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# Industry News

After briefly offering record-low rates of less than 3% on some of its mortgages in response to its rivals, Canada’s two biggest banks have pulled back their offers prematurely.

TD Canada Trust raised its special four-year closed fixed-rate mortgage 40 basis points to 3.39%, effective today, while also introducing a special five-year closed fixed-rate mortgage at
4.04%. The bank also hiked its five-year closed mortgage 10 basis points to 5.24%. TD had said it would offer the special rates until February 29th.

The moves put TD back in line with Royal Bank of Canada, which made the same rate decisions on Monday, also coming into effect today. RBC had also initially planned to keep its special rates available until February 29th.

The only difference is RBC already had the special five-year closed fixed-rate mortgage product, which it increased 10 basis points to 4.04%. RBC had first cut its rate to 2.99% in January in response to a similar cut from BMO.

If you want to break your mortgage, there are two ways to calculate the penalty. One uses three months’ interest and the other uses the Interest Rate Differential (IRD). The bottom line is that with either method, if you want to take advantage of lower interest rates, it’s going to cost you. And it will be a mind-numbing exercise trying to understand the penalties.

I want to take advantage of an offer by the Royal Bank for a 2.99% five-year mortgage. But to do so, I must break my existing \$116,000 mortgage with PC Financial.

When the penalty is calculated using three months’ interest, the process is straightforward. Since \$450 of my monthly payment goes towards interest each month, the cost is \$450 times three months which is \$1,350. But when I use the IRD method, the choice becomes difficult because the penalty is more and getting a straight answer on how the penalty is calculated is difficult.

An interest rate differential is the difference between the interest you would have paid over the balance of the mortgage, versus the new rate the bank can charge another client for the remainder of your term. If interest rates fall, the bank increases your penalty because it can get less from that other client. This so-called “reinvestment rate” is blamed for the constantly changing penalties. In my case, during the few days I was asking questions my IRD penalty at PC grew by \$90 because the reinvestment rate decreased.

The list of detractors of reverse mortgage has another name added to it: David Chilton, otherwise known as ‘the wealthy barber’, after the title of this famous book on personal finance.

At a speaking engagement last Thursday night in Scarborough, Ontario, Chilton discussed various mistakes people make while managing their financial affairs. Taking out a reverse mortgage, he pointed out, was one of them and against the grain of common sense.

“When you take out a reverse mortgage, you’re turning compounding into your enemy instead your friend,” said Chilton. “Experts intuitively think negative of reverse mortgages. All the David Chiltons of the world have spent their entire life telling you to harness compound, not to fight it.”

Things could spin out against the borrower quite quickly, he explained, if interest rates were to shoot up to 10%. Admitting it was a highly unlikely scenario given what the world economy is doing what it’s doing, but Chilton said anything can happen down the road.

With Canadian household debt levels at historic highs, some consumers might be looking for ways to reduce what they owe – or at least make repayment a little less painful.

A number of companies offer debt reduction deals to help provide relief from creditors. But the Financial Consumer Agency of Canada (FCAC) has warned that, by using them, sometimes consumers can wind up in worse financial shape.

Fees, late payment charges and interest can all conspire to sink them into a bigger hole. And missed payments and misinformation can end up hurting their credit rating, which consumers may be desperately trying to protect.

“If an offer to reduce your debts seems too good to be true, it probably is,” FCAC Commissioner Ursula Menke said in a statement.

Jesse Mecham says he takes offence when people speak ill of budgeting. “It irks me when they talk about the dreaded ‘B-word’. There’s nothing dreadful about it.”

Mecham, creator of YouNeedABudget.com (YNAB) and author of a book with the same title, says that a budget should be the foundation of every financial decision we make and is a liberating financial tool.

Most of us would likely describe budgeting as something other than liberating, like restrictive or monotonous, but he has a point: If we’re in debt or having a hard time increasing our savings, then tracking our finances is the fastest way to a financial fix.

We have a lot of options when it comes to tracking our money online. I’ve tried the Excel spreadsheet, tested out Quicken, and more recently, Mint.com. Mint is a fantastic site for obtaining a big-picture view of your finances, and it’s free. YNAB falls into the online tracking category, but it’s solely dedicated to helping us create and stick to our budgets. The theory behind the site’s origins comes from Mecham’s personal struggles tracking spending when he was a young married student with a baby on the way. As a result, he created four budgeting principles that form the basis of the site.