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Tips, Advice, and Explanations from a Vancouver Mortgage Broker  

Posts Tagged ‘ARM’

How Are Mortgage Penalties Calculated?

Sunday, April 25th, 2010

I’m getting lots of questions about why bank penalties have fallen in the last three weeks. This blog explains the calculation methodology behind it:

Transcript of Video Blog:

Hi, everybody. It’s Rowan Smith from the Mortgage Centre. I wanted to address penalties, and interest rate differentials, and three month interest penalties and how it all works today in this blog.
I’m getting a lot of inquiries about it. There’s some confusion as to why rates have gone up and penalties have gone down. Well, let’s look at the standard mortgage terms.

For variable rates mortgages, most institutions, the way that it’s going to work is if you break the term at some point during any time; now most variables are five year terms, but some of them are three years.

That means that during that period of time, your discount or your premium on your rate will not change. For example, if your rate was prime rate plus a quarter, for five years you would always be prime plus a quarter regardless of where prime went. Up or down, you would follow it with a quarter percent.

You’re guaranteed that, so should banks go with prime plus a half or prime plus one, you’re still guaranteed to retain the prime plus a quarter throughout that five year term.

In exchange for that security, if you break that term, that five-year term, to sell your house, or you need to refinance, take equity out and end up doing it with a different lender, you’re going to pay a three month interest penalty.

That said, it’s a non negotiable. It’s going to happen at every single institution. However, the three-month interest penalty is the only one that will apply to a variable rate mortgage. In the event that you’ve got a fixed rate mortgage, it will be the greater of three months’ interest or the interest-rate differential.

Interest rate differential is a complicated formula that essentially looks at how much time is left in your term, what rate you’re paying now, what rate the bank could get on money now, and they charge you that difference. That’s a simplification, or perhaps an oversimplification of it.

But if you visualize being at six percent, and let’s say rates went down to the 3.69 they were at and you wanted to get that rate, that bank would be giving up on six percent for the remainder of your five year term and letting you out into the lower term.

So they’re going to look at their loss/profit and are basically going to charge you that amount or three months’ interest, whichever is greater.

You can guarantee that in cases where rates have gone down, your penalty is going to be dramatically larger under the interest-rate differential. Now how far down? It depends. It’s a complicated formula.

How much time is left in your term? If you’re within the last year, it’s generally only ever three months’ interest. There are a lot of different variations in how these penalties can be calculated from bank to bank to bank.

So if you’re looking at your penalty, not quite sure if the penalty is worth paying it to get the new lower rates, give me a call and I can walk through the math with you on it and make sure that you’re making a correct decision.

Also, if you’re looking at that penalty and wondering why did the penalty go down from last month when I had a quote, it’s because rates came up. That means that the bank could get a greater rate from money loaned at the same point at time.

So if you were three years into a five year term, there are two years left. The bank will compare their profit and loss of what they would get on a two-year mortgage.

Imagine, for example, that rates have gone in two years from, let me grab a number here, 2.25 to 2.9. If you were previously paying five percent, that spread, the difference between what they could be getting and what they are getting, got smaller, thus your interest-rate differential penalty will be smaller.

As you can see, there’s quite a bit to penalty calculation. If you have any questions, give me a call. For the Mortgage Centre, I’m Rowan Smith.

Mortgage Changes Continue – Stated Income Limited

Wednesday, March 10th, 2010

More mortgage changes are commented on, particularly, those for self employed people:

Transcript of Video Blog:

Hi everybody, Rowan Smith at the Mortgage Centre. So once again, there’s been another rule change that’s come down and this one deals specifically with self-employed people.

I have heard statistics, and I have nothing to back this up, but I have heard statistics that over 60 percent of the people in BC are self-employed or have some self-employment income. So, if that’s the case, this rule is going to effect a lot of people.

Previously, if you had a very good credit rating, and I mean pristine. You were able to put five percent down and if you were self-employed, you could state your income. You did not have to document it. You did have to document that it was reasonable, that that number was not just something that you fictitiously pulled out of the air; because that would be mortgage fraud.

You had to document simply that you had a business for the last couple of years, or that you’ve been in the field for a couple of years. You can’t do five percent down under that program any more. The fact is on April 19th, you are only going to be able to do 90 percent financing. You will require 10 percent down as a self-employed person, if you can’t document your income under traditional rules.

Now how many of these deals are out there and how many people are affected by this? Generally, self-employed people, I would say, they’re usually putting down 10 percent or more down. I did not get a lot of five percent down self-employed stated income programs.

I have seen, I can count on my hands in the last 40 years, so I don’t think that this change is necessarily going to affect a lot of people in the market as a whole, but it will bring some stability back again. This is the whole purpose of the government’s changes, is to prevent speculation and there has been a lot of it in the last while and some of these stated income programs have certainly been taken advantage of by some banks, lenders, and brokers.

So, if you have any questions about stated income, or if you’re self-employed and you’re thinking of buying a place and you’re not sure if you qualify under the new guidelines, please give me a call. It’s Rowan Smith from the Mortgage Centre.

CMHC Mortgage Rule Changes

Tuesday, March 9th, 2010

Hi everybody. It’s Rowan Smith with the Mortgage Centre. The last couple weeks we’ve seen a lot of announcements about mortgage changes, rules changes, and how people are going to be qualifying for mortgages going forward, especially the variable rate. And that’s one of the biggest changes and it’s something I wanted to cover today and talk about was how are variable rate mortgages going to be affected? How are people’s ability to qualify going to be affected under the new rules?

Transcript of Video Blog:

So the government has officially announced now that the rate they’ll be using to qualify people for a variable rate mortgage is going to be the five year posted rate. Presently, that’s 5.39%. Compare that to currently, with a lot of the non bank institutions and the non traditional institutions.

One of their biggest abilities to gain market share has been that they qualify people for the variable based on many times ahe three year discounted rate or a five year discounted rate. There’s various policies all over the place that vary from lender to lender to lender. Now we as brokers took advantage of that by finding the best rules that fit our client and so getting the most amount of mortgage that we could.

Now going forward, that won’t be the case any longer. The government has officially leveled the playing field. So anybody offering a variable rate mortgage will have to have to qualify at the new five year posted rate. Well, not the new posted rate, but the existing posted rate.

So let’s see what kind of difference that will have. If previously under the old guidelines, if you made $60,000 a year and just assuming that the average taxes and fees and stuff, and assuming no other debts, you’re able to qualify for $460,000 of mortgage for a variable. Under the new guidelines, that’s reduced to $364,000 that you are able to qualify for.

That’s a reduction of 20%, almost 21%, that you’re no longer able to afford. So if you’re looking for a property that is worth $800,000 in today’s market under today’s rules fast forward six months and the number of people who qualify for that is going to be dramatically reduced.

Everybody is going to be qualifying for 20% less than they do today. Now this may bring us long term stability to market, but I am going to bet that there’s going to be some growing pains from the transition of the old rules to the new.

Now when is that going to take effect? Well, April 19th is the date that this “law” as it were, however, some other institutions may move to this sooner, often they do. That’s the deadline when everybody has to be on board with this system. A lot of institutions already use this rule. Some of the big banks, the HSBC and whatnot, they already qualify you based on a posted rate.

Now they already use a three year posted rate, in many cases, and there is a big difference between a three and a five year. The whole purpose of this is to determine what can somebody afford now, and what can they afford if rates should rise. It builds in a safety net, it builds in a budget builds into the budget that rates may increase and that payments may increase and this may be better for us in the long term.

In the short term though, if you are trying to stretch to get the maximum amount of mortgage that you can, perhaps because the bank doesn’t accept your income, or you’re on a relatively new job, or there’s mat leave, or something like that coming up, you need to get on this now to qualify and purchase now. For the Mortgage Centre, I’m Rowan Smith.

Fixed or Variable – A Video Blog On What Is Best

Thursday, December 31st, 2009

Hello again,

People are constantly asking me what product to take, and are quite obviously torn up about it, so I did this video blog to explain what product to take: fixed or variable.

Transcription of the Video Blog:

Hi everybody, it’s Rowan Smith from The Mortgage Centre. I’m going to tackle the biggest question I get every day: should I get fixed, or should I take variable, and what’s going to happen. I don’t have a crystal ball, but I do have several years in the industry – it adds up to about 10 – and while I haven’t seen the 80’s since I was a kid, I do remember what was going on at those times and I’ve still dealt with many clients that have told me stories.

Here’s my opinion, for what it’s worth, and what I think you should be looking at:

First off, which strategy is best?

It depends on your situation.

Anybody that say otherwise is not worth the license on the wall. Your unique financial position dictates whether or not a variable rate is an option for you, and it dictates whether you should be taking a fixed rate.

Picture two people in exactly the same situation with mortgage amounts and income that are the same. The thing is: one guy is a commissioned person. The second guy makes a base salary. Obviously, the person that makes a base salary, that makes that amount of money  can know it’s going to be there. The guy with the commissions doesn’t know that.

Now, if they had to stretch, or even worse, if they needed the variable rate mortgage in order to qualify for that in the first place. If they need to take variable, so they know they can afford it, well, variable rates change. Rates rise. People in that situation should absolutely not be in variable. They should be in a fixed rate so they know what their payment is going to be, because they know that their salary is going to be a set amount.

Now, on the flip side, if somebody is buying well within their means, and they have the affordability of the payment; maybe the payments make up a very small percentage of their annual income, then they can take that risk that the rates are going to rise. They can afford to take a variable rate mortgage.

I myself have taken fixed rate mortgages on 2 out of 3 that I’ve had. The reason being is, my income fluctuates. I want to know at least one thing is stable, and that’s the payments. So I took the fixed rate.

People that have a risk aversion to possibly paying more, or are going to lose sleep over their rate possibly increasing: these are not good candidates for a variable rate mortgage.  Sometimes it’s best to just take fixed if that will give you peace of mind and put your mind at ease, and also provide you with two, three, five, or ten years of price stability

You look at a payment right now that is $2,200. I’m just grabbing this number out of the air. Look five years from now. Look ten years from now! What is $2,200 going to mean for the house that you’re in right now. Is that going to mean a lot of money? Chances are, with inflation, job increases, wage increases, promotions, moving up within your career, that payment will present a much lower percentage of your overall income in 5 years. So if you are struggling to make ends meet, and you’re looking at that mortgage payment that I’m presenting you with and you’re saying, “Rowan, I don’t think I can take a 5 year, I need to take a variable,” then I don’t think you should buy the house. Variable rates are not a way to lower your monthly payments so you can afford it, it’s a way to take a risk and take a lower payment, but face the upward chance that rates could rise, and thus your payment could rise.

It doesn’t take a lot of rate increase just to make that payment quite high. If today’s prime rate is two and a quarter, and you’re in a variable rate at prime, and you’re looking at it going, “yeah, but I took a three year at 3.49%,” well how much is that? It’s a point and a quarter that rates have to move, FROM THE LOWEST HISTORICAL  POINT THAT RATES HAVE EVER BEEN.

So what should you be taking today when all you have above you is rate room to move upwards ,with virtually no downward move, again:

It depends on your unique situation. Call me up, we’ll go over your numbers, we’ll go over your job, your career, what you’re going to do in the next few years. Are you going to have kids? Is someone going on mat leave? Are you going to be leaving the country? Are you going to travel? These are all things which play into this. If it’s going to be a rental property, then perhaps your want to simply minimize carrying costs. If it’s going to be a home, then maybe you should be looking at keeping your costs stable so your housing is a fixed cost in your budget.

I don’t know what your situation is, but I can certainly help guide you and coach you in what is best for you.

Anybody that doesn’t look at your personal situation and just screams, “variable is best and always best. You save the most!” is absolutely providing dangerous financial advice and you should be asking around.

Thanks for watching!

Fixed or Variable Rate Mortgages – The Unending Debate

Monday, November 16th, 2009

I get calls and questions on this topic almost every week. Given the changing market, it’s time for an update as of November 15th, 2009.

In fact, I recently took a call from a real estate lawyer who was buying a place and wanted my opinion on this topic, and I went into great length as to what I thought. In the end, she ended up taking variable, and in this market, I think this is the right move, for her. Here is why:

I have written several strong articles in favour of fixed mortgages in the past. For me, personally, I just like them. Period. It’s the way I work. I want to know what my payment is going to be for the next 5 years and I don’t want anyone telling me otherwise.

Could I save money if I took a variable. Probably, but I don’t care. If you are considering fixed or variable rate mortgages there are three things you need to think about three specific questions:

1. What are the current rate offerings ?
2. What is your income and employment situation?
3. What is the reason you are buying the property?

WHAT ARE THE CURRENT RATE OFFERINGS?

Previously, when I was arguing for fixed rates for most clients it was at a time when the 5 year variable and 5 year fixed were nearly on par. This was because the capital markets were forcing banks to set their variable at prime rate PLUS 1.5% or prime rate PLUS 1.0% for a rates that were equal to (or even higher!) than fixed mortgages. In this situation, with prime rate sitting at all time lows, it made no sense to take a variable rate when there was only one way for rates to go (up) and no savings, even on day one, by taking a variable rate mortgage.

If there is no savings by taking a variable rate, why absorb the risk of the rising payment?

Well, capital markets have changed, and there are a few banks offering prime MINUS 0.10% for a net rate of 2.15% versus my best rate on a 5 year fixed of 3.85%. This is a full 1.7% difference, and this market, that is substantial. In other words, prime rate would have to rise from 2.25% up to 3.95% before you break even. With the Bank of Canada pledging to hold rates low until mid 2010 that is about 9 months of a significant savings before we see prime start to move up. If you want to save some money, this is a compelling time to take a variable rate as you can transfer to a fixed rate mortgage at any time, with no penalty.

Based on current offerings from banks, and depending on your own answers to my next two questions, variable looks like the way to go.

WHAT IS YOUR INCOME AND EMPLOYMENT SITUATION?

With a variable rate, you face a variable payment (or a variable amount that goes towards principle – which CAN result in a negatively amortizing mortgage where you owe more at the end of the term than at the beginning, if you don’t pay attention).

So, how are you paid? How often? Are you paid a salary that is set? Do you get bonuses or commissions? Are you self employed with the option of more work if you want it? These are all important things to think about.

If you are paid a salary, and especially if you need to take a variable rate to comfortably afford the property, you need to be very careful if you take a variable. You’ll need to watch interest rates and lock in at the first sniff of rising rates. This is true unless you have a mortgage payment that is very modest when compared to your salary.

If you get bonuses and commissions, do you NEED to earn those bonuses in order to make your payments? What happens if the rates rise (and your payment) and you don’t get the bonus? Will you be ok? Do you have enough “wiggle room” in your budget to absorb a higher payment, or a higher payment along with lower income?

If you are self employed, how seasoned is your client base? How confident that you can repeat last year’s success? If you are a realtor, chances are you have done very well the last five months, but what about last december through march? If your income is seasonal, or varies dramatically, do you also want a variable payment?

The bottom line is to look hard and dispassionately at your income pattern. If you have a lot of  “wiggle room” to absorb a rising payment, or if your budget is sufficiently comfortable, then you can take a variable and enjoy the savings.

However, if you NEED that variable rate to afford your payment, you should not be taking it and not buying the property. People are, by their nature, myopic, and they only look at the recent past. If rates rise, are you going to be ok?

WHAT IS THE REASON YOU ARE BUYING THE PROPERTY?

This is often overlooked. People get so hung up on fixed versus variable discussions that they forget why they are buying the property. If you are buying a rental / investment property, then you likely are thinking all about cash flow. If this is the case, variable may be the way to go. If you are buying your own home, and you intend to live in it for a while (5+ years, for example) then you may want a fixed rate so you can rest assured your housing payment won’t increase.

Or maybe not.

There are lots of other reasons, and here are a few: Maybe you’d prefer to buy your house and you want to save every penny, so you plan on taking variable and watching rates like a hawk to try and capture the most savings possible. Personally, as someone IN the industry, I think this is madness unless you happen to enjoy watching interest rate and bond moves (perversely, I do, and you should take advantage of this).

Or maybe not.

Maybe you are buying a property that is a “holding property” and you simply want to minimize your carrying costs until you subdivide it, or until the subdivision or city plan reaches your property and you sell. Variable might be a good choice here as your exit plan is relatively assured and timeline clear. With savings available on variable in the short term, this might be the way to go.

Or maybe not.

Maybe you have a lot of “wiggle room” in your budget, but are so busy you don’t feel like watching rates all the time, and heck, if rates rise a point or two it won’t be the end of your financial world. Variable might be the way to go here.

Or maybe not.

Maybe you are doing an equity take out to invest, and with rates so low you want to lock in now at the fixed rates because you don’t believe they’ll be back any time soon. You plan on investing the money, and you want to know what your “cost of capital” is so you can monitor if your investments are outperforming your debt to buy them. In this case, fixed rates are likely for you.

Or maybe not…

IN SUMMARY

As you can see, a lot of the decision is very personal, and based entirely on features of your own unique financial situation and personality makeup.

There is no rule of thumb. Brokers that drone on and on that “variable is always best” are likely getting angry calls from their clients they put in variable mortgages 6 months ago when rates were prime + 1% and are now Prime – 0.10%. Good. That’s the way it should be. Advice is only as good as the person giving it, and if they don’t take the time to look at your unique situation of income, risk tolerance, budget, and property type, then they aren’t doing their job and you should be speaking to someone like me instead.

Until next time, happy house hunting!

Fixed or Variable Mortgage? Things to Ask Yourself Before You Decide

Sunday, July 5th, 2009

The question of “fixed or variable” comes up so often I just had to put a post out about it.

There are a number of considerations that need to go into this analysis, and it is different for everyone. The variables I would recommend considering are:

1. How long you are going to be in the home?

2. Is your income fairly stable or does it fluctuate?

3. How tight is your budget using a fixed and variable rate?

4. Will a rising mortgage payment make you lose sleep or stress out?

5. Where are rates headed?

6. Do you follow rates and financial news closely?

HOW LONG ARE YOU GOING TO BE IN THE HOME:

First, most variable rate mortgages are 5 year terms. This means that if you are possibly selling, or refinancing in the 5 year term, then perhaps a shorter term is best. If you are going to be in the home for more than five years, then you can pretty much take whatever form of mortgage best fits your situation based on your answers to the other questions above. As a general rule, if someone is going to be moving in the near future, or thinks that they may want to buy a larger home in the not-too-distant future, then I would take a make a determination partially based on this variable. Sure, if you take a mortgage, any mortgage I offer is “portable” to a new property, but if you need to borrow additional funds, you’d be borrowing them at current rates and taking a “blended” rate based on the rates when you buy/move to a new home.

IS YOUR INCOME FAIRLY STABLE OR DOES IT FLUCTUATE?

If you are on a stable salary, then taking a fixed rate is likely the safest bet as you are going to get a set payment. Taking a variable rate mortgage means your payments could go up (or down) on any given month. If your income is fixed, then this is an argument for a fixed rate. However, the answer to the next question then becomes of paramount importance: how tight is your budget. If your income is variable, or if you are self employed and your income fluctuates wildly, then it seems (to me) to be a recipe for trouble to take a mortgage with a variable payment, and a variable income. If you are really “on top” of your finances, then you can likely make it work. Alternatively, you can use lines of credit or “overdraft protection” to manage your cash flow should there be a particularly lean month. My experience over the last ten years, however, is that in times of rising rates, variable rate mortgages cause a lot of stress and heartache for people who work hourly or suffer from unstable income.

HOW TIGHT IS YOUR BUDGET USING A FIXED AND VARIABLE RATE?

If you look at the payments for a 5 year variable rate (currently 2.65% today) versus a 5 year fixed rate (currently 4.19%) you will, obviously, find the lower variable rate payment attractive. However, if you have to “stretch” or “tighten your belt” or find that the variable rate payment, while possible today, is still high, imagine what would happen if the rates rise? We are at historical lows in rates today. Can you afford it if rates rise by 1% or 2.5% (a VERY common move in interest rates over a 5 year period of time on variable rate mortgages). If you find that you need to take a variable rate to “afford” the payment, then you shouldn’t be taking it. If you can afford to make the same payments as a fixed rate mortgage (just more goes to principal) then you can consider a variable and enjoy the lower rate of interest and higher rate of payment.

WILL A RISING MORTGAGE PAYMENT MAKE YOU LOSE SLEEP OR STRESS OUT?

Some people, and I admit to being one of them, like to know what the monthly cost of living is. I like to know, with certainty, what my monthly bills are going to be so that I budget things out. If my mortgage payment starts to rise (as rates rise) it will stress me out. For this reason, I have chosen peace of mind over interest rate savings. This doesn’t apply to everyone. Some people would rather “let it ride” and take a variable rate as they have historically cost less for borrowers about 95% of the time. However, there is always that 5% when variable rate causes trouble, and the last question we need to ask is possible the most crucial:

WHERE ARE RATES HEADED?

Prime rate (the rate that variable rate mortgages are based) is at the lowest point it has EVER been in Canadian history. These are “emergency rates,” as the Chief Economist for CIBC, Benjamin Tal, has called them. With rates sitting on the floor, there is only really one way for them to go: up. The question is, when will they go up? And how far will they rise? Many people jump to point out that the Bank of Canada has stated they intend to hold rates low until the end of 2010. While this is technically true, there is nothing binding the BOC to do so. If inflation starts to creep up (and it IS creeping up) you can bet that the BOC may change their tune. So, if the difference between 4.19% and 2.65% (fixed versus variable) is 1.54%, by taking a variable you are thinking that prime rate will not rise by 1.54% in the next 5 years, or that if it does, it will stay low long enough for you to reap significant savings.
DO YOU FOLLOW RATES AND FINANCIAL NEWS CLOSELY?

If not, how will you even know when rates rise or fall? For my clients, I keep them all up to date via email with rate updates so they can see the trends for themselves and see what rates are available on conversion. Use your bank, and they don’t care a whit. Use another broker, and I can’t say what their follow up is. Bottom line: if you don’t follow rates frequently, variable poses an added risk as you will only know your rate has risen when your payment is higher (many people fail to even notice that!).


MY PERSONAL TAKE

I think 5 year rates at anything less than 5% is a damn good rate. Period. I prefer fixed rates, but that is just me, and it will differ for everyone. Historically, variable rate mortgages were offered at prime rate or BELOW prime rate. Today it is prime PLUS 0.40% (down recently from prime PLUS 0.80%). This means if you choose variable, you are choosing to lock in that premium for 5 years. If rates start to rise, and banks start to offer prime rate again, you will be still at prime PLUS 0.40% with no hope of getting out.

Lastly, as fixed rates rise independently of variable rates, even though you can convert to a fixed rate at any time, there is no telling what that fixed rate conversion option will give you. Three weeks ago if you were at prime + 0.40% you could swap out to 3.79% at many lenders. Today, it’s around 4.49%. So even with prime rate not moving, the conversion option has trapped a lot of people in variable; hoping that fixed rates will come back down so they can get out – a remote likelihood.

So that’s my take: I prefer fixed rates in this environment with near-record lows. I’ve put my money where my mouth is and locked in my mortgages. However, depending on your answers to the above questions, maybe you think differently and want a variable. Great! I’m happy to help anyone with the process.

Thanks for reading!

Fixed or Variable: The Debate Continues…

Saturday, June 27th, 2009

With fixed rates on mortgages rising, and variable rate mortgages seemingly falling, consumers are often wondering what the best course of action is.

The media has pounded it into people that “variable rates always save you money.” If this was true, why would any stooge be foolish enough to take a fixed term? The answer is that variable rate mortgages OFTEN save you money, but only in times of stable or declining rates. In times of rising rates, variable rate mortgages often cost clients far more.

While interest rates are stable or falling, variable rate mortgages (typically pegged to prime rate) allow clients to ride the downward trend. However, when rates start to rise, so too does their rate.

With prime rate held down to what is, effectively, zero in the eyes of the banks, variable rate mortgages only have one way to go from here: up.

People taking fixed rates are, today, able to lock in these historically low “emergency” mortgage rates for 5 to 10 years, and take on absolutely NO risk of upward rate movement. People taking variable rate mortgages are doing so at historically high premiums. Historically, variable rate mortgages were offered at or below prime rate. With prime so low, and profit margins eroded, banks are now offering variable rates at prime PLUS some amount. A client taking a variable rate today will get lower rates in the short term, but when rates begin to rise (and if and when variable rates start to be offered at or below prime again) the variable client will be paying far more than anyone else for their variable money.

If we imagine that prime returned to a more “natural” 5% in the next two years, that means that varaible clients would be paying 5.4% when new clients may be able to get below 5%.

Now, many proponets of variable mortgages cite the “transferrability” option as the saving grace: that you can transfer to a fixed term at any point in the term. While this is great in theory, human nature being what it is, people often fail to transfer when they should and miss the boat.

For example, if prime rate is 2.25% and you have a prime + 0.40% rate (5 year term) for a net rate of 2.65% and the best fixed 5 year rate is 4.04% then you may thing that the 2.65% is a great deal! Fast foward a year and a half and you hear that prime rate is going up. You call your broker, and ask for the best 5 year rate and are shocked to hear that the best rate is 4.75%!

How could this happen? Because fixed rates and prime rate are not tied, and are, in fact, based on entirely different market forces. Fixed rates can (and have just recently) risen while variable rates have remained stable.

Bottom line: unless you follow interest rates and financial news on a daily basis, you likely aren’t going to be well enough informed to know when to lock in, or what the rates are at any given point. You can’t count on your bank or lender to advise you either, as they are ultimately only in this for the profit. If upward moving rates and higher payments scare you, if your budget is tight, or if you don’t follow financial news very often, take a fixed rate. If you none of those apply, then you can roll the dice on a variable.

However, my personal feeling is that taking a variable today is like buying Nortel at $200 per share and thinking that it would go higher and higher and higher still. It, like rates today, only had one way to go…

BC Property Tax Assessments Frozen – Help or Hurt?

Thursday, November 27th, 2008

BC announced they would be freezing assessments at the July 2007 value to prevent homeowners from being squeezed.

Upon review, it looked like the province may have actually frozen the values at the peak in the market! This looked, on the surface, that it was going to be a disaster of a decision. When Gordon Campbell spoke about this, he used the words “locked in” and this was a bit of a error. In appears, in comments made later by Kevin Krueger, Revenue Minster for BC, that their intention was to make the 2007 number a “Ceiling” and not a “floor.”

However, some property owners were arguing that their property peaked in 2007 and they don’t want that as the value as the values have since slid downwards. Faced with a potentially crushing number of appeals that would grind the assessment authority to its knees, the government then made the announcement that they would now be publishing both the July 1, 2007 values and the July 1, 2008 values, and letting homeowners CHOOSE which was most advantageous and to pay the one they wish. This will allow home owners the ability to adjust what they pay as to when their area peaked in price.

I appears that in this case, the government has done some that will help homeowners pay a more fair tax on their propert. It’s nice to see the government do something right for a change!

Variable vs. Fixed Mortgages Part 2 – A Follow Up

Thursday, November 27th, 2008

My last post sparked off a flurry of of emails, phone calls, and inquiries about its content. In particular, the rates I quoted, and my rational for offering them were thrown into question by past clients, potential clients, other brokers, and even some of my family.

There are a few points that need to be addressed in order for this issue to be explored properly. First off, a list of the concerns that I received, in point form:

1. The product I am offering is not offered by a chartered bank (INCORRECT!)

2. The rate I am offering is not available at all brokers and banks (CORRECT!)

3. The article sounded like I was angry at other brokers for always advising clients that variable is best (CORRECT!)

4. The rate I am offering is below the variable rate mortgages, and this is an anomaly (CORRECT!)

5. The product and program I offer has lots of rules and conditions that not everyone qualifies for (CORRECT!)

Let’s address each in turn. First off, the rate I was quoting IS offered by a major chartered bank. In fact, in the last two days, another bank has also started offering a similar rate so the rate is out there in two chartered banks – not some “second floor” bank as one client suggested.

Is this rate offered by all brokers? No. From time time, banks will offer promotional specials (4.90% on a 5 year closed is such a promotion) that is the result of the broker sending them a lot of business or very high quality business. In these cases, the lender may elect to only offer it to their, say, top100 brokers. If the broker you are working with isn’t able to offer this rate, it doesn’t mean their advice is bad or not worth listening to, but suggests that they deal with other lenders. There is nothing wrong with this. There have been many times where I was unable to get the rates advertised by one broker, only to find out that broker sends lots of their business to that lender and they are being rewarded for it by being able to offer a better rate or better terms. In these cases, go with the rate and product you want. Go with whomever offers you the best advice and service. Bottom line: not every broker offers the same rates and products – if they did, why would anyone ever shop around online? Alternatively, give me a call and, if you qualify, I will set you up appropriately.

All the above being said, make sure you check the date on the broker’s site to ensure the rates you are looking at are current. I have seen many brokers be very lax about updating their websites.

Many people suggested I sounded angry in the last post, and they are correct. I am tired of people sticking to dogmatic principles when there are alternatives. Is a variable rate ALWAYS best? No. In times of increasing rates, variable rate mortgages can be financially devastating if people do not have sufficient room in their budget to absorb the higher payments. Also, just because you can convert to a fixed product out of a variable product offers you little protection. You rarely get to transfer across to the best rate in the market, and are beholden to that lender’s rates at that point in time. By the time variable rates have risen, fixed rates are often also higher. For example, if you are in a variable rate at 5% and the fixed rates are 5.50% you are sitting pretty. However, if that variable rate jumps to 5.60% and you try to lock in, you don’t get to lock in at 5.50% You lock in at whatever the rates are at that time, and they will likely be up over 6% at that point. This makes people “chase the market” and often results in them never actually pulling the trigger and getting out to a safer fixed term.

In changing and challenging financial times, you need to think outside the box. Period.

The concern that the rate I am offering is below prime, but that this is an anomaly is correct! What bearing does that have, however? You have to make decisions based on the best information available to you today. The variable rate offers you a small amount of “what if” protection as falling rates get you lower payments, but often results in you “chasing the market” in an upward cycle. Are variable rates historicaly better? In the past 8 years they sure as heck are! However, when rates have no room down, and a lot of room upwards, where would you rather be? In times of increasing rates, variable is not the place to be. So you need to ask your broker, what point in the cycle are we at now? With prime rate at 4% and poised to dip a little more, do you think we are near the top (with lots of downward rate room) or near the bottom (with lots of upward room)?

The last concern voiced was that the product I offer has lots of requirements to qualify for it and not everyone can get it. My answer? So what! ALL mortgage rates you see posted at ALL banks have a myriad of terms and conditions and guidelines that have to be followed. Just because, say, Royal Bank is offering 4.85% on a five year fixed mortgage, does that mean ALL customers going in there will get that rate? NO! Obviously not. They have to qualify for it. The rates I offer are no different.

I hope that addresses the web of concerns that people have voiced. As of today, the variable rate mortgage dropped to Prime + 0.60% for a net rate of 4.60% which now puts it as a lower priced option that the 4.90% I offer on a fixed rate. So is variable better? Ask your broker. If they don’t ask you lots of questions about your income, future plans, future expenses, and risk tolerance, then they haven’t done their job.

Ultimately, it comes down to affordability, and risk tolerance. If you can afford the variable rate (and that includes the RISK) then go ahead and take it and you may save lots of money. I hope you do! That is what my service is all about.

Fixed Rate or Variable Rate Mortgage – Which is Best?

Monday, November 24th, 2008

Ok I’m angry. I read an article today from the Vancouver sun that angered me greatly as it fails to take into account the complexities of the “variable versus fixed” debate that nearly every client goes through during the mortgage approval process.

The article was in the Vancouver Sun, and was written by Garry Marr “Family Man” on November 22nd, 2008 and went as follows:

———— Begin Article ————

When it comes to ranking some of my biggest financial blunders, getting a fixed-rate mortgage when I purchased my first home is right near the top.

“Don’t lock in, mate, it never makes sense,” I remember a senior columnist at the Financial Post telling me about 11 years ago when my wife and I decided, pre-kids, to lock into a bigger commitment than our marriage.

The gap at the time between a fixed-rate mortgage with a five year term and a variable-rate mortgage tied to prime was so scant it hardly seemed worth the risk.

But even a difference of 50 to 75 basis points – there are 100 basis points in 1% – turned into a few thousand bucks lost over the five-year term.

By the time we moved up to a bigger and better house, I didn’t need much convincing to go with a variable rate product.

Of course, it has saved us money.

The question is: does it still make sense to go with a variable rate based on market conditions that have changed dramatically in the last eight weeks?

By way of background, in early October, banks were offering variable rate products for about 60 points below prime.

A few months before that, it was almost 90 basis points below prime.

But then the credit crisis hit and variable-rate products switched overnight to 100 basis points above prime.

They have stayed there ever since, leading some of us to question whether they still makes sense.

Gary Siegle, Calgary regional manager with InvisInc, a mortgage consultant firm, says while deals are not as good as they were in September, there is no question a variable rate mortgage will save you money.

This week, the lowest rate you could get on a five-year fixed-term mortgage was about 5.5%, Mr. Siegle says. “Plus, what do the economists say will happen to rates? They say they’ll go down.”

There is one other factor added to the mix. The Bank of Canada’s rate, usually tied to prime, went down last month, and some of the major banks refused to go along with the cut because it would have cost them too much money.

“Will banks change their rates when the Bank of Canada reduces its rate? It’s a good question.

But the last time they resisted, it didn’t last long before whatever influence the Government of Canada had was wielded and they all followed suit,” Mr. Siegle says.

The problem for banks are all the customers with existing mortgages negotiated at 60 to 90 basis points below prime.

Every rate cut costs the banks money. They are actually losing money on those customers now.

And, according to Mr. Siegle, that is one reason that if you have a variable-rate at a rate below prime, you would have to be “very worried” or “very conservative” to want to lock in that rate.

You would be converting a mortgage as low as 3.1% to one at about 5.5%

“Those people are sitting pretty,” Mr. Siegle says.

Don’t feel too sorry for the banks. They had been pushing variable rates up until the credit crisis hit.

The Canadian Association of Accredited Mortgage Professionals said this week that about 40% of home loans negotiated in the past year were variable-rate products tied to prime.

“We don’t know what the impact of getting rid of the discount will be,” says Jim Murphy, chief executive of CAAMP.

Don Lawby, chief executive of Century 21, says even with variable-rate products now 100 points above prime, the issue has not changed.

“It comes down to what you can afford and what is your comfort level,” Mr. Lawby says. “For many consumers, they feel comfortable locking in for five years.”

Ultimately, a fixed-rate product is still like an insurance policy.

Yes, it will make some people more comfortable. I don’t know about you, but I don’t feel all that comfortable paying more interest.

———— End Article ————

This article had several points that upset me and have left me feeling like I should respond. Unfortunately, the Financial Post likely won’t indulge me as much as I’d like them to in terms of space, so I have to respond here to my readership.

The first point that I’d like to discuss is the idea that there is, potentially, a 50 to 75 basis point difference between fixed and variable rates. The article seems to suppose that a variable rate mortgage will be lower than a fixed rate mortgage. Traditionally, that has been true, but anyone seriously acquainted with bank rates across the country will know that you can actually get a fixed-rate mortgage BELOW a variable rate mortgage.

I am able to get 4.90% on a 5 year, fixed, locked-in term and only 5.00% on a variable rate mortgage tied to prime (prime is currently prime and the rate is set at prime + 1%).

So, currently, you can SAVE money with a fixed rate mortgage. Now, this IS an unusual situation, but these are unusual financial times, and conventional ideas don’t hold up when the fundamentals in the market have changed.

The next issue I have is that the author, and even the consultant at Invis they spoke to, said that “…there is no question that a variable-rate mortgage will save you money.” I cannot abide by this statement, when I can CURRENTLY save you money by taking a variable rate mortgage, and should prime rate NOT fall at the banks, then you are exposing yourself to the risk of rising payments and interest AND taking a higher rate. I hardly think this is a good idea.

The banks do not have to follow the Bank of Canada when the Bank of Canada lowers it’s lending rate. We already saw evidence of this the last time the Bank of Canada lowered rates. It took several lenders several days to lower their prime rate, and there was no influence by the Bank of Canada exerted to make them lower their prime rate. The fact they lowered prime was solely a function of them doing what all companies do: reduce their margins to gain market share. The truth is, that when prime rate was 4.5% and mortgage rates were prime + 1% the banks WERE making money. When the Bank of Canada announced a reduction in its key lending rate, the banks were hesitant to reduce their profits by lowering their prime rate. Several banks and mortgage lenders took many days to reduce their prime rate. The charge was led by TD and Scotiabank who dropped their prime rate on the same day. Initially it was only by a fraction of the overall change, but by the end of the week they had lowered it the same amount with the Bank of Canada. Again, there is no law or any way the Bank of Canada can influence ALL the banks and lenders. They simply don’t have the leverage or “teeth” to do so.

Let’s not forget that the prime rate is currently 4% which is getting pretty damned close to 0%. Do you honestly think there is that much room left for prime rate to go down? Seriously? Do you think prime rate is going to get to levels at 0% or something and that lenders will continue to lend? Would you??? There is a limit to how much rates can fall, but there is a HUGE amount of room upwards.

The closing sentence made me actually laugh out loud in this case. The idea that the author isn’t comfortable with paying more interest is laughable when I am actually advertising fixed rates BELOW the variable rates he is advocating.

A lot of bankers, mortgage brokers, and media, have been singing the praises of variable rate mortgages, and when the conditions have been right, so have I. When we were getting 90 to 100 basis points below prime rate, it made good financial sense: prime rate was higher (with more downward potential) and fixed rates were substantially higher (sometimes up to 1.5% higher). However, that time has changed.

The one person I agreed with in the article was the chief executive of CAAMP – the governing association for mortgage brokers. The key to the question really is what you can afford and what you are comfortable with. Comfort was overlooked in this article as though only blundering fools would take a fixed-rate mortgage and fixed payment.

There four types of people that buy in the market, in my experience:

1. Those that buy far below their means, safely, and have relatively stable income
2. Those that buy the maximum they can afford, and have relatively stable income
3. Those that buy far below their means, safely, and have variable income (commissions or bonuses)
4. Those that buy the maximum they can afford, and have variable income (commissions or bonuses)

For self employed people, or people whose income varies dramatically, does it really make sense to take the risk of a variable interest rate (and therefore a variable payment) when their income isn’t a sure thing? Having variable income AND a variable payment is a recipe for budgetary problems. If there was a substantial savings available (now or in the future) by taking a variable rate mortgage, then perhaps it is worth consideration.

When fixed rates are at (or below!!!) variable rates, with not a lot of downward potential, fixed rates provide customers savings AND comfort. This isn’t all that common, but right NOW is the time to have this discussion with an Accredited Mortgage Professional, and not a member of the mass media.

Please, post your comments on this. I argue with mortgage brokers and bankers about this damned near every day, and most of them stand by the dogma that “variable is best,” without having any economic facts or education to back up their opinions. They are just doing what the rest of the herd is doing, and this is NOT the time to run with the herd.