Secondary credit card user a nobody

Garry Marr, Financial Post

It was a bit of a shock to Brenda Harfield when she tried to order something on her Sears card and was told to get her husband, if she wanted to complete the transaction.

“I cut that card up and told them that everything that comes from them goes into the garbage,” says the Sydney, B.C., resident.

Her wrath was wrongly directed at the retailer but you can’t blame her. She handles all the paperwork in the household but the credit cards were in her husband’s name. Or at least they used to be.

She discovered like many woman do that being an authorized user on a card has its limitations. It’s not just a lack of access to the account for certain transactions, the account also doesn’t exist in terms of your credit history.

“Since all this happened I am the primary card holder on all of them” says. Ms. Harfied.

Smart move. My wife found this out the hard way when she applied for a card and was turned down. She came home fuming and blaming me. She immediately switched about half our credit cards to her name as the primary card holder, in an attempt to improve her credit rating.

It worked. TransUnion LLC — one of two companies providing credit ratings in Canada, the other being Equifax Inc. — agreed to let her check her rating for free after doing the same for me last month and she scored 783 out of 900, just below the 786 I received.

She also discovered the credit issuer considers her hyphenated married name an alias, but that’s another column.

“If you are a secondary credit user, that doesn’t give any credit data. If you are contractual borrower or a co-signer then you could get a credit report in your own name,” says Tom Reid, director of consumer solutions for TransUnion.ca.

He says about half of the consumers that are checking on their credit report with the company are women. “You see more and more women trying to get access to credit and they want to understand more about it,” says Mr. Reid.

There are some serious risks for women who hand off responsibility for their credit to their husbands, says Robert McLister, editor of Canadian Mortgage Trends.

“If it’s a joint card, creditors will report that card’s repayment history to the credit bureaus for both co-applicants,” he says.

“Women who are joint cardholders sometimes relinquish payment responsibility to their husband, which can backfire if the husband doesn’t pay responsibly. We’ve seen cases where a wife separates from her husband but forgets to cancel her name off a joint account. The husband then racked up the card or missed payments, without the wife ever knowing. In those types of cases, the wife typically finds out after it’s too late and/or after the file has gone to collections.”

Certified financial planner Jeanette Brox said she recently met a client whose mother had never had a credit card until five years ago and then found herself in trouble when her husband landed in hospital.

“I think I heard about this in the dark ages but it’s hard to believe it exists,” says Mr. Brox.

She’s actually been dealing more with debt consolidation the last few years and one good thing about those spenders, they always make sure they have their own credit card in their own name.

“I have also seen a real determination of the woman to have her own card,” says Ms. Brox, adding she still has her share of clients where the man is listed as a primary card holder or the only person on the mortgage.

The ultimate irony might be where the woman is running the financial household but in her husband’s name. “The wives are usually the generals running things,” the financial planner says.

Ms. Brox adds, however, that’s not good enough when you consider the percentage of marriages that end in divorce. It really makes sense for women to establish their credit.

“I like to have the woman have her own name on things,” she says.

So do the credit rating agencies.

– from February 11, 2011 Financial Post

Canadian mortgage holders in good shape, survey says

Derek Abma, Postmedia News

Most Canadian mortgage holders are on solid financial ground and could withstand the extra expenses that might come with higher interest rates somewhere down the road, according to survey results released Monday.

The Canadian Association of Accredited Mortgage Professionals said 84 per cent of those with mortgages could withstand paying an extra $300 or more on their monthly mortgage payments. In B.C., 33 per cent have made additional payments or increased payments, according to the study.

This leeway comes with most homeowners being in a good position in relation to the value of their home versus what they owe on their mortgage, and in their ability to negotiate reasonable terms on their mortgages, the survey showed.

It was found that the average Canadian mortgage holder has home equity — the value of their home minus their owed mortgage debt — of $146,000, or 50 per cent of the value of their home. In B.C., the average mortgage is $183,000 and for those with mortgages, the average equity is 58 per cent.

It was also found that people who have arranged a mortgage in the last year had attained an average rate of 4.23 per cent on five-year, fixed mortgages, which is 1.42 points less than the normal posted rates over this time. As well, the study found that 72 per cent of Canadians who have renegotiated a mortgage in the last year have been able to get a lower rate — 1.09 percentage points, on average.

“Canadians are being smart and responsible with their mortgages,” Jim Murphy, president and CEO of CAAMP, said in a statement.

The results were based on web polls with more than 2,000 Canadians this fall, more than half being homeowners with mortgages. No margin of error was provided.

– from November 9, 2010 The Vancouver Sun

Inflation tame, will Bank of Canada hold rates?

Paul Vieira, Financial Post

Inflation was softer than expected in August, data revealed Tuesday, leading analysts to suggest it may persuade the Bank of Canada to hold interest rates steady in the coming months.

The headline inflation rate was 1.7% in August on a year-over-year basis, Statistics Canada said, while month-over-month consumer prices slipped 0.1%. Meanwhile, the core rate — which strips out volatile-priced items such as food and energy — remained unchanged at 1.6% in the month.

Market consensus was for a headline rate of 1.9% and a core reading of 1.7% in August.

The figures indicate inflation poses no threat to the economy, and at present consumer price increases are running below the Bank of Canada’s forecast. For instance, analysts indicate the core rate — which the central bank closely watches because it excludes volatility — will come in lower than the Bank of Canada’s forecast for 1.8% in the third quarter of 2010.

This has analysts suggesting the Canadian central bank might refrain from raising its benchmark rate again at its next meeting on Oct. 19.

The central bank sets its policy rate in an effort to attain and maintain 2% inflation.

“This report clearly indicates that inflation is becoming a swing factor for Bank of Canada. And it supports our view that the Bank of Canada will be on hold for some time,” said Jonathan Basile, vice-president of economics at Credit Suisse in New York.

In seasonally adjusted terms, core prices were flat in August, and the six-month trend has ebbed to a mere 0.3% annualized rate — which is the lowest pace in over 25 years of data, said Douglas Porter, deputy chief economist at BMO Capital Markets.

“Inflation remains well under wraps in Canada,” he said. “If anything, some measures of core inflation trends are even lower than in the United States, where deflation chatter is rampant.”

As of Tuesday morning, markets had priced in roughly 66% odds that the Bank of Canada sits on the sidelines next month. Following the release of the consumer price data, the Canadian dollar sold off and yields at the short-end of the bond curve dropped.

The Bank of Canada has raised rates by 25 basis points at each of its last three meetings, as Canada recovered strongly from the recession. However, growth has ebbed as of late, due to a slowdown in the U.S. and global economies. Second-quarter GDP expansion was 2% annualized, down from the 5.8% reading in the first three months of 2010.

The soft inflation reading also suggested there still remains “significant amount” of excess capacity in the Canadian economy, said Toronto-Dominion Bank economists in a note.

Any further cool down in economic growth could put pressure on retailers to cut prices further to attract buyers — particularly on big-ticket items such as cars, added TD economist Diana Petramala.

The inflation data indicated energy prices rose 5% year-over-year, following a 7.9% increase during the 12-month period to July. Excluding energy, the headline inflation was up 1.4% in August.

Homeowner’s replacement costs, which rose 5.5%, passenger vehicle insurance premiums, up 5.1%, and food from restaurants, which was up 2.5%, also pushed the inflation rate higher. However, consumers paid 2.2% less for clothing and footwear in August than they did a year earlier.

– from September 21, 2010 Financial Post

With rates low, is it time to reconsider your mortgage?

Fiona Anderson, The Vancouver Sun

VANCOUVER – With mortgage rates low and more likely to go up than down, some borrowers may want to think long and hard about whether they want a long and hard — fixed, that is — mortgage rate.

The first question is whether to go fixed or variable when borrowing to buy a home. Statistics show that 88 per cent of the time, a variable mortgage is cheaper than a fixed-rate mortgage, said Feisal Panjwani, senior mortgage consultant with Invis-Feisal & Associates Mortgage Consulting in Cloverdale. But the problem with a variable rate is that it is just that: It changes over the life of the mortgage.

The variable rate is based on the lender’s prime lending rate, which today is 2.75 per cent for the major banks and credit unions. The best variable rate available according to Invis — a national brokerage company who negotiates mortgages on behalf of clients with various lenders including banks, credit unions and wholesale lenders — is prime less 0.6 percentage points, or 2.15 per cent. But banks change their prime rate from time to time, usually whenever the Bank of Canada changes its overnight target rate, which it has done twice since the beginning of June and is expected to do again in the fall.

Lenders also change the formula by which they calculate the variable rate. So while the best variable rate is now prime less 0.6, earlier this month, before the Bank of Canada’s most recent hike, the rate was prime less 0.5 per cent. That means people who took out a mortgage two weeks ago would be paying 2.25 per cent (2.75 minus 0.5) now. In October 2008, when the Bank of Canada’s rate was at an all-time low and credit was tight, lenders were charging as much as prime plus 1.0 for their variable mortgages and borrowers who signed up then would be paying 3.75 per cent now.

If that kind of uncertainty “is going to keep you up at night,” Panjwani recommends taking a fixed rate.

“Lock it in and forget about it,” Panjwani said.

If you are willing to take the risk, check your payments, he said. Some mortgages will adjust the monthly payment every time the rate changes, making it difficult to budget. Others will keep the payments the same but just attribute more to interest and less to principal if rates go up (and vice versa if they go down).

The next question is how long to go. Except for six-month mortgages, rates are generally higher the longer the term. But if you think the rates are going to go up, you may want to lock in longer and preserve the rate you can get now.

The most common term for fixed-rate mortgages is five years, but with rates at historic lows, Barry Rathburn, manager of mobile mortgage specialists with TD Canada Trust on Vancouver Island, believes some people might want to look at a 10-year mortgage.

The 25-year average for the five-year rate is more than eight per cent, but the 10-year rate now is as low as 5.35 per cent, Rathburn said.

So for those on a fixed income, or employed in a job that isn’t likely to see much of a pay increase over time, knowing what your payments will be for 10 years may be a source of comfort, he said.

It also makes long-term budgeting easier, he added.

Panjwani agrees that a 10-year mortgage might be suitable for someone who is very risk-averse and wants to lock in a low rate for as long as possible. But statistics show that only 10 per cent of the time has a 10-year term worked out better than two consecutive five-year terms, he said.

And while the 25-year average for a five-year posted rate is more than eight per cent, most lenders offer a discount of at least one percentage point from their posted rates, so the average is closer to seven per cent. And that average includes the extremely high rates of the late 1980s.

But if you did want a long-term mortgage, “historically speaking now is a good time to do it,” Panjwani said.

However, he said, you will be paying a premium — the difference between the 10-year and five-year rates, which now are as low as 4.29 per cent.

“So there’s a quite a big premium you’re paying to take the extra five years of security,” he said.

But if rates do increase significantly, then “those taking a fixed 10-year are going to be ahead of the game.”

And no one knows for sure what will happen to rates, he added.

“In my opinion, unless someone is extremely concerned about rate fluctuations, they are better off on a five-year,” Panjwani said. “But for those people who really want to play it safe, it’s okay.”

One thing a 10-year borrower doesn’t have to worry about is a larger prepayment penalty. As discussed in last week’s Money Watch, lenders usually charge the greater of three months’ interest or interest differential — the difference between the interest on the mortgage being paid out and the rate the banks could earn re-lending that money — when a borrower wants to pay out his mortgage before the term is up.

If this applied to 10-year mortgages, that interest rate differential could be quite high. But a Canadian law, which has been around for more than 100 years, limits the prepayment penalty for any mortgage that is greater than five years to three months’ interest, said David Mydske, the national practice group leader for the commercial real estate group at Borden Ladner Gervais LLP.

So the interest differential may apply for the first five years, like a five-year term, but after that the lender can charge only the three months’ interest, Mydske said.

With rates likely rising over the next few years “that’s probably all [the lender] is going to get anyway,” he said. “So I’m not sure it’s as big an issue now when rates are so low.”

– from July 27, 2010 The Vancouver Sun

Forget market timing, buying a house is about life timing

Garry Marr, Financial Post

“You know, you’re making the biggest mistake of your life. The housing market is going to fall.”

I got this great piece of advice from another journalist at the Financial Post, who has since left the newspaper, after buying my first home. Not exactly the type of thing you want to hear after taking on huge debt and making the biggest financial decision of your life.

Lucky for me, I didn’t heed that advice about Toronto’s red-hot real estate market — in 1998. I’m not going to say I made a shrewd business decision 12 years ago, or even six years later when I bought a larger house.

For me, it wasn’t a case of not following what turned out to be bad advice from a fellow business journalist. Nor was it about trying to time the market.

I was simply following the same pattern as most Canadians: I got married and decided to stop renting and buy something. Later came the need for a bigger home when the second kid was on the way.

Which brings us to today. The supply of housing is rising fast as people try to list their homes for sale before the market “crashes.” This is happening at the same time that demand is starting to wane. Economists and even the real estate industry are all predicting a correction, the only argument being how severe it will be.

So, the question for anyone buying is, should you wait?

Don Lawby, chief executive of Century 21 Canada, thinks the strategy of waiting for a crash is not going to work during this economic cycle. “For a market to crash, you have to have people who are desperate to sell,” says Mr. Lawby. “People will [only sell] if they can’t afford their mortgage or they don’t have a job.”

He doesn’t see a decline in prices, “unless you are predicting that mortgages will renew at a hefty premium, which is not the case, or a whole bunch of people are going to lose their jobs.”

Mr. Lawby believes neither will happen.

And, he adds, you are really into a risky game if you are timing the market. “A house is a home. If all you are doing is looking at it as an investment –that’s what happened the last 15 years–it’s not just that. It’s a place to live and a place to raise a family,” says Mr. Lawby.

Even Benjamin Tal, a senior economist with CIBC World Markets, who last month said in a report that Canadian housing is 14% overvalued, has doubts about playing the market. But he suspects that’s exactly what some Canadians will do.

“Is there a sense that prices will go down and people will wait? I think it might be an issue,” says Mr. Tal. “It won’t be the main reason [people don’t buy], but it will happen at the margins. The fact that people sell at the peak and wait to buy is a normally functioning market.”

But even if you do make the right call on housing prices, it could end up backfiring on you in other ways. For example, if interest rates rise fast enough, any gains you make on price could be erased by interest charges, says Mr. Tal.

Edmonton certified financial planner Al Nagy says you need to think of your house the way you think about any long-term investment. “Whether it’s an investment for use in your retirement or a house to live in, it’s a long-term thing. The timing becomes less critical than it would be if it is a speculative [investment].”

And he says making a call on the housing market is as tricky as any other investment call. “It’s very rare you catch the bottom. You can’t let the market dictate when it’s time to buy. The time to buy is when you can afford it,” says Mr. Nagy.

I’m not sure that philosophy would fly with my former colleague, but the problem with timing the market is, what if your timing is off?

– from June 9, 2010 Financial Post

Extended Amortization

Extended amortization periods may allow you to qualify for a larger mortgage. The longer the amortization period, the smaller the monthly payments and hence the larger property you can afford.

For example, income of $50,000 would qualify for a mortgage of approximately $200,000 using 25-year amortization, a 5 year fixed rate of 4.39% and standard guidelines. With 35-year amortization, the same income and interest rate would qualify for a mortgage of approximately $235,000. With excellent credit and NO other liabilities (credit cards, lines of credit, loans etc.) the same income would qualify for about $300,000.

What if I don’t want to take 35 years to pay off my mortgage? By using prepayment privileges offered by most banks, you can pay off the mortgage in the traditional 25 years or less.

Mortgage amounts include CMHC/GE fees. Subject to change without notice. Approval based on formal application, credit check, income and down payment verification. Broker/lender fees may apply.