Are you ready to become a mortgage broker?

May 14, 2008

Let's test your credit knowledge with 5 everyday situations.

Question 1: All else being equally who would have better credit?

Client A: This woman has a Visa card with a $5000 limit and routinely
charges $4500 to her credit card per month. She makes sure that she
pays off her balance every month.

Client B: This woman has a $15,000 limit on her Visa card and carries
an average balance of $10,500. She only makes the minimum monthly
payment require by Visa.

Answer: Client B

Explanation: Credit bureaus receive their information from Visa once
a month (as they do from all credit issuers). As a result, credit
bureau companies cannot determine if the credit balances are paid in
full or just partially. As a percentage Client A has a higher balance
on his credit compared to the credit card limit (90%). Client B has a
credit card balance of only 70% of her limit. As a rule of thumb you
should always keep you credit card balances at less than 75% of its
limit.

Question 2: All else being equally who would have better credit?

Client A: This man has managed to save in his RRSP accounts over
$250,000. In addition, he has over $150,000 in various savings
accounts. This man pays for everything with cash and does not have
debt or credit cards of any kind.

Client B: This man has 3 credit cards and routinely carries a debt
load of over $25,000. This person has total savings of $500 and thus a
network negative network of $24,500.

Answer: Client B

Explanation: Net worth is not reported to credit bureaus. In fact,
without any debts, Client A's credit history would be bare and thus he
would have a very difficult time trying to get a mortgage at all.
Client B would have a fairly easy time trying to get a mortgage.

Question 3: All else being equally who would have better credit?

Client A: This woman is a brand new employee at a fast food restaurant
earning $8.50/hr. For the last 18 months she has had a credit card
with a $2000 limit. She rarely carries a credit card balance that
exceeds $1000.

Client B: This woman is a doctor and makes an average declared income
in excess of $250,000 per year. She has had good credit for years but
has recently closed all her debts and lumped everything into a single
brand new loan.

Answer: Client A

Explanation: Income is not reported to credit bureaus, so the incomes
listed in the question are a red herrings. Client B has recently
closed all her credit cards and other loans thus effectively reducing
her credit history to a very short period. You should never close all
your credit facilities at once like that. If you wish to close a
credit card make sure your new credit card has been active for many
months. (12 to 18 months)

Furthermore, being so new, client B's loan would be right near its
limit and this would also hurt her credit score.

Question 4: All else being equally who would have better credit?

Client A: This man has had a mortgage for over 20 years with a
current balance of $50,000. He has never missed a payment on the
mortgage and has absolutely no other debts or credit cards. This
person uses their debit card frequently.

Client B: This man has one credit card with a $2000 balance. They
have missed one monthly payment 8 months ago. They had some minor
missed payment 3 years ago.

Answer: Client B

Explanation: Mortgages in Canada are not reported to credit bureaus.
I don't know any official reason why. They are reported to credit
bureaus in the USA.

Client A would be nearly invisible to the credit bureau and thus it
would be assumed that he has bad credit. No credit equals bad credit.
He would find it very difficult to get a mortgage. Client B would
not have a problem.

In a marriage or common law relationship, it is very important that
each spouse has their own credit since a mortgage will not be reported
to either of their credit bureaus.

Question 5: All else being equally who would have better credit?

Client A: This woman declared bankruptcy 6 years ago and was
discharged for bankruptcy 5 years ago. She currently has a credit
card with a $10,000 limit and an average balance of $4000. 3 years
ago, while on an extended vacation she missed two monthly payments.
She quickly made up for the missed payments upon returning from
vacation and has never missed a payment since.

Client B: This woman travels for work and is out of the country a
lot. As a result, she has a splattering of missed payments spread
over the last 4 years. Her latest missed payment was 3 months ago.
She currently has a credit card with a $10,000 limit and an average
balance of $9000.

Answer: Client A.

Explanation: This is a trick question. Client A would undoubtedly
have a better credit rating. However, banks will forgive a bankruptcy
but never a missed payment after a bankruptcy and that is what she
has. Thus, client A would find it very difficult to qualify for a
mortgage despite her high credit rating. Client B would not find it
too difficult to get a mortgage.

Bank of Canada lowers overnight rate target by 1/2 percentage point to 3 per cent

April 22, 2008

OTTAWA - The Bank of Canada today announced that it is lowering its target for the overnight rate by one-half of a percentage point to 3 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 3 1/4 per cent.Growth in the global economy has weakened, reflecting the effects of a sharp slowdown in the U.S. economy and ongoing dislocations in global financial markets.

Growth in the Canadian economy has also moderated as buoyant growth in domestic demand, supported by high employment levels and improved terms of trade, has been substantially offset by the fall in net exports. While both total and core CPI inflation were running at about 1.5 per cent at the end of the first quarter, the underlying trend of inflation is judged to be about 2 per cent, consistent with an economy that was operating just above its production capacity.

The Bank is now projecting a deeper and more protracted slowdown in the U.S. economy. This has direct consequences for the Canadian economic outlook, with declining exports projected to exert a significant drag on growth in 2008. In addition, tightening credit conditions and softening sentiment are expected to moderate business investment and consumer spending. Nevertheless, domestic demand is projected to remain strong, supported by firm commodity prices, high employment levels, and the effect of cumulative easing in monetary policy.

The Bank projects that the Canadian economy will grow by 1.4 per cent this year, 2.4 per cent in 2009, and 3.3 per cent in 2010. Consistent with this growth profile, the economy moves into excess supply in the second quarter of 2008, and spare capacity continues to increase through early next year. However, a gradual recovery in the U.S. economy, a return to more normal credit conditions, and accommodative monetary policy should generate above-potential growth and bring the economy back into balance around mid-2010.

The recent price-level adjustments for automobiles and the effect of past changes in indirect taxes will keep measured inflation below target through 2008. The emergence of excess supply in the economy should keep downward pressure on inflation through 2009. Both core and total inflation are projected to move up to 2 per cent in 2010, as the economy moves back into balance. There are both upside and downside risks to the Bank's new projection for inflation; these risks appear to be balanced.

In line with this outlook, some further monetary stimulus will likely be required to achieve the inflation target over the medium term. Given the cumulative reduction in the target for the overnight rate of 150 basis points since December, the timing of any further monetary stimulus will depend on the evolution of the global economy and domestic demand, and their impact on inflation in Canada.

A full analysis of economic and financial developments, trends, and risks will be set out in the Bank's Monetary Policy Report, to be published on 24 April 2008.

Information note:The Bank's next scheduled date for announcing the overnight rate target is 10 June 2008.

Can a variable rate save you money?

April 21, 2008

At True North Mortgage we spend our days watching mortgage interest rates going up and down at various Canadian lenders. We have noticed over the last few months that 5 year fixed rates have been trending downward. This is no surprise as it was predicted by such leading banks as TD, RBC and CIBC. In fact, most major lenders have issued statements suggesting that the 5 year fixed rates will be trending lower all year and may dip below 5% by the end of the year depending on how rough the recession is in the US. (rougher means lower 5 year rates)

The Canadian government has already responded to the weakness in the US by lowering the prime rate. In fact, on Tuesday, the Government of Canada will likely lower prime rates by another 0.5%. This will essentially make the True North Mortgage Variable rate product 4.00%, (P-75%) a product supported by ING Direct.

One of our clients called us recently to see if it would be prudent to break his fixed rate mortgage and take a variable rate mortgage, and perhaps lock in at some future date when 5 year fixed rates are lower. Quite frankly, after running the numbers we were surprised by the results.

Normally, we discourage this sort of behavior as the penalty can be quite stiff and there is little certainty that 5 year fixed rates will be lower in the future.

In his case, his current mortgage balance was $265,000 and he was locked into a fixed rate of 5.74%. He was curious how our variable rate would effect his payments. Currently, he is paying $1,655 per month and has been for about 1 year. At the variable rate his payment would be $1,394. That is a savings of $261/ month on his mortgage payments. Actually, the saving would be even greater than that because, due to the magic of amortizations schedules, the amount applied to principle would be $114 more every month on the variable.

As a result, the client would be better off by $375 per month. Of course, the client would have to pay a penalty of $3803 but that would only take 10 months to cover off.

In fact, paying the prepayment penalty would have a 120% rate of return; an obvious ?go? decision. The only down side would be if the client choose to lock-in his rate within the next 10 month period at a higher 5 year rate than he is paying currently. But that is really unlikely with all indictors pointing to the downward trend in 5 year fixed rates.
In any event, if you are currently in a 5 year fixed rate at more than 5.50%, please give us a call and we can work out your options.