Don’t handcuff your mortgage

Posted: 4th July 2009 by Laurin Jeffrey in Mortgages and Financial Information
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Gary Marr, Financial Post

Would you like to pay an extra $300 per month on your mortgage? Not likely.

That hasn’t stopped a number of Canadians, with the deal of a lifetime on a variable-rate mortgage, from switching over to a more expensive fixed-rate product and paying the extra freight.

A fear of rising rates is driving the rash decision. But if you’ve finally managed to pin your banker to the ground, why on Earth would you let him off the mat?

More than 28% of Canadians have a variable-rate product tied to prime, according to the Canadian Association of Accredited Mortgage Professionals (CAAMP). If you negotiated a deal before October of last year, chances are you are now borrowing money for as little as 1.35%. That’s based on deals that at one point saw the banks giving 90 basis points off prime. Prime is now 2.25%.

The average sale price of a home last month in Canada was $306,366. Based on a 25% downpayment and a 25-year amortization, your monthly payment would be $962.61 at 1.35%. Convert that to a five-year fixed-rate term and you’re probably going to have to consider a 4% mortgage rate and a monthly payment of $1,289.04.

Rates are rising fast. Most major banks upped their five-year rate by 40 basis points this week, although discounters were still offering just over 4% this past week.

“It’s not a mass rush yet, but we are starting to see… people locking in. But variable rates are still so good,” says Joan Dal Bianco, vice-president of real estate-secured lending, TD Canada Trust. She stops short of questioning why a consumer would pull out of these “deals” that are no longer available on the market.

Try to get a variable-rate mortgage today and the best you can probably hope to get is 60 basis points above prime, or 2.85%.

The landscape changed dramatically in October during the credit crunch. As the Bank of Canada lowered rates, the major banks reluctantly lowered prime because of the massive amount of customers with variable-rate products negotiated under the old, higher terms.

“Bonds yields are going up rapidly and people are starting to realize the rates are going to go up,” Ms. Dal Bianco says. Throw in the fact the Bank of Canada used the weasel word “conditional”(on inflation rates)when it promised not to raise rates until June, and you can understand why some people think today’s record-low prime rate might not hold.

But if you’re someplace between 60 to 90 basis points below prime, the rate is going to have to go up pretty fast to justify locking in today at 4%, even though that is just slightly above the all-time low hit last month for a five-year term.

“I don’t understand why you would lock in,” says Jim Murphy, chief executive of CAAMP. “Sure, if they start to rise, but [Bank of Canada governor Mark] Carney says they won’t rise, so you’ve got another year at that prime-minus rate.”

Don Lawby, chief executive of Century 21 Canada, says even when rates do start to increase, they are not going to jump significantly right away. You are not going to get 4% on a fixed rate again, but double-digit rates seem unlikely. “The only logic to locking in would be for someone very sensitive to any rate change and they just want to be secure,” Mr. Lawby says.

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Contact the Jeffrey Team for more information  -  416-388-1960

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How Canada escaped U.S.-style housing woes

Posted: 4th July 2009 by Laurin Jeffrey in Other Real Estate Markets
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By Stephen Dupuis

I recently returned from a BILD-organized housing study tour of Denver and while the participating builders and designers took plenty of inspiration and ideas from the many great communities we visited, what stuck in my mind the most was how many times I heard the “F-word” while in the United States.

No, I don’t mean the four-letter word. The F-word I kept hearing was “foreclosure.”

On our first morning in Denver, the cover story on the front page of USA Today was “Mortgage crisis robbing seniors of golden years” and it spoke of the growing number of seniors facing or experiencing foreclosure on their properties.

The next morning’s Wall Street Journal had two full pages of Foreclosure Notices for Denver. In many cases the notices showed outstanding balances that were even higher than the original principal amounts if not equal or just slightly less, suggesting that these homeowners had taken out interest-only mortgages, one of the sub-prime mortgage products that has caused so much grief for U.S. homeowners.

That same day, CNN reported there were more than 1 million foreclosures in the U.S. this year as a lead into a story on a Foreclosure Prevention Summit taking place in Baltimore.

The summit was apparently quite successful in assisting many homeowners to avert foreclosure.

That is great, but the very existence of the summit is disturbing.

Thankfully, foreclosures, which occur when mortgagees default on their payments to the point where the mortgagor sells their home out from under them, are a rarity in Canada thanks to cultural, regulatory and market differences.

Culturally, we strive to pay off our mortgages as quickly as possible and our banks compete on features such as weekly or bi-weekly payments with further options to increase regular payments or make lump-sum payments. Americans aren’t nearly as inclined to pay off their mortgages quickly, which probably has a lot to do with the fact their tax code allows mortgage interest to be deductible.

From a regulatory standpoint, Canadian homebuyers borrowing more than 80% of the purchase price of the home are subject to minimum downpayment (5%), maximum amortization periods (35 years) and compulsory mortgage insurance requirements.

Moreover, the lending standards, which include minimum credit scores, maximum debt ratios and loan documentation standards are both strict and strictly adhered to.

As for market differences, the problem that many U.S. homeowners are experiencing is the double whammy of depreciation exacerbated by the fact that they weren’t building equity in their homes.

The trouble with banking on appreciation is self-evident. If lending rates go up or house prices go down, or worse yet, both happen simultaneously, you end up with a home worth less than your mortgage, and that’s exactly what happened in the U.S.

Here in Canada, our prices never went up as far or as fast and being conservative, pay-down kind of people, we are not suffering from the same woes, and that’s a very good thing.

Lest I leave you with a completely negative impression of Denver, it is a beautiful city to visit and one of the healthier U.S. housing markets, relatively speaking.

We chose Denver for the variety of outstanding low and highrise developments on the market and enjoyed tremendous cooperation from its builders’ association as well as the individual builders who welcomed us with open arms to their communities.

That said, I’m grateful we enjoy very high rates of homeownership in Canada thanks to a very sound mortgage finance system.

Stephen Dupuis is president and CEO of the Building Industry and Land Development Association. The views expressed are those of the president.

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Contact the Jeffrey Team for more information  -  416-388-1960

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Is it time to lock in your mortgage?

Posted: 2nd July 2009 by Laurin Jeffrey in Buying Real Estate, Mortgages and Financial Information
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One mortgage broker seems to think so. Here’s why.

Rob Carrick -  Globe and Mail

Jas Grewal’s reaction to the recent runup in interest rates was to abandon a sweetheart of a variable-rate mortgage in favour of a safer, but more expensive, fixed-rate mortgage.

Mr. Grewal, you should know, is a mortgage broker. A mortgage broker who sees the potential for much higher rates in the future.

“I’m fairly conservative and I’m locking in,” said Mr. Grewal, of the Mortgage Centre in Toronto. “Rates are starting to spike and I think they’re going to continue.”

Variable-rate mortgages like the one Mr. Grewal has are unaffected by rate increases over the past couple of weeks. But fixed-rate mortgages are on the rise, and he’s worried about a pervasive trend toward higher borrowing costs. He may have a point — it may be time to bail on that variable-rate mortgage and lock in for the longer haul.

Ultralow rates are a big reason why there are signs of life in the housing market. Sales activity and prices have been rising this spring; the average resale price of a home sold in May was nearly $320,000, according to the Canadian Real Estate Association, bringing prices back to where they were before last fall’s financial meltdown.

But rates are ticking up again. Five-year mortgages with a juicy discount applied are now going for about 4.3% after a pair of two recent rate increases that lifted them off historical lows in the 3.7% range. Meanwhile, the prime rate, used as a base rate for variable-rate mortgages, continues to sit at 2.25%.

Mr. Grewal’s concern is that rising inflation will send short-term interest rates soaring to a point where a five-year mortgage at today’s rates will look like a comparative bargain.

Statistically, variable mortgages are a better deal than fixed mortgages 88% of the time, Mr. Grewal said. “But I think we’re in that 12% zone right now.”

Whether you’re thinking of locking a variable rate into a fixed-rate mortgage or of renegotiating a mortgage you took out years ago to benefit from lower rates today, you have some thinking to do about rising borrowing costs.

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Contact the Jeffrey Team for more information  -  416-388-1960

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First-time home buyers’ expectations too high

Posted: 1st July 2009 by Laurin Jeffrey in Buying Real Estate, First Time Buyers, Other Real Estate Markets, Toronto Real Estate
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By Mario Toneguzzi

First-time home buyers are primarily concerned with affordability when choosing a new home, but their expectations may be too high relative to their current financial buying power, says a survey by real estate firm Coldwell Banker.

The survey was conducted among the company’s brokers and sales representatives in markets across North America.

Nearly half of the survey respondents reported that affordability was the top concern for first-time home buyers, but 82% of this group also consider move-in conditions to be very important when searching for homes. Only seven per cent are looking to buy fixer-upper homes that they could buy at a lower price and renovate themselves.

“In the past, first-time home buyers were willing to purchase older, more basic houses in an effort to save money and break into homeownership,” said John Geha, president of Coldwell Banker Canada. “Today, this group has greater home expectations because they have grown up accustomed to their parents’ lifestyles. It is important for first-time home buyers to remember that by considering a fixer-upper for their first home purchase, they can build equity over time and move up and into a second-stage home that better reflects their expectations.”

According to 29% of Coldwell Banker brokers and sales representatives surveyed, first-time home buyers were more concerned with down payments 10 years ago than anything else while only 23% said this is the biggest concern in today’s market.

Some other key findings from the survey include:

- 70% of respondents said first-time home buyers are looking for larger homes than they were 10 years ago;

- 38% said proximity to work is the top priority for first-time home buyers;

- 33% said investment is the top reason for first-time home buyers in making their purchase; and

- 46% said first-time home buyers look at five to 10 homes on average before making their purchase.

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Contact the Jeffrey Team for more information  -  416-388-1960

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Is it too late to refinance your mortgage?

Posted: 1st July 2009 by Laurin Jeffrey in Mortgages and Financial Information
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Mortgage rates have surged in recent days, but that doesn’t mean you can’t still cut your costs

Roma Luciw – Globe and Mail

The days of ridiculously cheap mortgage rates appear to be over. Now they’re just cheap.

A sudden and dramatic jump in rates last week means Canadians looking to break their existing mortgage and refinance at a lower rate may have missed the sweetest spot in recent history. But that doesn’t mean people can’t still trim their payments.

“We are not going to see these rates again for a while, not in the immediate horizon and maybe never,” says Gary Siegle, a Calgary-based manager at mortgage broker Invis. “But rates are still at historical lows. Depending on what your penalties are, there is still money to be saved.”

Toronto-Dominion Bank kicked off the hiking party, raising its five-year closed mortgages – the one of the most commonly chosen by Canadian homeowners – by a whopping 0.4% to 5.85%.

That hike, its biggest in nearly a year, is on top of a 0.2% increase unveiled last week by TD and several other big Canadian banks. Three other big banks followed in TD’s footsteps and raised their posted rates in the last twenty-four hours, and other lenders are expected to follow suit.

With interest rates floating near generational lows, Canadian home owners who locked in last week may have been fortunate enough to negotiate a fixed-rate five-year mortgage as low as 3.65%. “Clients who locked in during the last few months will enjoy the benefits of rates lower than any we have ever seen,” says Eric Iankelevic, a mortgage agent with mortgagebrokers.com in Toronto.

Although no one knows where interest rates are headed, the consensus is that they are unlikely to be this low again for a long time.

“These are really emergency interest rates but emergencies do not last forever,” says CIBC World Market economist Benjamin Tal. “I do think that interest rates will rise, I don’t think it will happen in the very near future but three, four, five months from now they will be higher. Definitely a year from now they will be higher. And in two years, they could be notably higher.”

The stunningly low interest rates have led many Canadians to break their existing mortgage and get in at a lower rate. Mortgage brokers say that despite the penalties associated with it, a massive chunk of their recent business has been refinancing existing mortgages. And despite the latest jump in mortgage rates, they don’t expect that to change.

Kim Arnold, a mortgage consultant with Dreyer Group Mortgages in Vancouver, says with mortgage rate still well below their historical norm, it is still a good time to look at refinancing.

The decision to break an existing mortgage depends on the penalty, as well as how many years are left on the existing mortgage. It might, for instance, make more sense to break a mortgage with a year left on it as opposed to one with four years left.

“It is not always worth it,” Ms. Arnold says. “It depends on the lender and it depends on the penalty.”

Penalties for breaking a mortgage loan can be either the greater of three months’ interest or the difference between the interest the bank could make on your mortgage as originally arranged versus lending money out at current rates. Most recently the so-called interest rate differential, or IRD, is the larger penalty and the one many lenders use.

All of this is specific to the lender and subject to negotiation. In some cases, banks will do a blended rate, which blends the existing mortgage with the lower current rate. At the end of the day, home owners may or may not end up paying less interest than if they had stuck with their current mortgage.

Mr. Iankelevic says some of the best deals out there are the variable-rate mortgages. Given that the Bank of Canada has said interest rates are likely to remain unchanged until the second quarter of 2010, a variable rate can provide huge savings for home owners who can stomach a little risk.

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Contact the Jeffrey Team for more information  -  416-388-1960

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