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CategoryMortgage Products

Stock market drop and slight recovery.

Did you know that between July 22nd and August 8th, the TSX index dropped 14%?   Did you know that since August 8th, it has recovered 9% of that loss?  What a roller coaster ride…But there’s good news here…

So how will this affect your mortgage rates?

Fixed mortgage rates are priced from the 5 year Cda govt bonds.. Bond yields also dropped like a rock.. from 2.27% to 1.35% during that same time period…  that’s a 0.92% decrease.  A visit to TD Bank’s website shows us their ‘5 year fixed rate Special offer’ is 4.19%... no drop at all.   Call a Mortgage broker and you’ll see rates of around 3.49% today.

Sure, fixed rates are very low but they should be lower….  Fixed rates are usually priced around 1.30% to 1. 70% above the 5 year bond yield…  Why haven’t you seen mortgage rates keep pace with the bond yield drop?   That’s not hard to figure out… The Banks are maximizing their profits… same old story…Banks are infamous for hiking rates quickly and but slow to move when it comes to cutting rates.

How about Variable rates?

Well, not much to report there… The Bank of Canada meets 8 times a year.   Last meeting was July 19th.  Next meeting is Sept 7th.    You can forget about any immediate rate hike.   Economists have done an about-face with their forecasts…. We were expecting a rate hike this September or October… That’s now been pushed back to 2012… and there were even some rumblings about a possible BOC rate cut (but I’m not sure that’s gonna happen).

At 3.00%, the Bank Prime rate is still very, very low and makes borrowing very attractive…   Current Variable rate mortgages are priced at between Prime less 0.65% to 0.80%…    We may not see interest rates drop, but there is no reason for them to go up for the next little while…. Enjoy the low rates.

U.S. looking at Canada’s mortgage and banking yet again..

Found this article interesting….

Canada is the envy of the world when it comes to our mortgage and banking regulations.   This article in the Huffington Post questions why is there a 30 year fixed rate mortgage term and points to Canada’s mortgage and banking system as a better, more viable option.

In case you didn’t know, 30 year fixed rate terms are the norm in the U.S.   5 year Variable rate mortgages are the more common mortgage product around the world, including Canada.   200 U.S. Banks have failed since 2008… NONE in Canada… and in 1985, almost 3,000 U.S. banks failed but only 2 Canadian Banks closed their doors....

Go ahead Canada, feel good about yourselves…!

New Cashback mortgage offers are finally worth looking at!

The old Cashback mortgages

As a general rule, cashback mortgage offers have never really worked to the benefit of the borrower.  The Banks loves it when a borrower takes one of these deals because it costs the borrower more, earning a higher profit for the Bank.

A cashback mortgage is easy to understand….  The Bank will usually give you Posted Bank Rates with some cash back on closing… The cash back is depends on the term of the mortgage but it’s usually been between 2% and 5.5% of the mortgage balance.

If you have a $250,000 mortgage, the thought of getting $5,000 to $13,750 back in cash on closing sounds pretty good…  But let’s take a closer look…

If you do the math, this usually works out to around a 0.60% to 1.10% discount off Posted Rates.  Today’s posted 5 year fixed is 5.69%… that would give you an effective fixed rate of around 4.59% at best… Compare this with today’s wholesale discounted fixed rates of 4.19% and the REAL cost of getting that 5.5% cashback means you will pay $4,767 more over the 5 year term.

The New cashback mortgages

Recently, we came across an interesting offer from one of the major Lenders….  Thought we’d share the details…

-5 year fixed rate of 4.29% with a 2% cashback for mortgages under $400k gives an effective rate of 3.89%…and 3% cashback for mortgages over $400k gives an effective rate of 3.69%.

-5 year variable rate of Prime less 0.50% with a 2% cashback for mortgages under $400k gives and effective rate of Prime less 0.90%.. and a 3% cashback for mortgages over $400k gives and effective rate of Prime less 1.10%

Note: if you were to apply the cashback at the time of closing, the effective rates would be even lower.

There is a catch…These cashback offers are only available for mortgage refinances or transfers from other financial institutions… they are not available for purchases (we don’t understand why but that’s the deal)…  AND  you CANNOT pay these out early with giving back the entire cashback to the Lender…It is also a little harder to qualify for these products and the approval process is a much more involved and time consuming…  You will definitely want your broker to be involved in helping processing the approval…  (don’t be surprised if your broker has to charge you a small fee for their time…it will still be well worth it.)

I must say, even with these limitations, it  may still be worth considering.   It’s good to see some more competition in this segment of the mortgage market.

Taking a look at Reverse Mortgages

Retirement means different things to different people.   One thing we can all agree on is that we don’t want to run out of money…

Reverse Mortgages seem to be gaining some attention in the media again…. I thought it might be worth bringing or sharing some thoughts… here’s a recent article.

A Reverse Mortgage will give a lump sum of cash or monthly payments for life or a combination of both… it’s all tax free money…. Ok, that does sound good..

But upon closer inspection, we see that the interest rate is around 2% to 3% higher than what you can borrow money at for similar fixed rate products.  5.90% vs. 3.50%. Remember, you are borrowing money and NOT paying it back.. the interest just accumulates and compounds…   there are also appraisal fees, administration fees, legal fees… and if you want to sell your home and pay this off, you face huge penalties that could range from 11 months worth of interest to 4 months of interest….Yikes!

Another alternative would be to borrow a secured line of credit at Prime plus 0.50% with interest only payments…. currently, that rate would be 3.50%….

I remember when these products came out in the mid ’90s.. they were horrible… they have changed and rates are a little better, but my advice is talk with a qualified Mortgage Broker or Financial Planner before making any decision…

My last thoughts… I wouldn’t put my parents into one of these products…..

Taking a look at a 1 year and 3 year fixed rates

I’ve had some inquiries about taking a 1 year and 3 year fixed rate…and for good reason.   A 1 year fixed rate can be had for about 2.50% and a 3 year fixed rate is 2.90%.   This does make going with a shorter fixed term an attractive option if Bank Prime rate continues to increase.

Best Variable rate is around Prime less 0.65% or 0.70% for qualified applicants with some conditions….  that puts the Variable rate at 2.30% or 2.35%…

I like Variable rate mortgages for many reasons but these shorter, fixed terms can be a good alternative.. Make sure you understand all the terms and conditions… speak with a qualified Mortgage Broker.

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