Mortgage Update
For a brief time-window from mid-January, until the first week of February, Canada’s mortgage market saw a brief dip in 5-year fixed rates, to historic lows of 2.99%. BMO started the action, but its 5-year product had strong limitations on it, including no right of re-financing outside BMO, and no full payout without a bona fide sale. CIBC, RBC and others responded with the same rate, but fewer restrictions. By the first week of February, the 2.99% window closed, and rates at the Big 5 rose once again, to 3.34%. Last Tuesday, February 7th, another, less-reported event occurred: CIBC’s broker subsidiary FirstLine Mortgages announced an end to funding of stated-income mortgages. (These mortgages are where the lender does not require copies of the borrower’s pay stubs, income tax returns, or other income documentation – the borrower is essentially asked to state his income, and is taken at his word. Lenders typically offer this loan format to self-employed borrowers, or other borrowers who might have difficulty documenting their income using conventional means, eg. new Canadians). Around the same time, news began to re-surface that CIBC is in process of divesting FirstLine from its asset stable. And so the question comes up – are the restrictions on stated-income mortgages an effort to improve FirstLine’s brand name prior to sale, or are they an indicator of a widerspread aversion to risk by banks in Canada’s mortgagescape? Quite likely, the latter is the case, as over the past couple of months several lenders have quietly discontinued their stated-income mortgage products or have added a interest-rate premium to them for their increased risk.
Another factor that is not much-discussed is the IRD (Interest Rate Differential), otherwise known as the mortgage pre-payment penalty. These pre-payment penalties come into play when a borrower wants to break their current mortgage in order to take advantage of better mortgage terms at either their current bank, or another financial institution. The justification for having an IRD penalty in the first place is to compensate the bank for any loss that they may incur when re-lending the funds. Among the Big 5 banks, the IRD penalty is typically calculated as a factor of the posted interest rate for the time period remaining in the mortgage, and the principle amount remaining in the mortgage. Since the 1990s, though, the differential between posted rate and discounted rate has steadily crept upwards, and with the increased spread between these figures, the size of IRD pre-payment penalties has commensurately skyrocketed. To solve this problem over the past several years, many banks pay cash-back bonuses to cover the costs of porting and re-financing over to their institution prior to end of term – indeed, my own manager at CIBC touts our bank as the “cash-back king”.
At the moment, I continue to offer the stated-income mortgage product for Self-employed and New Canadians through CIBC’s mortgage advisor channel; I also can offer generous cash-back incentives to help ease any of the associated costs of mortgage financing. I welcome the opportunity to serve you for all your mortgage needs, be it home purchase, re-finance, or debt consolidation. Peter Sugden, CIBC Mortgages & Lending, 1-866-791-9923.
Allan’s Insights – Financial and Wealth Management
You’ve worked hard to make your money and now it’s time to make sure it last. Allan, a senior financial planning consultant, provides a great introduction into the world of Financial and wealth planning.
1) What is a Financial planner?
A financial planner is someone who is fully licensed to handle all aspects of your finances. He or she can assist with planning your retirement, managing your risk, investing your money, tax minimization, applying for insurance and establishing a monthly budget.
2) When should someone turn to a financial planner?
Someone should turn to a financial planner when they are not sure about certain aspects of their finances, when they have a life event (marriage/divorce/kids/buying a house) or when they are unhappy with their current advisor.
3) Do I have to pay them? Or how does that work?
Financial planners compensated by commission only have a vested interest in your finances. If the value of your investments rises their commission goes up, if your investments fall in value their commission goes down. This creates an incentive for them to actively manage your account and put more effort into your overall financial plan. Advisors working in the bank are on salary and have little incentive to work harder or actively monitor your investments.
5) My Friend/family member lost a lot of money in mutual funds/stock market lately how do I make sure I don’t do the same?
Investments into the stock market are never guaranteed, if your advisor has invested you in a manner contrary to your risk profile you talk to the securities commission. The stock market can go up or down at any time but history has shown that investing for a period of 10 years or more results in very positive rates of return. The last 3 years have seen very bad world economic events causing a recession and significant pressure on the stock market. Investors lose money by cashing out at the lowest point in the market. Investors make money by recognizing a low point in the market and investing new money. Staying invested while markets are down allows for clients to experience the rebound upswing. By having money invested in a well diversified and balanced portfolio you allow yourself the best possible opportunity to grow your money. Experiencing significant gross positive rates of return are insignificant. Investors should focus more on net returns after taxes and employ tax minimization strategies to ensure better rates of return.
6) What is one piece of advice you would give someone looking to invest their money in this turbulent economy?
Investors looking to invest money into the stock market during a turbulent time should do so in a steady manner. This strategy is known as dollar cost averaging where a set amount is invested on a monthly basis therefore eliminating the guessing game out of investing. This ensures investors are never putting money in the height of the market and takes advantage of low points in the market.
