How to keep your credit ship shape – part one

These days, credit is king. If you’re applying for a mortgage, you’ll need a beacon score of at least 620 in order to be considered for a lender’s best rates. There are several factors that contribute to a strong credit score:  Payment history, Amounts owed, Length of credit history, New Credit and Types of credit used.

Payment history: It sounds basic, but payment history is one of the most important factors in determining a beacon score. Your credit  report will list all of the accounts you owe money on as well as how well you keep their balances current. It also keeps track of past due delinquencies for the past several years, so always pay your bills on time. If you’ve slipped up in the past, bankruptcies, liens and judgments will also be present for 7 years.

Amounts Owed: This will report the amount owing on all accounts as well as  the number of accounts with balances and the proportion of credit lines used. It’s important to use credit when you have it to show that you’re a responsible consumer. Some people believe that having credit and not using it will help their credit situation. Not so. You need to show a good track record in borrowing and re-paying.

Length of Credit History: How long have you had credit at your disposal? Showing a good track record over an extended period of time will always work in your favour when it comes to a beacon score.

New Credit: This category keeps tabs on how often you are applying for credit and the amount of time between each application. Applying for credit too often will lower your score. That’s a big reason using a mortgage broker is good for your credit: one credit check allows me to shop around to many different lenders.

Types of credit used: On your report, there will be an itemized list of the types of credit being used – credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.) The more you use these “credit channels” and keep their balances current, the better your score will be.

Remember, a credit score takes all of these factors into consideration, not just one or two.

Stay tuned for part 2 tomorrow….

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Canadians now have another option to purchase property abroad

We had a guest come into The Mortgage Group yesterday who was the business development manager for Lloyd’s TSB International. The focus of his presentation was to show us how Canadians can invest in offshore property through their lending facilities. With the US housing market in its current condition, it stands to reason that there are many opportunities to find real value in an under-priced home south of the border. Lloyd’s also offers financing in other parts of the world as well such as parts of Europe, Asia, Australia and New Zealand. The loan-to-value (or, in other words, the amount the bank will loan compared to the value) fluctautes from 50% to 70% depending on location and the specific market conditions of each area. Florida, for example, came up as an obvious example in the meeting, where Lloyd’s will go as high as 50% LTV. Interest rates are VARIABLE ONLY, so this mortgage product does come with a certain prerequisite for risk tolerance. They do not off a fixed rate. As of today though, rates in the USA are offered between 2.69% and 3.09%. Cheap. As per their site, their rates are based on:

• The prevailing Lloyds TSB UK base rate
• The Bank of England base rate
• Our (Lloyd’s) Cost of Funds for the relevant currency
• LIBOR or EURIBOR rates

For more information on Lloyd’s, please send me an e-mail to wright@mortgagegrp.com. Have a great weekend!

Inflation…When to lock in and when to keep riding Prime

A sunny day in Vancouver definitely gives me a spring in my step. It’s beautiful out there today! I hope everyone gets a chance to get some fresh air.

Not surprisingly, I’ve been talking to a lot of people these days about rates these days….Where they’re going, what the lowest one is, and of course the classic “fixed vs. variable” debate. Retail Prime is currently at 2.5% with the Bank of Canada’s Prime sitting at 0.5%. (Do you think they want us to spend? They can’t make it much cheaper.) There is speculation that Prime will drop again on April 21st.  But what’s the backlash to all of this, when there is an abundance of money floating around in the system to try to encourage consumer spending? Well, one result is inflation. Here’s one definition:

“A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.” (click here for the Bank of Canada’s explanation of inflation)

Hmmmmm. Well that doesn’t look to good either. So, as a measure to counter-act inflation, what does the bank do? They raise Prime to discourage additional spending and borrowing. They close the floodgate, if you will, and re-balance the economy to their projected goal of 2-3%. So, if you’re a variable rate mortgage holder with a rate of Prime +0.8%, and the Bank of Canada decides to raise prime back up to 3.00%, you could suddenly find yourself paying a heck of a lot more per month than you did before.  Just a head’s up.

If that was the case, some people would probably start looking to lock in to a fixed rate mortgage. Take careful note, though. Variable rates are based on Prime whereas fixed rates are based on bond yields. If you’re shopping for a fixed rate mortgage, you can pretty much ignore all the hype you’ve been hearing about Prime, because the two products are mutually exclusive from one another. Fixed rates right now are super low because bond yields are coorespondingly low. If you want to get a general idea of where fixed rates might be going for a 5 year mortgage, start following the yields for 5 year canadian bonds. You’ll find that they relate to each other closely. Check out the graph below. (Thanks to the good people at Canadian Mortgage Trends…your blog rocks!)

There’s no Canadian subprime crisis

I’d like to say hats off the The Vancouver Sun for their response to the Globe and Mail’s completely irresponsible tabloid piece last week. The Globe printed an alarmist story about “Canada’s subprime crisis”, but didn’t substantiate its claim with anything except for a weak anecdote. Especially in a time of recession, I feel that the media is obligated to report the facts in a positive way. Consumer confidence reacts to both good and bad news, and to get out an economic downturn, people need to feel safe to start spendng again. I’ve posted the article here, and would be interested to hear your opinions on the matter.

How to avoid parking tickets in Vancouver

Parking tickets…….ugh. I have to admit, I am pretty diligent in avoiding them. I always plug my meter (I use coins for the first 2 hours, then when the time is up I can add 4 more hours from my phone) and if I have to park illegally somewhere, it’s usually for two minutes or less. With all of the real estate construction happening downtown these days though, open spots are becoming harder and harder to come by. The good folks at The Vancouver Sun wrote an article a few weeks back outlining how to avoid a ticket in Vancity. Enjoy, and don’t forget to use your freebie.

CLICK HERE FOR THE STORY.

The Vancouver real estate market re-adjustment

Today we’re going to link to Wade Allen’s blog. Wade is a friend of mine who likes skiing almost as much as I do. He also happens to be a seriously talented real estate agent. In his most recent blog post, he explains why he thinks we’ve come close to a levelling off in the drop of real estate prices. I agree with what he’s saying: First off, we live in Vancouver. Stick your head out the window any day of the week (even a rainy day) and you’ll quickly see that we live in the most gorgeous city in the world. This is not Muncie, Indiana, folks! Even if the sky fell tomorrow, I really don’t think Vancouver will ever be a “bargain” place to find real estate (not unless you get lucky at a foreclosure hearing….and even in court you’re paying close to market prices, I’m told.)

Please check out Wade’s site, listings and blog. Give me a call if you’d like us to put a deal together for you. Client appreciation could include a lift ticket or two.

“Canadian banks keep looking good amidst global turmoil”

I thought I’d take a stab at writing a cliche joe-average “the sky is falling but papers are selling” type of headline. You like?

Here’s another good read on the strength of Canadian banks  compared to our neighbors (sic) to the south. It even has a real Barack Obama quote where he actually talks about Canada!!!

TORONTO- Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia and Bank of Montreal gained ground in the ranks of North America’s 10 biggest banks after U. S. counterparts stumbled or disappeared in the past year.

Royal Bank, Canada’s biggest bank by assets, is now seventh-largest in North America after tripling assets in the past decade, according to data compiled by Bloomberg from company filings. Toronto-Dominion, Scotiabank and Bank of Montreal rank eight, ninth and 10th. At the end of 2007, Toronto based Royal Bank was the sole Canadian firm among the top 10.

Canadian banks have remained profitable, outperforming their peers, because of tighter government restrictions on lending and capital requirements. The country’s six biggest lenders reported less than $ 20 billion in debt-related writedowns since the credit crisis began in 2007, about two per cent of the $ 887.1 billion US recorded by banks and brokerages worldwide.

” It’s a combination of the deleveraging that you’re seeing at some of the U. S. banks and, frankly, the relative strength of the Canadian banks,” National Bank Financial analyst Robert Sedran said late last week. ” They’ve been less disrupted . . . than a lot of their U. S. peers.”

While New York-based Citigroup Inc. lost $ 17.3 billion US in the fourth quarter, San Francisco-based Wells Fargo & Co. had a net loss of $ 2.55 billion US and Bank of America Corp., the biggest by assets, lost $ 1.79 billion US, Canada’s six largest banks were profitable in the quarter ended Jan. 31, and each beat analyst estimates.

Canada’s performance has been noticed. U. S. President Barack Obama said in a February interview with Canadian Broadcasting Corp. that Canada has been ” a pretty good manager of the financial system and the economy.” In October, the World Economic Forum ranked Canada as the soundest financial system.

” The Canadian system is more or less working,” Scotiabank chief executive officer Richard Waugh said last month. ” Even during this crisis, we have a lot of good assets on our balance sheet that are earning good, sustainable revenue.”

U. S. banks have racked up record losses and received unprecedented financial support from the government in the past year.

Canadian banks have climbed in rank as U. S. banks collapsed or were bought out. Lehman Brothers Holdings Inc. filed for Chapter 11 bankruptcy protection in September and Bear Stearns Cos. agreed to be purchased by JPMorgan Chase & Co. last March. Wachovia Corp., which ranked sixth last year, was acquired by No. 4 Wells Fargo & Co. and Merrill Lynch & Co. was bought by Bank of America Corp., which ranked third at the end of last year.

A decade ago, Canada’s banks failed to make the top 10 list. Royal Bank had the equivalent of $ 183.9 billion US in assets at the end of 1999, making it the 12th-biggest bank on the continent. Royal’s assets more than tripled to $ 577.6 billion US by the end of January, in part by adding a U. S. franchise based in Raleigh, North Carolina.

Toronto-Dominion has spent more than $ 15 billion US in the past four years expanding in the U. S., including purchases of Portland, Maine-based TD Banknorth and Cherry Hill, New Jersey-based Commerce Bancorp Inc. .

Shares of Canada’s banks dropped amid the global financial crisis. The nine-member S& P/ TSX Banks Index has dropped 2.6 per cent so far this year, less than the 42 per cent drop among the 24-member KBW Bank Index.

” We’ve beaten expectations to some degree, but I wouldn’t overplay that,” Royal Bank CEO Gordon Nixon told reporters in Vancouver in February. ” The expectation is the Canadian banks will continue to generate profitability throughout this turmoil and I think that’s a real positive.”

• Bloomberg News – BY SEAN PASTERNAK and DOUG ALEXANDER

Now is the time to buy!

I’m going to get on my iSoapBox here again for a quick second….If you have good credit and a stable job with a 5% down payment (plus a little more for closing costs), right now is a fantastic time to get into real estate. Mortgage rates are still as low as they’ve been in years. Here’s an article from The Daily News explaining my point a little further.

Canada’s Big 5 banks: a snapshot of how they’re looking

One of the nice things about being a mortgage broker is that bank representatives send me good articles to post on my blog. By now we’ve all heard about how Canada’s banks are a model for the world. Well, here’s some numbers, some quotes, and a brief synopsis of what the Big 5 banks are up to these days.

Royal Bank of Canada

First quarter profit: $1.05-billion, down from $1.25-billion.

What’s working: The bank’s securities arm makes big bucks, and its huge retail bank in Canada generates steady earnings. RBC benefits from strong loan growth and expense control, notes UBS analyst Peter Rozenberg.

What’s worrying: A foray into the U.S. leaves it exposed to the sagging American economy. Investors never like to see too much of a bank’s earnings come from capital markets, because it’s a volatile business. And while the securities division is doing well, it’s also booking big writedowns. “RBC’s Achilles heel, in Moody’s view, is its U.S. operation,” the rating agency says.

What the CEO says: “As a Canadian bank with global operations, RBC does have a competitive advantage relative to many of our global peers. The fundamentals of our domestic economy, while stressed, appear stronger than in Europe and the United States, having benefited from a public policy agenda that for many years valued prudent fiscal management.”

Total assets: $713-billion

Tier 1 capital ratio (Jan. 31): 10.6 per cent

Provision for credit losses: $747-million, up from $293-million

______

Toronto-Dominion Bank

First-quarter profit: $712-million, down from $970-million.

What’s working: Retail arm TD Canada Trust is a dominant force across the country. “The bank’s sizable capital cushion, combined with the recurring earnings from its Canadian franchise, leave it well positioned to manage through a period of economic headwinds,” says Moody’s Investors Service.

What’s worrying: TD expanded in the U.S. just as things were getting really bad. Now, the bank has the biggest U.S. retail banking presence of any Canadian bank – half of all the bank’s branches are in the U.S. Plus, TD owns a big U.S. wealth management operation that may suffer as markets plunge. The consensus among analysts is that the bank’s securities and trading side isn’t big enough to make up for declining performance in other areas of the bank.

What the CEO says: “We are living in unprecedented times. So what we consider solid performance in the current environment is certainly not what we would be happy with in the long term. … We are going to take some bruises if the situation gets worse, but we’re still going to be able to deliver solid earnings.”

Total assets: $585-billion

Tier 1 capital ratio (Jan. 31): 10.1 per cent

Provision for credit losses: $537-million, up from $255-million

______

Bank of Nova Scotia

First-quarter profit: $842-million, up from $835-million.

What’s working: The bank’s international business – the largest of the Canadian banks – posted a record quarter, and Scotiabank’s reputation for risk management remains intact. The bank’s securities and trading arm, Scotia Capital, had a near-record quarter.

What’s worrying: Investors are leery of exposure to car loans and the auto industry. They are also keeping an eye on the bank’s corporate loan book, the biggest of any Canadian bank.The bank’s large international division, with a big presence in Latin America, was much more profitable than anticipated in the latest quarter, but the macro environment in Latin America has deteriorated in recent months, notes RBC Dominion Securities analyst André-Philippe Hardy.

What the CEO says: “The banking sector in Canada is still in good shape. Some say the best in the world. As a group, we are all very well capitalized by global standards. And Scotiabank clearly demonstrated this by the fact that we were able to raise more capital this quarter, all of it from the market, from private sources.”

Total assets : $510-billion

Tier 1 capital ratio at Jan. 31: 9.5 per cent

Provision for credit losses: $281-million, up from $111-million

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Canadian Imperial Bank of Commerce

First-quarter profit: $147-million, up from a loss of $1.46-billion.

What’s working: Most of the big problems relating to exposure to subprime-linked investments are behind the bank, and its balance sheet is rock solid after raising another $1.6-billion of capital this week. Analysts and investors like the fact that its Canadian-focused business means bad U.S. loans aren’t a big issue.

What’s worrying: The bank is getting out of or cutting back in so many business lines to avoid problems that it’s unclear where growth will come from. Investors worry that the bank is becoming so risk-averse that it won’t be able to compete.

Its core consumer lending segment saw earnings decline 14 per cent in the latest quarter, due in large part to rising provisions for bad credit card, manufacturing and real estate loans, notes Blackmont Capital analyst Brad Smith.

What the CEO says: “Market conditions worldwide for banks remain difficult. Yet arguably one of the better places to be right now is in Canada. At CIBC, the majority of our revenue is derived from retail markets, where we enjoy strong market positions in a broad range of products and services.”

Total assets: $354-billion

Tier 1 capital ratio at Jan. 31: 9.8 per cent (it’s now a whopping 11.5 per cent)

Provision for credit losses: $284-million, up from $172-million

______

Bank of Montreal

First-quarter profit: $225-million, down from $255-million.

What’s working: The bank’s trading operations are buoying profit, and its retail operations are rebounding after lagging for years. A switch toward more profitable products, such as lines of credit, is helping the core operations churn out strong earnings.

What’s worrying: Investors are concerned that trading profits can disappear fast, and the bank has a U.S. loan portfolio by virtue of its presence in the U.S. Midwest. There’s also a nagging worry that the bank will cut its dividend that won’t go away no matter how many times CEO Bill Downe says the payout is safe.

Credit Suisse analyst James Bantis is watching for rising credit losses in the $42-billion (U.S.) U.S. loan portfolio. He sees a large drop-off in the quality of the U.S. portfolio, which accounts for 27 per cent of BMO’s loan book, compared to the Canadian portfolio.

What the CEO says: “Financial institutions everywhere continue to face headwinds in credit markets and the capital markets environment. BMO is well positioned to meet these challenges, having accessed markets to bolster our capital position and having further strengthened our strong liquidity in the period, albeit at a higher cost.”

Tier 1 capital ratio at Jan. 31: 10.21 per cent

Total assets: $443-billion

Borrow to invest against your RRSPs

I had a training session at work today, and the speaker that came in runs a company that helps people borrow against their RRSPs for the purpose of investment.In Canada, when you borrow to invest, the interest on that loan is a tax write-off.

Do you see where I’m going with this?

Here’s my version of Leverage Investing 101:

Say, for example, that you borrow $25,000.00 to invest in a non-registered portfolio. You would pay an interest-only monthly payment, which at the end of the year would be a tax write-off. In the meantime, your non-registered portfolio is making you money, anywhere from 4% -8%. The benefit here is that the money didn’t cost you anything to borrow (remember, the interest only monthly payment is a tax write off), and the non-registered portfolio has made you some money. You are taxed on that money made as a capital gain, but you still come out ahead.

Let’s apply that same thinking to an RRSP (which is a registered portfolio). Suppose you have an RRSP balance of $50,000.00 and you want access to that money for the purpose of investment. Under Canadian tax law, if you take money out of that RRSP, you are taxed on it as income at your tax bracket, so around 40%. Not a good move. Instead, you can transfer your RRSP into a different type of RRSP product where, as long as you are borrowing to invest, the interest is a tax write off. Even better, the new RRSP product chugs along, making you a standard 4% return.

Here’s a scenario: You’re a home owner with a Line of Credit against your home for $650,000. The balance on that LOC is $210,000.00, so you have $440,000 of room. You’ve put a $150,000.00 deposit down on a new $700,000.00 condo development that, when complete, you plan to rent out. You also have $140,000 in RRSPs. You still need to come up with $550,000 before the new condo is yours. You’ve got $440,000 of room on the LOC, so that leaves an outstanding balance of $110,000 owing.

You could go to the bank and ask for an extension on the LOC to make up the difference, but in today’s economic climate, not only may they say “no”, they may actually reduce that LOC limit to reflect today’s conditions. (Yes, that is really happening.)  Alternatively, you could get take out a mortgage for the balance. The problem there, though, is that if you sell the property and break the mortgage, you are charged a big penalty fee. Yuck.

Here’s a better solution. Transfer $110,000 from your current RRSP portfolio to the type of RRSP I’m talking about here. Take an interest only loan against it, and make tax-deductible monthly payments of about $750.00 a month. Rent out your new condo. Gain rental income from that. Or, sell the new condo (hopefully for a profit), pay your loan of $110k back, and go on a vacation. You can pay the loan back at any time with no penalty in this scenario. The RRSP has not been cashed out at all, meaning NO tax penalty is being paid.

If you want to get rich and make your money work for you, send me a message and let me help you get in touch with the company that makes this happen.