Wednesday, June 26, 2013

Should you cancel your credit card?

By Gail Johnson | Pay Day – Mon, 24 Jun, 2013
A friend has accumulated many, many credit cards over the years. She admits she signed up for some of them just to get the store discounts, never planning to use the cards for long. With so many pieces of plastic weighing down her wallet and so many monthly statements coming in, she wants to streamline and cancel all but one. But should she?
“This is a really common question when I go out in the field,” says Paul Le Fevre, director of operations at Equifax Canada Co., one of two national credit bureaus. (The other is TransUnion Canada, which didn’t respond to an interview request.) “It depends on consumer’s circumstances at the time.”
The most prevalent reason people are hesitant to cancel credit cards is the concern that doing so will adversely affect their credit score. That’s certainly possible, Le Fevre explains.
“If someone is going from multiple cards with 20 per cent utilization on each of them and doing a consolidation to one product at 100 per cent utilization, that utilization factor could perhaps have a negative impact on the score because of the high balance,” he says. “But over time, as the consumer pays down that debt, it will have a positive impact on the score as the utilization goes down.”
Credit utilization rate is one of the key factors that makes up a person’s credit score. It’s the amount of outstanding balances on all credit cards divided by the total of each card’s limit, expressed as a percentage. For instance, if you have a $2,000 balance on one card and a $3,000 balance on another, and each has a $5,000 limit, your credit utilization rate would be 50 per cent. Credit issuers typically like to see a credit utilization rate of about 35 per cent or less. (Another main driver from a scoring perspective is payment history—whether you pay your bills on time.)
Given that low utilization rates make for a strong credit score, insolvency counsellor Margaret Johnson, president of Solutions Credit Counselling Service Inc., advises against cancelling credit cards.
“You could have five credit cards and only be using one of them and that’s not going to hurt your credit rating; in fact it will improve your credit crating because when you have active credit cards with a zero balance, that’s the most points you can get,” Johnson says.
“I understand people might be concerned about using them [all those credit cards],” she adds. “If that’s the concern, cut them up or put them in a safety deposit box; I’ve heard of people freezing them in the freezer. But do not throw them away.”
Keep in mind that it’s harder to qualify for credit as people age and their incomes go down. So, if you have access to a number of cards now, and healthy spending habits, why not keep them?
If you're still determined to get rid of some of your cards. Le Fevre notes that consumers can request that the reasons for cancelling be noted on their credit report.
“It’s always a good idea for the consumer to indicate to the credit grantor [when cancelling a card] that they want that narrative added, that it was closed at request of the consumer,” Le Fevre says. “Consumers can add a statement on their Equifax report saying they went through consolidation, for example. Any narrative…just tells the story a little bit more.”
People should make a habit of obtaining and reviewing their credit report regularly, Le Fevre reminds.
“It’s very important that consumers verify the information on their report on a regular basis to ensure it’s complete, accurate, and up to date,” he says. “We do recommend checking at least once a year—ideally not two days before the conditional purchase on their dream home is going to expire.”

Friday, June 21, 2013

Should you rely on a broker for a great mortgage? Or call around yourself?

Robert McLister Special to The Globe and Mail Published Sunday, Jun. 16 2013,
If you visit different mortgage broker websites, you’re bound to come across wording like this: “We work with over 50 lenders to serve you better.”
The idea is that having more lenders to choose from when shopping for a mortgage improves your odds of getting the best deal. But is more really better and is it enough to rely on a broker to contact lenders on your behalf – or should you call around yourself?
Access to multiple lenders is a key benefit that brokers like to promote. However, the pool of banks that brokers have access to has shrunk since 2007, when Bank of Montreal, Canadian Imperial Bank of Commerce, ING and others began exiting the independent broker market. Those banks feel they can profit more by selling mortgages directly to customers.
Furthermore, most brokers don’t compare every available lender. Maritz Research found that 90 per cent of the typical broker’s volume goes to just three lenders. That’s partly because some brokers feel more comfortable in knowing a few lenders well, versus many lenders superficially. It’s also because brokers often get preferential rates and service – like better turnaround time – from their primary lenders.
Yet another reason, in certain cases, is self-interest. Lenders pay financial incentives to brokers who send them a certain amount of volume. Such incentives can be a conflict of interest if they lead a broker into recommending a less competitive mortgage.
When a broker deals with just three lenders, he or she might as well be a sales rep for those companies. There’s nothing necessarily wrong with that – if the lender has the best mortgage for the customer, but that’s not always the case.
One way to avoid brokers who don’t shop around sufficiently is to deal with an established and experienced high-volume broker, someone who isn`t as pressured to send a set amount of volume to a particular lender. These brokers are typically found high up in Google’s local search results, due to their longevity, referrals and professionally-run businesses.
In a perfect world, it would be easy to find a broker who shops all lenders objectively, even lenders that don’t pay brokers. Unfortunately, most brokers don’t have the time or technology to closely track the rates, terms and guidelines of 50-plus lenders. And brokers, like bankers, like to get paid and seldom recommend outside lenders.
So if you truly want to shop all major lenders, you’ll need to do your own legwork. If you’re getting a new mortgage, you must:
  • Contact these non-broker lenders yourself: RBC, BMO, CIBC, HSBC, ING, Manulife Bank, PC Financial
  • Go direct or use a broker to get quotes from these lenders: Scotiabank, TD Canada Trust, National Bank, Industrial Alliance, Desjardins and the major credit unions
  • Use a broker to get quotes from wholesale lenders like First National, MCAP, Street Capital, Home Trust, Merix Financial, ICICI Bank, CMLS, MonCana Bank, Radius Financial, RMG Mortgages, AGF Trust, B2B Bank, Xceed and others.
In short, you’ll never truly know all the deals out there unless you take matters in your own hands and contact dozens of lenders. However, you need to be sure it’s worth your time. You might save another 0.05 or 0.10 percentage points off a great bank or broker rate by shopping yourself (that’s about $49 savings per $100,000 of mortgage per year).
But the legwork could literally take hours of asking the right questions and negotiating with all the key lenders. And if you inadvertently pick a lender with onerous fine print, the cost of that lender’s restrictions could easily outweigh any upfront rate savings.
Using rate comparison sites for leverage is another strategy. The problem there is that rate sites typically don’t reveal all the limitations of a mortgage (e.g., penalty calculations, porting rules and mortgage increase policies, to name a few). So you still need advice or lender feedback to find the ideal mortgage at the absolute lowest possible rate.
Even if you plan to get your mortgage directly through a bank – like 57 per cent of Canadians do – contacting a broker might work in your favour. At worst, you’ll get market and rate intelligence that you can use to your advantage at the bank. At best, the broker may find you a flexible product that costs less, and/or suggest a strategy that saves you interest.
And, brokers have dozens more options than any single lender, which gives them access to cut-rate pricing, easier approvals for people with special situations (eg. self-employed or with bad credit history), lower penalties for breaking a mortgage early, and more choice of features, like pre-payment privileges, linked credit lines and the ability to extend your term before the mortgage comes due, penalty-free. (Banks too have unique features not available through brokers. Examples: BMO’s Cash Account, TD’s HELOC and Manulife’s One account.)
Comparing dozens of lenders on your own can be educational, but it takes considerable effort and some know-how. If you know what questions to ask, that extra effort can lead to a slightly lower upfront rate. I’ll list the essential questions in a future column.
Just remember this. The cheapest rate doesn’t necessarily equal the least money out of pocket. Things like costly payout restrictions, lender refinance policies and accelerated payoff privileges can add or subtract thousands from your total borrowing costs.
In practice, most Canadians lead busy lives and are content to let a banker or broker find them a mortgage that’s “good enough.”
But if you have the spare time and truly want the best deal, you can engage a broker to shop for you, and call the non-broker lenders yourself and cross reference your quotes with a rate comparison site. And while you’re at it, don’t be afraid to get a second broker opinion.

Have a great weekend!

Thursday, June 6, 2013

You’d have to see rates move dramatically higher for a major correction.

Canada’s housing market is showing signs of a soft landing amid evidence of robust demand and buoyant new construction plans.
Home prices in Toronto, Canada’s most-populous city, rose 5.4% in May from a year ago, the biggest increase in five months, the Toronto Real Estate Board reported Wednesday. Statistics Canada said the value of April municipal building permits posted a 10.5% gain.

To see the graph click on link..

Housing-market data are showing few signs of a sharp correction even amid warnings from analysts and policy makers that a bubble may have been forming. Finance Minister Jim Flaherty tightened mortgage rules for a fourth time last year on concern that an overbuilding of condos could lead to sharp price declines. Former Bank of Canada Governor Mark Carney identified record household debt as the biggest domestic risk to the economy.
“The base case scenario is a soft landing,” said David Tulk, chief macro strategist at Toronto-Dominion Bank’s TD Securities in Toronto. “You’d have to see rates move dramatically higher” for a major correction, he said.
Driven by historically low interest rates, Canadian banks have been increasing dependence on real estate lending to drive earnings, with residential and non-residential mortgage assets totalling $955 billion at the end of March, or 26% of total assets, according to OSFI data. That’s up from $521 billion five years earlier, which represented 20% of assets at the time.
Fading Impact
The impact of Flaherty’s policy changes are beginning to fade, Toronto Real Estate Board President Ann Hannah said in Wednesday’s release.
“A growing number of households who put their decision to purchase on hold as a result of stricter lending guidelines are starting to become active again in the ownership market,” Hannah said.
The average sale price rose to $542,174, from $514,567 a year ago, while a composite home benchmark price index for the city was up 2.8%, the Toronto Real Estate Board reported. Unit sales dropped 3.4% from a year earlier to 10,182, the board said in an e-mailed statement Wednesday.
The decline in Toronto sales was led by condominiums and townhouses, while purchases of detached homes rose in May. Prices were up in all categories of homes.
On a year-to-date basis, Toronto sales are down 9.6%.
‘Weaker Volumes’
“The story continues to be one of weaker volumes,” Derek Holt, vice-president of economics at Toronto-based Scotiabank, said in a note to investors. “The question is how that will carry over into construction and prices.”
Residential building permits rose 21% to $4.35 billion in April, Statistics Canada said today, led by a 51.9% jump in condominium construction intentions.
Vancouver made one of the largest contributions to the national increase among 34 cities, Statistics Canada said, with permits rising 50.7% led by multifamily dwellings. Calgary permits also rose 40.6% to $773 million on commercial buildings.
Vancouver’s real estate board said Tuesday that home sales rose 1% in May from a year ago, with composite prices down 4.3%.
Falling home construction, which helped lift Canada’s economy out of recession, has been a drag on growth over the past year, shrinking at an annualized pace of 4.7% in the first quarter, according to GDP data released last week.

Wednesday, June 5, 2013

Canadian non-mortgage debt shows biggest quarterly decline since 2004

Canadian non-mortgage debt shows biggest quarterly decline since 2004
OTTAWA - New data on consumer credit suggests Canadians are becoming more cautious about making purchases that involve taking on debt.
The analysis by TransUnion Market Trends shows average consumer debt in Canada, excluding mortgages, fell by two per cent to $26,935 in the first three months of 2013 from the fourth quarter in 2012.
While total debt is still 3.5 per cent higher from a year ago, it was the first quarterly drop since the third quarter of 2011 and the largest since the firm began collecting the data in 2004.
TransUnion vice president Thomas Higgins says while the fall-off was significant, it is still too early to declare a trend. He notes that the 2011 decline was quickly followed by rapid increases in 2012.
The Bank of Canada has welcomed the general trend to more frugal finances among households, particularly in mortgages, which make up for the vast majority of debt held by Canadians.
The bank continues to warn, however, that Canadians could be caught out once interest rates start rising.
Higgins says the average Canadian pays about $1,398 in interest each year on their lines of credit, but that would rise by $350 if rates rose by one percentage point, and by $699 if rates rose two points.
With interest rates at rock-bottom levels, TransUnion says delinquency rates remain low for all credit products.
On consumer debt — which includes credit card debt, lines of credit, instalment and car loans — all provinces except British Columbia posted a quarter-quarter decline in the first three months of 2013. In B.C., credit rose 3.7 per cent.