With fixed mortgage rates rising quickly in the last few weeks, is it finally time to lock in your variable mortgage?
Your mortgage is up for renewal or you just bought a home and it is time to decide: fixed mortgage or variable mortgage. Both options are at historic lows, which sounds like a broken record since the economic collapse of 2008. With 5 year fixed rates hovering around 2.89% and variable mortgages at prime less 0.6%, either option is attractive. But how do you choose? The answer is in oil prices.
With oil prices collapsing from $140 per barrel to $45-$50 range in the last 6 months, Canada's GDP growth will slow down and there are talks of Alberta going into recession, yes the "R" word. Over the last 4 years, Alberta has been carrying the country with its economic growth. As Alberta slows down, inflation will be lower, unemployment will be higher (in Alberta, NewFoundLand and Saskatchewan).
Slower economic growth (GDP and employment) will lead to lower inflation, below 2-3% target range for the Bank of Canada which would keep prime rate at current levels. If the economy shrinks, the Bank of Canada will cut prime rate to stimulate economic growth (as I write this post, the Bank of Canada has surprised the market by cutting the benchmark rate by 0.25%. Effective tomorrow, prime rate is 2.75%!)
Until the economy returns to "its full capacity" which the Bank of Canada is predicting to be late 2016, or later in my opinion, the benchmark rate which drives prime rate will probably not increase till then.
So, as oil prices go, so does the Canadian economy.
Homeowners are taking advantage of historic low interest rates whether they are fixed, around 3%, or deeply discounted variables around prime less 0.5%. Majority of homeowners and real estate investors choose a 5 year term, but what happens in the future if it is required to increase the mortgage amount for the purpose of debt consolidation, equity take out for investment purposes, or moving to a new home?
Home Equity Take Out Options
Example: Property value $480,000. Current mortgage balance is $250,000 at 3.09% with 3 years remaining till maturity and the homeowner wants to borrow $150,000 to buy an investment property. There are 3 options for the homeowner to entertain:
- Break the mortgage and restructure up to 80% based on current market value. Con: paying a penalty and refinancing at a higher interest rate (assuming interest rates will not be at 2.99% in 3 years time)
- Add a HELOC up to 80% of current market value: HELOCs are offered at prime+0.5%. Good option since it is setup separately and interest costs can be easily tracked for income tax deductions
- Increase & blend: Leaving the current mortgage at 3.09% unchanged, the homeowner can add another $150,000 to the mortgage based on current mortgage interest rates with the new mortgage maturing at the original date. In this case, a 3 year fixed term would the product choice.
The above illustrates the options for a fixed mortgage holder. The options are different for variable mortgage holders:
- Refinancing the mortgage with the penalty being 3 month interest
- Adding a HELOC up to 80% of current home value
- Increase and blend is not an option lenders offer. To my knowledge only one lender allows increase and blend for variables. ING Direct used to allow it, however that might have changed after the acquisition by Scotiabank and renaming to Tangerine
One thing to look out for is the fine print detail for no frills mortgages (ultra low rates) as some might restrict the homeowners ability. For example, BMO's 2.99% offer allowed the homeowner to refinance only with BMO and did not allow adding a HELOC. Since the homeowner has no negotiating power they are at the mercy of the bank when it comes to interest rates.
There is more to mortgages than interest rates. Rates are the cost of getting into the mortgage, however the fine print can cost thousands more.
To navigate through the mortgage minefields and for a hassle free transparent experience please contact Nawar.
It is that time of year again....spring market. This is when the majority of real estate transactions occur and hence when the banks tend to get aggressive on mortgage pricing to gain market share. Another 2.99% offer was made by BMO which was in the headlines across various media outlets. My objective in writing this article is to explain the fine print of BMO's mortgage. In 2014 homeowners ought to expect more transparency and explanation from their mortgage professional or bank employee.
Here are the fine print details of the 2.99% offer:
- 25 Years Maximum Amortization: It is advantageous to payoff your home early, however one size does not fit all. If the homeowner, intends to buy an investment property, cottage or a second home in the future, the higher mortgage payment due to the lower amortization would restrict mortgage qualification. Other cases where 25 year amortization is disadvantageous are: self employed homeowner, family that's expecting a child and income will drop due to maternity leave, family that has to support a child through university, single parent, homeowner who is looking to leave their job and start a business......
- Pre-Payment Privileges: 10%. Although the majority of lenders offer 15%-20% pre-payment privileges, I believe 10% is decent since majority of homeowners do not max out that privilege
- Increase Payment Privilege: 10%. Decent but again, not the best in the industry (15%-20%).
- Fully Closed Term: This is where BMO has their clients locked up. The homeowner can get out of the mortgage if they sell the home via bona fide sale (arms length sale) or refinances with BMO. In negotiations, if one has only option or entity to negotiate with they would not be in position to get a good deal. The interest rate differential (IRD) for this mortgage product is punishing since it is 2% below the posted rate (4.99%) and it's equivalent to approximately 4% of the outstanding balance.
It is important for homeowners to sit with their mortgage professional and ask about the cost of getting into the mortgage (interest rate) and inquire about the costs of getting out of the mortgage (penalties, portability, restrictions). A mortgage is one piece of the puzzle in a homeowner's financial plan and it is important to ensure the right product is chosen based on features and not just rates.
On February 28, 2014, CMHC announced mortgage insurance premium will increase effective May 1, 2014 for homeowners, self employed and 1-4 rental properties. Here is a chart of the current and new insurance premiums for owner occupied homes
What exactly does this increase translate into dollars and cents? Here is an example based on 5% downpayment, 3.49% mortgage amortized over 25 years
As you can see the increase is moderate ($8.98 per month) and should be manageable by homebuyers. It will be interesting to see what happens in the future since CMHC stated they will review insurance premiums annually and make announcements in the first quarter moving forward.
Genworth wasted no time in announcing similar increases to their premiums effective May 1, 2014. Canada Guaranty took a few days to mull over their decision but they will increase their insurance premiums as well.
[contact-form subject='I Have A Question...'][contact-field label='Name' type='name' required='1'/][contact-field label='Email' type='email' required='1'/][contact-field label='Comment' type='textarea' required='1'/][/contact-form]
Referrals are still the primary method of getting introduced to a mortgage broker when buying a home or an investment property, however more and more Canadians are searching for mortgage brokers online. Borrowing hundreds of thousands of dollars is a serious undertaking and requires due diligence. Based on my years of experience here is a checklist of how to find a trustworthy mortgage broker.
Trustworthy Mortgage Broker Checklist
- Online Presence: Everyone, well pretty much everyone, has a website nowadays. However, are they active in publishing material relevant to the market? Are they experts in a niche market (real estate investment, self employed, first time home buyers, bad credit, private mortgages....) or are they the jack of all trades? Going through their website you will get a good feel if they are experts in a specific field.
- Strategy vs No Strategy: Quoting rate requires no skills, afterall most brokers and lenders have the same rates with a possible difference of up to 0.1% ($100 for every $100,000 per year). Unfortunately, obtaining a mortgage licence is easy; one course, a few hundred dollars and off you go! If a broker or agent is only quoting rates without explaining the following, run away:
- Pros and cons of each product
- How each product helps you achieve your financial goals
- Fine print terms (penalties, mortgage features)
- A plan to pro-actively manage the mortgage post funding
- Execution: A financial planner engages their clients on an ongoing basis to adjust their portfolios as economic conditions and clients' lifestyle change, why wouldn't you expect the same from your mortgage broker? Building net worth is achieved through 2 ways: 1/ increasing assets and 2/ decreasing bad debt. How will the mortgage broker track your mortgage and keep you informed? Why not have a debt manager on your team?
- Full Time vs Part Time: Since mortgage agents have a low barrier of entry, there are some out there who operate on a part time basis. There is nothing wrong with someone building their business to transition full time into the profession, but would you trust a part time lawyer, a part time doctor, a part time real estate agent or a part time contractor?
- Experience: I'm into sports, so I'll use a sports analogy: great coaches used to be players in the past. If you are looking to invest in real estate, shouldn't you engage a mortgage broker who invests in real estate, whose been through the ups and downs? If you are self employed, shouldn't you approach a full time self employed mortgage broker who personally experienced the challenges of getting mortgage financing? If you are a first time buyer, shouldn't you meet with a mortgage broker who had a terrible experience getting a mortgage for their first home?
- Job Interview: I view hiring a mortgage broker as applying for a job. You probably can recall going for a job interview, where the interviewers asked lots of questions and based on your answers (and references) got a gut feel for you. Hiring a mortgage broker is the same, use the above information to ask questions and get a good gut feel for who you should hire. You are trusting a professional with hundreds of thousands of dollars.
If you are buying your first home, an investment property or you are self employed and looking to interview a professional mortgage broker, please contact me.
I have to share this personal experience since it resembles what I deal with on a daily basis with my mortgage clients. My home and auto insurance policies have been with a company for years now until I got my renewal letter a few weeks ago. The jump in insurance premium caught my attention especially since my wife and I are responsible drivers: we have 2 young children, and our records have been impeccable; no tickets, no violations, no accidents.....Usually I get my renewal, go through it to ensure there aren't major changes, the price is reasonable based on the previous premium and then renew.
Sounds familiar? You get your mortgage renewal, too busy with kids, work and life, numbers look ok and you renew? I wasn't happy with the increase in premium and decided to look around.
I tried a price comparison site which provided a low price but after connecting with the insurance company it turned out the information transferred to them from the rate site was inaccurate and the quoted price was invalid; it was higher.
Sounds familiar? You check out a mortgage rate site to find out the rates being quoted are for 30 day closings, have restrictive conditions, not valid for rental properties, you can't refinance the mortgage in the future.....and the list goes on.
By investing some time I saved 25% off what was offered by the existing insurance company.
3 Mortgage Renewal Tips
- Don't sign the renewal letter sent by your incumbent lender
- Rate sites provide a number but don't tell the full story
- Take the time to consult with a professional, it could save you thousands of dollars
In my business, new and repeat clients are provided with superior service and their business is never taken for granted. I don't understand why some businesses take their existing clients for granted.
If your mortgage is up for renewal, you don't want to be taken for granted and looking for professional unbiased advice, please contact me.