A few weeks ago, you were making one of the most important moves of your life. You have been discussing this plan for a while, you have dreamed about it and you finally did it. Your dream will come true in a few weeks and you just can’t wait to smell the odour of fresh paint in your new living room of first new house… A few weeks ago, you signed an offer to purchase your new home, congratulations!

But before sitting in your brand new couch in your brand new house, you need to get a brand new mortgage . This is when you come across a huge billboard advertising a cash back of 5% - 5.5% on your mortgage. Man, this is perfect! You were just thinking of renovating the kitchen! Hey wait… your mortgage is $200,000… this means that you will get $10,000 in your pocket to buy that house! VIVA EL CASH BACK! Not so fast buddy…

Why are you getting huge cash back on your mortgage?

Before we start about whether mortgage cash back is good for your situation or not, you need to understand how a bank does its pricing for mortgages. There are 2 things that can be adjusted: interest rates and the amount of cash back. Since the interest rate war has been pretty rough on any banks these the past 12 months, some banks are starting to play on the other side of the equation; they are talking cash back. The more cash back you get in your pocket, the less you can negotiate the interest rate (and vice-versa).

The easiest way to know if you should take the cash back or the low interest rate is to do a small math calculation by comparing both options. Let say that you have a $200,000 mortgage. Therefore, you have 2 options:

-         get a cash back of $10,000 (5%) and an interest rate of 5.85%

-         get no cash back and a low interest rate of 4.35% (you can usually get about 1.00% to 1.50% off the posted rate).

When you see huge cash back mortgage promotions, they usually offer it on 5 year term mortgage (fixed) and give you the posted rate. Then, you just have to calculate (roughly) how much you save in interest over the next 5 years: ($200,000*(5.85%-4.35%)*5years = $15,000. While this is a gross amount (since your principal will decrease according to your payment), you can see that the cash back is not that of a great option. If you decide to go on a variable rate, you will be able to save even more money .

Why take the cash back promotion then?

There are a few situations when cash back is a good thing (while most of the time, cash back mortgage is just another marketing gimmick ).

#1 You need money now

If you need money to renovate or to buy a second car since you are moving away from your job, the cash back option can help cover those costs right now. Don’t forget that if you save $15,000 instead of $10,000 in my previous example, you don’t get the $15,000 in your pocket, it is just decreasing your mortgage payments over the next 5 years. So if you need a few thousand for a specific project, it may be worth it.

#2 Cash Back for a cash down

Young couples often use the cash back as cash down on their property. It may be a good strategy to buy a house in a hot market. If you wait 2 or 3 years to buy the very same property, inflation will work its magic and it will be more costly than taking the cash back today in order to boost your cash down.

#3 Cash Back for rental properties

This may be a really good strategy for rental property owners. Since the interest rate is tax deductible (and mostly paid by your renters anyway), you are probably better off with additional cash in your pockets (that can cover maintenance, an empty apartment, etc.).

So the Cash Back mortgage promotion is not that bad after all

As is the case for many financing or investing products, cash back mortgages can be a really good idea for some people in specific financial situations. All I am saying is don’t get hooked by the 5% cash back without asking questions and without asking what other mortgage options are  offered. In the end, you could take a variable rate with appraisal and notary/lawyer fees paid instead of taking a huge cash back… just discuss your options with your banker

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During my last coaching session, I had discussed with my sales coach how being a financial planner was a great job:

#1 You enjoy a flexible schedule.

#2 You have the feeling of helping people with good financial advice.

#3 You get paid well .

#4 And one of the most important things; you get to meet and know very interesting people.

One of the things I like the most about being a financial planner is the opportunity to develop great relationships. On the other hand, the thing I hate the most about my job is when people think I am there to take orders and that I can’t help them. Sorry… I don’t deliver pizza!

I truly believe that clients have all the reasons in the world to get to know your banker personally and work together for the long term. While he will be in a better position to explain things and provide you with solid financial advice, you will also be in a better position to understand what he is doing and getting a better grip over your personal finances.

Another advantage? Who do you think is gets better service? The guy calling for a rate and doesn’t want to hear about any strategies and doesn’t care about the relationship with the banker or the guy that makes an appointment and explains his whole situation to his banker? I’ll let you guess…

In order to develop a great relationship with your banker, I thought of providing a few good tips:

#1 Pick the right one

Dealing with money is dealing with a person first. So you need to find someone who understands you and that you feel comfortable with. Since he needs to be one of your closest confidents (financially ), I think it is only normal to meet with a few bankers before making your decision.

#2 Chose him for the right reasons

While personality is very important, you should also look for a banker with an impeccable sense of integrity and professionalism. You want someone who will take your calls and get back to you within the very same day. Drop anyone who can’t do that. Financial background or diplomas are important too. While they are not a guarantee of competency, it is still better than nothing .

#3 Work with him

Some people go see their banker and think that hiding things is a good idea. They think that he won’t find out or that it will slow down their application. In fact, if you don’t work with your banker, you are just making his job harder… and getting something approved harder to get too!

#4 Talk numbers – learn his language

Bankers evolve in a world of numbers and ratios. While he must teach you how it works in a bank (how we calculate stuff, understand your investment statements, etc.), you should also answer his requests with your numbers. Bring statements with you, it will help to establish a greater strategy with real numbers.

#5 Meet him twice a year

You probably see your mechanic a few times per year for oil changes and car maintenance, you should see your doctor and dentist for an annual check-up. This is the same thing for your banker. Twice a year is just enough to keep track of your plan and financial goals. You can take the time to review your financial situation and if there are any better products to improve your balance sheet.

Developing a relationship with your banker is a really good financial move as you will now be part of his priority when there is important news that comes out.

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Before I start with this morning’s article, I want to ask you to vote for me in the Free Money Finance March Madness contest. The best personal finance article will win the right to give $1,000 (generously provided by FMM) to a charity of your choice. I have selected a charity that helps children. Please comment on this post with the word “figures”. Thx a million!

The Prime Rate, or Prime Lending Rate, is a term used in many countries to describe an interest rate reference used by Central Banks. This key rate has been a major discussion for the past 6 months, as we realized that the sky is not falling and soon talk about economic growth and prosperity will dominate again. The prime rate is the starting point for all discussions involving mortgage rates (especially variable rates that are directly linked to prime). When discussing interest rates, we usually address debt management and how tough it would be if mortgage rates would climb to 6%+ again …

I don’t really like to play Nostradamus with regards to market trends or interest rates and I’ll show you why today. Recently, Bloomberg asked several economists their opinion on the Canadian Prime Rate and at where it would be at the end of 2010. You can see their predictions in the following table:

Out of 8 highly paid and hopefully knowledgeable economists, we notice predictions of a Canadian Prime Rate between 0.25% (no change) and 2.25% (an increase of 2.00% within one year… or should I say 10 months!) for an average prediction of 1.18%.

So my question is quite simple: how can someone predict no change and another (with the same level of knowledge/competence/tools of analysis) forecast a rate that is 9 times higher? I even read that some economists from Desjardins see the Prime Rate at 7% in 5 years… I guess I should call them to know which stocks will give me a 20% annualized return over the next 5 years. They probably have it written in their black book of prophecy This is why I spoke about Nostradamus!

So what is the point of this post if it’s not to predict the Prime Rate?

The point is to tell you that you will read a lot of apocalyptical scenarios about the interest rate going up since semsationalism sells. The very same people that were convinced that capitalism was dead 12 months ago will try to convince you that we are going to back to 12% interest rates as seen in the 80’s.

In fact, you will probably see a smooth increase in the interest rate as the economy gains its second wind. However, it won’t happen overnight

We still have a fragile economy, high unemployment rate (8.3%) and job creation doesn’t reflect reality as most of them are part time or under paid compared to the lost jobs. In addition to that, do I have to mention that the loonie is strong enough compared to the US dollar that we don’t really need interest rates to give it the final push to parity?

What if we see 10 years of near to zero economic growth as Japan experienced? Oh shoot…. That’s it! I am writing about another apocalyptic scenario on the other side… see how easy it is to predict the future based on rationale?

image source: Xurdle

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I had read in an interesting report published by well known firm, Breton Woods, comparing the cost of a prepaid debit card vs a regular checking account in the United States. While prepaid debit cards are not a big deal in Canada, I was curious to learn more about why scores of Americans are turning their backs on traditional banks by trying alternatives.

Who doesn’t have a bank account?

There are around 60 million adults that do their transactional business while avoiding banks. I guess that the recent recession helped increase this number and therefore, the popularity of prepaid debit cards.

Most of them are found within minority groups; poor people, people without college education and those who do not really use their bank accounts. As many individuals now work with a day-to-day money management budget, they prefer to keep their cash in pocket instead of having to transact with a financial institution. As making money under the table and receiving cash in an envelope became reality for many of them, a regular bank account seems to be a money-eating-box-of-fees with aggressive appetite!

No bank account, what are your alternatives?

As I previously mentioned the prepaid debit cards gained a lot of popularity in the past decade. It allows an individual to load money on a debit card that is accepted almost everywhere (the access is comparable to a regular credit card). While this option may seem expensive since you have to pay fees each time you reload the card, Breton Woods showed that it is a great alternative for specific individuals helping them save up to 35% in banking fees.

Other marginal options include using check cashing services (like ACE’s), payday loans (very expensive!) and pawn shops. It really seems that we are going backwards as these individuals prefer having cash in their hands regardless of the fees (check cashing services can easily take more than 4% of the amount you want to cash).

So if it expensive, why are they doing it?

In my opinion, there are 2 major reasons why some Americans have decided to give up their banking accounts. The first one is because they have completely lost their faith in the banking industry (can you blame them?). There is an uncomfortable sentiment towards banks since they “got the country into financial trouble”, they were saved in extremis by the Government and paid themselves fat bonus check as early as 2009. Let just say that they didn’t behave like socially responsible corporate citizens!

The other reason comes from a lack of financial education. People who have a hard time managing their money get easily frustrated when paying overdraft fees, NSF checks and other banking fees related to poor money management. Cash or prepaid debit cards won’t “let them down” as once there is no money left, you just can’t do anything!

In the end, I still believe that you are better with a checking account but in some cases, financial education has to start with cash in your pocket!

image source: Sam Howzit

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Yesterday, I wrote an article about the different compensation structures for financial advisors. Another way to know if your financial advisor is working for you is the end result of his follow-up calls. When I call a client, I always make sure that there is an added value for the client. There are 3 major reasons why your financial advisor should call you:

#1 To Offer To Make More Money for You

The main purpose of having a financial advisor is to have someone looking for opportunities while you are working. There are tons of ways to make more money on different things. For example, your financial advisor can offer you:

- A better product for your investment strategy. As the financial industry evolves faster than our brains can understand, there are often better investment products on the market. One shouldn’t jump from one fund to another all the time. However, if you have reach the required amount to gain access to a better investment solution, your financial advisor should be the first one to call you and make sure you benefit from this opportunity.

- Tax strategies that decrease the tax bite. Sometimes, a simple transaction can help you earn a few thousand on your next tax refund.

- To offer a better rate on fixed income. By doing a CD ladder or offering a municipal bond instead of a certificate of deposit, you can earn a better yield without necessarily taking more risk.

#2 To Help You Save Money

This is probably the area where there is a lot of room to improve for many financial advisors. How many times do we realize as clients that we are paying too much for something? Wouldn’t it be nice to have someone suggest switching products before we realize what is going on?

There are plenty of ways to save money with financial services:

- Bank account fees

- MERs on investments

- Mortgage and other lending rates

- Appraisal and lawyers’ fees

- Account merging to reach minimum amounts required for more sophisticated solutions

#3 To Help You Save Time (time IS money, isn’t?)

When someone shows me a trick to save time and become more efficient, that person gets a lot of my attention! So if your financial advisor can help you save time by navigating through the sea of red tape in the financial world, this can mean a lot.

There are always “better” ways to do things. Your financial advisor should be aware of the most productive and effective way to do your financial business. By saving a few minutes or hours here and there, you will be able to do a lot more interesting things with your time.

So, if your financial advisor calls you to offer a new product or give you information, ask yourself: can make money, save money or save time with this phone call. If your advisor gives you good tips on a quarterly basis, you will continuously improve your financial situation ;-D

If he doesn’t do that, there is nothing stopping you from calling him and asking for more help

image source:

sparktography’s

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