Insurance

June Jell will never forget the time she and her husband John sat down with their agent and turned mortgage insurance down flat. Six months later, he died suddenly of a heart attack at the age of 59, leaving her struggling to keep up with house payments.
While she got back on her feet eventually, it wasn't without sacrifices along the way --including the family home.
Now she tells everyone she knows, "If you can get it, take it. We thought mortgage insurance was expensive at the time, and because of our age we believed we could handle everything."
In retrospect, she realizes, "It really wouldn't have been that expensive after all. It would have been a blessing."
Insurance of any kind is one of those things people like to put on the back burner or do without. "A lot of homeowners don't want to add the cost of insurance to their mortgage payment," says Feisal Panjwani, a senior mortgage consultant with Invis Inc. in Surrey, B. C. "One of the biggest mistakes they make when they sign their mortgage is declining insurance, thinking they will research it on their own. Nine times out of 10, they don't get around to it. Then, when something goes wrong, it's too late."
It's not surprising that some homeowners balk at mortgage insurance, especially when they feel they are already stretching their monthly payments to the maximum.
Especially in these economic hard times, however, you can't afford to be without it, says Jennifer Hines, vice-president of creditor insurance for RBC Insurance in Mississauga, Ont. "Clients at all stages need to make sure their mortgage is protected. Some have life and disability insurance, but the family still could be left holding a debt on what tends to be a person's largest individual debt obligation."
The ideal time to look at options is when you do your mortgage application. The most common are insurance tied to the mortgage itself, or to the lender. Tying insurance to a mortgage balance is usually preferred since you can switch lenders and keep the same policy. This reduces the risk of facing higher premiums or finding out you are uninsurable when you reapply at another bank, Lorne D. Greenwood, a real estate lawyer based in Milton, Ont., advises.
"Getting insurance through an independent broker to cover the same amount means you won't have to re-qualify with each mortgage," Mr. Greenwood says. This is also a good choice when your mortgage balance decreases and you want to reduce your premiums. Mr. Panjwani notes that it's especially important for firsttime or younger buyers to get coverage because the mortgage balance is high, insurance premiums tend to be in their favour, and medicals are not generally required.
For those who think their disability and life insurance policies are enough if things go wrong, that may not be the case, Ms. Hines warns. "Typically, disability policies will only pay 60% to 70% of your monthly income, so there is still a gap. You still need coverage for other expenses. We tell people it doesn't have to be an either/or situation. We also suggest they consider whether they need to top up what they have, so they don't have to be concerned about mortgage payments in the event of a death or disability."
There are additional considerations homebuyers should be aware of regarding mortgage-related insurance. When it comes to high-ratio mortgages, according to the Bank Act anyone borrowing more than 80% of the value of the property must insure the mortgage to protect the lender against defaults.
The premium for this default insurance -- not to be confused with conventional mortgage/life insurance coverage -- is paid once at the time of the closing, at a rate that varies between 0.5% and 3.75% of the mortgage amount. Title insurance is also an increasingly important option for protection against title problems and fraud. "Just about every lawyer is recommending it," Mr. Greenwood says. "The premiums can range in price depending on the value of the home you are insuring."
Mr. Panjwani notes that buying mortgage insurance doesn't have to break the bank. "If you can't manage it all, cover what you can afford. For example, you can insure a percentage of a portion of the outstanding balance, or the life of one of the borrowers through a term life policy.
"There is no real right or wrong answer on what type of insurance you should take. Regardless of the choice, some coverage is better than none at all."

Tune up your credit score for more chance at a good mortgage

If you’re thinking of getting your first mortgage or you have to renew one, you may be looking forward to the all-time-low mortgage rates now available. But beware, those mortgages — and any mortgage — may be hard to get.

One thing you can do to avoid being left out in the mortgage-less cold is to check your credit score, and make it the best it can be.

Lenders have tightened up their requirements and the government has made it more difficult to get mortgage insurance, said Brian Peterson, president of the Mortgage Brokers Association of British Columbia.

Last summer, the federal government set new guidelines for which mortgages can receive government-backed insurance.

Under the new rules, set out in a Department of Finance backgrounder, the government will no longer insure 40-year mortgages. Also, while zero-down mortgages are still available, the government will only insure 95 per cent of those loans.

The government also set a credit score floor of 620 for potential borrowers, with a limited number of exceptions allowed. (Canada’s major credit-rating agencies use a scale from 300 to 900; the higher the number, the better your credit rating is.)

Peterson said the credit score floor has been reset at 600.

All mortgages in which the loan is more than 80 per cent of the property value require insurance. And lenders now sometimes choose to insure other mortgages at their own expense so they can sell them as part of an asset-backed security, Peterson said.

So while a borrower’s credit score is not the only criterion — lenders also want stable employment and a low debt load — it is an important one.

It’s a score people can improve.

There are two providers of credit scores in Canada, Equifax Canada and TransUnion.

Tom Reid, director of consumer solutions for TransUnion, has heard about cases where consumers who thought they had a good credit score are being declined for mortgages.

Reid recommends people aim to get their credit scores up to 750, and 47 per cent of Canadians are in that range.

Credit scores are based on reports lenders provide regarding loans they have made and their repayment. Lenders include credit card companies, retailers that have their own credit cards, and banks reporting lines of credit and auto loans.

For a good credit report, payments should be made on time, even if the payment required is small and almost not worth bothering, Reid said. And balances on credit cards should be kept below 50 per cent of the cards’ limit.

Keep applications for credit down to a minimum, except if you are shopping around for the best deal on a big purchase, Reid said. Potential lenders may think you are desperate for credit if you have a number of different companies checking your score at the same time.

Also have a mix of loans and credit cards to show you can manage debt, Reid said.

“It may be easier to manage [one loan] but it doesn’t show lenders that you have the ability to manage other types of credit with potentially higher payment obligations,” he said.

Also, before cancelling a credit card, think about whether keeping it could positively affect your score. If you’ve made the payments on time and have had the card for a while, you may be better off hanging on to it, and not using it. Once you’ve cancelled the card, you’ve also cancelled its positive credit history.

What hasn’t traditionally been included in credit reports is mortgages. But that’s changing with more financial institutions choosing to provide mortgage information, Reid said.

One problem some would-be borrowers may face is a lack of credit history. For them, Reid suggests starting with a credit card from a retailer as they are generally easier to get. Then make sure the payments are made on time.

The longer credit history you have, the better your score, so start early, Reid said.

The Financial Consumer Agency of Canada has helpful information about credit scores — how to read the reports and how to improve them — on its website here. Check out “For Consumers.”

Refinancing to save money

Now that the Canadian Lenders have followed the Bank of Canada’s lead and dropped their prime rate by .50% to 2.50% not only is the variable rate coming down but so are the fixed rates. Every day it makes more sense to take a look at your mortgage and see what re-financing would save you. I will do my best to break down the components to try and simplify this for you.

First of all, let’s take a few things for granted:

1) you are currently maintaining a good credit record

2) your job/income is stable and reliable

3) the value of your property is such that you currently owe less than the property is worth.

On a simple re-finance to get a better rate and save money on interest, you first need to determine what your pre-payment penalty is.

In just about every mortgage, the lender has the right to charge the greater of “Interest Rate Differential” or “three months interest”. “Interest Rate Differential” or IRD is calculated usually determined by most lenders by the difference between the posted rate at the time you took your mortgage and the current posted rate. You may have gotten a discount at that time. It doesn’t matter, they will probably use the posted rate.

So, for example, say in March, 2007 the posted rate at your lender was 6.79% and the posted rate today is 5.79%. The difference is 1.0%. If you took a 5-year mortgage, you would then have 3 years left. If your current balance is $200,000 then multiply that by 1.0% by the remaining 3 years of the term = approximately $6,000. Depending on the amortization chosen at that time will determine the decreasing balance and actual amount of the penalty.

For the sake of this exercise, let’s say it is $5,500. Now, the same mortgage, three months interest would be based on the rate you actually have on your mortgage. Let’s say it is 5.35%. Therefore, 3 months interest would be $200,000 multiplied by 5.35% (one year’s interest) = $10,700 divided by 4 = $2,675 (3 months interest). Again allowing for a decreasing balance and your penalty may be in the range of $2,550. That means the lender would have the right to charge the $5,500. I say “the right to charge” because you may be able to negotiate this penalty down with what you would offer in return for a re-financing package. And that may consist of the increase in mortgage dollars you are going to be borrowing.

Once you have determined your penalty, then you need to know what your current balance is, add any discharge fee (usually $75 – $150) and legal fees to register the new mortgage (&750-$1000). Now you know what your new mortgage will need to be.

Using an amortization table you can determine what your balance will be as you pay your new mortgage down. Now if you want to truly compare the savings, use the payment you have been making on your original mortgage. Same payment, lower interest not only means you are paying less interest but the amount being paid on the principal is more so you are ultimately paying your mortgage off much faster. Compare the amortization schedule from your original mortgage to the new mortgage to determine your savings.

You can also calculate in savings against future increases. Remember, your original mortgage term will have to be renewed in two or three years and the rates will be higher again. These lower rates won’t last forever. So your new mortgage at the lower rate will carry on for two or three years longer and the savings will be all the more.

Now, if you really want to save money and still pay for your home quicker, consider your personal debt. Any loans and credit cards you may be paying 12 – 18% or more on. Remember, thinking that you are safer by having less debt on your home only works if you don’t owe any personal debt. And if you owe money, you will have to pay it all back. The key is to pay less interest. Transferring $25,000 of personal debt at a rate of 15% to your mortgage can easily save you as much as $5,000 in only three years (11% difference on an average balance of $15,000). If you are paying $750/month on that debt you can simply add that to your mortgage and your personal debt will be paid off just as quickly as if you kept the personal debt separate from your mortgage. Using the examples I have suggested here savings can add up to as much as $15,000.

Now, these ideas above are for the individual who has equity in their property and has the cash flow to make their current payments. But what if you have had a cut in income or are concerned about a future cut in income and are just looking to cut down on your payments?

If you are like many who started out with a 25-year mortgage, say $150,000 @ 6.0%, your payments are probably at about $960/month plus property taxes. You may also have the same personal debt of approximately $25,000 @ 12 – 18% with payments of about $750/month. So you are obligated to pay about $1710/month on an income that isn’t so reliable. If you were to re-finance now with a $175,000 mortgage over 35-years @ 3.89% (5-year term) your payments are now $760/month. You free up cash of $950/month that you don’t have.

If your income improves you increase your payments &/or make lump sum payments of 15 – 20% (depending upon the lender) to the tune of at least the $950/month you have been saving. You are back to paying off your mortgage in even less than the 25 years you originally signed up for. Even if you don’t make the extra payments you still save the $5,000 on your personal debt. And it’s a win-win situation. The bank is glad to help you with a mortgage that fits your income better. They will have the confidence you can afford it.

The main point I am trying to make is that you have an opportunity to use the value of your home to manage your debt in a way that puts money where it belongs, in your hands.

How monetary policy influences mortgage decisions

Variable or fixed? It's the question homeowners and homebuyers ask most often and inevitably elicits an unsatisfying answer.

Whether it's worth paying the penalty to terminate a fixed-rate mortgage to obtain the lower rates available on variable-rate mortgages is a calculation that forces assumptions about future monetary policy even the Bank of Canada is hedging its bets on.

Over the past few years, the focus of monetary policy has been inflation control. What this has to do with mortgages is that the principal tool for controlling inflation is the interest rate lever. The bank has set an inflation target of two per cent and interest rates are raised or lowered to increase or reduce borrowing, which in turn stimulates or depresses demand. In this way, the bank ensures demand doesn't overwhelm the economy's capacity to satisfy it and inflation is held in check.

Since December 2007, as the economy has slid into recession, the central bank, in concert with other industrialized nations, has cut its overnight lending rate by 400 basis points to 0.5 per cent in an effort to bolster demand. Clearly, it can't go much lower.

The bank has also been trying to encourage lending by injecting liquidity into the financial system. There has been concern that this infusion of money will be inflationary, raising the threat of stagflation -- inflation with no economic growth.

However, the bank is not "printing money" to carry out this task. Rather, it is purchasing assets, such as commercial paper and bankers' acceptances, from financial institutions that have been unable to trade them because of tight credit markets and replacing them with cash or more liquid government securities.

These purchase and resale agreements are temporary and unwound after 28 days so they are, in effect, simply exchanges of assets with no increase in the monetary base.

Similarly, the federal government's infrastructure spending program should have no significant impact on inflation since government demand is replacing private sector demand. In other words, there is no increase in aggregate demand.

For inflation watchers, this should be good news. And it gets even better. In January, the bank said it expected inflation to return to the two-per-cent target in the first half of 2011 as the economy returns to its potential. It has since hinted that it might be later, sometime after mid-2011.

Variable rate mortgage rates are derived from the prime rate, which financial institutions usually, but not always, set in accordance with Bank of Canada interest rate adjustments. But negotiations on mortgage rates are getting tougher. Lenders are beginning to set variable rates at a premium over prime instead of the past practice of a discount to prime.

Fixed-rate mortgages are based on bond yields, which are market driven and largely independent of central bank moves. Higher yields increase funding costs for financial institutions which raise fixed mortgage rates in response.

As it happens, bond yields have been bumping record lows in a slumping economy, making fixed rate mortgages a better deal than they've been for decades.

So, variable or fixed? It's up to you.

Breaking up with your mortgage Variable rates look pretty attractive

Anybody who bought their first house in the 1980s must marvel at mortgage rates today. Or perhaps fume.

Another rate cut this past week from the Bank of Canada led all of the major banks to lower their prime lending rate to a new low of 2.5%.

Consumers who locked into variable-rate mortgages tied to prime before credit markets tanked are getting as much as 90 basis points below prime and borrowing as low as 1.6%. It's the deal of the century.

In October, the banks suddenly changed the rules on borrowing and demanded consumers pay a 100-basis premium over prime if they wanted to go variable. The banks have eased up since and the premium on a variable-rate product is 80 basis points above prime for a 3.3% rate.

It poses an obvious question for anyone who has locked into rates as high as 5.75% on a five-year fixed-rate mortgage: Should they break that mortgage?

"It probably does make sense to break it now," says Vince Gaetano, vice-president of Monster Mortgage.

He gives the example of one client who came into his office this past week with a $205,000 mortgage and a 5.24% interest rate. The customer had 3½ years left on a five-year mortgage. The penalty to break his mortgage is the greater of three months interest or what is called the interest rate differential. The interest rate differential is the lost interest between your current rate and market rates.

In that client's case, his interest rate penalty is calculated based on the current four-year rate at his bank, now 4.14% on a discounted basis. The lost interest to the bank is about $7,800, which is what the customer will have to pay.

It's a big penalty but Mr. Gaetano argues that if that same customer breaks his mortgage and goes with the variable-rate mortgage at 3.3%, the savings would be in the $13,000 to $14,000 range over 3½ years -- more than offsetting the penalty.

There is also a nifty little trick you can pull off if you have a prepayment option on your mortgage. Mr. Gaetano's customer has a 25% prepayment privilege, so he can knock $57,000 off his mortgage and lower his penalty by about $2,800.

"You can access [that 25%] from an unsecured line of credit or some credit cards for a few days and reduce your penalty because the penalty is based on the balance outstanding," says Mr. Gaetano.

While not encouraging people to break their mortgages, the banks are acknowledging that some consumers who locked into higher rates can save money if they refinance at the new lower rates.

"I think it does make sense as an option for some people trying to lower their rate," says Joan Dal Bianco, vice-president of real estate-secured lending at TD Canada Trust.

She says if you are refinancing your mortgage, you can take the interest rate differential penalty and tack it on to your new mortgage. If you have credit card debt, you can add that on too, and the refinancing makes even more sense.

The office of consumer affairs for the federal government has a great site to help you make the decision: www.ic.gc.ca/eic/site/oca-bc.nsf/ eng/ca01817.html. Moshe Milevsky, a professor at York University's Schulich School of Business, who created the calculator used on the government site, says it ultimately comes down to how much money you will save on your mortgage if you break the contract.

"To me, it's pure mathematics. There is nothing speculative or probabilistic about the decision to break a mortgage. It is the classic example of undergraduate finance time-value-of-money calculations. If the homeowner can refinance into a mortgage with an identical term that reduces monthly payments above and beyond any penalty costs, then go for it. Plain and simple," says Mr. Milevsky.

Breaking your mortgage based on a decision to go into a variable-rate mortgage is an entirely different decision.

"This decision shouldn't be confused or muddled with the classic long or short decision, or whether real estate prices or interest rates are headed up or down from here," he says.

So, it comes down to two choices: The first is to break your locked-in mortgage and renew for another fixed term. If it saves you cash, that is a no-brainer.

The second choice is whether to switch products and go with a variable-rate mortgage. Historically, consumers have saved money 88% of the time going variable, according to Mr. Milevsky's own studies.

I'm still in the camp that favours a variable rate.

Dusty Wallet This will not save you any money, but if you are strapped for cash because one of the breadwinners in your home has lost a job, the banks will let you lengthen your amortization period. If you have a 25-year amortization you can lengthen it to 35 years without any service charges -- other than the huge jump in interest charges!

Canada Prepared to Accelerate Asset Purchases to Help Economy

Canadian officials indicated they may broaden asset purchases to help lower borrowing costs and battle the effects a deepening global slump.

Bank of Canada Governor Mark Carney yesterday said purchases of non-government assets may be an option as the bank looks at policies beyond interest rate moves. In a separate interview, Finance Minister Jim Flaherty said he’s studying more efforts to shore up the commercial paper market.

“We have lots of options to look at,” Flaherty said in Horsham, England, on the sidelines of a meeting of finance ministers and central bankers from the Group of 20 “The key here is we’ll do what is necessary in order to make the markets function well in Canada.”

Canada’s economy shrank at a 3.4 percent annual pace in the fourth quarter, the most since 1991. Reports have also shown record job losses and trade deficits in recent months.

Carney signaled he’ll likely revise down his outlook for the world’s eighth-largest economy next month. The Bank of Canada’s forecast for 3.8 percent growth in 2010 is more than twice the pace predicted by the IMF.

“When we laid out the projections in the update in January, we also laid out some upside and downside risks,” Carney said in the interview. “It’s safe to say the downside risks, particularly around the outturn in the global economy, have materialized.”

Beyond Rates

Carney said purchasing non-government assets is an option the central bank may consider. Earlier this month the Bank of Canada cut its benchmark lending rate to a record low 0.5 percent, and said it is preparing to use policies beyond interest rate moves, if needed, to revive an economy hit by a recession and tight credit markets.

“As we bring out the framework, it will be consistent that the bank is managing credit easing or has a framework for managing credit easing and we’ll decide when and if to use it,” he said.

Credit conditions for corporations have tightened, with companies facing the worst prospects for obtaining loans or making new sales in a decade, according to a survey of executives by the Bank of Canada released Jan. 12.

Purchases of securities may help drive down longer-term interest rates, stimulating borrowing and economic growth.

Extraordinary Measures

Canadian policy makers left the door open for extraordinary measures earlier this month. The Bank of Canada said at its March 3 interest rate announcement that it will outline how it would implement such measures on April 23.

Fed Chairman Ben S. Bernanke has increased the central bank’s total assets by $1 trillion over the past year to revive the economy and stem the risk of deflation. In December, the Fed switched to using emergency credit programs as the main tool of monetary policy. The Bank of England this month began to acquire government bonds with newly created money.

So-called quantitative easing is designed to leave banks with so much cash that they stop hoarding and expand lending. It can involve a central bank buying securities and creating money to pay for them. A central bank can also try buying up securities to drive down longer-term interest rates, extending efforts to keep short-term rates low with benchmark rates.

Buying Assets

In Canada, the federal government has taken the lead in purchasing assets from the financial system in a bid to revive lending, including facilities to acquire as much as C$125 billion in mortgages from banks and C$12 billion in car loans and leases.

Carney said it’s logical for the government to purchase the mortgages through the state-owned Canada Mortgage and Housing Corp., rather than the central bank, because the agency already insured the assets. Still, the central bank has “providence” over “credit easing,” he said.

“It makes sense to run that through CMHC,” Carney said. “In terms of other potential measures, we’ll work with the government to decide how to design them.”

Flaherty said the finance department and the central bank are coordinating efforts.

“We both have a role. The key here is that the framework is a framework that matches what the bank can do with what the government can do,” Flaherty said. “I have regular discussions with the governor of the bank to make sure we don’t go off course, that what he proposes to do meshes with what the government is doing.”

Should you break your mortgage to save big bucks?

With interest rates plunging to their lowest levels in decades, many Canadian homeowners are eyeing the prospect of breaking their mortgages to negotiate new ones with more favourable rates.

Experts say that even with the financial penalties that come with breaking a fixed-rate mortgage, many homeowners may be in a position to save money by breaking with their monthly status quo.

Anthony De Almeida, president and CEO of CanEquity Mortgage, says interest rates have fallen so low in such a short period of time that last year's fixed-rate mortgages now seem "ridiculously high," even though they would be considered quite low historically.

Such dramatic changes in the market, these experts say, have sent homeowners marching to mortgage brokers to see if breaking their mortgage would be in their best interests.

To break or not to break?

Jim Tourloukis, president of Verico Advent Mortgage Services in Unionville, Ont., says the decision of whether or not to break one's mortgage can be made through simple mathematics.

"At the end of the day if the balance on their mortgage is less by breaking it, then it makes sense to do it," Tourloukis told CTV.ca in a phone interview.

Moshe Milevsky, a professor at York University's Schulich School of Business, said the key factor for homeowners is being in a position to absorb the financial penalty that comes with breaking a mortgage, but still coming out on top.

"It has to be someone that took out a mortgage at a relatively higher rate, maybe three years ago; it's got to be a relatively long amortization period so the interest clock is ticking at quite a high rate," he told CTV.ca in a recent phone interview. "For them this simple formula will work out."

"If it's only a couple of bucks a month, it may not be worth the hassle of going to the bank," he added. "But I would say if you can save $20 or $30 a month on the mortgage, why not spend an hour in the bank and go through the paperwork?"

The penalties

In general, the penalty for breaking a mortgage is either a payment of three months interest, or something called the interest rate differential (IRD) -- a non-standard calculation which seeks to compensate the bank for the money it loses when a homeowner breaks their mortgage.

"In theory what it represents is the interest cost, or the interest income, that the bank forgoes by you breaking the mortgage," said Tourloukis, of the IRD.

De Almeida describes the IRD as "the difference between the rate today and the rate that you have currently."

In any case, the bank charges homeowners the larger of the two penalties, which has tended to be the IRD as interest rates have plummeted.

Then there are legal fees, paid to lawyers who handle the cancellation of the old mortgage and the creation of the new one. De Almeida said these fees typically range between $500 and $1,000.

Once the combined penalties are calculated, they can be added to one's new mortgage balance or paid off directly depending on the homeowner's preference and financial means.

More security, less debt

Because interest rates are so very low right now, it may also be attractive for homeowners to negotiate new mortgages where they are locked-in at a fixed rate for the long term.

"The rates haven't been this low in 50 years or more, so anybody that's gotten a mortgage in the last three, four, five years is very interested in locking in," De Almeida said.

De Almeida said he has had many clients looking to lock in to seven or 10-year mortgages, even if it means paying more than they would for a shorter-term mortgage.

"Why not pay a little bit more and have 10 years of security, especially in this market?" he said.

In a similar way, homeowners can decrease their liabilities by opting to take other debt they may have -- say credit card or car loan payments -- and tack it on to their newly negotiated mortgage, in order to pay it off at better rates.

De Almeida said the combination of low interest rates and an otherwise tight credit market makes it "a perfect time to be throwing your credit cards into a mortgage and to becoming debt-free."