Many people ask me what I am recommending with regard to rates and terms right now. Every person’s situation is different, but as of today, October 24, 2010, the following is what I am generally suggesting to my clients:
5 year term
Variable rate mortgage.
The interest rate is .65% below current prime lending rate of 3.0%, =2.35%.Worth your time for monitoring interest rate hikes.
Avoid extended amortization periods of 25, 30, 35 & 40 years.Select 20 years, the difference is nominal.
Accelerated weekly or bi-weekly payments.
Set your payment to what fixed rate payment would have been to reduce repayment period.
Your Benefit:
Your mortgage will be paid off early in 12-years and 3 months!
Many of our clients want to take advantage of today’s exceptionally low interest rates by getting out of their current mortgage and into a new one. For most, that is a very expensive, long term option. Please read the following article for some of the reasons why. Each situation is different, and we will be pleased to go through your current mortgage and its payout penalty to see if moving to a new mortgage is worthwile.
Have you ever wondered why the banks list posted mortgage rates that are ridiculously high?
One reason is that it could result in you paying $10,000 or more in extra penalties should you ever break your mortgage with them.
Here is the scenario:
Many people have, at one time or another, looked at breaking their mortgage in order to get a better rate.
With interest rates dropping to historic lows, it is more and more common for homeowners to think about the benefits of breaking their mortgage, paying a penalty, and locking in to a new lower rate mortgage.
Traditionally, the mortgage penalty on fixed rates is either 3 months interest OR something called the Interest Rate Differential (IRD) – whichever is higher. On a closed, variable rate mortgage, it is usually simply 3 months interest.
While the 3 months interest is pretty easy to understand, the IRD is a little mysterious. For help on this, I went to TD Bank’s mortgage website. RBC has a similar section.
They both show the following formula:
Step 1: (A) The current interest rate under your Mortgage expressed as a decimal (for example, 6.75% = .0675)
Step 2: (B) The current interest rate that we can now charge for a mortgage term offered by us with the term closest to your remaining term. The interest rate will be our posted interest rate for the term minus the most recent discount you received
Step 3: (C) A – B = C, which is the difference between your current interest rate and the interest rate in B above (write C as a decimal)
Step 4: (D) Amount you want to prepay
Step 5: (E) Number of months for the remaining term of your Mortgage
Step 6: (F) (C x D x E) ÷ 12 = F, F is your estimated Interest Rate Differential Amount
Let’s say you have a mortgage at 4.75%, and it comes due in 2 years, and it has a current principal owing of $400,000. TD’s current 2 year posted rate is 4.1%. Let’s say that you were offered a 0.5% discount off the 2 year rate. The math would work as follows:
While $7,200 seems like a lot of money, if you can lock in a 5 year mortgage today at 4%, you are benefiting from 2 years of a 4% interest rate instead of 4.75%, but you are also guaranteeing three additional years at 4%, when it is quite likely that in two years, a 5 year fixed mortgage rate will be a lot higher.
Here comes the evil part.
At many big banks, they don’t use your existing 4.75% rate. What they do is take the posted rate at the time you took out your mortgage. This is a rate that has no relevance to you, as you never paid it. In fact, it likely isn’t listed anywhere on your mortgage contract. Remember the ridiculously high mortgage rate we talked about at the beginning of this article? Now you see what it can be used for.
In the March budget, the federal government said it would “bring forward regulations” to standardize the calculation and disclosure of mortgage pre-payment penalties. (This applies to federally regulated lenders.) We are still waiting.
The Bank of Canada raised its benchmark interest rate by 25 basis points for the second time in two months, even as households and governments in the developed world continue to cut back on spending.
The rate is now 0.75 per cent. The bank said any further increases “would have to be weighed carefully against domestic and global economic developments.”
The central bank became the only one in the Group of Seven to hike its key lending rate after keeping it at unprecedented lows during the recession.
While economic growth in Canada has largely relied on consumer spending, the bank now projects that business and trade will make up a larger part of the country’s gross domestic product, but overall growth won’t be as large as the bank previously thought.
The bank now estimates that Canadian GDP will expand 3.5 per cent in 2010 and 2.9 per cent in 2011, down from the previous projection of 3.7 per cent and 3.1 per cent respectively.
One of the biggest rounds of applause at a housing-policy conference sponsored by the Federal Reserve Bank of Cleveland this week was for Virginie Traclet, a soft-spoken researcher from the Bank of Canada. All the French-born Ms. Traclet had to do was describe Canada’s mortgage market.
To start with, interest on mortgage debt isn’t tax deductible in Canada, so the government isn’t bribing people to take on more debt.
Canadian lenders are closely regulated and conservative. Subprime loans never accounted for more than 5% of the market, Ms. Traclet said.
All mortgage loans are made on the basis of giving the lender recourse to the borrower’s other assets—such as cars or savings—if the loan defaults. In the U.S., we have a mixed bag of recourse and non-recourse loans and many restrictions on banks’ ability to go after other assets. That means borrowers are more likely to walk away even if they could pay.
If the mortgage loan totals more than 80% of the estimated property value, the borrower must buy mortgage insurance. The main seller of such insurance is a government agency. That’s a blatant government subsidy to the market, but at least the Canadian government acknowledges it and makes its financial backing for that agency explicit. In the U.S., we allowed the government to pretend it wasn’t really backing Fannie Mae and Freddie Mac.
So how is Canada doing? As of March, 0.44% of Canadian mortgage borrowers were three months or more past due on their loans. In the U.S., the rate was 9.5%. Canada’s homeownership rate, about 68%, is roughly equal to ours.
American patriots will object: But the Canadians don’t have our 30-year fixed-rate mortgages with the right to prepay at any time! That’s true. Most Canadian mortgages have five-year terms. When they are renewed or refinanced, the borrower faces the risk that interest rates will be higher. In the U.S., many of us have believed since the 1930s that American households shouldn’t have to take that interest-rate risk. We invented Fannie and Freddie to take the risk for us.
But the risks taken on by Fannie and Freddie didn’t vanish. They were just shifted to quasi-government entities. In 2008, the government had to take control of Fannie and Freddie once it became clear that defaults would wipe out their meager capital. So far, the Treasury has had to cough up about $145 billion to cover their losses. That’s the bill (still a running tab) to taxpayers for all those risks they supposedly avoided under our mortgage system, which politicians in Washington long described as “the envy of the world.” And that bill isn’t being paid only by people who have mortgages.
Still, Ms. Traclet was diplomatic about our shortcomings. She declined to say whether Canada has a better mortgage system than we do.
OTTAWA – Borrowing costs for consumers and businesses are slated to start rising moderately after the Bank of Canada moved off its ultra-stimulative monetary policy Tuesday, hiking its trendsetting interest rate a quarter point.
It was the first time in almost three years that the central bank actually raised the policy rate but it will still be regarded as a bold and perhaps risky move on the part of governor Mark Carney.
The move lifts the trendsetting overnight rate to 0.5 per cent and puts Canada first among the world’s G7 leading economies to start tightening monetary policy — and it may remain out on a limb for some time.
Most analysts don’t expect any others among the big seven to start raising interest rates until next year at the earliest.
The initial reaction of markets was to take the Canadian dollar down almost a cent to 94.93 cents US, although the loonie recovered most of the losses by mid-morning.
Scotiabank economist Derek Holt said the market reaction was in line with expectations that Carney would be more “hawkish” in his statement. Instead, the bank statement seemed to cast doubt whether it would continue to raise rates or take a pause.
”Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments,” the bank said.
Markets had already largely priced in a quarter-point hike and most analysts had forecast Carney would keep making incremental increases for the rest of the year.
”They can have their cake and eat it too by signalling they are serious about reinforcing price stability, but they are not going to go too far out on a limb,” said Holt.
The decision will likely affect financial vehicles such as variable rate mortgages and lines of credit tied to the prime rate.
But Holt said a quarter-point hike is so small that it will have little impact on borrowing behaviour. Canadians can mitigate the higher interest rate by stretching out amortization schedules, or by paying down less principal, he explained.
The Bank of Canada also stressed that real interest rates in Canada remain exceptionally low.
”This decision still leaves considerable monetary stimulus in place,” it wrote in an accompanying note.
Carney’s action would not have raised eyebrows a few weeks ago, when an entrenched global recovery appeared on solid ground. But since then Europe’s unfolding debt crisis and bank weaknesses in Spain have shaken the foundations of the global outlook.
Still, Canada’s central bank said conditions had improved sufficiently to move off what had been described as the emergency rate for the economy of 0.25 per cent, where it had been since April 2009.
The bank said Canada’s economic growth has been unfolding largely as expected, citing Monday’s release by Statistics Canada that showed gross domestic product output had expanded by 6.1 per cent in the first quarter.
It said that household spending is expected to moderate, while business investment fills in the gap.
The darkening clouds on the horizon all have to do with the global economy, which the bank said remains heavily dependent on low interest rates and government spending and is becoming “increasingly uneven.”
There is strong growth in emerging economies like China and India, some consolidation in the United States and Japan and “tensions” in Europe that are likely to result in higher borrowing costs and a ratcheting down of government spending that will slow growth.
“Thus far, the spillover into Canada from events in Europe has been limited to a modest fall in commodity prices and some tightening in financial conditions,” the bank said.
But it noted that Europe remains an important downside risk for the global economy, which would likely have spillover effects for Canada.
In raising the overnight target rate, the central bank noted that it is keeping the deposit rate it pays out to financial institutions for holding short-term deposits at one-quarter point, re-establishing the normal operating band of 50 basis points.
