They have created a very clever combination of sales promotion tactics, and advertising messaging that has led to a flurry of inquiries, discussions, and media coverage of the lowest publicly advertised rate in Canadian history.  For this, I applaud BMO’s marketing team as they have created a buzz around mortgages, something very challenging to accomplish.  Mortgage brokers and bankers have been receiving a record number of inquiries about this ‘too good to be true’ mortgage product.  So, beneath the marketing, what is the ‘product’?

The product is a 5 year fixed ‘low rate mortgage’, where ‘low rate mortgage’ is the actual brand of the mortgage product.  It is not BMO’s regular 5 year fixed rate mortgage product.  According to BMO’s website, their regular 5 year mortgage is 4.09% (as of Jan 17 2012), which is significantly higher, so, what is the difference?

The BMO ‘low rate mortgage’ offers home-owners a trade-off between rate and flexibility. Here are some of the additional restrictions:

• Mortgage is fully closed and can only be paid off upon sale of your home
• Pre-payments have been reduced to a 10% lump sum pre-payment, and a 10% increase payment option
• Maximum amortization is 25 years
• The option to skip a mortgage payment or take advantage of the BMO cash account is not available
• The mortgage can only be refinanced or renewed early with BMO

So how could the restrictions affect you?  The most restrictive is clearly the fact that the mortgage can only be paid off with the sale of your home – essentially they have created a retention strategy by eliminating the opportunity for their clients to seek out other options.  Here are some general examples where you may want to pay off your mortgage before the end of your term: you receive an insurance payout and want to pay off your mortgage, you want to refinance but your credit slipped below the minimum score required by your bank so your only option is to move to another lender, or you want to refinance but your bank is not offering you a competitive rate so you want to switch institutions.

The ‘low rate mortgage’ is not for every Canadian.  Even BMO calls it a “no-frills mortgage”, which implies a ‘discount mortgage’, on the mortgage product comparison table on their website.  The fact is, when you’re comparing the ‘low rate mortgage’ to regular fixed rate products, you are comparing apples to oranges, not apples to apples.  What lesson can be learned here?  Don’t be blinded by the marketing – learn the facts, and consult your mortgage broker or banker who can help you determine if this product is the right fit for you.

Written by Doug Adlam
Professor of Marketing, University of Guelph
Branch manager, Champion Mortgage Inc.

Buying a new home, however, is different than buying a resale – and there are certain things to be aware of as you head into the commitment:
-    When buying a resale home, you’d typically sign a standard form of Agreement of Purchase and Sale. With a new build, there’s no such standard form. Most builders prepare their own agreements so it’s important that you read yours thoroughly – and have a lawyer look it over as well. Clarify as many details as possible.

-    When it comes to financing, many builders will offer you a deal through their financial institution – likely accompanied by a few incentives. It’s important to know that you don’t have to use the builder’s lender. Be sure to shop around – or utilize the services of a mortgage broker – to see if there are better rates to be had, or a better mortgage to suit your personal needs.

-    When acquiring financing, it’s also important to make sure that your lender’s mortgage commitment meets your specific time frames. A pre-sale home can take a long time to be built – the last thing you would want is for your lender’s mortgage commitment to expire before the actual closing date.

-     Read up on your builder before signing on the dotted line. If the company is notorious for extensive delays, broken promises or buildings that stray far from the written plan, you can likely find that information on the Internet.

For more information on acquiring financing for a new build, give us a call – or visit http://www.cmhc.ca/en/co/buho/buho_004.cfm.

The concept of Interest Rate Differential (IRD) is one that often comes up in these situations - and is currently in the news thanks to a single mom’s lawsuit against CIBC. The woman, who recently went through a divorce and was forced to break her mortgage, is suing CIBC for using vague language in her mortgage contract that is forcing her to pay the IRD - the amount of money the financial institution will lose in interest payments as a result of the broken contract. In this situation, it’s around $45,000 because she had eight years left on her mortgage.

The formula that banks use to calculate the IRD are among life’s great mysteries, and often differ between bank to bank, and whether you have a fixed or variable rate mortgage. If you’re signing a mortgage, it’s best to find out what your bank’s policy is upfront, just in case you may have to break it at some point. You may also want to pay a few extra points to ensure your mortgage is portable (can be moved to another home, if you choose to move during the term of the mortgage) or, if you’re not quite sure what the future might bring, sign on for a shorter term. There’s no rule that says you have to sign on for five years - and, in many cases, a lesser term makes more sense, and might even save you money.

The thing is, you will likely never take out a bigger loan than a mortgage - and the thought of spending the next 25 years paying it off can be daunting. Even if you implement accelerated payments, or take advantage of throwing a bit of extra cash towards your mortgage from time to time, it doesn’t seem to make a significant dent. It can be much more gratifying to turn to the stock market, GICs or other investment vehicles instead – but there’s also a lot more risk involved. For those of you still unconvinced, consider this:

There are a lot of things to save for in life - including retirement, vacations and emergencies. Add investing to the mix and you’re not left with a lot of extra cash at the end of the day. Simplifying your investment goals by paying off your mortgage first can open a lot of doors for you down the road. After all, once your mortgage is paid off, you can use the equity to tackle those other investment goals later  or qualify for a home equity line of credit to use as your “emergency savings”?.

Paying off your mortgage faster can be seen as a forced savings plan. Most mortgages allow you to pre-pay up to 20% annually. If you set your mortgage payment to that higher amount – or as high as you can afford – the funds will leave your account automatically, and you’ll save thousands in interest payments, not to mention shave years off the life of your mortgage.

Even if the housing market completely stalls and your home never increases in value (which is pretty unlikely), you’ll still have something to show for your investment in the end. In these uncertain times, you can’t really say the same for the stock market.

We’ll likely never see interest rates as low as these in our lifetime. Whether you have a variable rate mortgage or a fixed rate, why not take advantage of this moment in history and pay off as much principle as possible? When low interest rates are said and gone, won’t you be happy that you did?

Obviously it’s great to diversify – and no one is saying you shouldn’t invest elsewhere. But if cash flow is an issue, and you can’t afford to gamble your money away, paying off your mortgage as fast as possible might be an option for you.

While most people would assume RRSPs are the best route to go – especially given the marketing push they receive by financial institutions and advisers – they actually don’t give you the biggest bang for your buck if you factor in the amount they’re taxed after retirement. The research report revealed that, for lower income earners without dependents, RRSP investments are your best savings option if you’re renting, and don’t have a home that is generating equity. If you are a homeowner, it makes more sense to accelerate your mortgage payments rather than set aside 2% of your annual income in an RRSP because you’ll get twice the return.

If you’re in a higher income bracket, a combined RRSP and TFSA is the way to go if you’re planning on investing more than 10% of your annual income, rather than simply saving in one vehicle or the other, the report says. This is assuming you take the tax return from your RRSP investment and reinvest it in a TFSA. This lowers the tax rate after retirement because you’re splitting your savings between the two vehicles.

That being said, the CGA discovered that – regardless of your income bracket – accelerating your mortgage payments yields the highest returns compared to other savings options. However, every situation is different, and we’re not all text book cases. If you’re thinking about saving for retirement, make sure you thoroughly assess your options and determine which route makes the most sense for your particular circumstance.
To see the report in its entirety, visit the website here:
http://www.cga-canada.org/en-ca/ResearchReports/ca_rep_2011-11_planning_for_retirement.pdf

Whether you’re planning for Christmas, Hanukkah, a big New Year’s Eve party, a trip to visit family or friends, or a winter vacation, the time is now to get your finances in order to avoid debt and regrets that can lead to the holiday blues.

The season of gift-giving and fellowship too often creates the spirit of giving far beyond what you can realistically afford. But if you start now you can be holiday guilt- and debt-free for the New Year. Here are three tips to help you stay on track.

1. Create Expectations and Family Buy-In. You may have a magic budget number in mind, but unless everyone is willing to stick to it, then the target is useless. The key is to communicate with family members and begin planning now to avoid last-minute weaknesses and over-buying. Minimal lifestyle changes such as skipping dessert in a restaurant, packing a lunch, or renting fewer movies can help save money that can be earmarked for the holidays. Kids can contribute to a coin jar and learn about the value of saving as well.

2. Make a List & Definitely Check it Twice. Record everyone on your gift-giving list and be sure to check it twice. Set recommended amounts and then keep track of spending along the way. Recognize that over-spending in one area means that you must reduce costs in another – a notion that’s easier said than done when you’re in the throes of the holiday spirit. Check your list for necessities and consider changing the amount of a gift if your budget is looking tight. Remember that it really is the thought that counts!

3. Say No to Last-Minute Temptations. Stores know the temptation of exquisite decor displays and fabulous clothing that lead to impulse purchases and, with it, a case of buyer’s guilt later. Be strong and don’t give in. A pass on that $100 lush velvet skirt today may ultimately lead to a much happier and financially-fit spring season next year. A general guide: if it’s not on your “approved” list, then the answer is no. Exceptions can occur, of course, on last-minute party invites or occasions, but keep close watch on overall costs.

When hunting for the perfect house, never underestimate the valuable role friends and family can play. While you likely don’t want 17 members of your extended family trailing behind as you tour potential dream homes, they can be an incredible resource in locating said dream house.

If you are making an offer on a home and appliances are to be included, make sure to write down the make, model, and serial number of the appliance(s) and/or take pictures of them. It’ll come in handy to ensure that the item that is supposed to be there when you take possession of the home is the one that you saw when you made the offer. Also include that information in the offer to purchase so that everyone is aware of the details of what is to be left.

Look at a lot of houses, even ones that you aren’t interested in so you can get a feel for certain features. You can never really judge a house by simply looking at the listing information.

When buying your house, don’t think you can do all the renovations yourself and juggle everything else. I fell into that trap. We lived in a construction zone for six months until I ended up hiring a contractor to complete the rest of my work. While doing it yourself can save you a lot of money, it can add a lot of stress as well. Start with small projects before going onto the big ones!

Get a feel for the market in the area that you targeting. This can be easily accomplished in part by looking onto MLS. However MLS shows the asking price, not the final sale prices. They often differ. Are your expectations in line with your finances?

The first thing to look for when purchasing a small condo? An accompanying locker. This blog post from truecondos.com highlights the disconcerting trend of the disappearing locker space. As developers look for new ways to make more money from their condo projects, they’re cutting back on locker and parking spaces in favour of more units. Learning to live in less than 1000 square feet can be difficult enough - doing it without a place to store those winter coats and sporting equipment can lead to a very cluttered, and uncomfortable, existence.

Another way to avoid clutter in a small space is to invest a bit of time and money into establishing an effective organizational system. Multi-functional furniture, that either fills more than one purpose or features hidden storage compartments, can go a long way. Investing in racks and organizational systems to declutter those out-of-sight areas - such as closets and kitchen cupboards - can also greatly increase the space of your apartment. This video, from unclutter.com, showcases how implementing some boat-inspired storage techniques can make a sub-300 square foot space livable.

And lastly, if you’re looking to save a bit of a cash but city living isn’t for you, why not build one of these hobbit-like low-impact woodland homes? Not only are they cozy, but they’re easy on the environment as well!

Your best solution is to consult your mortgage professional or lender to determine whether your situation can be quickly repaired or if you face a longer road to credit recovery. Either way, there are solutions to every problem.

Mortgage professionals who are experts in the credit repair niche can help credit challenged clients improve their situations via a number of routes. And if the situation is beyond the expertise of a mortgage professional, they can help you get in touch with other professionals, including credit counsellors and bankruptcy trustees.

Following are five steps you can use to help attain a speedy credit score boost:

1) Pay down credit cards. The number one way to increase your credit score is to pay down your credit cards. Revolving credit like credit cards seems to have a more significant impact on credit scores than car loans, lines of credit, and so on.

2) Limit the use of credit cards. Racking up a large amount and then paying it off in monthly instalments can hurt your credit score. If there is a balance at the end of the month, this affects your score – credit formulas don’t take into account the fact that you may have paid the balance off the next month.

3) Check credit limits. If your lender is slower at reporting monthly transactions, this can have a significant impact on how other lenders may view your file. Ensure everything’s up to date as old bills that have been paid can come back to haunt you.  Some financial institutions don’t even report your maximum limits. As such, the credit bureau is left to only use the balance that’s on hand. The problem is, if you consistently charge the same amount each month – say $1,000 to $1,500 – it may appear to the credit-scoring agencies that you’re regularly maxing out your cards.  The best bet is to pay your balances down or off before your statement periods close.

4) Keep old cards. Older credit is better credit. If you stop using older credit cards, the issuers may stop updating your accounts. As such, the cards can lose their weight in the credit formula and, therefore, may not be as valuable – even though you have had the cards for a long time. You should use these cards periodically and then pay them off.

5) Don’t let mistakes build up. You should always dispute any mistakes or situations that may harm your score. If, for instance, a cell phone bill is incorrect and the company will not amend it, you can dispute this by making the credit bureau aware of the situation.

According to TD Canada Trust’s First Time Homebuyers report, 91% of first-time buyers were pre-approved for a mortgage before house shopping in 2010, and that number fell to 76% in 2011.

There’s no real reason why less home buyers should be taking advantage of the opportunity to get pre-approved for a mortgage – especially if you’re dealing with a mortgage broker. With one glance into your credit score, we can use the information to see which lenders are willing to approve you for a mortgage, at what rate and for how much.

While this approval isn’t etched in stone – the lender will still want to see proof of income and other personal details upon approval, and if you’re putting less than 20% down, your mortgage insurer (i.e. CMHC or  Genworth) will also have a final say – it nevertheless gives you a good picture of what type of funds are available to you, and at what rate.

Not only does this help you put a more accurate budget together – and ensure your house hunting endeavors fall within your allotted price range – but, in many cases, it also allows you to secure the best available rate. Most lenders will hold their best rate for you for 90 days (and sometimes 120 days) upon preapproval. If you don’t find a home within that time (or if you just haven’t had a chance to start looking) you can obtain another preapproval hassle-free.

For the amount of effort it takes to call up your mortgage broker and obtain a preapproval (which is close to zero), it’s definitely worth the added convenience. In many cases, we can do the legwork online, and have it turned around within a business day or less.