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Posted Interest rates

Lenders chop rates again… 2.99%… and Variable rates at Prime less 0.35%!

Today we saw 2 announcements….   For the first time ever, we saw a 5 yr fixed rate being offered for 2.99%.    This is not a No Frills mortgage… so you don’t have to worry about minimal prepayment privileges, or restricted payout options, and no monkey business when it comes to penalty calculation….  You probably won’t see a lot of publicity about this because of the mainstream media was quick to promote the BMO NO FRILLS mortgage as the first 5 yr fixed mortgage under 3.00%….earlier this year.   But I can tell you, it’s a significant milestone.

And we also saw the introduction of the lowest Variable rate mortgage in almost a year… Prime less 0.35%, or 2.65%.   This isn’t one of those NO FRILLS Variable rate mortgages that is full of restrictions… you have all the regular options including being able to lock into the BEST discounted fixed rate at any time.

These 2 offers are very special…   They don’t come with hidden clauses or back door penalties, or exit fees.   These products are legit!

The driver behind the pricing is competition, the increased spread in profit margins and a slowing housing market..   The thirst to grow a business and keep the business on the books is going to see a lot of competition…. and the winners are us… the borrowers…

If you want more info on these rates or other mortgage related issues, call me anytime.

Steve Garganis

416 224 0114

 

 

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 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…

 

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….

Posted Interest rates

Canadians saved $2.7billion on their mortgage by refinancing or renewing this year.

Variable rate mortgages have been extremely popular.   A study by the Canadian Association of Accredited Mortgage Professionals (CAAMP) showed that 37% of Canadians took a Variable rate last year, compared 31% from the year prior.

And Canadians saved almost $2.7billion by renewing or refinancing their mortgages this year.   Wow, that’s a lot of money… maybe too much?   The banks have put a lot of pressure on borrowers NOT to take Variable… they’ve made it harder to qualify by getting the govt involved and having them qualify all new Variable rate clients with posted 5 year fixed rates…. And most recently, the Banks have jacked up their Variable rate pricing from Prime less 0.75%, 0.80% and even 0.90%, to Prime less 0.00% and even Prime PLUS 0.10%.

Watch for the Banks to hike fixed rates as they aren’t earning enough… or so they tell us…