Posted in Bank of Canada, Bank of canada rates, Benchmark interest rate, Best Rate Mortgages, British Columbia Mortgages, Canadian Economy, Canadian Mortgage News, Interest \rate Increases, Interior Mortgages, Kamloops broker, Kamloops home mortgages, Low Interest Rates, mark carney, Mortgage Affordability, Mortgage Rates, Variable rates

Bank of Canada hold key rate steady

Bank of Canada Keeps Key Rate Steady

As expected by most economists, the Bank of Canada announced earlier today that it is keeping its key policy rate steady.

In its statement the Bank noted that it expects “growth in Canada will be slow through mid-2012 before picking up as the global economic environment improves, uncertainty dissipates and confidence increases.”  The Bank also projected today that the Canadian economy “will expand by 2.1 per cent in 2011, 1.9 per cent in 2012, and 2.9 per cent in 2013.”

The prime rate at most lenders will stay at 3.00%, which means those with variable-rate mortgages will still enjoy relatively low rates.  A new variable-rate mortgage can in many cases be obtained by qualified borrowers at Prime minus 0.20% – 0.40%  Home equity lines of credit and variable-rate credit cards are also typically linked to the prime rate.  The pricing for new fixed-rate mortgages is influenced by trends in the bond markets, rather than the central bank’s key policy rate.

The Bank’s next rate decision is scheduled for December 6.

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Posted in advice on locking in your mortgage, Bank of Canada, BC Mortgages, Benchmark interest rate, Best Rate Mortgages, fixed or variable rate or both, Fixed rates, Kamloops broker, Low Interest Rates, mark carney, Mortgage Affordability, rate fixed mortgage, variable rate mortgages, Variable rates

Increase to Variable Rate Mortgages

Why could I get Prime minus .90 last week and today it is Prime minus .25?– A great question, says the Mortgage Brokers Association of BC (MBABC), especially when fixed interest mortgage rates are remaining the same.  The quick answer?  As with many things, it all boils down to money.

Over the last couple of months, banks and other lenders have been offering historically low variable interest rates to qualified homebuyers in an effort to attract new clients and mortgage business.  In the short term, lenders have been prepared to accept these low profit margins with the knowledge that, as the prime rate inevitably rises, so too will their profit on variable mortgages – a similar ‘loss leader’ tactic used by retailers to get consumers into their door.

“However”, says Geoff Parkin, MBABC’s president, “the recent announcement by Bank of Canada governor, Mark Carney has changed the mortgage lending landscape.”   Carney stated that, because of poor performing global markets and continuing economic uncertainty, the benchmark interest rate would remain unchanged.  The long-term outlook indicates continuing low fixed interest rates with no significant increases to the Prime rate.  “In a nutshell”, says Parkin, “the bank’s theory of anticipating rising profits on variable rates was proven wrong.  They’ve had to quickly respond to this situation by reducing the variable rate discount in order to gain back profit.”

What does this mean for consumers who have variable rate mortgages?  Much of the same, says Parkin.  “We continue to see low fixed rates and the variable rate is under 3.0%.  There may still be value in going variable over fixed, but because consumers all have different financial situations and mortgage needs, we recommend they obtain expert financial advice from their MBABC mortgage broker.”

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Get a lock on mortgage rates

Get a lock on mortgage rates

Even though there was a drop in some of this week’s fixed-rate mortgage products, some rates are expected to go up this year. Why the inconsistency between fixed and open rates? Fixed-rate mortgages follow bond yields. Variable rate mortgages reflect changes in the Bank of Canada’s prime rate, which is expected to rise.

 

There are ways to cushion the blow of rate hikes and make sure mortgage hikes are not a shock to your financial system.

 

“If the client is in a variable rate, which has the most fluctuation potential in the short term, I suggest they base their payments on a 4% fixed rate rather than making the lower payments based on today’s 2.25% variable rate,” says Gerri Vaughan, mortgage broker with Invis in Edmonton. “That way, they’re paying more towards the principal and they won’t have a payment shock when rates do start climbing.”

For clients who are already locked into a fixed rate, Ms. Vaughan says now is a good time to review their mortgage to work out if they should pay a penalty and renew early.

“It will really depend on what kind of pay-out penalty their existing lender is going to charge,” Ms. Vaughan says. “You have to look at those on a case-by-case scenario.”

Ms. Vaughan says borrowers who recently secured a low fixed-rate mortgage, and have a number of years remaining on their deal, are unlikely to benefit from an early renewal. However, customers who are nearing the end of their fixed-rate term may be better off paying early exit penalties and securing a new deal.

“Do an annual review of where things are with the mortgage. What are their plans over the next 12 months, are they planning to consolidate debt are they planning to do some renovations?” says Ernest MacDonald, a mortgage broker with Mortgage Intelligence in Halifax. “Does it make sense to renegotiate the mortgage now, to lock in low rates for the next five years, say?”

 

For clients considering buying a home within the next few months, the advice is get pre-approved.

 

“Even if they think they’re not buying for a few months most lenders will hold their rate for 120 days. If they’re locked in and rates shoot up, it protects them. If rates go down they always get the lower rate,” Mr. MacDonald says.

 

About 18% of respondents to a BMO Bank of Montreal survey last month said they would struggle to meet mortgage payment if rates rose. Ms. Vaughan says it is critical to be certain of your finances before contemplating homeownership.

“Be secure in your financial position and be comfortable that you’re going to have a job going forward,” Ms. Vaughan says. “The rates are good, the prices are good depending on where you are in Canada. It’s a good time to look at homeownership without overextending and being house poor; that’s no fun.”

Mr. MacDonald says having an overall financial plan is crucial.

 

“We’ve had pretty easy access to credit over the past 15 years. It has led to a lot of people not really knowing where all their dollars are going,” Mr. MacDonald says. “It really comes down to paying attention to where your money is going and being prepared if rates do go up.”

 

 

Posted in British Columbia Mortgages, Canadian Economy, Canadian Mortgage News, Fixed rates, Kamloops broker, Kamloops Mortgages, Variable rates

No simple answers for new buyers The choice: To lock-in or go variable

Do you lock in or go variable? With mortgage rates tantalizingly low it is easy to see why so many people prefer the latter, but that could change if the rates start to rise.

Maria Dominelli, a mortgage specialist with independent mortgage brokerage firm Invis in Victoria, B.C., says deciding which route to choose depends on an individual or couple’s short-and long-term goals, the amount of debt being carried and their overall tolerance to risk.

“I always ask clients whether they can afford to ride the wave, because there will be waves,” she says. “If you cannot afford an extra couple of hundred dollars a month if rates rise, it is not for you.”

Contrary to what many might think, there is not a downside to locking in, says Laura Parsons, a mortgage expert with BMO Financial Group in Calgary.

“Do your homework and if you do lock in, do not look back,” she says. “It depends on the person and what they can tolerate. Some people can’t sleep at night because they’re worried about what the rates are going to do. In that case, of course, a variable rate would not be suitable. You may want to just know what your mortgage rate is going to be for the next five years.”

Karen Blomquist, a mortgage associate with Mortgage Intelligence based in Calgary, conducts a needs analysis with her clients to “find out a little more about who they are.

“If they can’t sleep at night, what’s the point?” she asks. “[But] if someone has enough money and enough savings and risk, why wouldn’t you go variable? But if you are a little tight, you have a fear of fixed changing and you like to look at the long term, then I would say absolutely, lock in.”

Ms. Dominelli says that mortgage professionals have a responsibility to make sure that consumers really understand what they are getting into.

“Not all fixed rates are equal in terms of the product and not all variables are equal,” she says.

“As an example, bi-weekly does nothing for you. It gives the lender your money more often. Accelerated is when you have 26 payments. You may think you have an accelerated payment, but in reality you don’t. You have to really make sure you are signing the right document.”

For the purpose of this story, she calculated the difference between a $250,000 mortgage, amortized over 25 years at a five-year fixed rate of 3.69%, and a variable mortgage at prime minus 0.80%. In each case, the monthly payments were $1,273.38.

“Assuming the current prime rate of three per cent steadily increases to five per cent by the end of the term at the end the five-year period, the principal balance in the fixed term (assuming no extra payments) would be $216,444 versus $208,027 in the variable rate mortgage,” Ms. Dominelli says.

“That’s what makes a variable mortgage attractive, when you work out the numbers and show people the potential. However, I say that with caution because I would never show that to a highratio borrower. The reality is that this is what has happened as of late: you have had the lowest interest rate on the variable and the fixed, but going forward I don’t know if we can count on history repeating itself.”

Ms. Parsons says people are really paying attention to interest costs, and so they should. “As an example, taking five years off the amortization of a $300,000 mortgage can save you $53,000,” she says. “It’s huge.

“There is nothing wrong with requesting an amortization schedule when you get your mortgage so you know where you’re at in the first five years, 10, 15 and so on. Paying weekly, rather than monthly is a great way to battle that interest cost and also, get used to having a higher payment.”

Posted in BCMortgage, Best Rate Mortgages, British Columbia Mortgages, Canadian Economy, Canadian Mortgage News, Fixed rates, Kamloops broker, Kamloops Mortgages, Low Interest Rates, Mortgage Affordability, Variable rates

Fixed rate mortgages find few friends..

I’ve been doing this job long enough to remember when those rates looked quite competitive. By today’s standards, they’re too high to get much support at all from a panel of six mortgage brokers I surveyed by e-mail on TD’s deal.

They’re big fans of variable-rate mortgages, which today can be had for as little as 2.15 to 2.30 per cent. You ride in the front car of the interest rate roller coaster with these mortgages, though. Every time the Bank of Canada sets its rate benchmark higher, borrowing costs on variable rate mortgages rise as well.

The risk of rising rates is hard to quantify right now because of global economic cross-currents such as soaring commodity prices, economic troubles in Europe, what’s happening in Japan and an improving but still damaged U.S. economy. Our economy is on the upswing, and yet the Bank of Canada remains tentative on rates. It bumped up its overnight rate three times last summer by 0.25 percentage points each and hasn’t made a move since.

The bank has six more opportunities to raise rates this year, starting on April 12. It’s tough to be sure whether rates will increase in the rest of 2011, but you can be dead certain that over the next seven years, they’ll rise to levels that are much higher than they are now.

Seven- and 10-year mortgages are an extreme, and thus infrequently used, way of insuring yourself against a higher rate world. A survey released late last year by the Canadian Association of Accredited Mortgage Professionals showed just 7 per cent of mortgage holders had terms of five to 10 years and 1 per cent had terms longer than 10 years.

The CAAMP survey also found that roughly two-thirds of people have fixed-rate mortgages, about 30 per cent have variable-rate mortgages and the rest have hybrids with variable and fixed components. Clearly, Canadians like the idea of interest rate security. But seven years of it? Not so much.

“We have a small number of customers going into the odd terms, which are two, four, seven and 10 years,” said Chris Wisniewski, associate vice-president of real estate secured lending at TD Canada Trust. “We haven’t seen a significant rise in the last little while, but there’s more and more concern about the potential for rising interest rates.”

Several of the mortgage brokers surveyed for this column were strongly in favour of variable mortgages as opposed to fixed-rate mortgages of any term. “In my many years of experience, going fixed generally has not worked out well for my clients,” wrote Peter Majthenyi of Mortgage Architects in Toronto.

Vancouver mortgage broker Kim Arnold said she currently can get a variable-rate mortgage for clients at prime minus 0.85 percentage points or 2.15 per cent. For people who want fixed rates, she can arrange a three-year term at 3.42 per cent or a five-year term at 3.79 per cent.

The most aggressive stance against the seven-year mortgage came from veteran mortgage broker Vince Gaetano of Monster Mortgage. “It’s an ill-advised idea [for the consumer] and money maker for TD Canada Trust,” he wrote in his survey response.

Mr. Gaetano said the extra cost of locking in for seven years isn’t worth it. His preferred approach for people who want a locked-in mortgage is to take a five-year term, but make payments as if the rate was the 4.79 per cent charged on the seven-year term.

“It is important that Canadian consumers understand the need to accelerate the repayment of their debt rather than worry about where rates are going,” he wrote.

One mortgage broker who offers some support for the seven-year mortgage is Jake Abramowicz, who works mainly with first-time buyers in Toronto. “I think it would be a good idea if someone taking a fixed [mortgage] would extend for longer,” he wrote. “Problem is, most of my first-time buyers don’t see themselves in their places for seven years. The great majority, being between 25 to 40 years old, want to keep moving up the property ladder.”

Seven- and 10-year mortgages may be fringe products, but they do get you thinking about where rates will go in the next several years. Some people will decide to pay a higher rate today so they can tune out whatever’s ahead, and who are we to fault them?

Variable rules

Two mortgage brokers give their takes on the down side of fixed-rate mortgages:

David Larock of Integrated Mortgage Planners: “I have long thought that the five-year fixed-rate mortgage was overrated because you’re paying a premium for interest-rate protection, yet not really getting as much as you think. For example, if you take a five-year fixed today, and rates stay low for 2½ years and then start taking off, you have paid for five years’ worth of protection and, in the end, you’re only really getting a benefit for half of that time period.”

John Cocomile of Greedy Mortgage: “In theory, rates are at historical lows and they will trend up to where they’ve been historically, but not for a long time. The mess in the U.S. is going to keep rates low for the next 18 months to two years, likely longer. Most people in longer-term fixed-rate mortgages end up paying a big penalty, anyway.”

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Worry warts still have time to cushion their mortgage against rate hikes

TORONTO – The prospect of higher mortgage rates and stiffer rules that went into effect this week on qualifying for house loans have left Canadians scrambling for answers to their home financing questions before rates rise.

Many Canadians already faced with growing consumer debt are worried about how they’ll continue to make payments once mortgage rates rise. And many others, who want to get into the market ahead of rate hikes wonder how or if they’ll be able to do so.

Big Canadian banks have hikes their fixed-rate mortgage rates by as much as 0.85 per cent in recent weeks and the Bank of Canada said Tuesday that it could raise its key lending rate from 0.25 per cent as early as June, which brings variable and short-term rates into play.

And as the reality of higher rates creeps closer, mortgage holders face a slew of insomnia-inducing questions.

The answers are different for each homeowner or prospective homebuyer, mortgage experts say, but there are some general rules that wise mortgage holders follow in order to cushion themselves against rate hikes.

Jim Rawson, a Toronto-based regional manager at mortgage broker Invis, said those with mortgages coming up for renewal in the next four months and buyers looking to get into the market before rates rise should get pre-approved at current rates, giving them 120 days to lock in.

Refinancing is also an option for those worried about existing mortgages, but owners would have to pay a penalty.

“If you think that rates are going to go up three points in the next two years and you have a year or two left on your mortgage, to pay a small penalty for the peace of mind for the next five years might be worth it,” says Rawson.

Nervous buyers should consider a fixed-rate mortgages for a longer period of time and take comfort in knowing the payment will not change for the term of the mortgage, Rawson said.

“You don’t ever want to put somebody into a variable rate mortgage, although there are savings to be had right now if they’re going to be worried about what happens with rates every night,” he said.

“If they’re going to lose sleep over it, for Pete’s sake take a five-year (rate) at 4.64 (per cent), it’s still an incredible rate.”

New mortgage rules introduced this week will force some consumers to plan for rate hikes because all potential homeowners must now meet the borrowing standards for a five-year fixed-rate loan, even if they choose variable or shorter-term loans.

But the rules will only disqualify about five per cent of the applicants who would be most unprepared when rates rise, leaving about 95 per cent to take responsibility for their own financial security.

Homebuyers who don’t qualify for the five-year posted rate may either have to put more money down, or buy a less expensive property, Rawson said.

“Instead of buying a dream home, they might buy a starter home like most people used to have to do.”

Homebuyers worried about their ability to make payments may have to compromise, says Peter Veselinovich, vice-president of mortgage operations at Investors Group.

“You might have to settle for a little less house initially in order to start building up equity, or you might want to consider having a cushion in your payments.”

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Bank of Canada signals rate increase..

The Bank of Canada has signalled it is likely to raise interest rates in the next few months in response to unexpectedly strong domestic growth, including a housing boom that has shown signs of developing into a speculative bubble.

In its latest monetary policy review on Tuesday the bank said it was maintaining its key overnight lending rate at 0.25 per cent for the time being, but it was “appropriate to begin to lessen the degree of monetary stimulus” with the recent improvement in the economic outlook.

Dropped from the statement was a pledge made repeatedly in recent months not to raise interest rates before the second half of 2010.

“The market is reading that as a signal that they’re going to hike on June 1 [the date of the next policy review],” said Shane Enright, currency strategist at Canadian Imperial Bank of Commerce. “The odds on an early rate hike have increased.”

The Canadian dollar rose above parity with the US dollar immediately after the Bank of Canada’s statement.

The central bank lifted this year’s growth forecast for Canada to 3.7 per cent, adjusted for inflation, from 2.9 per cent previously. However, it now expects the growth rate to slow to 3.1 per cent in 2011, compared with its earlier projection of 3.5 per cent.

The revision was based on stronger growth in other parts of the world, which has boosted the prices of Canada’s commodity exports, the booming domestic housing market and heavy government spending on stimulus projects.

House prices have soared to record levels in Toronto and Vancouver, and bidding wars have become commonplace. The government tightened mortgage lending rules this week in a bid to cool the market.

The Bank of Canada said the extent and timing of monetary tightening would depend on the outlook for economic activity and inflation. It would maintain its 2 per cent inflation target, it said. Meanwhile, it has halted measures to inject extra liquidity into financial markets.