Mortgage Girl Edmonton

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Jim Flaherty has big news

Ottawa- Finance Minister Jim Flaherty has unveiled three new rules aimed at reducing Canadians' soaring household debt.
· Mortgage amortization periods will be reduced to 30 years from 35 years. – Effective March 18, 2011

· The maximum amount Canadians can borrow to refinance their mortgages will be lowered to 85 per cent from 90 per cent – Effective March 18, 2011

· The government will withdraw its insurance backing on lines of credit secured on homes, such as home equity lines of credit – Effective April 18, 2011.

The rules are aimed at encouraging responsible lending and borrowing and encouraging people to increase their home equity.

"Our measures will help improve the financial situation of households in Canada," Flaherty said.

"While interest rates are currently low by historical standards, eventually they will rise. Canadians should — and for the most part do — understand this when taking on significant debt such as the purchase of a new home."

The minister said the measures are aimed at protecting "the stability of the economy by ensuring lenders' practices are sustainable." He said that will increase the security and stability of home ownership.

"This will also increase the savings of Canadian families — savings of tens of thousands of dollars over the life of a mortgage, savings that go back in the pockets of hardworking families, where they belong."

The new rules come on the heels of a Bank of Canada announcement that Canadians' domestic debt burdens have hit record levels.

The ratio of household debt to disposable income has reached 147 per cent and household debt has reached $1.4 trillion.

The International Monetary Fund has called household debt the No. 1 risk to the Canadian economy.

Building your credit rating

Don’t close unused credit cards- if the card has a low interest rate, use it periodically and pay off the balance quickly. This can keep your credit active and improve a low credit score.

Beware of closing accounts- get it in writing that the account has a zero balance before closing it. I have seen a $22 balance ruin a credit score because the borrower was unaware of the balance.

Spread out your spending- it is better to have 2 cards at 50% of the limit than to have 1 card at limit.

Never exceed your credit limit- even $1 over limit can lower your credit score. Always ensure your balance is below your limit before your interest calculation day. Your interest calculation date can differ from your payment date; check your statement to confirm.

Speak to professionals with shared goals- there is a different credit plan for someone eliminating debt than there is for someone getting a mortgage. Do your research before making any decisions about your credit.

Pay your bills on time- late payments lower your score and show poor repayment habits when it comes time to apply for more credit.

Know your score- protect yourself from identity theft by checking your credit at least once a year. The higher your score, the lower risk you are to potential lenders if you are applying for credit.

Why is Term Type so important?

The mortgage term is the length of time you have agreed to a certain interest rate and a specified payment schedule. Most common terms range from as short as 6 months to as long as 10 years.

Rate and term go together like home size and location; you have to take both into consideration when making a decision. As we have heard before, “The lowest rate will save you hundreds, but the wrong term can cost you thousands.” Your mortgage term can have a greater impact on interest costs than the interest rate can. Since your term affects how long you are locked into a certain rate, if you were to make any unexpected changes, like breaking your term early, that will cost you. Or if interest rates don’t move as you planned, your term affects how long you are overpaying or underpaying on interest.

It is important to research your term options and ensure you are thinking of your future when making a decision. It is easy to find the best rate on the internet; it is harder to ensure you are taking a term that is right for you. See below for a brief review of the terms available to you today.

Most Popular Fixed Terms

1-year fixed: A short fixed term provides a comparable alternative to a variable rate as long as rates rise as economists expect. Because it is only a 12 month term, at the end of the year, you can move into another 1 year term or consider a variable rate- keep in mind, variable rates may have deeper discounts available a year from now.

2-year fixed: Assuming prime rate increases by 1.75% in the next 2 years, two-year terms are mathematically a little more attractive than a variable or 1-year fixed term. If you think prime is going to stay low, then go with a 1-yr fixed term.

3-year fixed: Second most popular term to a 5-year fixed. Reason being, 3-year rates are lower than 5 year rates today and when compared with other terms in an internal rate simulation, the 3-year term wins! If I had to pick a 5-year strategy for myself, I would choose a 3-year fixed term followed by two one-year terms. Be aware, with a 3-year term, the majority of the risk is in years 4 & 5.

4-year fixed: We affectionately call this the presidential term, because historically, Canadian & American interest rates tend to take a bit of a dip before a US Presidential election. If the 4-year term end doesn’t line up with an election, then 4-year rates don’t make sense unless you’re planning to break your mortgage in 4 years.

5-year fixed: This is the most popular term in Canada, and the term we get asked about the most. Great thing is, rates are still at an all-time low, making 5-year terms very appealing to anyone wanting security against rising rates.

Longer Fixed Terms

7-year fixed: Not sure why we have these as I have never had a customer take a 7-year term. If you are worried about interest rates, take a 10 year term and get 3 more years of payment security.

10-year fixed: This is the term for you if you’re not overly concerned about interest rate savings and you want to know what your mortgage payment will be for the next 10 years. That being said, statistics show that 90% of the time, 10-year fixed terms cost more than 2 consecutive 5-year terms.

Variable Terms

5-year Closed Variable: Historically, variable rates have prevailed over 5-year fixed rates. 77% of the time you will see savings with a 5-year variable rate versus a 5-year fixed rate term. If you believe that history will repeat itself, than a variable rate may be the way to go.

That being said, every major economist expects prime rate to continue climbing over the next year. If Prime rate goes up by 1.5% over the next 2 years, 5-year fixed rate terms will have an edge over the usual interest saving variable rate terms.

3-year Closed Variable: The average homeowner changes the terms of their mortgage on average every 3.5 years. The advantage of a 3-year term is you can renegotiate your mortgage terms earlier, than say the popular 5-year term. It is also attractive If you think variable rate discounts will get deeper in the next 3-years. Keep your eyes out for no-frills discounted rates, some restrictive conditions may garner you better variable discount.

1-year Closed Variable: 1 year fixed rates are lower than the 1-year variable rate. Take a fixed rate so you don’t have to worry about prime rate rising.

5-year Capped Variable: I am not sure what the appeal of this term is and I have yet to find out.

5-year Open Variable: An open mortgage is just a temporary band-aid, its main purpose is for short term funds. You are paying higher interest rates for the flexibility an open term offers. So keep in mind, when comparing an open to a closed term, closed variable terms are portable and they only have a 3-month simple interest payout penalty. So, if cash-flow is king, the closed variables are offering better rates than the open terms.

Other Terms and Features

Open HELOC (Home Equity Line of Credit): HELOCS are fully open products right around the 4% interest mark today. A HELOC is like a credit card with a really big limit, so be aware you are using it responsibly. If you absolutely need interest only payments, or are planning to pay off the HELOC quickly, or want to use it for interest offsetting, than a HELOC may be an option in that case.

Hybrids: A hybrid mortgage is part fixed term and part variable term. It is ideal for the borrower who can’t decide, it’s like diversifying your mortgage term. These aren’t the most popular products out there, mostly because the projected benefits are very dependent on what interest rates do in the next 5-years. If you don’t want to commit to a 5-year hybrid mortgage, take a look at a 3-year fixed term, which is somewhere right in the middle.