|Variable or fixed? Both options have merit|
|Thursday January 28, 2010 01:49 PM|
January 28, 2010
By Rob Carrick
From Thursday's Globe and Mail
With a 10-year mortgage, you're entirely insulated from the coming cycle of interest rate increases
Whether you prefer to go fixed or variable with your mortgage, there are developments you need to know about if you want protection against rising rates and ways to outsmart your bank.
Let's start with fixed-rate mortgages, where we continue to see borrowing costs at close to historic lows. Most people go with a five-year term, but there's a case to be made for choosing terms of seven or even 10 years.
Rubbish, you savvy borrowers are no doubt saying. The premium to lock in for seven years is too high to make it worthwhile.
"There's not a right or wrong choice," replies Peter Majthenyi, a mortgage planner with Mortgage Architects in Toronto. "It's capturing the temperament and risk tolerance of the client."
These days, those of Mr. Majthenyi's customers who prefer a locked-in rate are commonly going with 10-year mortgages at 5.3 per cent. That compares with his best rates of 3.79 per cent for a five-year mortgage and 1.95 per cent for a variable-rate loan.
Some homeowners can't get comfortable with the idea of paying such a large premium to lock in a mortgage for a decade, Mr. Majthenyi said. But there are cases where it makes sense. Example: People who are buying a house in today's hot market and want some cost certainty as they take on a mega-mortgage and look ahead to years of rising rates.
With a 10-year mortgage, you're entirely insulated from the coming cycle of interest rate increases. Over that period, Mr. Majthenyi notes, your income will rise and you'll pay off a lot of the interest on your mortgage. At renewal time, you should be in a good position to make higher mortgage payments if need be.
The 10-year rate of 5.3 per cent seems high in comparison with current five-year rates, but it's reasonably attractive if you look at the past decade. The average five-year rate posted by the big banks over that period was 6.78 per cent, according to Bank of Canada data. If we discount that rate by 1.5 percentage points, we get a real-world average, five-year rate of 5.3 per cent.
There you go: 10 years of rate certainty at the cost of five years' worth over the past decade.
To give the other side of the argument about long-term mortgages, let's hear from mortgage broker Jim Tourloukis of Advent Mortgage Services in Unionville, Ont. He points out that the higher rate for the 10-year mortgage would potentially cost hundreds of dollars more per month.
"That's a big insurance premium to pay," he said. "Peace of mind is important, but you can get that with a five-year mortgage."
Worried that you'll have to renew at much higher rates in five years' time? Mr. Tourloukis said you can work around this by jumping into a one-year mortgage on renewal.
As the economy slipped into recession, we saw short-term mortgage rates at roughly the same level as five-year mortgages. But it's more typical for there to be big savings in a one-year term. These days, for example, Mr. Tourloukis is advertising a one-year rate of 1.99 per cent, and a five-year rate of 3.74 per cent.
Now let's talk strategy for people with variable-rate mortgages, specifically those who took out their loans early in 2009. The financial crisis was still raging back then and lenders were charging the prime rate plus a markup of as much as a full percentage point for variable-rate mortgages.
You can now get a rate of prime minus 0.1 to 0.3 of a percentage point. The net result for some borrowers is that they could chop their rate by a full percentage point if they were to break their current mortgage.
Mr. Tourloukis said it can be cost-effective to do this, thanks to a quirk in mortgage fine print. The penalty for breaking a variable-rate mortgage is three months' interest - period. With fixed-rate mortgages, lenders charge the greater of three months' interest or an "interest rate differential" (IRD) that compensates them for interest lost as a result of you breaking your mortgage.
Lots of people have tried to break existing mortgages and been deterred by astronomically high IRDs. Mr. Tourloukis said it's plausible that someone who took out a $300,000 variable-rate mortgage last May might face a penalty of something like $2,200.
What are the potential savings if you reduce the rate on a $300,000 variable-rate mortgage taken out last spring to current levels? Close to $2,000 per year, assuming you make 26 biweekly payments. With a five-year term, you could be looking at more than $6,000 in cumulative, after-penalty savings if you make your move now.
|Canada Mortgage Bonds 101|
|Wednesday January 27, 2010 10:45 AM|
Canada Mortgage Bonds (CMBs) are debt securities fully backed by CMHC that provide investors with a return that’s better than government bonds. CMBs are important to the Canadian housing market, because they provide vital liquidity to keep the housing market moving.
The amount of debt outstanding under the CMB program has increased by 20% over the last year (mid-August 2009) to $168 billion and attracted international investor support, which suggests continuing investor confidence in the Canadian residential real estate market.
Here’s how the process works:
Lenders originate mortgages
Lenders aggregate a group mortgages (also known as pools) for the purpose of selling them to investors
Lenders sell these pools as mortgage-backed securities (MBS) to the Canadian Housing Trust (CHT), a CMHC-run entity
The CHT sells Canada Mortgage Bonds (CMBs) to generate funds to buy the lenders' mortgages
The CHT uses the MBS cash flows to make interest payments on these CMBs to investors.
The lenders take their proceeds and re-circulate them again as new mortgages
Because CMBs are fully guaranteed by the government, investors demand less interest on CMBs. That lowers the cost of funds for lenders and thereby lowers the cost of mortgage financing in Canada.
|Research shows Canadian mortgage market can manage risks|
|Monday January 25, 2010 09:36 AM|
New data collected by CAAMP indicates homeowners are borrowing less, not more, than they can afford to borrow
TORONTO, Jan. 14 /CNW/ - New research using data collected by the Canadian Association of Accredited Mortgage Professionals (CAAMP) from its corporate members strongly suggests that Canadian mortgage lenders and borrowers, including first time home buyers, are being extremely prudent with their borrowing and lending.
Last month, CAAMP surveyed members who issued more than 40,000 mortgage loans totalling $10 billion, which were funded during 2009 (the data is for home purchases only and excludes renewals or refinances of existing mortgages). The dataset represents about one-sixth of total mortgage activity for home purchases in Canada. The research is published in a report titled Revisiting the Mortgage Market - risk is small and contained.
Key findings include:
- 86 per cent of these home buyers chose fixed rate mortgages. This
share fell late in the year as variable rates became more attractive
(at 2.25 percent compared to 4 percent for fixed rates)
- Among borrowers who chose fixed rates, a significant number opted for
longer terms - less than 5 per cent chose terms of two years or less.
20 percent took three year terms, 5 per cent four years, leaving 70
percent with a fixed rate for five years or more
- The vast majority of people who took out their first mortgage last
year borrowed less than they could afford to, as their Gross Debt
Service ("GDS") ratios are far below allowed maximums, even at the
higher interest rates that are used to qualifying them for their
- The high share of fixed rate mortgages and low GDS ratios for home
buyers are contrary to perceptions that consumers and financial
institutions are taking on more risk
"This new research shows that Canadians are assessing their abilities and vulnerabilities," said Jim Murphy, AMP, President and CEO of CAAMP. "They are being prudent and the vast majority of Canadian mortgage borrowers are not taking on undue risks. They have factored rising interest rates in to their mortgage decisions."
Will Dunning, CAAMP Chief Economist and author of this new report said that a small minority of homebuyers are cutting it close when it comes to affordability. He stressed that "this dataset is primarily focused on first-time homebuyers who are considered to be most at risk. Each year, about 2.5 to 3 per cent of Canadian households make a first-time home purchase. Our data shows that only a small percentage of them are pushing-the-envelope - about 4,000 households which amounts to a tiny fraction of the 13.25 million homeowners in Canada. For those who borrowed in prior years, risks are even lower."
Speaking to the stress tests conducted by CAAMP, Dunning said that "the bottom line from the simulations is that even though mortgage payments will probably rise for most borrowers, the increase in their incomes will more than offset the higher payments. All in all, the degree of risk from rising mortgage rates appears to be small and manageable."
|Bank of Canada Leaves Rates As Is|
|Tuesday January 19, 2010 02:01 PM|
The Bank of Canada’s rate announcements have sounded pretty similar for the last 8 months: no change, no change, no change…
Well, today they met again, and guess what? No change.
The Bank left Canada’s key lending rate at a record low 0.25%. That’s been the rate since April 21 of last year.
In today’s report it said:
* “Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010.”
* “The global economic recovery is under way.”
* The economy should return “to full capacity” with inflation returning “to the 2% target in the third quarter of 2011.”
* “The Bank projects that the economy will grow by 2.9% in 2010 and 3.5% in 2011.” (an increase versus its prior forecast)
The next Bank of Canada meeting is March 2.
|New Found Prudence: Canadian Mortgage Borrowers Not Taking 'Undue Risks'|
|Thursday January 14, 2010 03:32 PM|
From the Financial Post (January 14th, 2010)
by Paul Vieira, Financial Post
OTTAWA -- Despite concerns about a Canadian housing bubble and high levels of household debt, a survey commissioned by the country's mortgage brokers suggests Canadians are exhibiting prudence when borrowing from a home.
The survey, released Thursday by the Canadian Association of Accredited Mortgage Professionals, indicated the vast majority of home buyers, at 86%, were opting for fixed-rate mortgages over variable products. Moreover, 70% of people surveyed opted for terms of at least five years or more -– a signal that buyers realize interest rates are headed upward and want to capitalize on the record-low borrowing costs for as long a period as possible.
"This new research shows that Canadians are assessing their abilities and vulnerabilities," said Jim Murphy, CAAMP's president and chief executive. "They are being prudent and the vast majority of Canadian mortgage borrowers are not taking on undue risks. They have factored rising interest rates in to their mortgage decisions."
The results emerge after senior officials at the Bank of Canada said that it was "premature" to talk about a housing bubble in the country. Still, the central bank has warned about rising household debt levels and consumers' ability to finance that debt once interest rates begin their climb back upward.
The survey is based on questions to members who issued more than 40,000 mortgage loans totalling $10-billion, which were funded during 2009 (the data is for home purchases only and excludes renewals or refinances of existing mortgages). CAAMP said the data represent about one-sixth of total mortgage activity for home purchases in Canada.
The findings also indicated that the majority of people who took out their first mortgage last year borrowed less than they could afford to, as their debt service ratios are below allowed maximums.
"The high share of fixed rate mortgages and low debt-service ratios for home buyers are contrary to perceptions that consumers and financial institutions are taking on more risk," CAAMP said.
In an updated economic forecast released Thursday, CIBC World Markets indicated that the red-hot housing market is set to cool down this year as listings increase and buyers back off once mortgage rates begin to climb.
|HST to Become Payable on GST-Qualifying Residential Real Property Transactions |
|Tuesday January 12, 2010 12:20 PM|
As you are no doubt aware the British Columbia government has proposed the enactment of a harmonized sales tax, the HST. HST will apply to the sale and purchase of new or substantially renovated housing units. If the sale of a housing unit is currently subject to the GST, it may become subject to the HST.
Under the HST the Provincial Government will provide significant rebates, both for builders and purchasers, intended to make the effective taxes payable on the purchase of new or substantially renovated homes equivalent to the taxes currently payable per the Goods and Services Tax. The following table provides a simple summary of the applicability of HST on the sale of new or substantially renovated housing. For more detailed information please contact Mullin DeMeo or your professional tax adviser.
Barristers and Solicitors
1626 Garnet Road
|How your mortgage can set you free of other debt|
|Tuesday January 12, 2010 12:08 PM|
Credit crunch, debt crisis — call it what you will, but the current economic climate is spurring people to get their own finances in order. For Jack and Sarah Stewart, of Toronto, this means tackling the $40,000 in debt they've allowed to balloon during the past eight years. With their mortgage coming up for renewal, they're thinking of clearing the slate and rolling the burden into their mortgage.
"We want to consolidate our debt, but we're not sure if increasing our mortgage is the best way to do it," says Jack, who asked that his and his wife's names be changed to protect their privacy.
He's not alone. Laurie Campbell, executive director of Credit Canada, says it's a question people grapple with all the time. "Homes in the past have been your sacred cow," she says, referring to the drive to pay down one's mortgage as quickly as possible.
These days, however, with people juggling debts and paying varying rates of interest, increasing one's mortgage can be a smart move, even if it takes longer to pay off.
Lowering interest rates
Peter Majthenyi, a mortgage planner with Mortgage Architects, in Toronto, says it's a common theme as homeowners strive to bring down the overall interest they pay, as well as reduce their monthly obligations. He prefers to think of it as repositioning one's debt, and in his experience, "in almost all cases, it's justified."
"If you have debt that is sitting at 18 percent interest, then it certainly makes sense," says Campbell, adding that it's something to consider only if you have enough equity in your home and if your mortgage is coming up for renewal (read the fine print to find out if the penalties for breaking a mortgage outweigh the possible benefits).
Majthenyi notes that if you're working with the same lender, there's often no penalty involved with increasing your mortgage before the term expires.
The Stewarts seem like prime candidates. They have a $200,000 mortgage on a house worth about $425,000. They have plenty of equity, they're up for renewal at the end of the year and they say they're serious about getting their finances in order. Ideally, they'd roll the debt into their mortgage, continue an accelerated payment program whereby they pay every two weeks and they would not increase their amortization period, but instead increase their payments.
Dealing with debt
It's a good plan, says Campbell, who thinks all mortgage holders should accelerate their payments. She also likes the idea that they plan to stick to a 17-year amortization instead of renegotiating another 25-year mortgage. However, she stresses that none of this amounts to much if the Stewarts are going to continue the same spending habits and find themselves in a similar position five years from now. "They have to understand what got them into this $40,000 debt in the first place. They have to make sure they don't fall victim to that again."
She recommends cutting up credit cards, especially store cards, which have higher rates of interest, and not using one's line of credit like a bank account.
The Stewarts say the bulk of their debt was incurred for renovation costs, including a new kitchen and installing hardwood flooring, but admit their spending habits need a makeover. "We're always dipping in to our line of credit because we're strapped for cash," says Sarah Stewart. "I think if we consolidate the debt, it'll increase our cash flow and we'll be able to live within our means."
Jeanette Brox, a Certified Financial Planner with Investors Group in North York, Ont., always encourages her clients to look at the big picture when it comes to financial health: "My job is to make them think outside the box." She says helping people manage debt, while securing their future, is essential. "People need to think beyond what our parents did, which was paying down the mortgage," she says. "I used to think that way too, but I don't anymore."
In her view, the Stewarts and others like them need to take an aggressive approach if they ever want to get ahead. Not only do they need to improve cash flow, but they also need an emergency fund for unforeseen expenses, not to mention a retirement plan.
Planning for the future
Brox admits a lot of people would balk at the idea, but she thinks the Stewarts, both in their early 30s, should not only roll their debt into the mortgage, but increase their mortgage an additional $35,000 for a total of $275,000. To make payments more manageable, she'd also recommend increasing the amortization period to 25 years. She would invest $25,000 in mutual funds and further $10,000 in a money market account (earning about two percent interest).
"This is what I call a lifestyle fund," says Brox, adding that part of the interest cost on the mortgage would be tax deductible. "It's a win-win situation, but you've got to be really disciplined."
That means using their increased tax return to pay down the principal on the mortgage, thereby helping compensate for the interest cost of carrying the additional $35,000. The other bonus is that within five years (or so), the $25,000 registered retirement savings plan, or RRSP, will have grown to about $40,000. She stresses this is a long-term plan and people have to realize that the market is going to rise and fall.
"It's all based on comfort level," says Brox, adding that the biggest mistake she sees with people who reposition debt is that they don't have a long-term plan and, as Campbell, pointed out, go back to old spending habits. "People need to have their whole financial picture analyzed. It's something to consider, but you need to work with a planner or bank manager."
Lines of credit
There's a whole school of thinkers that shudder at the thought of increasing one's mortgage. At the core of this is that you're trading unsecured debt for secured debt and paying interest on that debt for the entire life of your mortgage, which can dramatically increase the cost of borrowing. In addition, refinancing also involves added legal costs (in most cases a minimum of $500). An alternative is consolidating debt onto a line of credit or home equity loan, which have higher interest rates than a mortgage, but can be paid off more quickly.
This works in theory, say our experts, but rarely in real life. "A lot of people just make the minimum payment and never get it cleaned up," says Brox.
"I'm wary of open lines of credit because they can easily stay at $50,000 forever," says Campbell, adding that an increased mortgage payment forces people to be more disciplined in paying down debt.
As for paying the debt for the entire length of your mortgage, all the experts stress that the way to combat this is by channelling extra funds back into the mortgage and paying off the mortgage early. This could mean accelerated payments, using tax returns or bumping up the payments. "We're putting all the money back into the principal of the mortgage," says Majthenyi, who points out that an extra $10,000 on a mortgage costs about $50 a month, while a $10,000 loan requires minimum payments of $300.
In the Stewart's case, it's costing them about $1,000 a month to cover $40,000 debt. If it's part of their mortgage, it translates into about $200. Ideally they'd direct the bulk of that money back into their mortgage through an annual lump payment or by increasing individual payments by a few hundred dollars.
Repositioning debt into one's mortgage is a sound option for people who are committed to changing bad habits and/or taking a long-term approach to getting their finances in order.
When it comes to money, Brox says that people need a big-picture plan, not a band-aid solution: "A lot of times it's not what you make but how you manage it."
by Michelle Warren, a freelance writer
|Victoria Festival of Trees Raises a Record Breaking $106,221 |
|Wednesday January 06, 2010 10:59 AM|
The 18th Annual Victoria Festival of Trees proved to be the biggest and best yet as the annual event raised a record $106,221 to support the urgent needs of BC Children's Hospital.
Look for the Mortgage Depot Tree next year!
|CMHC’s Role in Canada’s Credit Crisis Recovery|
|Monday January 04, 2010 03:55 PM|
Think back to the fall of 2008 … Banks failing … credit getting tight … the stock market crashing. Most of this was blamed on sub prime mortgages. What would you have thought if your pension manager or RRSP administrator had chosen that moment to invest your money into mortgages? You probably would have tried to have them arrested!
That’s the dilemma that banks and mortgage lenders faced. For the most part, the money that Banks lend as mortgages is raised from investors’ money in RRSP’s, pensions and non-registered investments. ALL those investors were justifiably refusing to put any new money into mortgage investments. No money … no new mortgages. No new mortgages and our housing industry would come to a complete halt … prices would fall and foreclosures would begin to rise.
The solution … the government of Canada expanded the role of CMHC to allow them to insure much larger numbers of mortgages. CMHC insurance protects the lender against a loss in the event the borrower fails to pay. Because CMHC is backed by the government, the lender is sure of recovering all funds. With that in place, investors can now allow their funds to be invested in mortgages safely. For a period of time, lenders were so careful about mortgages, that nearly all new mortgages were insured with CMHC, even mortgages that were for a small percentage of the value of the property. Naturally, this caused sharp increase in the number of mortgages insured.
Recognizing we were entering a recession, CMHC tightened the rules banks must follow for qualification, thus avoiding much of the trouble facing the USA, where loose lending practices were a big factor in triggering the whole mess.
The result? Today we have strong solvent banks, relatively low mortgage delinquency and a housing market that has cooled down without destroying millions of people’s lives and investments. Was it the right thing to do? Compare Canada to the rest of the world and the massive public bailouts that were necessary to save banks. CMHC’s increased role suddenly looks like an awfully good alternative!