The fixed/variable debate goes on...

A recent article in the Financial Post has stirred up the fixed vs. variable rate once again – hinting that the variable rate's reign may soon be coming to an end. Historically, variable rate mortgages have saved homeowners money, averaging a lower rate than the typical five-year fixed-rate mortgage. With the Bank of Canada's widely-known decision to raise the Prime rate over the next few years, and the bond market bringing fixed rates back to record lows, the tides may be turning. When it comes to deciding which product is right for you, it's best to ignore historic trends and focus on your particular situation. If you're on a tight budget with no room to move, a variable rate isn't right for you because it has the potential to increase up to ten times per year. If you find the qualifying rate uncomfortable – the current posted five-year fixed rate – then again, it's likely not right for you. If you've determined that you can handle the fluctuations of a variable rate, it might be in your best interest to choose that route but pay it at the current posted five-year fixed rate. The extra payments will allow you to drastically cut into your principle, and your budget won't be affected for quite some time – at least until variable rates hit the 5% mark. Another option is the hybrid mortgage – which allows you to split your mortgage into a variable and fixed component, thus taking advantage of the best of both worlds. To truly determine the option that's best for you, however, why not give me a call? There's no obligation to sign on the dotted line, and I'd be happy to uncover the best mortgage for your needs.

Another argument for paying down that mortgage...

While mortgage brokers have long advocated the notion of paying off one's mortgage, this age of low interest rates has created yet another advantage to the concept. In a recent article in the Toronto Star, Moshe Milevsky, a professor at York University's Schulich School of Business, argues that in today's volatile stock market, money is only earning around 3% - if individuals are willing to lock in for a few years. Money in demand deposits and savings accounts are earning even less - somewhere around 1%. At that rate, Milevsky argues, it will take a retirement nest egg 72 years to double - not a great rate of return to say the least. So even though mortgage rates are incredibly low, they're still higher than what people are earning on their savings. So if your clients come across some extra cash, wouldn't it make more sense to pay down their mortgage than invest it in an investment vehicle that's earning peanuts?

Tips for freeing up cash flow

While we'd all like to see our mortgages paid off sooner rather than later, accelerated or lump sum payments aren't necessarily in the cards for everyone - especially if you've just started a family, or are having difficulties making the switch from being a renter to a homeowner. Here are a few options to help you increase your monthly cash flow: 1. Go no-frills. One way to save a bit of money on your mortgage payment is to go with the lower rate of a no-frills mortgage. If you're not using your prepayment privileges, why pay the extra interest? With a little discipline, you could always put your savings aside and use them for a rainy day. 2. Use your bank card to its full potential. Bank cards and credit cards today come with a vast array of incentives - including cash-back options, auto-saving options, and travel miles. My personal favourite is the Shoppers Drug Mart MasterCard that allows you to save a ton of dough on all of life's essentials. Sit down and think about what makes the most sense to you. If you're spending the money anyway, it couldn't hurt to see something for it. 3. Take a lesson in frugality. Welcome to the new era of coupon cutting. There are a variety of websites and e newsletters out there that are designed to keep you informed of the best bargains in your area. My favorite? Groupon.com. Every day you'll receive a deal to a local restaurant, gym, or one of a vast array of products in your city. Because hey -every little bit counts. While managing your cash flow is important, try to keep your mortgage top-of-mind - and pay it down whenever possible. After all, imagine how much cash you could free if you eliminated that pesky mortgage payment?

HST 101: For Homeowners

What says "Happy Canada Day" better than a new tax? Nothing - according to the provincial governments in B.C. and Ontario. On July 1, the residents of those two provinces must now pay the Harmonized Sales Tax on a variety of goods and services that were once only subject to the GST. Homebuyers aren’t immune to the new charge, but there are certain things these two governments are doing to make the new tax sting a little less. Essentially, the HST will only impact those homebuyers who are building or purchasing a newly-constructed home, or substantially renovating their homes. Individuals who are purchasing resale homes are exempt from the new tax. For those that fall into the first category, both governments are offering tax rebates. In B.C., purchasers of newly built homes will be eligible to apply for a maximum rebate of $26,250 — with more rebates potentially available if construction spans the July 1 implementation date. In Ontario, all buyers get a rebate of $24,000, regardless of the purchase price. So that’s the same as paying no tax on Many homebuilders have included the costs of HST and the associated rebates under the plan directly into the purchase price. In these cases, the rebates normally available to a homebuyer are assigned to the developer. Information about whether the HST and rebates are included in the purchase price is included in the agreement of purchase and sale. If the developer has not included the HST and associated rebates into the price of the home being built, homebuyers must apply to the federal government for the rebates and wait for the forms to be reviewed and approved. As a result, these amounts must be financed by homebuyers during the intervening period. Certain costs associated with buying and selling of homes will also be impacted. Such items as legal fees and real estate commissions will now be subject to HST.

The benefits of non-bank lenders

If Canada's five chartered banks were the only institutions allowed to lend money in the form of mortgages in this country, rates would be sky-high, and the selection of mortgage products would be rather slim. Thankfully, we have non-bank lenders to keep the Big Banks on their toes.

While these lenders may not invest the same number of dollars in fancy advertising campaigns, they're nevertheless an excellent option for savvy consumers who are looking for a good mortgage deal.

Because non-bank lenders don't have to support the overhead costs of brick-and-mortar branches, and instead opt to go through the mortgage broker channel, they're able to offer better rates. In addition, because they're seeking to steal market share from the dominating big banks, they're much more likely to offer unique mortgage features - such as better prepayment options, flexible payment frequencies, and unique products such as cash-back mortgages - while at the same time offering a little more flexibility when it comes to clients with lower credit scores, or those that are self-employed or commission-based.

While non-bank lenders aren't considered "banks" in the traditional sense, they're still required to follow all the same regulations and underwriting guidelines as their bank counterparts. They also have access to the same default insurance options as the big banks - whether that's through CMHC, Genworth, or United Guaranty.

Not all non-bank lenders are "sub-prime" (in fact, there are very few of these lenders left in Canada), and while it's true that many of them are foreign-owned, there are many homegrown institutions here as well. Their models have seen success across the globe, and continue to thrive here in Canada.

If you're in the market for a new mortgage or a renewal, I invite you to head into your local bank branch to see what type of deal it can offer you. Then pop by my office and I'll scour the rest of the country's lenders - and likely save you a few percentage points off your mortgage.

Mortgage Misinformation

Ever since the Federal government announced a new set of mortgage rules in February, misinformation has been spreading like wildfire. Don't buy the hype - acquiring a mortgage is still possible!

Below are a few mortgage myths, debunked:

1. You can still purchase a property with 5% down.
While the government did change the rules regarding 5% down payments, the changes only affected property investors. If you're a first-time buyer - or if you're looking to move into another residence that you plan to occupy - you can still buy a home for 5% down. You can even buy a home with rental units in it for 5% down, as long as you plan to live there too.

2. You can still purchase a vacation or second property with 5% down.
If you have your eye on a new cottage or second home, those are also exempt from the new down payment changes. Unless you plan to rent it out when you're not living there, you can still purchase a second home for 5% down. The only situation that falls under the new rules - where you'll be required to put 20% down - is if you're purchasing a property solely for investment purposes. This is to prevent real estate speculators from artificially inflating the market.

3. You can still qualify for a mortgage.
While the government did implement a rule to reign in over-zealous first-time buyers, the intention was noble. To prevent first-time buyers from getting in over their heads, the government is now making it mandatory for lenders to qualify them on the five-year fixed rate - even if they're choosing a lower variable-rate mortgage. This is because, while variable rate mortgages may initially seem lower, they change according to the Bank of Canada's Prime lending rate - and in the coming year or two, the government has made it quite clear that this rate is going to increase. By qualifying borrowers at the higher rate, lenders are ensuring homebuyers can withstand the increases.

Home overvalued? Local rental rates will tell

The topic of real estate overvaluation has been a hot one over the past week - pretty much ever since the big banks tweaked their real estate forecasts.



CIBC is the most recent bank to sing a different tune when it comes to real estate appreciation across the country, arguing that approximately 17% of homes are overvalued, and Canadians can expect a 5-10% price drop in the coming year or two.

Real estate markets across the country have been hot for over a decade, so this concept of overvaluation makes sense. To see if your home is one that 17%, you may want to employ a tool from the stock market.

When analyzing stock, investors look at its price-to-earnings ratio, which is a comparison of a company's share price with its annual profit. The higher the ratio, the more expensive a stock is relative to its underlying value.

Houses are similar in this regard - but instead of earnings, you have to look at the going rental rate in the area. Take the rental rate, multiply it by 12 (to get the annual cost) and divide your home's going price by that number. If you get a number that's higher than 20, your house is overvalued.

As an example, we employed this method to apply to a one-bedroom condo across three cities. To find the going purchase price, we visited www.mls.ca. To find the going rental rate, we visited www.craigslist.org. Where possible, we tried to find units in the same building or at least the same street. Keep in mind that just because one of the examples is overvalued doesn't mean every home in that city is. Prices can be escalating in a certain area of a certain city, but as long as rents are keeping up with them, chances are they're not overvalued.

Example 1: Toronto

Purchase Price: $325,000

Rental Rate: $1500/mo (x 12 = 18,000/yr)

Ratio: 18.05

Example 2: Edmonton

Purchase Price: $204,500

Rental Rate: $800

Ratio: 21.3

Example 3: Vancouver

Purchase Price: $369,800

Rental Rate: $1175/mo

Ratio: 26.22