Inside Online Mortgage

For almost 1 year now I have been hearing people say you should “wait” or “don’t buy” because higher interest rates are going to bring house prices down. I have also heard during that same period that you should lock in your mortgage because rates are going to skyrocket. I thought it would be a good time to look at what has actually been happening….

1. variable mortgage rates are about as low as they have ever been. You may have heard in the news that there was a rate increase at the beginning of June, and therefore have the idea that rates are much higher now than they were a few months ago. Here is what has actually happened:

March 2010 5 year variable rate = 1.9%
July 2010 5 year variable rate – 1.9%

Yes, prime rate went up by 0.25% but the discount that lenders offered on the prime rate increased leaving you the same rate as there was 3 months ago, and a much better rate than there was 6 months ago.

2. Fixed Rates have increased slightly in the past few months, but have actually dropped in the last month.

March 2010 5 year fixed rate = 3.79%
May 2010 5 year fixed = 4.49%
July 2010 5 year fixed rate = 4.19%

The most interesting part about this is that fixed rate mortgages are directly related to the Canada 5 year bond yields. In March the bond yield was 2.9% and today it is 2.44%. What that means is that the economy has not driven the fixed mortgages up, but the banks have chosen to increase the profit that they are making on 5 year mortgages. This is directly connected to why they are trying to drive the market towards switching out of your variable mortgages and lock into a fixed rate.

The truth is that prime rate will rise modestly, with many predicting another 0.25%, but most banks have drastically modified their predictions on the extent that rates will increase over the next couple of years. At the same time we do know that over time housing prices do always rise, and if you are constantly waiting to see if you can time the low part in the market, you are likely setting yourself up for much higher housing costs than if you do something today.

Contact me for further information and discussions regarding your mortgage strategy.

1. If your mortgage term is going to be up for renewal within the next 2.5 years you should talk to me about early renewal. What is just as important as your current rate, is what your rate will be at the end of your term and you may be set up to come out of your term during a period of peak mortgage rates.
2. If you are on a variable that is discounted less than 0.30% you should talk to me about refinancing into a better variable discount.
3. If you are currently on a fixed mortgage that is higher than 4% you should definitely talk to me about the possibility of refinancing.

This question is neverending, and that is probably because the answer is different all the time. Variable mortgage rates, and fixed mortgage rates to not fluctuate in tandem. This means that at any given time the spread between the variable rates and fixed rates can be drastically different. We are currently at a time in history where the spread between fixed and variable is had one of his largest spreads in history. I am not going to argue in this article about whether a person should go fixed or variable, as I typically like to make those assessment based on individual consultations with my clients, and assessing their needs, goals, and personalities.

I would like to show some analysis that i have done recently that may shed some light on this subject. The data below will show a typical BC mortgage with a very low 3.89% (the average is now in the mid 4s) and a best on the market 5 year variable of prime -0.50%. You may be quick to argue “but prime is going up”, and you would likely be correct, which is why I have added some periodic rate increases into my scenario. Notice that there are 5 rate increases of +0.50 every few months starting this summer. This information is based on a basic consensus from economists on what is likely to happen over the next couple of years, and is certainly not optimistic. As you can see from the data, with the same size mortgage, and the periodic rate increases, the variable will still leave you with the least amount of interest paid, and the lowest mortgage balance at the end of 5 years.

Disclaimers:
1. I do not know for absolute certain that variable rates will not increase at a faster, or to a higher rate than what is represented.
2. I do not know that variable rates will even increase that much.
3. Many people will actually not do better than 4.3-5.5 percent range and will actually experience greater savings on the variable.

Please click on this link to view the data:

variable vs fixed

There has been a lot of talk lately about the potential of rising interest rates creating another drop in the Real Estate Market. While I personally do not thing that historical data supports this argument, I would like to explore just how much risk there really is in plunging into the market today, should the economic pessimists prove correct.

I should say that I do believe rates will rise, but I don’t believe they will rise to the point of keeping people from participating in the housing market.

I also believe that even if there was a market decrease due to higher interest rates, the risk of purchasing today is still minimal due to how low the current rates actually are.

The term one needs to consider is “net equity gained”. This means that instead of only factoring the equity gained or lost in the home’s value, it is also worth considering what the costs were in obtaining that equity.

Scenario: We will look at a $400,000 house, and presume that sometime in the near future interest rates go up nearly double, and housing prices drop 10%. We will then look at the difference between purchasing now at the higher price, or purchasing later at the lower price with the higher rates.

Option 1 – purchasing now

As you can see, the actual equity in the home after the price drop is only $65,000 (it started at $80,000). The total payments during a 5 year period to keep that equity is $81,600 so the net equity gained/lost is a loss of $16,226.

Option 2 – waiting until the housing market to drop 10% because rates have gone up to 7%.

Here you see, that although you waited to purchase at the lower home price, your net equity after factoring in the mortgage costs is -$25,000 for the same 5 year period.

When the reduced amount of downpayment required in scenario 2 is factored in, your resulting loss is roughly the same.

Other Considerations:
1. if housing rates don’t drop when interest rates go up, waiting will prove to be a a very poor financial decision.
2. There are too many combination of housing market changes, and interest rate changes to cover here, this is strictly an example.

My conclusion is that I believe there may be more risk in waiting then there is in getting into the housing market today, while housing prices may not have fully rebounded, and interest rates are at record lows.

First of all, I just need to say that I love challenging conventional wisdom. I believe there is always more than one way to look at something, and I enjoy discovering those different ways.

Conventional and usually wise money management thinking would suggest that you are always better off taking bi weekly mortgage payments vs. monthly mortgage payments. I will agree that on the surface this does seem to be a way to gain an advantage on that big goal of paying off the mortgage, I would also like to say that there is maybe more to the picture than that.

First of all, I don’t see my job as simply advising people how to pay their mortgage off quicker. On average people switch mortgages every 3.5 years in Canada due to either moving or refinancing. This means that most of the time, the mortgage that I put people in is not going to be paid off by them unless they pay it out because they sold their property, or because the refinanced with another lender. Keeping that in mind, there are other factors I need to consider, such as:

1. What stage of life are my clients in? (first home, retiring, investing) or (early in career, paying off student loans) or (height of earning potential, retiring)
2. How can i make their mortgage most affordable?
3. How do I ensure that the mortgage they are in has the flexibilities for possible life changes and changes in financial goals?

These are a handful of questions that factor into making a good financial decision, and they also indicate that the best practices of conventional wisdom will not always fit when taking into account these other factors.

So, back to my example of bi weekly versus monthly. I will show you data below that says I can save you approximately the same amount of money on monthly payments as you would with bi-weekly by using some other options available in the mortgage market.

Option 1 – Bi -weekly.
Pros: pay off your mortgage quickly by essentially making an extra monthly payment every year. (bi weekly means 26 payments per year so it forces you to make more payments than simply dividing the monthly payments in half would)

Cons: you have now bound yourself to making more than the minimum payments. There is a good chance you had already budgeted a payment that was comfortable to your current income, and without realizing it, you could be stretching your annual budget.
Benefits: See numbers below:

Accelerate Payments      Monthly Payments
Mortgage amount             $400,000                         $400,000
Interest rate                          4.00%                                 4.00%
Payment                        $881.61 bi-weekly          $1,763.21 monthly
5 year balance                   $360,950                             $370,796

In 5 years (typical mortgage term) using bi weekly payments you will pay off an additional $9846! This seems like a great idea when they show you at the bank. The thing that is not mentioned is that you also made an additional $8815 in payments to accomplish this! Well, at least we did still save $1000, so not bad.

Here is Option2 – Monthly payments using annual prepayment.

Pros: keeps your minimum obligation as low as possible in case of tight finances while still providing the opportunity to make extra payments on your mortgage. (mortgage lenders allow 10-20% annual prepayment of mortgages)
Cons: requires discipline in order to realize the same savings as option 1.

If you use the same monthly payment plan listed above, but put an annual $1800 down at the end of every year you will have made an additional $9000 in payments and gained $9757.26 in principle equity.

Granted you do gain about $200 more doing the bi-weekly way, but for most people, and depending on the stage of life they are in, it may not be worth it.  Option 2 offers nearly the same savings, but adds additional flexibility of letting you decide if you want to make those extra payments.

Well, its that time again when certain interest groups make enough noise that the government decides that it is in their political best interests to make some changes to show that they are listening and doing something about it.

I think it is extremely important to note, that although the things that happen in the US do definitely have an affect on the Canadian economy, that does not mean that there is a problem in Canada. I am of course referring to the banking and lending industry, in which Canada has always maintained completely different standards and lending practices. Canada has always maintained mortgage default rates that are a fraction of our US counterpart’s.

So, here are the changes and what they will mean.

1. 5 year Qualifying Rates

This one is a pretty clear example of government grandstanding. The truth is that most lenders already do this. Essentially they are saying that if you take a variable rate mortgage (currently 1.95%), the banks need to ensure that you will be able to make payments when rates rise. This means that even though you are taking the low variable rate, they will decide how much you qualify by using the 5 year rate instead (curently 3.79%).

This is not a terrible idea, its just not a new idea either.

2. 90% maximum refinancing:

This one I have mixed feelings about. The idea according to the government is that if they stop letting people refinance their homes to 95% of the appraised value then we can ensure that they maintain equity in their homes and it becomes a form of savings. If the average home is around $400,000 then they have essentially reduced your borrowing ability by $20,000.

I am a little bit troubled by the government creating a situation under the guise of “forcing” people to save more money. I am also uneasy about the government forcing people to pay higher interest on consumer debt rather than saving money by taking out the equity in their homes.

I believe this could put people in a situation where they need to sell their home to get out of debt, rather than refinance, and I don’t believe that is good for any part of the market.

I don’t believe that this will have a dramatic effect on the housing market or economy, and i also don’t believe it will have a dramatic effect on preventing the so-called “housing bubble”, so my conclusion on it is why do it at all?

3. The 80% investment property:

This move is clearly the most dramatic of the 3 announcements. The government has decided that people need to have a 20% downpayment in order to purchase a rental property. It was only a little bit more than 1 year ago that you could do this with 0% downpayment, and was changed to 5%. This is an extremely dramatic change and again, I need to question what the value to our economy is by making this move.

This move will have an effect on the real estate market as a large part of that market is people building wealth through purchasing income properties. In fact in the people I know who have built significant net worth, most of them have done so by purchasing income properties with less than 20% down.

The idea is to reduce the real estate speculation that goes on in the market, and prevent people from potentially purchase investment properties that they cant afford.

It will remain to be seen how extensive the impact to the market will be as result of these changes.

The bottom line is to consult a mortgage planner who will work for you to maximize the existing and future rules to your best possible benefit

How are mortgage rates set?

The chartered banks set the prime lending rate (the rate they offer their best customers). They base their decisions on teh Bank of Canada’s overnight rate because that’s the rate that influences their own borrowing. There are approximately eight times a year the Bank of Canada makes rate announcements. Variable mortgage rates and lines of credit move in conjunction with the prime lending rate.

Fixed-rate mortgages are a little different. Banks use Government of Canada bonds to raise money for fixed rate mortgages. In the bond market interest crates can fluctuate more often, since they are subject to the changing moods of traders and bond investors which try to figure out how fast the economy will grow and where inflation is headed. As a result, watch the bond market for clues on where fixed mortgage rates will go next.

I thought I would start off the new year by compiling a list of financial tips and thoughts that I feel are either unknown to most people, or at least too little thought is given to them. Contact me today to learn more!

1. Is there a way to invest in Real Estate within my RRSP or Tax Free Savings Plan? (Hint: yes, but few know about it)

2. Is my current mortgage term, rate, and amortization fitting in with my overall financial strategy?

3. Is there a way I can pay off my mortgage 5 years sooner without spending any additional additional money?

4. Is it worth paying a penalty to get out of my current mortgage term and refinance at todays low rates? (contact me to see if it is worth it for you)

5. Is there a way to make my mortgage tax deductible?

6. How much money could I save by consolidating my high interest debt?

7. Is this a good time to invest in a rental property, and could I qualify?

8. Are there other types of mortgages that my bank has never told me about?

9. Should I borrow home equity to top up my RRSP or Tax Free Savings Account?

10. Do I have a Mortgage Planner who I trust working for me and not the bank?

Contact me at deanlarson@onlinemortgagepros.ca to ask these or any other questions.

Happy New Year!

Worried about defaulting on your mortgage? All of a sudden, your financial life feels a bit like that blockbuster movie: the one with the hero being pursued by some powerful and relentless alien monster. In your nightmares, though, it’s called “debt” – and it’s just as ugly and frightening. The good news is that the hero generally wins – by finding the right weapon at the right time. Fighting debt is a lot the same. When you’re feeling pursued by the debt demons, it’s time to get smart about finding your own best weapons.

If you’re barely staying ahead of the mortgage, you’re not alone. For many Canadians, a drop in income has meant a struggle to keep up with monthly bills. As a nation, we’re starting to pile on credit-card debt – just to get by.

According to Equifax, the average delinquency rate for all types of credit excluding mortgages was up 19% in May 2009 over 2008. BMO Capital Markets recently estimated that more than 150,000 households in Canada were experiencing some degree of stress in meeting their debt obligations. And other stats show the same picture – Canadian Bankers Association reports mortgage arrears were 0.4% in May 2009, up from 0.26 a year earlier, while the Office of the Superintendent of Bankruptcy noted that consumer bankruptcies rose 31% year over year to the end of April 2009.

It can be tempting to want to conceal your debt problem for as long as possible – but that’s almost never the best strategy. Your mortgage lender doesn’t want to see you default on your mortgage; they’d much rather help homeowners find a way to keep their home.

For mortgages insured by the Canada Mortgage and Housing Corporation (CMHC), they have identified several tools available to help you ride out a period of economic uncertainty:

1. You may be able to convert a variable-interest rate mortgage to a fixed-rate mortgage: a strategy that can protect you in the event of a sudden jump in interest rates.

2. Your lender may be willing to offer a temporary payment deferral, or other flexible options for shortterm relief. If you’ve made any lump-sum payments against your mortgage in the past – or if you’ve been on an accelerated payment schedule before – that history can help.

3. You may be able to extend your amortization period to reduce your monthly payments. You can shorten the amortization again later if your circumstances change.

4. If you’ve actually missed a few payments already, you may ask if the lender is willing to add them to the mortgage balance and extend the payment period accordingly. (Best, however, to start talking before you start missing payments!)

5. A special payment arrangement for your situation may also be possible.

Ultimately though, it’s best to seek help at the first sign of financial trouble. A chat with an experienced independent mortgage planner is often a great place to begin – because they are working for you, not the lender, and they know what the lenders are after. It can be easier to be completely open about your situation. Independent planners also have access to a huge range of lenders, so they can help you build a tailored financial solution.

It’s possible that your financial situation just requires some extra penny-pinching to stay on budget. But if you find yourself adding to your credit card debt – or borrowing to make mortgage payments – then it’s time to call an experienced mortgage planner. The earlier you get help, the easier it will be to conquer your debt demons!

© Copyright 2009, Mortgage Architects, all rights reserved. GA54_JUL09_01

There has been continued confusion about the current status of interest rates, and where they are going in the future. I have written about this before, but do think it is time for a refresher.

First of all it is important to understand the difference between fixed rate mortgages and variable rate mortgages. It is also important to understand that there is no direct correlation between them. This means that one can change while the other can remain static.

Variable : This means that this mortgage will fluctuate in relation to the bank prime lending rate. As a rule the prime lending rate is consistent accross all banks. When you are approved for a variable rate mortgage you are approved for a floating mortgage rate that will have some correlation to the prime rate, ie. Prime -0.10.

Fixed Rate: This is a mortgage rate that is fixed for the duration of the term you signed for. Your payment and rate will remain static for that term which could be anywhere from 1-10 years with the most common being 5.

Important facts that are often confused or misunderstood:
-variable is not the same is open, and fixed is not the same as closed. Variable mortgage and fixed rate mortgages are both usually on a closed term.
-Variable rate mortgages have a prepayment penalty equal to 3 months interest penalty.
-Fixed rate mortgages have a prepayment penalty equal to 3 months interest or Interest Rate Differential, whichever is higher.
-Although most variable rate mortgage can be converted to a fixed rate mortgage at any time, you don’t get to lock in at whatever your current variable is, you instead will lock in at the best fixed rate mortgage at that time.
-fixed rate mortgages can go up and down while variables remain the same, and vice versa.
-Prime Rate can go up and down while fixed rate mortgages remain the same.
-The Bank of Canada announcements related to interest rates directly affect the prime lending rate and therefore variables, but not necessarily fixed rate mortgages.

Where Are Rates Going?

Although no one has a crystal ball it is widely thought by experts and economists that rates are as low now as we are likely to see them in the next few years. As the economy strengthens, history shows that we will head into a period of high inflation which will mean higher rates.

Most economists are predicting a 2-3% increase in fixed rates by the end of next year. The best indication of projected fixed rates is to watch the Canada bond yields. Fixed rate mortgages typically follow their trend.

We have various tools to help analyze where rates will go, and what the potential changes in prime rate mean in terms of your decisions to go fixed or variable. Bottom line is if you are going to do any mortgages financing in the next couple of years, contact us today to work out a sound strategy!