Interesting Rate

I received an anonymous comment a couple days ago on my month end review telling me that my line of credit interest rate was exceptionally high. I hadn't actually given my line of credit interest rate any thought at all, it was just something that was there so I accepted it. The comment however spurred me into gear. I didn't expect to get the 4.5% interest rate he/she mentioned, but if my interest rate was high why not look into getting a decrease?

To google I go!

Apparently the internet isn't a very good place to go to find interest rates on lines of credit in Canada, the banks play that information pretty close to their chest. So, I called my bank Tuesday at lunch, and managed to get an appointment for after work on Wednesday. That was fast!

I almost got my hopes up there!

So, I went in and discussed a rate decrease. No dice. Apparently the major banks tie their line of credit rates to the "customer relationship" they have with you, ie: The more financial credit products you have with them, the better the rate they'll give you. So, if you have your mortgage, credit card, line of credit, RRSP, TFSA, and other investments through them, they'll give you a better rate than if you have just a chequing or a savings account with them.

Lovely.

If you wanted my investment business to build our "customer relationship", why did you try to convince me to lock into a 5.5% fixed rate mortgage when I was being offered 3.99% elsewhere? That doesn't sound like good relationship building to me.

Save 1.5% on a $237,000 mortgage, or save... any number... on a $11,000 line of credit balance.

You tell me what to pick.

There was the option of securing my line of credit to my house equity, but that wasn't guaranteed to be successful. Along with the application process there was an assessment cost of just under $200, and other application/closing fees of close to $500. Those fees alone are essentially the same as tacking another 6% onto my interest rate for the year. Why on earth would I want to do that for a drop of a couple percentage points? I'm trying to pay the thing off, not float it.

The other option offered was to look at increasing the limit on my line of credit. Apparently if I bumped the limit up to $20,000 it would put me into a different "relationship" category, and COULD possibly drop my rate 0.1 - 0.15%

Excuse me if I don't jump for joy on that one.

I contemplated the very financially dangerous maneuver of increasing my credit limit and using the money to pay off my credit card to save myself a few percentage points. I thought better of it.

If I'm going to be shopping around for a better rate, I want as few credit inquiries as possible. The financial advisor did offer me a useful piece of advice though. She said that if I have investments with another bank, I should consider looking to them because they might give me a better rate on a line of credit. Definitely something to remember.

I was just hoping to get a better rate through my existing account. The last thing I wanted to be doing was rate shopping with a balance sitting at 90%+. Not good.

Makes me want to rethink my savings vs. debt repayment plan.

Any Canadian guys/gals know what the banks are offering for line of credit or loan rates right now?

My Two Cents

I never expected anyone would ever read my blog, let alone go out of their way to tell other people about it! Yet it's happened a couple times this week. Thank you to The Asian Pear and Saving for Travel, I appreciate the shout outs. I feel all warm and fuzzy now :)

I picked up a couple pennies at the LRT station. One last night, one this morning. You can't actually buy anything with a penny anymore, I'm pretty sure that even penny candy is all five cents and up now (can you still get candy for a nickel?) Those of you in Canada probably remember the announcement back in December that the Bank of Canada is considering abolishing the penny due to the fact that inflation has eroded it's buying power to the point that it's nearly worthless. It costs more to produce them than their face value.

So why am I picking up a couple dirty coins on my way to the train? Other than because I always have?

Future value.

No, I'm not holding on to them in the hopes that they become rare items and make me a millionaire. They're going in my coin box, the one that goes towards my extra mortgage payment. Those two pennies will save me seven pennies over the life of my mortgage, and that's just assuming that my interest rate doesn't go up. If my rate after renewal went up to 6% and stayed there for the rest of the mortgage, those two pennies would save me about eleven cents. That's eleven cents I don't have to fritter away on my own.

Is seven, or even eleven, cents really going to make a difference on a two hundred and forty some-odd thousand dollar loan? Not really. But if I do it enough times it will. These pennies are my little snowflakes.

Hence the coin jar.

It doesn't take any time, and it doesn't cost anything, so why not?

Waiting For Interest to Work In My Favour

My annual mortgage statement came in the mail last night. I'm glad, I was beginning to wonder where it had gotten off to. That was right about where the glad part ended. There is something rather unfortunate about paying almost $17,000 onto a loan and only seeing the balance improve by about $4,500. It's like having one of those payday loans, only it has a nicer name.

Hey you, yeah you Interest, I've got something to say to you: Bite Me.

I have the sudden urge to empty my wallet into my lump sum payment jar right now. In fact, I'll probably do that as soon as I'm done typing here.

The envelope wasn't entirely filled with suck though. Apparently my mortgage provider is starting a website where I can go to check my balance, review my statements, change my payment frequency or amount, or make lump sum payments. That last one makes me happy, it will make the process much easier come the end of the year.

Home sweet home. One day you'll be all mine.

Interest Introspection

I was looking at my debt balances the other day, and thinking about how much I pay on them in interest every month. My credit card balance currently costs me about $55 a month in interest charges, while my line of credit costs me about $85 a month in interest charges. For a little while there I was thinking "maybe I should pay down the line of credit first, it's costing me more in interest." For a couple days now that's what I'd been thinking I'd do *shakes head*, but I sat down and gave it some thought in terms of investments this morning. The money I put towards paying off the credit card is like investing money and getting a 12.9% return, while putting money towards the line of credit is like getting an 8.52% return. Sure, I'll feel better watching the total interest I'm paying decrease every month, but it will decrease at a much slower rate than if I keep paying off my credit card first, and I'll end up paying more interest overall. If I had applied my slightly confused money sense to all of my debts I would have had myself paying off my mortgage before I paid off my credit card. Doesn't exactly make sense, does it?

Some days I wonder how I got myself into this mess. Then I have moments like these. Then I remember.

*facepalm*

The Acid Test

I've been wondering what would happen to my mortgage if my interest rate was to jump when I have to refinance with a new interest rate in 4 years. I locked my rate in for 5 years, unfortunately I don't keep if for the life of my mortgage (though that would be awesome!) The mortgage calculations are slightly different in the different countries, so I'd recommend finding a local calculator rather than using this link if you're outside of Canada.

http://www.cmhc-schl.gc.ca/en/co/buho/buho_005.cfm

I found a calculator claiming to be Canadian that talked about PMI and based it's tax rate on Massachusetts. Do I think it's calculations are accurate? Not likely. If you don't know interest rates from insurance, I'd suggest really wandering around the CMHC website. Do this before you even go into a bank! A mortgage is the largest loan most of us will take out in our lives, make sure you know what the bankers (or even better, mortgage brokers) are talking about before you sign anything! Even better, check out this site:

http://www.yourfirsthomecanada.ca/

Their website is under reconstruction, so it doesn't look that great, but it is chock full of resources for people looking to buy their first (or second, or third) home.

Anyway, back to what I started rambling on about. My mortgage was ~$242,000 when I started a year ago. I pay on an accelerated biweekly schedule, so instead of making 12 months worth of payments I make 13 months worth per year (1/2 month payment every 2 weeks = 26 1/2 month payments = 13 months worth of payments)

Not counting taxes, my mortgage is ~$533 every 2 weeks on the accelerated schedule. This averages out to ~$1154 a month, and the lifetime interest cost of the mortgage is ~ $169,546. On a regular monthly payment schedule I'd pay ~$1065, and the lifetime interest cost of the mortgage would be ~$205,433. It's a small extra payment every month for a decent savings in interest.

But like I mentioned before, my interest rate will (most likely) be increasing when I renew my mortgage in 4 years. How is this going to affect my ability to pay for the house?

At the end of the first 5 years, at the rate I'm going, my balance will be ~$228,000. Not considerably less than what it is now, thanks to the wonder of interest payments (so much better when it's working for me, not against me).

Interest Rate: 5%    Monthly Payment: $1217    Interest Cost: $210,053
Interest Rate: 6%    Monthly Payment: $1356    Interest Cost: $260,231
Interest Rate: 7%    Monthly Payment: $1502    Interest Cost: $312,582

If the interest rate goes up a percentage, my monthly payment would only go up ~$63 from my biweekly accelerated monthly payment, not too bad. If it goes up 2 percentage points, the monthly payment increases ~$202 a month. Huh... If it goes up 3 percentage points, the monthly payment increases ~$348 a month. Ouch.

But what if I pay off the insurance costs? Then I'd only have ~$220,000 left owing on the mortgage. That should help, eh?

Interest Rate: 5%    Monthly Payment: $1174    Interest Cost: $202,683

Interest Rate: 6%    Monthly Payment: $1309    Interest Cost: $251,100

Interest Rate: 7%    Monthly Payment: $1449    Interest Cost: $301,614

That didn't really seem to help much. The monthly payment at 5% is close to what I'm currently paying on the accelerated biweekly rate, but the other two still kinda hurt. Lets say I really focus my efforts and chip away at this sucker after I dig myself out of the other debts. What would I be looking at if I can get it down to ~$200,000?

Interest Rate: 5%    Monthly Payment: $1067    Interest Cost: $184,257

Interest Rate: 6%    Monthly Payment: $1190    Interest Cost: $228,273

Interest Rate: 7%    Monthly Payment: $1317    Interest Cost: $274,194

That's looking a little more reasonable. What this tells me is that once I've finished taking care of the other debts, I need to really focus on chipping my mortgage down. That way once the economy stabilizes, and mortgage rates go up again, I'll be able to continue paying for it comfortably without needing a huge salary hike. I'm glad I looked at this now rather than 3 and a half years from now; time is still on my side.


Home Buying For Dummies, 4th Edition
100 Questions Every First-Time Home Buyer Should Ask: With Answers from Top Brokers from Around the Country
The First-Time Homeowner's Handbook: A Complete Guide and Workbook for the First-Time Home Buyer (Book & CD-ROM)