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?

 

5 Year Versus 10 Year Fixed Mortgage

Just when I think mortgage rates won't get any lower, they drop. With real estate sales volume slowing down across Canada and lots of bad economic news globally, mortgage rates have hit an all time low for 5 year fixed and 10 year fixed mortgages.  The battle of 5 year versus 10 year fixed mortgage is back!

5 Or 10 Year Fixed Mortgage

How do you choose which product makes sense?  Per Bank of Canada, average 5 year posted rate for the last 10 years is 6%.  It wasn't too long ago, in 2007 and 2008 5 year discounted mortgages were at 5.79%-5.99%.

Let's look at data to analyze which option makes sense by calculating the break even mortgage rate:

• Mortgage balance: $350,000
• Mortgage Amortization: 25 years
• Compare 5 year fixed mortgage at 2.89% versus 10 year fixed at 3.69%

 

What the abort chart shows is if one selects a 10 year fixed mortgage, sets the payment and forgets about it for a 10 year period versus choosing 2 5 year fixed mortgage terms, the breakeven mortgage rate is 4.49%.  If one believes that mortgage rates will be higher than 4.49% in 5 years from now, the 10 year fixed mortgage option makes more sense, or if one believes that rates will be lower than 4.49% in 5 years from now, the 2 5 year fixed mortgage terms option makes more sense.

BUT, as a mortgage professional, my clients don't get away with setting the mortgage and forgetting about it. Utilizing the inflation hedge mortgage strategy, pro-actively managing the mortgage and adjusting the payments for inflation, the breakeven mortgage rate drops to 4.35%. The inflation hedge mortgage strategy protects the homeowner from payment shock when renewing at higher mortgage rates and reduces mortgage amortization by achieving mortgage freedom earlier.

Understanding historical interest rates data and the breakeven mortgage analysis, the decision of choosing 5 year fixed mortgage or 10 year fixed mortgage should be an easier one.

Disclosure

• The breakeven mortgage rate will vary depending on mortgage amount and amortization.
• Above mortgage products are fully portable, assumable and have 20% pre-payment and 20% increased payment privileges built into them.
• Above mortgage products can be ported to a new property and mortgage amount can increased which is known as port, increase & blend in the mortgage broker world. This is important feature since it would be a bad mistake to break these low rate mortgages in the next 3-5 years if one decides to move.
• 10 year fixed mortgage penalty the day after 5 year anniversary is 3 month interest (not interest rate differential) per Interest Act.

To run your personal mortgage breakeven analysis, please contact Nawar.

Business Owners Mortgage

With round 4 of the mortgage rules taking effect on November 1, 2012, mortgage qualification for business owners got tougher.  Don't despair, since there is still hope for a business owner to get their last mortgage....ever. As you are aware, the new mortgage rules reduce the maximum mortgage to 65% of home value for business owners who use a stated income (income that is not verified by Canada Revenue Agency documents). However, as previously explained in a blog post regarding business owners mortgage options, a mortgage up to 90% for a purchase or 80% for a refinance can be obtained.

Business Owners Mortgage....The Last One

Many homeowners choose a 5 year mortgage term over other terms, however in today's economy the difference between 5 year and 10 year fixed mortgage has never been this small (2.99% vs 3.79% at the time of writing this blog post).  The 10 year fixed mortgage provides the following to a business owner:

• Stability and security of fixed cost of borrowing over a 10 year period
• Not worrying about qualifying for a mortgage in 5 years time frame and providing pages and pages of financial statements
• Protection from rising interest at renewal time
• Freedom to focus on growing the business, being profitable and tax reduction strategies

The chart below compares 2 options for a $350,000 mortgage: 2 5 year fixed mortgage terms and a 10 year fixed mortgage term

To summarize, the above chart shows if one believes mortgage interest rates in early 2018 will be higher than 4.75%, the 10 year fixed mortgage is a viable option. As difficult as it is to predict where mortgage rates will be in the future, why would anyone want to renew at higher than 3.79%-3.89% interest rate in 5 years time?

This mortgage option powered by the inflation hedge mortgage strategy (explained in this video) provide a solid plan to achieve mortgage freedom.

To discuss your mortgage options whether you are buying a home, an investment property or renewing your mortgage, please contact me.

Apple, RIM And Your Mortgage Freedom

June 29th is a special day for the following reasons:

• 5 years ago, Apple's iPhone was launched. It was the birth of Blackberry's nemesis
• Today is the first day after RIM announced major losses, delays in launching Blackberry 10 operating system and 5000 additional layoffs
• It is also the busiest day for lenders in Canada as the highest number of mortgages close today

You might be wondering what's the connection between the above 3 points.  Last year, I was meeting with a few investment banker friends who, at that time, said RIM's stock was a buy since it's price of $16 was undervalued and the company had lots of cash.  Fast forward 9 months, RIM's stock is at $7.4 (June 29, 2012 stock price). It has lost half of its value.  It is important when buying a stock, mutual fund or investment property to buy based on economics: how much revenue is generated (sales of company, rental income a property demands), profits (net profit, cash flow after all expenses are taken into account) and potential appreciation (R&D and innovation for a company, solid area that will experience growth due to jobs, infrastructure or immigration).  Buying (stock or investment property) because someone said it is good to buy is speculation and could result in disaster. Do your own due diligence.

As for the Apple connection, emulating their drive to innovate and improve by continuously reviewing the mortgage, adjusting it and understanding the opportunities leads to financial freedom. Being complacent by getting a mortgage, setting a payment and forgetting about it would be following RIM's path.  There is more to mortgage than rates.

Having a vision (building a portfolio of positive cash flow properties or being mortgage free) and executing a plan would result in financial freedom and not arranging a mortgage on the busiest day for lenders.

To discuss how to achieve mortgage freedom or build your real estate investment portfolio, please contact me.