Misconceptions about mortgage brokers

A Few Misconceptions

Misconceptions occur in every business and the mortgage business is no different.

A recent example is this post by Boomer & Echo (B&E), a prominent blog that we typically enjoy. In it, B&E opines on why not to use a mortgage broker.

In the piece, the author gets some stuff wrong. As often happens, we came across it in our weekly blog scan and feel obliged to offer some counterpoints.

B&E makes four claims. They are:

1. Brokers push 5-year fixed rates.
   
   Counterpoint: Brokers sell a higher ratio of variable-rate mortgages than bank salespeople, and have for quite some time. That’s per executives we’ve questioned at banks with both broker and retail channels (e.g. CIBC and Scotiabank). In general, however, all mortgage professionals (bank or broker) sell a lot of 5-year fixed product. It’s the most popular term (has been for decades), it’s the easiest to qualify for, and it has the most competitive discounting (albeit, not presently).
   
2. Loyalty to your bank pays.
   
   Counterpoint: The Bank of Canada concluded exactly the opposite (more). To summarize, it’s research found that existing customers pay more than new customers. What’s more, no one lender continually has the best mortgage options. By comparison shopping, good brokers can save homeowners interest and identify the lender with the right flexibility/value tradeoff. The best brokers provide expert term analysis, proper deal structuring and helpful strategies to reduce a borrower’s amortization.
   
3. Bankers have better reputations
   
   Facts: The RBC specialist incident last April proved that reputation should be judged individually, not by virtue of where a mortgage advisor works. Generally, brokers and bank specialists are both paid by commission and the commission is similar whether they sell a 5-year fixed or variable. Neither is holier that the other in that respect, except that bank reps are hired to push only one brand.
   
4. Your better off doing it yourself
   
   Counterpoint: We have visions that people will someday get a mortgage online like they buy a stock at iTrade. But we’re not there yet. Good brokers provide counsel that saves time and money. Do-it-yourselfers sometimes discount the value of advice, mesmerized instead by brokers/bankers who can save them a few basis points in rate. For most, that’s a mistake because:
• Few individuals grasp the mortgage math needed to perform proper term selection. Term selection impacts borrowing cost far more than rate selection. A “good rate” alone does not equal a “good deal.”
• There are lots of creative techniques that skilled advisors can use to help people whittle down principal quicker.
• Lenders rarely disclose all of their mortgage restrictions until you sign their contracts. Brokers know the benefits and pitfalls of multiple lenders, and advise borrowers in advance.

It is possible to pick your own investments, do your own taxes or write your own will, but people still hire financial planners, accountants, and lawyers. There’s only so much time in a day and we can’t specialize in everything.

In all of those industries there are great and not-so-great practitioners. Brokers are no different. Interview several before picking one. Ask questions like:

• Which lenders they use most often and why
• How long they’ve been in business full-time
• Why their term recommendation is mathematically sound for your specific needs.

Sense if you can trust them. If they seem to care about you, and are competent, and make you feel comfortable, you’ll be glad to have them on your side

Courtesy of Canadian Mortgage Trends

lawlessbrown.com

CIBC downgrades growth outlook

September 22, 2010 By CBC News The Canadian Imperial Bank of Commerce has downgraded its growth forecast for Canada and the United States next year, calling the recovery a "great disappointment." The Canadian Imperial Bank of Commerce has downgraded its growth forecast for Canada and the United States next year, calling the recovery a "great disappointment." The bank's top economist Avery Shenfeld slashed his prediction for GDP growth in 2011 to 1.9 per cent growth from 2.5 per cent for Canada. He also scaled back his target for the United States to 1.8 per cent from 1.9 percent.
"The Great Recession that shattered global growth in 2008-09 is now water under the bridge, but the great disappointment of a sub-par global recovery will be with us for a good while longer," he said. The global economic recovery has largely been based on government stimulus, the report says, and now that that's being unwound, the world's economy is likely to slow.
In the four years before the recession started, the world's economy grew by five per cent per year, the report notes. But the bank now expects that will slow to a 3.6 per cent pace in 2011. Europe is a particular area for concern, but the impact of a weak U.S. economy is going to be felt everywhere, Shenfeld said.
The slowing economy will be enough to compel the Bank of Canada to alter its current path and hold rates steady from now until next spring, the report says. "As a result, the Bank of Canada will wait until spring before renewing a very gradualist path to normalcy in interest ates," Shenfeld said. Last week, Toronto-Dominion bank also lowered its forecast for Canada's economy next year to two per cent growth, down from 2.5. Royal Bank did the same earlier this month, shaving 0.3 percentage points off its 2011 forecast, to 3.2.

The Bank of Canada is currently projecting 2.9 per cent GDP growth next year. Canadian Broadcasting

www.lawlessbrown.com

Its Still Growth but a bit Slower

Reuters

The Canadian Real Estate Association cut its 2010 forecast for resale house prices and sales, saying sales in British Columbia were not as strong as expected at the start of the year.

The industry group said it now expects the average price to climb 1.6% to $325,400 nationally in 2010, a big drop from its previous forecast of a 5.4% gain.

Sales are seen rising 5.5% to 490,600 units in 2010. In February, CREA forecast sales of 527,300 units in 2010, up 13.3% from 2009.

The group said a decline in affordability in British Columbia hurt sales in the province during the first quarter, although sales in Ontario were much as expected.

“Lower expected activity in British Columbia accounts for more than half of the downward revision in national sales activity,” the group said.

CREA said it now expects sales in B.C. to fall 5.9% this year to 80,000 units from 85,028 in 2009, while prices there are seen up 2.3% at $476,400.

It expects Ontario sales to rise 10% to 215,400 units, a record but a smaller gain than previously thought. Prices are seen to increase 3.9% to $330,900.

The association had expected to see stronger sales in the first half of the year, ahead of the introduction of new mortgage rules, rising interest rates and new sales tax regimes in Ontario and British Columbia.

Month-to-month home resales have been cooling from the beginning of the year, while listings have been rising, quieting a feisty debate that a bubble was forming.

The real estate association repeated Wednesday it did not see a U.S.-style housing price correction, mostly because of solid mortgage market trends.

The Bank of Canada raised interest rates for the first time in three years this week, bringing its benchmark overnight rate up a quarter point to 0.5%.

For 2011, CREA forecasts an 8.5% slide in sales to 448,700 units, with every province except Newfoundland and Labrador to post declines from this year. An earlier forecast pegged the slide at 7.1%.

The average national price is seen slipping 2.2% to $318,300, compared with an earlier view of a 1.5% decline.

lawlessbrown.com

Variable or Fixed? What type of client are you?

Conservative, Balanced, or Risk Tolerant. Which type are do you fit into?

Conservative

• Prefer certainty on mortgage
• Meet new qualifying rules
• First Time Home Buyer
• Limited budget for payment increase
• Minimal equity in property
• Need to know exact monthly payment, interest rate & interest cost & principal balance outstanding at maturity
• Concerned with rate increase
• Will pay higher rate for long term mortgage stability
• No plans to sell in next 5 years

** a candidate for 4 - 7 years fixed rate

Balanced

• Prefer best of both worlds: variable and fixed rates
• Some equity in property
• Monthly budget not stressed
• Could tolerate fluctuation on some portion of mortgage: monthly payment, interest rate, & interest costs
• May sell within 3 years
• Short term plans with property

***Candidate for short term fixed rates, variable rate with fixed rate conversion option, Hybrid/split mortgage, Fixed rates of 1 - 3 years

Risk Tolerant

• Prefer lowest market rate
• Could tolerate interest rate fluctuation
• Monthly budget not stressed
• Prepared for potential monthly payment increase
• Understands long term savings with variable over fixed rate
• May sell within 1 year - Short term plans require mortgage flexibility
• Rate instability for potential higher interest cost savings

***Candidate for variable closed or open, could convert to fixed rate anytime
*** Variable rate mortgage or short term fixed rate 6 mos - 1 year

. Lawlessbrown.com

Unemployment Improving in Canada

Janet Whitman, Financial Post

Canada, which remains on much sounder economic footing than the United States, had a better-than-expected increase of 24,700 workers added to payrolls in May, with most of the gain in full-time and private-sector positions, Statistics Canada reported. Bay Street had been forecasting a 15,000 gain.

The U.S. rate isn't likely to head much lower this year or next because the expected U.S. economic growth of around 3% or 4% won't be enough to create sufficient jobs for the roughly 15 million Americans out of work and new entrants in the labour market.

Canada's strong jobs report, meanwhile, shows the Bank of Canada was on the right track by raising interest rates earlier this week despite the financial turmoil in Europe, said Benjamin Reitzes, an economist with BMO Capital Markets. "Canadian employment is now only 108,000 from the peak hit in October 2008, and is up 1.7% from a year ago, much better than the still-negative yearly change in the U.S.," he said.

The strong report indicates more interest-rate increases are coming, perhaps as soon as July, some analysts said. http://www.financialpost.com/Jobs+stall/3115343/story.html

lawlessbrown.com

With Statistics Like these, Now is the time to Re-arrange your finances!!!

Studies are proving that many Canadians have taken on more debt than they may be able to handle.

With the increase in current housing prices and mortgage rates at almost historical lows, now is the perfect time for home owners to take advantage of the current economic environment and re-arrange their finances, BEFORE interest rates start to climb.

Lowering consumer debt will not only decrease the amount of interest being paid on credit cards and lines of credits, it will drastically reduce monthly obligations. This will put homeowners in a much more stable and solid financial position moving forward and be able to face the increases in interest rates that are headed our way.

Talk to Krista and Sherri, your Accredited Mortgage Professionals, and see the benefits of using the equity in your home to save you money each month and be able to take the interest rate increases in stride.

Krista Lawless, AMP

lawlessbrown.com

Even recession didn't slow down Canadian's spending, report finds

By Julian Beltrame, The Canadian Press

OTTAWA - Neither recession, global uncertainty nor growing joblessness appears to have stayed Canadians' appetite for spending money they don't have.

A new report by the Certified General Accountants Association of Canada shows that household debt in the country kept rising through the recession and peaked in December at $1.41 trillion.

That's $41,740 on average per Canadian, or debt to income ratio of 144 per cent that is the worst among 20 advanced countries in the OECD.

"This report is another indication of Canadians' readiness to consume today and pay later," says association president Anthony Ariganello.

"The concern is do they understand the full cost of paying later?"

The Bank of Canada has also voiced similar concerns, with governor Mark Carney having repeatedly advised Canadians to ensure they will be able to meet their mortgage commitments once rates increase. Ottawa has put that cautionary principle into effect by stiffening the means test chartered banks must apply when issuing open-ended mortgages.

Most Canadians don't yet share that concern. The accountants' survey found that almost 60 per cent of Canadians whose debt had increased still felt they could manage it or take on more obligations.

But the accountants say many households could find themselves in difficulty when interest rates, as expected, begin to rise.

The report estimates that even a small two per cent increase in rates would mean that mid-income and higher income households would have to cut their outlays on non-essentials by between nine and 11 per cent.

The finding is similar to one reached by the Canadian Association of Accredited Mortgage Professionals in a survey results release Monday.

The survey showed that while Canadians appeared well positioned to absorb higher rates, there would be a significant number that would come under stress. The mortgage professionals estimated that 475,000 households would be challenged if mortgages rates rose to 5.25 per cent, and that 375,000 were already facing pressure paying their bills.

The most likely outcome for a debt squeeze is that households will stop spending on non-essentials, and that could ripple in a general slowing of economic growth.

Household spending, particularly in the housing sector, was a mainstay of the economy during the recession. But as interest rates grow, a bigger percentage of household income may need to be diverting into paying off debt, meaning less cash for other purchases, like autos, appliances, furniture and clothes.

BMO Capital Markets economist Sal Guatieri says that is the flip-side to the Bank of Canada's decision to slash rates to historic lows during the recession.

"That's why we did not experience a great recession," he noted. "That was the intention all along of the Bank of Canada, to get people borrow and spend. The problem is if that continued, Canada eventually would have a debt problem."

But that is why the central bank is preparing to reverse course and start increasing the cost of borrowing, he added.

Most analysts believe Carney will start moving on rates on June 1 with a small quarter-point hike.