Thursday, September 1, 2011

Fall Financial Inventory

As our summer holidays wind down, the fall real estate and financial markets tend to go into higher gear. Autumn appears to be a season where we all start paying closer attention to our financial goals.

Real estate values in the GTA keep on rising… moderately, but rising nonetheless despite recent economic woes in the U.S. and Europe. Our housing market has been sustained by recent lower unemployment, steady immigration, and mortgage rates that are expected to stay low for the foreseeable future. Remember that even if rates begin to gradually rise next year, they are still considered low… ask your parents! It appears that a combination of all these factors has created a more "balanced" market where supply and demand seems to be more in sync.

Recently, the bond market had generated some "crazy" low five-year fixed rates, as low as 3.25%, which is an all-time historic low. Yet this does not mean we should all stampede to go with a fixed term. Variable mortgage rates are not based on the bond market, but are based on what the Bank of Canada (BOC) feels should be done to keep the economy in balance. The BOC meets eight times a year to address inflation, productivity, and the general health of the economy. In a normal market they usually adjust the Prime rate (which variable mortgages are based on) a couple times a year to either stimulate, or cool off the economy. I think we can all agree that there's no hot economy in sight that needs to be cooled down, and Canadian economic growth is moderate, therefore interest rate reductions are not required. Expect this overnight rate to be flat for a few years to come making a variable mortgage a very attractive choice.

Despite the interest rate, variable mortgages tend to be safer than fixed mortgages because you can change to another mortgage term for free anytime. Conversely, fixed rates lock you down with huge discharge penalties to get out of them early. You likely know someone right now who is upset about the discharge penalty on their fixed mortgage. You also know someone who is absolutely thrilled that they stuck with a variable mortgage and did not waver even though at times interest rates were rising… am I right, or am I right?

The information age has made variable mortgages even more popular than ever. Now anyone can browse online to quickly determine which mortgage may best suit them, where in the past we oddly enough only relied on our Banker's advice… how much sense does that make? The internet has made us all more financially literate, which may not be the best thing for a mortgagee (the lender). I believe where our parents' generation was coached to take a basic five-year fixed mortgage, our children's generation will instinctively choose variable mortgages.

Now that so many borrowers are opting for five-year variable mortgages, the mortgagees (lenders) needed to change their pricing and tactics. To be profitable, all mortgagees have cut back on the discounts they were giving on variable mortgages. Prime less .9% no longer makes financial sense for them, where prime less .5% makes them the profit they need to keep shareholders happy. Generally speaking, mortgagees tend to promote a closed fixed term, which is more profitable for them. A fixed mortgage may be good for you and a variable mortgage may be good for you, but don't let someone else make that decision for you. Do your research and understand where your money is going and why? Having the lowest interest rate does not translate into paying less interest. Usually there's more savings in the mortgage terms, privileges and strategy. A mortgage savvy "independent" Certified Financial Planner could make a significant difference in operating your finances at maximum efficiency. If you don't watch out for your money who will? Leaving that to your Banker is like leaving the monkeys to watch over your bananas.

Finance Home Upgrades with a Purchase Plus Improvements Mortgage

If you intend to buy a home that needs some immediate upgrades, a "purchase plus improvements" mortgage may be right for you. This type of mortgage covers the purchase price of the home, plus any renovations that would increase the value of the property, such as finishing a basement or redoing the kitchen. For current homeowners, a "refinance with improvements" option may be available.

Let us guide you through the process:

Step 1: Mortgage pre-approval
Arranging a pre-approved mortgage not only protects you if interest rates increase, it also gives you a clear price range for your new home.

Step 2: Obtain cost estimates for upgrades
Once you have found a home, you need to get written quotes from licensed contractors on the renovations you plan. These quotes will be used as the estimate for renovation funds that will be forwarded to you after the projects are completed.

Step 3: Mortgage application
When you are applying for the mortgage, your lender will add the estimated costs of the renovation into the lending agreement. For example, with a 5% down payment, your mortgage broker would apply to a lender for 95% of the "as improved" market value, which will be higher than the actual purchase price.

Step 4: Finalize purchase
Your Realtor and mortgage broker will walk you through this part of the process. The funds for renovations will be sent to your lawyer "in trust" when the mortgage closes.

Step 5: Complete upgrades
The lender will "hold¬ back" funds for the renovations until the work has been completed and inspected, at which time the contractor can be paid.