30 Nov

Canadians rein in debts amid uncertainty


Posted by: Mike Hattim

Globe and Mail

Canadians are getting the message on debt.

After months of warnings from senior officials like Bank of Canada Governor Mark Carney, consumers are pulling back on their borrowing. In particular, the rate at which they are racking up new mortgage debt has slowed, according to a new analysis by Canada Mortgage and Housing Corp., a phenomenon that is partly caused by a cooling housing market.

Many economists, as well as groups such as the Organization for Economic Co-operation and Development, have cited record consumer debt levels as a key risk to the Canadian economy. The average Canadian household has debt that is 150 per cent of income, and mortgage debt accounts for the largest chunk of credit that Canadian consumers hold.

CMHC, the federal Crown corporation that is at the heart of the country’s housing market, said Tuesday that household debt remains a concern but there are encouraging signals. “At the moment, there is little evidence of a significant overvaluation in the Canadian housing market over all, although some centres warrant close monitoring.”

In addition to the mortgage slowdown, the growth in personal loans, lines of credit and credit cards has also levelled off in recent months, the agency said. It’s a sign that, despite low interest rates, Canadians are starting to feel less secure about borrowing and the direction real estate markets are headed, said Benjamin Tal, an economist at CIBC World Markets. “I think it’s a very positive trend – very consistent with my view that the housing market over the next few years will stagnate.”

The CMHC’s comments come days after Finance Minister Jim Flaherty said there is evidence that Canadians are paying down their mortgages faster.

But with interest rates and consumer borrowing costs remaining at record lows, and the outlook for the economy softening owing to Europe’s sovereign debt crisis, Ottawa continues to walk a tightrope between allowing consumer spending to stoke the economy and reminding Canadian borrowers to be prudent. On Friday, Mr. Flaherty once again warned homeowners to be mindful of the fact that low interest rates will not last forever.

According to the most recent data from the Bank of Canada, chartered banks in this country had $68.3-billion in personal loans outstanding in October, up from $67.7-billion in August but compared with $61.5-billion in October of last year. Credit card balances grew to $62.4-billion from $62.2-billion between August and October, and compared with $57.3-billion last October. Lines of credit rose to $229.8-billion from $227.4-billion, up from $218.9-billion a year ago.

Mortgage assets held by the chartered banks, meanwhile, hit $563.5-billion in October, up from $561.2-billion in August. But, illustrating how growth has slowed, that number was $500.2-billion in October, 2010.

Consumer caution will be a positive for the real estate sector because it lays to rest concern of an overheated market and the risk of a bubble popping, said Jim Murphy, chief executive officer of the Canadian Association of Accredited Mortgage Professionals.

“We’ve had all these discussions about a bubble, but the market is stable,” he said. “We have in most markets in the country real estate prices increasing at a measured pace.”

Glen Hodgson, chief economist at the Conference Board of Canada, said consumer confidence appears to be sinking with turmoil in the world economy.

“There’s no particular surprise that the demand for housing has slowed down a bit, along with the economy. I mean, people are nervous right now, and that tends to have an impact on their major purchases.”

However, he said there are also no signs that Canada’s housing market is destabilizing, and prices are still “pretty solid” in most markets. “We see the market as pretty much in balance if you go city by city,” he said.

29 Nov

Break the mortgage before debt breaks you


Posted by: Mike Hattim


From Tuesday’s Globe and Mail

Debt junkies, here’s how to break your borrowing habit by breaking your mortgage.

Warning: This will take discipline. If you follow this plan, you’ll commit yourself to a major debt paydown that will leave you little or no room to pay for new stuff on credit. But your mortgage will be paid off sooner, and you’ll get out from under that never-ending credit card or line of credit debt.

Let’s start with the breaking the mortgage part. Mortgage broker John Cocomile says you need to have a fixed-rate mortgage at a rate of at least 4 to 4.5 per cent to make a refinancing worthwhile. Also, you want to have debts to roll into your new mortgage.

The rationale for this starts with the fact that a penalty applies when you break a mortgage contract. For fixed-rate mortgages, the penalty is the larger of three months’ interest or what’s known as the interest rate differential (IRD). That’s basically the difference between your existing rate and current mortgage rates.

Mr. Cocomile said today’s low mortgage rates mean IRDs can be steep. So much so, in fact, that he questions the value of breaking a mortgage unless you do it as part of a larger debt consolidation.

“If there’s no other debt, the argument for breaking a mortgage is not really that compelling,” he said.

Let’s look at a real-life example based on one of Mr. Cocomile’s clients. This person owed $30,000 on an unsecured line of credit with a rate of 6 per cent and $19,000 on a credit card with a very low introductory rate that expires next month. The mortgage to be refinanced was three years into a five-year term, it had a rate of 4.5 per cent and there was a balance of $240,000.

Breaking the existing mortgage cost about $4,500 in penalties, an amount that was thrown into the new mortgage along with the line of credit and credit card debts. The client ended up with a new $295,000 mortgage at 3.09 per cent for four years.

The easy option for Mr. Cocomile’s client would have been to keep the 22-year amortization of the old mortgage. That would have kept payments low, but it wouldn’t have helped get the mortgage paid off as efficiently as it could be.

So here’s what Mr. Cocomile did. He took the total amount of monthly payments the client was making on various debts before the refinancing and made that the new mortgage payment. The amount of the payment is $2,330, which breaks down as $1,430 for the mortgage, plus $900 for the line of credit (it required a minimum monthly payment of 3 per cent of the outstanding balance).

Now for the payoff from this refinancing strategy: The new and larger mortgage will be paid off in 13 years, compared to the original 22 years. A subsidiary benefit is that the client gets to lock in a new mortgage at today’s ultra-low levels. The question is, what mortgage rate is best right now?

Up until recently, the slam-dunk move was to use a variable rate. These mortgages are pegged to the prime rate, now at 3 per cent, and discounts of 0.75 per cent were common. Now, the best discount around on variable-rate mortgages is 0.2 of a percentage point, and no discount at all off the prime rate is reality at some lenders.

Mr. Cocomile said there’s good value in three- and four-year fixed rates today. Both terms actually carry the same rate at some lenders right now, which suggests there’s little reason not to take a four-year term.

As an aside, Mr. Cocomile pointed out that attractive three- and four-year rates actually work against people who want to refinance. The lower these rates are, the bigger the interest rate differential that someone breaking a mortgage must pay.

There’s more to breaking your borrowing habit than breaking your mortgage, of course. A large amount of your cash flow will be sucked up by debt repayment, but you could still, in theory, use credit cards or a credit line to buy more stuff and ratchet your debt higher again.

So consider a borrowing holiday while you’re paying off your refinanced mortgage. Forget about your line of credit and cut up your credit cards, freeze them in a block of ice or stick them in a drawer. Mr. Cocomile’s advice to debt junkies who can’t break the habit but plan to refinance their mortgage, anyway: “Don’t bother – it’s not worth it.”


Here’s a plan for refinancing your mortgage, adding in your other debts and paying everything off sooner and at lower cost. This is a real-life example based on a client of mortgage broker John Cocomile.

Client’s Debt Profile

Mortgage with $240,000 owing at 4.5 per cent

Unsecured line of credit with a $30,000 balance at 6 per cent

$19,000 owing on a credit card with a low introductory rate of 1.99 per cent that rises to normal levels next month

The Plan

Break the mortgage and fold the credit line and credit card debts into a new mortgage.

End Result

A $295,000 mortgage at 3.09 per cent for four years (includes a $4,500 mortgage breakage penalty)

Old mortgage payment: $1,430 a month

New mortgage payment: $2,330 a month

Old mortgage amortization: 22 years

New mortgage amortization: 13 years

Old mortgage renewal: November, 2013

New mortgage renewal: November, 2015

Estimated interest savings: $14,396 over two years (based on lowering the mortgage rate and saving on debt carrying costs for the credit card and credit line)

28 Nov

What to expect from Canada’s banks


Posted by: Mike Hattim

By Cameron French

TORONTO — A volatile year for Canadian banking results is likely to end on a soft note, and the outlook for 2012 won’t inspire confidence as Europe’s debt troubles deepen and Canadian borrowers turn shy.

Analysts expect percentage year-over-year profit gains in the mid-to-high single digits when the country’s big banks begin reporting this week. On a quarter-to-quarter basis, profits are expected to drop from the third quarter.

Even so, with bank shares already at year-lows, even modest results could spark buying pressure, particularly if one or more of the banks raise dividends.

Toronto-Dominion Bank and Canadian Imperial Bank of Commerce , the nation’s second- and fifth-biggest lenders, are first in line to report for the fourth quarter, with results due early on Thursday.

Volatile financial markets will likely steer the results in the most recent quarter, just as they have so far this year.

“I think it’s fair to say the capital market side of the business is going to be lackluster,” said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier in Toronto.

The S&P/TSX composite index is down nearly 20% from the year-high reached in March, and recent results for U.S. and European banks, whose third quarter overlaps with the August-October fourth quarter of the Canadian lenders, were hurt by weaker capital markets revenues.

Falling trading fees, and weak underwriting and advisory activity should weigh on results, too. Analysts see only slim growth in wealth management income, a growing focus for several of Canada’s top six lenders.

National Bank of Canada, with one of the highest weightings of capital markets revenue, is the bank most likely to show zero growth, according to analysts. TD, which is most highly geared to retail banking, is expected to show double-digit profit growth.

The markets-related weakness should be offset by revenue from business and mortgage lending, which should grow despite razor-thin interest rate margins.

RBC Capital Markets analyst Andre-Philippe Hardy said stronger business-loan growth and lower loan losses should drive revenue in the business line that makes up the bulk of revenue for the banks.

However, mortgage growth is expected to slow next year, and Hardy sees investors quickly looking past the fourth-quarter results once they’re released.


“In light of the recent market volatility and slowing economic growth, we expect bank commentary on the outlook for 2012 to have a greater impact on share prices than reported earnings relative to expectations,” he said in a note.

CIBC World Markets analyst Robert Sedran expects full-year per-share earnings to rise a slim 4.4% in 2012, down sharply from his expected 12.3% for 2011.

Analysts also expect banks to reveal more about any exposure to Europe, where the sovereign debt crisis is spreading.

“I think the direct exposure is relatively minimal,” said Gavin Graham, president at Graham Investment Strategy.

“The real problem for the North American banks is the knock-on effect in the event we get a sort of Lehman-style freeze up in interbank lending,” he said, referring to the 2008 collapse investment bank Lehman Brothers.

Setting that aside, he said the recent pressure on the bank stocks could subside once results are released, particularly if the banks raise dividends again.

Shares of TD, Bank of Nova Scotia, and National Bank dropped to their lowest level in more than a year on Friday, while Royal Bank of Canada touched its lowest in more than two years.

After putting dividend increases on hold in 2008, Canadian banks began to resume raising payouts a year ago, and now all have done so except for Bank of Montreal, which instead directed its capital towards its $4 billion acquisition of Wisconsin bank Marshall & Ilsley.

“They got a (pass) because they had a big takeover,” Graham said. “But now you have to think there would be an indication from management that if they don’t do it now they are looking at raising it in the next few quarters.”

Other banks that analysts say may be due for dividend increases this quarter are Scotiabank and National Bank.

25 Nov

Christmas doesn’t have to sink your finances


Posted by: Mike Hattim

Postmedia News – Financial Post

If last Christmas got way too expensive way too fast for you, here are some tips on cutting back from Scott Hannah, president and CEO of the Credit Counselling Society, a non-profit organization.

Talk to your family and friends to let them know what you can afford to spend this year. The truth is no one wants to see their family or friends struggle financially or receive a gift purchased on credit.

You may be surprised to learn that many of your friends and family also want to cut back on their spending.

Use a spending calendar to nail down your holiday budget. Simply take a blank calendar and fill it in with what you can afford to spend and when you will spend it.

There’s a lot to consider: gifts, decorations, festivities, travel, babysitters, office party expenses to name a few. As you fill in your calendar, decide if it is something you want to spend money on this year or not.

By considering everything you want to spend money on over the holidays ahead of time you are able to plan what you can afford to spend and when you’ll have the money to do it.

Here are some other suggestions to get you started:

• Let your fingers do the walking online to find that perfect gift for someone at a fraction of the retail cost. Many online stores will ship for free once the value is above a certain dollar amount.

• Check out the Facebook pages of the stores you tend to shop at for money-saving coupons and other great deals.

• Finalize your holiday meal plan early and stock up on the items you need when they are on sale.

• Redeem loyalty-card points for gift cards and items on your holiday gift list.

• Choose off-peak times to do your shopping. Eat first, bring a bottle of water and don’t go if you’re tired or feeling stressed.

• The holiday season is full of low-cost/no-cost activities and events. Make time in your calendar to relax with family and friends and take in the magic of the season. It’ll put a smile on your face and won’t break your budget.

By being careful and planning ahead, you’ll avoid a January debt hangover and can get back to your saving plan sooner.

23 Nov

Five Lies About Your Credit Report


Posted by: Mike Hattim

“Once I Pay Off the Collection Agency, It Will Leave my Credit Report”

Wouldn’t that be nice? In most cases that’s not true. Once you pay off a debt that was in collections, the best you can hope for is the debt to be listed as “closed” but often it’s listed as “paid collection”.

When an account is listed as a collection, it remains on your credit report for seven years. Once you pay the debt, it is listed as “paid collection” for the remainder of the seven year period. It may be a bit of good news to know that the seven years doesn’t start over. The other bright spot is that an account listed as a “paid collection” is not as bad as an unpaid account that was referred to a collection agent.

“I make my minimum payment. That’s good enough”

Not true. Although paying the minimum balance is certainly better for your credit than not paying at all, those outstanding balances are strikes against you when your score is calculated so paying off the debt in a timely manner is the only way to help your credit score.

“Only errors involving money affect my credit score”

Once again, not true. What if your credit report has a wrong middle initial and the information in your credit report is actually the information of somebody else with a bankruptcy on their report? Fixing errors on your credit report takes a lot of time and if you wait until you try to qualify for a loan, you may have to reapply at a much later date. Check your credit report today.

“I shouldn’t shop online because it’s not secure.”

This one may be true but there are ways to check. Any time you are entering sensitive information in to a website look at the address at the top of your internet browser. If the address begins with “https” the site is secure and you’re safe to shop online. If it only says “http” do not enter any information about you or your credit card.

“Debit cards are as safe as credit cards”

Fraud protection and other safeguards that come with credit cards are quickly being adopted for debit cards but your debit card is a direct line to your bank account where a credit card is not. If somebody steals your credit card information, they may run up a balance but you still have money in your bank account until the problem is resolved. That’s not the case with a debit card. Be careful


Don’t believe everything you hear and verify everything, including the information in this article, with a trusted source before you make financial decisions based on it.

22 Nov

Mortgage break fees: The banks’ gain is your pain


Posted by: Mike Hattim


They say that a good financial consumer should ask questions and be able to get clear and open answers. When it comes to mortgage breakage fees, there is a secret ingredient that the lenders don’t feel an obligation to share. This is wrong and must be changed by law. Here is my story.

I took out a mortgage a couple of years ago. It was a five-year fixed mortgage at 3.50 per cent.

As you may know from a previous column, I am concerned about where interest rates will be in three years when I need to renew my mortgage. I believe there is a real risk that interest rates will move up fairly quickly once they start to move – although they will likely remain very low for at least another year.

Given that I can get a five-year fixed mortgage today for as low as 3.19 per cent, and not need to worry about interest rates for another five years – I am considering breaking my mortgage and locking in for another five years.

Here is where the problem lies.

I have no clue what my breakage costs will be. Only the bank does. Unlike even the dreaded deferred sales charge mutual funds and other financial products with ‘buried fees’, my mortgage breakage cost truly is a mystery. It can’t be found in the fine print. I have read my mortgage contract. I am a Certified Financial Planner (CFP), who helps clients with many of their mortgages. I still have no clue what my breakage cost is.

How can this be? How can mortgage lenders not disclose this?

My mortgage contract from TD Bank does explain how to calculate the breakage cost by using what is known as the Interest Rate Differential (IRD), but it doesn’t provide the numbers required to figure it out. In order to complete the formula, I need to know my current interest rate, the current posted TD rate for a three-year mortgage (because this is roughly what is left in the term), the current amount owing on my mortgage, the term left in the mortgage, and then the mystery ingredient.

The mystery ingredient is my ‘discount rate.’ The discount rate is determined by subtracting my 3.50-per-cent mortgage rate from the posted five-year mortgage rate at TD Bank on the day my mortgage was set up.

One problem. The posted rate was never discussed with me. It was never relevant to mortgage discussions. In fact, it wasn’t even put in my contract – anywhere.

Who cares what the posted rate is? Only the most unscrupulous bank employee would ever charge a client the posted mortgage rate. Everyone knows that the real rate is much lower.

Apparently though, when it is time to break a mortgage, the discount rate is key.

So, how do I find out my discount rate? I have to call TD Bank and ask them what it is. It takes them a little time to look it up, but that is OK. They can use that time to convince me not to leave TD Bank.

Good news for TD Bank. It turns out my discount rate was 1.9 per cent. This means that my breakage cost is going to be very high. TD would be pleased to ‘blend and extend’ my mortgage or provide many other helpful solutions. Of course, the discount rate serves only one purpose. It is to ensure that the mysterious breakage cost is extraordinarily high. This way, TD can keep my mortgage business, or if not, at least get paid a large fee.

I don’t have a problem with a breakage cost on a mortgage. It is a contract, and if I don’t want to keep my end of the bargain, I understand there should be a cost.

The problem is that TD and other lenders need to disclose these breakage costs in the open. They knew the discount rate on my mortgage at the time they finalized the mortgage. They could and should have put it in my mortgage contract, but they purposely do not include that information. If they did disclose it, people will understand how much they have been gouged, and put pressure on lenders to lower the fees. It will also allow people to break their mortgage without having to undergo a sales pitch from their lender.

I asked TD Bank to comment on their breakage fee policy for this story, but did not get a response. I was told in my discussions that many people complain about the breakage fee. Big surprise.

It is time that lenders like TD Bank are forced to put the discount rate in their mortgage contracts – and stop hiding these fees for their gain, and our pain.

22 Nov

Flying the coop: Getting your first apartment


Posted by: Mike Hattim

Globe and Mail Update

If you put your time and money to good use while living at home with your parents, you will begin life as a self-sufficient adult. Living at home offers you the time to increase your savings for your first apartment and pay down a large portion of student debt. Whether your income is from part-time work or your first full-time position, you will never have more disposable income than while living in the family home. Set a time limit for how long you will stay, and begin now to plan the steps you need to take for a place of your own.

1. Begin with a Savings Plan

Before you bolt out the door, you need to consider how much money you will need to get started.

Prudent financial wisdom recommends that you have an emergency fund equal to three to six months’ income. While you are still living in the family home, create a simple savings plan, which may look similar to this:

• 30 per cent of your (after tax) income to your apartment fund and emergency fund.

• 30 per cent toward your debt (student loans plus credit cards).

• 40 per cent for your transportation, cellphone, Internet, clothing, entertainment, vacations, etc.

Now consider your starting point. What is the value of your assets? How much do you owe? The difference between these two numbers is your net worth.

How much money do you earn each month? What are your fixed monthly expenses? What is remaining? A cash flow statement can show this information and will indicate if there is a surplus or a shortfall.

2. Selecting an Apartment

The first step is to create a budget. Include all of your existing commitments such as transportation costs, cellphone, loan payments, and so on. If you have a vehicle, include the cost of insurance, gas, and regular maintenance.

Start with your budget in mind. A good rule of thumb is that your rent should not exceed 30 per cent of your after-tax income. You may want to consider shared accommodation just to be closer to your job and to reduce your rent. Remember the less you spend on rent, the more money you have left over for other things.

Consider transportation between your apartment, work, and family and friends. Your apartment should be easily accessible to the places you frequent the most. How long will it take you to get to work or to travel to visit friends and family?

Where you live will have a great bearing on the cost. Large cities can have very high rents, forcing you to spend more, live in a less desirable neighbourhood, or live on the outskirts of the city. If you live on the outskirts of the city, that could mean an increase in gas mileage if your job is in the city centre. If you don’t have a vehicle, you will need to consider whether or not public transportation will be adequate. Also consider the amount of time you will spend commuting.

If you have a budget, and you have a good idea of the area in which you would like to live, start looking at some options within your budget. Inspect at least 10 apartments in different buildings. Take a day or two to consider your choices before signing a lease. Once you have identified an apartment you like, ask for a copy of the lease, take it home with you, and read it. Understand what you are signing, and if you are not sure, use a highlighter and ask the landlord for an explanation of highlighted sections.

Make sure you ask what utilities are included in the rent (e.g., electricity, gas, parking, cable, Internet). If utilities aren’t included, you will need to determine how much the additional costs will be. Add these extra costs to the rental amount. Make sure you are still within your budget.

If you are responsible for paying for your own utilities, call the providers and ask about security deposits. Each of these may be several hundreds of dollars.

You should do a walk-through with the landlord. If there is any damage to the place, it should be noted by both the landlord and you – preferably written down and signed by both you and the landlord. It may also be a good idea to take pictures of any damages to the rental property before you move in, so when you move out, you can prove you did not contribute to the previously documented damages (this should also be done with the landlord present). Ask the landlord if, prior to you moving in, the apartment will be painted, carpets cleaned, and appliances cleaned and inspected.

Sometimes it is possible to negotiate the rent. Do not be shy; if you ask politely and you clearly state your other options, you may find you are able to reduce the rent from the original asking price.

When you have found the place you want, you will be asked to sign a lease. Most leases have a one-year term and can usually be renewed annually. As you sign the lease your landlord will request a two-month deposit. Half will be applied to your first month’s rent. The balance will be held as either the last month’s rent or a security deposit.

Congratulations! You are now a fully self-reliant adult. Thank your parents for their love and support as you start your new life in your new home. Better yet, invite them over for a nice dinner!

21 Nov

Retire that mortgage before you do


Posted by: Mike Hattim

People who fail to pay off their mortgages by the time they hit their golden years are risking their dream of having a secure and fulfilling retirement, says Patricia Lovett-Reid, a senior vice-president at TD Waterhouse.

“If we spend a third of our life in retirement you don’t want to be setting aside a portion of your income to satisfy the debt that should have been retired itself when you were working,” she says. “My greatest fear is that many Canadians may wake up and find that they’re living a quality of life that isn’t as fulfilling because they compromised tomorrow for a better today.”

And with interest rates so low right now, it has encouraged too many people to borrow more than they can afford and live far beyond their means as they focus on their wants and not just their needs.

“There will be a day of reckoning,” she says, especially when rates begin to rise and that debt burden becomes too heavy for some to manage.

Earlier this week, Royal Bank of Canada’s latest housing study found that 57 per cent of Canadians surveyed expected they’d still be paying off their mortgage debt after they turned 55, and nearly one-third said they’ll still be carrying that debt past the age of 65.

Elisseos Iriotakis, a partner at Safebridge Financial Group, says the root of the problem is that more people are living in more expensive cities – with higher house prices and living costs – and what used to take 25 years to pay off is now taking much longer.

“A dollar can only get stretched so far,” he says. And today, people’s finances are being pulled in so many directions: paying for the cost of living, repaying debt, building up RESPs for their kids, RRSPs for their retirement and TFSAs for their emergency funds.

Here are some of their tips to help people get rid of their mortgage debt before they’re eligible for seniors discounts.

Put your mortgage first

“You have to prioritize,” says Mr. Iriotakis, and realize that paying down your debts, including your mortgage, gives you a guaranteed return – something you won’t get from the volatile stock market.

So paying yourself by paying down your mortgage is a “guaranteed” return, he says. “It’s better than a GIC, so by knocking down your mortgage you’re guaranteed that 3 to 4 per cent.”

And paying off your mortgage debt faster will save you thousands of dollars in interest payments, he adds.

Ms. Lovett-Reid says if you don’t take your hefty mortgage seriously, you won’t pay it off. And while paying off your mortgage may not be “exciting,” it will bolster your personal balance sheet.

Give your mortgage payment a raise

Mr. Iriotakis suggests home owners increase their mortgage payments each year by the rate of inflation, at a minimum, and if you get a raise, increase your payments by the same percentage.

And if you have a variable-rate mortgage, “keep your payments at a five-year [fixed] rate or greater … so that helps you to reduce your principal a lot quicker.”

Choose your mortgage carefully

If you have some expenses coming up, Mr. Iriotakis suggests to his clients to keep with a 25-year amortization with their mortgage even if they can afford larger monthly payments. That way they won’t have to borrow at higher rates to cover those other expenses and can make lump-sum payments on their mortgage when they have extra cash. But this only works if you have the discipline to save the money and make the extra payments, he notes.

Mr. Iriotakis also suggests people don’t blindly take on a five-year mortgage because that’s what their bank says. On average, most mortgages are about 3.5 years long – which means many people locked into five-year mortgages are breaking them – and paying substantial fees – before they come due. About 70 per cent of consumers break their mortgage before its term is up, he says, some due to divorce, refinancing or to get a better interest rate.

If you are not disciplined with your cash, then pay as much each month as you can afford towards your mortgage and choose accelerated bi-weekly payments, since that’s basically a forced savings plan, he says.

Be disciplined

The best way to avoid having too much mortgage debt is not to get it in the first place, says Ms. Lovett-Reid. Don’t get lured into buying the biggest house possible. Choose one you can afford, she says. Put debt reduction targets and deadlines in place. And have the courage to stick to them. Focus on paying off your debts and living below your means so that you don’t find yourself saddled with a huge debt from your mortgage and line of credit when it comes time to retire.

She says people have to ask themselves: “Is my lifestyle sustainable in retirement?”

Because by the time people hit retirement “they want to be channelling any excess cash that they may have – not to mortgage payment, not to a debt – but to a life and an experience instead.”

Any windfall cash should be put towards your mortgage, says Mr. Iriotakis. It’s always nice if a rich uncle gives you a pile of cash, he jokes. But if you get a tax refund, put it towards your mortgage, and make sure you’re maximizing all your tax benefits to get the biggest refund you can.

A way out if you’re buried in mortgage debt

If you are heading towards retirement and still have a significant amount of mortgage debt, you have a few choices to make, says Mr. Iriotakis. You can bite the bullet and downsize by moving to a smaller house or condo, or moving to a cheaper location. “That’s a quick way of getting rid of the mortgage,” he says.

Or, you can refinance your home and take a longer amortization so your monthly payments are less and will be affordable for you on a lower income.

Ms. Lovett-Reid says while retiring with debt isn’t ideal, it can be managed. You can delay your retirement for a few years, or look for a part-time job to have while you’re retired. Retirees can also look at the possibility of a reverse mortgage, or boosting their exposure to equity with the hope that their savings will generate more income over the long term.

17 Nov

Many Canadians will carry mortgages into their 70s: survey


Posted by: Mike Hattim

Financial Post Staff

OTTAWA — Survey results suggest Canadians might have unrealistic expectations of when they’ll be mortgage-free.

The Royal Bank of Canada poll, released Thursday, showed 72% of respondents with a mortgage expect to have it fully paid off by the time they are 65. However, it also found that 33% of those 55 or older still have at least 16 years left on their mortgages.

“Canadians want to be mortgage-free as they approach retirement age and beyond, but the reality is that it takes prudent planning and the right advice to stay on track,” Claude DeMone, RBC’s director of strategy for home equity financing, said in a statement.

The survey showed that younger respondents were even more optimistic in their plans. For those between the ages of 35 and 54, 39% thought they would be mortgage-free by the time they are 55, and another 39% expected it my 65.

Among those between 18 and 34, 12% thought they would be mortgage-free by the age of 35 and 26% by the time they are 45.

The data was based on surveys done by Ipsos Reid of about 2,000 Canadians who are part of an online panel. All questions relating to mortgages were with people who had one. No margin of error was available.

16 Nov

Renewing and refinancing mortgages is saving Canadians big bucks


Posted by: Mike Hattim

Garry Marr

Canadians saved $2.7-billion in the past year renewing or refinancing their mortgages and the betting money among consumers seems to be that interest rates are not going up any time soon, according to a new survey.

The Canadian Association of Accredited Mortgage Professionals says 37% of Canadians opted for a variable rate mortgage in the last year, pushing up the overall percentage of Canadians floating with prime — and vulnerable to Bank of Canada rate hikes — to 31%.

But the group maintains Canadians are not overexposed to a potential rising rate environment with the survey finding 84% say they could handle a rate increase that boosted their mortgage payments by $200 per month. The average amount of room Canadians say they could afford on top of their current costs is $750 per month.

“Overall, our survey paints a picture of Canadians generally and homeowners in particular as very focused on their finances,” said Jim Murphy, president of CAAMP. “They are planning ahead, aggressively paying down their mortgage in advance of any economic jolt.”

Government policy that cracked down on refinancing rules may also be having an effect on the market. Earlier this year Ottawa tweaked the rules on refinancing, restricting consumers to 85% debt on the value of their home, down from 90%.

CAAMP said Canadians have become conservative about taking equity out of their home with 10% of mortgage holders doing so in the last year, a drop from 40% a year earlier.

“There is no need for policy makers to introduce new measures that would reduce housing activity,” said Mr. Murphy, his comments clearly aimed at suggestions the market needs even more governance and tighter measures such as increased minimum downpayments.

It’s clear Canadians are enjoying the low interest rate environment that CAAMP says lowered the average mortgage rate to 3.92% from 4.22%. The effect is that among the 1.35 million mortgage borrowers who renewed or refinanced in the past year, the savings was $2.7-billion.

“Some people are coming out of 5% plus mortgages and saving a lot of money,” says Rob McLister, editor of Canadian Mortgage Trends. Someone with a $500,000 mortgage going from 5% to 3.29% with 20-year amortization could save almost $40,000 in interest over a five-year term, he says.

Mr. McLister is seeing a growing line of people looking to break a mortgage and willing to pay the interest penalty.

CAAMP said 32% of Canadians reported making some sort of change to their mortgage in the past year with almost two-thirds of those people saying they were refinancing or renewing their mortgages. Among those who renewed, 78% got a rate reduction.

Canadians who are looking for that better rate appear ready to shop around with 21% of respondents who renewed or refinanced their mortgages in the last year saying they switched lenders.

Mortgage rates continue to be at or near all-time lows with a flatter yield curve reducing the steep discount on variable rates and making locking in more attractive. The website ratesupermarket.ca says the best variable rate product on the market now is 2.48% while a five-year fixed rate closed mortgage is now as low as 3.19%.

“What you are facing is whether you lock in today and know what my rate will be for the next five years or go variable and gamble,” says Mr. McLister. “There is risk there.”

Sal Guatieri, senior economist with BMO Capital Markets, said the savings are positive because it is putting extra money in the pockets of Canadians. “I almost expect more people to jump into variable given the long-term interest rate environment looks so benign,” says Mr. Guatieri.