Last week, I mentioned that I applied for a low interest rate balance transfer credit card. I need some temporary financing and I think that such credit cards can give me a nice cash advance for a low rate. I had been looking around to see what my options were. Sadly enough, there are no 0% balance transfer offers available in Canada at this time! The cheapest one I have found was at 1.99%. All right, 1.99% on $10,000 only makes $199 of interest after a year. So in the end, it’s not that bad (especially if you compare it to a 8% loan or a 15% credit card!). Since I have had a positive experience with MBNA in the past (I once had a Montreal Canadiens credit card ), I decided to go with them once again.
After applying online, I decided to call MBNA to see if they had received my application (the last page of my application didn’t refresh properly). Interesting enough, I waited less than 2 minutes on the line before speaking to a human being.
The lady was really helpful and found my application right away. She asked me if I wanted to review the application on the spot so they can issue an immediate approval (thinking that my credit card bill was due in mid-June, I jumped at the offer!).
The MBNA process is quite straight forward. They validate your identity, the information that you filled in the application and go a little bit deeper (they asked me if I was a home owner, the amount of my mortgage payment, they looked at my credit bureau with me and validate all debt there are).
The nice thing is that they take your word for it. For example, she asked for more info on my salary but never asked for any proof. I just had to describe what percentage of my income was base salary and how much was variable.
After she had validated my application, she was able to give me my authorized limit… drum roll please…. $13,000! I was quite happy because this means that I will be able to pay off my parents in full 2 weeks from now!
I have noticed that there is one huge catch to making a balance transfer to another credit card. The catch is that we are human! What does this mean? It means that while I might only need to transfer 8 or 9K, I will likely transfer 12,000$ to my regular credit card to ensure I have enough room to pay everything. The problem is that I have just created a $12,000 debt at 1.99% payable in full 10 months (or pay through the nose)… I will have to be very careful to pay it off on time!
How the credit card balance transfer works
Once I get my card, I simply have to call to activate the card. Then, they ask me how much to transfer and to which credit card. They make the payment for you so you don’t have to worry about anything. The most important thing is to make sure that your credit card bill is not due on short notice. If you are planning to get a 1.99% balance transfer credit card, I would suggest that you start the process just after you paid your credit card bill. Therefore, it will give you about a month to complete the transfer. In my case, it will take about 2 weeks to have everything completed (the card approved, receive it and transfer the credit card balance over to MBNA).
I received my card only a few days after calling. When I called to activate the card, they were quite fast to complete the whole process. A big thanks to Trevor and Ticker for the comment on my previous posts about the credit card terms and balance transfer fees. This gave me the occasion to ask the guy what the exact process was. Here it is:
– The balance transfer is done within a week. They send the money to the other credit card company by electronic transfer.
– If you miss a payment on your credit card, the 1.99% rate disappears and you jump to the killer regular credit card rate.
– If you go over your credit card limit, the balance transfer deal ends as well and you go back to a normal credit card rate.
– You have 10 months at 1.99%, after that, it’s over. So you are better off not fooling around with this debt!
– There is a fee of 1% of the amount transfered to organise the balance transfer
– The payment to my credit card took 3 days (they say 2 to 5 business days).
– The card is platinum but doesn’t look like one. The design is not that great
– But, the fact that the card is platinum doubles your warranty on your purchases up to 2 years.
Overall, the credit card balance transfer won’t cost me too much and it will help me paying off the loan from my parents faster than expected. On the other hand, I will shortly setup a payment plan to make sure I pay off and remove this debt from my balance sheet by the end of the year!
So if you are thinking about doing a balance transfer, I truly suggest to try the 1.99% MBNA Platinum credit card:
I don’t know about you but I am growing tired of the media telling us how high interest rates will become in a year or two. They keep writing in the papers about interest rate calculations affecting your mortgage payment if the prime rate goes up by 5%. Some of them even push the limit saying that the prime rate will be 7% within 5 years… how the hell would they know? Did they tell the world in 2003 that prime rate would it 2.25% for 18 months in 2008? Who was right back in 2003? Please, give at least one name!
So today, I’ll do something different. I’ll use the very same math to perform interest rate calculations that affect your mortgage payment, but on the other hand. Since the mass media always tend to show you how much you *might* pay if the prime rate goes up by 2% compared to a fixed rate, let’s take a look at how much you *paid* in excess since 2008 compared to a fixed rate.
So let’s take an easy example:
Amortization: 300 months (5 years)
Negotiated 5 year Fixed rate: 3.85%
Negotiated Variable rate: P+0 = 2.25% for the first year, now at 2.50%
Before I start with my calculation, you can argue that you were been able to lock your 5 year rate at 3.69% or even lower, but I could argue back that some of my clients are paying way less than P+0, so let’s keep it this way.
So during the first year, you would pay $12,430.08 in mortgage payments if you had taken the 3.85%. With the variable rate of 2.25% during the first year, you would have paid $10,454.64… so 2K less for the first year.
Let’s assume that the prime rate will go up during the next 12 months with an average of 3% (which includes that it increases from 2.50% to 3.25%). Your mortgage payments will go up to $11,357.88 for the year. So you will be saving another 1K during this year.
So you start year 3 by paying 3K more in interest with your fixed rate or by applying the very same 3K on your mortgage to create a safety net. Let’s assume that you just took the 3K in your pocket and you keep the same strategy (either paying 3.85% fixed rate or 3.25% variable rate). And let’s imagine that the prime rate goes up to 4.50% (with an average rate of 4%). Your mortgage payment with this new interest rate increase would be $12,624.48.
So after 3 years, and a lot of interest rate increases, you have still saved a total of $2,853.32. So let’s push the interest rate higher to 5.5% with an average of 5%. Mortgage payments for the year totals $13,958.52.
So after year 4, your overall mortgage payment is still lower and you have still saved $1,324.88.
When we look at this scenario, you will be a loser if interest rate keeps increasing for 5 years in a row which is unlikely to happen. And if it does, you will have lost about $1,000 compared to the fixed rate. Then, if you keep with the variable rate for another 5 years instead of locking a very high 5 year term fixed rate (because if Prime = 5%, the 5 yr fixed rate could be around 7 to 8%). You are almost sure to see a decrease in interest rates during the next 5 years since we always go through economic cycles.
Final thoughts on interest rate calculations and mortgage payments
Based on these calculations, I am a firm believer in the variable rate but by simulating 5yr fixed rate mortgage payments. i.e. , you pay low interest rates (prime) but you make higher payment (simulate it a 4%). Therefore, you are building a huge safety net to compensate if the variable rate goes higher.
See, the future is not always black when we talk about variable ratesComments: 18 Read More
A very small note this morning as the Bank of Canada has finally decided to increase the overnight interest rate to 0.50%. This interest rate increase will obviously pushes Canadian banks to increase their prime rate from 2.25% to 2.50% in the upcoming days.
The recent positive economics datas (economic growth, inflation and drop in unemployement rate) are the most important reasons leading to this interest rate increase. The Bank of Canada doesn’t consider that the economic problems from Europe should affect its future economic growth that much and I guess this is why we see a interest rate increase of 0.25% today.
The next schedule for the interest rate revision is due on July 20th. While this interest rate increase was expected, any further increase should be done very carefully as we are still going out slowly of the previous recession. Some economists report that they are afraid to see the Bank of Canada increasing their interest rate too fast as they did in 2002.
In my opinion, I am not very surprised about today’s increase. I was expecting no change to an increase of 0.25%. on the other side, I don’t think this event is the signal of the low rate party ending. I think we have another good 6 months to 12 months of low interest rateComments: 6 Read More
Next Tuesday, The Bank of Canada will announce the new (or unchanged!) Prime Rate. For several months now (since the credit crunch of 2008), The Bank of Canada has maintained its prime rate at the virtually lowest level possible; 0.25%.
We started to read about potential rate increase in late 2009 when Australia had increased its rate several months in a row. However, the Australian reality appears to be quite far from that of the Canadian economy.
The most important reason why the Bank of Canada would increase their interest rate would be to maintain the inflation at an “acceptable” level. This level is currently set between 1% and 3% with a “ideal” rate of 2%.
Since we have been flirting with the 2% inflation rate for a while (currently at 1.9% as of April 2010), many economists have predicted that the Bank of Canada would start increasing its interest rate as previously mentioned by Mark Carney, Governor of The Bank of Canada.
There are more clouds in the sky than expected
The Bank of Canada was ready to stop the low interest rate party this summer but recent events in Europe might cause the Bank reconsider its strategy. Considering the economic problems stemming from the PIGS (Portugal, Ireland, Greece and Spain), the stock market has responded negatively.
Therefore, the economy may slow down again and reduce the inflation risk. Considering this scenario, there is no urge to increase the prime rate right away.
The general demand for resources is slowing down as the price of oil has dropped significantly. This will also have an important effect on inflation (even though they consider the inflation rate with and without the price of oil).
What is my bet on the Canadian Prime Rate?
I bet it will increase by 0.25% but I would definitely not be surprised if it stays at 0.25% until July. The only point I am quite confident of is that we won’t see an increase of 0.50% or 0.75% as some economists were predicting a few months ago.
It’s not that they were wrong in the predictions; it is just that today’s economy evolves so fast that your 5 year projection are probably right when you do them but they go wrong 2 weeks later ;-).
I hope to benefit from low interest rates till the end of 2010. This would help me stabilize my finances after my moving in June. This fall, I will seriously attack my mortgage so it starts decreasing faster than it has been for the past 2 years!
Comments: 8 Read More
Can banking get any more complicated? Hey man, you have no clue ;-). But in fact, clients can make banking and the loan industry complicated:
At first, somebody wants to buy a house but doesn’t have any cash available for a down payment. So, banks create mutual funds to help him save.
Then, this same individual can’t manage his budget so he can’t really save. And, banks come up with RRSP loans.
Now that he has a 5-10% cash deposit saved, he now wants to buy his house right away. Therefore banks offer him a mortgage.
But the guy wants more flexibility as he wants to make home renovations and buy a new car. So the banks create the home equity line of credit.
And guess what? The same guy doesn’t want to manage notary/lawyer’s dates while buying and selling properties. This is why banks created a bridge loan.
A bridge loan is a very interesting product for individuals who don’t want to bother about dates when selling/buying their properties. A bridge loan is a short term loan that advances the amount of your cash down temporarily between the sale of your current house and the purchase of the new one.
Picture this: you have a house selling on June 13th (the moment you will receive your check) and you give the keys to the new owner on June 17th. You finally find the home of your dreams and you are getting the keys on June 12th. Therefore, you will have to give the seller your check before that date. Let’s say that you have to pay him on June 9th. The bank will disburse your mortgage on June 9th, but where will you find your cash down if you are getting the money from the sale of your house on June 13th? This is why you have 2 options:
#1 You ask your buyer to accelerate the process and go to the notary on June 6th so you can get your money ready for June 9th. However, if the buyer pays upfront, he will want to possess the house faster. If he only gets the keys on June 17th, he will request compensation for the 11 days that you live in “his” house for “free” (since your mortgage will be paid off on June 6th at the time of the sale.
#2 You keep the dates as is and ask for a bridge loan from your bank! The bridge loan will be disbursed on June 9th (the date you are buying) and the bank will also disburse your new mortgage so you have the whole amount to buy your new property. Therefore, on June 9th, you will be responsible for the 2 mortgages (since you haven’t sold your house yet) and a bridge loan (which is the equity lying in your previous property that is not sold yet).
On June 13th, you will receive the check from the sale of your house but the bank will demand from the notary/lawyer to be paid first for #1 the outstanding mortgage and #2 for the bridge loan.
They used to have a basic fee for a bridge loan since it is a temporary loan where banks don’t make much money on it (imagine the interest rate of 5% on $50,000 for 5 days… you don’t get much from it!). However, since competition is pretty rough, banks tend to wave bridge loan setup fees in order to make sure they get the mortgage!
It is usually comparable to the interest rate on unsecured personal loan. In fact, bridge loans are unsecured loans (but they are set on a very short amortization).
What is the maximum amortization for a Bridge Loan?
There are no specific rules about bridge loan in terms of amortization. Since the bank is still taking a risk, they usually don’t extend bridge loan for more than 90 days. Otherwise, your bank will require that you renegotiate your possession dates instead of asking for the bridge loan.
Basically, the bank will require that the 2 transactions are almost certain. Therefore, they will need your purchase and sale contracts with financing approval for all parties involved. The bridge loan will be disbursed at the same time as your new mortgage and you don’t have to do anything to manage it. The repayment date of the bridge loan will be set according to your sale date at the notary/lawyer. The bank’s main requirement in order to grant the bridge loan is obviously to get the final mortgage (we don’t work for nothing after all ).
After giving some thoughts about it, I will be going for the bridge loan instead of managing date with buyers and sellers. The bridge loan won’t cost me much and it is definitely an easy way to get everything done without headaches!Comments: 5 Read More
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