Financial Update - Talking to BMO

One on one with BMO economist John Turner

By CMP | Wednesday, 30 September 2009

Some economists are claiming the worst of the recession is behind us. BMO expert John Turner recently spoke with CMP's sister publication, CRE, about what this could mean for the real estate market and interest rates going forward.

There have been whispers that we may be nearing the end of the recession. Can you comment on this?

John Turner: According to BMO's Economics Department, the whispers are turning to shouts. Canadian consumer spending has turned upwards, while the housing market has seen an astonishingly fast recovery. Financial conditions are much improved and confidence is on the mend. BMO Economics estimates that Canada's recession ended in the third quarter, following three consecutive quarterly contractions. Aggressive monetary stimulus and hefty fiscal spending appear to have turned the economy around a little sooner than previously thought.

Do you think the Bank of Canada, by making the announcement on July 23, 2009 that the recession is over, is preparing Canadians for a rate increase (even though it said it wouldn't for 12 months)?

JT: BMO's economists think not. They think the Bank truly believes it won't need to raise rates until mid-2010. The recovery, at least initially, is expected to be soft due to weak U.S. demand. The unemployment rate is expected to climb moderately further, and inflation should remain below target for a couple of years until the slack is absorbed.

It was recently reported that home sales have jumped 40 per cent between January and May 2009. Aside from low interest rates, what other factors could have contributed to buyers getting off the fence and purchasing?

JT: There are a number of contributing factors, including pent-up demand accumulated during last year's downturn, the federal government's tax credit incentive for first-time home buyers, a growing sense that the worst of the global economic crisis is behind us and the government's insured mortgage purchase program which kept the credit taps flowing.

Of course, with interest rates being relatively low, this means lower mortgage payments for both first-time homebuyers as well as others. In some areas, prices have been holding steady and/or decreasing with recent market compression; this has led to better access to homeownership, which is a great investment. Everyone needs a place to live, and buying a home not only fulfils that need but also acts as an important component of a wealth accumulation strategy.

How might the forecasted increase in housing starts affect the real estate market from a buyer's perspective?

JT: BMO's economists expect housing starts to trend higher as the economy recovers, but remain soft for a while as a result of some overbuilding during the previous boom. The rising starts will help to keep the market balanced, since it now risks shifting back to a sellers' market if demand remains strong. The current four-month supply of resale listings is in line with, if somewhat below, historic norms.

The age old debate of fixed vs. variable is alive now more than ever. What should buyers take into consideration when deciding?

JT: It all depends on what the buyer is comfortable with and what they're looking for. Fixed rate mortgages are great for Canadians who are concerned about upward pressure on rates and who are looking for peace mind. With a fixed rate mortgage they get the peace of mind of knowing what their payments are going to be and how much of their mortgage they will have paid down at the end of their term.

On the other hand, variable rate mortgages - when taken over the long-term - have proven to be a winning strategy for Canadians over the last 25 years. Each buyer's circumstances are different and we invite Canadians to speak to a BMO Bank of Montreal mortgage specialist for the best individual advice.

For the rest of the interview, see October's issue of CRE, on newstands now.

Insurance = Lifesavor

Mortgage Life Insurance is a form of protection that will pay off the balance of your mortgage should you or your partner happen to pass away, leaving the other with the remaining mortgage balance to pay down on their own. However, adding on yet another cost when you already feel as though you may be stretched to the limit with your monthly mortgage payments make it fairly undesirable to obtain for most people.

One of the main benefits to this type of insurance is that if it is tied to your mortgage and not to your bank, you are free to move your mortgage as you see fit and not re-apply with higher premiums. Many items on a mortgage application may change once you move into your house - you may choose to have a family and one partner may stay at home to care for the child. If you are down to one income and you lose that income, the mortgage company will still anticipate their monthly payments to be made.

Many people will say that they already have some form of Life or Disability insurance through their employers. These types of insurance are only as good for as long as you are employed through that specific company and may not be enough to cover the balance if they only cover a percentage of your payment.

My personal preference: I always like to put myself in the shoes of the borrower to see what I would do if it were me. Having recently gone through the process myself of obtaining Personal Life Insurance I do see value in Mortgage Life Insurance as a 'bare minimum' but would recommend a slightly different strategy.

We all know that if you decline the insurance now under the assumption that "you'll do it later, once things settle down around your new home" you won't be surprised to find out that you will simply never get around to it.

I accepted the Mortgage Life Insurance when I first moved into my home thinking that I would do the research on my own and if I found a better product I would immediately switch. Two years later and I am finally beginning to do so. Am I a procrastinator you ask? No...

Most of these products offered by Mortgage Brokers have a 30 day free trial. Feel free to sign up for that and if you have all of your ducks lined up in a row, you are covered for one month and then can move elsewhere if you so desire.

The main reason that you would move your insurance elsewhere after the 30 day free trial is up is because personal life insurance is quite often a less expensive alternative and offers more flexibility. For example: 50% pay down mortgage, 25% for children's education fund, 25% savings as opposed to 100% pay off your full mortgage balance with mortgage life insurance.

Moving is a big commitment and even if you aren't sure as to when you'll get around to the insurance side of it all, you should definitely commit to researching all the alternatives and finding the policy appropriate for you.

If you are looking to speak with a licensed insurance broker, I would highly recommend the services of the broker I myself have used in the past.

Enjoying Your Home in the Summer

After a brief absence, I am back and ready to flood your inbox with new blog posts from The Mortgage Circle.

Even though we are currently in the middle of July, it feels as though summer hasn't even begun in Calgary what with all the rain we've been having and all. The search for my new 'summer duvet' has proven to be not necessary, at least not in the immediate near future. Today, however, has been a pleasant surprise. As I'm writing this blog entry, I'm sitting in my backyard, content in the sunshine and squinting to read what I've just writen on my laptop screen. The flowers that I have planted are so far behind it looks like it may as well be May in my yard, but my grass is looking green, and this is a huge accomplishment.

This is an area that no one really seems to educate you on - you've gotten yourself a new mortgage, you've made a few payments on it and everything seems to be in order. Heck, you've even set yourself up on the City of Calgary TIPPS program. You are GOOD!

Your first summer in your new home rolls around and you take a trip to Sunnyside to load up on new plants to beautify your home and prove to your neighbours that you will be taking care of your place, in case they ever doubted you. You buy a few new items to speed the process along - Miracle Grow and Bloom Blaster top your list but you also have a few pesky weeds. Not a problem - just pick up a bottle of Round-Up on your next trip to the store. Right? Wrong.

I'll agree to share this excerpt with you knowing that as silly as it may all sound, I know that I am not alone here. When I cautiously ventured out to see if this had happened to other people before, it had - with results far worse than mine.

You see, as I sit here typing looking out at my yard, there are loads of shiny new circles of green grass. No, I do not have a dog, and nor did the previous owners. Rather, in my overzealousness to stamp out an impending Weed Problem, I took it to a whole new extreme. I grabbed that bottle of Round-Up and conquered those weeds. Squirt. Squirt. Squirt Squirt Squirt. I wasn't alone here either. My boyfriend 'helped' and squirted the dandelions in our backyard. We felt pretty pleased with ourselves and settled down to enjoy a nice, cold beverage on our new patio set.

A few days later we began to see the error of our ways. Large, circular patches of our once green grass lay like the hide of a Dalmation dog. Quickly, after the damage had already been done, friends and family began to weigh in on our dilemma.

"ROUND-UP? You never use Round-Up on weeds." Or- "I'm surprised you didn't kill your whole damn yard-" that jewel came from my Father. Okay, okay! We get it! So now what? Well, I spent the better part of the summer digging out the dead circles of grass and sprinkling a mixture of what looked like newspaper and lint, but promised fresh glades of new grass within two weeks. To our surprise and relief, it worked! We still have spotty grass but I like to think that the varying shades of green offer up a nicely textured palette of grass, so to speak.

The long and short of it? Ask around - and don't be afraid of silly questions, especially if they prevent natural disasters such as ours. Just because you're a new home owner and you've mastered the financing portion of it doesn't mean you're expected to know all there is to know about home ownership!

How your Credit Affects your Ability to Qualify for a Mortgage

Is your credit in order?

Client's often get caught up in the excitement of searching for a new home before ensuring that their finances are in order. Occasionally it can go so far as to putting in an offer and not realizing until quite late on in the game that something that occurred recently or even a few years back is still showing up on their credit bureau and impeding their chance at securing a mortgage.

Credit scores are broken down as follows:

1. Previous Credit Performance: 35%

• Pay your bills on time. If you pay your bill 3 days early, they receive it 3 days early and this can increase your credit score by 3 points.
  

2. Current Level of Indebtedness: 30%

• Keep your credit card at 75% of the maximum by making minimum payments. (ie: 10K limit keep at or below 7,500). This shows that you are managing your credit.

3. Length of Time Credit Has Been in Use: 15%

• Most lenders want to see "2 active trade lines for 2 years or more" when applying for a mortgage as they are reviewing your past history and willingness to repay when deciding to fund your mortgage or not.
• A credit card from a major bank has much more merit than a Capital One card that anyone can get.

4. Pursuit of New Credit: 10%

• A major advantage to using a Mortgage Broker is that when we access your credit bureau report we have options to bring your application to many different lenders. If you were to negotiate your own mortgage rate by visiting each local bank branch yourself, each bank would then in turn access your credit bureau. Over time, multiple "hits" on your credit lower your score.
  

5. Types of Credit Available: 10%

• Revolving credit (credit cards & lines of credit) affect your score more on a bureau than an Installment credit (monthly car payment) which has a fixed monthly amount. The "danger" in revolving credit is that when we determine your "debt service ratio" to determine your mortgage pre-approval amount we are only looking at outstanding credit balances and not the limit. A lender sees this access to unused credit as a possible risk factor.
  
• A variety of credit is desirable, ie: a credit card (revolving credit) and a car payment (installment credit) display a good combination of credit.

General Tips

- If you do not have any established credit, the Home Trust Secured Visa is an excellent option to begin building or re-establishing your credit.

This is the preferred card to re-build your credit as Home Trust regularly reports to the credit bureau, whereas a Capital One card does not (not even after 1 year - you would be no further ahead).

Please contact myself at leah@mortgagegrp.com for more information as I can send you the required form to help you get started.


- Consider seeing a credit councilor for advice. I would recommend Credifix Inc - Riley Wight - rileyw@shaw.ca or 403.277.4357 (HELP)

They can multiple resources availabe to them to work in your benefit (ie: can remove old collections so that they do not appear on your bureau for 7 years, which is the normal length of time).


Tip from Riley: do not cancel an old credit card as it will lower your score. Simply renew it and don't use it if that is the case.

Bank of Canada: Prime Rate 2.50%

As predicted, the Bank of Canada lowered their overnight rate to 0.5% on March 3rd, which brings prime rate down to 2.50% from 3.00%. Based on a recent article from TD Bank, one of the main reasons for the cut was due to tight credit. A proposed framework for easing future credit is expected to be released in April. However, a new policy alone will not be the only solution. The report indicates that external factors affecting Canada, such as the US recession (in particular, mention of the auto and housing industry) will plague us and until there is a form of "stabilization of global financial markets around the world" we will take time to recover.

On the rate front: a further 25bps decrease making the overnight rate 0.25% is anticipated (prime rate = 2.25%) and these rates wouldn't be expected to rise again until the latter half of 2010.

How does this information affect you if you are currently looking into a mortgage?

Banks continue to offer variable products at prime plus 0.8%/5 years. One particular credit union associated with TMG The Mortgage Group is offering the full savings at prime rate (2.50%) although payments are based on 5.4%. The good news is that you are instantly building equity and paying down a large portion of your principal while enjoying the added benefit of being capped at 5.4%. Should prime rate increase to 7,8,9% (it's anyone's guess these days) your payments would be capped at 5.4%. Alternatively, 5 year fixed rates are historically low (4.39%/5 years) and for comfort and peace of mind, this is a guaranteed low rate.

Understanding your Credit Score

Credit scores aren't generally something we really and truly think about until we're applying for a mortgage. Sure we all know that it bodes best for us if we make our payments on time and don't carry a balance on our credit cards, but after that how many of you know what you can do specifically to improve your credit score? I'm going to break it down for you into several different blog posts as I'm sure you'll find this to be captivating information!

Part 1:

What is the purpose of a credit report and what type of information can you expect to see on the report?

As per the www.equifax.ca Canadian credit website, you can expect to find the below information on your report:

• Personal Identification - Includes key identification information, such as your name, address, date of birth and Social Insurance Number (SIN)
• Consumer Statement - Allows you, the consumer, to add a brief comment about any information in your report
• Credit Information - Provides details of your credit accounts and transactions and shows if payments are being made on time
• Banking Information - Includes information on your bank account and NSF cheque history
• Public Record Information - Contains information about secured loans, bankruptcies and/or judgments
• Third-Party Collections - Contains information about any involvement with a collection agency trying to collect on a debt
• Inquiries - Includes all organizations or individuals that have requested a copy of your credit report in the past three years

*Note re: the above bullet on inquiries. Unless you really, really, really require that 'free baseball hat' or 'free t-shirt' that they are promising you at the Flames game when you sign up for a Mastercard, do not go through with this. This will be a "hard hit inquiry" on your credit bureau and will lower your credit score needlessly!

The credit report exists to provide lenders a glimpse of your financial history at any given point in time. When you being to establish credit or receive a loan from a bank, all of this information is documented on your credit report. If you were to miss a payment or go into collection over an unpaid bill - this too is documented on your credit report.

All of this information produces a FICO or Beacon score, which ranges from 300-900 and is known as a credit risk scoring system. Someone with a credit score of 720 is much more likely to pay their monthly mortgage payments each month and on time than someone who has a 545 and has in the past gone to collections for unpaid bills.

The credit report also highlights all active and inactive trade lines, providing the lender with a snapshot of your financial history as well as your willingness to repay the debt. It is most beneficial to have no more than 5 trade lines at a time. If you have numerous credit cards with a balance of zero, simply because you qualified for them but do not utilize them, why not cancel them and clean up your bureau?

Next post in the credit series will explain how the credit score relates to your ability to 'qualify' for a mortgage. Keep reading for more exciting information!

Horoscope for 2009

Sydney, Australia: Ringing in 2007

It's that time of year when radio stations begin playing their "top 100" songs of the year and horoscope predictions for the upcoming year are printed out and scoured over. For a different spin on the Real Estate outlook, I thought I would format it in the style of a horoscope. These are my predictions for the market this year:

Where's my luck this year?

If you are a first time home buyer looking to buy, this is a great year to buy. You've patiently waited out the storm (subtle metaphor for the more commonly used term "boom") and now the pouring rain has slowed to a mere drizzle. This is the time to secure a pre-approval and take advantage of low interest rates, 4.79% for a 5 year fixed.

Home Sweet Home

No need to lament over perceived lost income due to buying at the so-called "wrong time." Truly, there is no wrong time. The way I see it is this: you need a place to live. Yes, the value of your home has likely decreased on your annual property statement this year but what would you have paid were you to have continued on living in your rental? Perhaps those numbers balance each other out. Enjoy your home and make it your own - have fun this year with some new paint with a funky name like sulfur yellow or black raspberry. With names like these, what's not to enjoy? (disclaimer: the two listed above do not match each other).

Mantra for 2009

"Focus on what you do best and let go of the rest" - Les Hewitt