visit Valueland’s website at http://www.valueland.ca

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Backgrounder:

There are two types of mortgage registration: regular and collateral charges.

• A conventional/regular mortgage charge allows a customer to transfer his/her mortgage to a different lender as an “assignment“ without using a lawyer.
• A collateral mortgage charge prevents a second lender from getting an assignment from the current lender. A new registration can only happen by discharging the existing and registering a new mortgage. A lawyer fee will be charged.

When you talk with your bankers about mortgages, they say that the most important is the reputation of the lender and the customer service you get. Many mortgage specialists may also advise you that it is the service you get and the planning aspect of your mortgage that are most critical.

Mortgage Rate is the Defining Cost Factor of Your Mortgage

However, when you talk about mortgages with your friends and colleagues, they enjoy talking about interest rates and how low or how high their rates are. Why is there such a difference between your bankers and friends? Some mortgage experts explained: it is easy for consumers to talk about interest rates since the rate is the only visible thing understandable to consumers!

Who is right? My answer is this: the consumers are right. Consumers have become smarter with all their learning and the easily accessible knowledge on the web. This difference comes from where the parties stand in terms of self-interest!

Higher Interest Rate Steals Your Money

Before I get into the numbers to show why interest rate is the most important factor for mortgages, I want you to answer two questions. First, is it easy to ask for a raise from your boss? Secondly, is there anyone who gives you a free coffee every morning for five years?

Math does not lie. Let us review a few interest rate examples to understand the cost of higher interest rates. The calculations below are for a mortgage of $250,000 with 30 year amortization. You are offered with 3.59%, 3.79%, 3.99% and 4.25% for a five-year mortgage. The following table provides you with the monthly payments, total interest paid in five years and total interest for 30 years.

During the five-year term, your loss would be around $8,000 between 4.25% and 3.59%. With a mere 0.20% difference in interest rate, your loss would be $2,413 for five years.

Get Your Free Coffee Everyday

Let’s feel this loss in terms of what we can all relate to. If you get a morning coffee ($1.32) for free for five years, are you going to love it? Would it be a good idea to put this money into your children’s RESP or your own retirement fund? Please also note that the $2,413 is money after taxes and it is worth more than $3,000 before taxes!

You can avoid the loss by getting a lower mortgage rate. You can switch your mortgage to Valueland to earn your daily free coffee for the next five years!

Martin Shao is the President of Valueland Mortgages. Forward your mortgage questions to AskUs@valueland.ca or visit Valueland’s website at http://www.valueland.ca

Writers Wanted!

What do you expect from a three months’ run of this homeowner’s community? Not much, right?

Today (July 10, 2010), SmartHomeOwners.ca is now ranked number 273,054 internationally and 5,827 in Canada, by Alexa, the web ranking company! This is a remarkable achivement for a small web community dedicated to Canadian homeowners. The articles, tips, blogs have been met with positive feedback, and it’s all thanks to you, the readers.

Not everyone can write like a “real” writer. However, we all write in one way or another to communicate and share our knowledge, insights and skills so that we can collectively better our lives.  You, the readers and community members, have tons of knowledge and skills to share. Why not write to enrich the ways we live and work together!

So, write a few short articles of your interest, experience and expertise. Get it published at SmartHomeOwners.ca and get paid doing it. Here are a few tips to get you started:

1. You are able to write about any topic of your choice related to homeownership and the like;
2. The length of the short articles is between 350 to 500 words;
3. Email the article in text file or as email content to articles@smarthomeowners.ca;
4. Our editors will review and notify you when your articles are accepted for publishing on the website;
5. You will get $10-15 for each accepted and published article;
6. (Editors’ decisions are final.)
7. Writers will receive payment cheques.

We hope to hear from you soon. Happy writing!

Vanguard Law Group LLP today became the first real estate law firm in Canada to conduct a remote video purchase closing. The event occurred through the establishing of a completely secure wireless video and data link between a laptop computer at the purchaser’s home and the computer of one of the firm’s lawyers. The closing was initiated by a Vanguard commissioned signing representative who attended the purchaser’s home equipped with a video camera enabled laptop computer. The signing representative and the lawyer, when ready, established a data link via a 3G wireless connection and industry standard communication software. Once connected the purchaser and the lawyer were able to view each other on screen with full audio capabilities. Through the software, the lawyer was then able to present and explain the entire signing package to the purchaser, who saw every document as it was being presented, on the screen on the signing representative’s laptop. After the explanation of each document, the purchaser was directed by the lawyer to sign, where applicable, the physical versions of the documentation they had viewed on screen. The signing representative was present throughout and commissioned documents as necessary.

“This is another milestone event for our firm” said Sanjay Soni, Managing Partner of Vanguard, “it has the potential to completely change the way purchase and sale closings are conducted in this country. Instead of the clients coming to the law office, we now have the means to bring the lawyer to them on a scale never before seen. The reaction of the purchaser was extremely positive. Not only was he thoroughly impressed with the technology, but he found the whole closing process convenient and less intimidating as he was sitting in the comfort of his living room.”

The entire closing lasted about 25 minutes with the purchaser and lawyer interacting as if they were in the same room at the same time. The signed paper documents were then returned to Vanguard’s law office for final processing and registration.

About Vanguard Law Group LLP

Vanguard Law Group LLP is a leading real estate law firm with offices in Vancouver, British Columbia and Mississauga, Ontario. Vanguard uses cutting edge technology to enhance its clients closing experience. The foundation of the firm is built on exceptional customer service and a relentless approach to innovation. Vanguard’s mission is to change the way legal services are delivered in Canada particularly in the area of real estate conveyancing.

For more information on this event or about Vanguard Law Group LLP contact:

http://ww.vanguardlg.com

 Which one do you choose, your bank or your mortgage broker? This question sounds simple to answer, but it is really difficult to choose when there is so much mis-information in the marketplace. This short blog article is to demystify the mortgage arrangement services.

Two Ways to Arrange Your Mortgage - Your Bank or Mortgage Broker?

  Years ago, homebuyers would go directly to the bank for their mortgages. There were not much choices for consumers. Historically, mortgage brokerages were an insignificant player as a financial intermediary and mortgage brokers arranged mortgages only for those who could not obtain mortgages from the main street banks. The borrowers were either self-employed or people with low credit scores. Regular banks did not service these groups of borrowers. As a result, mortgage brokers represented some non-bank lenders such as a trust company or a private lender and acted as the bridge between lenders and borrowers.

  However, for the last ten years, this situation has changed greatly. Currently, mortgage brokerages not only represent non-bank lenders, but also arrange mortgages for the major financial institutions (i.e. major banks). With unique operational structures and relatively low operating costs, these brokerages have won a considerable market share. In a recent study released by CMHC in 2010, 45% of first-time homebuyers chose mortgage brokers for arranging their mortgages. 39% of all homebuyers used mortgage brokers.  The market share for mortgage brokers has been on the growth side since 2006.

 The majority of these mortgages arranged by mortgage brokers eventually landed with the major banks. A consumer may then ask the question whether to go with a broker or directly to the bank. The first right question to ask is really what mortgage you choose, not which lender to pick. The deciding criteria should be the product features and pricing, objectiveness and service levels.

The following chart attempts to compare the services from banks and mortgage brokerages:

  Let me ask you another question. When you need to travel, where do you get your airline tickets? You do not go directly to the airline companies. Instead, you go to a travel agency (or its website) to book and buy your air tickets. Similarly, you get your mortgages from a mortgage brokerage that offers you better deals and un-biased service. Independence and multiple choices are the two most important benefits you get from your mortgage brokers.

Martin Shao is the President of Valueland Mortgages. Forward your mortgage questions to AskUs@valueland.ca or visit his website http://www.valueland.ca

Valley Bridge

Recently, we have received numerous phone calls to seek advice as to whether early mortgage renewals or transfers are beneficial to homeowners. Here are a few steps to follow:

1. Know Your Mortgage

Many of us may not fully understand the term and other particulars on our largest debts in life. You need to understand (1) time left on your mortgage term; (2) the interest rate; (3) remaining balance; and (4) whether there is a breakup cost.

Some homeowners have left this important job to their banks and trust that their bank should give them a fair rate and the best option that suits the borrowers.

2. Reasons to Change

The only constant in life is change. You may need to change your mortgage when you move to a new house, borrow more money to finance your business or simply lower your mortgage payments. Under the current economic situation (i.e., recession), interest rates are low. For those who had arranged their mortgages a few years ago, there may exist an excellent opportunity to save money by changing an existing mortgage.

3. Right Approach to Assess:  Total Costs

Carrying a mortgage is a tremendous commitment (and responsibility) in one’s financial affairs since it is usually the largest debt in life. That’s why one needs to know the total costs of obtaining or changing a mortgage.

Total costs of having a mortgage include interest payable during the mortgage term, legal fee, discharge fee and broker fee if applicable. There is usually a fee payable to the mortgage lender if you break your mortgage term/contract before its maturity (i.e., penalty).

4. To Break or not to Break, that is the Question

It requires accurate information to make your decision on whether to break your current mortgage contract or not. “Total Costs” approach is the right one.

• First, you need to understand your current mortgage rate and the new interest rate to ensure that you pay less interest on the new mortgage [existing interest minus new interest].
• Secondly, you need to know the penalty you will have to pay [minus penalty]. You may call your lender to get this.
• Finally, you need to know if you pay any other fees such as discharge fee, legal fee, appraisal fee and broker fee [minus fees].

To conclude, if your result (i.e., existing interest minus new interest minus penalty minus fees) is positive and significant, it is time to break the mortgage contract. A rule of thumb is this: you may consider breaking your mortgage if there is 1% difference between your existing mortgage rate and the new rate offered.

Click Here to Compare Mortgage Options

However, costs may not be the only factor to consider. You may also consider non-monetary aspects such as convenience of banking, existing banking relationship or flexibility of using credit. At the end of the day, it is your responsibility to save and manage your money wisely, not the bank’s!

Martin Shao is the President of Valueland Mortgages. Forward your mortgage questions to AskUs@valueland.ca or visit his website http://www.valueland.ca

This is really a million dollar question. Maybe it is worth more than a million dollars if you add all mortgage payments we pay to the banks collectively by the homeowners.

If you can take the rising rate for the next one to two years, I still believe that variable is the best choice,  for the following three reasons:

1. Canadian economy is improving, but not in its best shape yet. Trust what you feel and see, not what you hear from those who are paid to speak.
2. Inflation is still manageable by Bank of Canada. Like in the US, Canadian economy still needs low interest rates.
3. Canadian dollar appreciates more than expected. If this trend continues, our export is going to be in big trouble and we will continue to loose jobs.

Moreover, if Bank of Canada increases its lending rate, how much and how fast can they go? We believe they will not jack up the rate rapidly and dramatically to kill the early signs of economic recovery. Starting at 1.65% per year, let it rise a couple of points and you still save when your mortgage amount is the most!

Martin Shao is the President of Valueland Mortgages. Forward your questions to AskUs@valueland.ca or visit Valueland’s website at http://www.valueland.ca

Do you need a mortgage? Absolutely not!

In life, you do not need a mortgage. What you really need is a  place to live and enjoy, as long as the place has the support for your weight and the protect you need over your head. This place is usually called a shelter or home. This place can also be rented or purchased.

In the physical world of real estate, you are actually buying them either for shelter or investment. What you are really buying is the utility of the shelter and a few other intangible features. In an ideal world, like in the Neverland, you can have anything you want. The reality, however, is far from it for the majority of us.

We all have limited resources. So, we need to borrow money to buy a place to live and enjoy. This money is called “mortgage”, which is secured on the land you have together with the roof and its support.  But, we have to get a mortgage when we do not have enough money to buy the place we like. No one needs a mortgage.

When you live in a rental home, you pay monthly rent to your landlord. Similarly, you pay interest (i.e., rent) to the money-lord monthly since you are renting their money. The borrowing and lending is somewhat fair by a contract. The parties of this transaction are also happy since each party has got its respective goals accomplished.

In Canada, the money-lords (i.e., banks) make billions of dollars every three months from lending you money and other investments. As depositers and borrowers, we have contributed quite a large portion towards their profits. Don’t get me wrong. I am not against bank profits.

What I am against is the mis-management of your money and mortgages. Here are a few starters:

1. Leave the negotiation and arrangement of your mortgages to your bankers;
2. Deposit your money into your bank accounts paying you no interest and not increase your mortgage payment;
3. Do not pay any extra towards your mortgage;
4. Be happy and ready to sign your mortgage renewal letter;
5. Do not seek a second opinion on your mortgages;
6. Sign your mortgage contracts within 10 minutes with your bankers.

Knowledge is power. Shared knowledge and ideas are the real key for us to help each other as homeowners. As a member of the homeowner community, I am on your side to work with the money-lords to get rid of your mortgages faster than your original payment schedule.

Martin Shao is the President of Valueland Mortgages. Forward your questions to AskUs@valueland.ca or visit Valueland’s website at http://www.valueland.ca

**Post your questions and comments here. I will answer your questions. **