Skip to content

CategoryMortgage Tips

3 year fixed mortgage rates under 3.00%

Fixed mortgage rates are sitting at around 3.89% for a 5 year closed and 2.90% for a 3 year closed.  These are definitely attractive rates and are at or near historical lows…

Why?  The Bond market has dropped significantly over the past 3 months…. this has come as a surprise to many but not all…  The economic recovery isn’t as certain as we once thought… with mixed data coming out about our economy, this uncertainty will cause interest rates to stay low…

Once trend that has caught our eye is that lenders are now offering Mortgage Brokers a higher commission to sell a 3 year and a 5 year fixed rate product… and although that may attract more busy from some, I’m still recommending the Variable Rate mortgage, even though we get paid less.. it’s always about doing what’s in our client’s best interest.

Variable rate has been a proven winner over the past 25 years… I don’t think our economy is as strong as some would think….There has been improvement but we have a long way to go before we can say we are out… Hence the lower fixed mortgage rates… Variable rates will increase but it will be a slow, steady climb… with current Variable rates at 2.10%, Variable has a long way to go before it is not cost-effective.

Do bi-weekly payments save you money?

Back in the mid 90’s, there was a huge marketing blitz by the Big Banks that promoted making bi-weekly payments instead of the traditional monthly payments.   The sales pitch was that you could save huge amounts of money and pay your mortgage off much faster….save 4 or 5 years off your amortization…. Sound familiar?   Well, BI-WEEKLY PAYMENTS DON’T REALLY SAVE AS MUCH AS YOU THINK!

And I’ll prove it…. here’s the straight facts!

Let’s use a $200,000 mortgage with a 25 year amortization, a 4.00% interest rate and a 5 year term.

MONTHLY PAYMENTS $1,052.04.  MORTGAGE BALANCE AT END OF 5 YEARS $174,107.86.

Now let’s calculate bi-weekly payments and the balance remaining at the end of the 5 year term.

BI-WEEKLY PAYMENTS $485.55.  MORTGAGE BALANCE AT END OF 5 YEARS $173,885.20

So you end up reducing your balance by only $222.66 over a 5 year period... Not much of a benefit…you really aren’t paying your mortgage off sooner.

You may have seen options by your Lender or Bank to pay an ACCELERATED PAYMENT.   This simply means you increase the amount you pay every month…  The normal acceleration formula is to make one more month’s worth of payments every year but spread it out over the 12 months… I’ll show you.

LET’S USE THE SAME MORTGAGE OF $200,000, 25 year amortization, 4.00% interest rate and a 5 year term.

ACCELERATED MONTHLY PAYMENT $1,139.71.  MORTGAGE BALANCE AT END OF 5 YEARS $168,300.27.

You end up with a balance that is $5,807.59 lower at the end of 5 years…but don’t forget, you paid and extra month’s worth of payments every year during those 5 years, totaling $5,260.20.  So the net benefit is really $547.39….

Now let’s look at ACCELERATED BI-WEEKLY PAYMENTS of $526.02….the  MORTGAGE BALANCE AT END OF 5 YEARS IS $168,121.95.

The net benefit is a little better… $725.71…

BOTTOM LINE…. increase your payments and you’ll pay your mortgage off sooner…go with a bi-weekly ACCELERATED payment… it is a better choice.. bi-weekly or weekly payments are not a mysterious formula for paying your mortgage off sooner… It’s the INCREASED PAYMENT that helps you pay it off sooner…… After all, the best mortgage is no mortgage.

Didn’t I say to stay away from these Hybrid Mortgages?

Is it just me or are the Banks pushing these Hybrid Mortgages more these days…?  RBC recently reported that 40% of Consumers buying a home in the next 2 years would consider a Hybrid Mortgage…

Wow!  That’s much higher than any figure I’ve seen…  And it doesn’t reflect the current level of Consumers that currently have a Hybrid mortgage. (current figures are at 6% according the Canadian Association of Accredited Mortgage Professionals).

Globe and Mail’s, Chaya Cooperberg, took a closer look at this product…..Oh, and by the way, a Hybrid mortgage simply splits your mortgage ….. part fixed rate and part variable rate.  The theory is that you can benefit from today’s lower Variable rate but also secure a fixed rate to protect yourself from future rate increases….  Sounds great but these products are flawed and DO NOT work in the Consumer’s favor.

Here’s what you need to know:

-studies point to Variable rate mortgages as having the lowest rate of interest over the life of your mortgage.. they just save you money….(your rate fluctuates with Bank Prime…up and down)

-fixed rate mortgages buy you the security of knowing what your rate and payment will be…but the key word here is BUY. Your paying for this insurance with a higher average rate over the life of your mortgage…  (plenty of studies out there to show this).

-combining these 2 products in one mortgage will limit your options… there is a portability feature but it’s not straight forward and we’ve received different explanations on how this actually works….. these mortgages are not transferable to other financial institutions….

-many borrowers that are currently in these products have staggered maturity dates meaning they can never get out without paying some sort of penalty…….

A better alternative to getting part fixed and part floating, is to go with a Secured Line of Credit.. the Floating portion is Open to repayment without penalty…   Keep in mind these products are not portable to a new home and they are not transferable…At least you won’t get stuck with a penalty…

These Eggs do belong in one basket

Our parents taught us to pay our mortgage off quickly… Great advice, but they forgot to tell us to not incur other debt while we were paying that mortgage off….

A few years back, there was a study done about Debt Diversification by Moshe Milvesky, Associate Professor of Finance at Schulich School of Business Milevsky debt review.   The study showed that we were using the old rule of ‘Don’t put all your Eggs in One Basket’ and applying that to our debts.   And this is exactly what you should NOT be doing…

Investment diversification is GOOD, Debt diversification is BAD.   The study used $95,000 as a typical amount of diversified debt and $2,700 in idle cash…. the conclusion is that this combination results in a $1,000 loss per year by not managing debts properly.

If you have equity in your home and you carry a balance on your credit card, line of credit, or have a car loan or student loan, then you should consider utilizing the equity to borrow at the lowest rates possible… Residential Mortgages are always the cheapest form of financing…

National Home Ownership Week April 12-16

Genworth Financial is kicking off the traditional Spring housing market with a week of Online seminars…  Each day has a different theme….The goal is to educate prospective homebuyers and borrowers so they can make informed decisions….

The website is Homeownershiphelp.ca and here’s the schedule of events…

MONDAY
APRIL 12
TUESDAY
APRIL 13
WEDNESDAY APRIL 14 THURSDAY
APRIL 15
FRIDAY
APRIL 16
Credit Day Reality Check Homebuying Basics Test Your Knowledge Tips on Purchasing and Owning a Home
Learn the importance of good credit and how your credit history is established Find out how to reconcile what you want with what you can afford Understand the steps of home purchasing in Canada Take the Homebuyer 101 course Find out the fast facts that will help make your dream home a reality
%d bloggers like this: