BC announced they would be freezing assessments at the July 2007 value to prevent homeowners from being squeezed.

Upon review, it looked like the province may have actually frozen the values at the peak in the market! This looked, on the surface, that it was going to be a disaster of a decision. When Gordon Campbell spoke about this, he used the words “locked in” and this was a bit of a error. In appears, in comments made later by Kevin Krueger, Revenue Minster for BC, that their intention was to make the 2007 number a “Ceiling” and not a “floor.”

However, some property owners were arguing that their property peaked in 2007 and they don’t want that as the value as the values have since slid downwards. Faced with a potentially crushing number of appeals that would grind the assessment authority to its knees, the government then made the announcement that they would now be publishing both the July 1, 2007 values and the July 1, 2008 values, and letting homeowners CHOOSE which was most advantageous and to pay the one they wish. This will allow home owners the ability to adjust what they pay as to when their area peaked in price.

I appears that in this case, the government has done some that will help homeowners pay a more fair tax on their propert. It’s nice to see the government do something right for a change!

My last post sparked off a flurry of of emails, phone calls, and inquiries about its content. In particular, the rates I quoted, and my rational for offering them were thrown into question by past clients, potential clients, other brokers, and even some of my family.

There are a few points that need to be addressed in order for this issue to be explored properly. First off, a list of the concerns that I received, in point form:

1. The product I am offering is not offered by a chartered bank (INCORRECT!)

2. The rate I am offering is not available at all brokers and banks (CORRECT!)

3. The article sounded like I was angry at other brokers for always advising clients that variable is best (CORRECT!)

4. The rate I am offering is below the variable rate mortgages, and this is an anomaly (CORRECT!)

5. The product and program I offer has lots of rules and conditions that not everyone qualifies for (CORRECT!)

Let’s address each in turn. First off, the rate I was quoting IS offered by a major chartered bank. In fact, in the last two days, another bank has also started offering a similar rate so the rate is out there in two chartered banks – not some “second floor” bank as one client suggested.

Is this rate offered by all brokers? No. From time time, banks will offer promotional specials (4.90% on a 5 year closed is such a promotion) that is the result of the broker sending them a lot of business or very high quality business. In these cases, the lender may elect to only offer it to their, say, top100 brokers. If the broker you are working with isn’t able to offer this rate, it doesn’t mean their advice is bad or not worth listening to, but suggests that they deal with other lenders. There is nothing wrong with this. There have been many times where I was unable to get the rates advertised by one broker, only to find out that broker sends lots of their business to that lender and they are being rewarded for it by being able to offer a better rate or better terms. In these cases, go with the rate and product you want. Go with whomever offers you the best advice and service. Bottom line: not every broker offers the same rates and products – if they did, why would anyone ever shop around online? Alternatively, give me a call and, if you qualify, I will set you up appropriately.

All the above being said, make sure you check the date on the broker’s site to ensure the rates you are looking at are current. I have seen many brokers be very lax about updating their websites.

Many people suggested I sounded angry in the last post, and they are correct. I am tired of people sticking to dogmatic principles when there are alternatives. Is a variable rate ALWAYS best? No. In times of increasing rates, variable rate mortgages can be financially devastating if people do not have sufficient room in their budget to absorb the higher payments. Also, just because you can convert to a fixed product out of a variable product offers you little protection. You rarely get to transfer across to the best rate in the market, and are beholden to that lender’s rates at that point in time. By the time variable rates have risen, fixed rates are often also higher. For example, if you are in a variable rate at 5% and the fixed rates are 5.50% you are sitting pretty. However, if that variable rate jumps to 5.60% and you try to lock in, you don’t get to lock in at 5.50% You lock in at whatever the rates are at that time, and they will likely be up over 6% at that point. This makes people “chase the market” and often results in them never actually pulling the trigger and getting out to a safer fixed term.

In changing and challenging financial times, you need to think outside the box. Period.

The concern that the rate I am offering is below prime, but that this is an anomaly is correct! What bearing does that have, however? You have to make decisions based on the best information available to you today. The variable rate offers you a small amount of “what if” protection as falling rates get you lower payments, but often results in you “chasing the market” in an upward cycle. Are variable rates historicaly better? In the past 8 years they sure as heck are! However, when rates have no room down, and a lot of room upwards, where would you rather be? In times of increasing rates, variable is not the place to be. So you need to ask your broker, what point in the cycle are we at now? With prime rate at 4% and poised to dip a little more, do you think we are near the top (with lots of downward rate room) or near the bottom (with lots of upward room)?

The last concern voiced was that the product I offer has lots of requirements to qualify for it and not everyone can get it. My answer? So what! ALL mortgage rates you see posted at ALL banks have a myriad of terms and conditions and guidelines that have to be followed. Just because, say, Royal Bank is offering 4.85% on a five year fixed mortgage, does that mean ALL customers going in there will get that rate? NO! Obviously not. They have to qualify for it. The rates I offer are no different.

I hope that addresses the web of concerns that people have voiced. As of today, the variable rate mortgage dropped to Prime + 0.60% for a net rate of 4.60% which now puts it as a lower priced option that the 4.90% I offer on a fixed rate. So is variable better? Ask your broker. If they don’t ask you lots of questions about your income, future plans, future expenses, and risk tolerance, then they haven’t done their job.

Ultimately, it comes down to affordability, and risk tolerance. If you can afford the variable rate (and that includes the RISK) then go ahead and take it and you may save lots of money. I hope you do! That is what my service is all about.

Ok I’m angry. I read an article today from the Vancouver sun that angered me greatly as it fails to take into account the complexities of the “variable versus fixed” debate that nearly every client goes through during the mortgage approval process.

The article was in the Vancouver Sun, and was written by Garry Marr “Family Man” on November 22nd, 2008 and went as follows:

———— Begin Article ————

When it comes to ranking some of my biggest financial blunders, getting a fixed-rate mortgage when I purchased my first home is right near the top.

“Don’t lock in, mate, it never makes sense,” I remember a senior columnist at the Financial Post telling me about 11 years ago when my wife and I decided, pre-kids, to lock into a bigger commitment than our marriage.

The gap at the time between a fixed-rate mortgage with a five year term and a variable-rate mortgage tied to prime was so scant it hardly seemed worth the risk.

But even a difference of 50 to 75 basis points – there are 100 basis points in 1% – turned into a few thousand bucks lost over the five-year term.

By the time we moved up to a bigger and better house, I didn’t need much convincing to go with a variable rate product.

Of course, it has saved us money.

The question is: does it still make sense to go with a variable rate based on market conditions that have changed dramatically in the last eight weeks?

By way of background, in early October, banks were offering variable rate products for about 60 points below prime.

A few months before that, it was almost 90 basis points below prime.

But then the credit crisis hit and variable-rate products switched overnight to 100 basis points above prime.

They have stayed there ever since, leading some of us to question whether they still makes sense.

Gary Siegle, Calgary regional manager with InvisInc, a mortgage consultant firm, says while deals are not as good as they were in September, there is no question a variable rate mortgage will save you money.

This week, the lowest rate you could get on a five-year fixed-term mortgage was about 5.5%, Mr. Siegle says. “Plus, what do the economists say will happen to rates? They say they’ll go down.”

There is one other factor added to the mix. The Bank of Canada’s rate, usually tied to prime, went down last month, and some of the major banks refused to go along with the cut because it would have cost them too much money.

“Will banks change their rates when the Bank of Canada reduces its rate? It’s a good question.

But the last time they resisted, it didn’t last long before whatever influence the Government of Canada had was wielded and they all followed suit,” Mr. Siegle says.

The problem for banks are all the customers with existing mortgages negotiated at 60 to 90 basis points below prime.

Every rate cut costs the banks money. They are actually losing money on those customers now.

And, according to Mr. Siegle, that is one reason that if you have a variable-rate at a rate below prime, you would have to be “very worried” or “very conservative” to want to lock in that rate.

You would be converting a mortgage as low as 3.1% to one at about 5.5%

“Those people are sitting pretty,” Mr. Siegle says.

Don’t feel too sorry for the banks. They had been pushing variable rates up until the credit crisis hit.

The Canadian Association of Accredited Mortgage Professionals said this week that about 40% of home loans negotiated in the past year were variable-rate products tied to prime.

“We don’t know what the impact of getting rid of the discount will be,” says Jim Murphy, chief executive of CAAMP.

Don Lawby, chief executive of Century 21, says even with variable-rate products now 100 points above prime, the issue has not changed.

“It comes down to what you can afford and what is your comfort level,” Mr. Lawby says. “For many consumers, they feel comfortable locking in for five years.”

Ultimately, a fixed-rate product is still like an insurance policy.

Yes, it will make some people more comfortable. I don’t know about you, but I don’t feel all that comfortable paying more interest.

———— End Article ————

This article had several points that upset me and have left me feeling like I should respond. Unfortunately, the Financial Post likely won’t indulge me as much as I’d like them to in terms of space, so I have to respond here to my readership.

The first point that I’d like to discuss is the idea that there is, potentially, a 50 to 75 basis point difference between fixed and variable rates. The article seems to suppose that a variable rate mortgage will be lower than a fixed rate mortgage. Traditionally, that has been true, but anyone seriously acquainted with bank rates across the country will know that you can actually get a fixed-rate mortgage BELOW a variable rate mortgage.

I am able to get 4.90% on a 5 year, fixed, locked-in term and only 5.00% on a variable rate mortgage tied to prime (prime is currently prime and the rate is set at prime + 1%).

So, currently, you can SAVE money with a fixed rate mortgage. Now, this IS an unusual situation, but these are unusual financial times, and conventional ideas don’t hold up when the fundamentals in the market have changed.

The next issue I have is that the author, and even the consultant at Invis they spoke to, said that “…there is no question that a variable-rate mortgage will save you money.” I cannot abide by this statement, when I can CURRENTLY save you money by taking a variable rate mortgage, and should prime rate NOT fall at the banks, then you are exposing yourself to the risk of rising payments and interest AND taking a higher rate. I hardly think this is a good idea.

The banks do not have to follow the Bank of Canada when the Bank of Canada lowers it’s lending rate. We already saw evidence of this the last time the Bank of Canada lowered rates. It took several lenders several days to lower their prime rate, and there was no influence by the Bank of Canada exerted to make them lower their prime rate. The fact they lowered prime was solely a function of them doing what all companies do: reduce their margins to gain market share. The truth is, that when prime rate was 4.5% and mortgage rates were prime + 1% the banks WERE making money. When the Bank of Canada announced a reduction in its key lending rate, the banks were hesitant to reduce their profits by lowering their prime rate. Several banks and mortgage lenders took many days to reduce their prime rate. The charge was led by TD and Scotiabank who dropped their prime rate on the same day. Initially it was only by a fraction of the overall change, but by the end of the week they had lowered it the same amount with the Bank of Canada. Again, there is no law or any way the Bank of Canada can influence ALL the banks and lenders. They simply don’t have the leverage or “teeth” to do so.

Let’s not forget that the prime rate is currently 4% which is getting pretty damned close to 0%. Do you honestly think there is that much room left for prime rate to go down? Seriously? Do you think prime rate is going to get to levels at 0% or something and that lenders will continue to lend? Would you??? There is a limit to how much rates can fall, but there is a HUGE amount of room upwards.

The closing sentence made me actually laugh out loud in this case. The idea that the author isn’t comfortable with paying more interest is laughable when I am actually advertising fixed rates BELOW the variable rates he is advocating.

A lot of bankers, mortgage brokers, and media, have been singing the praises of variable rate mortgages, and when the conditions have been right, so have I. When we were getting 90 to 100 basis points below prime rate, it made good financial sense: prime rate was higher (with more downward potential) and fixed rates were substantially higher (sometimes up to 1.5% higher). However, that time has changed.

The one person I agreed with in the article was the chief executive of CAAMP – the governing association for mortgage brokers. The key to the question really is what you can afford and what you are comfortable with. Comfort was overlooked in this article as though only blundering fools would take a fixed-rate mortgage and fixed payment.

There four types of people that buy in the market, in my experience:

1. Those that buy far below their means, safely, and have relatively stable income
2. Those that buy the maximum they can afford, and have relatively stable income
3. Those that buy far below their means, safely, and have variable income (commissions or bonuses)
4. Those that buy the maximum they can afford, and have variable income (commissions or bonuses)

For self employed people, or people whose income varies dramatically, does it really make sense to take the risk of a variable interest rate (and therefore a variable payment) when their income isn’t a sure thing? Having variable income AND a variable payment is a recipe for budgetary problems. If there was a substantial savings available (now or in the future) by taking a variable rate mortgage, then perhaps it is worth consideration.

When fixed rates are at (or below!!!) variable rates, with not a lot of downward potential, fixed rates provide customers savings AND comfort. This isn’t all that common, but right NOW is the time to have this discussion with an Accredited Mortgage Professional, and not a member of the mass media.

Please, post your comments on this. I argue with mortgage brokers and bankers about this damned near every day, and most of them stand by the dogma that “variable is best,” without having any economic facts or education to back up their opinions. They are just doing what the rest of the herd is doing, and this is NOT the time to run with the herd.

Not a day goes by that someone doesn’t comment to me about the economy going into the toilet, housing prices falling off a cliff, and foreclosures across the US mounting.

So, are foreclosures mounting in Canada as well? Apparently, the answer is yes, but he situation is nowhere near as bad in the US.

Does that mean foreclosures up here in Canada are available as a good investment? Yes, but only if you know where to look. I keep reading in articles and newspapers that people should look for foreclosures and pre-foreclosures, and I am getting sick of them firing people all up but then offering no prescriptive techniques for how to actually find these foreclosures.

I have published other articles about pre-foreclosures and foreclosures, so I will leave the definition to the prior posts. The link to those posts (for those that would still like to read it) are as follows:

http://mortgagelocator.ca/blog/?p=158

So where do you find them?

The short answer is as follows:

1. Mortgage brokers that deal with foreclosure bail outs
2. Foreclosure lawyers
3. Real estate agents
4. The MLS (multiple listing service) (http://www.mls.ca) or through your realtor’s MLS system
5. Court website in your area

Let’s look at each option, and find which are the most valuable tools.

MORTGAGE BROKERS

As a mortgage broker myself, who deals with a lot of “hard money situations such as foreclosure bailouts, debt consolidation, and private lending, I often find clients in very difficult situaitons that are either pre-forclosure or actually in foreclosure. Many times, it may be me, or a broker I know, who loaned the funds as is now in foreclosure. Talk about grass roots information! This is as close as it gets to the heart of the situation, and most people in foreclosure have contacted a mortgage broker to discuss bail out options. I’d be happy to pass on the names of my clients that are looking for a quick sale (with their written consent, of course) to those that are interested. Rarely is there more than one going on at any particular time, but check back from time to time and we may be able to help.

FORECLOSURE LAWYERS

Depending on your city, you will have to track down a lawyer that specializes in foreclosures. I would start with a quick web search, and then use the yellow pages (old fashioned print ones with ads in it) and go from there. These lawyers may be willing to provide you people’s names (again, only wih their consent) of people that are trying to sell their property before the banks take it away from them. My personal experience is that with a few phone calls, I can usually get my hands on a few names and addresses and have approached the clients by mail once I got permission and went from there. Many times, the properties that the lawyer tells you about will already be listed by a realtor. In these cases, you MUST GO THROUGH THE REALTOR. Do not try and circumvent the realtor in this situation in the hopes of getting a quick sale and better deal from the seller because they will owe the realtor their commission NO MATTER WHAT, so you will NOT get a better deal. I cannot stress this last point enough.

REAL ESTATE AGENTS

Many properties that are in foreclosure get granted “Conduct of Sale,” whereby the lender gets the right to list the property and put it up for public auction. There are many of these on the market at any one time, and you can just get your realtor to send you a list of all properties that contain the following words in the listing, “court ordered sale,” “foreclosure,” and “public auction,” and that will capture most (if not all) of them on the MLS at any one time. From there, you have to make a subject free offer into court in a public auction, and away you go.

THE MLS

This point is really just piggybacking off the last one regarding realtors. You will NOT be able to find the actual listings with the key words I gave above as you cannot refine your search this finely on www.mls.ca so in other words, “talk to your realtor.”

COURT WEBSITE IN YOUR AREA

Foreclosures are regulated provincially, so by searching the court websites you can usually get a list of “chambers applications” or “chambers hearings” going on in the court in your province. Now, this is a tricky bit of research, because they don’t label the hearings as “foreclosure hearings,” or anything that obvious. Here is how you have to do it:

Look at all the rooms in the court building (on the website) and click on a list of hearings or applications going on that day. Obviously, a hearing with the name “James vs. Michaels” is likely not a foreclosure hearing. Also, if it is a matter pertaining to family law, for example, it isn’t a foreclosure or real estate hearing. As I said above, most of the applications pertaining to property will be chambers applications in front of a Master (usually not a judge) and will be labelled as, “Bank of Montreal vs. Smith” or “Royal Bank of Canada vs. Matthews” or somethere whereby it is clear that a bank is challenging an individual (or corporation) on some matter.

So you look at the list and see ONE that says “Bank of Montreal vs. Smith” and then you see “Bank of Montreal vs. Johnson” and “Bank of Montreal vs Williams” and you should be cluing in that the bank is doing ALL their hearings on one day (usually represented by the same law firm to save on legal fees) and that these are the hearings. Usually, these days only happen once a week or so, so you will have to watch the court websites daily. It can be a tiring process, but once you identify the hearings are going on, you can go to the courts, get the names of the people involved, and either search them out conventionally through phone book and white pages, or you can get court transcripts or pull up the judgements (this is ALL public info, by the way) and contact the people via mail (remember the do-not-call list and you likely should’t call them).

So that is how to find foreclosures (or pre-foreclosures in the case of the court info I gave). Other than these techniques, word of mouth, or actually being in the industry it is NOT as easy as the “experts” that offer high priced real estate courses will tell you. It takes time, diligence, and a bit of ingenuity, but it can save you a lot of money (or make you a lot of money) if you do it.

In an effort to loosen up the tough financial markets the Governement of Canada has announced they will be buying $50 Billion in residential mortgages from the banks. The move is done in an effort to privide some cash and liquidity to banks that, while certainly not facing the strains of other contrys’ banks, have tightened up guidelines and rates such that markets across the country are suffering.

By providing banks with money, it isn’t just providing profits. Instead, it will free up money for other uses such as student loans, lines of credit, car loans, business loans, etc… Banks have been so tight in the past two months that getting money for anything OTHER than a residential mortgage has been very difficult.

This move will effectively triple the amount of insured mortgages that Ottawa can buy from the banks. They also set up a funding facility that will make it cheaper to use government insurance which would guarantee bank borrowing. The lending facility provides Canadian banks with cheaper funds by knocking .25% off the commercial term borrowing rate to the banks, and waiving the 0.25% surcharge “until further notice.”

Said Flaherty, Finance Minister, “it is an efficient, cost-effective and safe way to support lending in Canada at a time of extraordinary strain in the global credit markets.” Further, “our goal in all of this is to support the availability of credit to Canadian consumers and businesses to foster economic growth.”

Also on Wednesday, the government said it will inject $8 BIllion in the country’s tight money market under new liberal terms. The new Canadian-dollar term loan facility will be conducted by auction in $2 Billion dollar blocks whereby banks can offer any non-mortgage loans as collateral.

All of this is good news for Canadian borrowers and banks, and we can likely expect to see the cost of funds for banks fall and thus the rates on variable money with them. Already, there are rumblings in the industry that variable rate discounts (currently prime PLUS 1%) may go to prime PLUS 0.60% or better. Finally, some relief is in sight.

In the current real estate market, with developers of new homes hoping to sell their inventory (or being desperate to do so). Incentives can take many forms: cashback after completion, renovation allowances, vehicles, real estate commissions, paying the GST or any manner of incentive.

In real estate, as in anything else, there is no free lunch. If you buy a house for $500,000 and get $20,000 cash back after closing. Did you really pay $500,000? Or did you really py $480,000? The banks say you paid $480,000 and this can affect your financing options.

I came across this article that was in the Vancouver Sun on November 15th and was written by Derrick Penner. I am going to re-publish it here for reference as it explains the costs of the various incentives such as cashbacks and other incentives that developers and lenders offer.

_____________<Begin Article>______________________

They are temptations to buy a new home: offers of cash back, decorating allowances, commission payments, even new cars.

However, consumers face a potential financing sting if they accept such incentives without doing all of their homework, accord to the Mortgage Brokers Association of BC.

Association President Brian Petersen said it comes down to whether or not the lender views the incentives as a discount to the purchase price. In that case a lender will deduct the value of the incentive from the size of the mortgage a buyer was trying to arrange, he said.

Mortgage lenders usually won’t quibble over allowances of a few thousand dollars for new appliances or to upgrade furnishings, Petersen said.

However, lenders won’t look past higher vale incentives such as a developer paying the real estate commission on the sale of the buyer’s existing home, or throwing in expensive gifts such as automobiles.

“On a substantial kind of thing worth $20,000, $25,000 or $30,000, a good [mortgage] underwriter would not let that by,” Petersen said.

The example he used was a buyer looking to buy a $500,000 condominium — with a 10-per-cent down payment — from a developer who was throwing in a $20,000 car as part of the deal.

Petersen said a lender may look at the situation, decide the buyer is purchasing a condo and a car, and deduct the auto’s value from the price tag of the condo. So instead of advancing the $450,000 mortgage the buyer was expecting, the lender advances only $432,000 — 90 per cent of $480,000 — while the developer still needs to be paid the full $500,000.

Petersen said he has seen a couple of cases in the Okanagan, where he is based, where developers have thrown in cars as incentives and buyers have been stuck trying to come up with additional funds.

Petersen added that it is important for a buyer to tell his lender about incentives he accepts. To withhold such salient facts would constitute fraud. Offering incentives is not something unexpected in a buyer’s market for real estate, Petersen said, and there is nothing wrong with them so long as consumers understand the implications that might come along with accepting them.

“We’re trying to get people aware that it’s not going to end up being a free ride for them,” he said, “you may end up paying for it.”

_____________<End Article>______________________