What To Look Out For With Low Cost Mortgages

The overwhelming majority of people wanting to buy a home will not be able to purchase one without first finding a lender to grant them a loan. In case you didn’t already know, a home loan is commonly known as a mortgage.

Having a good credit score when applying for a mortgage will normally result in the finance company offering you a lower rate of interest. In some cases lenders will not even be willing to consider granting a loan if you have a poor credit score. Lenders view bad credit scores as a sign that the borrower may default on payments.

There are other options available if you are turned down because of your poor credit score. There are mortgage lenders who specialize in offering loans to high risk borrowers. These high risk lenders offer a special type of loan called a subprime mortage.

Subprime lending is not without an element of risk for the borrower. Because a subprime mortgage is frequently the last option for risky borrowers, lenders can take advantage.

Companies That Deliberately Mislead

They take advantage of the fact that many people do not bother to read the fine print and bump up the rates dramatically at a later date. Unfortunately the subprime market has been exploited by these companies.

Taking out a subprime mortage has been the cause of many home foreclosures. Inevitably borrowers fall behind in their payments, often resulting in foreclosure.

First Time Buyers - Watch The Fine Print

New buyers are enticed into subprime mortgages by lower rates. Don’t be fooled by the lower initial rate as they may rise steeply at a later date. For these reasons it’s vitally important that you read the fine print very carefully to ensure there are no hidden surprizes down the line.

Here’s some background information on how the collapse of the subprime market precipitated the financial crisis. When borrowers could no longer keep up with their mortgage repayments, thousands of home owners went into foreclosure. Many of the subprime lenders were unable to recoup their money as the housing market collapsed. Many banks and companies also suffered losses as they had speculated in the subprime market on a large scale.

A subprime mortage mortgages can work, but the borrower must ensure they can afford the true cost of these mortgages. In other words, poor credit scores mean higher cost mortgages in the long run. There is no need to be afraid of subprime lenders. Just stay away from the crooks who are only out to get your money.

Bank Of Canada Cuts Rate By 50 Points

Canadian banks will pass along only part of a central bank rate cut to borrowers, with Toronto-Dominion Bank being the first to announce on Wednesday it will lower its prime lending rate by 25 basis points to 4.50 percent.

That is only half of the 50 point cut in administered rates made by the Bank of Canada earlier on Wednesday, when it acted with other central banks to lower key lending rates in an attempt to shore up investor confidence and ease the effects of the global credit crunch.

The Bank of Canada dropped its overnight rate target to 2.5 percent.

Canadian Imperial Bank of Commerce, Royal Bank of Canada and Bank of Nova Scotia said they would make the same reductions as Toronto-Dominion, bringing their prime rates to 4.50 percent from 4.75 percent, effective Thursday. Other banks were likely to follow suit, based on past patterns.

The prime rate influences borrowing rates on other consumer and business loans.

“There’s certainly no rule that states that they have to cut their rates in lockstep with the Bank of Canada,” said Steve Foerster, a finance professor at the University of Western Ontario’s Ivey School of Business.

“I think we’re in unusual times right now, and their costs have been going up.”

TD, Canada’s second-largest bank, said that it would be “challenging” to fully match the half-percentage point cut because funding costs have risen in the industry. It called the smaller cut “a balanced move.”

The banks should be able to increase their lending margins, as the rates that they pay on their clients’ deposits will likely drop more than the rates they charge on loans, Blackmont Capital analyst Brad Smith said.

“Funding for banks has been largely decoupled from administered central bank rates, that’s particularly evident in the U.S.,” Smith said. The Canadian banks’ decision to only partly implement the central bank’s rate cut reflect that reality, he said.

Tim Hockey, president of Toronto-Dominion’s TD Canada Trust unit, said that all financial institutions have been watching key lending rates very closely.

“Continuing market turmoil has steadily driven up the cost of borrowing for financial institutions,” he said in a statement. “This makes it challenging to match the Bank of Canada rate cut at this time.”

Economists at National Bank Financial said on Wednesday that the liquidity squeeze has intensified over the last few weeks in the Canadian banking system, just as it has in other countries.

A key barometer of the cost of funds for Canadian banks is the one-month bankers’ acceptance (BA) rate, which has been rising in 2008, while prime rates have been falling since last year, NBF noted in a commentary.

That means the spread between the prime rate and BA rate, which has historically been about 1.65 percentage points, has narrowed to 1.16, NBF said.

Central bank actions, market reaction and the competitive landscape will all be considered when setting future rates, TD Bank’s Hockey said.