April 25, 2011 § Leave a comment
There has been a lot of talk about high inflation rates lately (Bloomberg), and I think everyone is feeling the pinch. There have been questions floating around about how best to curb inflation rates, and the most common way to do so is to raise Bank of Canada’s overnight rate. This rate is most often used to curb short-term inflation, and Variable-Mortgage rates move whenever it does.
More recently the Prime lending rate – or overnight rate has been at historically low levels to stimulate the economy and encourage spending. Economists have been calling for an inevitable increase in the Prime/Overnight rate as the economy becomes more stable. There is some debate as to whether this will happen sooner than later, but for the time being the variable mortgage rates are providing consumers with considerable savings over the fixed rate.
Fixed mortgage rates are based on longer-term inflation predictions. If there is an expectation that rates should rise in the future, then the end result is higher rates for fixed-rate mortgage products.
While inflation is the key to determining interest rates in the future, there is always a difference of opinion among experts as to whether it’s about to surge upwards or remain the same for a long period of time.
What we’re seeing reflected today is speculation that inflation will continue to raise, hence a recent increase in the fixed mortgage rates. Currently, there is a 2% disparity between fixed rates (4.24% – 5 year average) and the variable rate (2.25% – 5 year average). This spread means considerable savings for variable-rate mortgage holders that are able to stomach the prospect of market volatility.
We don’t like to give one-size-fits-all advice, because everything to do with personal finance and mortgage solutions is subjective. What we will suggest is taking advantage of the low variable rates by increasing your mortgage payments so that your principal is getting paid down as quickly as possible. This way, when rates do rise you have already adjusted to the higher payment amount, and you have also built up a considerable amount of equity for that inflationary day!
Hopefully you learned a thing or two. If you would like a more in depth review visit the Move Smartly Blog for the original Post.
April 12, 2011 § Leave a comment
There have been whispers of Canadian’s obsession with real-estate becoming an unhealthy one (Canadian Business, April 25, 2011). How could home ownership be unhealthy when their owners meet the financial qualifications? It’s true that Canadians value home ownership dearly – nearly 70% of Canadians are home-owners, but that’s not necessarily a negative thing. The government has had a helping hand in making it possible ever since introducing CMHC in 1946 so that WWII veterans could more easily afford a home. There has always been a reasonable and just banking system in place which has protected against a US-Style housing market crash.
Why is there such a fixation with home ownership in North America? Well, there are a number of reasons: It’s seen as a sound investment; it’s a great way to build net worth over time (accounting for approximately 1/3 of one’s net worth) and of course there is everyone’s goal of having a mortgage/rent free retirement.
From 1999 to the end of 2010, the average resale home value rose 110%. There have been steady increases of 7% each year, and more than 10% between the years of 2002 and 2007. Think that’s just a fluke? It doesn’t seem to be slowing down any despite the recessionary mentality: the average resale price increase of 6% between January 2011 and February 2011 alone.
These staggering stats may explain the so-called “warped perception” of first-time buyers today. All they’ve ever known are easy mortgage approvals, low rates and strong growth. But despite the over-all mentality of society at large, the reasoning is there. For instance, the growth in the Toronto market was ranked #1 in North America, with February sales in the GTA amounting to one-fifth of the total U.S. housing sales in the same month. Calgary, Toronto and Vancouver dominating the top 5 of the “World’s Most Livable Cities” it doesn’t seem unreasonable that the value of real estate should continue to grow at a reasonable pace.
But those of the older generation remember the 1990’s, which were mostly flat by way of property growth – and they also remember sky-high interest rates. It’s them that are calling for tighter mortgage regulations and cooling of the market. It’s true that Canadians should try to save and diversify their assets without relying so heavily on their home equity, but many people lack the discipline to do so without the structure of mortgage payments. Don’t let the nay-sayers spook you off buying. Do so while it’s affordable, and while regulations allow for 5% down payment.
April 1, 2011 § Leave a comment
A number of publications have been giving the Canadian economy a bad rap (Wall Street Journal, I’m talking to you) and some of the figures may even seem to back them up. Debt-to-income figures are holding at 148%, but CIBC economist Benjamin Tal says the mortgage picture isn’t as bad as it looks.
Some speculators were of the belief that Canadian mortgage lenders gave out just as many sub prime ‘NINJA’ loans as our U.S. counterparts. To this, Tal states that “the quality of debt in Canada is totally different (than in the US before the crisis).”He goes on to say that “Subprime in Canada was less than 5% (of overall mortgage volume). In the U.S. it was 33%.”
Finally, someone who gets it! The Canadian mortgage lending industry was in no way dealing with the same lending products as the U.S., which is part of why we didn’t see a domino effect of Power-Of-Sale properties. The number of Canadians vulnerable “in terms of very low equity on their house and very high debt service ratio” is only 4%.
As for the type of credit Canadians have, it’s considered to be “good” (mortgage, student loan) debt more than “bad” debt (consumer credit cards, retail store credit cards). It looks like Canadians started easing off the debt too, with credit growth now at a 9-year low.
There is a downside, however. Canadians have gotten spoiled with ultra-low interest rates, and these rates have nowhere to go but up. When rates rise, “of course you will see some increase in defaults.” However, rates rise for a reason, Tal says—because the “economy is doing better.” When the economy improves, unemployment falls. “The unemployment rate, not interest rates, is the number one factor impacting defaults.” Higher rates will reduce consumption because people are forced to service more expensive debt.
And there we have it. Now can everyone stop fretting about household debt and adjust their perception to the broader picture? Fix unemployment and the wage disparity issues so that inflation doesn’t become unmanageable.
March 25, 2011 § Leave a comment
A lot of clients have a knee-jerk reaction to the 4-year term and insist on a 5-year mortgage. But when the rate is at 3.64% versus the going rate of 3.89% of the 5-year, a borrower stands to save a considerable amount of money!
Well, we’re here to tell you that traditional isn’t always better!
Here’s 3 Reasons why your next mortgage should be a 4-year fixed!
Reason # 1
You get a lower interest rate! This means lower payments, and more of them going towards the principal of your mortgage.
Reason # 2
By the end of the 4th year, you will have paid off more principal and you will have paid less interest. (See the chart below)
– Pay $750.00 more towards your mortgage principal
– Save $2425.00 in interest payments
– Total payments will be $1675.00 lower
Reason # 3
If there’s a chance you’ll break your mortgage in four years (people refinance every 3.5 years on average), a 4-year fixed might lessen or eliminate your mortgage penalty.
Given the above reasons, this 4-year rate special is a great boutique lender product. It likely won’t last long, so if a low fixed-rate mortgage is what you seek, get in touch.
Below is the figures mentioned above.
Please note that rates may change without notice and are subject to certain conditions. OAC, E&O.
March 7, 2011 § Leave a comment
By Amy Brown-Bowers ~ Bankrate.com
Nearly one out of every five mortgage borrowers in Canada took equity out of their home in the past year, with the average estimated amount being $46,000. Added up, that means that the total amount of equity “take-out” for Canadians during the past year has been $46 billion. These statistics, which come from a recent Canadian Association of Accredited Mortgage Professionals (CAAMP) report, reveal just how prevalent home equity loans are.
Home equity loans in simple terms
In the simplest of terms, a home equity loan is when you subtract your outstanding mortgage from what your home is worth and borrow some of the difference. The process of getting a home equity loan “is the same as getting a mortgage,” says John Panagakos, principal broker at The Mortgage Centre in Toronto, adding you complete a regular application, submit to a credit check, and provide income verification.
There are generally two types of these loans: a home equity loan and a home equity line of credit. The difference is that you can continue to withdraw from and pay back money on a home equity line of credit, whereas with a home equity loan, once you have used and paid back the money, the loan is gone.
Panagakos refers to the latter as a “collateral loan,” and says that the “preferred method is the equity line of credit because you can draw on it, pay it down, then use it again,” giving borrowers more flexibility.
Recent regulation changes
In the past, Canadian regulations allowed for what were called “high-ratio” home equity lines of credit. These loans were meant for people with expectations of higher income over time — for example, a newly graduated doctor — thus allowing them to borrow more than their current circumstances would typically allow.
However, Canadian Finance Minister Jim Flaherty recently announced changes to mortgage rules that directly apply to home equity loans. Until March 18, 2011, Canadians will be able to refinance up to 85 per cent of the value of their home but as of April 18, 2011, that will be further reduced to a maximum of 80 per cent. Thus, moving forward, “there will be no more high-ratio home equity loans available,” says Panagakos.
When are they useful?
According to CAAMP’s November report, the most common use for money borrowed from home equity over the past year was home renovations, accounting for $15 billion, or 33 per cent of the total national take-out amount; debt consolidation and repayment accounts for $13.5 billion, or 29 per cent of the total take-out.
“A home equity line of credit’s flexibility is its main advantage compared to other mortgages, and when used responsibly, offers the borrower a long-term mortgage and line of credit arrangement without having to re-qualify when they wish to tap into home equity,” says John Thompson, senior vice president of product development and strategic initiatives at MCAP Service Corporation, an independent Canadian mortgage and equipment financing company that recently launched a new home equity line of credit called Home Account.
“This is especially handy when paying for school tuition, a family vacation, home renovations, RRSPs or other financial investments, buying a car or even a cottage,” he says.
Thompson adds that this type of loan “tends to be for the more experienced homeowner who values paying off their mortgage faster if possible, but is aware that it’s a really efficient way to borrow money at a very good rate.”
Is it for you?
Panagakos offers some helpful questions to ask yourself when trying to determine if this is a good option for your family:
- Is this a short-term loan?
- Is it for an investment that will generate more revenue than the interest on the loan?
- Are you planning to use the money to renovate and possibly sell soon?
If you answer yes to these questions, a home equity loan may be worth considering.
Home equity loan red zones
While borrowing against the equity in your home can make good sense, be careful that you are not using a home equity loan to pay for daily expenses, such as groceries or utilities or other ancillary bills.
“[These] are not for the homeowner who believes that this allows them to use the equity in their home like a bank machine, or for default management purposes,” says Thompson.
In other words, carefully consider the purpose of the loan and have a specific investment or goal in mind when considering this product. Think of it as an investment tool, not as a way to fill gaps in your regular budget.
Amy Brown-Bowers is a writer in Toronto.
March 1, 2011 § Leave a comment
With every Bank of Canada Rate Announcement meeting, variable rate mortgage holders can be seen biting their nails with anticipation of a rate hike. For the fourth consecutive meeting, they have held the key lending rate at 1%. This in turn means that prime rate remains unchanged at 3%.
Some of the key factors in this decision are global inflationary trends and unrest in the Middle East, causing concern for rising oil prices.
The bank’s views on the strong Canadian dollar will be closely watched – and delicately tampered with as it runs-up to a near three-year high against the U.S. dollar. Considering the already strong dollar, a rate hike increase may discourage our U.S. counterpart to continue importing at the same rate.
Stretched household balance sheets that restrain consumption growth and residential investment are another deterrent for a rate hike at this point in time, but it is being said that there is expected to be a rate hike before the first half of the year is over.
For now, variable rate mortgage holders can breathe easy. When there is an eventual hike, it will more than likely not exceed a quarter-percent.