Skip to content

Tag5 year fixed rate

Posted Interest rates

2.89% 5yr fixed rates are available… but are those offers legit…?

You’ve heard the saying, “there are no free lunches”…. or “if it sounds too good to be true, it usually is”.…  I’m not sure how these sayings got started but they probably came from a bad experience…  My favorite is, “the problem with things that are free, is that they cost too much”.…   These sayings can be applied to most things in life…   including your mortgage.

Recently, I’ve seen a growing number of websites and radio ads offering these so-called “great mortgage products” at 2.99% and now 2.89% for 5 yrs… A number of readers have asked me if these offers are legit?  Here’s what I tell them…. Hope you find this useful…

In short, the rates are real but the product offerings come with too many strings attached for my liking….. things like the rates are for CMHC insured mortgages only… or the rates are only held for 30 or 60 days….you can’t pay the mortgage off for the first 3 years…. limited prepayment privileges…..prepayment penalties are far higher than other mortgages….you lose your ability to negotiate a rate if you have to refinance the mortgage.

These product have, and can, end up costing you more in the end.   This is why you won’t see me promoting or advertising these rates.

A CLOSER LOOK AT WHAT THESE PRODUCTS ARE ABOUT

In trying to capture market share, some Lenders have created products with slightly lower rates… Ok, I like that part of it…. BUT, they come with inferior terms and restrictions…… and this is where you could end up paying big time, on the back-end of these mortgages.    You’ve seen my previous articles about $20k, $25k, and $30k in mortgage penalties….. This is what makes these products and other NO FRILLS mortgages a bad option…and why I refuse to endorse them.

Let’s face it, the first thing most of us look at is the price… If I said you can buy and iPad for $200, or a 65″ Plasma TV for $500, you would keep listening… In the case of mortgages, we look at rate… 2.89%….  But hopefully, you keep asking questions.  9 times out of 10, you would probably find out there is a catch….. Maybe you have to buy something else, or the make and model is older or of a very poor quality, or the sale was only for a limited time, or it’s a refurbished model, etc….  You get the picture…

In most cases, those offers are just bogus.   The headlines are there to catch our attention… They want to entice you…to get you in the front door or to make that phone call, or to click that link on your computer….The seller is hoping that either 1 out of 10 will not ask too many questions and take the product… or they will shift you into another product… The old bait and switch….  That’s how most of this type of advertising works.  It’s a numbers game…

And it isn’t any different with mortgages.  But the problem with mortgages is that we are talking about a very complex financial product.  A mortgage is a loan agreement, a legal contract that will bind you for 5 years, in most cases.   The loan is secured by your house.  Think about that… You are putting up your home as security… you better understand all the terms, obligations, limitations, restrictions, privileges….. most importantly, look at how much it will cost you to exit this product.

Here’s where I have a BIG problem with these flashy ads….  in most cases, the borrower doesn’t even know what questions to ask…  They can’t get all the required info in order to make an informed decision.     We saw a great example of this earlier this year when BMO offered their 2.99% NO FRILLS mortgage… only, they didn’t market it that way… they called it a Low-rate mortgage…   Quite a play on words.  They made it sound like they were doing us a favour by pushing people into these mortgages… but as my readers know, the limitations to this product can and will prove costly for a large number of borrowers….  which is why I gave that product a huge thumbs down.

For those seeking my opinion and advice, I suggest you take a good hard look at these offers…. ask questions…. you’ll probably end up being part of the “9 out of 10 group” that asked too many questions and saved themselves from a mortgage disaster.

Should you need my help or advice, feel free to contact me anytime.   steve@mortgagenow.ca or 416 224 0114.

Steve

Posted Interest rates

Wanna know where rates are going? Look at 2 yr bond yields.

Probably the most popular question asked is, “where are rates heading?”  Or “when will they go up?”   Let’s face it, if you have a mortgage or are invested in real estate, then you better know the answer or understand what affects rates.  After all, interest rates can make or break a housing market.

We decided to take a few minutes to explain how you can follow the indicators that affect interest rate movement….  We won’t make you a Financial Expert, but you will gain a better understanding of what affects rate movements…

My first suggestion is to stop paying so much attention to the news or TV… (apologies to my media friends)… but the wild headlines are there to grab your attention…  it’s not that difficult to understand…

Last week, the Bank of Canada met for the 5th time in 2012.   There are 8 scheduled meetings each year… (and by the way, this helps to keep rate movement and monetary policy more predictable…. the more predictable a Govt is, the more stable it’s economy is.)   The Key Rate is set during these meetings… this rate directly affects Variable rate mortgages…. No surprise, the Bank of Canada Governor, Mark Carney, kept the rate unchanged.

That means Bank Prime is still 3.00%.   And with more negative economic news from Greece, Spain, other parts of Europe, the U.S, and now Canada, it’s safe to say rates should remain flat for some time……(remember, bad economic news usually means rates will drop or stay low).

So the Bank of Canada’s Key Rate (also known as Target Rate or Overnight rate) directly affects Variable rate mortgages… but indirectly, they also affect Fixed Rates.   A better short term indicator to watch is the 5 yr Govt of Cda bond yield.   We watch this to see where fixed rates are headed in the short term… say, over the next few days or or few weeks.   A good long term indicator for Fixed rates is the 2 yr Gov of Cda bond yields.   Financial Experts  pay very close attention to this index if they want to know where rates are going in 6 months or longer.  And at present, the 2 yr yields are very low…..

Bottom line, rates should remain low for some time…   Not so hard to follow, right?

And not to confuse you, but historically, Fixed rates usually go up ahead of Variable rates…. so we need to watch Bond yields together, with the Bank of Canada’s Key Rate to gauge where rates are going…

Hope this helps… and as always, feel free to call or email me…

Steve Garganis

416 224 0114

steve@mortgagenow.ca

Posted 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 1 Comment on When opportunity knocks…open the door. Interest rates

When opportunity knocks…open the door.

It’s March, 2012.   How will you look back at this month in 5 years time?    There are certain dates in history that stand out for all of us.   Some are more personal than others, like the birth of my son, the day I met my wife, my first trip overseas, NHL pro hockey camp, etc.

And then there are dates where I look back at missed opportunities.

-October 1984, I had a chance to buy a waterfront lot on Balsam Lake in Ontario’s cottage country, for $22,000…. now selling for $400,000.   There was a new condo in east Toronto for $82,000 in September 1987…. now selling for $392,000….(and yes, I think I was 5 years old…Lol!)..

-Or how about that semi-detached house at Danforth Ave and Woodbine, in Toronto, for $175,000 in 1990….now selling for $500,000.    More recently, I could have bought a house for $320,000 in 2005, near the water in Burlington, Ontario…..that same house sold for $800,000 last year.

The point it, I think we will look back at March 2012 as the month when the Banks declared mortgage war against each other…  Only in this war, there is a winner… YOU, the consumer, YOU the borrower, YOU the investor.   We are seeing record low mortgage rates.   And they won’t last forever.  In fact, this mortgage war is probably going to accelerate interest rate hikes…  almost like starting a campfire with gasoline soaked wood… It’s burning red hot but it won’t last for long.

With interest rates are record lows, isn’t this the time to borrow?    A $300,000 mortgage will carry for $1196/mth.. and that’s with a 5 year fixed rate term.  Bond yields are climbing… 5 yr bond yields are up to 1.71%.. that’s up 30bps in less than a month… 5 year fixed rates follow bond movement… i think it’s safe to say, we should expect rates to climb in the near future… and the reason they haven’t moved yet is because of the Mortgage wars…

We are hearing the cries by the govt and some bankers, telling us not to borrow too much.  Personal Debt level concerns are plastered all over the internet and media.   But we aren’t seeing many articles telling us how to borrow and invest wisely…. borrow when rates are low instead of borrowing when rates are high… borrow when you qualify instead of borrowing when you don’t… borrow when you don’t need the money…   Isn’t that when Banks want to lend you the money?

We have just seen a draft guideline, Bill B-20,  entered in for review with a May 1st decision date.   These new regulations are aimed at tightening lending rules even further.. and this time it’s targeting Home Equity Lines of Credit..   That’s right, they want to make it even harder to qualify for these products and possibly make the repayment terms more strict…

Opportunity is knocking… answer the door..

Posted 2 Comments on BMO announces lower rate IF you take a shorter amortization! Interest rates

BMO announces lower rate IF you take a shorter amortization!

Have you heard the big news?   BMO lowers rate their best discounted 5 year fixed rate to 3.49%  to encourage Canadians to take an amortization 25 years or less.  They claim they want to encourage Canadians to pay their debt off faster…..  Sounds nice and in keeping with the Christmas spirit, doesn’t it?

Ok, before we get all warm-hearted and teary eyed, let’s take a closer look at what this really is.    First, this IS NOT the best discounted fixed rate in the market.   A good Mortgage Broker can get you 3.39% out there with no restrictions on amortization (even lower with some No Frills mortgage products).   We all want to pay our mortgage off faster, but choosing a shorter amortization only limits your future options…   My recommendation to almost all my clients is to take the longest amortization possible……

It’s not that I want you to have a mortgage forever, it’s about having options….  I always take a ‘what if’ approach….   Follow me for a minute…

Let’s say you had a $300,000 mortgage and you took this BMO 3.49% rate,  your payments on a 25 year amortization with be $1496.23/mth.   But if you took a truly discounted mortgage at 3.39% with a 35 year amortization, your minimum payment would be $1216.75/mth.   You could always INCREASE your payment to accelerate your amortization to 25 years or shorter.

Now, let’s say you lost your job, had some unexpected expense come up, or a financial emergency or just needed to lower your payments.   If you chose 25 year amort, then you are stuck with that payment.. if you chose 35 year, then you can always go back to that lower payment…    That’s the flexibility that we want.  It’s not about taking longer to pay, it’s about having the option to reduce your payment if needed.

LET’S NOT FORGET THE BANKS HISTORY WHEN IT COMES TO RATES

In keeping with the Christmas theme, Mr. Potter would be approve the Banks latest strategy.   In case you didn’t know, the 5 year Canada Bond is in record low territory…. hovering at around  1.31%… the 5 year fixed rates are priced from the bonds… the spread is normally around 1.25% to 1.40%… and yet today, the spread is 2.18%…. WOW!  and why?  TO MAXIMIZE PROFITS.   This is has nothing to do with wanting to helps Canadians. 5 year fixed rates should be under 3.00% but they aren’t, because the Banks want to maximize profits.

VARIABLE RATE PRICING IS AT 1990’s LEVEL

Variable rate pricing went from Prime less 0.90%, 3 years ago, to Prime plus 1.00% in during the October 2008 US mortgage crisis, to Prime less 0.75% just six months ago…. to Prime plus 0.20% today.    That’s right, Prime PLUS 0.20%.  Haven’t seen this pricing since the ’90s.  There are no fundamental reasons for this… it’s simply profit taking by the banks.. they are forcing us to take a 5 year fixed rate.   Sure, today’s 5 year fixed rates are at historical lows, so there is very little attention being given… but when rates go up, and they will in a few years, we will start to ask for more competitive products and better options other than a 5 year fixed rate….  (Can you see Mr. Potter’s grin getting larger?).

My advice… think about who your banker works for….and who your Mortgage Broker works for….