Mortgage Rates Are Up....Already!

There has been lots of talk about interest rates not moving up for the next year or two.  But mortgage rates are up already!There are two types of mortgage products: fixed rate and variable rate.  Variable mortgages are based off prime rate which is set by Bank of Canada's benchmark rate, whereas fixed mortgages are based off bond yields.  As per the Bank of Canada's most recent announcement, the benchmark mark rate remained unchanged which effectively left all variable mortgages, HELOCs and unsecured lines of credit unchanged. However, the bond market has experienced a sharp increase in yields which pushed fixed mortgage rates higher.

Variable Mortgage Rates

Bank of Canada's benchmark rate is a tool to control inflation around the 2% level.  As inflation creeps up, the Bank of Canada increases its benchmark rate to slow down spending due to the higher costs of borrowing. On the other hand, when the economy contracts (recession), the Bank of Canada reduces its benchmark rate to stimulate spending and economic growth.  Currently, Canada is in a stable inflationary period, therefore the prime rate has not changed for a few years and should remain close to the 3% level in the near future.

Fixed Mortgage Rates

You might be wondering, why did fixed mortgage rates move while prime rate did not?

The bond market movements are influenced by good or bad economic news. Good economic news result in money moving from the bond market, which offers low returns since it is considered a secure investment, into the stock market for higher returns.  For the bond market to be attractive for investors, yields increase. As yields increase, fixed mortgage rates increase.  Good economic news such as job creation, GDP growth, improved housing numbers result in upward pressure on bond yields and fixed interest rates.  The US economy has been showing signs of improvement which caused the recent increase in fixed mortgage rates.

There you have it, now you know why fixed mortgage rates have increased and variable mortgages have not.

With the recent 5 year mortgage rates increase, the difference between 5 year and 10 year fixed mortgages is at an all time low, is it time to rethink the 10 year fixed mortgage strategy?

How To Beat 2.99% 5 Year Mortgage Rate

Bank of Montreal's 2 week promotion of 2.99% 5 year fixed rate has initiated a flood of emails from lenders lowering their interest rates on various mortgage terms.  Yes, the gloves are off since we are back from the holidays and the real estate market is active again.Can this rate be beat?  The answer is yes if one looks at a longer term.  Here is a scenario I ran for clients today based on a $250,000 mortgage:

Option 1: 10 year fixed 3.89% amortized over 30 years.

Option 2: 2.99% 5 year fixed amortized over 25 years, renew at normal interest environment of 5.75% for 5 years (click here for historical chart).

For both options, the monthly payments are set exactly the same over the 10 year period.  Here is a screen print of the comparison chart:

Summary:

• Option 1 home equity after 10 years: $75,706  (10 year fixed results in additional equity)
• Option 2 home equity after 10 years: $69,576
• Payment shock with option 2: $310 per month when renewing from 2.99% to 5.75%
• With inflation hedge mortgage strategy, additional equity would be obtained with option 1

In conclusion,  mortgage rate is important, however looking at the long term picture and minimizing the cost of homeownership is key.

To discuss how you can be mortgage free sooner, please contact me.

Turn Down The Noise And Take Action

A new year is upon us and we are hearing the same things: "Real estate is overvalued by 10%, 25%...", "We are due for a correction".... I agree that real estate prices, and I'll only speak for Toronto since this is where I live and conduct my business, have appreciated over the last few years, however, one can't generalize since real estate is very local.  As per my previous posts "2 Factors That Can Affect Your Home Value", interest rates spike or unemployment spike are the 2 factors that can derail real estate prices. The other factor, is some major global disaster such as a country defaulting on its debt, would affect everyone and everywhere.There is lots of information on TV, radio, newspaper and on the internet. It can be overwhelming and paralyzing.

I am a firm believer in putting a plan together and taking action.  Since it's early in the year, it's a great time to put a financial plan (when you want to be mortgage free or think about buying an investment property to create long term wealth or topping up your RRSPs or consolidating debt to improve cash flow) then take action.  It's best to look back at year end and be grateful for taking action this year as opposed to wishing had done something 12 months earlier.

Please feel free to contact me to discuss your personal mortgage and financial goals.

How I Ended Up With 2% Equity In My Home!

Over the last few years, real estate prices have appreciated considerably where some first time home buyers have had a hard time qualifying for a mortgage.  Nevertheless, some are able to scramble the minimum 5% downpayment (or have some of the downpayment gifted by a family member) to start their journey of home ownership.

When buying a home with 5% downpayment, the mortgage has to be insured per Government requirement.  The insurance premium is 2.75% (for 25 year amortization) or 2.95% (for 30 year amortization) which equates to the homeowner having 2.25% to 2.05% equity in their home at the day of closing.  In the first few years of homeownership, the majority of the mortgage payment pays for the interest portion and minimal mortgage principal is paid down.  It's important to keep in mind that if one is planning to move in 5 years (outgrow the 1 bedroom condo), once the costs (realtor fees, legal fees, downpayment requirement for new home & closing costs) are taken into account, the seller might find themselves to be short of funds which will mean they have to stay for a longer period of time in their current home.

It's important to have a plan to paydown the mortgage principal which fits a person's long term goals. Afterall, getting a mortgage, setting the payment and forgetting about it is not a sound approach to financial freedom.

To discuss your personal mortgage financing needs, please contact me.