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Posts Tagged ‘credit’

Should We Worry About a US-Style Housing Meltdown?

Wednesday, December 5th, 2012

This is an article by Benjamin Tal, one of CIBC’s top economists who answers this question. I found it to be a great write up that expresses the differences between the US and Canadian housing economies.

“House prices in Canada will probably fall in the coming year or two, but any comparison  of the American market of 2006 reflects a deep misunderstanding of the credit landscapes of the pre-crash environment in the US and today’s Canadian market.

The Canadian housing market has more distinguishing attributes that separate it from the pre-crash US market. Yes, the debt-to-income ratio in Canada just broke the American record set in 2006, but comparing the three years heading into the US crash to the past three years in Canada reveals that the debt-to-income ratio in Canada has been rising at half the speed seen in the pre-crash US market. Even more important than the amount of debt is its quality. The distribution of the credit score in Canada has not changed dramatically in the past four years. That is very different than the experience seen in the US in the four years heading into the recession.

In the US an astonishing one-third of mortgages taken out in 2005 and 2006 were in negative equity position, and more than half had less than 5% equity. In Canada, the negative equity position is nil, and only 15-20% of new originations have an equity position of less than 15%.

In a final analysis, not all is well in the Canadian housing market. Home prices are overshooting their fundamentals, mainly in large cities such as Toronto and Vancouver. The recent slowing in sales activity will probably be followed by price adjustments in many cities across the country. But the Canada of today is very different than a pre-recession US. Therefore, when it comes to jitters regarding a US-type meltdown here at home, the only thing we have to fear is fear itself.”

Bank of Montreal BMO 2.99% Rate Special – Explained by Vancouver Mortgage Broker Rowan Smith

Monday, March 19th, 2012

Transcript of Video Blog:

Hi everybody. It’s Rowan Smith with the Mortgage Centre. I want to address Bank Montreal’s 2.99 percent offer that’s on the market and to explain some of the restrictions that people need to be aware of, some of the fine print. First off, yes, it’s one of the lowest rates historically ever offered, but it comes with some restrictions such as you can only have a 25 year amortization. Now, many people don’t think that this is a problem because they think I only want a 25 year amortization anyway and across a lot of Canada that is still absolutely the practice. Read the rest of this entry »

Line of Credit At Renewal – As Explained by Vancouver Mortgage Broker Rowan Smith

Thursday, October 13th, 2011

Transcript of Video Blog:

Hi, everybody. It’s Rowan Smith from the Mortgage Center. I want to talk today specifically about lines of credit. More importantly I want to talk about lines of credit that you want to keep but you maybe want to renegotiate maybe the mortgage in front of it. This is something that comes up from time to time. Read the rest of this entry »

Collateral Charges – Another Lender Gets On Board

Thursday, November 4th, 2010

Transcript of Video:

Hi, everybody. Rowan Smith with the Mortgage Centre.

I want to talk today about a change that was announced that’s been swept under the radar, and that’s that TD Bank has announced their mortgages will now be a collateral charge. Now what a collateral charge is, it differs than a traditional mortgage in that you can re-advance that mortgage back up to the amount or even beyond that you originally registered it for.

Now to a client, what does this mean? Let’s look at it from numbers. Let’s say you bought something for $500,000, you put 20 percent down under grant, and you had a mortgage for $400,000. Traditionally, as you paid down that mortgage, you could only advance it ever back up to the amount of the original mortgage, not beyond, and many institutions didn’t allow you to re-advance it at all.

However, a collateral charge allows you to register the mortgage for some fictional figure, perhaps the value of the home plus 25 percent — not the mortgage, but the value of the home plus 25 percent or more. Some institutions, such as Scotia, don’t even specify a limit.

Now, why they’re doing this is twofold. First off, for you the client, yes, it means convenience. What you’re going to be able to do is go back into the bank after a couple of years. You’ve paid your $400,000 mortgage down to $350,000, but let’s say you need $50,000 because you want to renovate. Well, rather than having to break the term and pay legal fees and all this type of stuff, you’ll be able to now just borrow back up to the $400,000, or beyond. If your home is worth more now, based on how much they registered the mortgage for.

It sounds very convenient, but the reality is it’s also a form of golden handcuffs, because once you’re into that type of charge, you can only get out of it by paying off the mortgage and moving it to another institution and paying the legal fees to do so. It’s a way of locking you up with that institution.

Now to anybody that’s had a mortgage for longer than one term, they’ll know that first offer that the bank gives you at renewal is never that great. So if you’re thinking you’re going to move your mortgage or you’re going to shop your mortgage at the end of your five-year term, if you’ve taken the new collateral charges from TD or from other institutions like that, chances are you’re not going to be able to shop it without eating some legal fees in there.

So primarily, it’s a customer retention tool as well as it does, in fact, add value through ease of use and ease of future access to your funds. Myself, I’m not a fan of them, however.

For the Mortgage Centre, I’m Rowan Smith.

Lines of Credit – An Update On A Specialized Product

Friday, October 15th, 2010

Transcript of Video Blog:

Hey everybody. Rowan Smith from The Mortgage Centre. I want to talk today about lines of credit. It’s been a while since I’ve done a post on it. I get a lot of questions on it, people not understanding when a line of credit is possible and what kind of rate they can expect. So first off, when is a line of credit possible? Well, you have to have 20% equity in the property. CMHC does not allow to have people have an interest only portion of their mortgage, so lines of credit are interest only. Typically, prime plus one is the going rate, although your institution may offer you something better if you have a very large investment portfolio or a longstanding connection with them. Prime plus one is the baseline rate by which you should be judging any particularly offers you are receiving for a line of credit. If you’ve got a $500, 000 home and you have a $350, 000 mortgage, you can only have 80% financing, that’s conventional financing, if you’re going to want a line of credit. Now, in that case, that’s $400, 000. If you’ve got 350 and the max is 400, the maximum line of credit you’re going to be able to get is 500. Now, that’s a secured line of credit and secured line of credit rates. Your institution or any other institution can offer you unsecured lines of credit all they want. How big they’ll go is generally an indication of how aggressive their policy is or how much debt they think you can service with your taxable income.

To give you an example of how this plays into it, I had somebody who was looking to qualify for a $50, 000 line of credit but they needed $80, 000 so they went to two different banks and applied for a $30, 000 line of credit and were declined at both of them because unsecured $30, 000 is very large. For secured you can have three million dollar lines of credit if you have the equity in the property, but when it comes to an unsecured line of credit the banks generally have a cap. Anything over $10, 000 and they start wanting to see a lot more net worth, a lot more fall back position, meaning vehicles, meaning cash assets, stocks, RSPs, savings, and what not.

You say, “well, if I had the savings I wouldn’t need the line of credit”, but in most cases people need a line of credit as a contingency, not as the primary source of their funding. There are secured lines of credit with your mortgage, can’t exceed 80% of the value of your home based on the appraisal, not based on list prices of other properties in your area. There are unsecured lines of credit which banks can do whatever they heck they want as long as they believe you and believe your credit rating is strong enough and that your income can service it. If you want any clarification on this, please contact me.

I’m Rowan Smith from The Mortgage Centre.

How Credit Scores are Calculated

Wednesday, June 10th, 2009

On every mortgage application, one of the first questions we hear from the lender is: can you send me their credit score. More and more borrowers are becoming aware that the manner in which they have handled their bills, over the past 5 years, has a material impact on their terms and rates on mortgage financing today. Just because a debt that went bad due to a divorce was ultimately paid, the effect can be long lasting, embarassing, and detrimental to future credit applications.

A nice breakdown of how credit scores are calculated came across my desk today and I wanted to post it so that people can see how their score is establisehed (or harmed):

FACTORS                                    WEIGHT          POINTS
Past Payment History               35%                   315
Credit Utilization                        30%                   270
Length of Credit History           15%                   135
Types of Credit in Use              10%                    90

Inquiries                                        10%                   90
TOTAL                                          100%                 900

In Canada we refer to this as your “Beacon Score” but in the USA it is more common to hear it referred to as a “FICO Score”

So, what does this all mean?

Past Payment History: Well, this one is obvious. If you miss a payment, it will show up on your credit and will have a VERY detrimental effect. However, in order to qualify as a “missed” payment, you needn’t be a day or week late. You must be really late. You have be one full payment cycle late before it shows up. So, if your bill is due on the 15th of June, and you forget and don’t pay it until the end of June, it is likely not going to show up on your credit bureau. However, if you miss the June 15th payment, and then miss the next one on July 15th, it absolutely will show up!

Credit Utilization: This the percentage of available credit being used. However, the credit score is calculated by a dumb computer so it doesn’t really do this calculation well. For example, if you owe $450 on a visa with a $500 limit then to the computer that does the scoring, that means you are utilizing 90% of your available credit. This is a very high percentage, and your score will suffer for it. However, if you owe a $450 on a $5,000 visa, it will have a positive effect on your score as the computer will see you are using less than 10% of available credit (even though the amount owing is the same). So, how you allocate your debt is important. It is far better to spread it out over several accounts, than load up one card. Then again, if you pay it off every month in full, you never have to worry about this.

Length of Credit History: The longest that an item remains on your credit is 72 months or 6 years. Each “Trade Line” or account reports the number of months reporting, and the longer the better. This can be important because people may have a Sears card they forget about that has 72 months reporting of good usage (even though they never ues it) and they always say, “should I cancel it?” I wouldn’t. That long lasting, but still current, account has a very positive impact on your score that can help mitigate other areas you may not score as well on.

Types of Credit in Use: Certain types of credit are worse than others. For example, finance companies (Wells Fargo, Citibank, etc…) score low, whereas visa cards and revolving credit facilities score high. Also, the number of recently opened accounts has an impact.

Inquires: This is the most misunderstood portion of the bureau, but one that people guard jealously. The more “inquiries” (companies looking at your credit score) the lower your score. However, you can see this accounts for only 10% of the score. Also, the folks operating the credit bureau don’t want to hamper you from shopping around, so all applications done within a 7 day period (for a similar type of account – mortgage versus finance company, for example) count as 1. More will show up, but the impact on your score is minimal. Also, you are allowed to have inquiries! Just because an inquiry was on there, doesn’t mean your score is low. However, if you apply at TD for a visa, RBC for a loan, a finance company for a secured card, and then Hydro pulls your bureau as well, you can expect it to drop. How much? Even then, it might be a few points. If you score well in other areas, you shouldn’t even be given this a thought. However, if you are re-building your score, you should monitor this carefully.

SCORES AND INTERPRETATION:

Minimum = 300
(Lowest I’ve ever seen is 393)

Maximum = 900
(Highest I’ve ever seen is 826)

Average = 660
(More likely 660-680)

A good score = 680+

A great score = 700+

So that should give you a good primer on what scores mean, how it is calculated, and what you can do to preserve yours.

Your credit is like your reputation: it takes years to build, and only a couple stupid moves to tear it all down…

What is Credit? How to Repair it… Credit Repair

Wednesday, June 4th, 2008

Your credit is one of the most important things that a lender looks at when evaluating you and your application for a mortgage. To many people this is an unfair examination of factors that are often beyond your control. While this might be true, it is also true that some people manage to maintain perfect credit through all sorts of life’s obstacles. How do they do it? That is what this report is going to outline in specific detail. By the end of reading this report, you will have a detailed action plan that you can put into practice to begin to rebuild your credit immediately.

Note, this is not an overnight process. Building good credit takes times. Sadly, destroying it can be done virtually overnight. If you have already written an offer on a house and are trying to find a way to quickly shoot up your credit score, I’ll be honest with you: it isn’t possible. However, if you want to get your credit in shape so that in 6 months to a year from now you are well positioned to purchase a home and continue building a solid credit history, then you are the target audience for this brief write up.

WHAT IS A CREDIT ‘SCORE?’
There are really two elements to your credit. There is the score (called a ‘Beacon Score’ in Canada and a ‘FICO Score’ in the U.S.), and then there are the ‘Trade lines.’ Let’s address each in turn:

Beacon Score
Your Beacon Score or ‘Credit Score’ is the first thing that a lender looks at. It is a mathematically derived number that takes into account the number of accounts that you have, the length of time they have existed, the amount owing, the percentage of the credit limit being used, and any collections / judgments against you. The theoretically score ranges from 300 (low) to 900 (high). However, rarely are people below 480 unless they are in the midst of a financial crisis, and rarely are people above 820 just due to the way the formula works.

Most people with decent credit have a score of around 680. This is a solid score that gets you access to virtually EVERY lending program at full discounts.

There is NO fast way to boost your credit score. Each month, the different creditors you have report the current status of your loan / credit card / account. They report randomly and at varying days of the month. If you happen to be in arrears on the day they report, then you will show as a late payment even if it is only one day late! This system is in place to prevent people from manipulating the credit score. There is no one you can contact to boost it quickly, and there is no trick that will run it up fast. Credit, like a personal reputation, takes a lot of time and effort to build, but only a single mistake to harm.

Trade Lines
These are the individual accounts that you have. For example, if you have a card with MBNA Mastercard, the credit report shows the authorized limit, the amount of debt outstanding, your monthly payment, how long you have had the account, and if you have been late on payments at any time in the last 5 years. Five years! That is a long time that stuff will remain on your bureau. It will also show how many times you have been 30, 60, or 90 days late on your payments in the last 5 years.

Each account has a separate trade line that reports ALL of the above information. There are a few items that do not report to the credit bureau companies at this time. They are: mortgages on residential properties with a bank (credit unions DO report), loans in your business name, some auto or equipment lease companies, and some savings and loan companies.

How Do You View Your Credit
There are two credit reporting agencies in Canada and three in the United States. The most commonly used agency in Canada is Equifax. They can be found at www.equifax.ca and you can order a report instantly online for around $20. This is something that you should do periodically to make sure that nothing incorrect is reporting or that any errors are cleared up. Errors do occur! Not surprisingly, they are usually not in your favour. You can also get a copy of your credit bureau for free, once per year, by phoning Equifax and leaving a message (it is a hokey system but personal experience has shown that it does work).

Once you have your credit bureau, review it for inconsistencies. If you find that someone says you missed a payment but you think you did not, then the onus is on you to prove that you made the payment on time. Simply calling to complain is not only futile, it is not possible. If you have requested a copy of your bureau from Equifax, a number will appear on the report that you are to call for any corrections. This number is not a public number and it varies depending on what area you are living in. You can only get this number once you have gotten your credit bureau report sent to you.

Note: A lender will NOT accept a copy of the credit bureau that you give to them. They will insist that they pull their own copy directly from the credit bureau to avoid any possible fraud or manipulations (they DO occur frequently).

Inquiries and Credit Seeking

Most people are unaware that the more times people/companies look at your credit, the more it hurts you. The only exception to this rule is when YOU look at your bureau as this process does not have a derogatory effect.

Why? You may ask. Every time someone (a bank, credit card company, cell phone company, or anyone else) looks at your credit, it is recorded on your credit as to what date, and who pulled your credit to look at it. If a bank sees that you had our credit pulled at another bank, but doesn’t see a corresponding ‘trade line’ that shows what you got loaned to you, they wonder what happened. Did you get declined? Did you get the loan and it is not showing up? Are you trying to get the loan from multiple people? Are you in dire financial straights and need a loan? They don’t know for certain. The only thing that they do know is that you are seeking credit for one reason or another. As more and more and more people look at your bureau, not only does it look suspicious to the lenders, but it lowers your Beacon Score!!! Each inquiry doesn’t lower it by much, but when taken as a whole, 30 applications in a 3 month period of time can be very harmful to your credit and will raise all sorts of ‘red flags’ to the lender.

Some people make every payment on time, all their life, and then find out their credit score is low because of all the applications they put out there but never followed through on.

Does this situation sound familiar? You walk into a mall, or at a hockey game, and a young person approaches you with a ‘Free gift if you will apply for this mastercard.’ You think that there is no harm because you don’t really intend on taking the credit card, but you do intend on taking the gift. You walk away, and ignore all their mail and phone calls and think you have gotten something for nothing. What you don’t know is that they have pulled your credit and left their mark on it. Every loan you apply for, for at least the next two years, will now be influenced by that simple inquiry. Bottom line: don’t take the gift.

I Have Lots of Credit, Use it Well, but My Score is Low. Why?
There are a couple of other things that lower your score aside from credit seeking (or the appearance of credit seeking). The first one is having too many active accounts. Even if you manage them all well, the fact that you have 3 Visa cards, 4 Mastercards, 2 American Express cards, a car loan, boat loan, Sears card, etc… all combine to make it look like you could get into financial difficulty because you could run up your debt level. Having too much credit can result in lenders wanting you to close out some accounts before they will approve your mortgage and this leads to hassle and trouble later on.

Another thing that may lower your score is owing as much, more, or close to the authorized limit. For example, if you have a credit card with a limit of $5,000, and you owe $4,000 or more on that card, it will have a slightly harmful effect on your score because you are close to the limit and it appears you don’t have the funds to pay it off. If you are AT the limit, the effect is even stronger. If you are slightly over your limit, then the effect is very harsh. Even if you never miss a payment, but at the end of the month the interest is added to the card (and you apply for a mortgage before paying it down), the score will be lowered as it appears that you are exceeding the authorized limit. These rules may not appear fair, but it is the way that credit is calculated in Canada and there are no ways around it.

Ok, I Want to Fix My Credit Now. What Can I Do?
If you have had some troubles in the past, and you want to better your score for a future mortgage or home purchase, there are several things you can do to bolster your score. They are:

1. Do not apply for any other debt. Each inquiry hurts your score, remember?
2. Pay down your balances to below 50% of the authorized limit. The lower the better.
3. Do not miss any payments. Sounds simple? It is the most common reason for bad credit for obvious reasons
4. Keep your addresses on file updated with lenders if you move
5. Do not move around a lot as this looks dicey to lenders even if justified
6. Pay your parking and traffic violation tickets. They can end up at collections and ultimately on your credit which will lower your score substantially.
7. Clear up old debts and get it ‘in writing’ that it is paid in full. Keep this proof on file!!
8. Pull your credit once a year to review it and make sure it is up to date
9. Contact Equifax immediately if something is wrong and get proof in writing that it is fixed.
10. Close unused and unwanted / unneeded accounts

How Long Will It Take to Raise My Score?
Credit, like your personal reputation, is built up over time. Usually the credit bureau is behind by about 1 to 2 months. If it shows that you are in arrears on, say, your credit card, and you make a payment, it may not be reflected for 4 to 6 weeks. Credit is not instant, and you cannot make quick repairs. You can expect repairs to take 6 months to 2 years depending on how severe the credit problems were. There is no fast way to fix it other than continuing to use your accounts and continuing to pay them off in full as soon as you can.

What if I Have a Bankruptcy In My Past?
This is a complicated area of borrowing. You may still be eligible for fully discounted rates, even if you are a past bankrupt. Please request my other report: Past Bankruptcy for specific programs and advice pertaining to credit repair in this unique financial situation. Contact me directly if you are in this situation.