With regular news reports on the high levels of consumer debt in Canada, there has even been some talk about further tightening of mortgage regulations.
While its hard to imagine further changes to mortgage rules at this point, it is somewhat surprising to read news reports that make claims that Canadian consumer debt is higher than American or British consumer debt levels.
Of course we have to take all these reports with a grain of salt as virtually all are done through some sort of survey for which the related accuracy or inaccuracy can be roundly debated.
Regardless of which country’s debt load per capita is higher, the fact remains that the average Canadian is carrying a high debt load and is having trouble getting it paid down.
Reducing debt load is all about paying down the principal loan or debt amount outstanding.
Being that most people are not likely going to be able to suddenly increase the amount of money they make each and every month, the debt reduction exercise has to turn to putting more of the available dollars towards principal reduction.
This is primarily done in two ways.
The first most obvious way is to reduce discretionary spending and put those dollars against debt balances outstanding.
The second most potentially impactful way to reduce debt is through reducing the cost of capital on the debt that is outstanding.
The keys to reducing the cost of capital on debt is to access cheaper forms of capital by leveraging assets that can be pledged for security and your personal credit score.
This is where mortgage financing comes into a play in a major fashion for those that have equity in real estate.
Consumer debt is in many cases unsecured debt which not only tends to provide higher and higher interest rates over time, but also has a negative impact on your credit score when you are utilizing a high percentage of available credit.
And most of the debt or credit that impacts your credit report is unsecured and/or revolving forms of credit, not mortgage credit.
So when you are able to pay down the sources of credit through mortgage financing or mortgage refinancing, you can potentially access cheaper capital through mortgage financing and have your credit score improve through lower credit utilization of the sources of credit that are tracked by the credit bureaus. This will in turn lead to lower cost secured and unsecured consumer debt.
As I stated at the outset, a lower overall cost of capital allows more of your monthly cash to be available for debt pay down.
While this is not going to be a solution for everyone with high consumer debt, for those that have equity in real estate, there is no time like the present to see if you can devise a debt reduction strategy through greater leverage of mortgage financing.
The best way to determine what options are available to you and how to go about taking advantage of them is to work directly with a Toronto Mortgage Broker who has the experience and lender sources required to make this approach work.
The first consideration when looking at a mortgage refinance scenario is what is the purpose or need for mortgage refinancing in the first place?
Here are the three most common reasons or needs for a mortgage refinance action.
Regardless of the reason, a mortgage refinance creates the need to create a new mortgage or rewrite or amend the existing mortgage either to change the terms of the mortgage or to transfer it to a different mortgage lender.
The second second consideration when looking into mortgage refinancing options is the structure and requirements of any existing mortgages that would be paid out through the mortgage refinancing process.
Regardless of how a mortgage refinance is funded, any existing mortgage payouts may be subject to prepayment penalties which may not make payout the most cost effective approach.
This is where consideration is given in certain situations to a second mortgage or home equity line of credit as other options to provide additional capital for the least amount of cost.
The third consideration is given to the financial and credit profiles of the borrower or borrowers.
Forced refinance mortgage actions where either the borrower must find another mortgage lender or a certain level of funds are required, can reduce the number of potential options that are available to an existing borrower.
And mortgage refinance actions that take place when cash flow and credit are weak or sub optimal may limit the available choices for mortgage refinancing to short term lending options like private mortgages where financing can be put into place to stabilize a situation and allow time for lending criteria to be strengthened.
Because every situation is somewhat unique, and also because lender programs can change on a regular basis, it can be hard at times to determine what the most cost effective options are for a mortgage refinance requirement.
The best approach for getting a good mortgage refinance result is to work directly with an experienced mortgage broker who can thoroughly go through your situation and requirements and provide you with relevant options for your consideration.
The reality is that every time a mortgage interest term is coming to its end, mortgage renewal with the existing lender as well as mortgage refinancing with potentially a new lender is something that should always be considered.
The reasoning here is that, depending on who’s statistics you adhere to, mortgage lenders renew about 80% of their existing mortgage portfolio. Or put another way, of the accounts that are paying on time and have not provided any repayment for the lender, the level of renewal is extremely high.
So while getting the renewal is a very important business activity for mortgage lenders, the renewal process is not necessarily approached as a way to renew the customer for their continued loyalty.
In fact, most mortgage renewal offers provided by mortgage lenders to their existing borrowers offer the bank or institutional lender’s posted mortgage interest rate.
This is typically not the best rate that the lender is prepared to offer, but its the starting point for the renewal process.
In most cases, the mortgage holder will sign the renewal for potentially a higher than market interest rate, and continue on with the lender for a further interest term.
Being open to mortgage refinancing is simply developing a mind set that your goal when committing to a new interest term is to get a market rate for your particular situation. Being that everyone’s property, level of income, and credit profile are going to be different, what’s best for one borrower is not necessarily going to even be available for another.
That being said, when you get to renewal time, it makes a great deal of sense to respond to the mortgage lenders offered renewal rates by asking them if they can quote a lower rate.
It also makes sense to go to the market place through an experienced mortgage broker and get competitive rate quotes as well.
And while costs are incurred to switch from one lender to another, the cost savings on interest can far outweigh the incremental cost of moving. Some mortgage lenders even pay for the transfer costs themselves.
After going through a market rate comparison, if you find that your current mortgage lender is prepared to offer you a proper market rate for your new mortgage term, then it likely makes sense to just stay where you are.
But the point here is that its up to the borrower to make sure the relationship stays equitable, otherwise you may end up paying a higher rate which over time can add up to a considerable amount of money that could have been used for other things, such as paying down the mortgage principal.
If you are going through a mortgage renewal process and want to discuss mortgage refinancing options, then I suggest that you give me a call so we can go over your situation and requirements together.
If you’re like most Canadians, the answer would be very little which is hard to understand considering the potential amount of money involved and its impact on your cash flow which directly influences your life style.
Studies have shown that more than half of mortgage holders are likely to renew their mortgage with their current mortgage provider without first making sure that their new offering was competitive in the market place.
There is nothing wrong with being loyal to a lender and vise versa, provided that the business relationship is equally good for both parties.
And because mortgage lenders all know through their own surveys and data analysis that the majority of their mortgage holders review, there is no incentive for them to offer a best in market renewal option or even one that’s close.
That being said, if you a mortgage lender has room to move in their rate and you are prepared to leave for a better one, they are likely going to improve their offering to you to retain your business.
But that also speaks to you understanding the options that are available to you in the market place and how the process works.
Whether it seems logical or not, if you want to stay put with your current mortgage provider and still want to be paying a competitive interest rate, then you’re going to have to do at least some market research, or get someone like an independent mortgage broker to do it for you.
With knowledge in had, the same knowledge that your mortgage lender already holds, there is more likely going to be the opportunity for a fair and equitable deal constructed that benefits both parties.
And also remember that there is a certain level of precision required with these numbers so you also need to pay attention to the details as close enough will likely take more money out of your pockets than you may be aware of.
Take the example of a $300,000 mortgage. If you are able to get your current mortgage lender to reduce their mortgage renewal offering by 1/2% based on competitor offerings, this basically increases your annual cash flow by approx. $1,500 to spend with as you please, including paying down the principal on your mortgage.
Better this amount go into your pocket than the lender’s pocket.
Once again, nothing wrong with staying put with a lender, provided that its equitable to do so.
The collateral charge mortgage has made a lot of news lately in terms of how it will impact borrowers and borrower movement from one mortgage lender to another.
If you’re not completely up to speed on the topic, lets walk through a simple example.
If you have a $300,000 property and accept mortgage financing for $150,000, the mortgage lender will register a collateral mortgage for the full property value or $300,000.
From the lender’s point of view, the borrower can now refinance and/or take on secondary mortgage products from the lender without incurring any legal costs.
From the borrower’s point of view, the collateral charge pretty much eliminates the ability to get second mortgage financing or home equity lines of credit from any other lender than your first mortgage provider.
For a more in depth discussion on the topic, here’s a link to a recent article on the ING collateral mortgage move …. http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2011/12/ing-direct-goes-collateral.html
ING appears to be banking on the fact that is going to be better for the majority of its customers and that’s why its making the move. One can also argue that it may further increase borrower retention as well as provide a spring board or ING’s much anticipated HELOC program launch which would work well with a collateral mortgage for existing clients.
In the article linked to above, there is also the debate as to how the competitive landscape will now change among mortgage lenders.
With a collateral mortgage, once a term is up, it will be interesting to see how the competitive offerings change with respect to paying switchover fees to grab customers. Right now, there aren’t many lenders that offer it, but that could change in the near future as well.
So the short term nature of the instrument falls into the realm of bridge financing.
But as a source of bridge loans, private mortgages arguably hold the top rung in the ladder for a number of different reasons.
First, bridge loans that are not secured by real estate will typically have a more exhaustive lender assessment process as well as a loan administration process to protect the lender from risk of loss.
Remember that a bridge loan has a defined beginning and end and the source of funds or event that will provide the source of funds to pay out the bridge financing has been validated.
So when the lender has to depend on certain things happening in order to be assured that the bridge loan will be repaid in full and on time, more work has to go into the risk assessment and management process.
Bottom line, other forms of bridge financing are going to take longer to get into place. And when you’re really under the gun for time, its not uncommon to be able to get a private mortgage in place in less than a week provided you have everything in order to getting the deal closed quickly.
Second, as far as bridge financing goes, a private mortgage is likely going to be one of the cheapest, if not the cheapest, sources of bridge financing available to you.
Bridge loans for transactions like purchase order financing can command interest rates of 3% a month or higher along with lender and broker fees. In comparison, private mortgage interest rates are considerably less.
Third, private mortgages require you to pay interest only mortgage payments each month for the most part. You stay in control of you cash flow and as long as you are servicing the debt, the lender is not likely to be interfering in your business.
With other forms of commercial bridge loans, the lender can require considerable controls over cash flow and spending during the time the bridge loan is outstanding. These restrictions can make it difficult to manage other financial requirements you may have at times.
Because of the security being provided through the equity you hold in a real estate property, the private mortgage lender can act quickly, provide a reasonable rate, and stay out of your business when offering short term financing.
This week there was an interesting development among two of the big 5 banks in Canada where Royal Bank and Scotia Bank went from advertising their variable mortgage rate at a discount to the prime rate, to posting rates at a slight premium to prime.
This further tightens up the spread between variable mortgage rares and fixed rates, further fueling the debate over whether to be going fixed or variable now and in the near future.
You can find a more detailed discussion on this topic at the following link … http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2011/12/variable-discounts-turn-to-premiums.html
Over the past number of months, there has been a lot of discussion on forums and different publications on the fact that banks are making considerably more margin on long term fixed rates as compared to the now paper thin margins on the variable rates.
Variable rate pricing issues aside, there would appear to be less profit making opportunities for banks in the capital markets as the world continues to try and pull out of the financial malaise we ourselves in.
And with the ongoing pressure to keep profits up, perhaps pushing consumers more towards the long term fixed mortgage rates is a strategic move on the part of banks to replace revenues down in other areas.
Regardless of whether the change in pricing is driven strictly by increases in costs or an attempt to flip the average mortgage portfolio more towards fixed from variable, the market rates have changed and once again consumers must consider whether they are better off with a variable rate or a fixed rate mortgage, and at what point is the difference in the two worth the risk, especially for home owners on a tight budget.
It will be interesting to see how the other major banks react in the weeks ahead as well as the other major mortgage providers.
If you have rate options available to you, the current trends should be worth paying attention to.