CategoryInterest rates

Posted January 2, 20131 Comment Interest rates

Personal Debt levels and Mortgage Debt levels

Unless you’ve been living under a rock for the past 4 years, it’s impossible to not know the Federal govt’s concern about Canada’s Personal Debt level. The media has covered this topic extensively. After all, bad news sells more than good news…..

Here’s some current stats from Statistics Canada that really gets my blood boiling!…. We now carry a total debt load equal to around 164% of our annual household income. That’s at an all-time high…. The govt is convinced that we are spending too much or our income towards real estate… They have made numerous changes to mortgage lending rules that make it much tougher to qualify for a mortgage. If there really is a problem, why is the govt focusing on low-interest rate products like mortgages?

Current mortgage rates are at around 3.00%. Current credit card rates range from 9.99% to 19.99%….personal loan and car loan rates range from 6.00% to 9.00% and up. Aren’t low-interest rate products better than high-interest rate products? We have not seen any changes to these non-mortgage debt products…. Who benefits from higher rates? Yup, your banker!… Continue reading “Personal Debt levels and Mortgage Debt levels”

Posted December 17, 2012 Case study

Fed govt, BIG SIX BANK’s pushed us into Fixed rates!…part 1 of 2.

VARIABLE RATE MORTGAGES WERE THE BEST OPTION

For years, I’ve promoted the merits of Variable rate mortgages vs Fixed rates. To me, it was a no-brainer. Historical stats showed that you would save over 1.00% on your mortgage, per year, every year (some years had savings of over 3.00%!). Do the math… That works out to $1,000 to $3,000 per year for every $100,000 of mortgage.

And for years, the BIG SIX BANKS, the Bank of Canada, the Federal govt and other fear-mongers pointed out that Variable rates fluctuated and your rates would change and possibly go up…

If you were able to block out these warnings, do a little research, then you may have been lucky enough to enjoy the huge savings that Variable rates gave us over the last 15 years… Fortunately, over 80% of my clients listened to my advice and chose Variable rate. But even at the height of Variable rate popularity, just 45% of Canadians were ever in a Variable rate product at any one time. Today, it’s less than 15%.

In 2008, the U.S. sub-prime mortgage crisis hit. Financial markets were in turmoil. New Variable rate mortgages were either pulled from the shelf or were priced so high as to make them an unattractive option (prime plus 1.00% with some Banks).

BEGINNING OF THE BANKS HIGHER PROFITS

The Banks actually liked this. After all, the most profitable mortgage product is the 5 year Fixed rate. Not hard to figure out. The lower the interest rate, the less the Bank’s make. This became a great opportunity for the Banks to reduce their Variable rate exposure… And so began the great campaign to force us into 5 year fixed rate mortgages. (by the way, these inflated Variable rate prices only lasted around 6 months…we’re not back to the good old days of Prime less 0.90% but anything at Prime less 0.50% or better is worth a look….it’s worth noting for the record that I still didn’t recommend 5 year fixed rates to my clients during this time… I recommended shorter term fixed rates ranging from 6 months to 3 years and then went back to Variable rate… history has shown that this was the right strategy).

Starting in late 2008, and continuing today, Bankers would call, email or write letters to their Variable rate mortgage clients to warn against higher rates coming… and they should consider locking into a 5 year fixed rate mortgage. There were many reasons given… a bad economy… uncertainty in the financial markets… or my favorite, a special rate offer (it was special alright! Lol!!)… And the media jumped in too. TV, radio, newspapers, major news websites…how many times have you have heard the warnings about rising mortgage rates??…or record personal debt levels?? This created an even higher level of uncertainty and fear… Mr. Potter would be proud!

Think about it… The Banks were strongly recommending that Variable rate clients go from a rate of 3.25% or better, and into a 5 year fixed rate of 5.50%!!? (November 2008). And the worst part about all this is that hundreds of borrowers listened and did it… and have regretted it ever since!!! Where’s your Banker now?…

watch for part 2 of 2… FED GOVT, BIG SIX BANK’S pushed us into Fixed rates!… tomorrow!

Getting a mortgage today? Speak with a Mortgage Broker…and think twice about sticking with your BANK…. you could just save yourself $thousands.

As always, I welcome your comments and questions. Let me know if I can help.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

Posted November 9, 201211 Comments Interest rates

O’Leary only wants Fixed rate mortgages…really?

CBC News did a report about Renting vs. Buying, earlier this week.. And it featured Kevin O’Leary and Amanda Lang, two well-known TV personalities….Ok, we covered Rent vs. Own in great detail just a few months ago… And I also talked about using your home as a retirement fund, earlier this week in my Baby Boomer 10 year retirement plan article.. But this isn’t what I want to talk about… I want to talk about some comments O’Leary made about Fixed Rates, during that report.

UNPOPULAR COMMENTS AGAINST O’LEARY

I’m taking a chance by speaking out against Kevin O’Leary. But I must speak up regarding something as important as this… So here it goes…

O’Leary is starting a new mortgage company….Congrats! I’m sure he’ll do well. He said his company would ONLY offer Fixed rate mortgages because Mr. O’Leary doesn’t believe ANYONE should be in a Variable Rate mortgage…. he went on to say that because Fixed Rates are so low, you would have to be insane to stay in a Variable Rate…Hmm.. well, if you are one of my clients then you know how absurd this statement is…

2008-09 MORTGAGE HISTORY LESSONS

Over 80% of my clients are, or have been in a Variable rate mortgage… Most of them enjoyed rates of Prime less 0.75% or better… some even had Prime less 0.90%..and for a while, they enjoyed rates as low at 1.35%!!! During the 2008-09 recession, we were inundated with TV and Media personalities telling us to lock into a 5 year Fixed rate mortgage because of the sub-prime mortgage crisis and stock market crash… You remember that? I do… and I recommended clients do the opposite.. take short-term mortgages until the dust settled on interest rates… This WAS NOT the popular advice… It was panic time…. but that’s when you need to remain calm and review the facts…

Fortunately, most of my clients didn’t listen to the media and followed my advice. I recommended several different products… 6 months, 1 year, 2 year, 3 year and even the short-lived 3 yr Variable rate… In ALL cases, it was the right product choice…. It was the best option at the time for that particular client…My clients have saved $$thousands each and every year through my advice!

(historical fact… Variable rate mortgages have been a cheaper way to finance your home in over 88% of time…Professor Milevsky study.)

TODAY’S STRATEGY

Unfortunately, new Variable rate products aren’t priced as well today…. This is probably that other 12% of the time….And although I am not recommending Variable rates today for most borrowers, it still might be the right product for some… To say everyone should get out of their Variable rate is just bad advice! The GOAL IS TO PAY THE LEAST AMOUNT OF MONEY TO OWN OUR HOMES!

My criteria for choosing Fixed over Variable depends on many factors but here are 3 things I pay close attention to:

1-Variable rate pricing not as attractive.. the best Variable rate today is Prime less 0.35% (3.00% less 0.35% = 2.65%)…..

2-Fixed rates are at historical lows (just over 3.00%).

3-the spread between 5 yr Fixed and Variable should be over 1.00%…today it’s less than 0.50%.

Add all of this up and it’s an easy choice today….I cannot recommend Variable Rate for most NEW mortgages….

THIS DOESN’T MEAN YOU SHOULD GET OUT OF YOUR VARIABLE RATE!!!

If you have a Variable rate of Prime less 0.75%, I would stick with that… that’s 2.25%… why start paying over 3.00%? There is no forecast for immediate rate increases… And this is where I am very concerned…. We have a very well known TV personality that comes out and says everyone should lock into a Fixed Rate mortgage…. I’m sure the BANKS would love to see you out of a 2.25% mortgage and into a 3.00%+ rate. I completely disagree with O’Leary. There is no ‘One size fits all’ mortgage. Everyone is different and has different needs… I’d be very careful about listening to anyone that wants to pigeon-hole all Canadians.

BEWARE THE TV EXPERTS… Just a final note…. How many times have you heard ‘Rates are going up soon’ in the last 4 years.? You must lock into a Fixed Rate… I hear it everyday…. and if my clients listened to these ‘Experts’ they would have been out of their Prime less 0.75% Variable rate and into a 4.00%, 5.00% or even 6.00% fixed rate mortgage! Those that have listened to the facts have done extremely well. There isn’t a crystal ball… it’s not magic, it’s simply viewing the mortgage landscape, current economic trends, monitoring inflation rates and paying attention to govt and policy makers… I really don’t watch the news or listen to any media or TV personalities. I just look at the facts and present them here.

As always, if you have any comments or questions or would like to know what strategy is best for you, give your mortgage broker a call.. or call me if you don’t have a broker. I’d be happy to help.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

Posted September 20, 2012 Case study

Rent vs Own…which is better?

Rising house prices could make you rethink buying a home.. Could renting be better today? With the average home price in Toronto around $500k and the National average at $356k, renting might look more attractive. And for certain situations, like short-term accommodations and retirement living, it does make sense. But I’m not convinced that renting is right for most of us.

Some simple rules of thumb to remember when buying real estate:

you should plan on owning the home for at least 7 years. This will amortize or spread out any associated expenses with the purchase or sale of your home.
buying for investment should be a long term play.. again, 7 years is usually long enough to take us through any economic cycle of ups and downs.
forgot buying for a quick flip. Unless you are a professional renovator with a deep pockets, don’t try to imitate people on HGTV (yes, it’s another 4 letter word we shouldn’t repeat in public).
don’t buy at your maximum debt servicing ratios…. stretching yourself thin when interest rates are at record lows isn’t smart.
speaking of interest rates…. make sure to qualify yourself with an interest rate of 5.00% or higher.. this is a more realistic rate than today’s 3.09%… just plan for rates to go up… when they do, you’ll be prepared…
we won’t get into buying a rental property here… it requires more explanation.. but for many, it’s an even better investment than buying your principal residence… a topic we will discuss at a later date.

Type in Rent vs Own or Rent vs Buy on google, and you’ll find several recent articles on the subject. This one, from the Financial Post, stood out…. it’s against owning. The article explains that you will be better off, financially, if you rent… They even give an online calculator to prove the point…. Okay, let’s take a closer look at this calculator… Ah, there’s where we have a difference of opinion…. Their calculator assumes you can earn an annual 7.00% Return on Investment outside of Real Estate… And they are using annual house appreciation rate of 2.00%.

Hmmm, how many people have made an average annual return of 7.00% in stocks, bond, mutual funds over the past 5, 10, 15 or 20 years??? Most the people I know are still looking to match the stock market highs of 2000 or recover their investments from the 2008 crash. And using a 2.00% annual appreciation rate for real estate? Come on, let’s get real! Try typing in more realistic numbers like 5.00% investment return and 5.00% house appreciation and see what you get… And that 5.00% investment return is being generous. Real Estate becomes the winning choice…

We also have to factor in the intangibles. Not having to worry about moving because your landlord is selling… and not having to move the kids…. and just plain pride of ownership… There is something to be said for owning your home.. People tend to care a little more about the home they own.

Here’s another article from the Globe and Mail that isn’t against owning but is advocating you save up a larger down payment. I like the philosophy. Wait and save… but don’t wait for house prices to go down… that just hasn’t worked… Timing the market is always a tough thing to do…So even if house prices fall over the next few years, you’ll probably end up spending more on your mortgage as these record low interest rates are expected to go up over the next few years.. Here’s a calculator I found through The Star’s Moneyville. I typed in some numbers using today’s averages… rents, house price, mortgage rate, inflation rate, etc…. the results showed buying would save you over $400,000 over a 25 year period. Try it out.. see how it would fit your situation.

Let me know when I can help.

Steve Garganis steve@mortgagenow.ca

416 224 0114

Posted September 5, 2012 Interest rates

Bank of Cda doesn’t change rate…U.S. Fed not to raise rates until 2015?

Bank of Canada announced they were keeping the Target Rate unchanged today, during their 6th of 8 regularly scheduled meetings for 2012. (This is not a recording..Lol!)

A more interesting topic is the U.S. Fed. There was an article last week that caught my eye. The article quotes the San Francisco Federal Reserve Bank president as saying he doesn’t believe the U.S. Fed will raise rates until 2015. And even if you don’t agree with that forecast, we must acknowledge that US Fed Chairman Ben Bernanke has stated he doesn’t forecast any increases until 2014.

Why is this important for Canadians to follow? They say when the U.S sneezes, Canada catches a cold. There’s a lot of truth to that statement. The U.S. is our biggest trading partner. History tells us we follow U.S. economic policies and trends.

CANADA MAKES IT’S OWN PATH

But something changed in 2008. The U.S. had a financial meltdown. The entire world was impacted and pushed into a global recession. Somehow, Canada came out of this with minimal damage. No housing crash. No Bank failures. No meltdown. In fact, many sectors our industry have flourished including our housing industry. We don’t have any mortgage default problem. Our unemployment rate is 7.3% compared with the 30 yr average of 8.4%. And our Banks are reporting $billion quarterly profits. We are the envy of the world….financially speaking.

CDA GOVT CONTINUES TO FOLLOW US GOVT

Still, the Cda govt continues to follow the U.S. Fed with regards to any rate increases or decreases. After all, we are still a very small economy compared with the U.S. and the rest of the world. The Bank of Canada has not increased the Target Rate for 24 months. Bank Prime currently sits at 3.00%. And many economists believe we won’t see any increase until late 2013 or even 2014. This leads me to believe mortgage rates will remain low for some time to come.

BUT WHICH MORTGAGE TERM SHOULD YOU CHOOSE?

The big question is which mortgage term to choose today… short or long? fixed or variable? The answer depends on you…. your goals, plans, financial strategy, risk tolerance, etc. Each of us has different needs… Product selection is very different today. There is an interested Variable rate product at Prime less 0.35% that has my attention. 5 yr fixed at 3.19% and 3.09% are still available… not a bad option for most of us…. My best advice is to get some advice. Speak with a qualified, unbiased professional. Speak with a Mortgage Broker. A Mortgage Broker doesn’t work for any one Bank.. they can offer a wide variety of products from a large number of Lenders….

As always, if you have any questions or comments, feel free to contact me.

Steve Garganis

steve@mortgagenow.ca

416 224 0114