New Mortgage Rules Mean Less House or Less Choice for Mortgage Terms
Canada Mortgage and Housing Corporation has announced that as of April 19th home buyers will have to qualify for their mortgages at the bank’s posted 5 year rates if you are putting less than 20% down and are taking a variable rate mortgage or a term of less than 5 years. This is being done to ensure that people do not over extend themselves and end up losing their home in the future because they are forced to renew their mortgage at a higher rate. What does this mean to home buyers? You will now qualify for less of a mortgage than before or you are stuck with a five year mortgage term.
For example if the maximum amount you qualify for with a 3 year rate of 3.49% is $350K you will now only qualify for $273,674 because you have to qualify at the 5 year posted rate of 5.39%. Your interest rate will still be 3.49% but you qualify for over 20% less of a mortgage because of the new rules.
How will this effect you? What do you think it will do to real estate prices in general?
RRSP Season
We are just into February and I am sure you are being bombarded with advertising about RRSPs. I received my Money Sense magazine earlier in the week and I wanted to share a portion of the article about RRSPs.
Q. I have a pension. Do I need an RRSP too?
A. For most people the answer is yes – although if you have a good pension at work you can certainly contribute less to your RRSP than someone without one. With no pension, you can contribute up to 18% of your income to an RRSP each year. If you have a private pension, then the amount you are allowed to contribute to your RRSP will be reduced, to reflect the fact that you are also contributing to your retirement 
income through your pension at work.
There is one group that doesn’t need RRSPs at all: government workers. Teachers, police officers and other civil servants have among the best pension plans available and won’t need help from RRSPs to retire comfortably. For instance a couple who are both government workers can expect to enjoy a combined annual pension income of at least $50,000 with is roughly the kind of income that a million dollar portfolio would generate
Q Which should I contribute to first: my mortgage or my RRSP?
A. Financial planners have debated it for years, but from a pure dollars-and-cents perspective the correct answer is usually to pay your mortgage down first. Every time you make an extra mortgage payment you reduce the amount owed on the principal. If you mortgage interest rate is 5%, paying it off faster is like getting a guaranteed 5% return. yes, you can get a better return than that in the stock market (if you’re lucky), but it’s no guaranteed. So unless you can find GICs that pay 5% you may want to attack the mortgage first.
I want to add a couple of comments to these points. If you are carrying a balance on any high interest debts such as credit cards or loans you are better off paying them before your RRSP and mortgage. Those who are involved in a group RRSP plan where your employer matches your contributions should contribute to these plans before making additional mortgage payments.
What do you plan to do this year, pay down your mortgage or contribute to your RRSP?
Mortgage Questions & Answers
Since I began my blog in June 09 I have spent some time in different forums reading, learning, and answering questions, specifically in relation to mortgages and the calculations involved in comparing different scenarios. I have learned that very few people, including some experts do mortgage calculations properly. While I am confident that errors are occurring due to minor oversights or assumptions they have the potential to cost you hundreds, if not thousands of dollars. In the past, I have provided accurate information to people to be helpful, because I enjoy working with numbers and saving people money. It has recently occurred to me that my responses can be time consuming and of value to people.
If you have a question about the $$$ savings you may experience by refinancing your mortgage for a lower rate, consolidating debt or are comparing different offers from lenders please feel free to email me at mortgagemath@debtfreeby43.com . You will receive a reply within 48 hours. Your email address will only be used to reply to your question and will not be added to any mailing lists now or in the future!
I have set up this email address to send an auto response that will include a link to make a donation to Debt Free by 43. Although a donation is required to have your question answered there is no minimum donation. Simply donate what you feel an answer to your question is worth. It is that easy!
I won’t get rich, but it is my hope that I can generate some cash every month to take my better half out for a nice dinner. That may decrease the number of times she refers to herself as an “Excel widow.” I do love working with the numbers. If you need some help please feel free to email me at the address above. I appreciate your continued support.
Mortgage Renewal Time
A couple of months before your current mortgage contract is about to expire your bank will send you a renewal letter. The rates on this letter are not likely the best that your bank or another lender can offer you for renewal. Why wouldn’t your bank offer you the best rate? Your bank is a business and like any other business they want to make money, lots of money to pay for their skyscrapers.
The CAAMP current Annual State of the Residential Mortgage Market in Canada report shows that 88% of consumers renew their mortgages with their current bank. Let’s look at this from a business perspective.
You are the CEO and you know there is an 88% chance that your customer will renew with you so you send out a renewal letter with your 5 year posted rate on it at 5.49% A small percentage of your customers accept this rate without question and you have just locked in some huge profits.
A greater percentage of your customers call and ask why they were not offered the special rate of 4.19% advertised on your website. Your customer service representative’s simple response is, “Those rates are for new customers, but I can also offer it to you.” Your customer accepts that response and is happy with their rate. You have still not given your customer the best rate you can, but have locked in some more profit.
A few of your customers will still not be satisfied and will call and state that they have seen the rate of 3.99% offered on many mortgage brokers’ web pages. You may or may not meet this rate for various reasons.
Let’s look at the effect of this on your customers based on renewing a $200,000 mortgage with a 20 year amortization period. The following are the rates, monthly payments and the outstanding balance after your new 5 year term.
Rate: 5.49% Monthly PMT: $1542.52 Balance: $222,936
Rate: 4.19% Monthly PMT: $1340.93 Balance: $218,349
Rate: 3.99% Monthly PMT: $1313.70 Balance: $217,597
Of the 88% that renew with you 15% accept the posted rate, 60% are happy with your current special rate and 13% push for the rate they have found posted elsewhere. You have still retained 88% of your customers and compared to the rate of 3.99% that you could have offered all of your customers you have locked an average profit of over $5,000 per mortgage over 5 years. Multiply that by 750,000 customers and you have some big profits making shareholders very happy.
What are your experiences with mortgage renewals?
Disclaimer: The rates compared are hypothetical but reasonable based on current rates posted on the internet. The writer’s opinion is not necessarily the opinion of a bank’s CEO or any other bank employee.
Renewing Your Mortgage
A 2008 CAAMP (Canadian Association of Accredited Mortgage Professionals) survey reveals that 86% of people renew their mortgage with their current lender. With this statistic available it is no wonder that banks do not offer the best rates available when it is time to have your mortgage renewed. Why would they when they know very few people will switch to another lender? If a customer calls phones to negotiate a better rate all the banks needs to do it lower their initial rate by a little bit and the customer is happy.
Currently one of the big banks has a special 5 year rate of 4.44% available. That is a full quarter of a percentage over what can easily be found on any mortgage broker’s website. Let’s compare renewing a $250K mortgage taking the banks initial offer to getting 4.19% elsewhere. The numbers are based on a remaining amortization period of 25 years at 4.44% I will be adjusting the amortization period on the mortgage with the rate of 4.19% to ensure monthly are the same.
4.44% over 5 years – Monthly Payments: $1375.36 Balance at the end of the 5 year term: $219,272
4.19% over 5 years – Monthly Payments: $1375.36 Balance at the end of the 5 year term: $216,058
It will cost you $3,215 if you just sign your renewal without asking for a better rate or moving your mortgage. Make that phone call or shop around. You may find that there are no fees involved when you move your mortgage or refinance at the end of your term. Take advantage of this and consolidate your debt at this time, you will save money.
Canada’s outstanding mortgage debt at the end of year in 2007 was $821.4 billion. If this rate differential is applied to the entire mortgage debt the difference is just over $2 billion a year. This is money out of the hand’s of Canadian families and into the hands of lenders.
Simply incredible!