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.