4 Feb

Fixed vs. Variable at February 2014

General

Posted by: Randy Johnson

The Bank of Canada recently stated they may not increase Prime until 2016.  Lets do a “sensitivity” comparison of these 2 choices.  We are looking at a $500,000 mortgage amount, using a 3.29% fixed rate and a 2.55% 4 year, variable rate over a 25 year amortization.

Let’s assume the following for changes to prime over the next 4 years:

1) It remains the same for 4 years,

2) After 2 years, it increases by 1/4% each year,

3) After 2 years, it increases by 1/4% every 6 months,

4) After 2 years, it increases by 1/4% every 4 months.

 

Should those assumptions occur the following would happern:

1) One would save $16,000 by choosing the VRM, which equates to 13.7% of the total monthly payments,

2) One would save $12,500 by choosing the VRM, which equates to 10.7% of the total monthly payments,

3) One would save $10,200 by choosing the VRM, which equates to 8.7% of the total monthly payments,

4) One would save $8,000 by choosing the VRM, which equates to 6.8% of the total monthly payments.

Going back over 60 years, one who has chosen a VRM has saved money 90% of the time.  This would likely be the case in February 2014.

6 Mar

The latest on the VRM vs. Fixed Mortgage…..with financial comparisons

General

Posted by: Randy Johnson

I recently prepared a comparison of the two for clients.  I compared a 5 year, 3.94% fixed rate to a Prime – 0.70% VRM (2.30%).  In the first case I assumed prime would increase by 1/4% every 6 months, and then I prepared another set of calculations where it increased 1/4% every 3 months.

If prime increases 1/4% every 6 months, by the end of the 5 year term it would be 5.25%. This matches the highest it’s been in 10 years.  On a $333K mortgage, one would save almost $4,000 with the VRM.  The ending payments on the VRM remained less than the fixed rate mortgage payments throughout the term.

If one assumes prime will increase by 1/4% every 3 months, prime would be 7.75% by the end.  In this case, fixed was the better option, saving close to $11,000 in 5 years. Additionally the VRM payments increased to a level that was bout 17% higher than the fixed, or roughly a 3.5% annual average.

If a borrow can’t afford any payment increases due to job, life or their financial situation, the fixed rate is likely the best option.

If not, and one believes prime will likely not exceed about 5.75% in 5 years the VRM should be considered.  Otherwise take the fixed.  Email me for the spreadsheets.  🙂  Randy

 


Moshe Milevsky on Locking Into A Fixed Rate (Canadianmortgagetrends.com)

Apart from peoples’ desire to front-run mortgage rule changes, nothing drives mortgage volumes like a rate increase, or the threat of one.

5-year fixed mortgage rates jumped 1/4 point last week. Many saw that as their cue to lock in a fixed rate.

Moshe-MilevskyBut Moshe Milevsky, author of the most quoted mortgage research in Canada, reminds people in this Moneyville story that short-term rate increases shouldn’t spark panic.

He says, often “the public is urged to act now,” but then “a few months later something unforeseen” happens and rates fall back down.

Milevsky writes that just one year ago rates did the same thing.

Here’s a chart we put together of 5-year bond yields over the last year (government bond yields drive fixed mortgage rates).

Bond-yields-and-mortgage-rates

(click to enlarge)

Had you got a $200,000 25-year-amortized mortgage in March 2010, just as rates were soaring, you would have paid a healthy premium. Suppose, for instance, that you had chosen the typical 3.94% five-year fixed at the time, and held it to today. Our calculations suggest you would have paid over $2,500 more interest than you would have in a prime – 0.50% variable (which was common at the time). That’s not exactly chump change.

But making a point based on hindsight is narrow-minded. At the time (March 2010), most analysts believed rates were starting a long-term trend higher.

The point is simply this: future rate expectations should not be the primary determinant of your chosen term.  (“Future rate potential,” however, is a different matter. You do need to account for where rates might go—so you’re prepared if they do.)

Whatever the case, Milevsky warns not to “rush into home ownership because you are convinced that mortgage rates are headed-up” and that we’ll never see low rates again.

74583499He then adds something interesting. Despite Milevsky’s research showing that variable rates have historically saved homeowners considerably more money, he says:

“If you’ve just bought a home and you have a large mortgage, relative to the home’s value, I urge you to lock-in for as long as possible.”

That’s quite unequivocal advice from a respected authority, and especially noteworthy given that Milevsky is an academic who doesn’t make public recommendations lightly.

Milevsky says highly leveraged homeowners “are now facing the probable risk that real estate prices decline and interest rates increase.” This, and “the possibility of job loss, disability or other macro factors” make someone with less equity and financial resources “the ideal candidate for a fixed rate mortgage.”

“The last thing you want to be doing is trying to renew your mortgage in a year or two from now, if rates increase and possibly the appraised value of your house has declined by 10 per cent or more.”

Milevsky, on the other hand, says he chose a variable-rate mortgage for his own home “because I can tolerate the risk and want to pay as little as possible for unnecessary insurance.”

20 Feb

The Clock is Running Out on 35-year Amortizations

General

Posted by: Randy Johnson

In less than 20 business days, 35-year amortizations and 90% loan-to-value refinances will disappear from the high-ratio insured mortgage market. (See: New Mortgage Rules Now Official.) Well-qualified borrowers will then notice a big jump in mortgage rates for high-ratio 35-year amortizations and 90% Loan-To-Value refinances. That’s because they’ll only be available on pricey uninsured mortgages after March 17. If you’re thinking of applying for either of the above, do it soon to ensure you’ve got a firm lender (and insurer) approval before the deadline. Remember, if you want to refinance a prime mortgage to 90% LTV and/or get a high-ratio 35-year amortization, you need a written commitment from a lender by March 17. If you’re purchasing, you also need a signed purchase agreement dated before March 18. Call me to discuss. Randy

11 Feb

Next Week – Real Estate for Home Owners & Buyers – Vancouver School Board

General

Posted by: Randy Johnson

This is 2 night seminar, next Thursday at John Oliver High School at Fraser & 41st.  We have an trusted, experienced realtor, and an enthusiastic home inspector.  Yours truly will chat about mortgages including the new mortgage rules, fixed vs. variable, money-saving types, pitfalls to avoid and lots more.  It will be nowhere near as ‘dry’ as one may think.  🙂

 

Real Estate for Home Owners & Buyers – Vancouver School Board

A house or apartment purchase may likely be the most important purchase you will make. The mortgage industry is an increasingly complex one, with a myriad of mortgage products available in the marketplace as well as dozens of lenders, many who do not work directly with the general public. Are you aware of and do you understand all of the available options? We will cover a variety of residential mortgage and property topics for both owners and investors, money saving tips and pitfalls to avoid.  We will also deal with the new mortgage rules and their affect on buyers.  Three top professionals will guide you through their area of expertise – mortgages, real estate and home inspection.

This course can save you money and provide you with useful information to make your purchase less stressful.

The course is intended for existing owners, first time buyers and investors who are looking to purchase one or two residential rental properties.  It is not for commercial or sophisticated investors.

We constantly receive enthusiastic feedback from the vast majority of participants. Some of the comments from past attendees include:

True information on buying and mortgaging, very thorough,
very comprehensive, instructors – all good mannerisms and demeanour,
very informative and easily understood,
excellent speakers – very knowledgeable in their respective fields,
well presented, would recommend this class for future real estate investors or current owners,
very worthwhile course, great information & good handouts,
explained mortgage options and pitfalls, learned a lot about the topic,
thank you for an informative class- great course, I really enjoyed this,
very informative (lots of info),
honest insights from real experts, thorough information,
people with first hand experiences sharing their knowledge,
professionals of the industry,
very helpful advice,
very personable – all were easy to ask questions,

When: Thursday February 17th & 24th 2010,  6:30 to 9:30
Where:  John Oliver High School,
Cost:  $79.00
Phone:  604-713-4550
Course ID: JO 18394

26 Jan

Household Credit Growth In Canada The Slowest In Nearly a Decade: CIBC World Markets Inc.

General

Posted by: Randy Johnson

Further evidence that the media, their doomsayers and our finance department are off the mark and overly negative with respect to the new, misguided mortgage rules.  Randy 🙂

 

Canadians heed warnings on increased debt by Bank of Canada

TORONTO, Jan. 26 /CNW/ – Canadians are getting the message on cutting debt levels with growth in household credit now rising at its slowest pace since 2001, finds CIBC’s latest Household Credit Analysis Report.

Inflation adjusted growth in household credit in the third quarter of 2010 was the slowest in nearly ten years, while the 0.27 per cent increase in credit during November (the latest available data point) was the softest monthly reading in more than 15 years.

“After coming through the most leveraged period of consumer spending in recent history, Canadians are getting the message that they need to cut back on their debt levels,” says Benjamin Tal, Deputy Chief Economist at CIBC. “After rushing back to shop in 2010, consumers will take a well-deserved break in 2011. The softening in the monthly pace of job creation from an average of 31,000 in 2010 to 20,000 in 2011 will single-handedly slow growth in personal spending by more than 0.4 percentage points.

“But as important will be the change in the propensity to spend. With the U.S.-Canada saving rate gap at a 40-year high, and ongoing indications that monetary authorities wish to curtail the risky level of household debt, 2011 should see the beginning of an adjustment in the household balance-sheet.”

While overall credit growth has dramatically slowed, mortgage credit levels are still rising at close to seven per cent on a year-over-year basis, although in recent months that pace has also slowed. “A closer look at the monthly pattern reveals that the market is now growing by a monthly rate of only 0.4-0.5 per cent,” adds Mr. Tal, author of CIBC’s Household Credit Analysis Report.

“The reduced demand for mortgage credit is more notable among first time home buyers—a trend that is already visible in the brokerage channel. The recent changes to the market introduced by the Ministry of Finance recently are not significant enough to derail the market, but are sufficiently targeted to soften marginal borrowing. We estimate that the move to shorten the maximum mortgage amortization from 35 years to 30 years will cut the growth in mortgage originations by roughly two to three percentage points in 2011. Overall we expect mortgages outstanding to rise by close to five per cent in 2011 after an estimated 7.7 per cent increase in 2010.”

The report notes that mortgage arrears appear to have peaked in February 2010 and are now stabilizing. The arrears rate is currently at 0.43 per cent—up from 0.24 per cent in early 2006. Mr. Tal notes that while this is significantly higher than it was before the recession, this number is well below the arrears rates seen in previous recessions.

After rising since early 2008, consumer bankruptcies are also now in a clear downward trend with the number of bankruptcies now falling by close to 25 per cent on a year-over-year basis. On a cumulative basis, they are now falling by close to 19 per cent with Ontario showing the best improvement.

Despite softening credit growth, the report found that the debt-to-income ratio continued to rise in the third quarter of 2010. Debt increased by 1.3 per cent while income fell by 1.5 per cent. As a result the debt-to-income ratio climbed to a new record high of 146.

While Canadians’ debt continued to grow, Mr. Tal says that the cost of covering these debts is trending downward. “Debt interest payments now account for 7.2 per cent of disposable income—the lowest debt service ratio since mid-2006. While debt is still rising faster than income, it is no longer rising faster than assets. The net worth position of Canadians has improved in the third quarter in absolute terms and relative to income.”

“Our expectations that the housing market will stagnate in 2011 and might even see some softening in the second half, suggest that the estimated eight per cent rise in net worth in 2010 will not be matched in 2011. And with consumer spending dancing to the tune of changes in net worth this represents another source of slowing for consumers.”

While much of Canada’s GDP in recent years has been driven by highly leveraged consumer spending, Mr. Tal sees much different and more sustainable factors driving the economy this year. “The seemingly benign 2.4 per cent GDP growth projected for 2011 masks the dynamics of powerful economic forces pulling in different directions.

“The end result will be another year of only middling growth, but a new mix of economic activity as a vibrant business sector will gradually take over for an exhausted consumer and restrained government. Look for the Bank of Canada to start raising rates as early as May of this year, but the overall speed and magnitude of future rate hikes will be limited by the growing effectiveness of monetary policy and a modest recovery.”

Other key findings in CIBC’s Household Credit Analysis Report:

  • Lines of credit are now rising by a monthly pace of 0.3 per cent, the slowest pace since 2007 and down from nearly two per cent in late 2009. Arrears are down to .22 per cent in the third quarter from .25 per cent in the second quarter.
  • A similar trend can be seen in the direct loans portfolio with the delinquency rate falling notably in recent months and is now at a record low of 1.23%.
  • The overall growth in credit cards outstanding has stabilized at below 1 per cent (year-over-year). This pace is unlikely to accelerate in the near future.
  • Credit card delinquency rates and bad debt have risen notably over the past year, but recent delinquency figures reveal an improving trend. Given the sensitivity of this portfolio to developments in the labour market, a relatively stable unemployment rate in the coming quarters suggests that delinquencies in this portfolio have already peaked and will probably improve a bit in the coming few quarters.

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/hca-110126.pdf

CIBC’s wholesale banking business provides a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.

For further information:

Benjamin Tal, Senior Economist, CIBC World Markets Inc. at (416) 956-3698, benjamin.tal@cibc.ca or Kevin Dove, Communications and Public Affairs at 416-980-8835, kevin.dove@cibc.ca.

 

 

25 Jan

Real Estate For Home Owners & Buyers – Vancouver School Board Seminar

General

Posted by: Randy Johnson

A house or apartment purchase may likely be the most important purchase you will make. The mortgage industry is an increasingly complex one, with a myriad of mortgage products available in the marketplace as well as dozens of lenders, many who do not work directly with the general public. Are you aware of and do you understand all of the available options? We will cover a variety of residential mortgage and property topics for both owners and investors, money saving tips and pitfalls to avoid. We will also deal with the new mortgage rules and their affect on buyers. Two or three top professionals will guide you through their area of expertise – mortgages, real estate and home inspection.

This course can save you money and provide you with useful information to make your purchase less stressful.

The course is intended for existing owners, first time buyers and investors who are looking to purchase one or two residential rental properties. It is not for commercial or sophisticated investors.

We constantly receive enthusiastic feedback from the vast majority of participants. Some of the comments from past attendees include:

True information on buying and mortgaging, very thorough,

very comprehensive, instructors – all good mannerisms and demeanor,

very informative and easily understood, excellent speakers – very knowledgeable in their respective fields,

well presented, would recommend this class for future real estate investors or current owners,

very worthwhile course, great information & good handouts,

explained mortgage options and pitfalls, learned a lot about the topic,

thank you for an informative class- great course, I really enjoyed this,

very informative (lots of info), honest insights from real experts, thorough information,

people with first hand experiences sharing their knowledge,

professionals of the industry, very helpful advice, very personable – all were easy to ask questions,

 

When: Thursday February 17th & 24th 2010, 6:30 to 9:30

Where: John Oliver High School,

Cost: $79.00 Phone: 604-713-4550 Course ID: JO 18394

25 Jan

Top 10 Effects Of The New Mortgage Rules (from mortgagetrends.com)

General

Posted by: Randy Johnson

1. Lower purchase and refinance demand will depress mortgage volumes, sparking greater rate competition as lenders battle for less business

2. A small portion of home buyers will sprint to buy homes with a 35-year amortization before March 18, followed by downward pressure on home prices after March 18 as the amortization reduction removes market liquidity

3. Negative personal consumption and wealth will result thanks to equity take-out restrictions, rising rates and softening home prices

4. Unsecured debt usage will increase as homeowners are restricted from accessing as much of their equity, leading to even greater bank profits in unsecured lending

5. Default rates will see no material improvement

6. No significant improvement will occur in the number of risky borrowers, due to no change in TDS limits or Beacon score requirements

7. HELOC rate discounts will be less frequent as some non-bank offerings disappear and HELOC funding costs inch higher

8. Banks will pick up mortgage market share

9. More private lenders will offer high-interest uninsured 2nd mortgages to 90% LTV

10. If amortization restrictions accelerate falling home prices, we’ll see somewhat greater default risk and more negative equity situations among low-equity homeowners

24 Jan

"The Reason Bank CEOs are Superheroes (to their shareholders)"… and NOT the public

General

Posted by: Randy Johnson

The following article from mortgagetrends.com is an interesting and accurate summary of how our Finance Department helps their big bank buddies. 

Having numerous years of work experience at the big bank level, I found it disturbing that many of the decision makers in the area of mortgage lending were very political but financially unsophisticated.  And now this same crowd is unjustly influencing government decisions that negatively affect the public.


“In one epic and brilliantly calculated move, bank CEOs like TD’s Ed Clarke and BMO’s Bill Downe convinced Canadians they had consumers’ interests at heart, and convinced the Finance Department to:

1) Overlook credit card debt, a market that’s yielded double-digit growth for banks and funded $260 billion of purchases last year

2) Ignore the risk of unsecured lines of credit (ULOCs) so banks can continue offering them to their customers when 85% LTV refinances aren’t enough [Brokers don’t generally sell ULOCs.]

3) Quash broker’s primary source of growth (first-time buyers) with amortization restrictions

4) Cut off consumers’ ability to refinance profitable high-interest consumer debt into low-interest mortgage debt

5) Eliminate HELOC competition from non-deposit-taking lenders which rely on securitization (HELOCs have been massive money-makers for banks, with 170% growth over the last decade. HELOCs now account for 12% of household debt. Banks like TD, BMO, and RBC are largely unaffected by the new HELOC rules because they don’t depend on securitization. )

6) Increase HELOC funding costs at banks with broker channels (like Scotiabank and National Bank—both of which securitize some of their readvanceable products, according to sources)

7) Brush aside the consultative recommendations of CAAMP aimed at permitting well-qualified borrowers to retain mortgage flexibility in exchange for tighter borrower qualification standards

8) Make it harder for more people with collateral charge mortgages to change lenders (Thanks to the lower 85% LTV refi maximum. Bravo to TD’s Ed Clarke on this one.)

In short, the big bank CEOs orchestrated a virtuoso performance for their shareholders, at the expense of sensible mortgage holders. It’s moves like this that justify every crumb of their $5 to $15 million+ compensation packages.

Rob McLister, CMT

19 Jan

New mortgage rules miss debt management target

General

Posted by: Randy Johnson

Mortgage brokers say tightening rules on unsecured consumer debt, not mortgage lending rules is the answer to lowering household debt

January 17, 2011 (Vancouver) – Finance Minister Flaherty’s announcement this morning of tighter mortgage rules continues to emphasize mortgage debt as the culprit for record levels of household debt.  However, these changes affect high ratio mortgages only, a very small part of the mortgage market.  The real issue says the Mortgage Brokers Association of BC (MBABC) is growing consumer lines of credit, consumer loans, car leases and credit cards, and the unsecured lending practices of these lenders, not what homeowners are doing with secured mortgage debt.  The new rules will primarily affect new and younger homebuyers, a demographic which does not typically shoulder high consumer debt.

Mortgage lending is not creating the problem of record levels of household debt, consumer debt is, according to the MBABC.  By the time consumers need to refinance their mortgage, consumer debt already exists.  A mortgage refinance can often be a solution to a homeowner’s debt issue, and these new changes reduce the effectiveness of this solution.  It does not, however, resolve the main issue of consumer debt, which started the problem to begin with.

“Household debt loads are directly related to these unsecured debt factors, not mortgage lending”, says MBABC President Joanne Vickery.  “Further tightening of mortgage rules is not necessarily the right answer.  Consumers need to have the discipline to change their financial habits and to not take on debt that they cannot afford.”

“Consolidating household debt and rolling it into a mortgage is a smart option for an initial solution”, says Vickery “provided that any savings are then used to pay down the mortgage or invested into a retirement savings vehicle.  Consumers cannot, however, continue to use their home as an ATM; they must change their habits on acquiring consumer debt.”

Vickery advises homeowners and those looking to buy a home to contact a qualified MBABC mortgage broker for assistance with determining home affordability as well as long-term debt planning and debt management.

19 Jan

Mortgage Rate Specials January 19th, 2011

General

Posted by: Randy Johnson

5 Year Fixed Special 3.79%

5 Year Fixed Special 3.69% HIGH RATIO ONLY

Best 5 Year Fixed Rate, No Frills Quick Close Special 3.54%

Best 5 Year VRM P – 0.80% (2.20% today)