 Mike Toporowsky AMP
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| Blog Description |
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| Mortgage Strategy |
Thursday, July 29, 2010 |
Mortgage StrategyYou keep hearing financial experts telling you that your personal mortgage strategy needs to match your mortgage selection.
Selecting a mortgage should be easy, right? I mean our parents were never given a choice. They walked into their bank and the loans officer slid a contract in front of them and they signed. There were few choices anyway and back then shopping for rates and features was unheard of. Everybody offered the same thing, so you went with the flow.
Since the dawn of the mortgage specialist, there have been many new options available to today's customer. The products are driven by customer demand and new lenders creating niche markets of boutique mortgage products. The big 5 Canadian banks pick and choose the ones they like and incorporate them into their own mortgage programs and there you have the evolution of the need for mortgage strategy.
So, how do you choose? First, your current circumstances will play a large roll in what you should choose. You make the best decision you can, with the information that you have available. That way you can always feel good about your decision.
Fixed closed mortgages are the traditional comfortable stress free mortgages that are the same as the ones our parents got. Why would you choose this mortgage? You will know what your payments are for the term that you choose, because the only time you negotiate rate is when they get renewed, when your term is up (6 month-10 year term options). The lifetime (amortization) of these mortgages can be up to 40 years (35 year CMHC maximum). If you can lock in a rate near the historic lows, you will benefit over the long-run. If you have pre-payment options you can pay your mortgage way ahead of schedule.
The negatives...payments are slightly higher than variable rate, penalties are very high to pay it out.
I recommend this payment if you are traditional and don't like stress. I also recommend this if you are living close the the end of your budget.
Fixed Open Mortgage If your plan is to mortgage for a short term, the fixed open mortgage is a good value. There are no penalties to break the contract. As an example, if you are buying to fix up a property and flip it for a profit, this would be a good choice.
The negatives...rates are about 4 percent higher than regular rates, because the lender knows he will not get a penalty when you are ready to pay it out. If your original plan to pay out this mortgage falls through, you will have to continue paying a very high rate, until you figure out how to either refinance or sell.
I recommend this if you have a short term plan, because the penalty savings will make sense.
Variable closed mortgage are for those customers who can afford to weather increases in interest rates. Rates currently are low and are forecast to stay low for a while, but when they do move, there is really only one way they will go. The penalty to break these contracts is usually a 3 month interest penalty, whether you refinance or sell. Currently these rates are extremely low and if you do the math, they can currently save you a lot of interest. Look for the terms that offer you prime or better. Sometimes you can get your variable rate at less than prime, so whenever the rates move you are below the lender's prime rate for the term of your variable rate mortgage. As an example prime minus .25% will give you the rate some of today's brokers are advertizing for 2% because 2.25% (today's bank prime) minus .25% = 2.00%. Another example is if the rate swings to say 2.50% your rate will be 2.25% etc. Read the previous variable rate blog.
The negatives...if the rate doubles (historic average rate in Canada is 7.5%) can you afford to pay twice as much as you are currently paying? The lender will offer to let you fix your rate if the rate starts to climb. You will be able to lock in at the new rate available, not today's historic low rates.
50/50 Split mortgages are the product of the evolution of mortgages. They are a split between a closed mortgage (to protect at least half of the mortgage at today's fixed rates) and a variable rate mortgage (to gain the benefit of today's incredible floating rates). The rate you pay is the average of the 2 plans. So you could pay 4% on a fixed 5 year plan and 2.25% on a variable, so your starting rate would be between the two rates. Now, if the variable rates skyrockets you still pay the average between the two products but half of your mortgage will anchor you, so the fluctuation will not be too stressful. For example, if within the 5 year term the variable jumps to 5%, your average rate would only be 4.5%.
The negatives...not many. You will have payment adjustments to make on half of your mortgage (assume they will eventually go up, not down). You will still have a penalty, but it won't be as high as the fixed closed rate.
I do recommend this mortgage if you are just slightly adventuristic and can afford to increase your payment a bit.
Watch for my next blog to see part 2 of this mortgage strategy feature.
What would you like to know about mortgage strategizing?
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posted by MIke Toporowsky at 9:05 pm - 0 comments
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| How do Mortgage Changes affect you? |
Wednesday, June 23, 2010 |
How do mortgage changes affect you?
Plenty of confusion over government rules
BY BILL MCFARLANE, CALGARY HERALD
Unless you're a turtle, you don't want your home to be a big weight on your back.
But for many people, the thought of buying a home is just that, a weight.
Where to look? What to look for? How much to pay?
What is the impact of the new the government rules for qualifying for a mortgage? The considerations go on and on.
You can take much of the anxiety out of the process by doing some homework first.
The best place to start is figuring out just how much you can afford. After all, answering that question will help you focus on your realistic options.
First, there is plenty of confusion
over the recent government changes made to qualify for a new mortgage.
To begin, you can still have as little as five per cent as your down payment to purchase a home you are going to live in.
The down payment change the government made in April was for people who already own their home and want to refinance it to do things like renovations, take a major vacation or pay some debts.
In that case, they must have 10 per cent equity and can take the mortgage up to a maximum of 90 per cent of the appraised value of the home.
You must qualify at the government prescribed rate when:
- The mortgage is more than 80 per cent of the value of the purchase cost
- The fixed term of the mortgage is less than 5 years
- Or the mortgage is a variable rate mortgage, you must qualify at a government prescribed rate.
At the time of writing this article, the prescribed rate was 5.99 per cent.
However, if you select a five-year closed term mortgage or longer, the actual mortgage rate you are paying on your mortgage will be the rate at which you will qualify.
The significance here is that actual mortgage rates being charged now on five-year terms are significantly lower than the prescribed rate of 5.99 per cent.
Next, get a fix on your net worth. That's the difference between your assets (what you own, such as savings accounts and bank deposits, stocks, bonds, vehicles and so on) and your liabilities (what you owe, such as loans, credit card balances, unpaid bills, your existing mortgage, etc.)
You'll need this information when visiting your financial institution to discuss a mortgage.
It will also help you assess how much you have available for your down payment and other costs.
When you look at what you can afford, don't just consider the purchase price.
There are all sorts of "extras" associated, including the inspection fee, appraisal fee, legal fees, closing costs, property insurance and moving costs.
It all adds up, perhaps tacking on two per cent or more to the price of the home -- which in this market comes out to several thousand dollars.
Then there are the financial obligations that you must be prepared to assume on an ongoing basis:
- Monthly mortgage payment;
- Property/school taxes;
- Utilities; on going maintenance and,
- With a new home, you will have:
- Landscaping;
- Fencing and decks;
- Driveways, etc.
A turtle might be able to stick its neck far out, but you don't want to. By realistically evaluating your financial situation and accounting for all expenses, you can establish just what you can afford up front, and the maximum you can put toward your monthly housing costs.
That's a lot to think about.
© Copyright (c) The Calgary Herald
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posted by MIke Toporowsky at 9:35 am - 0 comments
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| Private mortgage lenders are not all created equal |
Sunday, June 13, 2010 |
Private Lenders are not all created equal
Shocked! Confused...I didn't think so, because most folks like yourself already realize that anybody can be a private lender. It's true; and you can even use your self directed RRSP as a mortgage lending fund.
As a mortgage broker I continuously interview many potential private lenders...some with experience and some are trying to start.
I always complete a background check on them. Much like a mortgage applicant I need to know who's lending the money, not just who is borrowing it. Does the money come from traceable sources? Does the lender have any kind of public record? I need to know who I can stake my 30 year reputation on, because I will always be known by the deals I complete.
My favorite private lenders have a some of these unique qualities...They are not nervous, they are sworn to uphold the privacy act, they know what mortgage niche they like to lend in, they are there when I need them, they are fair (but not greedy), they use common sense and my customers always give positive feedback from the experience. Every private lender wants to know what the exit strategy is for their investment, it is critical to their decision.
As a mortgage broker I need to rely on a few different types of private lenders. Some specialize in the short term stuff (like bridge financing and interim/construction financing). Some are looking for long term boring stuff that that makes a better return than their current mutual or savings. Some are even asking for high risk, but their rates reflect the risk (be prepared if you need one of these loans). You often hear about "equity lenders". Equity lenders lend based on the value of your home. If there is enough equity then they will lend you the money. Be prepared to pay both a high fee and a high rate. Even if they offer a low rate for 6.85% at say 6 months to a year and they get a 6% lender's fee from you...do the math. That low rate just jumped to the mid teens, and the lender yielded what he wanted. Yes, I have private equity lenders in my lists too, but i make sure they are ethical and I also make sure the deal is a win-win for everybody. There must be a clear exit strategy.
If your mortgage broker specializes in private lending, like I do, they will have a complete mix of potential lenders they can call on. My only real challenge is that during the really cold snaps in Alberta, my private lending sources are all down south waiting out the sub zeroes. That being said, if you would like to have a coffee and talk about how you can be added to my list, just contact me at mike@RealMortgageSolutions.ca . I have a close circle of licensed leading mortgage professionals whom I consult with and when the right deal comes along, your RRSP can suddenly become your great performer. |
posted by MIke Toporowsky at 9:36 am - 0 comments
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| Reverse Mortgages |
Sunday, June 13, 2010 |
Reverse Mortgages
I was totally ignorant of the benefits of a Reverse Mortgage plan, until I took the time to corner the local CHIP rep.
Until that meeting, I was totally against the reverse mortgage in any way shape or form, because I thought they were designed to benefit CHIP more than the home owner.
I was WRONG! There are definitely times when a CHIP mortgage plan makes sense. I was even hurting myself as a well rounded mortgage broker. My local broker rep is Terry and he was totally aware of the criticisms and negativity associated with the plan. It will not work for everyone and sometimes even CHIP can't help, but for those folks who i can help, this plan is a beaut (That was my best Don Cherry impression). Poor Terry, I absolutely hammered him with questions that I had prepared before my inquisition.
He was very composed and resolved in the fact that in CHIP's 26 year history they have helped thousands of Canadians live in their homes until they were ready to move...not because they were forced out with high bill payments.
I called my friend in the financial planning industry to ask him his opinion of the CHIP reverse mortgage plan. He was opposed to it, but it was more or less along the same reasoning that I had...negative press. When I started pointing out real life scenarios that made sense, his negative push-back because less and less. While he was not yet 100% on-side he did promise to educate himself in the product and report back to me when he was done.
What I learned was... that by keeping an open mind and listening to the benefits of a tried and true plan I could better serve the needs of my customers (who need to be 60 years of age or older for this product). |
posted by MIke Toporowsky at 9:36 am - 0 comments
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| Traditional thinking blocks new solutions |
Wednesday, June 9, 2010 |
A Reverse Mortgage is a financial quality of life solution that many seniors will not even consider.
Former Federal independent MP, Garth Turner, once described Reverse mortgages as " The thing you would do if you hate your children". I could not disagree more. I have spoken with a few seniors who would have been perfect for the reverse mortgage program, but their negative responses were varied. One said that they want to leave something in their will for their children.
One wanted to do it and even agreed to the reasoning, but was very fearful of change and never made it to a formal agreement.
I found that there are serious misunderstandings about what a reverse mortgage is and how much it costs. It also breaks my heart to see a solution that could be so beneficial to the quality of life of a senior be outright dismissed because of traditional stigmas.
Many consider that it took 40 years to pay off a mortgage and they would prefer sell it if they couldn't afford to live there anymore.
Then what... seniors home, rent, landlords, loss of independence, loss of familiarity, loss of your long time neighbours, loss of pets, loss of the traditional family home. What if you had many years of independence remaining? These changes could cause high anxiety for anybody, especially a senior.
Reverse Mortgages are a relatively new idea in the Canadian market. They have been available for over 27 years and quietly are proud of the fact that they honoured every promise they made to seniors in their history. If Reverse Mortgage seniors were to be surveyed, you would see a completely different picture of a terrific program that has allowed them to enjoy a better quality of their golden years.
It is true that a reverse mortgage is not a financial tool for every senior and there may be better options that need to be considered.
If it is the right solution then it should be embraced as a natural progression in the retirement planning cycle. Adult children of a reverse mortgage customer normally endorse the choice, because they themselves see the benefit of an independent parent.
Still not sure, check out the website for CHIP www.chip.ca and read the success stories.
Mike Toporowsky AMP
Mortgage Broker
Real Mortgage Solutions |
posted by MIke Toporowsky at 8:03 am - 0 comments
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| Outrunning the Bear Market |
Thursday, June 3, 2010 |
Outrunning the bear market
by By Alexandra Twin, senior writer
Wednesday, June 2, 2010
After the Dow's worst May in 70 years, the threat of the stock correction becoming a full-blown bear market has intensified.
But this isn't new territory for long-term investors. They've faced this precipice 29 times since World War II, according to Standard & Poor's chief investment strategist Sam Stovall.
In 17 cases, they've avoided seeing a correction (a decline of at least 10% off the highs) turn into a bear market (a decline of at least 20% off the highs).
In 12 cases, they weren't so lucky. And in three of those 12 cases it became what Stovall calls a "mega meltdown," or a decline of 40% or more. In fact, the 2008-2009 stock market bloodletting sent the S&P 500 crashing 57% from an all-time high to a 12-year low.
But as the correction vs. bear market debate continues, what seems to be critical, at least on the technical side, is that the selling not surpass 15%. Historically, if that happens, the correction will become a bear market.
So far this current correction has avoided that 15%. At its worst, the S&P 500 was down 12.3% off the highs. As of Tuesday's close, the S&P 500 was down 12% from the highs.
But hovering below the 15% mark doesn't mean the selling is over by any means.
"We don't know if the market direction is going to be up or down, but we do know it's going to be up and down day to day," said Randy Frederick, director of trading and derivatives at Charles Schwab.
The increased volatility increases the likelihood of more selling, particularly with the market in a mode where it retreats on both big news and a lack of news.
The threat of the European debt crisis, the weaker euro, the BP oil spill, increased tensions between North and South Korea and signs that China's booming economy is slowing all dragged on stocks in May. But there have been numerous days in which there was little relevant news, either on the positive or negative side, and stocks sold anyway.
So correction or bear? Here's what to consider:
Correction: If the market is in correction mode, it will probably chop around for a few months, then move higher, according to Stovall.
Of the 17 times that the correction didn't become a bear market, stocks lost an average of 14% over a four-month period. Typically it took stocks another four months to get back to breakeven, and another four months of gains before another correction or pullback kicked in.
A pullback is considered a decline of 5% to 9.99%. They happen frequently and like corrections, are part of normal market functioning. Stovall estimates there have been more than 50 since World War II.
There were only two times (1955 and 1997) that the market "corrected," recovered and then turned lower right away. More often, the market gets back to breakeven and then gains an average of 10%.
Bear market: S&P research shows that when a correction becomes a bear market, it tends to stretch on for 14 months and yield a decline of 33%, on average. The recovery back to zero tends to take nearly two years.
Stocks currently appear to be in a "garden variety bear market," pushing toward a decline of 20% to 30% as the mountain of problems becomes too much for investors, according to the editors of the Stock Trader's Almanac.
Heightened investor worry: In what could be either a bad or good sign, depending on whether you're a contrarian, investor sentiment took a turn for the worse last week, according to the latest survey from the American Association of Individual Investors (AAII).
Bearish sentiment, or the expectation that stocks will fall over the next six months, jumped 17.2% to 50.9%, marking the highest level of pessimism in the survey since November 2009.
Also, AAII's monthly survey showed investors pulled money out of stocks last month and reallocated it to bonds, cash or cash equivalents, reflecting global jitters and the fear of further stock erosion.
Investors held just 50.9% of their portfolios in stocks and stock funds in May, down 9.5% from April. That's the smallest percentage in stocks since May 2009, shortly after the market bottomed. It's also below the historical average of 60%
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posted by MIke Toporowsky at 3:41 pm - 0 comments
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| Nationally, Housing Prices may have peaked for the year |
Thursday, June 3, 2010 |
Nationally, House prices have peaked for the year
By Sunny Freeman
TORONTO — Skyrocketing home prices appear to have reached their height and are expected to stabilize for the rest of the year and into 2011 as the real estate market cools significantly, economists say.
Gregory Klump, chief economist at the Canadian Real Estate Association, foresees a slight decline in year-over-year prices in the latter half of 2010 before they flatten in 2011. This will happen as new listings come onto the market faster than anticipated and balance out the dynamics between buyers and sellers.
On Wednesday, the real estate association revised its projected housing price increase for this year down from 5.4 per cent to just 1.6 per cent over 2009.
The association predicted that the national average housing price will decline by 1.5 per cent by 2011, driven down by lower prices in the strong markets of B.C. and Ontario, while prices in the rest of the country will remain stable.
Will Dunning, chief economist at the Canadian Association of Accredited Mortgage Professionals, said this year’s prices have likely peaked, and should remain flat for the rest of the year before falling in 2011.
“Last year there was a pattern during the year — slow at the start, strong at the finish, and it’s going to be the opposite this year, almost a mirror image,” he said.
“Somebody who’s in a position to buy can take the time to make sure they get the property they want at a price they’re comfortable with,” he added.
The real estate association also lowered its 2010 national forecast for resale transactions by nearly 40,000 from its previous forecast of 527,300 due to a weaker-than-expected start to the year in British Columbia, Ontario and Alberta.
“The biggest contributor to the downward revision in annual sales activity would be British Columbia, where affordability has begun to bite into sales activity. Their first quarter came in weaker than expected and that’s expected to carry throughout the year,” Klump said.
The association now expects 490,600 units will be resold nationally this year through the Multiple Listing Service. This is still up 5.5 per cent from 2009.
A number of temporary factors pulled sales forward to the latter part of 2009 and the first part of this year, including anticipation of higher mortgage rates, tougher mortgage lending regulations and new taxes in Ontario and B.C. that will add thousands of dollars to the final price tag of many houses starting July 1.
The association’s revision came a day after the Bank of Canada announced it was hiking its key lending rate from an emergency low of 0.25 per cent to 0.5 per cent. Many economists predict that the era of historically low interest rates has come to an end and that rates are now on an upward trend.
Although mortgage rates have gone up and are expected to rise further, the association says the higher cost of borrowing will have a minimal impact on the market this year. Instead, sharp price increases earlier in the year appear to have been the main factor for the expected decrease in demand in British Columbia and Ontario.
Dunning said while some buyers “could drive themselves crazy” trying to calculate whether it’s better to get into the market now while mortgage rates are low but prices are high, or to wait until the opposite is true, it’s so difficult to get it right that homebuyers should just buy when the time is right for them.
Rob Hafer, regional manager at Invis mortgage brokerage, agreed that market timing is tough, and generally not worth the headache since a house is such a long-term investment.
“If you’re going to buy real estate, it’s a long-term investment, so if you can afford the home now … no matter when you bought within a couple years you’re probably ahead of the game anyway,” he said.
“If you can get in now and you can hold it long term, it’s always a good time to buy,” he added.
Klump said the market adjustment will stop short of venturing into a buyers’ market as “a more challenging pricing environment” will deter some potential sellers and limit the supply of available homes.
“A lot of people who were thinking they were going to clean up on their asking price are going to be faced with a lot of competition from other sellers out there, and ultimately will take their house off the market and try again when the pricing environment becomes more to their liking,” he said
But Dunning said balanced markets don’t last very long and said he believes market conditions will soon favour buyers.
“It’s usually always one way or the other, and we’ve had this immensely powerful sellers’ market and …there could be a very rapid transition so that it now becomes a buyers’ market.” |
posted by MIke Toporowsky at 3:39 pm - 0 comments
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| Pre-Qualified vs Pre-Approved |
Wednesday, June 2, 2010 |
The Difference between being Pre-Qualified and getting Pre-ApprovedThere is a very important difference between being Pre-Qualified and Pre-Approved.
Pre-Qualified is a planning step where you get the mortgage broker and lender to look at your application and they will let you know what your maximum mortgage limits are. If you are not sure about what you can afford, it would be wise to see what types of mortgages you would be qualified for. It is at this stage where you discuss any shortcomings, like credit, down payment or income requirements. You may be required to take some planning steps. The process may take some time, but you really don't want to pay more than you have to for your mortgage. A poorly planned purchase can force you into taking a sub-prime mortgage, that is far worse than you expect.
Even if you are pre-Qualified for your new mortgage you should always make your purchase "subject to financing", that way the bank can confirm the property falls into their lending guidelines.
A Pre-Approved mortgage means the bank is holding an interest rate for you. It does not mean you are guaranteed to get the mortgage, but they would have briefly looked at your application and decided that they would probably consider doing business with you. To take advantage of the rate they are holding, you must complete the closing of your mortgage within the time-line of the Pre-Approval.
The Lenders will always have the final say in whether or not a mortgage is finalized. One really big advantage to using a mortgage broker is when the bank you thought Pre-Approved or Pre-Qualified you fails to complete their commitment, your broker can quickly change gears and move your business to a more friendly lender (you don't have to lift a finger).
I invite your feedback
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posted by MIke Toporowsky at 7:45 am - 0 comments
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| Rent To Owns |
Tuesday, June 1, 2010 |
Rent To Own...what you should know.
I had the opportunity to help develop a Rent To Own program for a home builder in Edmonton. The home builder saw them as a unique way of selling their homes in a tough market. Most of the potential buyers were trying to find a way off the rental treadmill. One came to me and said I don't want to rent anymore, because it is the equivalent of paying 100% interest. You can pay a landlord for years and never see any benefit of home ownership or value in real estate. Some just wanted a way to protect themselves from rent increases.
Rent to Own is not the way I would go personally, because there are better ways of getting off of the rental treadmill. A rent to own investor I met had amassed quite a number of rent to own homes that were currently under 'option to purchase' contracts. He was not interested in sinking anymore of his own money into additional properties, because he found that it was easier to help others administer their properties for a fee. He says he started out by purchasing homes for Rent To Own buyers and 85% of them failed to fulfill the contract. That was the number he gave me...85% failure. He says he simply turns around and offers the same property to somebody else as a Rent to Own and the cycle starts again.
Why is there such a failure rate for the rent to own tenant/future owners? It all boils down to planning and discipline. There are the few cases where uncontrollable circumstances cause a failure, but for the majority it was old habits that caused the failure.
Why were they renting initially? Just out of the nest, poor credit (lack of credit), seasonal employment, bankruptcy, not long enough on the job, divorce, poor planning, low income earnings, no contingency fund for emergencies, expensive vices (uncontrolled spending, gambling, smoking, drugs, drinking, etc.). Many of the younger applicants were recently living at home and wanted all the luxuries of their parent's home...now!
There are different types of rent to own or lease to own plans. If you are intent on getting into a rent to own, you should know what your plan should be to pay out the landlord when the contract is up. Canada Mortgage and Housing Corporation requires a rent-to-own contract to have 2 specific items. A portion of the rent going toward a future down payment (the portion stated will be the additional rent amount above normal market rent for a similar unit) and an agree percentage of the accumulated down payment to be returned to the tenant if the rent-to-own agreement fails. That way the tenant is not totally in jeopardy of loosing all down payment money. CMHC does not stipulate the exact percentage, so it should be negotiated into the Rent-to-Own package.
I found that many folks who were inquiring about the program were shocked at the costs. They simply realized that they would have to be patient and plan for their purchase. This definitely would have made sense if you were buying on a rent to own plan when the market was at it's peak. The landlord will factor in a future purchase price by adding anywhere from 3-9% increase in the home's future value for each year you rent from him. The same customers from 3 years ago could have repaired their credit and saved up a down payment and bought the same home today for 10-15% less than at market's peak in 2007.
Yes, rent-to-own allows you a couple of years to re-establish your credit, but if you have not dealt with why your credit was bad in the first place, don't expect things to change in 2-3 years. Rent-to-own is a quick fix for the "i want it now" convenience of owning a home. Convenience comes with a price.
The solution...plan to be a homeowner and you will reach your goal. Plan a budget to save for your down payment. Work with a mortgage specialist to find out what you will need to qualify for a mortgage and make sure you follow the plan. Listen to suggestions on how to improve your Beacon score. If you have a setback, just stay with the plan, the best you can. In the meantime, use your planning time to research the perfect home for your needs. Check out neighbourhoods and talk to the folks who live there. Find out how the school bus or transit system works in that area. Talk to realtors to see what home prices are doing. See where they would recommend and why. Set a price range on your purchase, with help from your mortgage broker.
Feel free to comment, if you have any questions.
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posted by MIke Toporowsky at 8:14 am - 0 comments
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| Mortgage Rates Explained |
Tuesday, June 1, 2010 |
Mortgage rates explained...
There is a distinct difference between mortgage rate hikes. I am often asked why variable rates and fixed rates do not move at the same time.
Variable rates are adjusted by the Bank of Canada. The entire mortgage market tenses every time Mark Carney's group meet to decide whether an adjustment to the rate is required. Variable rate decisions are usually made to ensure the Canadian economy is kept in balance. If the dollar is climbing too quickly, the Bank of Canada may increase the rate to slow the climb. This move would protect our export market. If the economy is struggling, the rate will stay low to support corporate and personal borrowing to stimulate the economy. If the economy is heating up the Bank of Canada will 'tap the brakes' and keep the economy from reaching a dangerous level of rapid inflation. If you take the variable rate, you must be prepared to accept increases over time. Currently the rates are at a historic low, so the only real question is 'How long will the Bank of Canada keep the variable rates Low'?
One real benefit to taking the variable mortgage is, you would not be affected by an Interest rate differential penalty. Instead, you might only be subject to the 3 month interest penalty clause for an early payout.
Another benefit is that you can convert your mortgage to the fixed rate. The only drawback is that by the time you decide to convert to a fixed rate they would most likely have climbed from what was originally offered.
Fixed rates are generally tied to the bond market. Fixed rate predictions are generally tied to increasing or decreasing bond prices.
If you watch the bond market you can almost guess what the senior economists are going to say about their next long term economic forecast. If long term 5-10 year bond prices are increasing, long term interest rates will also increase. Recently the fixed 3-5 year rates increased by about .5%, because the 3-5 year bond market was putting increasing pressure on the fixed mortgage prices. That being said, the 10 year rate has stayed the same, making 5.2% a very attractive option for a 10 year mortgage term.
Things to watch out for...
If the market slows down again and you have committed to a long term mortgage, rates might decrease again and you will be stuck for a long time with a rate higher than most.
With a fixed rate mortgage you will be subjected to an Interest Rate Differential Penalty (IRD). This penalty calculates how much interest the bank is entitle to receive before the end of the agreed term. This huge penalty might even be charged if you sell your home early. So make sure your mortgage strategy matches your future plans.
So you see that while both rates are offered as mortgage rates, you are required to decide whether you would like to commit to a moving target rate of a variable mortgage or pay a slightly higher interest rate to lock in your fixed term for a longer more predictable period.
You could choose the 50/50 split mortgage where half is fixed and the other half is variable. That way you get the immediate savings of the variable and the long term security of the fixed rate. |
posted by MIke Toporowsky at 7:25 am - 0 comments
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Mike Toporowsky AMP
Real Mortgage Solutions
Email:
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