Employee Discount Scam

Employee Discount, What Does it Mean?

I note one of the major banks is now offering Employee Rate Mortgages, attempting to entice you to move your mortgage over to their bank, with the promise of the same kind of discounts or lower rates that you would only receive if you were an employee of said bank. This continues on from the automobile manufacturers (specifically Ford) that offers Employee Rate discounts on their cars, but what kind of discount are you really getting?

RBC even touts these discounts when trying to entice new employees:

Whether you are looking to arrange a loan or buy a home, employee banking benefits can help you reach your financial goals. You’ll have access to valuable discounts on a wide range of banking, investment and insurance services, including reduced mortgage rates and reduced home and auto insurance rates.

These must be amazing discounts, and they are willing to give any person who walked in off the street the exact same “employee enticing” savings that they offer to their new hires ? That is amazing, but if they are giving you the same “insiders” rate that they give their own employees, weren’t those same folks taxed on that “benefit”?

Employee Discount

The Employee Discount Scam

No, this has little to do with the employees of RBC, and more to do with car financing marketing schemes from the Automobile industry. The Mortgage business is becoming quite cut-throat, so this is RBC attempting to differentiate themselves from their competitors by cloaking a better deal with the promise of it being an “insider’s deal” (thus assuredly the best deal you could possibly get).

What is next? I can see the marketing scheme already,

If you can find a better mortgage deal, you bring it to us and we will match that deal!

No, wait, that is precisely how the Mortgage business currently works.

Given our finance minister’s laissez faire attitude towards the banking industry lately, we may see more interesting “marketing schemes” introduced to entice us to move our hard earned cash to another banking institution.

Changing banks is fine, but make sure you get a good deal when you do it.

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Credit Checks Can Cause Issues

It is interesting to see how the dominoes fall  in the financial world, and one of the most entertaining stories I have is from about 25 years ago as my wife and I were looking to buy our first house.

As we shopped for the first Big Cajun Hacienda,  Mrs. C8j and I decided we needed to shop around to get the best mortgage deal, that was possible at the time. At the time interest rates were very high and we were hoping to find as low a locked in rate as we could (it ended up being 12.5% for a five-year term). We spoke to our bank (at the time) Scotiabank but my brother had (at the time) a good deal (in his opinion) with BMO, so I went and spoke to them as well.

Both banks wanted to “pre-approve” me for a mortgage on the basis of my income and such, so they both came back with about the same deal for me, so we were leaning towards Scotiabank (as they were our current bank). Scotiabank also suggested I apply for their Visa card to help with moving expenses and such, and it seemed like a good idea (at the time).

Gift Cards, Cash

So Many Cards so easy to get these days.

The application seemed straight forward, but about 3 weeks later I got a terse, but polite, letter saying that my application for the Visa Card was denied, with no explanation (but thanking me for applying).

I was flaberghasted, insulted and very mad (in my younger days, I was even a bigger hot head than I am now), so I phoned the number on the letter to get an explanation for this serious insult that had been inflicted on my Financial Ego! I spoke to a very patient and nice lady at the Scotiabank Visa help center (I would say she earned her pay that day), and she calmly explained that my “file had been flagged” and that was why I was refused the Visa Card.

“Why was the my file flagged?”, I asked.

The answer was simple, my “credit file” had been accessed twice in the week before my application, which caused the system to kick out my application as high risk. Why did my “credit  file” get accessed? Remember those two pre-approvals? Those two procedures cause the whole system to suddenly view me as a bad credit risk, because people were looking up information on my credit, as simple as that.

Once the patient young lady on the phone and I figured this out, she said she could put through my application, and get me the card in a few days, but I decided not to do that, and decided to go with BMO instead.


This was the first time I had been exposed to the Business of Credit, Mortgages and Banking and it was an eye-opening experience, and from that I have learned to be wary of banks, and to always ask questions about all processes no matter what transpires.

Oh, and isn’t it interesting that I was actually turned down for a credit card? Anybody heard of that these days ?

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House Poor ?

Nobody Calls it House Poor?

That is an expression that you don’t hear much these days, and I wonder why it seems to have evaporated as a term when purchasing a house? Very rarely do I hear of Realtors using this expression to dissuade potential buyers from binding themselves up in too much long-term debt (if anything the opposite is true). My guess is the code phrase to other realtors would be for buying too much house now, might be “buying a house they can grow into“.

With  the current rate of interest for mortgages, it seems like a great idea to take on as much house as you can especially if you are young because you have so many things ahead of you:

  1. You will need more space because you are going to have kids
  2. You will make more money soon, because your career is only starting
This House MIGHT be a bit of a stretch for you, but you can grow into it.

This House MIGHT be a bit of a stretch for you, but you can grow into it.

Yes, a real estate agent told me that, in 1990 when we were looking at our first house, but I didn’t fall for it, and back then our first mortgage rate was 12.9% so we locked in for 5 years (that was a great deal back then!).  We didn’t actually over buy at the time, because with interest rates so high, adding more to the principal meant a higher monthly payment.

These days you can get a mortgage at 2.95% (at best), thus adding more principal wouldn’t change much. You might even be tempted to borrow more money to:

  1. Get some new appliances for your house
  2. Consolidate your credit card debt
  3. Add in your moving expenses, land transfer taxes and maybe a nice vacation
  4. Add in your Student Loans

At that rate of interest why not?

Allow me to be clear in my answer, “What are you NUTS ?!?“. We are living with historically low-interest rates, which will eventually go up, what do you do when that happens? Assuming the rates can’t go up because of the fragile economy is going to catch a bunch of folks off guard is my guess.

Anybody else ever heard the expression House Poor lately?

 

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The Principal is always Your Pal

Last week I wrote a very flawed post about What would Happen if Interest Rates doubled. Luckily my sharp-eyed commenters called me on it.

First point, like in school the PrinciPAL in your Mortgage is your Pal, not principle, as I originally wrote it. Someone commented how would anyone take me seriously if I was unable to discern the difference, I pointed out as the “Clown Prince of Personal Finance” respect isn’t really that high on my list.

The other major blunder I made was in my spreadsheet. Let’s have a look at my first assertion from my mortgage table. What’s wrong here:

Payment Number Principal Interest Payment Principal Payment
1 $250,000.00 -$833.33 -$486.26
2 $249,513.74 -$831.71 -$485.31
3 $249,028.43 -$830.09 -$484.37

Take a look at the PrinciPAL payment column, somehow my weird calculations have the amount you pay down on the principal each payment, decreasing, which is just SO wrong (even wronger than saying Principle of your Mortgage (in my subtle opinion)). What was wrong with me? I don’t usually screw up that many things in one article (that often).

The mistake I made was relying on the Excel PPMT() function to figure this out, instead of doing a simple calculated version on the basis of the Interest payment from IPMT()

Principal Payment = Monthly Payment – Interest Portion
Principal Payment  = $ 1319.59 –  $ 831.71 = $487.88  (for Month 2) (it got Month 1 right)

So really what this should have looked like was:

Payment Number Principal Interest Payment Principal Payment
1 $250,000.00 -$833.33 -$486.26
2 $249,513.74 -$831.71 -$487.88
3 $249,025.86 -$830.09 -$489.51

Thus the table for the end of the 5 year term would look like:

56 $220,700.69 -$735.67 -$583.92
57 $220,116.76 -$733.72 -$585.87
58 $219,530.89 -$731.77 -$587.82
59 $218,943.07 -$729.81 -$589.78
60 $218,353.29 -$727.84 -$591.75

More importantly the overpayment option now looks much better too:

Payment Number Principal Interest Payment Principal
Payment
Overpayment
37 $231,433.88 -$771.45 -$548.15 -$610.00
38 $230,275.73 -$767.59 -$552.01 -$610.00
39 $229,113.73 -$763.71 -$555.88 -$610.00
40 $227,947.85 -$759.83 -$559.77 -$610.00
41 $226,778.08 -$755.93 -$563.67 -$610.00
42 $225,604.42 -$752.01 -$567.58 -$610.00
43 $224,426.84 -$748.09 -$571.50 -$610.00
44 $223,245.34 -$744.15 -$575.44 -$610.00
45 $222,059.90 -$740.20 -$579.39 -$610.00
46 $220,870.50 -$736.24 -$583.36 -$610.00
47 $219,677.15 -$732.26 -$587.33 -$610.00
48 $218,479.81 -$728.27 -$591.33 -$610.00
49 $217,278.49 -$724.26 -$595.33 -$610.00
50 $216,073.16 -$720.24 -$599.35 -$610.00
51 $214,863.81 -$716.21 -$603.38 -$610.00
52 $213,650.43 -$712.17 -$607.42 -$610.00
53 $212,433.00 -$708.11 -$611.48 -$610.00
54 $211,211.52 -$704.04 -$615.55 -$610.00
55 $209,985.97 -$699.95 -$619.64 -$610.00
56 $208,756.33 -$695.85 -$623.74 -$610.00
57 $207,522.59 -$691.74 -$627.85 -$610.00
58 $206,284.74 -$687.62 -$631.98 -$610.00
59 $205,042.77 -$683.48 -$636.12 -$610.00
60 $203,796.65 -$679.32 -$640.27 -$610.00

Remember, it’s OK to point out my mistakes, but don’t be a comment troll about it either. Thanks to Michael James for pointing out the folly of my arithmetic.

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What If: Your Mortgage Rate Doubled ?

So while I was ruminating about what would happen if Mortgage Rates increased violently, I came up with a very interesting exercise to try out for those with mortgages that allow them to make over payments when they wish.

If I assume that current mortgage rates can be achieved at around 4% annually, using the PMT command in most spreadsheets, you can do a very quick comparison to come up with the following simple table.

Interest rates 4.00% 8.00%
Years of Mortgage 25 25
Amount of Mortgage $250,000.00 $250,000.00
Monthly Payment $1,319.59 $1,929.54

Given Canadian mortgage rules are a bit different, and interest rate calculations are not quite right, let’s just use these numbers as an interesting basis for our model.

The question is, can you afford if your mortgage rate suddenly doubled when you had to renew your mortgage? Maybe it’s time to find out if you can. From the above simple table, the difference is about $610 a month, so why not simply increase your Mortgage payment to that amount for a period of time? Maybe experiment and try it for 6 months to see whether you can live with this extra pay out, and if you can, then continue to pay this for the rest of your term, thus lowering your principal?

What might this cause? So at the end of your first five year Term your mortgage schedule for the last few payments might look like:

Payment No
Principal Interest Payment Principal Payment Overpayment
56 $224,613.20 -$748.71 -$436.88
57 $224,176.32 -$747.25 -$436.03
58 $223,740.29 -$745.80 -$435.18
59 $223,305.11 -$744.35 -$434.34
60 $222,870.77 -$742.90 -$433.49

So after five years you will have paid off about $27,000 from your mortgage, a good start, but then if interest rates have somehow jumped to 8% your monthly payment now are $600 more (ouch). (by the way I used the iPMT and pPMT spreadsheet functions for those calculations).

What would happen if at the start of year 3 of your term you started making a $610 overpayments on your loan, what might the end of your 5  year term look like?

Payment No. Principal Interest Payment Principal Payment Overpayment
37 $233,077.61 -$776.93 -$453.34 -$610.00
38 $232,014.26 -$773.38 -$451.28 -$610.00
39 $230,952.99 -$769.84 -$449.21 -$610.00
40 $229,893.77 -$766.31 -$447.15 -$610.00
41 $228,836.62 -$762.79 -$445.10 -$610.00
42 $227,781.53 -$759.27 -$443.04 -$610.00
43 $226,728.48 -$755.76 -$440.99 -$610.00
44 $225,677.49 -$752.26 -$438.95 -$610.00
45 $224,628.54 -$748.76 -$436.91 -$610.00
46 $223,581.63 -$745.27 -$434.87 -$610.00
47 $222,536.75 -$741.79 -$432.84 -$610.00
48 $221,493.91 -$738.31 -$430.81 -$610.00
49 $220,453.10 -$734.84 -$428.79 -$610.00
50 $219,414.31 -$731.38 -$426.77 -$610.00
51 $218,377.54 -$727.93 -$424.75 -$610.00
52 $217,342.79 -$724.48 -$422.74 -$610.00
53 $216,310.05 -$721.03 -$420.73 -$610.00
54 $215,279.32 -$717.60 -$418.73 -$610.00
55 $214,250.59 -$714.17 -$416.72 -$610.00
56 $213,223.87 -$710.75 -$414.73 -$610.00
57 $212,199.14 -$707.33 -$412.73 -$610.00
58 $211,176.41 -$703.92 -$410.75 -$610.00
59 $210,155.66 -$700.52 -$408.76 -$610.00
60 $209,136.90 -$697.12 -$406.78 -$610.00

Interesting, isn’t it? Now you are $13,000 farther into your principal, and when the bank comes back to figure out your new 5 year term, you end up with the following:

Interest rates 8.00%
Years of Mortgage 20
Amount of Mortgage $209,136.90
Monthly Payment $1,749.30

Your monthly payment is actually lower than it would have been, and in fact if you kept up your $1930 monthly payments, you’d still be paying off the principal of your loan by about $185 a month (more than you would normally), not a bad thing either.

Anybody thinking of trying this idea out?

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