Low Interest Rates Good Reason to Lower Debt

Low Interest Rates Good Reason to Lower Debt

Low Interest Rates Good Reason to Lower Debt

In a press release on February 6, 2015 Lucie Tedesco Commissioner Financial Consumer Agency of Canada stated that just because interest rates have gone down, referring to the recent Bank of Canada decision to lower the overnight rate, does not mean that Canadians “should take on more debt.” In fact the low interest rates good reason to lower debt.

 

Low Interest Rates Good Reason to Lower Debt
picture courtesy of the Financial Post

To many mortgagers (owing money borrowed on real estate) or those with loans whose payments are calculated based on the Prime rate, which in turn is calculated on the Bank of Canada’s overnight rate, low interest rates can be a double edged sword. Especially if you can’t control your spending; however if you are able to curve your appetite for borrowing, then for you low interest rates good reason to lower debt as you can pay more towards your principal and less towards interest payments.

Commissioner Tedesco went on to say that “Canadians should look at this low interest-rate environment as an opportunity to pay debt down, rather than to accumulate more, even for a larger house, a newer car or a winter vacation.” We should be realistic and be ready for when interest rates will increase.

For its part the Financial Consumer Agency of Canada has developed tools and resources to assist the consumer with managing their debt obligations and can be found at “How to Beat that Debt.”

To read the full press release from Lucie Tedesco Commissioner Financial Consumer Agency of Canada click here.

Trusterra Mortgage is here to help. If you currently have a mortgage and are considering to consolidate your debt, or want to get the lower interest rates that are available currently, contact us to see what options are available for you and we’ll assess your current financial situation to see whether it is worth it for you to break your mortgage to refinance it or not.

Bank of Canada rate cut

Bank of Canada Rate Cut

Bank of Canada Rate Cut

The Bank of Canada rate cut could be just around the corner. Analysts are predicting that due to the not-so good Canadian economy outlook, there is the possibility the Bank of Canada rate cut could be more real than fiction at its next interest rate announcement on March 4, 2015.

It was the surprise of the year, and we’ve barely started the new year, when the Governor of the Bank of Canada Stephen Poloz announced last week on Wednesday January 21 that they were lowering the key lending interest rate. Not to our surprise, this week Chartered Banks and other institutional lenders begin dropping their prime lending rate in response to the Bank of Canada’s rate cut. The Prime Rate is now at 2.85%.

Bank of Canada rate cut
picture courtesy of CBC

There are several indicators confirming the poor performance of the Canadian economy, such as the Statistics Canada labor market revisions, big 6 banks not lowering their prime rate equal to the Bank of Canada’s rate cut by 25 basis points and only lowering theirs by 15 basis points and another worry is the drop in oil prices which the Bank of Canada suggests is their main concern that could potentially get worse and impact not only the Alberta economy which is largely based on the oil sand productions, but also to resonate nation wide.

 

It’s a wait and see game at this point. After all, in the past 5 years there were many naysayers and predictions with what will happen with the prime lending rate, but at the end it never changed until 5 years later, and to our surprise, it went down instead of up.

What are your thoughts about the recent Bank of Canada rate cut, and future ones? How do you feel the Canadian economy is doing right now and where will we be next year this time?

Why Your Credit Score is Important

Why Your Credit Score is Important

Why Your Credit Score is Important why your credit score is important

As part of our coverage of November Financial Literacy Month #FLM2014, in this blog we will share with you information about the importance of why your credit score is important.

In Canada, and the United States having a strong credit score or what we call in the industry a beacon score, with a rich history of on time debt repayment is very important and goes a long way when it comes to applying for a mortgage or any other type of a loan.

We will focus our discussion in this blog on the Canadian mortgage market and why your credit score is important.

If you have good credit it will be that much easier to get approved for a mortgage. Throughout your lifetime of spending and purchasing items using your credit card or a line of credit or both, and as well other credit items such as car loans, these transactions are all recorded by the two credit bureaus here in Canada, namely Equifax and Transunion. These credit bureaus use mathematical algorithms to create your credit score based on your spending, credit limits, credit balances, and whether you pay back on time every month your debt obligations or not. They even take to account how many days or months you are late with making your payments and use this information when building and updating your beacon score.

Equifax_Transunion

The reason why your credit score is important for getting approved for a loan, such as a mortgage, is because the creditor or the mortgagee relies on the credit report to decide your credit worthiness and repayment ability if they were to give you a loan or a mortgage respectively.

The starting point for your beacon score, once your name and first credit activity is recorded in the bureau’s database normally is 650. From this point onwards, it is hoped that the borrower pays back their loan or debt on a monthly basis, and as they do, their beacon score begins to climb; eventually rising above 700.

The opposite is true if the borrower cannot or does not make payments on time and is late, their credit score will start to drop below 650 making it difficult for them to get approved for a loan or a mortgage from traditional creditors / lenders. Many times borrowers with poor credit scores have no choice but to wait on their plans to buy a home and get a mortgage until their repayment history improves and their beacon score begins to rise again. Or they have to apply for a mortgage on unfavorable terms from a secondary or private lender who will charge a premium to approve the loan, but will overlook and be forgiving for the poor credit history and beacon score. The premium includes a much higher interest rate, lender fee, and shorter mortgage terms, normally one or two years. This is another reason why your credit score is important.

We always recommend that you pull your own credit reports from Equifax and Transunion every year or two to see what information about you is stored in their records. There are several advantages to doing this. Firstly by doing your own credit check to your name, there is no negative ‘hit’ to your beacon score unlike when you apply for a loan or a mortgage and the lender does a credit check on you. Secondly, you can see if your personal information is correct and up to date. Thirdly, you will get a detailed historical overview of your credit spending, which will show, for example, the payment you made on time to the particular credit card company or your car lease or whatever else, was actually reported by them and recorded in the credit report. An example of a potential issue is with old student loans or credit card accounts that you had asked to be closed. The student loan that you paid back in full is not shown to be paid off and still active in your credit report, and the credit card that you paid back and thought was closed is still showing as open with a balance in the credit report. These errors need to be corrected right away because they will have a negative impact on your beacon score. By doing a credit check you can find out about these abnormalities and rectify the matter.

This is why your credit score is important, because in Canada, for that matter in North America, much of the lending is based on the borrower’s credit strength and healthy history of making payments on time and being able to manage your debts responsibly.

If you are in a position right now with a low beacon score and bad credit history, and no major bank or lender will give you a credit card, we can help. Contact us and we will help you get a credit card so that you can start to rebuild your credit history and beacon score.

Another group of borrowers are those who are new to Canada and don’t have any credit history here and want to buy real estate right away. If you fall under this category, we can also help you get a mortgage without having a credit history or beacon score. Review our information about the New to Canada mortgage product and contact us for further details and to get your mortgage application process started.

why your credit score is important

Variable vs Adjustable Rate Mortgage

Variable vs Adjustable Rate Mortgage

Did you know there are two types of mortgages whose interest rate can change as per the change in the lending institutions prime rate? That’s right, the two types are the Variable Rate Mortgage and the Adjustable Rate Mortgage.

You now might be asking what is the difference between a variable vs adjustable rate mortgage. In this post we provide a general overview of each one and hopefully provide a clear explanation to your question what is the difference between a variable vs adjustable rate mortgage.

variable vs adjustable rate mortgage

Adjustable Rate Mortgage – ARM

Payments automatically adjust with changes in the prime rate of the lending institution your mortgage is with to ensure that you maintain the original amortization schedule of your mortgage. The rate varies during the term of the adjustable rate mortgage.

The interest rate can change from time to time because it changes when the prime rate changes.

If your adjustable rate mortgage interest rate decreases, the payment amount also decreases..

If your interest rate rises, the mortgage payment amount will also increase.

One advantage of this product is you can have the ability to potentially lower, short-term interest rates.

 

Variable Rate Mortgage – VRM

The main difference with a variable vs adjustable rate mortgage is that the mortgage payments with the variable product remains fixed for the duration of the term; as the interest rate changes with any fluctuations in the prime rate. If the prime rate decreases, more of the mortgage payment will go towards paying off the principal; if the prime rate increases, more of the mortgage payment will go towards interest costs.

Your amortization period (number of years to repay the mortgage) may vary and be longer if rates have risen or be shorter if rates have fallen since the start of the term.

 

With both the Variable Rate Mortgage and the Adjustable Rate Mortgage you can always convert your mortgage into a fixed rate mortgage should you feel that the prime rate is rising or don’t have the tolerance anymore of rate fluctuations. Most of the time, the variable and adjustable interest rates are lower than the fixed rates.

If you still are not sure of which one is better or what the main differences are between a variable vs adjustable rate mortgage we encourage you to contact us with your questions and we would be happy to answer them. You may also like to add your remarks and questions in the comment section below.

Variable Rate vs Fixed Rate Mortgage

Variable Rate vs Fixed Rate Mortgage

This is probably one of the most popular and famous questions of all times in the real estate mortgage financing world; variable rate vs fixed rate mortgage. Which one is better? or Which one is worse? How do you decide which mortgage product is good for you?

variable rate vs fixed rate mortgage

To look at variable rate vs fixed rate mortgage as a question for your own good would be right for everyone depending on their own unique needs and tolerances.

A fixed rate mortgage has a rate guaranty for the term of the mortgage. For example, if you get the 5 year closed fixed rate, then, you are guaranteed to hold on to your rate for the full five years without it changing. There is a sense of security and closure for you knowing that you don’t have to worry about the fixed rate changing during the life of your mortgage term.  Even if you are an investor of real estate, this type of a mortgage can be beneficial to you because you know exactly what the interest rate will be and can calculate your R.O.I. accurately and work into your formula other expenses, which would allow you to know exactly what your net income could be each year. One down side to a fixed rate mortgage is the fact that if you ever decide to break the term / contract in the middle of it, the penalty can be significantly higher than if you were to break a variable mortgage.

A variable rate mortgage many times starts with a much lower interest rate than its counterpart fixed term rate. The variable interest rate is a discount that you would get from the lender against it’s prime lending rate. For those who are not tolerant of minor rate adjustments throughout the term of a variable rate mortgage, this product might not be your cup of tea. Currently the Bank of Canada has not changed its stance on the prime lending rate and it has not changed since September 9, 2010. However, the lenders have changed their discounts off of the prime rate. Several years ago you could have been approved for a variable rate as low as Prime minus .90%. Since then the current average discount for the closed variable rate is Prime -.50%. If you are planning to break your mortgage in the middle of its term, the penalty for the closed variable rate mortgage is three months interest payments, which for the majority of the time comes out a lot less than if you were to break a closed fixed rate mortgage that uses a formula called interest rate differential to calculate the penalty amount.

However, overall, statistics have shown that you can save more money if you go with a variable rate vs fixed rate mortgage. As of the date of writing this post the 5 year fixed closed mortgage is 2.99% and the 5 year closed variable mortgage is Prime -.50% = 2.50%.

Will Bank of Canada Lower Interest Rates

Will Bank of Canada Lower Interest Rates

On Wednesday, 16 July 2014, the Bank of Canada will announce its decision on the target for the overnight rate. What do you think will happen tomorrow, will Bank of Canada Lower Interest Rates, or will they stay the same, or even go up?

Since September 2010 the Bank of Canada has not changed it’s overnight lending rate, and we must wonder if the rate will be moving up at some point, if not now, when? As the Bank of Canada’s overnight lending rate remains untouched, the Canadian Chartered Banks and other lending institutions maintain their Prime lending rate at 3.00%.

The Governor of the Bank of Canada Mr. Stephen Poloz and his team of advisers working at the Bank of Canada must look at many variables and factors affecting the Canadian economy and based on that decide if it is timely to raise or lower the interest rate.

If we were to make any predictions, it would be towards the decision being one of maintaining the overnight rate the same and not touching it. However, in his previous interest rate announcement Mr. Poloz did give hints that they are not ruling out a rate decrease either.

It will be interesting to see what happens tomorrow. What do you think will happen, will Bank of Canada lower interest rates?

We’d like to hear from you,

Take our Facebook survey below, or go directly to our Trusterra Mortgage Facebook page and take the survey there.

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 Will the Bank of Canada Lower Interest Rates

Bank of Canada maintains overnight rate

Bank of Canada maintains overnight rate

The Bank of Canada maintains overnight rate at 1 per cent.

This morning in a press release the Bank of Canada announced that it will maintain its target for the overnight rate at 1 per cent, and correspondingly keeping the Bank Rate at 1 1/4 per cent and the deposit rate at 3/4 per cent.

In the press release which can be read in full by clicking this ‘LINK’ the Bank of Canada mentioned that the “total CPI inflation has moved up to around the 2 per cent target, sooner than anticipated in the Bank’s April Monetary Policy Report (MPR), largely due to the temporary effects of higher energy prices and exchange rate pass-through.” They went on to say that the “core inflation remains significantly below 2 per cent although it has drifted up slightly, partly owing to past exchange rate movements.”

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Bank of Canada maintains overnight rate

Variable vs Fixed rate mortgage

Variable vs Fixed rate mortgage

When trying to decide which mortgage type to go with, a variable vs fixed rate mortgage, you have to ask yourself how tolerant you are with risk. A variable rate mortgage traditionally has a better discounted rate than the fixed rate mortgage, but it can change at any time depending on what decision the Bank of Canada makes on its overnight rate. As the Bank of Canada Bank of Canadaincreases or decreases its overnight rate, so too will the chartered banks and other lenders that borrow money from the Bank of Canada increase or decrease their prime lending rates, which in turn affects the variable rate.

If you don’t want to worry about interest rates going up or down during the contractual term that you have agreed upon with your mortgage, then the best bet would be to go with a fixed rate term. This way you know for sure that your mortgage interest rate is locked in and guaranteed not to change within the term. For example, if you go with a 5 year closed fixed term; your mortgage interest rate will not change until the end of the fifth year. For some, the disadvantage to this mortgage product is the fact that your rate will not go down should the Bank of Canada lower its overnight lending rate as would be the case with the variable rate mortgage product.

When contemplating whether to go with variable vs fixed rate mortgage, know that it is ultimately up to the lender to decide if they are going to change their prime rate or not every time the Bank of Canada changes their rate. Sometimes Banks and other lenders of mortgage products will choose not to change their prime rate although the Bank of Canada changes theirs. Historically though, whenever the Bank of Canada changes their overnight rate, shortly after the banks adjust their rates accordingly.

Others might be thinking to break their mortgage in the middle of the term; whether it be for the reason of selling their home to take advantage of increased equity and home value due to favorable market conditions, or because they may not be happy with the current lender or interest rate, and for any other reason. To break a fixed term mortgage is more expensive than to break a variable rate mortgage. The lenders use different formulas to calculate the mortgage penalty to break the mortgage. With the fixed term, the lenders use a formula called Interest Rate Differential, and with the variable rate they only charge the client three months of interest payments. Therefore it can be much cheaper to break a variable vs fixed rate mortgage.

When considering these matters it is always best to consult with a mortgage broker or mortgage agent. These professionals are trained, and licensed to work on your behalf and to give you unbiased and sound advice regarding your mortgage options.

Are Mortgage Rates on the Rise

Many are asking Are Mortgage Rates on the Rise?

 

Within the last month major Banks and other lenders have been slowly increasing their fixed term mortgage rates, and many people in Canada have been asking are mortgage rates on the rise here in Canada. are mortgage rates on the rise

What most consumers don’t know about their question of ‘are mortgage rates on the rise’ is that as the cost of doing business goes up so too does interest rates. One example of this cost is the purchase of bonds. As the prices of bonds increase so too potentially does the interest rates on fixed mortgage rates.

Another question one can ask is are mortgage rates on the rise on the variable side of the mortgage industry? The answer to this question is that for the time being they are staying put. Variable rate mortgage rates are based on the Bank of Canada prime rate and what it charges financial institutions to borrow money from it. The Governor of the Bank of Canada has hinted — see the press release here — that for the short term the Bank of Canada will not be raising rates.

Bank of Canada Interest Rate Announcement 6 Mar 2013

Bank of Canada Interest Rate Announcement 6 Mar 2013

Today the Bank of Canada announced interest rate announcement was release. The Bank of Canada is maintaining its target for the overnight rate at 1 per cent and the Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

Here is a summary of the key points from the announcement: Bank of Canada

1) The global economic outlook is broadly consistent with the Bank’s projection in its January Monetary Policy Report (MPR).

2) Canada’s economy grew by 0.6 per cent at annual rates in the fourth quarter of 2012. The Bank expects growth in Canada to pick up through 2013, supported by modest growth in household spending combined with a recovery in exports and solid business investment.

3) Total CPI inflation has been somewhat more subdued than projected in the January MPR as a result of weaker core inflation and lower mortgage interest costs. Low core inflation reflects muted price pressures across a wide range of goods and services, consistent with material excess capacity in the economy.

4) Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent.  The considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with achieving the 2 per cent inflation target.