Honesty and business are two words that should never appear in the same sentence; for that matter in the same article.The are at direct odds with the consumer.
First of all let us understand that business has only one purpose and that is to grow its own wealth.Business does not give anything away to its customers save a pen or some other such trinket for being a customer.Business does not provide services or product to its customers without meeting its own requirement to make a profit.Today that seems to be at any cost.
The consumer as well as business has suffered for this dishonesty, however in the end it is the consumer who most suffers.The consumer hasn’t the resources to accept losses that business does, nor does the consumer have the resources to recover from those losses at the rate that business can.Why?Legislation and rules and regulation.
Consider the retiree who held his or her life savings in a Canadian Income Trust that was designed as a tax shelter to protect those savings.Business saw an opening to avoid paying corporate taxes by applying to become an Income Trust.BCE was one such Canadian Corporation.This move would have reduced its tax load significantly.The response to this attempt by BCE and others was for the federal government to declare Income Trusts as taxable.
This heavy handed approach now made all those retirement savings taxable while preventing corporations from avoiding their tax obligations.Many corporate investors and pension funds in the income trusts bailed out causing significant reduction in their values.The trouble was a lot of people lost a lot of money because now their accumulated savings were taxable; what was left of them.A windfall for the government for sure, and make no mistake; government is big business.
Other notable examples of business dishonesty are with Enron, Hollinger and World Com.Alan Schwartz as CEO of Bear Stearns, only a week before the collapse of the company declared "absolutely no truth" to the rumours of its problems of liquidity.Only days later the bank collapsed.It collapsed because investors withdrew their money and the company did not have the capital to support its so called assets.Bear Stearns employees who had invested their hard earned money in their own company lost it.While this story has not fully played out the fact remains that the public was deceived; lied to.It is not an uncommon practice.
How does this happen?It is a lack of regulation that allows these companies to operate with disregard for their actions combined with the extremely high cost of prosecuting them.Yes prosecution.
Think about it.If you were to buy a property at an inflated value then resell it to make a profit.The buyer then resells it again knowing that the value of the property is inflated to another buyer who may or may not be aware of this.When it is time to cash in on that property the final buyer discovers its true value and has to take a loss.It is fraud.This is what has happened in the subprime mortgage markets.The question that is unanswered is: Were the final buyers aware of the inflated values?To be sure no one will tell.Canadian banks are a part of this.Did they know?
Another area where Canadians are largely unaware of their own vulnerability is in… mortgages.No surprise there.Why?Simply because the mortgage lenders are betting that the consumer will take the best interest rate and ignore the rest.They are betting on both consumer ignorance and the consumer’s need to put money in their pocket.Ninety five or even 100% financed mortgages are being offered at low rates.Why?Because those rates will go up after the home owner has some equity and the prime rate is not fixed but variable.The real beauty of this is that the payments are fixed.It is called an Adjustable Rate Mortgage (ARM).In short it is a sub prime mortgage.But the banks have themselves covered.
Suppose the mortgage was taken out several years ago at a rate of 4.5% and now is coming due with a rate of 5.25%.Well because your payments were fixed, more of your payment went to servicing the interest charges and your principle payment has in fact fallen behind.In truth your 25 year mortgage can now be 40 years. If the interest rates have risen to a “cut off point” where all of your payment is going to interest or worse, not meeting the interest charges, the bank can demand lump sum payment for lost principle and or interest payments.
So what are your options?You can renegotiate your mortgage for the higher value and interest rates.You may have to pay a penalty for this however.
If you had invested the money you initially saved, you could apply it directly to the principle so it becomes equity in your home. This may allow you to convert to a HELOC (Home Equity Line of Credit.).A word of caution though.If your income is going to be sensitive to fluctuations in interest rates, any variable rate mortgage is a bad idea.
Be careful who you are borrowing from.You may not be able to talk face to face with a real person with the “virtual banks”.In fact dealing with them in this type of scenario may require you to find another lender and the cost of that is very high; the same as when you first took out your mortgage plus penalties and discharge fees.The truth is that they are not banks but financial services companies.Deregulation of the industry allows them to call their businesses banks, however they must still meet federal law..The other thing most consumers are unaware of is that these “banks” require a chartered bank to back them up.In other words, it is a chartered bank who is at the top of the pyramid.
Shop around!Before signing on the dotted line, have the contracts reviewed by an accountant or lawyer or both for worst case scenarios.If you can't live with those effects, don’t take out the mortgage and look at other options.
Put as much equity (down payment) into your home purchase right at the beginning.
Who can benefit from the ARM?Those buyers who have an income with a comfort zone that will not be seriously affected by fluctuations in interest rates.Those who have a solid savings plan that allows for extra payments or annual principle payment.Those who can negotiate an open ARM so they can sell their home within a short period of time and then pay off the loan.
Remember that mortgage lenders are in it to make money.Their interests are profit first and the mortgage is the vehicle they use to make that profit.They will sell the consumer the vehicle that makes the most money for them within the boundaries of the consumer to pay; at the time of sale.They will disclose what they have to by law, but not worst case scenarios.That is up to the consumer to figure out.
The “best deal” may not actually be the best for you.Look at the big picture and worst case before making the decision.