Variable or Fixed? an update on how to choose.

Variable rate mortgage

FIXED OR VARIABLE?

The debate over fixed vs variable never seems to end.   For the past 5 years, the Federal govt and the BIG SIX BANKS have been doing everything in their power to force us into choosing a 5 year Fixed rate.    The govt says it gives us security and protection against the anticipated interest rate hikes.   BANKS jumped on this bandwagon because 5 yr fixed is the most profitable mortgage product.. and with fixed rates hovering at 3.00% for the last 3 years, it’s been an easy sell.

On the surface, it’s not bad advice.    Fixed rates were supposed to go up.   The spread between Fixed and Variable has been less than 1.00% over the last 3 years.     My rule of thumb is that Variable rates should be 1.00% lower than 5 yr fixed in order to benefit from the possible rate fluctuations.   So naturally, 5 yr fixed was a better choice.

DO YOU TRUST YOUR GOVT AND YOUR BANK?

Well, not really.  If you chose a Variable rate at any time during the last 12 years, you would be a clear winner.  In fact, if you chose a Variable rate at any time over the past 30 years, you would be a winner.   That’s right, your overall average rate would be lower than compared with the overall average 5 yr fixed rate.

Having said all that, when the spread dropped to 0.50%, it’s hard for me to recommend choosing Variable for everyone.   That’s because we need to remember the emotional side of things.   If you can’t sleep at night because you notice every article or report about the impending rate hikes, then go with a Fixed rate.  I think there is something to be said for having peace of mind.  You just need to understand the cost and you need to be in the right product.

But if you understand that current economic conditions and forecasts by the Bank of Canada are calling for rates to remain low for some time to come, then consider choosing a Variable rate.    Saving 0.50% adds up to around $1,100 per year on a $300,000 mortgage.  So choosing a Variable can and still does make sense.

MORE PRODUCT DIFFERENCES

There’s another phenomenon.   New NO FRILLS Variable and Fixed rate products have come to the Canadian market.   You won’t see them advertised as ‘NO FRILLS’ products.  The products typically carry a slightly lower rate and attract a lot of attention.  However, these products should be avoided.   Saving 0.05% or 0.15% isn’t gonna make or break you.   But the restrictions, limitations and inflated penalty calculations will.  In the end, these products will usually end up costing you more down the road.  Signing a mortgage contract isn’t something to be taken lightly.

One of the biggest mysteries about mortgages was how the penalties were calculated.   In recent years, we’ve seen them skyrocket to $30,000, $40,000 and more.  And this is being charged by the BIG SIX BANKS… not some obscure financial institution.    If you aren’t sure how a penalty is calculated, ask questions.. and if you are still unsure, speak with an experienced Mortgage Broker.

One of the most important features to have in a Variable rate mortgage is the option to lock into the BEST discounted fixed rate that the lender has to offer at the time of lock in.   Again, this is something most of us don’t think about, but it’s critical.

BOTTOM LINE

Variable rate is still the clear winner even with fixed rates being in record low territory.    Incredible to say but it’s true.  Just be ready… you may need to lock into a fixed rate at some point… and you better have the option to lock into the BEST discounted rate… don’t be counting anything your Banker or Broker promised.   Get it in writing.  We may be making that call in the future.  For now, it doesn’t appear to be urgent.

Your best interest is my only interest.   I reply to all questions and I welcome your comments.  Like this article?  Share with a friend.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

But it came in a beautiful box?!

canadian-money-giftIf I gave the option of choosing between 2 cell phones, which would you choose?   Both phones had similar specs and were identical in almost every way… except PHONE 1 came in a nicely gift wrapped box with a bow on it.   PHONE 2 came in brown paper bag but was less expensive and also had slightly better options.

Most of us would choose PHONE 2 right?  Wrong!   When it comes to mortgages, most of us are focusing too much on the beautiful gift box and not paying enough attention to the contents.  They say around 47% of all mortgages go through a BANK and 39% go through a Mortgage Broker.   Broker share is up, but not enough in my opinion.

When it comes to mortgages, the BIG SIX BANKS have been charging higher rates than what can be had from MORTGAGE BROKERS (see Bank of Canada study ‘competition in the Canadian mortgage market).   And their inflated prepayment penalty calculations are now infamous (typical BIG SIX BANK penalties are around 4 times higher than other lenders).
Read the rest of this entry »

Mortgage renewal opportunities missed.

Banksters

DON’T SIGN THAT RENEWAL AGREEMENT BEFORE SPEAKING WITH YOUR BROKER!

Summer is a great time.  Vacations, time off, no school, sun and fun.  It’s also a time when most of our mortgages come up for renewal.   This year, things are a little different.  The loooong winter is really making us cherish the precious few months of summer.   We want to soak up as much of this warmer weather as possible.

This relaxed mindset appears to be making us easier prey for the BANKS mortgage renewal departments.  Mortgage renewals will typically follow the same process.   You get a renewal offer anywhere from 120 to 30 days prior to maturity.   The BANKS will offer you a rate that may be lower than their posted rate but, it’s much higher than the market rate, and some of us will go back and negotiate, some will call a mortgage broker to get unbiased and true market rates, and some of us will just sign that renewal and send it back in.

In the old days, most of us would just sign and return that renewal to our BANKS.   But that trend started to change over the last 10 years.  Consumers were shopping, calling mortgage brokers and seeking out better products.   Until this summer…. Read the rest of this entry »

The Star article on private lenders

Some comments I made about the changing lending landscape.  Click on the link below.

Private lenders step into Mortgage void left by banks.

The article was good and shed some light on just how much the federal government has tightened the Mortgage rules in Canada.  But the article excluded one very important fact.

loan sharkYes, I agree that the govt has gone overboard with their rule changes, and has forced qualified mortgage borrowers to pay higher rates and fees by having to go to alternative lenders.  But, consumers don’t necessarily have to go from an “A” lender with the best rates (currently at around 3.00%),  to a “C” lender with rates of around 12% to 15%.

There are “B” lenders that offer mortgages with only slightly higher rates. Usually 1% to 2% higher than “A” lenders.   I think it’s important to point this out.

A recent example is where one client was self employed, had a slightly bruised credit score of 602 (a good score is between 680 and 720), and his net income was not high enough to qualify (remember, self employed show a lower net income because they can write off more expenses). We found this client an 80% loan to value mortgage at 4.00% with some fees.   His net annual rate was 4.25%.  

So the message is, ‘There are ‘B’ lenders to fill the void left by the BANKS’…. and their rates are only slightly higher..  There are also ‘C’ lenders that fill a need for even harder to place mortgages…. These products come with much higher rates and fees.. But most consumers will either fit into an ‘A’ or ‘B’ product.   Only a small handful of applicants need to go to a ‘C’ Lender..

Your best interest is my only interest.   I reply to all questions and I welcome your comments.  Like this article?  Share with a friend.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

Use your mortgage to pull debt together and save for retirement.

saving-for-retirementPerhaps too much debt has made your monthly cash flow tight, putting you under some financial pressure and making it almost impossible to save for retirement. With the right plan in place, it may be possible to simplify your debt, reduce interest costs, and save for retirement, all without earning more or cutting your spending. 

If you have enough equity in your home (you can’t refinance a mortgage above an 80 per cent loan to value), we can show you how to use that equity to roll your high-interest debt into a low-rate mortgage and make a large RRSP contribution if you have contribution room.

Here’s an example – mortgage, car loan and credit cards total $225,000. If you have enough equity, you can roll that debt into a new $233,000 mortgage, including a fee to break the existing mortgage, and look at the payoff. Read the rest of this entry »

Your credit score is more important than ever.

bad credit  What is your credit score?

Credit scores can range from 300 to 900 and are used by lenders to determine what kind of a risk you are likely to be as a borrower. Your score is based on several attributes -

Payment history

The single biggest factor in your credit score is having a timely bill payment history. Recent late payments are factored more heavily than old ones so start today and never let a bill get past due. Read the rest of this entry »

Average Toronto detached home sale is over $966k

$$ up arrow Recent housing stats released by Toronto Real Estate Board (TREB) show listings and sales are down but, prices are up.  According to TREB, the average sale price for a detached home in Toronto is $966,875.    For those that have invested in real estate, you’ve done well.  For those that are looking to buy, this may not be such good news.. However, there is a bright spot.

TREB also said that affordability has not deteriorated due to low mortgage rates.   No doubt that low rates are helping to fuel real estate price increases.   If you are waiting for the market to fall and prices to drop, you may want to reconsider that plan.   The forecast is for prices to remain strong.

It’s been an interesting year so far.  We’ve had a cold Spring, an even colder Winter, and yet the real estate market is red hot.   Watch for house sales to remain strong.   Trying to time the market can be costly.  Just ask those that sold 2, 3 and 4 years ago.   There have been many calls to exit the market.  I have personally seen some clients sell and rent for the last 2 and 3 years.  They are questioning that decision now.

I think buying a home should be a long term investment.  Plan to hold for 7 years.  That’s a long enough time to live through any up or down housing cycles.   If you can stick with that plan, then you should be okay.  Don’t buy because you are afraid of missing out.  Buy because you need a home and can afford it.  Buy because it’s a long-term investment and you have planned and thought it out.   Buying to invest is a good idea, you just need to understand what it takes to own and finance a property.

Speak with a team of professionals.  You need a good realtor, a lawyer, a mortgage broker, and an accountant.   Professional advice doesn’t mean it’s gonna cost you a lot of money either.   Professionals usually cost less than you think.. or they get compensated by other parties.. such as realtors and mortgage brokers.. you don’t pay them when you buy a house…  The get paid by the seller or the mortgage lender (unless you don’t qualify for a traditional mortgage).    The point is, it’s easier than you think.

Your best interest is my only interest.   I reply to all questions and I welcome your comments.  Like this article?  Share with a friend.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

 

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