Ask your Broker or your banker the following Question;

How have you structured your own mortgage and why?

Aside from discovering that an overwhelming number of mortgage professionals have their own residence set up in a Variable rate product (a topic touched on last month) you may gain an interesting perspective on creating Options for unexpected events.

Several hundred transactions later, with a wide variety of lenders, I have learned a few things along the way.  Things which I try to apply to our own personal financing whenever possible.

Much of my role with clients is in creating options, options which may never be required, options for circumstances most clients had not thought to consider.  Being overly prudent during Mortgage inception takes only a few extra minutes and can result in saving clients thousands down the road.

The following ‘no-cost insurance plan’ creates a safety net from strategic use of pre-payment privileges. This goes well beyond a simple ‘skip-a-payment’ policy offered with many lenders.

The first step is finding a lender with an aggressive match-a-payment/miss-a-payment program, I know of only one that ticks all the other important ‘options’ boxes as well (i.e. 20% open prepayment privileges).

The target audience for this plan is typically above the age of 45, has less than 15 years current amortisation left on their mortgage, and are somewhat fiscally conservative, as most CDN’s in fact are.

The heart of the plan;

On paper, we take what’s typically ~ a 15-year amortization back out to 30 years, on paper only-not in reality.  We then implement the match-a-payment option, this doubling of the baseline payment will reduce the effective amortization to as little as 11 years and 6 months.

For each doubled payment (bi-weekly ideally) there is a banked ‘missed payment’ option.  Not just skipping one, but potentially skipping up to 30 payments in a row in a 5yr term mortgage.

Of course none of us ever plans or wants to miss a payment.  However this acts a bit like a disability insurance policy (which you should also consider having, as this is not a replacement for quality coverage) which costs nothing at all to have in place.  Just a few minutes of planning and foresight.

Not only is there the option to miss payments, just as importantly there is an option of cutting the payment in half by reverting back to the original contracted amortisation.

Key Point: Mortgage payment and amortization have a symbiotic relationship, as you increase one, the other decreases, and vice versa. 

You (the client) are in the driver’s seat.  Rather than being locked into a higher payment, you have effectively created a two- step buffer should anything in life change radically. And really via a simple e-mail or phone call one can:

1. Reduce the monthly payment by 50 per cent, simply by reverting back to the original amortization.
2. Reduce a payment to zero for an equal length of time for which they have been making double payments (within the term of the mortgage only, as the miss-a-payment option resets to zero at the start of each new mortgage term).

This all about money management and creating options for the unpredictable path all our lives follow.  This is simply a tool, one which may never be used, but is comforting to have handy.

As a happy personal anecdote, the fact that my wife and I had been enacting this strategy for 2 years gave us significant confidence when we wrote an offer on another property without having our current residence listed, let alone sold.  We knew if we needed to we could turn off the payment on the old house for up to 2 years reducing the carrying costs to nil.  Ultimately our former home sold within a few months, but having this knowledge and this power gave us the confidence and comfort to make a move on a property that we otherwise may not have.

This is part of my own approach to being more of an A-Z solutions oriented Broker than simply just A-to-B.  Looking past the short term nature of the initial transaction and perceived basic needs are what quality planning is all about.

Thank you.

@dustanwoodhouse

Vancouver, Calgary and Toronto Detached Housing Priced in Gold

….for CDN Real Estate priced in Interest Income and Stocks go to the Chart Book Index

First, the market news: The Dow lost 89 points yesterday. Gold fell by four bucks an ounce. 

And now the good news: The Great Correction is over! 

Hallelujah! People are going deeper into debt… and getting divorced again. 

No kidding. Bloomberg reports: 

The number of Americans getting divorced rose for the third year in a row to about 2.4 million in 2012, after plunging in the 18-month recession ended June 2009, according to US Census Bureau data. 

“As the economy normalizes, so too do family dynamics,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “Birth rates and divorce rates are rising. We may even see them rise strongly in the next couple of years, as households who put off these life-changing events decide to act.” 

Divorces were at a 40-year low in 2009, according to Jessamyn Schaller, an economics professor at the University of Arizona in Tucson, citing data from the federal government’s National Center for Health Statistics. The divorce rate more than doubled between 1940 and 1981 before falling a third by 2009, according to figures from NCHS, based in Hyattsville, Maryland.

Well, that’s great news, isn’t it? 

Things are going back to normal. If the Great Correction is over, you can expect higher consumer prices… more jobs… lower bond prices… higher bond yields… and a higher rate of economic growth. 

A real recovery, finally. 

But if the Great Correction isn’t over, you can expect more of what we have seen for the last five years – low consumer-price inflation (officially only 1.5% over the last 12 months), low bond yields (and high prices)… more QE… and sluggish growth. 

From the Wall Street Journal: “Household Debt Jumps as Banks Loosen Up.” 

Pity the poor schlep who has been forced to stay with his wife because he couldn’t afford to get rid of her. 

Here’s his chance: The Fed has gamely tried to boost credit, borrowing, spending, consumer prices and divorce rates. But although it can help push borrowing costs down through QE, it can’t make people borrow. 

Result: stagnation. 

But now… for the first time since 2008… households are borrowing more than they are paying off or defaulting on. Aggregate consumer debt in the US rose 2.1% in Q4 to $11.52 trillion – the largest quarterly rise since Q3 2007. 

“People actually want to step up and take on more debt,” said one analyst quoted by theJournal. 

For the last five years, households paid down debt. This is why QE has been such a dud when it comes to boosting real economic output. 

The Fed can fiddle with bond yields. But it can’t make consumers borrow. Nor can it boost the money supply. Banks have to lend for the money supply to rise. If they don’t, it doesn’t matter how much the Fed puffs up the monetary base. 

But if households’ appetite for borrowing suddenly improves… and if the Fed continues to hold interest rates to the floor… there could soon be a substantial increase in the money supply. 

This would give consumer prices the boost the Fed has been aiming for. It may even get more than it was hoping for. Higher consumer price inflation could spook overseas dollar holders… causing them to give their tattered Franklins and shopworn Grants the heave-ho, back to where they came from. 

But looking more closely, neither divorce numbers nor the debt numbers are sure signs of economic health. 

After five years of subnormal divorce numbers, you would expect them to regress to the mean, no matter what was going on in the economy. 

As for the recent increase in US household debt, the biggest gain came in student loans, which rose 12%. In fact, it rose almost exactly as much as borrowers aren’t paying. Delinquencies are at about 12%, too. 

Why do people want to go to school, rather than work? Because they can’t find good jobs. 

Why do they borrow, rather than pay for it out of savings? Because they have no savings. 

Why do they borrow from the federal government? Because this lender performs no credit check. 

Once the federal debt devil has you in his grip, it is very hard to get away. You may be prepared for a job, but that doesn’t mean a job is prepared for you. And the only way you can put off making payments on your debt is to borrow more and stay in school. Deeper into the bowels of debt hell you go. 

That’s why student loan defaults are growing so fast. Nearly one in eight borrowers hasn’t made a payment in the last 90 days – the highest delinquency rate of any form of debt. 

And it’s going up. Delinquency rates rose by 40% in the last three years. How much of that debt will never be repaid? 

And remember: When debts go unpaid, it impacts banks’ capital. This, in turn, puts downward pressure on lending… and the money supply. 

The fastest growing category of debt owes its growth to the failure of the economy, not its success. 

Is the correction really over? Maybe not. 

Regards,

Bill

Market Insight:
5 Reasons We Won’t See Emerging Market Contagion This Time Round 

From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners

While Bill has been examining the action in the US economy… we’ve been keeping an eye on the emerging markets. 

The dog that didn’t bark in the recent emerging market “crisis” was major capital flight into the perceived safe havens of the US dollar and US Treasury bonds. 

A major flight to safety is consistent with fears of financial contagion. The relative calm in the US Treasury market reflects relative calm among investors. 

Emerging markets have changed considerably since the Asian financial crisis of 1997-98 threatened to spark a worldwide financial panic. 

There are five important factors that make today’s emerging markets considerably more robust: 

1. The average rating of emerging market government bonds is higher (from BB 10 years ago to BBB today). 

2. Emerging market governments have less short-term debt (which becomes particularly vulnerable in a crisis because it must be refinanced). 

3. The combined debt-to-GDP ratio for the emerging markets is now lower than before (combined debt to GDP is just 35%… also lower than the developed markets combined). 

4. The emerging markets now have a combined $8 trillion in foreign exchange reserves as buffers if funding runs short. 

5. Few emerging markets are tied to US dollar pegs (which makes them more immune to speculative attacks). 

This doesn’t mean there won’t be plenty of bumps in the road for the emerging markets. But parallels to contagion-inducing financial panics are overdone.

“Billion-dollar investor Warren Buffett is rumored to be preparing for a crash as well. The “Warren Buffett Indicator,” also known as the “Total-Market-Cap to GDP Ratio,” is breaching sell-alert status and a collapse may happen at any moment.”

Warning: Stocks Will Collapse by 50% in 2014

It is only a matter of time before the stock market plunges by 50% or more, according to several reputable experts.

“We have no right to be surprised by a severe and imminent stock market crash,” explains Mark Spitznagel, a hedge fund manager who is notorious for his hugely profitable billion-dollar bet on the 2008 crisis. “In fact, we must absolutely expect it.”

Unfortunately Spitznagel isn’t alone.

“We are in a gigantic financial asset bubble,” warns Swiss adviser and fund manager Marc Faber. “It could burst any day.” 

Faber doesn’t hesitate to put the blame squarely on President Obama’s big government policies and the Federal Reserve’s risky low-rate policies, which, he says, “penalize the income earners, the savers who save, your parents — why should your parents be forced to speculate in stocks and in real estate and everything under the sun?” 

Billion-dollar investor Warren Buffett is rumored to be preparing for a crash as well. The “Warren Buffett Indicator,” also known as the “Total-Market-Cap to GDP Ratio,” is breaching sell-alert status and a collapse may happen at any moment. 

So with an inevitable crash looming, what are Main Street investors to do?

One option is to sell all your stocks and stuff your money under the mattress, and another option is to risk everything and ride out the storm.

But according to Sean Hyman, founder of Absolute Profits, there is a third option.

“There are specific sectors of the market that are all but guaranteed to perform well during the next few months,” Hyman explains. “Getting out of stocks now could be costly.”

How can Hyman be so sure?

He has access to a secret Wall Street calendar that has beat the overall market by 250% since 1968. This calendar simply lists 19 investments (based on sectors of the market) and 38 dates to buy and sell them, and by doing so, one could turn $1,000 into as much as $300,000 in a 10-year time frame. 

“But this calendar is just one part of my investment system,” Hyman adds. “I also have a Crash Alert System that is designed to warn investors before a major correction as well.”

(The Crash Alert System was actually programmed by one of the individuals who coded nuclear missile flight patterns during the Cold War so that it could be as close to 100% accurate as possible). 

Hyman explains that if the market starts to plunge, the Crash Alert System will signal a sell alert warning investors to go to cash. 

“You would have been able to completely avoid the 2000 and 2008 collapses if you were using this system based on our back-testing,” Hyman explains. “Imagine how much more money you would have if you had avoided those horrific sell-offs.”

One might think Sean is being too confident, but he has proven himself correct in front of millions of people time and time again. 

In a 2012 interview on Bloomberg Television, Hyman correctly predicted that Best Buy would drop down to $11 a share and then it would rally back up to $40 a share over the next few months. The stock did exactly what Hyman predicted.

Then, during a Fox Business interview with Gerri Willis in early 2013, he forecast that the market would rally to new highs of 15,000 despite the massive sell-off that was haunting investors. The stock market almost immediately rebounded and hit Hyman’s targets.

“A lot of people think I am lucky,” Sean said. “But it has nothing to do with luck. It has everything to do with certain tools I use. Tools like the secret Wall Street calendar and my Crash Alert System.”

With more financial uncertainty that ever, thousands of people are flocking to Hyman for his guidance. He has over 114,000 subscribers to his monthly newsletter, and his investment videos have been seen millions of times.

In a recent video, Hyman not only reveals the secret Wall Street calendar, he also shows how his Crash Alert System works so that anybody can follow in his footsteps (click here to watch it now).

Money News Editor’s Note: Sean Hyman Reveals His Secret Wall Street Calendar in This Controversial Video, Click Here