CategoryRate forecast

Posted May 28, 2013 Interest rates

5 yr Bond yields up significantly.. expect fixed rates to go up..!

5 yr Govt of Canada bond yields are up over 30bps in May. We should expect fixed mortgage rates to increase if they hold at this level. If you are thinking of buying, refinancing or if your mortgage is coming up for renewal, I suggest you contact your mortgage broker and get some rates held. This could be the beginning of the long-awaited mortgage rate hikes.

There is another chart you should look at if you want to see where Fixed mortgage rates are headed over the next 6 months. The 2 year Govt of Canada bond yields are a good 6 month indicator of where rates are going…. and this chart shows the 2 year bond yields jumped over 25bps in May.

We’ll report any changes as they get announced.

Your best interest is my only interest.

As always, I welcome your comments, calls and questions.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

Posted March 27, 2013 Consumer Debt

BMO caves in to Federal govt pressure and raises mortgage rate.

It was bound to happen. BMO announced their so-called ‘low-rate’ (NO FRILLS) 5 yr fixed rate mortgage would be increasing to 3.09% from 2.99%. This comes shortly after the Federal Minister of Finance, Jim Flaherty, said that he called BMO and asked them to pull their 2.99% ads. Last week, the Minister’s office asked Manulife Bank to withdraw their recent ad promoting a similar low rate.

While, 2.99% isn’t the best rate today, it was the lowest advertised rate from the BIG SIX BANKs. It was somewhat symbolic. Of course, Mortgage Brokers have access to even lower rates through the wholesale mortgage market, but these lenders don’t have the deep advertising pockets that BMO or the other BIG SIX BANKs have. So the publicity surrounding this rate and the increase will get much more air-time. You can actually find full-featured 5 year mortgages at 2.89% today, through a good mortgage broker (a word of warning.. I’ve seen lower rates offered, and I have access to these products… but these products are not full-featured and come with some limitations that make them less attractive… just be careful when choosing your mortgage and your mortgage broker)… Continue reading “BMO caves in to Federal govt pressure and raises mortgage rate.”

Posted September 25, 20121 Comment Mortgage Rates

Listings down, prices up…. housing bubble?

Latest housing stats show listings are down, sales are down… but prices are up, only slightly…. and houses aren’t on the market as long. They are selling faster. Doesn’t sound like a bubble to me. More like a soft landing.

This is exactly what the govt had in mind when it changed mortgage rules a few months ago and made it tougher to qualify for a mortgage. It’s still too early to say if these changes are just right or went too far….. We’ll need another 6 months or so to see the full effect. Best guesses are that the housing market could slow by 5%. But I haven’t seen that happen… In the Greater Toronto area, we are still seeing multiple offers and sales go above asking price…. The interesting stat for me is the fewer number of sales… We’ll be watching that stat… fewer sales over an extended period of time will stop any price increases…

This also means we should expect interest rates to remain low. The Bank of Canada will be under less pressure to raise rates with a flat housing market. Throw in the U.S. Fed’s announcement last week that they were going to keep rates the same until 2014-15, and we have the perfect setting for low rates.

RECORD LOW INTEREST ARE STILL HERE…. WHY AREN’T WE TALKING ABOUT THIS?

Speaking of low interest rates… Here’s some advice… before you put your plans to buy on hold, you should remember that we are still enjoying historically low interest rates. 5 year fixed rates at 3.09%… Variable rates at 2.65%..!! This is a fact that so many of us tend to ignore…. maybe it’s just too boring to talk about. I’ll make it more exciting…

A $400k mortgage will carry for $1912/mth based on today’s 3.09% 5 yr fixed rate…….Wanna wait for house prices to fall and save some money? Ok, but you should also expect interest rates to rise… lower house prices are caused by higher interest rates and higher unemployment… We don’t expect higher unemployment so we must attribute any house price drop to a rise in interest rates……a look back at the last housing crash in 1989 showed interest rates went up to 11% and 12% just before the crash….. make sense so far?

This is where so many of us stop thinking or analyzing…Cashflow and affordability are probably just as important or more important than rate, mortgage balance, purchase price, etc… if you aren’t comfortable with the payment, you will run into problems…. By the way, affordability is still VERY good according the RBC affordability index.

REAL MORTGAGE MATH SHOWS TRUE COST OF WAITING TO BUY

Let’s continue….Let’s say rates go to more normal levels… we’ll use 5% interest rates.. That same $400k mortgage will cost you $2326/mth.…. and if you wanna adjust the mortgage size by $40k because house prices should fall 10%, okay… a $360k mortgage at 5% will cost you $2094/mth... That’s still $182/mth more… and let’s also not forget, that you may have lost 1, 2, 3 or more years of not paying a mortgage down…. Did you know you will pay your mortgage down by around $10k per year in the first 3 yrs alone?

Real Estate isn’t always a great investment, but it usually makes more sense to buy, hold and enjoy, than it does not to buy and rent…. And with interest rates at record lows, it’s even easier to make that recommendation. Stop listening to the pessimist that say the sky is falling or the world is ending… If we listened to them, we would be renting for the last 10+ years… for that’s how long they have been saying house prices are inflated and need to drop…..

As always, if you aren’t sure where you fit in or what’s best for you, feel free to contact me to discuss… Your questions and comments are welcome.

Steve Garganis

steve@mortgagenow.ca

416 224 0114

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 March 23, 2012 Interest rates

The Star reports BMO suggests it’s time to lock into fixed rates…. well, maybe..

I had a discussion with The Toronto Star’s Susan Pigg about Fixed and Variable rates. Click here to read my comments in this article.

In short, BMO Captial Markets says it’s time to lock into a Fixed rate…. Well maybe, but I would caution anyone that had a BMO variable rate mortgage to think twice about locking into BMO’s well publicized 2.99% 5 year NO FRILLS mortgage. This product has limitations and restrictions that make it impossible to get out of the mortgage without selling your home. There are better options out there… you can get a great rate without sacrificing your options and privileges.

You also have to factor in the infamous BIG SIX BANK penalty calculation. We’ve written about this before. This could cost you dearly should you wish to refinance or have to pay the mortgage out before maturity. We have seen numerous cases of Bank prepayment penalties adding up to 12, 14, 18 and 20 months worth on interest. That’s right, 20 months worth of interest. Don’t get held hostage by your mortgage provider.

If you have a Variable Rate mortgage that is price at Prime less 0.50% or lower, I would stick with it… If you are higher than this or if you mortgage is coming up for renewal, then you should consider a Fixed Rate mortgage… And the only reason to consider Fixed rates is because they are priced so close to what a Variable rate could be had for today… Best Variable is around Prime less 0.25%… that’s 2.75%. Best 5 yr Fixed with ALL FRILLS is around 3.19%…

But before you make any decision, please speak with an unbiased advisor, like a mortgage broker…. Find out which product is right for you… Everyone is different and we all have different needs. There are so many unadvertised specials these days…. Your Mortgage Broker can access these products and also help explain the differences in penalty calculations and why this should be looked at more closely, even it you don’t think penalties apply to you…