Overdraft fee? Are you #$!@% kidding me???

Posted on by in mortgage, personal finance.
Overdraft fee 9

Overdraft fee on our account?

 

I am truly embarrassed. Just few weeks ago I rambled in lengths on how you should avoid getting overdraft fees by knowing when payments are supposed to come out of your account, and always making sure you have enough money in it. “Oh, only extremely dense people would let their account get overdrawn! You’re better than this!” 

Well, guess what. I log into Mint.com (which is the best money management website ever, just FYI) on Friday, and I see that we’ve been charged an NSF fee. What the hell?

 

Overdraft Fee

Overdraft Fee

 

Why did this happen?

 

For ages, my paycheck came into our account on Thursday night. On Friday morning, our mortgage payment would leave our account. I specifically picked every other Friday for our mortgage payments just so it is the same day as payday and I knew we would have money in our account. It’s always been like this, and it never changed once.

In fact, I started counting on this lately. Because we have rather aggressive savings goals this year, last few weeks I’ve been living a bit on the edge. I would move money between our checking and saving accounts trying to hit our goals rather aggressively, to the point that sometimes I would leave almost nothing in our chequing account. Out of my determination to hit our goals which borders on stubbornness, I flew a bit close to the sun. Counting once again that my paycheck will appear first in our account followed by our mortgage payment, I left our account too skinny.

But this Friday Murphy’s Law prevailed, and our mortgage payment showed up before my paycheck. Boom!

It doesn’t matter that my paycheck arrived shortly after. We didn’t have enough money in the account to cover the mortgage payment. And as a result, our bank refused the payment, issued an overdraft fee, and when I saw this I almost spilled coffee on myself. After all the hard lessons that I’ve had in my life when it comes to finances and preaching on my part how you should always be aware of your cash-flow, did I just cause an overdraft fee on our account?

 

Whose fault was this?

 

I’m not going to make up excuses for myself. It was 100% my fault for letting my stubbornness get the best of me. Yes, it’s great to have goals for your finances, and work hard on hitting them. But you should never leave your net empty, when you send your best players across the field to score some goals (yes, this is a hockey reference). This can have very dire consequences.

To add insult to injury, just few weeks ago my wife checked our account and noticed we’re flying unusually low to the ground - meaning we have unusually low account balance. She expressed concern about it, but I brushed it off. “- Don’t worry, honey. Your man will never let anything bad happen, I’ve got this!”

Overdraft Fee

What a perfect I-Told-You-So moment. Kill me now.

 

First results:

 

- $45 overdraft fee courtesy of President Choice Financial (our checking account) already been charged.

- $75 NSF fee courtesy of Macquarie Financial (our mortgage holder) that will follow.

- A huge load of embarrassment for me. Is this what crow dinner tastes like? Yuck!

 

I jump into action!

 

Fueled by my own embarrassment, I jump on the phone. Obviously, I can’t just ignore this rather negative event, but I also know that if I’m pro-active, it’s possible to avoid paying some of the fees. My plan is to beg for forgiveness until they stop me!

First I call our mortgage company and explain the mix-up to the best of my abilities.

Me: - Hello! My deepest apologies, but it seems to me that we’ve bounced a payment this morning. I just wanted to let you know that I’m truly sorry about it, and you can already debit our account for the full amount.

Very nice CSR: - Oh, I see. Thank you for letting us know and saving us time. We’ll debit your account shortly, and since this is the very first time you’ve bounced a payment, we’ll waive the NSF fee.

Me: - OMG, thank you so much!

 

Next, I call our bank and talk to them:

Me: - Hello! I just wanted to apologize for overdrafting our account this morning.

Very tired and emotionally withdrawn CSR: - Uhmmmm…ok.

Me: - Any chance you can remove the overdraft fee? This is the first one on our account.

Very tired and emotionally withdrawn CSR: - Not really, no.

Me: - I’ve been a client of this bank for a very long time; we have a number of products in our name. What can you do for me?

Very tired and emotionally withdrawn CSR: - Well, let’s see. I can probably meet you half-way. How does $20 instead of $45 sound?

Me: - Not nearly as good as a zero charge. Give me a break, it never happened before.

Very tired and emotionally withdrawn CSR: - Oh, fine. But next time you overdraft your account, this trick won’t work.

Me: - You’re the best. Won’t happen again!

 

Final results:

 

- President Choice Financial reimburses the overdraft fee within days:

Overdraft Fee

Overdraft Fee

- Our mortgage company sends us a postcard. How nice:

Overdraft Fee

Overdraft Fee

- We avoid paying $120 for my stupid mistake.

- Lesson #1: No matter how bad I want to hit our financial goals, I can’t live on the edge, and we should always have buffer in our daily account. Ideally, at the beginning of the month I’d like to have enough money in our account to cover all our expenses for the month. This way we never have to “time” our bills and paychecks.

- Lesson # 2: You can talk your way out of some overdraft fees. Of course, this won’t work if you constantly overdraft your account, but if you make a stupid mistake once in a while, banks can be surprisingly forgiving.

- Lesson # 3: My wife is one smart cookie 🙂

 

Overdraft fees by the numbers:

 

- Average overdraft fee charged by major banks is $34.

- Overdraft and non-sufficient funds fees accounted for 61 percent of total consumer deposit account service charges in 2011

- The amount in annual fees, on average, for accounts that had at least one overdraft or non- sufficient funds fee - $225

 

Mortgage life insurance is an awful financial product

Posted on by in insurance, mortgage, personal finance, real estate.
Mortgage Life Insurance 8

Mortgage life insurance seems like a good idea

 

At first glance, mortgage life insurance obtained from your bank sounds like an excellent idea. You’re buying a home for your family and sign up for a loan that will take decades to repay. While you’re signing documents for your mortgage, your bank rep mentions the benefits of getting mortgage life insurance - peace of mind, complete repayment of your mortgage in case you or your spouse pass away, and relative low cost (when compared to your mortgage amount that is). Sounds like a responsible thing to do to protect your family, right?

Mortgage Life Insurance

Mortgage Life Insurance

When we bought our home few years ago, we had this exact conversation with our mortgage specialist. Fortunately, I had enough brain cells to say that I needed more time to research it, and I started digging around. After looking into details of the mortgage life insurance offered by the bank, I found several reasons why it’s an awful product, and should be avoided at all costs - unless your hobbies include wasting money.

 

Mortgage life insurance is too expensive

 

Just out of curiosity, I’ve looked up the cost for mortgage life insurance on TD Canada Trust website. For example, you’re buying a small house and taking out a mortgage of $400,000. To obtain life insurance for a mortgage of this amount, you and your spouse (in my example you’re in your 30s) will have to pay $105.00/month (after generous 25% discount). If your mortgage amount is higher or if you and your spouse are older, the monthly expense will be higher.

 

Mortgage Life Insurance

Mortgage Life Insurance

 

This is extremely expensive when compared to simple term life insurance that can be obtained through independent brokers. Similar coverage of term life insurance would cost you less than $40/month and offer more to you - as I discuss it late. Even our life insurance policy offers superior coverage and flexibility.

While $105.00/month might not seem like a big deal when compared to your mortgage payment, the value just isn’t there. Also, keep in mind that your coverage will be going down as your mortgage is being paid down - while your premiums will stay the same.

 

No guarantee of paying out

 

Typical life insurance policy obtained through insurance broker is actually underwritten when you sign the contract and the risk is assessed prior to this. Once you enter the contract, the payout is guaranteed in case you or your spouse die. Insurance agencies take this step very seriously, and take every step possible to assess your health before the policy is signed. In our case, we had to go through a medical examination performed by a registered nurse to make sure our level of health is reasonable and we are insurable.

Mortgage life insurance is a bit different in a sense that it’s underwritten at the time of the claim. Bank won’t access your health prior to signing the documents; you simply fill out a short questionnaire about your health. If the unthinkable happens, the bank can actually deny the coverage simply because you weren’t insurable. The fact that you didn’t know about your heart condition won’t make any difference.

Check out this episode of CBC Marketplace on mortgage life insurance:

 

 

 

Mortgage life insurance is controlled by the bank

 

If I had mortgage life insurance for our home, and got hit by a bus, the payout would go straight to the bank holding my mortgage because the bank is the beneficiary for the insurance policy. My wife wouldn’t be able to make a choice on what to do with insurance money - it would simply pay off our mortgage. In case of private insurance, the proceeds would be given to my wife tax free with her choice of actions - pay off the mortgage, invest the money, or build a giant Rocky-styled statue of me.

Another thing to keep in mind is that your mortgage life insurance policy is attached to your mortgage. If you sell the house - the policy gets canceled. If you renew the mortgage - the police needs to be renewed. If you miss a payment - your policy gets compromised. In other words, you have no control over it whatsoever.

 

Why do banks offer mortgage life insurance?

 

Mortgage life insurance is an easy sell for bank employees to push to their clients as an added bonus. Any responsible adult would think about protecting their family from unexpected death. But mortgage life insurance offered by most banks is not the right way to do so. In reality, it protects the banks more than it protects you. It is also a great money maker for them given extremely high price and poor value of it to the consumer. No wonder bank employees are told to push this awful product!

 

What is the right way to go?

 

Don’t get me wrong, protecting yourself and your family is important and insurance can be a beautiful thing. It is your responsibility to make sure your family won’t suffer financially if you or your spouse suddenly passes away.

But mortgage life insurance offered by the banks is an awful product that offers very little  value. If I were you, I’d consider obtaining term life insurance from an independent insurance company. You will be able to control the coverage amount and what happens if the policy pays out. Your premiums will also be much lower than what the bank will offer you - and who can’t use some extra money these days?

My name is Financial Underdog, and I’m not impressed with mortgage life insurance!

Rising Mortgage Rates in Canada - What happens if the rates double?

Posted on by in mortgage, personal finance, real estate.

Rising mortgage rates in Canada?

 

Rising mortgage rates in have been discussed for quite some time. As you may or may not know, mortgage rates in Canada are tied to Bank of Canada lending rate - banks borrow their money from Bank of Canada, and then turn around and lend money to you and me. Of course, they charge a bit extra - after all, they’re in business of making money, not simply passing it around. Once you understand this, it’s easy to understand that Bank of Canada lending rate is tied to mortgage rates in general. If Bank of Canada brings their rate up, almost all banks follow the trend and raise their rates - because they don’t want to lose money. Three days ago, Bank of Canada made an announcement that interest rates will be staying where they’re now for now.

Rising Mortgage Rates in Canada

Rising Mortgage Rates in Canada

But it’s important to understand that currently mortgage rates (and other lending rates) are at historical lows. If you ever talk to old-timers, they’ll remember the rates being in double digits - 15-20%. Rates have been falling over the years - and with last recession Bank of Canada cut them to never-seen-before levels. Where will they go from here? I think it’s safe to say that they have nowhere to go but up. The economy is coming around, and sooner or later our government will have to do something to prevent it from running away again - and interest rates is one of the ways control it.

 

What are you paying now in interest?

 

If you ask somebody about their mortgage rates, they’ll probably respond “Oh, I’m paying around 3% currently”. People who pay a bit more attention to their finances will say “My monthly mortgage payment is $1200”. Somebody who is borderline obsessed with personal finance (that would be me) will say “My by-weekly mortgage payment is $495.17, and I pay my bank 3.89%!”.

Your mortgage payment consists of two parts - principal repayment (amount that goes towards paying off the house) and interest payment (amount the bank gets for lending you money). Lumped together is the amount leaving your bank account every month (or by-weekly if you’re on by-weekly payments). If you ever want to get depressed quickly, ask your bank how much of that amount is interest and how much goes towards the principal. Just because I had nothing to do, I called my bank:

$157.99 Principal Payment + $337.17 Interest Payment = $498.16 Mortgage Payment (by-weekly)

Good god, somebody give me some wine. My mortgage payment is mostly interest charges! No wonder banks have such nice buildings.

 

What happens if the mortgage rates double?

 

Currently we’re paying 3.89% on our mortgage  - which was a good rate when we bought our little home, not so good right now. Historical average for mortgage rates over the last 30-40 years is actually closer to 8 percent, or roughly double what it is right now for us personally. In two years, we’ll have to refinance our mortgage since our 5-year term will be up - but what kind of rate will we get? And with all the talk about rising mortgage rates in Canada - I got curious and decided to do some math.

Quick and dirty math on our mortgage payment if our rates double. The real number would be slightly off - because by that time our mortgage amount would be lower but that’s why I call it quick and dirty:

$157.99 Principal Payment + $674.34 Interest Payment = $832.33 Mortgage Payment (by-weekly)

Good god, I need more wine. If the interest rates indeed double  in two years, our mortgage payment will be over $800 (by-weekly) - which means we’ll be paying over $1600/month.

Can we afford it? Well, it will certainly put a break on our saving rates - currently we’re saving quite a bit for the future as many financial advisors recommend. If the mortgage rates double (and I doubt our income will do the same thing unless I start removing my clothes for money), most of the increase will have to come from the money we’re currently saving. The result? Less money being saved for the future, less money for consumption, and a whole lot of wine being bought.

 

How will rising mortgage rates affect you personally?

 

Ask yourself few questions - what is your current mortgage rate? How much are you paying in interest and principal payments? What happens if mortgage rates return to their historical average, will you be able to afford your house? Will you have to adjust your life?

While many people might be scared of rising mortgage rates in Canada, one thing you can do to punch fear in the face is to educate yourself. At least once you know your situation and facts, you can make an educated decision to worry about them - or not.

Once you educate yourself, you can look at some options - refinancing your mortgage to lock into current rates or even extending your mortgage term to 10 years. You can also increase your current principal payment and accelerate your mortgage repayment - this way your principal amount is lower when you’re refinancing.