One thing to bolster this motive to increase rates is the latest employment numbers. During the months of March and April this year, Canada experienced the best two-month employment gain in thirty years. To make this number even stronger is the fact that the most of these jobs were full-time jobs in the private sector. This also shows that business confidence of employers is increasing across the country.

With the job gains, the bond market has built in a 100% probability that the Bank of Canada will increase rates by the end of the year. But not everyone agrees with this statement. This is for several reasons including the fact that we have had a long period of weak job growth prior to these past couple of months, income growth is still lagging, and GDP growth among other things is relatively off course.

A key point that Carney makes is that by keeping interest rates low it will fuel our appetite for debt, albeit that number has been softening lately over the short term according to a recent report by CIBC and discussed in my previous newsletter.

If we see a downturn in Europe, with Greece and Spain being the main culprits, we could see a fragile recovery around the world, and many global economies just aren’t strong enough just yet to be able to pull out of another blow. When everything collapsed in 2008 countries every started spewing out money to ease the pain. If something happens now, they won’t be able to spend their way out of it.

Another factor to undermine our efforts moving forward is our housing market, which some have calculated to be at the brink of a bubble. But on the other hand, you have the head of RBC, Gordon Nixon, saying that there’s just too much media hype and we’re actually not that close to a bust just yet. In many cases, these ‘bubbles’ are isolated in certain geographic areas like Toronto and Vancouver.

Bear in mind that in the spring of 2011, Mark Carney also indicated that rates should begin rising late summer/early fall of 2011. But given the economic uncertainty around the globe, this didn’t come to fruition. This time around is much the same. There is so much political and economic uncertainly in Europe right now that we can’t discount the fact that this may come in to play again, leaving us hanging in there for the time being.

When will we see a rate hike? It’s hard to tell just yet, but I feel like we need some stronger fundamental numbers before we start pulling away from the pack.

You might be in the midst of a Consumer Proposal, but there may be a way to shorten the time required to pay it out and begin building your credit again. We are able to offer mortgages to those who are in a Consumer Proposal and have paid as agreed for a 1 year term.

The Mortgage will allow clients to refinance their home (provided they have equity) and pay out the remaining Consumer Proposal. The greater benefit is that the new mortgage would report to the credit bureau and aide in the restoration of a clean Beacon Score.

Instead of taking 3 or 5 years to pay a Consumer Proposal in full, the time could be reduced to just 1 year. While the interest rate is higher than a traditional mortgage, the rebuilding of credit and completion of the Consumer Proposal is offset by leaving the Proposal behind and having a fresh start. At the end of this mortgage, a client should have clean credit and be able to apply for a competitive mortgage through a national lender without higher rates or the possibility of being declined for financing.

If you are in this situation, please contact us today and find out if we can assist you!

I was talking to one of my friends the other day, and he told me an interesting story about what happened to him while he was at home having lunch the other day. He got a telephone call from someone, and on the other end, the gal told him: “Did you know you can get a 4% Cash Back on your mortgage, just by transferring your mortgage to our bank?” So, like most of us with a curious nature, this piqued his interest and he started asking her some questions.

By the time it was all over, between the telephone call and emails back and forth, he was a bit more wiser for it. In his case, his mortgage is about $400,000.00 and with the 4% cash back, he could get about $16,000.00. At first he told me this sounded really good, and he began to think of all of the things that he could do with $16,000 (down payment towards a new car, a trip or finally getting that “man care” he’s always wanted). Unfortunately, however, after he found out how much it would cost to break the mortgage (about $13,000), this kind of shattered his dream. But, he thought, he would still have $3,000 left over, but there were legal fees and some other costs to register the new mortgage, but he would still have some money left over. Then he found out about the new rate, which unfortunately, was not the best rate that they were advertising. The gal mentioned that this best rate is only for mortgages without the cash back option. In addition, this lender had a “claw back” clause in the mortgage, but instead of this being pro-rated, this lender required that all of the cash back be paid back in full no matter when the mortgage was paid out. So what happens if you have to sell prematurely and pay out the mortgage for any reason? Well, unfortunately, “you’re between a rock and a hard place”. So am I saying that all “cash back” mortgages are not feasible? Absolutely not, there are certainly times that they are a great product and may in fact be the perfect fit for you. For example, let’s say that you are a first time home buyer or someone who’s got a great job, but unfortunately, just hasn’t managed to save up the 5% for the down payment. In your case, do you have stellar credit and virtually no debt to speak of, you really want to own your own place, and are confident that you can make the payments but lack the down payment? Well, for you this may be an excellent option. Or let’s say that you’ve basically got the 5% saved up, but have a couple of other nagging debts you would like to clear up, as you really don’t want a lot of other payments on top of the mortgage. Well, once again the cash back may be an excellent option. You could use it to pay off your other debts so you only have the mortgage payment to contend with, and this will go a long way towards helping with your cash flow. Or you may be someone who needs to purchase a few new appliances for your new place, it may come unfurnished or may need some other repairs that just can’t wait; once again, this may be the right choice for you.

The bottom line is that with our ever changing world, there are more and more options out there when it comes to mortgages. That is why it’s so important to do your homework and research the various options, and that’s where we come in. At Auxilium Mortgage, we are here to help. We know that you have busy lives and that’s why we do the “leg work”, exploring the various options and then presenting them to you. Our team’s primary goal is your financial well-being, and ensuring that the products and services you get are the ones that are right for you!

Minister Flaherty Gets It Right

Last month in April, Finance Minister Jim Flaherty stated during a speech, “I’ve tightened up the mortgage insurance market three times… I really don’t want to do it again.” This was in direct response to Canadian Banks and Financial Institutions who have been repeatedly hounding him to further tighten up on the mortgage lending criteria. “Why aren’t the Banks tightening up their own mortgage lending criteria?”, he quipped. “They have the ability to change their own lending criteria.”, he remarked. I’m in agreement with the Minister. At the end of the day, the bank CEO’s and executives are the ones who need to run their own affairs, and govern their banks the way they see fit. If they really feel that the rules are too lax and need tweaking, they should change them, for at the end of the day they are accountable to their employees, shareholders and clients for running a bank with sound business practices. Quite honestly, if these CEO’s don’t feel it is currently with the rules that exist, then why wait for the government to fix something tomorrow that is broken today?

But when clients are looking to their broker to arrange their mortgage, their biggest concern is the rate that the broker can offer. Sure, a great rate is a bonus, but ultimately, that cheaper rate may cost the client thousands more in the long run.

When you factor in many external influences like the American economy, the U.S. Presidential election, and the ongoing crisis in Europe, it’s hard to get the same answer from everyone across the board when questioned about interest rate movement. This insecurity seems to be guiding clients to fixed rate mortgages over variable mortgages. Better still, many clients are looking at a ten year rate for added stability. Given the spread between variable rate products and fixed rate products, the minimal discounts offered on a variable, and the fact that rates have nowhere to go but up, a fixed rate mortgage never looked better.

So why isn’t everyone taking a ten year rate if it’s so good? Great question. The interest rate is not always the biggest concern for a client. Obviously, a ten year rate is a big commitment and not to be taken lightly. It’s impossible to see into the future, but if you do see yourself staying in that home for 10 years or more then it’s something to consider. Sure, most are portable or assumable, but that may not always work out, either. What many fail to acknowledge is that the penalty in the first five years is the higher of a) three months interest payments, or b) the IRD calculation, which is usually pretty hefty. However, after the five year mark, the client is only charged with a three months interest penalty. In reality, with a ten year mortgage you’re actually only going to be hit with a big penalty during the first five years. Afterwards, you’re just looking at the same penalty that you’d face with a variable mortgage.

For anyone that is considering the pros and cons of a long term or short term mortgage, they need to ask themselves will they be looking to refinance in the next couple of years, or can they accept a higher payment upon renewal in five years or less. Also, questions like job stability and ability to pay of their mortgage as quick as possible come in to place.

No doubt it’s a tough call to forecast where rates are going to be in both the short term and the long term; but I guess that’s the daily life of an economist and it’s not easy. One can only plan and make assumptions based on those plans, and choose a mortgage product that corresponds with how they think their life and the economy will play out.

1. What are some of the benefits of owning an income property? What are some of the drawbacks?

I like this idea. It’s a great way to accumulate wealth at reduced cost and risk. You are building an asset over time, while servicing the associated debtload and operating costs from rental income.

It’s very important to choose the property wisely. Talk to people who are doing it already, learn what works and what does not, and consult knowledgeable realtors to select home type and location.

You need to select and maintain your tenants with great care. A good tenant is worth their weight in gold. Unfortunately, many investors have had negative experiences where their investment properties are in disrepair when the tenants move out.

You are not guaranteed a monthly income from the property – if the rental market slows down, or just for the times when you are in between tenants, you will have to cover the operating costs from elsewhere. Unlike your principal residence, where any gains upon sale of the home are tax free, an income property can trigger taxable capital gains upon disposition.

Also, in recent months, many mortgage lenders have turned a cold shoulder towards investment properties – in some cases, it may now be easier to qualify for a mortgage on a rental property as a first time buyer, than as a homeowner who wishes to invest in additional real estate.

2. Are there any common characteristics of people who own income properties? For example, perhaps they have a willingness to take risk.

I’m not sure they have a greater risk tolerance – arguably it’s less risky than simply owning outright. In my experience, investors in income properties have a certain hunger for maximizing their dollar, and they work harder than others in looking for ways to make more money from their limited resources.

3. For people who are looking into purchasing an income property, what sort of financial situation should they be in (and what sort of resources should they have at their disposal)?

Unlike buying a principal residence, mortgage lending guidelines are tougher when you are buying a pure income property. You can forget about 5% down – normally you’ll need at least a 20% downpayment. And your income from all sources must be able to service not only the rent-adjusted mortgage on the income property, but also your existing home costs and any other debts you may be servicing.

Many investor/homeowners take out a home equity line of credit on their principal residence, and use that money to come up with the down payment on their income property.

That said, some people who do not already own a home may buy an income property for as little as 5% down if they choose to live in it too. Example, maybe they will live in the basement and rent out the upper floor or vice versa. Then it’s quite possible the lenders would look at this as a straight home purchase.

As long as they have their downpayment and closing costs and some contingency funds on hand these resources should be sufficient.

4. Is this a position many (or some) first-time homebuyers would find themselves in? Why or why not?

In my experience, not many first time homebuyers do this – the desire to live in and own their own home seems to outweigh the practical financial advantages. If you are a first time homebuyer and you do this, you may be giving up privacy and your perceived independence.

Having said that, I know several of my clients who have done this in one way or the other, and in each case it has worked out very well. I see it more often with single people than couples and families.

For some buyers, it might be the only way they qualify for a home purchase, since many mortgage lenders will allow you to include a percentage of the rental income in your income – thus qualifying them for a mortgage when their salary alone is not enough.

I have one client who bought a four bedroom home in Richmond Hill five years ago as a first time buyer, and rented out three bedrooms and the basement. She lives there rent free, and she has converted equity of $30,000 into $250,000 over this period of time.

Another client bought a triplex in Waterloo four years ago, and she lives in one of the units rent free, while renting out the remainder of the house to students. Her gain is over $100,000 so far.

It’s just as true if you have recently paid off your bad debts some other way – like through a debt management plan or a consolidation loan.

So many people vow to live without credit after one of these harrowing life events, and that is a big mistake. Or they never get around to doing it properly. Maybe they apply to Capital One and are granted a $300 secured credit card, and they heave a sigh of relief. Well that’s a start, but it’s not nearly enough.

Why you should rebuild your credit score

In this day and age, you cannot avoid the need for a healthy credit history. Landlords request permission to access your credit report. If you are buying or leasing a car, they will check your credit. If you wish to sign a cell phone contract, or if you need a mortgage, your credit report will loom large. Some employers even insist on seeing your credit history before issuing an offer of employment.

Surely it’s a lost cause?

No that is not true. Yes, time is your friend – the more space between you and your bad debts, the better your report will look. In fact, in Ontario, three years after completing your consumer proposal, the fact you were even in one will drop off your report. And in the case of a bankruptcy, it will take six years.

But what matters now is “what have you done lately?” Are you a reformed citizen? Have you accessed credit since the bankruptcy and have you demonstrated an ability to service and repay the new debt each month?

Your score will begin to increase within a few months of accessing new credit. And within a year or two, you will actually have a reasonable chance to secure a mortgage or arrange a car loan at less than disgusting interest rates.

However, it is very unlikely any creditor will grant you unsecured credit of any magnitude until the bad information has completely disappeared from your credit report.
How to rebuild your credit score

In a perfect world, you need at least two new active trade lines – credit facilities that have been arranged since your bankruptcy or proposal. If you had a car lease or loan during the entire process, that may count as one. Same with a student loan.

If you had a mortgage during the process, only a few lenders actually report your payment history to the credit bureaus – so you should not assume this will count as one. (Home Equity Lines of Credit are reported in most cases; traditional mortgages are not – Scotiabank being a notable exception.)

Try to arrange two credit cards from major chartered banks. The bank you deal with on a daily basis may even give you an unsecured card – the limit will likely be only $500 to $1,000. But regardless, this is so important that I suggest you offer up a security deposit for these new cards. Don’t ask any bank that was included in your original debt load – they will be less welcoming.

In a perfect world, these two new cards would ultimately have a credit limit of at least $2,000. But just do the best you can to get started. It’s better to have two $500 cards, than one for $1,000. Later you can offer to increase the security deposit (and the associated credit limit) when you feel more power.

If your circumstances are such that even this door is closed to you, then yes try Capital One, Home Trust, or Peoples Trust. Stay away from reloadable or prepaid credit cards – they will do nothing for your credit score.

Some people arrange one new credit card, and perhaps a small loan from their bank too. It could be an RRSP loan, or a car loan, or it may even be secured against your own money – like a one year GIC say. Pay the loan off as quick as you can (6 to 12 months) and this too will help rebuild your credit.

Retail store credit cards are better than nothing – but not much – don’t go overboard on these.

When can I start this?

Most advisers will tell you to wait until you receive your discharge from bankruptcy or at least six months into your consumer proposal. But I would suggest you start even sooner – the sooner the better. Of course, you should (you must) disclose to the new credit card issuer your present state, but you can honestly tell them you are working overtime to reform and part of your reformation is to rebuild your credit history as quickly as possible.

You can go to www.transunion.ca and order your credit report online – you create a profile a username and a password – store that info somewhere you will use it for life.

Related articles:

The original article I wrote for my website has several related articles to help the reader understand more about this subject. Click here and you will find these links at the bottom of the post.

Today I received an email from a successful thirty something woman who wants to get married and settle down in a new house.

Hi Ross :

I finally got my credit report and its not too good. Credit score is 553. Now, ROGERS and TD have been paid. However, I went to TD to try and get another credit card (to which I was denied) and they told me they saw an outstanding bill from CRA. I have just paid that off too. So all in all I should be in the clear and en route to “decent” credit. I also was able to obtain a credit card with a small limit of $300.

How long do you think before I can get a mortgage? Also, my dad is willing to co-sign for me. I really want to be in a home by October if possible.

I look forward to hearing any suggestions that you have. Thanks, Sammie.

Hi Sammie:

Unfortunately, in my opinion you are quite a ways from qualifying for an ‘A type’ mortgage – a year, more like two. However, as I recall, your income is good – I don’t know if you have saved up a DP yet – that is important.

By October this year, on your own you maybe able to qualify for a ‘B’ mortgage – meaning a higher interest rate, one time lender fees, and a downpayment of 20 to 25% .

Example 4.99% for one year, and a lender fee of 1% of the mortgage amount.

Bringing your dad into the picture may help – but total due diligence would need to be done on his personal finances and credit history – and if he is already servicing a mortgage and other debt, it may not help.

So best thing to do would be to talk and provide me with information about your dad’s finances – and also helpful if he could first access his own credit report at Equifax.

For rebuilding your own credit – I’d like to see two cards with limits of at least $1,000 – ideally $2,000 – and not from Capital One – but rather from major chartered banks.

Realistically, you can get these only by offering security deposits of a like amount and maintaining a banking relationship with each of those banks.

Best, Ross

Related articles

http://askross.ca/2012/04/lady-with-bad-credit-now-wants-a-mortgage-not-so-fast/

The Bank of Canada forecasts that our economy will grow by 2.4% this year but downgraded its forecast for 2013 to 2.4% from 2.8%. The extra growth this year will close the output gap (basically what we are capable of producing compared to what we actually produce) and warrant the removal of stimulus, in the way of increasing interest rates.

But this is not to say things can’t change. If you can remember, this time last year everyone was touting higher rates by mid to late summer or early fall, but then when the time came, these same people were questioning whether the Bank of Canada would have to decrease rates. There are still a few things dogging those at the Bank of Canada, primarily the ability of Europe to emerge from this recession later this year, higher commodity prices, and the biggest domestic risk, increasing levels of household debts.

This tends to lead everyone to two major questions: when and how much?

The thing is, is that if they plan on increasing rates, it will be a slow, step-wise process. If they start later in the year they may increase rates once or twice and then hold off to allow everyone to adjust and to re-evaluate the economic situation both at home and around the globe. They need to continuously monitor what’s going on with the US and Europe, as well as how our market responds to higher interest rates, especially with home values skyrocketing and household finances stretched to the max. The Bank of Canada also has to keep in line with the US and not move ahead too much, too fast while the Federal Reserve is on hold.

And even though these rates directly impact variable rate mortgages, it does have an indirect impact on fixed rates as the bond market reacts to news about rates and fiscal policy. When the government throws around rate hikes, the market takes this into consideration and in turn bond yields tend to bump up a little.

So it will be interesting to see what shapes up over the short term regarding economic improvement around the globe, and consequently, the steps that the Bank of Canada will take to ensure we remain afloat.