Fixed and Variable rate mortgages both have their advantages and disadvantages!
Historically speaking, homeowners tend to pay lower rates with variable mortgages, but these mortgages are also vulnerable to fluctuations because they’re tied to the Bank
of Canada’s prime rate (which is announced eight times per year). Fixed rates, on the other hand are primarily influenced by the yield on Canadian government bonds (bond yields) , and are typically higher than variable rates, but their rate is consistent throughout the term of the mortgage. Below are a few questions to help you determine which type
of mortgage is right for you.
CAN I AFFORD TO TAKE A VARIABLE RATE MORTGAGE
There is some risk associated with variable rate mortgages, so if you go this route, you must be able to mitigate the risk if rates do rise. One method of protecting yourself involves setting your payment to a fixed amount that’s higher than the minimum requirement. For example, setting your payments based on the current 5 year fixed rate will allow you to provide a buffer in the event that rates rise and, because you’re paying more than the minimum amount, you’ll be paying more of your principal as well.
DOES A VARIABLE RATE MORTGAGE FIT MY RISK PROFILE?
Once you have decided you can afford a variable rate mortgage, the next thing to assess is whether a variable rate mortgage fits your personality, lifestyle and comfort zone. If you’re the type of person that can’t sleep at night knowing that your rate and payment may change by 0.25%, then a variable rate mortgage may not be the best option for you.
WHAT TYPE OF VARIABLE RATE MORTGAGE SHOULD I CHOOSE?
There are three main factors to consider when choosing a variable rate mortgage:
Payment frequency – Make sure you are aware of the options available before deciding. Some lenders may not allow certain variations of payment frequency (i.e.accelerated biweekly or weekly payments).
Rate changes – Some lenders change their variable rates in line with the Bank of Canada eight times per year while others do it quarterly.
Conversion to fixed rate – Does the lender allow the mortgage to be converted to a fixed rate mortgage at anytime? If so, what rate are you guaranteed on conversion – the best discounted rate or the posted rate?
If you would like to discuss all of your options in detail please contact me directly at 250-819-6536 or 1-888-819-6536 or email me at email@example.com
After a crazy month fielding calls about rates and competitive rates from the major banks, they have put a hault on them. Although the product that were attached with them were limited and badly disclosed to consumers, there are still amazing rates to be had in the mortgage market. The problem with banks is that they can choose to give one rate today and a different rate tomorrow. All I can suggest be informed and do your homework and ask questions when shopping for a mortgage. Its not always about rate its about having a mortgage plan that suits your needs and someone that can show you ways to save money on your mortgage long term! If your interested in learning more about how to save money on your mortgage , no tricks no catch good ole information for you from me http://bit.ly/AfD2RR Here’s the article below;
After briefly offering record-low rates of less than 3% on some of its mortgages in response to its rivals, Canada’s two biggest banks have pulled back their offers prematurely.
Toronto-Dominion Bank, Canada’s second-largest bank, raised its special four-year closed fixed rate mortgage 40 basis points to 3.39%, effective Wednesday, while also introducing a special five-year closed fixed rate mortgage at 4.04%.
The bank also hiked its five-year closed mortgage 10 basis points to 5.24%.
TD had said it would offer the special rates until Feb. 29.
The moves put TD back in line with Royal Bank of Canada, which made the same rate decisions on Monday, coming into effect Wednesday.
RBC had also initially planned to keep its special rates available until Feb. 29
The only difference is RBC already had the special five-year closed fixed rate mortgage product, which it increased 10 basis points to 4.04%.
RBC had first cut its rate to 2.99% in January in response to a similar cut from BMO.
Matt Gierasimczuk, a spokesman with RBC, said the bank had to end its special prematurely because of rising funding costs.
“Our long-term funding costs have gone up considerably due to global economic concerns and, while we have held off in passing on these rate changes to our clients, it is now necessary for us to increase this mortgage rate,” he said in an interview with Bloomberg News on Monday.
With household debt-to-income ratios at at historic highs and still on the rise, the Bank of Canada has repeatedly voiced its concerns over the past year that Canadians are living beyond their means.
“We have expressed on numerous occasions our concerns about rising household indebtedness,” senior deputy governor Tiff Macklem said in a question-and-answer session following a speech in Toronto Tuesday. “The simple fact is that consumers are consuming more than they’re earning.”
Although you will never hear any bank say that publicly, this is what is going on. Recently there has been some industry chatter about a few banks offering a sub 3% 5 year fixed product. One particular institution is bragging about their 6 billion dollar portfolio under administration, this product, and how great it is. At first glance you might think ” WOW, that’s awesome!” However as with all mortgages, you have to dig a bit deeper to find out the real nuts and bolts of this sub 3% offer. It’s a great offer alright for the bank, not for you; the consumer.
Based on an average mortgage size of $250,000, that’s 24,000 Canadians that negotiated directly with the bank who will feel ripped off once they find out about their terms and conditions. I am very pro client / consumer, and my job is to look out for their best interests so I simply can’t endorse this product. Consumers though need to know why they shouldn’t either. This product is priced well below the market average for 5 year product, and does not come without it’s “catches”. It’s definitely buyer beware and the bank will not tell you this.
Some of the features (or non-features you might say) are:
Minimal or no pre-payment privileges
This product has extremely low pre-payment features. On a monthly increase basis this could mean nothing to less than half of what the industry norm is. Lump sum payments may also be nothing or less than half the industry norm and if allowed only once per year. Pre-payment features are extremely beneficial and allow for strategies to be put in place. Lack of strategy means lack of interest savings for clients and consumers.
When I say fully closed, I mean just that. A borrower cannot get out of the mortgage, unless they sell their place if at all. Who wants to sell their place if they want to refinance? I don’t know too many people that would. If borrowers do sell their place, a substantial penalty such as a 6 month interest penalty typically applies. Borrowers may be offered a reduced penalty (3 month) if they choose to refinance with that same bank however this still does not offer a borrower access to the entire mortgage market. It also confines them to more inferior product. If a borrower is going to pay a penalty, they rightfully should have the opportunity to entertain superior product. The average mortgage is in place roughly 3 years before being paid out or refinanced. Life just happens. More than likely a borrower will need to do something with their mortgage during their current mortgage term. To be locked down by these terms and clauses makes absolutely no sense.
No guarantee of best rates upon renewal or refinance
Banks know that consumers may not know the mortgage market at any particular point in time. What’s happening in the mortgage world is usually not on the forefront of people’s minds. When it comes time to renew or refinance borrowers can be offered a rate as high as 1% above the market norm and not realize it. When a borrower asks the bank to do better, they may be offered a discount further however that .5% “special” discount doesn’t look so good when the rest of the market is priced much lower. This amounts to more interest the borrower has to pay over the course of their mortgage. This is more money for the bank that should be staying with you.
Your mortgage will also be registered as a collateral charge.
Beware of this one as it is a very sly practice among banks. What does a collateral charge mean to a borrower? The bank will instruct the lawyer to register the title as a running account. More than likely you running account will have a global limit of the property value itself. This doesn’t mean you are going to get this money, it just means that your property is fully tied up. If you choose another lender at renewal, legal fees apply. A second mortgage or Line of Credit can’t be put behind this product because the bank has tied up ALL of your equity. No matter which way you turn, the bank has shackled you to more costs and fees.
The lesson here is that rate is not everything. Product and Strategy is. Borrowers need flexible product to execute strategy.
Thank you to one of my fellow brokers for writing this article. Consumers are becoming slightly more educated about shopping for a mortgage, but clearly not enough, that means we have alot more work to do to make sure consumers are much more informed about their options when shopping for a mortgage wherever they are in the mortgage process. READ ON…
Every now and then we see a mortgage stat that’s a jaw-dropper.
This finding from Manulife Bank is one of them. It suggests there are a lot more people with money to burn than one might expect.
Manulife recently surveyed 1,000 Canadian homeowners between the ages of 30 to 59. Among respondents with a mortgage, two-thirds (65%) did not compare mortgages from more than one lender when they last renewed.
20% stayed with their current lender after maturity and did not negotiate
45% stayed with their current lender and tried to negotiate a good deal, but did not shop around
35% compared mortgages from several lenders and choose the best overall lender and product.
The youngest group (ages 30-39) was most likely to shop around (41%), but was also most likely to
accept their current lender’s offer without negotiating (24%).
We asked Doug Conick, President & CEO of Manulife Bank, why on earth people would give so much power to their lender.
“Most people lead very busy lives and may not have the time or expertise to fully investigate their options,” he said.
“Through our debt survey we’ve found that only about 3 out of 10 Canadians work with a financial adviser to manage their debt more effectively.”
“With busy lives and a lack of advice for most, this decision often gets left until very close to the renewal date, causing borrowers to follow the path of least resistance and renew with their current lender.”
“The unfortunate thing,” he added, “is that this could end up costing them a lot of extra money and keep them in debt longer than they need to be.”
That’s for sure.
In our experience, people who auto-renew often pay 1/2%-3/4% more than necessary, or worse! In fact, we’ve seen innumerable people sign renewal letters at their bank’s “special offer” rate, which is usually well above the market. (Example: Today’s 5-year fixed “special offer” bank rates are 3.94% to 4.09%. That’s up to 80 basis points above competitive rates on the street.)
Even a 1/4% rate difference amounts to over $4,000 more in interest over five years, on a $200,000 mortgage with a 20-year amortization. That’s money that could normally go towards prepaying a fat chunk of principal.
It’s hard to fathom why anyone would let a lender pick their pocket like this. At the very least, folks must find it within their strength to lift up the phone and call an independent mortgage planner.
Even if you’d rather stay with your current lender at renewal, seek out a second opinion. You absolutely owe it to yourself to keep your lender honest by surveying the market.
Of course, this all begs the question of why someone would ever want to deal exclusively with a lender that aims to maximize the interest they pay…but that’s a story for another day.
Sidebar: The report also confirmed, yet again, the various studies which show that people underutilize their prepayment privileges.
In the last year, out of respondents with a mortgage, 70% did not make any extra payments.
By far, the most common reason cited for not making an extra mortgage payment was “a lack of extra money.”
Heres an interesting article on things to consider when locking in your mortgage or at least considering renewing your mortgage for a better rate. Lots of things to look at when rates are at an all time low. You can imagine consumers are taking a good look at their mortgage and where they want to go with it. Small differences in rates can save you thousands over the longer term. As most of us have a mortgage for years, take advantage of at least looking at your current mortgage and consider whether making a change could be beneficial. As always any questions or comments please feel free to contact me at 1-888-819-6536.
The gap between short-term and long-term rates has shrunk enough that it might be time for anyone renewing a mortgage to consider locking in.
Moves last week by the major banks to reduce the discount on variable-rate mortgages comes as the discounts for long-term mortgages have gotten as steep as they have ever been.
“What seems to be happening is they are focusing their attention on fixed rates. We are starting to see some aggressive competition on four-and five-year products,” says Gary Siegle, a mortgage broker and Invis Inc. regional manager in Calgary.
How aggressive? Try as much as 190 basis points. A five-year, fixed-rate mortgage with a posted rate of 5.39% is now being offered for 3.49%.
For whatever reason, the four-year, fixed-rate mortgages are being priced even more aggressively.
Mr. Siegle says he can lock consumers into a four-year, fixed mortgage for as low as 3.09%.
The discounting comes as variable-rate products, linked to prime, have become more expensive. Short-term money has become more expensive in the bond market, forcing banks to reduce discounts.
The banks traditionally move their prime rate with the Bank of Canada rate. With no flexibility there and existing customers getting huge discounts based on old deals, banks are forced to raise rates for new loans as short-term money gets more expensive.
The trend began in April when FirstLine Mortgages, a subsidiary of Canadian Imperial Bank of Commerce known for its low rates, cut its discount on variable rates.
Others banks were slow to follow, hoping to make money on volume. But refinancings have dried up under tougher mortgage rules and sales have slowed, creating the need to tighten profit margins on variable-rate products.
Today, the discount on a variable-rate mortgage is about 55 basis points off the prime rate of 3% – in other words, 2.45%. Compare that to 3.09% on a four-year mortgage and the premium to lock in is not that much.
“This gap is about as narrow as it goes,” says CIBC deputy chief economist Benjamin Tal. “It reflects a flat yield curve, which makes it difficult to make money in this business.”
Mr. Tal says variable-rate mortgages tend to be more attractive when there are inflation expectations not yet expressed in short-term rates. This time, he says, the bond market is depressed, anticipating recession, and that has shrunk spreads dramatically.
The one thing keeping people in short-term money is the sense that there is no urgency to move because the U.S. Federal Reserve Board has pledged not to raise rates for two years, which also effectively ties the hands of the Bank of Canada.
“We know the five-year rate is attractive, but we also know short-term rates are not raising,” Mr. Tal says.
What does that mean on a practical, dollars-and-cents basis?
Let’s use the Canadian Real Estate Association’s 2011 average sale price forecast of about $360,000 and assume a 20% down payment and a $288,000 mortgage.
At 2.45%, your monthly mortgage payment based on a 25-year amortization would be $1,282.98. At 3.09%, your monthly payment rises to $1,376.28.
But even at the gap, you would pay about an extra $7,000 in interest to lock in over four years.
Ultimately, the $7,000 amounts to an insurance policy. You get payment certainty for four years, but at a price.
If rates climb 200 basis points on your variable-rate mortgage, it could cost you $22,000 more in interest over four years. The reality is that rates wouldn’t jump at once and, therefore, increases would likely be gradual.
Moshe Milevsky, the York University finance professor who wrote the oft-quoted study that variable-rate mortgages do better than fixedrate mortgages 88% of the time, said if you start thinking about it like insurance, it comes down to your risk tolerance.
“There are people who pay a lot for protection on their portfolio; there are people who pay a lot for life insurance,” Prof. Mr. Milevsky says. “If the premiums are low enough, you might say, ‘Sure, I’ll pay.’ But if you have a tight budget, every basis point counts, and it might not be worth it.”
To me, he still has the ultimate answer for the tough decision whether or not to lock in.
“I still don’t get why more Canadians don’t split their mortgage,” Prof. Milevsky says. In other words, locking in half of the mortgage and floating with prime on the other half.
“When is a bank going to come to the realization Canadians hate making this choice?”
He’s right. Even with rates this low and the gap between short-term and long-term rates this narrow, it is still a tough call