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CategoryInterest rates

The Big Six have all raised their rates now…

A look at locking into a Fixed rate

By now, you’ve heard that Fixed Mortgage rates have gone up by 0.55% since November…5 year fixed is currently sitting at around 4.04% vs 3.49%.  (these are best broker rates…the best retail bank rates are 4.39%)…. Let’s take a closer look at what this will cost you.

On a $200,000 mortgage with a 25 year amortization, your monthly payment goes up by $58.89 or about $3,500 over a 5 year period.    That’s quite a bit of money…. and this probably gets a lot of us thinking about locking into a 5 year fixed rate….But is this the right strategy for everyone?

For some of us, it will make sense to take a 5 year fixed rate… this is not a bad option for those on a tight budget, pension income, or just can’t sleep at night thinking about rates…  make sure you are locking in for the right reason…

A look at NOT locking into a Fixed rate

Current Variable is 2.25%….  A $200,000 mortgage with a 25 year amortization has lower monthly payments by $185.16.  Okay, I know what you’re thinking and you’re right… this rate will not remain the same for 5 years.. In fact, we know it’s probably going to go up.   So it’s difficult to calculate exactly how much you would save or lose by sticking with a Variable rate…  History shows us Bank Prime goes up and down around 2 to 3 times a year….Look at this chart of Historical Rates. The RBC is forecasting for Bank Prime to go up by 1.00% this year and another 1.50% next year!!  (not sure I agree with this forecast).     If you like flexibility, are willing to tolerate rate movements, and want to take a calculated risk of floating your rate, then Variable could be a great option for you.

Is Variable rate more stable than Fixed rate?

The media keeps telling us mortgage rates are going up.. they will skyrocket….So why are people still considering Variable Rate mortgages?   We looked a little deeper and found some interesting trends…

-From Oct 2008 (the month of the U.S. Mortgage crisis) to Oct 2009, the Bank of Canada only changed Bank Prime 4 times…This was the worst recession since the Great Depression of 30’s….and yet Bank Prime only changed a handful of times….

-the BOC raised rates in 1992 because they thought the economy was strong enough to handle… they quickly lowered them but it was a little late as the economy staggered for another few years… this pattern has repeated itself on more than one occasion…most recently, 2010…

-the BOC forecasted that interest rates would skyrocket in mid to late 2010… they were wrong…

-Variable rate has historically been 1% to 3% lower than fixed rates.

Conclusion….Variable rate moves less often than Fixed rates… And yes, it’s more stable if you measure stability by rate movements… But there will be movement.. and maybe that’s what makes Variable rate a choice for only 25% of Canadians…  Us Canadians are a conservative bunch, or so our rep goes….  And by the way… The Banks would LOVE to have everyone take a 5 year fixed rate.. these are the most profitable mortgage products for them…. Keep that in mind…

Bank of Canada action not always prudent or correct…

Have to share this article giving us some history on the accuracy of the Bank of Canada (BOC)  interest rate forecasts…   This should get you thinking a little the next time you hear the  BOC forecasts…. Take a look at this Historical Rates chart.. look at the Bank Prime section…   You will notice some trends of rates hikes followed by rate drops…

We aren’t saying BOC rates will fall anytime soon… it’s clear the rate will go up…. but there is no straight line increase if you look back in history… Increases are followed by decreases…

-1992.. the BOC erred and raised rates thinking the economy was strong but they quickly retreated and reversed those increases after realizing it was too much, too soon.

-1995…the Quebec referendum year… remember that?  I do.. I bought a house that year… and interest rates went up 1.00% overnight after fears of a Quebec ‘YES’ vote was more than possible… but then rates dropped like a rock and remained low for several years…

-2000….another recession… the dot.com, dot.bomb error of hi-tech stock greed…  rates had climbed in 1998 and 1999 but dropped in 2001 and remained low once again…

-2008…the U.S. mortgage crisis… the worst Global recession since the Great Depression of the ’30s…. we saw BOC drop the rate to a modern-day record low…Bank Prime was 2.25%…

-2010…the BOC kept it’s promise to raise rates and increased the rate by 0.75% over a 3 month span to 3.00%….

-2011…. ?????  the BOC is expected to raise rates by as much as 1.00% this year, and another 1.50% next year, according to the RBC Economist…. Did the BOC raise rates too quickly?  Can our economy absorb these increases?   Questions that won’t be answered for a while…

It doesn’t mean you have to sit and do nothing

But this doesn’t mean you have to stand by and be a spectator.   By keeping informed with historical trends and understanding your own personal situation, you can be in control…. Understand where you fit in… Is Fixed rate better for you now?  Does Variable Rate still make sense for you?   Can you handle the potential increases that are coming?    A good Mortgage Broker can help guide you to the right answer… Remember, it’s your mortgage, your payment…your decision.

Fixed rates are heading up

Fixed mortgage rates are going up.   Already, TD Canada Trust has announced they are hiking rates by 0.25%.  Their new ‘best advertised rate’ is 4.39%.   They are also increasing their 5 year posted rate by 0.25% to 5.44%.  This posted rate is important if you are buying with less 20% down.   All Banks must qualify borrowers with the posted 5 year fixed rate, or the prescribed rate.

The bond market has climbed steadily over the past few weeks… 5 year Canadian Bond yield is at 2.74% today.  That’s an 8 month high.   The last time the bond was this high, the best 5 year fixed rate was 4.29%.

If you’re thinking of buying or refinancing, contact your mortgage broker and get a rate held.   Most Lenders offer a 120 day rate hold…. You can still get a 5 year fixed rate mortgage for under 4.00%.

On the bright side, these rate increases are a direct result of positive economic data that’s been coming out of Canada.  So although we don’t want to pay higher rates, we don’t want to have a weak economy either.

January credit card offers, new mortgage rules and Canadians buying U.S. real estate…

There’s been lots of reaction to the latest round of Mortgage rule changes… it’s been just over a week since the changes were announced and I’ve had some time to digest these changes but something just isn’t making sense.

At the same time, my December credit card bills have started to come in…..and because it’s January, I’m also getting those preapproved credit card offers…. I can even skip a payment with some of my credit cards… Isn’t that convenient?

This made me wonder….I decided to ask some simple questions like, “who will be affected?”… and “who will benefit?”.    Here’s what I have come up with…

First, here’s what a few Experts think…

Jim Murhpy, President of Canadian Association of Accredited Mortgage Professionals, says ‘Debt Fears are overblown’…. and here are the stats to back it up.   One stat that really stood out for me was that 79% of Canadians are in a 5 year fixed rate mortgage… that means 79% of Canadians are not at risk of interest rate hikes…

(as an aside, I still like Variable rate mortgages with their low interest rates and the historical data that clearly shows Variable outperforming Fixed rate….but if the govt wants us to be ‘safe and secure’ in our mortgage, then this stat should make the govt feel more comfortable)….

On January 10th, 2011, Bank of Canada’s own Deputy Governor, Agatha Cote, said that debt growth in Canada was slowing… So hold on here….On the one hand, we are spending like kids in a candy shop.. but on the other hand, our spending has slowed….  Mixed message?  … So what’s really going on?

I’m going to change the subject for a minute…. but read on as you will see this is all related….

Canadians are buying U.S. real estate like never before

There was another great article last week that showed Canadians are the largest foreign buyers of real estate in the U.S. accounting for 23% of all purchases? WOW!  And in border towns like Ellicottville, New York, a local real estate broker said Canadians accounted for 50% of sales….   read more here.

These stats and buying patterns are showing me something…  Our mortgage arrears are below 1.00%… this is an unbelievably low number.. Click here to see what our U.S. neighbors are saying…..   Hmmm, maybe we are borrowing wisely?  Maybe we are borrowing to invest?  Isn’t this a good way to spend our money?

If the govt wants to slow personal debt levels, then why not impose qualifying rules on borrowing unsecured lines of credits, credit cards and loans?   After all, mortgage balances are around $1trillion… but Credit card purchases totaled $260billion...!   Remember this number.

Who is really affected by the new Mortgage Rules?

Simply put, there are 3 new Mortgage rule changes:

1- Amortization maximum is 30 years, down from 35 years and down from 40 years in 2008.    2- Refinances will be reduced to 85% loan to value, down from 90% and down from 95% just 2 years ago.   3- Secured lines of Credit will no longer be insured, meaning the maximum is 80% loan to value.

1- 30 year Amortization.First time home buyers, Self-employed, contract employees are just some of the people that will be affected.. More Canadians are becoming self-employed or are on contract employment… This group of individuals doesn’t get a steady pay cheque… I would always recommend that this group take the longest amortization possible….Not to have a mortgage forever, but to ensure they have options and flexibility during times of uncertain income…  I would also recommend they set their payments based on a 25 year amortization or shorter… The longer amortization just means you could always reduce your payment to the lowest possible amount if and when needed.

This change will also make it a little harder for some Canadians to qualify for a mortgage… If you think this is good you need to remember last year, the government changed the rules that made it mandatory for all mortgages with less than 20% down to qualify at the Bank POSTED 5 year fixed rate (if you were considering a shorter term or a Variable Rate mortgage).  Many Banks are using this policy even if you have more than 20% down payment.   In effect, many of us are being forced into a 5 year fixed rate mortgage…. and which product do banks make the most profit on?   You guessed it… 5 year fixed rate mortgages…. read here for a little more insight.

Rental property Investors will also be affected.  Let’s face it, company pension plans are a thing of the past for most of us… (sometimes I wish I had a government job)…  So what’s someone without a company pension supposed to do?  RRSP you say?  Well, if your RRSP is anything like mine, then you are better off going to the racetrack or Las Vegas ….  At least you’ll have a good time spending it.   Real estate has been a proven winner over the last 10, 20, 40, 100, 300 years and probably longer….  The rents are usually indexed with cost of living and over time, the mortgage is eliminated giving you income and an appreciating asset.  Last year, the govt got out of lending on rental properties with less than 20% down…   It’s now a little harder to buy that investment property…

2- Refinances to 85% loan to value… Just one year ago, we were able to refinance our homes up to 95%… This options was not used by many…  Then it was reduced to 90%… now it’s 85%…   This won’t affect many of us but it will affect some..   Most people refinancing up to 85% or 90% were doing so to consolidate higher interest debt or to cover some emergency expense.   How is this helping to lower our personal debt levels?     This move will just force us to carry and borrow with those higher interest rate products… (are seeing a pattern here?)

3- Secured lines of Credit or Home Equity Lines of Credit (Heloc) are no longer available over 80%… This change really doesn’t affect many of us as most lenders stopped offering this product long ago and even when it was being offered, the costs were prohibitive.  This is a non-event.

Who will benefit from these new Mortgage rules?

So who really benefits from making it harder to qualify for a mortgage?   The answer is simple… Canadians will be forced to carry more debt on their credit cards, unsecured lines of credit and other high interest rate products… There are NO rule changes or policies in place for these products…  Don’t forget, credit card purchases totaled around $260billion last year…. In case you’re wondering, the total outstanding mortgage balances in Canada is around $1trillion.

The new rules won’t slow the credit seeker from getting another credit card and buying that new surround sound stero or hot tub or new car, etc..

So why did the government choose to make even further changes to mortgage rules?  The answers are obvious to me but I will let you decide.

Inflation rises to highest level in 2 years…but don’t panic

Latest figures show inflation jumped 2.4% in October according to Statistics Canada… compared with 1.9% in September.    The Bank of Canada aims for an inflation rate of between 1% and 3%.    Anything over 2% can trigger the Bank of Canada to take action… Usually, a hike in the Bank of Canada Rate, which affects Variable Rate Mortgages..

However, it’s no reason to panic.  A one month inflation spike probably isn’t enough for the Bank of Canada (BOC) to take drastic action.  It’s probably gonna take consecutive months of higher inflation or other events before the BOC raise rates again.  Most experts believe the Bank of Canada will not make any changes til next year.

Throw in some Global issues like Ireland’s’ debt and the Korean conflict heating up and you get uncertainty… Uncertainty means rates should stay low for some time…

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