We said “goodbye” to the super low 2.99% 5 year fixed rates last week and said “hello” to a still very competitive 3.08% 5 year fixed rate this week (source: Best Mortgage Rates Canada).

For most rate shoppers, this increase of 10 bps can be traumatizing. Consumers tend to drool over a mortgage rate that is even just a few percentage points (or more) below other advertised rates.  But let’s not forget that not all low rates are what they seem.  Some super low mortgage rates typically signal a no-frills product that isn’t fully loaded with the features and benefits that might be important to you.  Is shopping for a mortgage rate just like buying anything else; you get what you pay for?

2.99% vs. 3.08% … You Say Tomato, I Say Tomahto

At first glance why would anyone in their right mind opt for the 3.08% mortgage rate?!!  To the rate shopper, these are two very different numbers and the 2.99% rate is quite obviously the best choice.  But, they aren’t so different when you compare the monthly/bi-weekly payments of a $250,000 mortgage with a 25 year amortization:

@ 2.99%: $1,181.83mo/$545.46bi-weekly
@ 3.08%: $1,193.40mo/$550.80bi-weekly

Yes as expected there is an increase in the payment.  But, if this is going to make or break your monthly budget maybe you should re-think what you can afford!  And call me crazy, but I would want to know more about what each product offers before being shackled to the lower 2.99%.

BUYER BEWARE: Does the Rate Sound too Good to be True?

How are lenders able to offer such a low rate?  And what’s the catch, you might ask?  More times than not, lower rates are not offered on a standard product, rather it is a “no-frills” mortgage.  The no-frills mortgage might be a match made in heaven for you, it all depends on your need for flexibility and how important the 3P’s are to you (Pre-payment options, portability and penalties).  These products are also sometimes used in a bait and switch technique, so ensure that if you are in fact looking for a basic product that you aren’t up-sold into a more profitable mortgage (profitable for the lender that is).

No-Frills Mortgage

If you take away all the bells and whistles of a standard mortgage, what you’re left with is a no-frills mortgage.  No-frills mortgages are stripped down to eliminate features that add cost.  They are designed to appeal to frugal buyers who may not qualify at higher rates and are less likely to make lump-sum payments throughout the term.  When compared to a standard mortgage, no-frills mortgages offer:

• Minimal pre-payment privileges (0-10% vs. 10-20% with standard product)
• Minimal payment increases (0-10% vs. 20-100% with standard product)
• Quick close deadlines (30 days vs. up to 120 with standard product)
• Real deals only (no pre-approvals)
• A lack of portability
• Lower amortization (capped at 25 years vs. 30 years with standard product)

Is It Right for Me?

Just like any other big financial decision that you make in your life, the answer to this question is very much dependent on your personal situation.  What I can say is if you aren’t going to take advantage of the additional features offered with a higher rate and you are certain that your situation will not change over the course of the term (typically 5 years), then a no-frills product could be a great choice!  But without a crystal ball it can be hard to look into the future, you could get a promotion, you could lose your job or your family could grow and you might need to upgrade.  The lack of flexibility with the no-frills product could actually cost you more to get out of in the future than the interest savings you’ve captured.

Just keep in mind that the interest rate is not the only feature to consider when choosing a mortgage product that is right for you and in the current market there are still some great low mortgage rates available, fully loaded with features so you can have your cake and eat it too!

RateSupermarket.ca Week in Review

Wiarton Willie (Ontario) and Shubenacadie Sam (Nova Scotia) didn’t see their shadows on February 2^nd, 2012 and predicted that spring is on its way!  For Ontarians, this means that their mild temperatures should stick around which is exactly what low mortgage rates have done this week as well.  No big changes here!

*This chart is based on changes over the last week to our Best Mortgage Rates Canada page. Mortgage Rates may vary depending on Province.

Still, taking the search by storm are the 5 year rates!  Half of RateSupermarket.ca visitors searched, and searched, and searched for the 5 year fixed closed rates (maybe trying to find the expired special rate of 2.99%?).  The other half (48 per cent) searched for the 5 year variable closed rates, and the next leading searches were for 4 year fixed closed (0.7 per cent) and 10 year fixed closed (0.5 per cent).

Experts will tell you your debt-to-income ratio is one of the best ways to gauge your financial position. The media often quotes the Bank of Canada saying Canadians are at dangerously high levels of debt at 153 per cent. But what does that mean? I’ve spent countless dinner parties arguing how to properly calculate debt to income ratios and how can you tell if your in the danger zone. There are many schools of thought on how to asses your financial health.  Here are a few.

Your ability to service your monthly debt

Start by calculating how much fixed costs (debt) you have every month. These are costs you would pay even if you were away on holiday all month. This includes, mortgage, car payments, insurance, utilities, property taxes, minimum credit card payments and minimum student loan payments. Then calculate how much money you bring in as a household in one month. Your salary, your spouse’s income and any money you make from investments.

Take the first number (your debts) and divide it by the second number (your income) and multiply it by 100.

Experts say, ideally you want this number to be less than 30 per cent. If you’re between 30-40 per cent be careful where you are spending your money and if you’re creeping close to 50 per cent. You may want to cut back on some of your fixed living expenses.

Your total debt compared to your income

This is the debt to income calculation Statistics Canada uses to come up with that scary 153 per cent figure. Take your total debts, home loan, car loan, line of credit and credit card debt. Calculate how much money you would need to say “I’m debt free!”

Take that number (total debt) and divide it by your total annual household earnings after taxes (total income) and multiply it by 100.

Experts will say, if that number is under 130 per cent you are in good shape. 130-140 per cent you are in a vulnerable position. More than 140 per cent is getting close to the danger zone and more than 150 per cent means you’re operating at a debt level that would be hard to handle if interest rates were to rise 2-3 per cent.

Sorry! One more ratio

Canadians also need to look at their debt to asset ratios. This means the ratio of how much money you have if you sold everything compared to your total debt or liabilities.

Calculate all the debt you have outstanding. How much is left on your mortgage, credit cards, pesky line of credit and heck even your library dues. Who do you owe money to right now? Jot it all down. Then, add up how much your assets are worth,  your house, car, stock portfolio any other investments, even your 60 inch T.V! Anything you own with a re-sale value. Imagine you’re moving to Argentina to start a new life and you had to sell it all.

Take how much you owe to everybody (total debt/liability) and divide it by how much your stuff is worth (total assets) and multiply by 100.

Again, experts say the higher the number the fewer assets you have to back up your debts and that’s not very good. For example if you total assets are $1,000,000, but you owe $900,000. You ratio is 90 per cent. You have little equity in your home and you’re the fakest millionaire around. But on the other hand if you owe $100,000 but your assets are worth $250,000 you are well backed by the equity or assets you already have in your home.

No need for online calculators

I’m not going to give you a link to any online calculators, because this is easy math that most of us can figure out and frankly most of the calculators make the situation more confusing. If you do the math yourself it will help you understand where you may be spending too much and what these numbers really mean.

The better ratio

In my opinion the better ratio is the one that calculates your ability to service your monthly debt. That is the number most banks use to understand your ability to pay your mortgage. 

But that does not mean you should take a $1,000,000 loan just because the bank says you can afford the minimum payments. Calculate your affordability based on at least 2-3 percentage points higher in interest. This is the best way to protect your financial health.  Even if you’re on a fixed rate mortgage it means when your mortgage renewal comes up and interest rates are higher, you’re already well positioned to make those higher payments.

But my ratios are so high! Don’t worry so are mine

• Rubina’s household ability to service monthly debt: 50 per cent
• Rubina’s total household debt compared to income: 190 per cent (OMG)
• Rubina’s household debt to asset ratio: 44 per cent (yikes)

But, my husband and I are in our 30s. We pay our loans at a rate 3 percentage points higher than what the bank wants us too. If we were to lower our payment to the minimum, our monthly ratio would be lower as well. Also, we have no “bad” loans like credit cards or expensive lines of credit. We own our car and are conscious about our variable spending, so our ratio of household debt compared to income is decreasing every month. Finally, we bought our house two years ago and this is the most debt we will ever be in, as time goes on our debt to asset ratio will improve.

On top of this we’re well prepared, in the last year we have built a 6 month rainy day fund and we both have substantial retirement portfolios and good job prospects.

You need to take all of this into account when you calculate your own affordability. The ratios are important, but always put them into perspective with your unique situation.  Never live beyond your means.

In Canada, there are well over 18,000 individuals qualified to call themselves financial planners and thousands more can call themselves financial advisors, financial consultants and investment advisors without any set qualifications.

When we look at the financial planning world and the individuals preparing plans, you might be surprised to learn that the overwhelming majority of these individuals are actually working as commissioned sales people or on salary and bonus where almost every one of them have sales targets set by their employers.

The majority of financial companies (banks, life insurance companies, brokerage firms, etc.) operate on such a sales business model. So if you’re in the market for a financial planner, you need to be able to spot their marketing ploys before you agree to one of their investment packages.

Identify the Needs of Yours vs. Theirs

Over the past few years investors have been told how they need to make financial planning one of their top priorities. Accompanying this emphasis on “planning” has been an explosion in the types of financial plans marketed to investors like you. Some within the investment industry market a holistic financial planning approach, some a life-cycle approach, some a life-goals approach, and some just market a simple financial plan.

The investment industry markets financial planning to sell additional products and services. They prepare the financial plan; the plan clearly identifies the needs you have (real or not); and the sales person just happens to have the right product or service to satisfy those identified needs. In other words, the financial plan is the tool that leads to the sale!

While some of these financial planning needs may be legitimate, some may simply be part of the sales process.

6 Marketing Ploys to Watch For

So, the next time you sit down with a financial planner, be ready to identify the legitimate plans, and those “extras” that are nothing more than a marketing tool to boost sales.

#1. Estimates of Current Expenses

If you were asked to estimate your expenses, then the plan is not meant to help you save and create wealth. When asked to estimate expenses most people grossly underestimate their costs, and without a true and accurate picture of your daily expenses you have no idea where you are financially.

#2. Estimates of Future Income

Does your financial plan base its projections on your future income or your future expenses? If it focuses on your income, then the plan is more about marketing investments and insurance than it is about setting you on the path to financial independence. Your income is important, but for most of us going into retirement, estimating income is less reliable than estimating expenses. It’s harder to know what income amounts you will have as you get older and going into retirement. (What amounts will you receive from your income, investments, your company pensions, government pensions, etc.?)

Your expenses, on the other hand, can be identified and quantified today and you can use today’s expenses as an excellent guide when estimating your expenses in retirement.

#3. A One Size Fits All 20-Page Report

If your financial plan is 20 pages thick, how much of the information is specific to you? If your personal financial information is limited to a few lines at the beginning of the report, then the report is more about marketing products and services.

Computer software can spit out a 20-page report in five minutes. All that’s needed is a few of your financial details and a few financial assumptions to be made and a glossy financial plan can be created. Your financial plan’s usefulness is directly proportional to the amount of specific personal detail it relies upon.

#4. No Plan to Revisit

How often do you refer to your financial plan? Have you revisited your financial plan in the past six months, or one, three and five years? Or was it created, presented, and then filed, never-to-be-seen again?

Plans created for marketing focus on a single purpose (make the sale) and when that purpose is achieved, there is often no reason to revisit the plan. But a real financial plan is a useful tool (full of concrete personalized numbers and budgets) that you should return to frequently to measure and monitor your financial progress.

#5. Little Time = Little Usefulness

How much time did you personally invest in the creation of your financial plan? Were you asked to provide specific details of your expenses and income, not just your investments, insurance details and financial accounts? Did you invest a few hours of your time or did you simply answer a few questions off the top of your head?

Useful planning requires a commitment of your time if it’s going to be accurate. Basing your plan on guesstimates is pointless, unless it is a marketing tool.

#6. You Get What You Pay For

Finally, how much did your financial plan cost you? How much did you pay for it to be completed? Nothing? Then the plan is probably worth exactly what you paid.

More importantly, how do you think the person creating your financial plan is getting paid? Do they work as a charity, out of true concern for your financial success, or does selling you the products and services that satisfy the needs identified by your financial plan earn them a pay cheque, promotion or bonus? Learn to spot the differences in the financial planning game.

It’s Not All Their Fault…You Get What You Ask For

Selling financial products and services is an art. You have to sell the concept, the idea and the dream. It’s not like selling a car or an appliance where the buyer can see, touch and test-drive the product. Selling financial concepts takes a high level of skill, psychology and a great set of tools. Financial plans are one such tool.

So whom do we blame – the sales person or the buyer? Let’s face it. What would you prefer to have, a financial plan or a budget? A financial plan is fun, it deals with your wish list, your dreams for the future and it tells you how in 20 years you are going to have a million dollars for your retirement. What could be better?

A budget, on the other hand, what could be worse? A budget is not a lot of fun. It deals with our today, our reality. It tells me how much I spend (d’oh!) and how little I make. A budget is like the slave master – so serious, mean-spirited, always telling you what you can do and what you can’t do. How enjoyable is that?

The point is this: if you want to deal in dreams and fantasy, then you can’t complain when you get a financial plan designed as a marketing tool. Real financial plans take real time and effort, use real numbers, include a proper budget, and get real results.

If you happened to catch the Weather Network last year, you know the news wasn’t good. Natural disasters included massive flooding in Manitoba and Saskatchewan, 120 km/h winds that helped fuel $700-million in fire damage around Slave Lake, Alberta, a devastating tornado in Goderich, Ont. and, in November, further windstorms in Alberta that blew out windows in office towers, the roof off a school gym, and literally pushed trucks off the highway.

Yet even if you don’t happen to live in any of those communities, the multi-million-dollar insurance bill may have an impact on your finances. The Insurance Bureau of Canada has warned, in the wake of three consecutive years of cumulative billion-dollar weather-related insurance claims across the country, that Canadians could face home insurance premium hikes of 10 to 20 percent in the next two years.

Here are some ways you can lower your annual home insurance bill.

Shop around

This should go without saying, but a surprising number of people stick with the policy they’ve had for years without bothering to investigate if they can get a better deal elsewhere.

Take me, for example. When I first got my driver’s license (many years ago), I got my auto insurance from my parents’ agent. When my wife and I bought our first house, we went with the same guy. Finally, a couple years ago when we were preparing to move, we decided to make some calls to see if we could get a better rate and we’re shocked by how much lower the quotes were for comparable – or better – coverage than what we’d been paying for.

Review your coverage and contents

Prior to making those calls, you should have a good understanding of what your current policy covers, and consider changes to your life that may have made that coverage redundant (or under-valued). A new growing family means lots of new pricey gear; at the other end of the spectrum, when kids move out they may take a lot of valuable items with them when they literally empty the nest. Conduct a thorough survey of your household contents – and make a list and take lots of photos – to help you better assess your coverage needs, and have a record if you ever need to make a claim.

Shop in one place

Once you’ve found an agent that offers you a competitive rate for the level of coverage you need, consider bundling your auto and life insurance policies with them as well to take advantage of a multiple-policy discounts.

Look for a group discount

Many insurance providers offer discounts for being part of a “group,” like your university alumni association. When calling for quotes, ask if you fall into any unexpected categories.

Increase your deductible

A deductible is the base amount of money your insurance provider won’t cover when you make a claim. When calling for quotes, ask how different deductibles, say $500, $750, and $1,000, will affect your monthly premiums.

Add a security system

While most of us tend to simply ignore a bleating car or home alarm (or wish the owner would turn it off already!), insurance companies do value their role in deterring break-ins, and are willing to offer clients with systems a break on their rates.

Quit smoking

In addition to the money you save by not having to buy another carton of cancer sticks, you could also get a discount on your home insurance. Why? Smoking related fires cause millions in damage every year and are responsible for about one in five fire-related deaths.

The most expensive thing you will ever buy, or devote your money to on an ongoing basis is your home. So, when you have a big expense, the smart thing to do is seek out tax incentives.  And trust me, they’re out there!

Perhaps they’re not as numerous and as generous as those south of the border, but there are tax programs that can benefit you right now.

First Timers

First-Time Home Buyers’ (FTHB) Tax Credit

Introduced in 2009, this tax credit helps out new home buyers at tax time. If this is the first home purchased by you or your spouse (or the first home either of you have owned over the last four years — a boon to those who have taken a break from ownership and were renting for a few years), you can claim a $5,000 non-refundable income tax credit on your return the year you buy. That amounts to about $750 in savings (the tax credit is multiplied by the lowest personal income tax rate for the year, which is 15%). The credit is also applicable for anyone with a disability, or who is buying a home for someone with a disability.

To do: Get more information from Revenue Canada, talk to an accountant to be sure you’re filling out your tax forms properly. You don’t need to file any proof of purchase at tax time, but you must keep this information on file in case it’s requested later.

Home Buyers’ Plan

This program has been in place for years. When you purchase your first home, you can borrow, tax free, money from your own registered retirement savings plan (RRSP) for your down payment. What’s new here is that the limit has been increased to $25,000 — which is helpful considering the price of an average house in Canada today and new limits on how much you need for a down payment. You have fifteen years to repay that amount (and you do really want to get on that, as those retirement savings won’t grow until they are savings!).

To do: Consult with Revenue Canada to be sure you fully understand the rules. Get yourself on a repayment plan through your bank or financial advisor to beat that 15 year deadline to avoid extra fees and/or compromising your retirement plans. (You can find out more helpful information about being a first-time homebuyer from the Canadian Mortgage and Housing Corporation (CMHC).)

Any Home Owner

While mortgages are not tax deductible in Canada, property taxes are in some provinces, including Quebec, Ontario and Manitoba. You may need to do further research to find out the specific details. But in Ontario where I live, low and middle income people can apply for the Ontario Energy and Property Tax Credit.

To do: Do further research regarding the rules in your province. You don’t need your tax receipt when you file, but keep it to fill out the tax form properly and keep it on hand if the government asks for it later.

Working at Home

If you run a business of any kind out of your home, there are numerous household expenses that become tax deductions. If you have a home office and make any kind of freelance income, if you run a home daycare or anything like that, you may qualify. You can write off not only your home office or work expenses, but your utilities, renovation costs (if they relate to the business) and home insurance.

To do: Work with an accountant to determine which expenses are valid, and what percentage of these expenses can be written off (for instance, you don’t write off your entire heating bill, but a selected percentage, usually related to the amount of space your home business takes up).

Renovators

The ecoENERGY Retrofit program through the federal government is still on, and allows you to get up to $5,000 back on energy-saving home renovations. The program is ideally suited for people who have an older home that needs work and are planning some significant upgrades. For instance, the program gives you up to $690 back for a new furnace, $4,375 for a geothermal system, $375 for a new wood-burning stove, $375 for an on-demand water heater, $750 for ceiling insulation and $1,250 for basement insulation. The entire program expires on March 31, 2012 and getting rebates requires registering, getting a home audit and a follow-up audit.

To do: Check the Natural Resources Canada web site for more information about the program and to find energy auditors in your area. In some provinces you can get money back for the cost of the audit, which runs around $300. The audit can also help you quality for provincial or municipal grants as well, so hunt around for more information. Also, this program has been extended in the past, although there’s no word right now if the federal government may extend or renew the program after the March 31 deadline.

Don’t Miss Out on Tax Incentives

Keep your eyes open for tax incentives and rebates that suit your particular situation. Having a medical condition or a disability, owning two homes or having other circumstances can change your options for saving money, or taking advantage of certain programs. Keep in touch with a good accountant, listen up during budget time (both provincial and federal) and keep all receipts related to your home.

Like most of us, you probably pledged to lose a little weight, get more active, and to get a better grip on your finances this year. Unfortunately, resolutions are much easier made than kept. If you’ve made a money-related resolution, but are having trouble staying on track, you might just need a little motivation.

Below, I’ve provided a list of this year’s must-reads. Feel free to leave a comment and share titles that you’ve found helpful over the years.

Saving/Wiser Spending

397 Ways To Save Money by Kerri K. Taylor

Are you looking for simple and effective ways to stretch your dollar? Look no further. The queen of frugal, Kerri K. Taylor, has put together this book and it’s filled with all sorts of tips and tricks for saving money today – and tomorrow. Taylor and her family have saved thousands by practicing their frugal ways, and now she shows you how you can too. She offers ideas on how to save by making minor changes. 397 Ways to Save Money includes advice on everything from homeowner’s insurance to vet bills to cutting back on entertainment costs.

Amazon says, “By combining commonsense thrift with an average Canadian income, Kerry paid off her student loan of $17,000 in just six months and has since saved a six-figure portfolio.”

The Smart, Savvy Young Consumer: How to Save and Spend Wisely by Pat Foran

This book is for young savers and spenders from the age of 14 to 34. It includes information on how to find your credit score, good debt versus bad debt, and tips on finding the best deals on cell phone plans, car insurance and apartment rentals. You’ll learn how to save on monthly bills, and which common investment strategies will work best for you. If you’re young and want to get ahead of the financial game, this is the book for you.

Investing

Against the Herd: 6 Contrarian Investment Strategies You Should Follow by Steve Cortes

In a day and age when going against the grain can feel riskier than ever, Cortes suggests that breaking away from the herd is just what you need to do. Cortes tells readers to be cautious of conventional wisdom, and “presents six alternative opinions on major international investment events.” More of an interesting read than a guide offering practical solutions, Cortes’ book is at the very least unique in its thinking.

No Hype: The Straight Goods on Investing Your Money by Gail Bebee

Gail Bebee’s book, No Hype, is an easy-to-follow, practical guide to investment. She will teach you how to build a successful investment portfolio, no matter how much money you have. You’ll learn how to keep investment costs down, how to pick the best stocks, bonds, mutual funds and exchange-traded funds, and how to choose the right financial advisor for you. Bebee will also show you how to avoid making common investment mistakes and teach you how to plan your finances for retirement – all while reducing the amount of tax you pay on those investments. A must-read for anyone who wants to make the most of their money.

Budgeting

The Budget Kit: The Common Cents Money Management Workbook by Judy Lawrence

If you have a financial goal for the year, you’ll need a well-planned budget in order to reach that goal. Never used a budget before? Don’t worry; Judy Lawrence’s The Budget Kit will teach you how. The Budget Kit offers advice on how to regain control of spending, while providing background information on investing. It contains forms and record-keeping tools, including:

• Monthly budget worksheets
• Debt repayment worksheets
• Online information record
• Medical expense record
• Flexible spending record
  

Managing Debt

Crushing Debt: Why Canadians Should Drop Everything and Pay Off Debt by David Trahair

It’s a fact; Canadians are currently battling all-time high household debt. So isn’t it time to get your debt under control?

The average Canadian owes over $25,000 in consumer debt (which excludes mortgage debt), and that number is quickly rising. David Trahair warns Canadians about the risks of unmanageable debt and offers advice on how to get the problem under control. If you are currently one of the many Canadians who is struggling with debt, Crushing Debt will not only inspire you to face your problem, but also provide you with step-by-step solutions to help you get out of debt.

January is turning into one of the hottest months ever for real estate sales. Realtors say they have never experienced such a busy January.

What’s Behind the Boom?

Its being fueled by BMO’s move earlier this month to lower its five year fixed rate to 2.99 per cent. That’s the lowest posted rate from a major bank in Canadian history. The other banks have followed offering their own version of fixed rates below prime.  This historic event is pushing home buyers back into the market.

Royal LePage, which franchises brokerages across the country, recently forecast the Canadian real estate market will rise 2.8 per cent in 2012. That is slower compared to 2011, when the market rose 4.8 per cent.  But that forecast did not know banks were going to move fixed rates as low as they have.

Real Estate Poised to Heat Up

In my opinion, 2012 could be one of the hottest years for real estate.  The mini boom the country is experiencing now will only grow as we move into the busiest real estate season. March is traditionally the month when inventory of homes for sale increases and more buyers are out looking for a place to buy that will close during the summer months.

Canada’s Excellent Track Record is Paying Off

Why are mortgage rates so low in Canada? Our country’s reputation is driving international demand for bonds from Canada’s biggest banks. Foreign investors are fleeing to safety in Canada.  In the case of BMO, it was able to sell $1.5 billion worth of five-year bonds at a rate of 2.544 per cent, this month.  Making it easy for them to offer consumers the historically low-posted fixed rate. The lower the yield the better the signal that investors have confidence in a lender’s ability to live up to the terms of the loan.

These bond sales are moving through the system and pushing mortgage rates to record lows. It means homeowners can benefit from even cheaper money as more foreign investment moves into Canadian bank bonds.  With the Europe debt problems still spiraling out of control and the U.S.economy still on shaky ground the push for Canadian bonds could continue for the long run.

A Warning About Cheap Money

But as it’s been for three years, lower rates threaten to move Canadians into dangerously high debt levels. Many may be unable to afford their homes down the road. Anyone out shopping for a home should continue to calculate their own affordability at least 2 percentage points higher than what they are being offered.

The BMO special rate offer has now ended but fixed rates still remain unbelievably low at close to 3 per cent. Variable mortgage rates continue to be offered below prime and that means anyone searching for a new mortgage can explore this option. Low rates won’t last forever, but they seem to be here to stay for 2012. And the Canadian market stands to gain from it in a big way.

Since fixed mortgage rates have been dropping like flies lately, many Canadians are beginning to wonder if they should abandon their current mortgage and refinance at a lower rate.  “How do I do this?  Is it worth it?   What is it going to cost me?  WHERE DO I BEGIN!?” … sounds stressful doesn’t it?  Let me help!

The Break-Up

First and foremost, you need to figure out what all of this is going to cost you.  It doesn’t take a genius to know that paying $10,000 in penalties to save only $5,500 in interest with a lower rate isn’t exactly worth it.  So, what is the penalty going to be to get out of your mortgage?  GENERALLY SPEAKING (check with your lender), it is the greater of 3 months interest or the Interest Rate Differential (IRD).  3 months interest is pretty self explanatory, but the IRD involves a little math.

An Example

Let’s say that you have a mortgage balance of $200,000, your mortgage rate is 5.29% (originally a 5 year fixed rate) but you’re not up for renewal for another 2 years and you’re looking at another 5 year fixed at 2.99%:

3 months interest = [(mortgage balance x annual interest rate)/12] x 3
= [($200,000 x 5.29%)/12] x 3
= ($10,580/12) x 3
= ($881.67) x 3
= ~$2,645

IRD = mortgage balance x months remaining in term x [(your rate – current rates)/12]
= $200,000 x 24 x [(5.29% - 2.99%)/12]
= $200,000 x 24 x (0.1675%)
= $9,200

In the above example, (I hope that you are sitting down) your penalty would be a whopping $9,200 .  Do you HATE MATH?  Let us do the estimate for you, check out our mortgage penalty calculator.

But What’s the Benefit?

The benefit and break-even point can be difficult for the average person to calculate, especially when you have so many options available to you.  You can pay the penalty out of pocket or finance the penalty by increasing your mortgage amount; you can keep your payments consistent (therefore paying your mortgage off FASTER with a lower rate) or maybe you’d like to better your cash flow situation and have a lower payment with the lower interest rate!  Having said all of that, you should really speak to a licensed agent to help you figure it out.  Let them do the math!

Other Costs to Consider

If you are staying with the same lender, these charges shouldn’t apply.  However, if you are thinking about jumping ship you may incur a discharge fee to leave (approximately $250), legal fees to re-assign the mortgage (approximately $495-$1,000) and/or an e-registration fee to the tax department (approximately $72.50).  Additionally, the lender may require an appraisal to be conducted on the property.  An appraisal can run anywhere from $100-$250 depending on the type of appraisal required (i.e. drive by or full).  Sometimes the appraisals are rebated by the lenders and sometimes they are extra.  Ensure that you take these costs into consideration as well before jumping into a new mortgage rate

RateSupermarket.ca Week in Review

Bears aren’t the only thing hibernating in the winter months.  Typically there isn’t too much activity in the real estate (and mortgage) market in the first months of the year either.  So, in an effort to win over some business and fill their sales pipelines, many lenders have been offering some incredibly low rates.

**This chart is based on changes over the last week to our Best Mortgage Rates Canada page. Mortgage Rates may vary depending on Province.

It comes to no surprise that nearly half (49.6%) of our visitors are searching for the best 5 year fixed closed rate (due to all of the hype from last Friday’s rate drop announcement by BMO).  However you may find it interesting that the other half (48.6%) of our visitors are searching for the best 5 year variable closed rate; although there hasn’t been any big changes in pricing for the 5 year variable rate it still remains one of the top mortgage searches!  The next most popular searches were the 3 and 4 year fixed products (each at 0.4%).

What’s in store for mortgage shoppers next week?  Stay tuned!

It’s the final week of our four week series on growth investments for young investors. In case you’re just joining us – no worries! Feel free to catch up on the marketing hype behind growth investments, the math of why growth investments aren’t a wise move, and what history has to say about growth investments.

For this final part in the series, we’re going to take a closer look at the current economic cycle, and how it applies to growth investments. Why? You’ve probably heard the saying before: “Everything in life moves in cycles.” And guess what, this same wisdom applies to the financial life cycle as well. What do I mean by financial life cycle? The generational, economic, business and stock market cycles.

Now granted, this is a whole other topic on its own! But today we’re just going to do a quick overview. Ready?

The Financial Crisis of 2008: The Credit Cycle

The financial crisis of 2008 and 2009 marked a turning point in one of the longer of these cycles – the credit cycle.

Basically, in the 30-plus years leading up to the financial crisis, western society enjoyed the credit expansion phase of the credit cycle. During this phase, interest rates declined, making it easier and cheaper to borrow money. This increasing supply of borrowed money enabled people to pay more for houses, pay more for stocks, and pay more for commodities. And as the value of these assets increased, people were able to borrow more and more to pay more and more for houses, stocks and commodities.

Money was cheap, borrowing was cheap and easy, until, in 2008 and 2009, when the expansion phase could no longer support itself and the next phase of the credit cycle began – the credit contraction phase.

In a credit contraction phase, the prices of houses, stocks and commodities stop rising – and in most cases they begin to fall. This decline in value of assets, used to support more and more borrowing during the credit expansion phase, now begins to force the accumulated debt to unwind. And as people, corporations, and governments begin to worry about their future incomes, they begin to cut back their spending and focus on reducing their debt levels.

The Current Cycle: What Does the Cycle Say Now?

The credit contraction phase of a credit cycle is not supportive for growth investments, whether they are real estate, stocks or commodities.

As people reduce their spending to pay down their debts, corporate revenue and profits struggle to grow and stock prices will struggle to move higher. As people focus on paying down their debt, they’re not interested in borrowing more to pay more for a bigger and more luxurious home, so real estate prices will also struggle.

As a result, the current cycle makes investing in growth investments unattractive. Simply put, growth investments do not have the same support as they do during the credit expansion phase.

Growth Investment Recap

So, back to the original question we asked in the first part of our series…Should you invest your savings in growth investments if you’re a young investor?

Just like every big decision in life, do your homework first. What does the math add up to? What does history say?  And what are the current cycles telling us?

My advice? Capitalize wisely on your greatest asset of all – time. Time gives you the luxury of avoiding risk and still reaching your financial goals, so make your life easier, play it safe, and grow rich by avoiding growth investments. But hey…that’s just my two cents (no pun intended).

It doesn’t take kids long to recognize the power of plastic. My oldest daughter is barely six, but if my wife or I try to use the “I have no money…” line to get out of buying another toy or treat, she’s likely to say, “Well, use your credit card.” The point being, she gets how to use them, she just doesn’t really understand how they work. But, sooner or later (much later, I hope), she’ll be applying for her own credit card. And, like all of us, long before that she should have a solid understanding of their uses, abuses, and the implications of both.

Should you give your kids a credit card? And, if so, when?

Prepaid Can Payoff

Obviously, my kids are much too young to even consider it. But when is it appropriate to hand over a card to a child? Believe it or not, it’s not unheard of for teens or even tweens to be packing plastic in their wallets. Rather than hand their kids cash for their allowance or birthday money, parents will load the currency onto a card.

It gives the kids an early lesson in managing “virtual” money, has the advantage of being much more flexible than a single-store gift card since they can use it anywhere credit cards are accepted, and even provides a degree of security since the card can be cancelled if it’s lost or stolen. The downside is that these cards come with myriad built-in fees that can quickly chip away at the balance. Then again, maybe there are lessons to be learned there too.

Student Credit Cards

Eventually though, your kids will want and need to graduate to a “real” credit card. During the summer break after my first year of university, I flew out to B.C. to meet some friends. Needing a car to get around, I popped into the nearest discount car rental agency. Unfortunately, they required a credit card – or $300 cash – as a deposit. Lacking the former, I handed over a big chunk of my intended spending money to get my hands on a set of keys. Once I was back home, I applied for the first student card I could find, beginning the lifelong process of building a credit score.

Student credit cards are a great start for many reasons. You can usually find one with no annual fee, they tend to charge moderate interest rates on balances (15 to 20 percent), and they have relatively low credit limits, so you can’t get it too much debt-trouble.

Perhaps, most importantly, they’re relatively easy to qualify for, even if you don’t have much (or anything) in the way of credit history. The fact you’re attending college or university is often enough for you to qualify. (The banks are hoping you’ll stick with them when you graduate to that high-paying corporate gig.)

Co-sign, With Caution

If you want your high-school aged kids to start learning life in the cashless world, you’ll likely have to co-sign on a card with them. While it does give you a great opportunity to show your kids how much you trust them, you will want to closely monitor the account, and minimize the credit limit so you don’t end up on the hook for months’ worth of future allowances.

Regardless of what age and what type of card you help your kid start off with, set them up with a solid understanding of how powerful – and dangerous – a credit card can be if used improperly. Then, when they do make the inevitable beginner’s mistakes – like forgetting to make a monthly payment – help them learn the lesson from it, so they’re better equipped for life.