Prime Rates are All Over The Map

Unfortunately, not all variable rate holders are getting the full benefit from the 1/2 percent drop in the Bank of Canada overnight rate announced on October 8.   In the past, all lenders have the same prime rate.  With the credit crunch and the tighter cost of credit for lenders, this has all changed.

Here is a list of some of the major lender’s prime rates.

Island Savings     4.25%
Van City               4.25%
BMO                     4.25%
Scotia                    4.25%
Maple                   4.25%
Ing                        4.25%
Street                   4.25%
First Line             4.35%
CIBC                     4.35%
TD                         4.35%   (effective Nov. 1)
Merix                    4.50%
MCAP                   4.50%
HSBc                     4.50%
BW                        4.50%
Nat Bank              4.50%
Resmor                 4.50%

Reasons to Refinance Your Mortgage

A recent study by the Canadian Mortgage and Housing Corporation (CMHC) showed that 71% of mortgage holders refinanced their mortgage prior to the expiry of their mortgage. There are many reasons why you should refinance your mortgage.

Here are my top 5 reasons:

1) To lower your interest rate or to lower monthly payments

This is an excellent reason to refinance your home. It may be that you locked in your mortgage at a higher interest rate. Perhaps, the interest was higher at the time. You should be aware that there is a cost to breaking your current mortgage and starting a new one with a new lender. Your current lender will probably have a pre-payment penalty. A professional at BC Mortgage will need to evaluate your transaction to determine whether the savings of the lower interest rate is greater than the costs of breaking your current mortgage.

Alternatively, you may feel that your mortgage payments are difficult to maintain. If this is the case, you may benefit from extending the amortization on your mortgage. It may be possible to extend the amortization to 35 years for an insured mortgage or even 40 years for a conventional mortgage (i.e., a mortgage with 20% equity).

2)  Your lender has left the mortgage business

You may have obtained a mortgage through a sub-prime lender, many of which have closed shop. If you took out a mortgage with Accredited Home Lenders, GE Money, GMAC, HSBC Finance or Xceed Mortgage, etc., you need to come in and discuss your situation as soon as possible. When your mortgage is up for renewal, these lenders will not be able to provide you with an automatic renewal. It is important that we review your situation so that when your mortgage is due an alternative lender can be found. This may mean that we work with you to bring your credit score up so you can qualify with another lender. Another major advantage is that there may be an opportunity to lower the interest rate on your current financing.

3) To consolidate debts into your mortgage

Debt consolidation allows you to incorporate your unsecured debts into your mortgage. The objective of a debt consolidation mortgage is to lower your interest costs and spread out the payments into a more manageable monthly cost.

For example, if your home is worth $300,000 and your mortgage is $200,000, you have equity of $100,000. You can increase your mortgage to pay off your credit cards. If you have good credit, it may be possible to take out as much as 95% of the value of the home. The additional money can be used to paydown your credit cards. This the interest rate on a mortgage is lower than any other debt.  Secondly, with a mortgage, your payments will be lower since the payments can be spread over the life of the mortgage (say, 35 or even 40 years amortization).

Click here to learn more about debt consolidation

4) To renovate your home

If you want to spend a significant amount of money on improving your home, you may be able to take out a lot more equity than you realized! BC Mortgage can advise you through this process. Both insurers — Genworth and CMHC, will insure new mortgages which are “topped up” for this purpose, and the total of your current mortgage and the new funds exceeds 75% of the current home value. Not all improvements are eligible, however. Pools and spas are typical “over-improvements” which may not qualify for a high-ratio equity take-out. Of course, if the total requirement is less than 75% of your home’s current value, you should have little trouble getting the “top up” you need — regardless of the degree of luxury you plan to add.

5) To take equity from your home

Of course, there is a myriad of other reasons why you may want to do an Equity Take-Out (ETO) mortgage. A common reason is to shore up your family’s finances. With the credit crunch and a possible recession, it is prudent to buffer your cash reserves. If you own a business, this makes a lot of sense since it is always easier to obtain financing when you don’t need it. If you apply during a business down turn, you may not get the mortgage you want.  Secondly, if the value of your home drops, the amount you will be allowed to borrow will be reduced. For individuals, this is also true since a job loss will make it difficult to refinance your mortgage with favorable terms and conditions.

Crossing the Mortgage Renewal Minefield

When your mortgage is about to come up for renewal, you need to make sure you know all of your mortgage options.  Better yet, you should have a clear idea of what mortgage strategy is best for you.

Why the need for a strategy?
There’s a simple reason.  When renewing your mortgage, you’re most likely in a different financial position than when you first obtained the loan.  As our financial and life circumstances change, so does the mortgage that is best for our needs and goals.

Getting married, additions to the family, receiving an inheritance – these are all major life events that can have an impact on which mortgage makes sense.  In fact, most of us have questions as our mortgage nears renewal:  Should I go with a variable or fixed mortgage?  What about taking some of my home’s equity and using it for renovations or investments?  How can I be sure I’m getting the best rate?

Secondly, with the current financial turmoil, it makes sense to re-evaluate whether you need to shore up your cash reserves.  Remember – the best time to borrow money is when you don’t need it.  If you are in business and are expecting a downturn, this is the time to be thinking of taking equity from your home.  The same is true for people who may have to face the prospect of a lower income or job loss.      The wrong time to take out equity is when you lose your job or when the property value drops.

The “strategy” to avoid
At mortgage renewal time, don’t be too quick in just signing the renewal form and returning it to your current lender.  If you do so, you could be paying a higher rate, and end up with a mortgage product that might not be best suited to your interests and in some cases untold thousands in lost opportunity.  That’s really no “strategy” at all!

You better shop around…
Canadian mortgage holders are becoming more savvy.  More and more, homeowners are shopping around to get a better rate when their mortgage comes up for renewal.

However, working on your own, you could apply to perhaps two or three financial institutions and select from their in-house mortgage offerings.  A better approach is to talk to a mortgage broker – we can “shop” your application to an extensive line-up of lenders who offer a wide range of mortgage options.

Most importantly, we can offer expert advice on a customized mortgage strategy to ensure you are taking full advantage of the many mortgage options on the market in Canada.  We will also negotiate with lenders on your behalf to make certain that you get an extremely competitive interest rate.

Thinking of switching?
For those who are thinking of switching their current mortgage to another lender to get a better interest rate, most lenders now offer “no cost or low cost switches.”  This can be a smart way to reduce your interest costs.

Think of your mortgage renewal as an opportunity – to get the most from your financing.  With a little advice, and a strategy in place, you’ll be confident that your mortgage is meeting your needs – now and in the future.

Rates are Up for Variable Rate Mortgages

Variable rate mortgages are starting to cost more as investors are wanting a higher yield for non-government securities.  Last week, most lenders brought up their variable rate mortgage rate to Prime (from Prime less 0.40%).  Yesterday, TD Canada Trust led the industry by increasing their rate to Prime + 1%.  A few lenders have followed suit already.  One lender (Firstline Mortgages) has suspended its variable rate and HELOC product until further notice.

Fixed rates have moved up marginally.  Whereas a few weeks ago, you could get a 5 year mortgage at 5.45%.  Today, the standard rate is at 5.79%.

Monthly Review of Interest Rate Forecasts from the Major Banks

The Bank of Canada (BoC) held their benchmark interest rate on September 3, 2008 at 3.0%. This was in line with the expectations of most economists from the major banks.

Our roundup of the Big 5 Bank’s economic forecasts show that economists at these institutions are expecting rates to stay the same until the Third Quarter of 2009. The only exception was Scotia Bank which had forecasted a drop in the prime rate by 1/4 in the Fourth Quarter of 2008 and another 1/4% in the first quarter of 2009.

Here is what the big banks are forecasting for interest rates:

• TD Economics – Interest Rate Outlook table shows the BoC’s overnight rate (hence the prime rate) staying the same until the 3rd quarter of 2009 - TD Economics report dated Sept 25, 2008
• BMO Nesbitt Burns – Prime rates to remain stable until the 3rd quarter of 2009 – BMO Capital Markets Economics dated Sept 26, 2008
• RBC – …”This suggests that the central bank will remain on the sidelines monitoring the economic data to see whether one or the other risk comes to dominate. Our forecast assumes a 3.00% overnight rate through the end of this year before being gradually raised in 2009 as the downside risks to growth ease. – ” – RBC Financial Market Update dated Sept 8, 2008
• CIBC Wood Gundy – Table shows rates increasing in Sept 2009 by 1/2% – CIBC World Markets Forecast dated Sept 23, 2008
• ScotiaCapital – Drop in the overnight rate (hence the prime rate) by 1/2% – Scotiabank Group Global Economic Research dated Sept 9, 2008

This blog is being written on the eve of the vote of the US House of Representatives on the $700 Billion dollar bail out plan.  Which ever way the vote goes, I would expect that the major banks will be revising their interest rate forecasts.