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Good news about higher rates…. it means lower prepayment penalties.

If you tried to break your fixed rate mortgage or refinance in the last 16 months, then you probably found out the hard way the Big Six Banks and many other mortgage lenders (bu not all) calculate the penalty in one of two ways….

3 months interest penalty or Interest Rate Differential (IRD).   Most mortgages fell into the IRD category… how does this work?  Each Bank seems to have their own formula and I could find only one that posts the formula online….. TD Canada Trust’s formula is similar to most Banks…  I’ll give TD Canada Trust credit for posting this calculator online….at least borrowers can go here and figure out the cost of early prepayment… take a few moments and calculate how much your penalty would be…

Here’s an example:  $250,000 with 3 years remaining at 5.50% and where the branch gave you a 1.25% discount at the time the mortgage was first arranged…equals a penalty of $14,250. That’s equal to 12 months interest.…. Try the calculator yourself to see what your penalty would be….

The good news is that as interest rates climb it now becomes worth looking at getting out of the higher fixed rate mortgage products…..(probably a great time to be looking at variable rate mortgage with rates as low as 1.70%)

CIBC Economist forecasts for low mortgage rates through 2011

Here’s some good news to end the week…

CIBC’s Avery Shenfeld was quoted as saying interest rates would remain low through 2011… hey, that’s a different message from what we’ve been hearing lately… complete article here..

CIBC has a good history when it comes to forecasting rates…  And I think his forecast makes a lot of sense…

Some of the fundamentals for the forecast:  an expected low inflation level, mixed in with 20% lower overall Canadian output compared with the peak of 2008…end result is less pressure for the Bank of Canada to raise rates as much or as quickly as we once thought…

But there are more factors that I think will cool our Economy somewhat…. HST coming in July… New Mortgage Rules coming into effect in a few weeks….continued slow Global recovery…. continued slow U.S. recovery…

Lower rates for longer period of time?   Hmmmm…wonder how the media can turn that into a negative story….(sorry, couldn’t resist the sarcasm).  Yes, it’s GOOD time to borrow money.. don’t let anyone tell you otherwise… these are historical lows….Enjoy!

(but before you go… It’s important to point out that Experts are expecting the Bank of Canada to raise their rate in June or July…. but that’s NOT a reason to panic or get nervous.. the Bank rate is at 0.25% and our Bank Prime is at 2.25%…  these are both RECORD lows…we’ve never seen rates this low…..we must expect increases to come)

Historical rate trends favour variable rates..

Sometimes it’s just easier to see the numbers on a graph.. Here are a few updated graphs from Firstline Trust… Firstline Trust Historical Rates February 2010… Notice the spread between the Bank Prime rate and Fixed Rates… the spread is usually around 1.00% to 2.00% in favour of Variable rates.

Variable rate mortgages have outperformed Fixed rates in over 88% of the time…. here’s a great study by Professor Moshe Milevsky of Schulich School of Business… Milvesky variable rate 2008.    And here’s an article today by the Canadian Press that comments quietly, that Variable Rate should still be considered…

Hey, by the way… did I mention that we are still in historical rate territory?  If you look back at historical rates, you will see that it’s still a GREAT time to borrow money… Fixed rates in the 4.00% range… Variable rates still under 2.00%…  Doesn’t sound too bad to me…

TD and RBC raise rates by 0.60%.

TD and RBC have increased their 5 year posted mortgage rates this morning. We can expect others to follow. This comes as no surprise as the 5 year Bond Market increased to 2.87% causing the margins to shrink.

This is probably the beginning of several increases to come over the coming months. If the Economists are right, then we will see these types of hikes followed by a pause to see how the economy reacts.

We will be paying close attention to inflation, unemployment and the $Canadian dollar.

Fixing or locking in your rate may be an option for some but variable rate mortgages are still around 2.00% below 5 year Fixed Rates.

I’m still a fan of variable rate mortgages. I just think that they are a better product. But hey, that’s just me. We are all different and have different needs. Always talk to a Mortgage Broker to get your needs evaluated.

Don’t get trapped with dumb Bank ads…

Watching the Olympics the past few weeks meant I had to endure watching tons of RBC commercials… I normally reach for the clicker and change channels but gave up after they kept popping up every 10 mins.

One commercial in particular really bugged me… have you seen this one? The young couple are looking at a house with an old kitchen.  And then their RBC Mobile Mortgage Specialist suggests they split their mortgage … “part variable and part fixed…  to save money.”

Ok, can anyone tell me what that means?  ‘…To save money'”.   So splitting your mortgage will save you money?  Really? How? Who says?  Show me statistical data to support such a claim…

I remember that when these split mortgages became available at the TD Bank (I worked there in the 90’s), it was great idea to reduce how much business would leave the banks… Ask anyone that has been in a split mortgage what happened when it came time to renew the 2 split portions…you lose your leverage to negotiate the rate because you cannot transfer your mortgage out until both maturities match….

The result….you get whatever rate the Bank wants to offer at maturity….  BEWARE…. this is bank Kool-aid again… I don’t drink it…

Here’s another recent article about Bank commercials from Ellen Roseman of The Star.  This ties in with the bank ads portraying many of us idiots…

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