One of my contacts at Canada's top bank is offering a special 5 yr low mortgage rate of 2.99% for two weeks! The rate offer is effective January 12 and expires on January 25. Conditions: Maximum amortization is 25 years. Clients can only pre-pay 10% and increase their payments by 10% each year. Mortgage cannot be paid off or switched to another institution in the 5 year term unless client sells their house. Lender will hold the rate until April 2012.

Call me to get approved and start your home shopping!!

Successfully Navigating The Changing World of Mortgages

The real estate and banking sectors are set up to facilitate their deal making and profit taking with a measure of consumer protection added to keep things from becoming noticeably one sided.

Too many buyers and sellers further stack the deck against themselves by not digging deeper than fads, marketing, and salesmanship. Most real estate buyers and sellers invest more time learning about their latest mobile device and its apps than exploring ownership and financial strategies for buying residential and recreational property. Therefore, they may not miss what they did not understand, and would have appreciated, in the first place.

Have you heard about a great government program or a tax advantage only when the media lament its end?

How do you make sure you are taking advantage of all the options open to you to reduce the cost of the money you borrow to purchase real estate – your mortgage?

Real estate buyers and owners who want to achieve more for less should start this new year by learning what the latest round of mortgage resets mean to their specific real estate goals and opportunities. We always advocate going to the source, so dive into the detail announced by the Federal Ministry of Finance January 17, 2011.

Here are a few perspectives to start you off. Just remember, that what is relevant to you and your specific situation may not be on this list, hence the value of going to source:

Motives and motivation: The title, "The Harper Government Takes Prudent Action to Support the Long-Term Stability of Canada's Housing Market," has an election ring to it. Either the federal government is positive there won't be more negatives ahead for housing, so it wants to appear to have created the soft landing, or it is bailing out before problems hit, so it can point fingers at others while patting itself on the back. What's your opinion?

Reduce amortization: Cutting the maximum amortization period down 5 years to 30 years is not the across-the-board measure it has been presented as. This restriction applies only to new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent. The 35-year amortization may be available for mortgages outside these restrictions for borrowers that lenders feel suit this repayment method. The amortization period is the number of years, at a specific payment amount, that it will take to pay the mortgage principal and interest to zero.

Buyers' advantage: The longer the amortization period the smaller the monthly payment of principal and interest, and the greater the mortgage principal a buyer will qualify to borrow. Buyers could opt for the longest amortization possible – which used to be 40 years, then 35 and now 30-and then, down the road, decrease the amortization period on renewal to cut total interest costs.

Owners' advantage: The shorter the amortization period, the lower the total amount of interest paid on a mortgage. The common 25-year period provides a hefty profit for lenders. Pop your original mortgage principal into a mortgage calculator, and see how much you have paid for this borrowed money in the first 10 years. Compare this with how much is left to pay on the mortgage. Shorten the amortization period as much as possible when you renew. Even one year can make a difference in the total interest paid.

Equity building: The government reports the latest restrictions will "allow Canadian families to build up equity in their homes more quickly, and help Canadians pay off their mortgages before they retire". Home equity management is an ongoing topic in this column, but if these changes represent the government's best shot at facilitating equity building, they need input from consumers on what would really aid in accumulating value and repaying mortgage debt.

Taking taxpayers off the hook for lenders: The government backs mortgages arranged to buy real estate, so if the borrower defaults and can't make payments, the government (that's taxpayers) cover losses for lenders (that's largely the big banks). Those same lenders promote refinancing for a range of home improvement and lifestyle uses, the government is letting it be known that this lender-promoted debt should not be as risk-free for lenders as arranging the original mortgage. Lender reactions to the government taking taxpayers off the hook for mortgage default or lack of repayment may not be pleasant for homeowners.

Restricting access to equity: By lowering the maximum amount Canadians can borrow when refinancing their mortgages the government says it's promoting savings. The drop from 90 per cent to 85 may not seem significant until you want that 5 per cent in your pocket. This change means the only way to access that 15 per cent is to sell. When so many want to stay in their own homes as they age, does this move seem in synch with consumers goals?

Withdrawing government insurance on lines of credit: Lenders who issue lines of credit secured by real estate, including home equity lines of credit, will no longer have government insurance to cover them against losses. The government believes its move will ensure that risks associated with consumer-debt products used to borrow funds unrelated to real estate purchases are managed by the financial institutions and not borne by taxpayers. Will lenders demand a premium for their additional risk?

Note: The adjustments to the mortgage insurance guarantee framework will come into force on March 18, 2011. The withdrawal of government insurance backing on lines of credit secured by homes will come into force on April 18, 2011.

Government intervention: The government's paternalistic approach with this "for their own good" set of financial rewrites opens the door to many considerations. Do you want the government deciding what's best for you and your real estate, or would you prefer to deal with lenders who set standards and criteria for lending on a case-by-case basis? What may not be prudent for one borrower may be calculated risk for another.

The Honourable Jim Flaherty, Minister of Finance, was said to make "prudent adjustments to the rules" to "support hard-working Canadian families saving through home ownership". Does their definition of "saving" properly describe your intentions in owning real estate?

If you need help understanding finance and planning for your future, is the government your preferred source and resource? Maybe the wrong level of government and the wrong ministry are involved. Wouldn't it be more practical to teach money management and real estate investment in public school, so we all become our own experts?

Written by Jim Adair
Feb 2011 Realty Times newsletter
subscribe my Realty Times e-newsletter

Looking for a mortgage: Apply today!

Today, Finance Minister Jim Flaherty announced new mortgage regulations aimed at reducing soaring household debt for Canadians. The International Monetary Fund has called household debt to be the No. 1 risk to the Canadian economy.

The three new mortgage rules:

1. Mortgage amortization periods will be reduced to 30 years from 35 years.
2. The maximum amount Canadians can borrow to refinance their mortgages will be lowered to 85 per cent from 90 per cent.
3. The government will withdraw its insurance backing on lines of credit secured on homes, such as home equity lines of credit.

“This will prevent Canadians from taking on excessive debt,” Flaherty told a news conference, noting that Canadians in some cases are re-mortgaging their homes to buy boats and other large ticket items instead of reinvesting in their homes.

The ratio of household debt to disposable income has reached an alarming 147 per cent and household debt has reached $1.4 trillion. These new Bank of Canada rules are meant to curb this domestic debt burden.

The first change is likely to have the largest impact. Buyers who purchase a home with less than 20 per cent of the value of the home are required to purchase government-backed mortgage insurance through Canada Mortgage and Housing Corporation.

Under the new rules, mortgages amortized over longer than 30 years will no longer qualify for that insurance, making it effectively impossible to get a highly leveraged mortgage of more than 30 years in Canada.

Thankfully, the new rules do not include an increase to the five per cent minimum down payment Ottawa requires for a home purchase.

The new mortgage rules are both good and bad news, in my opinion.

Good news for people who do not understand the difference between ‘good debt’ and ‘bad debt’. These people love taking more and more debt, of what I call bad debt (investing in depreciating assets-cars, boats, large ticket items etc.) and borrow to max.

Bad news for prudent investors who have always used times like this (historically low interest rates) to take on ‘good debt’ and invest (in appreciating assets-real estate, stocks, mutual funds, gold etc.) In the case of a ‘good debt’, sometimes it possible to write off interest payments also.

These new rules will help to control such excessive borrowing, whether good or bad debt.

For some sound financial education visit: Get Smarter About Money

If you want to invest in Mississauga real estate, call me for friendly real estate advice. I can also put you in touch with financial, mortgage and or tax advisors who can help evaluate your goals, before you borrow to invest.