Deciphering the Recent Rate Announcement

General Pam Pikkert 26 Jan

Deciphering the Rate Announcement

Last week the Bank of Canada surprised everyone by lowering the prime lending rate.  They dropped the prime lending rate by .25% to .75%.  The media have been all over this but what does it actually mean?  Let’s break it down a bit into an informative little article written for the average consumer who does not have a degree in economics.

Why?

The first reason the Bank of Canada cited for this change is the sharp decline to the price of oil.  Here in Alberta we are well aware that this has been happening.   The lower price of oil is expected to boost global economic growth especially in the US.

 The falling Canadian dollar will help to boost non-energy based industries as we see an increased demand for those products from foreign economies.

Another reason cited is that inflation has remained close to the 2% target in recent quarters.  The weaker oil prices will pull down the inflation profile.

So basically the Bank of Canada is reacting to the oil price shock and is attempting to provide some insurance against the risks to the entire economy going forward.

What Now?

So the announcement was followed by the gleeful hoorays of those who opted for a variable rate mortgage.  A variable rate is where the interest rate is based on the prime rate less an ongoing discount or plus an ongoing premium.  For example, if you opted for a variable rate mortgage recently your rate is likely around prime, which is currently 3%, less .6% or 2.40%. 

The Bank of Canada sets their prime lending rate and the banks’ prime lending rate is at 2% higher.  Most people thought that the recent announcement would see their rate fall by the .25% to match the Bank of Canada decrease but that has not been the case.  At the time I am writing this article, none of the big 5 banks have opted to decrease their prime lending rate as of yet.  They are not mandated to do so though it is likely that if one of them does they all will and that the decreases would happen within hours of each other.   Let’s remember that banks are a business with shareholders and investors and the goal is to produce a strong profit each year.  Profit is not a dirty word and considering that our banking system is the envy of many it is a very good thing they are run the way they are.  Remember the international economic troubles in 2006-2009?  Our strong banking system is cited as one of the reasons we made it through far easier than other countries.  So all that being said, the banks may be working towards strengthening the bottom line which may mean no rate drops in the near future.

You may also be affected by this if you opted for a loan or a line of credit based on the prime rate plus or minus whatever discount you negotiated.

The Bank of Canada is scheduled for its next announcement on March 4th.  Economists are forecasting am additional decrease by the Bank of Canada but we will just have to wait and see

 

Surviving the Fluctuating Price of Oil

General Pam Pikkert 19 Jan

                           Surviving the Fluctuating Price of Oil

So due to international forces well beyond our control it appears that the price of oil is falling.  As Albertans we are well aware of the financial ramifications this can have to us personally.  A decreased profit margin may lead to cut backs by the oil companies in the form of decreased hours and possibly even layoffs.  So what can you do to make it easier?  Read on good friends as I share a few ideas with you.

Refinance Your Home

      The last few years have seen an increase to property values.  When you put this together with the fact that you have been paying your mortgage down you could be in a great position to do refinace.  Consider this scenario:

House value is $400,000

Mortgage at $280,000 at 3.75% = $1435/month

Credit Cards $7500 = $200/month

Line of Credit $20,000 = $600/month

Total $2235/month

If you refinance your home to $320,000 at today’s much lower rates you payment drops to $1514/month which allows you to payout all of the above and have a savings account of about $10,000 just in case. You will also save $721 which you then start putting away into your savings account every month.

Keep in mind that you will incur a penalty to break your current mortgage so call your lender to see exactly how much this will be.  No lender will pay this for you but some of them will pay your legal fees and appraisal costs which can save you up to $1000.

Get a Line of Credit

Perhaps you do not have the home equity necessary to do a refinance.  Consider getting yourself a line of credit in case of emergency.  The payments on this type of a loan are often interest only and the funds are easily accessed if you need them. 

Start a savings plan

We all say we would like to save more.  Perhaps the potential downturn will remind you to actually act upon this.  Consider setting yourself up on an automatic savings plan.  Most people find an automatic monthly withdrawal from their account to be relatively painless when compared to actually having to transfer funds.  Make sure you have an account like a TFSA where you have cash that is easily accessible without any penalties as seen with a savings account like an RSP.

Take a Close Look at the Little Expenses

The devil is in the details they say and this is true of your finances as well.  Take a look at your expenses. 

-Did you know that some banks offer fee free banking?  Maybe its time to consider a move. This could save you $20/month

-Are you being charged an annual fee on your credit card or maybe a higher rate?  Take a look around and see who is offering a better deal.  Even calling your current credit card provider to negotiate a better rate This is another potential $20/month

And really this list could go on and on.  Just these 2 ideas could save you nearly $500/month. There are coupons and discounts all around us, websites written by the thrifty to help steer you to great deals and of course well written articles in the Red Deer Express.    Until next time my friends.

Some Reasons You Should Ask Questions about your Mortgage

General Pam Pikkert 5 Jan

                            

                We mortgage professionals recently learned something very interesting.  A survey of mortgage consumers revealed that people would rather get a root canal than a mortgage.   Gasp!!    I can understand that the process can be overwhelming but considering that your home is likely the largest purchase you will ever make and will cost you hundreds of thousands of dollars perhaps we should reconsider this attitude?  Look at it this way, you shop around for the best price on a new TV which is likely under $1000. You look at flyers and websites and visit stores to see which one has the best picture and features so why not give you mortgage the same time.  Instead of saving hundreds of dollars you could save tens of thousands.

So if you have decided to stay with your current bank for your mortgage so that you have everything at one spot you should consider a few things before you sign.

  1. Interest Rate.  I know this will shock you but banks are a business.  They have investors and shareholders whom they are required to report to and these people like to see a profit at the end of each year.  Profit is not a dirty word and considering that the strength of Canadian banks are the envy of the world this is a good thing.  One of the ways they make money is through the interest they charge on the loans they make.  Despite your relationship with the bank you may not automatically be offered the best rate.  Do your research and make sure you are getting the best rate possible.
  2. Portability – This is a feature which will allow you to take your mortgage with you to a new property in case you end up moving.  Asking some questions can save you money and headaches later.   Does your lender role this into one new loan or will you end up with 2 parts to the new loan?  The latter could mean different maturity dates meaning you are locked into that lender indefinitely unless you are willing to incur a penalty down the road.
  3. Collateral Mortgages – It is a common practise for banks to register a higher amount on the title of your property than what you actually owe.  The benefit of this is that you can borrow additional funds without needing a lawyer down the road.  The downside is that the bank is now able to tie all the borrowing you do with them into this charge.  That’s right, your vehicle, trailer and credit cards are now potentially tied to the equity of your home.  This could be a real problem when you sell the house thinking you have $100,000 to put down on the next and then find out instead that all of the other debts will be paid first and you now have no down payment.  Keeping your mortgage with another lender protects you from this possibility.
  4. Prepayment Privileges – All banks offer you the ability to pre-pay your mortgage but did you know there are some differences?  Will you have to wait for the anniversary date or can you start immediately?  If you are making a lump sum payment is the minimum $100 or $1000?   These little differences can be frustrating
  5. Penalties-  We all know that if you break your mortgage you will have to pay a penalty but guess what,  that’s right, there is a big difference between the mortgage lenders.   Each is able to decide how they will calculate this amount.  All are now required to disclose this formula to you as a part of the mortgage process.  What you should ask is this.  What interest rate is used in the calculation?  Are they using the discounted rate or the posted rate?  The difference can be huge and cost you a lot of your hard earned money.

So there you have it, the reasons you should ask some questions before you sign.  Call your mortgage professional today for even more help.  Trust me, it’s way easier than a root canal.