CategoryMortgage Trends

Posted April 10, 2012 Interest rates

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

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 you’re 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 April 7, 2012 Consumer Debt

Govt to cut Secured lines of credit to 65% loan to value…

Thursday’s speech by OSFI head, Julie Dickson, at the Toronto Board of Trade, indicates it’s a done deal. Secured lines of Credit will be capped to a maximum 65% of the value of your home. “…the guideline does set out some firm rules that all institutions will need to adhere to – specifically that home equity lines of credit – or HELOCS – can have a loan to value ratio no greater than 65%….”

WE’RE MAKING SOME CHANGES…. I MEAN, WE ARE PROPOSING SOME CHANGES…

It was only a few weeks ago that OSFI issued a Draft B-20 guideline, a guideline that is filled with radical changes to mortgage lending rules and policies. It was supposed to be up for discussion, with a May 1st deadline…. So much for discussion…. it appears the decision was made already according to Ms. Dickson’s speech today…. here’s a copy of that speech… April 5 2012 remarks by Julie Dickson.

90%, 80% AND NOW 65%???… WHEN DOES IT END?

Remember 2007? It was just a few years ago that CMHC was offering 100% loan to value, interest only payment mortgages. Back then it was good to borrow at these levels…. And HELOC’s could be had for up to 90% LTV. Over the past few years, the govt has tightened up mortgage rules in an attempt to reduce access to credit. Mortgages were amortized for 40 years, then cut back to 35 and now 30 years.. But now the govt believes they need to step in again and limit access to your equity by reducing the Loan to Value limit to just 65%…. I looked back to some historical lending policies and couldn’t find a time when the govt ever imposed a limit of just 65%. It is unheard of! And it’s going to have a big effect.

SO WHAT’S THE PROBLEM?

OSFI is finding a solution to a problem that doesn’t exist. I don’t think they realize that Banks have pushed borrowers into lines of credit for years now, as a way of providing easier access to the equity in their homes. Canadians aren’t buying new TVs or new cars or other luxury items… they are using the equity to improve their net worth by buying investments. Why is this a bad thing? Are our defaults up? NO! Then what is the problem….?

WHO WILL THIS AFFECT AND HOW?

If you are a self-employed person and ever tried to get a business loan from the Bank, then you know how difficult it can be to get an approval… but even if you do, the repayment terms and interest costs could be a hard stop. End result is that business idea could remain just that… an idea that never got launched. One of the more popular alternatives was to access cheap money by borrowing, against the equity in your home. Mortgages can be great but if you need to borrow, repay and borrow again, then a mortgage can have costly registration fees and penalties. But through a HELOC, the repayment terms are great and it’s also a much lower rate of interest than any business credit facility.

Borrowing to invest isn’t anything new. A HELOC allows you to access YOUR equity at preferred rates. How about buying a second home or a rental property? You could use the equity in your home to help with the purchase and HELOCs give a separate accounting which makes reporting to Revcan much easier.

How about borrowing for your child’s education? Are we going to force Canadians to refinance their mortgages in order access cheap money? I’m sure the BIG SIX Banks will love to see you break your mortgage and pay their infamous penalties.

END RESULT

Get ready, because you are about to see us pushed into higher interest, unsecured lines of credit (oh yeah, there wasn’t any mention of reviewing these lending policies… that’s because NONE exist!).

Which debt would you pay last…. a mortgage, a secured line of credit or a credit card or unsecured line of credit? Obviously, it’s the unsecured debts would be last on our list… we will always pay for the roof over our heads…. which is why the defaults are still very low and within very acceptable levels.

We are going to see many Canadians discouraged from investing.. they won’t want to go through the trouble of borrowing with a mortgage… Congratulations OSFI, you’ve made borrowing more expensive….you’ve made investing for our future tougher than it has to be.

The WINNERS… the BANK…. The LOSERS… you and me, the average Canadian…!

Posted March 22, 20122 Comments Consumer Debt

OSFI’s latest proposals will affect every mortgage and line of credit..

Earlier this week we saw a draft guidelines proposed by Brock Kruger from The Office of the Superintendent of Financial Institutions. Yes, more tightening of mortgage and secured real estate lending…… To put this in plain language, the proposal will affect almost everyone… it will change how mortgages and secured lines of credit are offered….. in shorty, I think this plan is trying put out a fire that doesn’t exist. There is no need for the changes.

Draft B-20 just goes too far….. they target mortgages but also Home Equity Lines of Credit (HELOC). Most of the media coverage on this has been somewhat neutral.. but finally we have seen one reporter question these proposed changes. This article by Peter Foster in the National Post was great… He questions why we need any more changes when our mortgage and banking system is the envy of the world…. There is no emergency, no arrears problem, nothing to indicate our mortgage lending policies are overly generous.

It should be noted that non-bank lenders will not be affected by this… leaving them as a potential winner if these guidelines become policy…

Here’s a link to the entire 18 page draft.

SUMMARY OF THE PROPOSED CHANGES:

–Cash back mortgages could disappear.. currently, one could get a mortgage for 95% of the purchase price at Bank posted rates and then get a 5% cashback. The cashback can be used as the down payment. ( I don’t see many reasons for applicants to buy with no money down so this isn’t a big issue for me)

-homes would have to be appraised at renewal time… this is just crazy… can you imagine if your property value dropped and the bank asked you to pay down your mortgage at renewal time or even worse, call in your mortgage? What’ s OSFI trying to do.. force everyone to take a 10 yer fixed rate mortgage? They have already made Variable Rate mortgages harder to qualify for…. what’s the matter, they don’t want us to pay less interest?

–HELOC’s would have to be amortized meaning NO MORE INTEREST ONLY PAYMENTS... this one will affect more households and business owners than the OSFI probably realizes… businesses use their homes to finance businesses… that’s been going on for decades… but they aren’t borrowing with no assets.. remember, they are putting up their homes as collateral.. if we start to make it even more difficult for self-employed to obtain financing, this will affect the economy almost immediately. But how about the 2nd or 3rd time buyer in their 30’s or 40’s that wants to tap into their equity for investments… ? Are we going to eliminate all interest only payment facilities?

-HELOC’s maximum would be reduced from 80% to 65% loan to value of your house…. and let’s not forget that just a few years ago we could have obtained up to 90% loan to value through CMHC insured products. Again, just another crazy idea and very radical change in just a few years… where is OSFI taking us?

–mortgages would require tighter debt servicing guidelines including fewer exception approvals by your lender…

Mr. Kruger, your intentions may be honorable, but you are not being practical or realistic. Why have you introduced these proposals? To reduce access to credit? To make it more difficult for Canadians to tap into their home equity? To make it tougher to buy a house? Whatever you think these changes might do, I can tell you, as a 22 year mortgage industry veteran and industry insider, that these proposed changes will just shrink our economy, force us to take longer fixed rate products resulting in even higher mortgage penalties for the Banks… It will force us to tap into our credit cards and unsecured, higher interest credit facilities.… It will force business owners to pay more for raising capital… it will discourage investors….

Give this one a rethink… you are searching for a solution to a problem that doesn’t exist.

Posted March 8, 20124 Comments Interest rates

BMO NO FRILLS mortgage 2.99% is back… but please don’t read the fine print…

Ladies and Gentlemen, here’s a quote from Mr. Frank Techar, head of BMO’s domestic retail bank as published in The Financial Post “We believe these products will allow our customers to borrow smartly,” I couldn’t agree more… After you spend some time reading the product details, you are sure to turn around and run.

BMO’s NO FRILLS mortgage is back…2.99% for 5 yrs fixed and 3.99% for 10 yrs fixed until March 28. Both come with the same restrictions and limitations as before… We give this product a BIG THUMBS DOWNS! We recommend you stay away from this type of product.

Even thought I don’t like the product, I do like seeing these product announcements… they create a buzz and get competitors to react. It’s great for business.

First off, let me say, there are LOWER unadvertised rates out there…you can get another NO FRILLS 5 yr fixed at 2.95% and a REGULAR 10 yr fixed for 3.94%…..Now that I have your attention, I strongly recommend you read the details before making a decision…. mortgages can be complicated. Don’t make the wrong a decision.. speak with a Mortgage Broker.

What makes this product different from their regular line of mortgages are the restrictions and limitations. In January, BMO made headlines when they first announced this so-called ‘special offer’. It’s special alright… READ THE PRODUCT OVERVIEW… In January, I warned against taking this product…. my warning has been reactivated…. Once you read the fine print, you will realize this product is not suitable for most of us..it’s just a lot of smoke and mirrors trying to get you in the front BMO door.. a good marketing ploy… and I’m sure they’ll gain market share because of it. But let’s make sure you understand the fine print…

YOU STILL WANT THAT BMO NO FRILLS RATE?

But let’s say you’ve read all the fine print and still want this product… I’ve got news for you…. There are BETTER PRICED NO FRILLS PRODUCTS…. As a Mortgage Broker I have access to better unadvertised rates… Only problem is, I don’t have a $500million advertising budget… So I have to rely on providing my clients with good advice…Fortunately, my good advice has served me well and 95% of my business comes from repeat clients and referrals.

MY ADVICE

No Frills products came out around 8 years ago and my advice has been the same. DON’T TAKE these products. If you do, chances are you will not come back to me as a satisfied client. I can kiss your future business and future referrals good-bye. And I can’t afford to do that. That’s why you’ll NEVER see me promote or recommend these products. Yes, I have access to them but I’m going to do everything in my power to steer you clear of them.

WHAT’S AVAILABLE TODAY

Interest rate is probably the most important part of a mortgage but it’s not everything. Did you know that there are excellent 5 year fixed rate products hovering between 3.19% and 3.29%? and 10 yr fixed rates of around 3.94%? Why are these better? You don’t have to give up your options. You don’t have the restrictions of a NO FRILLS product, like BMO’s ‘low-rate mortgage’. You have full prepayment privileges.. you can payout the mortgage without having to sell your home.. you can refinance with any lender and not just your original lender… meaning you will be able to negotiate a competitive rate should you need to refinance. On average, Canadians refinance their mortgage every 3 years… This happens for a number of reasons.. selling their home, debt restructuring, family issues, work issues, etc…. Mortgage penalties charged on these NO FRILLS mortgages can be outrageous… we’ve seen penalties of up to 14, 16 and even 20 months worth of interest… Don’t put yourself in that situation…

Get all the facts and then make a decision.

Posted March 5, 20122 Comments Mortgage News

Mortgage penalty rules change… finally.. well, sort of…

The Federal govt announced some changes to protect Canadian Consumers… including rule changes to credit cards and mortgage prepayment information. Here’s a link to the entire news release.

For our purposes, we are focusing more on the mortgage prepayment announcement. Here’s a link to that portion of the news release.

There are 5 Elements to the Code of Conduct for Federally regulated institutions. The changes must be implemented within 6 to 12 months. In short, the new Code of Conduct rules will require these lenders to provide clear disclosure on how penalties are calculated, along with online calculators and access to knowledgeable staff that can be contacted through a toll-free phone. Continue reading “Mortgage penalty rules change… finally.. well, sort of…”