November 19, 2008
Uncategorized
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Unless you have been in a hole for the past two months I am sure that you have heard about or seen the results of the current financial markets. People who are retired are losing large amounts of their retirement savings. People who bought a house within the last few years are seeing the equity that they built up evaporate into nothingness. There have been big layoffs in the financial sector and maybe the manufacturing sectors will follow. Even China and India are seeing their growth rates decline.
Is the sky falling? No.
Many people throughout the course of history have managed to weather storms as bad if not worse than this one. In fact, there are hundreds of examples of smart and thoughtful people making their dreams come true at times like these.
So what can you do during this time to protect yourself and prepare to build for the future?
- Start thinking about your finances. Spend less than what you make and save the rest.
- Read good books on entrepreneurs. There are thousands of books to choose from. I have my favourites and would be glad to share them with you but for now just start reading.
- And lastly start to dream. Dream vividly. Dream often. We take actions on the things that are important to us. If our dreams are important to us we have the ability to make all of them come true.
I write this because I truly believe that many people will use this “crisis” as an opportunity to see their dreams come true. I sincerely hope you are one of them.
July 17, 2008
Uncategorized
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As I am sure you have heard the mortgage industry has recently had a couple of major changes.
- Forty year amortizations which are common are to be scaled back to 35 years.
- Where previously people with good credit could get a property with no down payment the will need at least 5% down payment.
So how does this really change things?
Lets take for example a couple who has a combined total income of $80,000 per year with great credit and no consumer debt. Under the old rules they would get approved for a mortgage of around $405,000. With these rule changes they would need to come up with a down payment of $21,000 and would get approved for a mortgage of $390,000. Thereby making the sale price of the house $411,000.
Now this sounds good to many realtors because the price of the property is greater, but the reality is that fewer buyers will be in the market place because it takes most households at least 3 years to save that much for the down payment.
Some pundits even state that this will exacerbate an already stagnating market place.
But once again the free market system seems to be coming through and some insurers may continue to allow 100% financing and maybe even 40 year amortizations.
The link below explains this more fully.
Bloomberg
I will be sure to keep you in the loop for how this all plays out over the coming weeks.
All the best
June 2, 2008
Mortgage Insurance, Uncategorized
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People don’t typically understand how the Mortgage Insurance Fee is calculated. This is too bad because it gives great insight into how lenders and insurers think, and can in- turn be helpful in other parts of the deal as well.
The fee is determined by the simple calculation noted below.
Fee = Premium rate X Mortgage Amount
We know what the mortgage amount is but how do they figure out the Premium Rate?
The premium rate is determined by two factors the Loan to Value and if you have decided to have an amortization that is greater than 25 years.
Loan to Value is calculated by the following calculation.
Property value – Down Payment = Loan to Value Ratio
Property value
So in the case of a house that is valued at $200,000 and the buyer has a $20,000 down payment then the loan to value is…
$200,000 - $20,000 = $180,000 = 0.9 = 90%
$200,000 $200,000
With a greater down payment that ratio reduces and with less of a down payment the ratio increases. The lender and insurer look at this ratio as one of the risk determinants. They believe that if the person has a greater down payment that it shows two things.
- First that they will have a greater incentive to make their payments because they have their own money tied to the property.
- Secondly that anyone that can save a large sum of money must be pretty good with their money and paying debts.
So the smaller the down payment the higher the premium and the larger the down payment the smaller the premium.
Extended amortizations are another factor that can affect the insurance premium. It used to be that the maximum amortization that was available was 25 years - so all insurance premiums were based upon the 25 year standard. Recently lenders have given the option of extended amortizations up to 40 years. By spreading the debt over an extra 15 years it reduces the monthly payments but it also increases the risk to the lender/insurer because the principle won’t be paid down as quickly. So they add to the premium for every five years that the amortization is extended beyond 25 years.
The system takes these two factors and comes up with the Premium Rate.
Please contact me.
April 23, 2008
News, Uncategorized
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Beltrame, Julian. The Canadian Press. April 22, 2008 <http://www.thechronicleherald.ca/Front/9006400.html>
OTTAWA - The Bank of Canada slashed interest rates by half a percentage point Tuesday amid worrying signs that the economic slowdown could be steeper and longer than previously thought.
It was second time in as many months that new bank governor Mark Carney has moved aggressively on interest rates, bringing down the key overnight rate to three per cent, one-and-a-half points below where it was at the start of December.
But in an unusual reaction, Canada’s chartered banks delayed for most of the day matching the central bank’s reduction, suggesting growing unease with the state of financial markets.
The Toronto-Dominion Bank was first to act, after 5 p.m. ET, announcing a 50 basis rate cut to its prime lending rate to 4.75 per cent, followed by the other four big Canadian banks.
“It’s a fair question to ask if monetary policy is losing its steam,” said Dale Orr, managing director of Global Insight Canada. He noted that the last time the bank cut the rate by 50 basis points on March 4, short-term lending rates dropped in response, but five-year, and 10-year bond rates actually went up.
The Canadian Real Estate Association offered further evidence consumers are not receiving the full benefits of monetary easing. The group said five-year conventional mortgages in Canada were 6.99 per cent prior to the central bank’s latest action, just slightly above where they stood a year ago.
“There’s a cost of funds issue that no doubt the banks have to wrestle with - the banks are reluctant to lend to each other because there’s a default risk,” TD Bank chief economist Don Drummond explained.
“We tend to think that the bank rate tends to set all the cost of funds, and it normally does, but it certainly hasn’t been doing that lately.”
In an explanatory statement of its action, the central bank did not mince words that its expectations for the economy have darkened and that it would probably need to cut rates at least once more to provide needed stimulus.
The bank said Canada is in for two relatively lean years and the economy would not fully recover until mid-2010.
“The bank is now projecting a deeper and more protracted slowdown in the U.S. economy,” it said in a statement.
“This has direct consequences for the Canadian economic outlook, with declining exports projected to exert a significant drag on growth in 2008.”
The Canadian dollar slumped almost three-quarters of a cent in reaction, but recovered most of those losses to close at 99.21 cents U.S., down 0.19 cents.
While some economists said the steep reduction was necessary, several questioned whether former governor David Dodge, who had praised the measured approach at his leave-taking in late January, would have reacted in similar fashion.
“It’s quite possible we may have had a different decision under David Dodge, but we’ll never know,” said BMO deputy chief economist Douglas Porter.
While avoiding using the word recession, the bank’s statement presented a gloomy picture of the global, U.S. and Canadian economies as they struggle to overcome the ongoing turmoil in financial markets caused by the U.S. subprime mortgage crisis.
The global economy has weakened, the bank said, and because of the slump in the U.S., Canadian exporters will find many of their traditional markets have dried up. But tight credit conditions and softening confidence will also slow down business investment and consumer spending, it added.
It projected growth at 1.4 per cent this year and 2.4 per cent next year, a significant downward revision from last January’s modest growth expectations of 1.8 per cent and 2.8 per cent. The economy will finally bounce back in 2010, it said, to record a 3.3 per cent rate of growth.
Still, that’s far from a recession. What will keep Canada’s economy above water, the bank said, is relatively strong domestic demand supported by high commodity prices, strong employment and stimulus provided by lower interest rates.
Porter said the bank’s stark language would justify such a deep cut, although he questioned whether the situation is as bleak as the central bank suggests.
“But given that Canadian inflation is so far below two per cent, the bank has the luxury of over-insuring the economy against downside risk,” he said. “They’ve taken out a huge insurance policy. Maybe they have too much insurance, but the upside risk on inflation is relatively mild at this point.”
The central bank said that the rate of price increases has been running at about 1.5 per cent in recent months and is expected to remain below its two per cent target throughout this year and next.
The bank’s next announcement for the target rate is scheduled for June 10, when many expect it will make its last adjustment this year by shaving the overnight rate to 2.75 per cent.