A change of strategy… Fixed rates… 5yr or 10 yr?

April 10, 2012 — Steve Garganis

For years, I have recommended Variable rate mortgages over Fixed rates.   The reasons are simple:

  • Variable rate outperformed Fixed rates in over 88% of the time.
  • You could lock into a Fixed rate at anytime should interest rates go up.
  • you could exit the product at anytime with a maximum 3 month interest rate penalty (compared with Interest Rate Differential penalties for Fixed rates that vary depending on current rates.. we’ve seen 10, 14, 16 and even 20 months interest penalties charged in recent years).
  • If you were in a Variable rate the last 5 years, then you have enjoyed an average rate of around 2.92% compared with a 4.37% fixed rate (annual average rate over last 5 yrs).    It’s been the least expensive way to own your home…  (my clients have saved between 1.45% and 3.00% per year on their mortgages over the past 5 years based on my recommendation).

But then, in August 2011, the Banks caught on.  They decided they wouldn’t offer those great Variable Rates or Prime less 0.75% (3.00% less 0.75% = 2.25%).  They all raised the price on new Variable rate mortgages to Prime less 0.00%.    And this year we have seen 5 year fixed rates hover at around 3.19% to 3.39%…  10 year fixed has also come down to 3.99% and 3.94%.

So what’s the strategy today?  What’s the least expensive way to own your home?     Here are some answers…

If you have Prime less 0.50%  or better, then considering sticking with it.

The fact is, over 80% of my clients are in a Variable rate mortgage of Prime less 0.50% or better.   They have enjoyed huge savings, especially over the last 5 years. I’m not too anxious to have them start paying a higher rate….. Instead of locking into a 5 or 10 yr Fixed rate, why not set your Variable rate payment based on the higher Fixed rates…  You’ll pay more towards principal and pay the mortgage off faster.

If your getting a new mortgage or your mortgage is coming up for renewal, then I would consider a Fixed rate term..

This might shock many of my clients and regular readers, but I can’t recommend taking a new 5 year Variable rate based on today’s pricing…  It’s time to look at Fixed rates…  The term will depend on your own personal situation, goals and needs.   5 year fixed (currently 3.29%) is looking like a good choice for many today… But a 1 year fixed (2.89%) might also we a good choice…   One product that is attracting more attention is the 10 year fixed rate (3.89% to 3.94%)… It’s never been under 4.00%… so many people are recommending it… But I’m not so sure about it…. After all, if you were to pay this mortgage out before the first 5 years, you would be faced with a monster penalty!   10, 14, 18 months worth of interest … maybe more…  On the positive side, if you paid the mortgage out after 5 years, the penalty is capped at 3 months interest.

If we compare the 5 yr fixed vs the 10 yr fixed, we can look at a number of different scenarios… but here’s a really simple one to look at…The question is, how much will rates have to increase by in order for you to be further ahead?

If you took a 5 yr fixed rate today at 3.29% but set your payments based on today’s 10 yr fixed of 3.94%, then at the end of the first 5 years, you would have to renew at a rate of 4.75% or higher, before you start to win with a 10 yr fixed rate.     So this is where the unknown comes in to play…  and the unknown can cause fear and panic…     But it can also mean opportunity…  Will interest rates be 2.00% higher than they are today??   Will Variable rate pricing come back to normal and again be the product of choice?  Will there be a new product that is even better than today?    I don’t know the answer… but I think 10 years is just too long of a term to commit to…Things change faster today…   Can we really make plans for 10 yrs?  Remember, if we need to refinance or sell, there is mortgage penalty to deal with….this can blow the savings right out the window…  A lot of what if’s…    I’d probably stick with 5 yr fixed today or go shorter term…

A last thought and point of reflection..

Interest rates have remained below average for the last 10 years…  They have been at record lows over the past 4 years due to the US sub-prime mortgage crisis and the longer than expected global and US economic recovery…..  Interest rates are expected to go up…  the big question is, when??   Regardless of the answer, shorter terms have ALWAYS been a better choice when it comes to mortgages… don’t be so quick to jump into a 5 or 10 year fixed rate… speak with your mortgage broker and get some advice.   Banks want borrowers to be afraid.. they want you to remain unsure…  They want you to lock into the longest term possible because this is where they earn the most $$profit….   Don’t be so quick to contribute the Bank’s profit margin….

Posted in Interest rates, Mortgage News, Mortgage Tips, Mortgage Trends, Rate forecast. Tags: , , , , , , . Leave a Comment »

The Star reports BMO suggests it’s time to lock into fixed rates…. well, maybe..

March 23, 2012 — Steve Garganis

I had a discussion with The Toronto Star’s Susan Pigg about Fixed and Variable rates.  Click here to read my comments in this article.

In short, BMO Captial Markets says it’s time to lock into a Fixed rate…. Well maybe, but I would caution anyone that had a BMO variable rate mortgage to think twice about locking into BMO’s well publicized 2.99% 5 year NO FRILLS mortgage.   This product has limitations and restrictions that make it impossible to get out of the mortgage without selling your home.   There are better options out there…  you can get a great rate without sacrificing your options and privileges.

You also have to factor in the infamous BIG SIX BANK penalty calculation.  We’ve written about this before.  This could cost you dearly should you wish to refinance or have to pay the mortgage out before maturity.   We have seen numerous cases of Bank prepayment penalties adding up to 12, 14, 18 and 20 months worth on interest.  That’s right, 20 months worth of interest.   Don’t get held hostage by your mortgage provider.

If you have a Variable Rate mortgage that is price at Prime less 0.50% or lower, I would stick with it…  If you are higher than this or if you mortgage is coming up for renewal, then you should consider a Fixed Rate mortgage…  And the only reason to consider Fixed rates is because they are priced so close to what a Variable rate could be had for today…  Best Variable is around Prime less 0.25%… that’s 2.75%.  Best 5 yr Fixed  with ALL FRILLS is around 3.19%…

But before you make any decision, please speak with an unbiased advisor, like a mortgage broker…. Find out which product is right for you…  Everyone is different and we all have different needs.  There are so many unadvertised specials these days….  Your Mortgage Broker can access these products and  also help explain the differences in penalty calculations and why this should be looked at more closely, even it you don’t think penalties apply to you…

 

Posted in Interest rates, Money saving tips, Mortgage News, Mortgage Products, Mortgage Tips, Rate forecast. Tags: , , , , , , , . Leave a Comment »

When opportunity knocks…open the door.

March 21, 2012 — Steve Garganis

It’s March, 2012.   How will you look back at this month in 5 years time?    There are certain dates in history that stand out for all of us.   Some are more personal than others, like the birth of my son, the day I met my wife, my first trip overseas, NHL pro hockey camp, etc.

And then there are dates where I look back at missed opportunities.

-October 1984, I had a chance to buy a waterfront lot on Balsam Lake in Ontario’s cottage country, for $22,000…. now selling for $400,000.   There was a new condo in east Toronto for $82,000 in September 1987…. now selling for $392,000….(and yes, I think I was 5 years old…Lol!)..

-Or how about that semi-detached house at Danforth Ave and Woodbine, in Toronto, for $175,000 in 1990….now selling for $500,000.    More recently, I could have bought a house for $320,000 in 2005, near the water in Burlington, Ontario…..that same house sold for $800,000 last year.

The point it, I think we will look back at March 2012 as the month when the Banks declared mortgage war against each other…  Only in this war, there is a winner… YOU, the consumer, YOU the borrower, YOU the investor.   We are seeing record low mortgage rates.   And they won’t last forever.  In fact, this mortgage war is probably going to accelerate interest rate hikes…  almost like starting a campfire with gasoline soaked wood… It’s burning red hot but it won’t last for long.

With interest rates are record lows, isn’t this the time to borrow?    A $300,000 mortgage will carry for $1196/mth.. and that’s with a 5 year fixed rate term.  Bond yields are climbing… 5 yr bond yields are up to 1.71%.. that’s up 30bps in less than a month… 5 year fixed rates follow bond movement… i think it’s safe to say, we should expect rates to climb in the near future… and the reason they haven’t moved yet is because of the Mortgage wars…

We are hearing the cries by the govt and some bankers, telling us not to borrow too much.  Personal Debt level concerns are plastered all over the internet and media.   But we aren’t seeing many articles telling us how to borrow and invest wisely…. borrow when rates are low instead of borrowing when rates are high… borrow when you qualify instead of borrowing when you don’t… borrow when you don’t need the money…   Isn’t that when Banks want to lend you the money?

We have just seen a draft guideline, Bill B-20,  entered in for review with a May 1st decision date.   These new regulations are aimed at tightening lending rules even further.. and this time it’s targeting Home Equity Lines of Credit..   That’s right, they want to make it even harder to qualify for these products and possibly make the repayment terms more strict…

Opportunity is knocking… answer the door..

Posted in Interest rates, Mortgage News, Mortgage Rates, Mortgage Tips, Real Estate news. Tags: , , , , , , . 1 Comment »

Banks are at it again… calling mortgage clients before maturity..

March 5, 2012 — Steve Garganis

With all the recent talk in the media about ‘rate wars’ and ‘mortgage market share’, it was only a matter of time before we saw this happening.  Yes, the Banksters are at it again.

We’re getting reports that Banks are contacting borrowers 4, 5 and even 6 months prior to maturity.   Supposedly, they are calling to ‘offer a great rate, if you sign now!’   Hey, that sounds great.  Except the interest rates that we see being offered aren’t really that great. In fact, they are higher than what is available in the wholesale market.

This isn’t anything new.   We saw this happen in late 2008 and early 2009.  The Banks were telling clients to lock into Fixed rates if they were in Variable (and we told our clients to stick with Variable as interest rates were heading down… sure enough, they did go down)…. And they were offering supposed ‘special rates’ 4 to 6 months prior to maturity.    The only problem is that the interest rates being offered were not as good as the Banks made it seem.  And the timing of the product offerings were clearly wrong.

What makes this problem even more complex today, is that some of the Banks are offering NO FRILLS mortgages with limited prepayment privileges and NO option to pay the mortgage out in full unless you sell the house.   They dangle an attractive interest rate but forget to tell you about the product limitations.   STAY away from these products.   They will come back to bite you in your bottom….. bottom line, that is.

Here’s some advice… Before signing any renewal offer, speak with your Mortgage Broker… find out if that offer and product are really as good as the Bank makes it seem.    The stats tell us that most Canadians will not bother shopping and just sign their renewal offer…  and that’s too bad.  A 0.40% difference in rate on a $250,000 mortgage will cost you $4774 in the first 5 years alone.   Don’t be so quick to sign what the Bank offers you… don’t be complacent….you could pay dearly for it.

Posted in Money saving tips, Mortgage News, Mortgage Tips, Mortgage Trends. Tags: , , , . 2 Comments »

RRSP, RESP, TSFA or Mortgage prepayment? Which has the best returns?

February 22, 2012 — Steve Garganis

HOW TO GET THE MOST OUT OF YOUR MONEY

Trying to decide what’s the best move can be difficult…. and I must admit, this is not an easy subject to tackle.   There are so many opinions…. But it’s important enough that I’m going to put my 2 cents in.  My final recommendations are listed at the bottom if you want to fast forward…

First, let’s come to an understanding that we are all different and have different needs…. you must ask for professional opinions and make up your own mind. Having said that, I think that for me, this is actually a very easy decision.

RESP   If you have kids, put money into an Registered Education Savings Plan…  the govt gives you 20% on a max contribution of $2500/yr per child.. that’s $500 of free money… Just be careful to not invest in any risky funds or stocks… you’re making 20% return already… don’t get greedy.

TFSA  If you have some extra cash, then yes, put those funds into a Tax Free Savings Account.  You can contribute $5,000 per year and any unused contribution limit carries forward each year… and the good news is that whatever investments are allowed for RRSPs are also allowed for TFSA.  Funds can go in and come out and grow tax free.  But I wouldn’t be putting too much in here while you still have a mortgage… Pay your mortgage off first.

RRSP  An old favorite for many.  Millions of Canadians have contributed to RRSPs in an attempt to be masters of their future and retirement.   Mutual Funds have become a favorite investment within RRSPs.  But now let me ask you… how has your RRSP performed for you?  For most of us, that answer comes with some profanities…%@!)*&%!!!   or something like that.

RRSP contributions are tax-deductible… and higher income earners will benefit greater…your funds can grow, tax-free… but you must pay taxes when you withdraw the funds.   At age 71, you have 3 options…-transfer to a Registered Retirement Income Fund, -buy a life annuity (better when interest rates are high), -or take the cash (bad choice as you will have to include those funds as income in one tax year which will result in large tax bill.)

RRSPs are a way to grow your investments, tax-free, and defer paying the tax… but you will have to pay the tax… make no mistake about that…

MORTGAGE PREPAYMENT   Probably the least exciting but the best choice for many.. just pay down your mortgage… your mortgage is not tax-deductible, unless you have a mortgage on an investment or rental property.    Get rid of that mortgage faster..make prepayments…  even little prepayments done regularly will make a difference…. On a $300,000 mortgage, a $3,000 annual prepayment will shorten your amortization from 25 years to 20 years, 10 months.   Based on today’s 3.29% mortgage rate, that’s a savings of over $28,000.   Hey, a $28k return on a $45k investment isn’t bad.

ONE MORE OPTION…INVEST IN REAL ESTATE  Sure, we’ve all seen property values go up over the last few years… actually, they’ve gone up over the last 12 years.. this is a long bull market for real estate… and there will probably be a correction.  But if you buy a rental property, you should plan to hold it for the long-term… 7 years or more… that’s usually enough time for any price correction to reverse itself.  Rental properties are popular today because mortgage rates are low and vacancy rates are even lower.

Another way to invest in real estate is through private mortgages.   Private mortgage rates run from 10% to 15%.   It takes a little more knowledge and experience to understand this investment, but it could be worthwhile.. Just be careful to get as much information as possible before making any 2nd mortgage investment decision.   These are RRSP eligible too. This subject will have to be covered in greater detail as there is a lot more to it.

FINAL DECISIONS.   For me, RRSPs just haven’t performed well…  And maybe I haven’t invested wisely…. One thing is certain, my Investment Advisors and Fund Managers all won… they take their cut off the top…   Not all Investment Advisors are alike, but I seemed to have hooked up with those that talked a better game than they could deliver.    Here’s a question… were you ever put into a Deferred Sales Charge (DSC) mutual fund?  You know, the funds where you can’t exit the fund family for 5 or 6 years without paying a hefty penalty?   I know several friends and clients that got pushed into those funds…. not one  of them is happy… I am staying away from these funds…

In case you can’t tell, I’ve lost my faith in mutual funds and decided to manage my own money.. and guess what?  I’ve done better than any advisor I know… I’m sure there are good advisors out there…but I’ve just decided that no one will care more about my money and future than me…

It’s time to take charge of our money….   so here are my suggestions…

  1. Put money into an RESP… if you have kids, this is a no brainer…  make sure to park that money in a safe, low risk investment… remember, you already made 20% with the govt’s contribution….let’s not get greedy.
  2. Pay off your mortgage.   Make lump sum prepayments… anything.. something is better than nothing… and try to increase your regular payments… this will accelerate the retirement of your mortgage.
  3. If you have to invest in stocks or funds then put this into a TFSA…
  4. Invest in real estate… it’s not exciting.. it’s not sexy… but history tells us it goes up over the long run…
  5. RRSPs… putting them last on my list… I’m just not a fan of them… if you have other cash, why not invest it elsewhere…  but if you have to put money in RRSPs, play it safe..  this is your future, your retirement… don’t gamble with it.
  6. Seek professional advice…. if you’re not sure what to do, get some advice… if you don’t have anyone to turn to, feel free to contact me… if I can’t answer your questions, I’ll direct you to someone who can.

 

Posted in Money saving tips, Mortgage Tips, Real Estate news. Tags: , , , , , . 4 Comments »
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