Merix Offers 50-50 Fixed-Variable Mortgage

Innovation seems to be returning to the mortgage market after a long dry spell.  For the past couple of months, all we’ve been hearing is lenders tightening their credit or pulling pulling out of the market.

Merix Financial recently announced their “50/50 Wise Mortgage”. This allows borrowers to take half of their mortgage as a 5 year fixed rate mortgage and the other half as a variable rate mortgage.  Merix already offers one of the most competitive variable rate mortgage at Prime + 0.40.  Their fixed rate is equally competitive.

The terms of this product mirror the terms of their fixed and variable rate mortgage.  The prepayment options are the same.  The interest rate to convert their variable rate is guaranteed to be their best fixed rate at the time of conversion.

This probably will work well for those who can’t seem to decide whether to go fixed or variable.  The borrower would like to take advantage of the savings of a variable rate mortgage and, at the same time, hedge their risks by locking in for half of their mortgage.

Monthly Review of Interest Rate Forecasts from the Major Banks

The major banks did not release any new interest rate predictions during the month of May.  I could only find forecast tables showing their expectation that the Bank of Canada overnight rate  (which is tied to the Chartered Bank prime rate) will not be rising until mid-2010.

The liquidity crunch seems to be easing.  The pricing for variable rate mortgages has slid down to Prime + 0.60% for some lenders from a high of Prime + 1.0% in October 2008.   The 5 year rate has also come down slightly to 3.79% for standard mortgages (although there are lower rates for “no frills” mortgages).

Here is what the major banks are forecasting.

1. BMO expects interest rates to start rebounding in 3rd quarter of 2010 – BMO Economic Research Focus dated May 22, 2009
2. CIBC World Markets forecasts the BoC to hold the overnight rate at its current level of 1/4%  at least until the June 2010 – CIBC World Markets May 13, 2009
3. RBC forecasts the BoC staying at its current level of 1/4% until the 2rd Quarter of 2010.  After that, RBC is forecasting a 1% increase in interest rates by the end of 2010 – RBC Financial Market Forecast dated May 8, 2009
4. National bank remains the lone dissenter as they expect rates to increase by the 1st Quarter of 2010. Their forecast for 2010 is an average prime rate of 4.25% – National Bank Monthly Economic Monitor dated May 2009
5. I could not find interest rate forecasts for Scotia Bank and TD Bank.

Given the extremely low interest rates today, I am recommending locking-in to a long-term mortgage (at least 5 years). That’s if you have the new variable rate mortgages which are price above prime.  While there is some savings to be had by keeping a variable mortgage for the next 6-8 months, the savings would not be significant.

For those with the “old” variable rate mortgages which were priced below prime (some at 0.90% below prime), it is a harder call.  If you have a couple of more years to go on that mortgage, I would keep that mortgage.  For you, interest rates have to rise by at least 3 percent before you reach the fixed rate mortgage rate.

Is it important to work with a mortgage professional that is up-to-date on interest rate trends? Absolutely!  The interest on your mortgage will be the biggest expense in your home purchase.  You’ll need a mortgage broker that thoroughly understands interest rate trends and how this affects your choice of your mortgage programme.

Stay up-to-date on interest rates and home buying trends by signing up for my e-newsletter at www.bcmortgage.ca/opt_in.htm .

Monthly Review of Interest Rate Forecasts from the Major Banks

On April 21, 2009, the Bank of Canada (BoC) announced their last rate drop (see the BoC rate announcement).  This brought down the overnight rate to 1/4% which is the lowest the BoC is able to go.   In that announcement, the Bank committed to hold the rate until “the end of the second quarter of 2010″.

It was no surprise that the forecasts from the major lenders were in line with the Bank of Canada’s announcement

• BMO expects interest rates to start rebounding in 3rd quarter of 2010 - BMO Economic Research Focus dated April 24, 2009
• CIBC World Markets forecasts the BoC to hold the overnight rate at its current level of 1/4% until the 3rd quarter of 2010 – CIBC World Markets April 28, 2009
• RBC forecasts the BoC staying at its current level of 1/4% until the 3rd Quarter of 2010 – RBC Financial Market Forecast dated April 3, 2009
• TD Bank did not provide a forecast – Read TD Economics Commentary dated April 21, 2009 of the BoC announcement to maintain the current overnight rate at 1/4%

Is it important to work with a mortgage professional that is up-to-date on interest rate trends? Absolutely!  The interest on your mortgage will be the biggest expense in your home purchase.  You’ll need a mortgage broker that thoroughly understands interest rate trends and how this affects your choice of your mortgage programme.

Stay up-to-date on interest rates and home buying trends by signing up for my e-newsletter at www.bcmortgage.ca/opt_in.htm .

Monthly Review of Interest Rate Forecasts from the Major Banks

On March 3, 2009, the Bank of Canada (BoC) announced a rate drop which brought the overnight rate down to 1/2%.   At the time, it was the consensus that this was going to be the last rate reduction until the economy recovers in 2010.  In that announcement, however, the BoC hinted at a possibility of one more rate drop.   The Bank stated that  the overnight rate can be expected to remain at this level “or lower “.  The “or lower”  part of the press release leaves open the option to reduce the overnight rate one last time.

Here is a summary of what the banks are forecasting:

• BMO favors one more rate reduction to 1/4 percent in April 2009 – BMO Capital Markets Rate Scenario dated March 4, 2009
• CIBC World Markets forecasts the BoC to hold the overnight rate at its current level of 1/2% -  CIBC World Markets Market Call dated March 2, 2009
• RBC forecasts the BoC staying at its current level of 1/2% – RBC Financial Market Forecast dated Mar 12, 2009
• Scotia Bank and TD Bank did not provide an interest rate forecast in March.  TD prepared a report entitled “The Perils of Ultra-Low Rates: The Canada Case“.  While there are precedents from other countries (e.g., Japan’s interest rate at 0.10%, US at 0.00-0.25%), problems could arise when interest rates approach close to zero.  There are implications for investors who will be earning close to nothing when investing in the money markets.  There are also implications for bank financing that is tied to the prime rate.

Stay up-to-date on interest rates and home buying trends by signing up for my e-newsletter at www.bcmortgage.ca/opt_in.htm .

Should you break your mortgage?

With dropping interest rates, there’s a lot of talk these days about whether to break your current mortgage and switch to a lower interest rate mortgage.  Here are the issues you need to consider:

1. The pre-payment penalty – You need to phone your lender to determine the penalty since the fine print in the mortgage documents will determine exactly what they will charge you to break your contract.  Lenders will charge you a penalty to break a closed fixed rate mortgage.  It is based on the interest rate differential (IRD) or three months interest (whichever is higher).  The reason for this is because the lender won’t be able to earn the same yield if you were to pay them back since rates have gone down.  By locking-in you get the peace of mind that you’re rates will not increase if rates go up.  By the same token, if rates come down, the lender (and its investors) expect that the yield will be the same so they recover this loss by charging you a penalty.  Each lender will have in its mortgage documentation the exact calculation for the penalty.  The penalty can vary among lenders so I suggest you phone your lender and ask the exact amount they will charge to break the mortgage.   Once you know how much it will cost to break your mortgage, I can calculate how much you would save by switching to a lower rate mortgage.
2. The type of mortgage you want to switch to – Your options are to switch to another fixed rate mortgage or move to a variable rate mortgage.  You’ll obtain the most benefit if you were to switch to a variable rate mortgage.   If you switch to another fixed rate mortgage, you will often find (with exceptions) that the penalty will negate most of the savings.
3. Whether you have the cash to pay the penalty – If you have the cash to pay the penalty, your mortgage can usually be “switched” to another lender without having to pay the legal and appraisal fees.  If you don’t have the cash, the penalties can be added on to the new mortgage but this will be treated as a “refinance” transaction whereas you will have to pay for the legal and appraisal fees.   Secondly, adding penalties to the new mortgage will require that there is enough equity in the property.

In most cases, the decision boils down to your answer to the following question:  Where do you think interest rates are heading? If you think interest rates are heading up, you should lock into another fixed rate mortgage and extend the term.  On the other hand, if you are of the opinion that interest rates will either stay the same or drop, you probably want a variable rate mortgage.   At our practice, we take the time to meet with with our clients personally to discuss in detail  interest rate trends and the pros and cons of each option since we consider this to be a very important and complex issue.

Be aware that there is a time element to making this decision.  Once you’ve made the decision to prepay, you should act fast since the prepayment penalty will increase when interest rates drop.  I’ve had clients who hemmed and hawed when the prime rate was in the low 5% range and now, they are kicking themselves for not acting sooner.

Secondly, calculating the savings can be complex.  It involves calculating the cashflows over the life of your remaining term and obtaining the present value.  Be sure you make sure that your mortgage broker understands the complexities of this transaction.

One final word: If you’ve locked-in to a high fixed rate mortgage, you should look into this option.  It could save you thousands of dollars in future interest.  Once the transaction is costed out, there is no downside.  They way I look at it, the prepayment penalty is money I will pay until the end of the mortgage term.  Either I pay it now or pay it later so it isn’t really an expense. Your major expense will be your time and effort in gathering up the paper work.

Bank of Canada Cuts Key Rate by Half a Percentage Point

he Bank of Canada reduced its key interest rate by half a point today to its lowest level ever.  The Bank has cut this key rate by four percentage points since December 2007.  In its announcement the Bank stated that this rate is to remain at its current level or lower until there are “clear signs” that the economy is recovering.

The Bank also noted that “The effects of the recent aggressive monetary and fiscal policy actions in Canada and other major economies will begin to be felt in the second half of this year and will build through 2010.  Once the global financial system stabilizes and global growth recovers, the underlying strength of the Canadian economy and financial sector should ensure a more rapid recovery in Canada than in most other industrialized economies.”

Those with existing variable rate mortgages will benefit directly from this recent news – these mortgages are linked to the prime rate.  However, there can be some variation in when, or to what degree, lenders react to a Bank of Canada rate announcement.  There are lenders who change immediately after a Bank of Canada rate move, while some lenders re-set their prime rate on the first of the month following and some even do so quarterly.  In addition, after recent rate announcements by the Bank, some lenders matched the Bank’s drop only after a delay, and some did not match the full rate cut.

Currently, pricing for new variable-rate mortgages is typically above the prime rate.  Those looking for a new variable-rate mortgage may wish to get pre-approved, to protect themselves if variable-rate pricing in relation to prime continues increase in the next few months.

Pricing for fixed-rate mortgages is not directly affected by today’s announcement.  However, some fixed rates have been trending downward in recent week.

Monthly Review of Interest Rate Forecasts from the Major Banks

The last interest rate drop is expected on March 3, 2009.  As least, that’s what the Big 5 Canadian Banks are forecasting (for now).  With the exception of BMO, the banks are expecting a 1/2% drop in the Bank of Canada overnight rate when the rate is reviewed on March 3, 2009.

Here is a summary of what the banks are saying:

• TD Economics – TD expects a rate cut of 1/2% in March 2009 - TD Economics Weekly Bottom Line dated February 27, 2009
• BMO favors a 1/4 percent rate cut – BMO Focus dated February 27, 2009
• RBC forecasts 1/2 percent drop – RBC Economics Financial Markets Monthly dated February 6, 2009
• CIBC Wood Gundy expects a 1/2% rate reduction – CIBC World Markets The Week Ahead (Market Call) dated March 2-3, 2009
• Scotia is forecasing a 1/2% drop in the BoC rate for 2009 – Scotia’s Global Forecast Update dated February 2, 2009.

Stay up-to-date on interest rates and home buying trends by signing up for my e-newsletter at www.bcmortgage.ca/opt_in.htm .

Consider Refinancing and to Reduce Interest Expenses

What a difference a year makes.  After a spike in interest rates starting in July 2008, home buyers were of the opinion that rates were going through the roof.  To avoid risk, many home buyers locked in their mortgage at the 5 year fixed rate between 5.7 – 5.9%.  As we see now, rates have softened significantly and will stay there for some time.  It therefore makes sense to re-evaluate whether it makes sense to switch to a lower interest rate mortgage.

Breaking a mortgage will result in a prepayment penalty to your current lender.  The question that needs to be answered is whether the savings from the lower interest rate mortgage is enough to cover the penalties and any closing costs.   I’ve run into several cases where it there were significant benefits to switching to a lower rate mortgage.   Here is one such scenario:

• Mortgage amount – $341,000
• Term – 5 yr term with 4 yrs remaining on mortgage, 35 year amortization
• Interest rate at 5.7%.
• Prepayment penalty of $10,000 (approx.)

The borrower had 2 options in this case – switch to a 4 yr term mortgage at 4.39% or get a variable rate at 3.8%.  Here is the total interest he would pay over the remaining 4 years of his mortgage based on these terms:

• 4 yr term – $59,263
• Variable rate mortgage – $50,037
• Stay at the current mortgage for the next 4 years – $75,500

The client saves $25,463 (or $75,500 less $50,037) by switching to a variable rate mortgage.  The net savings is $15,463 (or $25,463 less $10,000 penalty).

Interest Rate Forecast Update

With the 1/2% drop in the Bank of Canada’s overnight rate, the next question is whether there is still room to lower rates further.   According to some of the major banks, yes, there is.  Here’s what some of they are saying:

• CIBC World Markets – CIBC’s economists are forecasting another 1/2% drop in the BoC’s overnight rate.
• TD Bank – Another 1/2% reduction for 2009
• RBC – This bank forecasts interest rates to remain the same for 2009
• BMO – BMO newsletter indicated that rates cuts are still a possibility

Fixed rates have dropped as well.  A standard fixed rate is around 4.39% – 4.54%.  If you have locked-in late last year when rates were at its peak, it may benefit you to refinance at current lower interest rates.  Be sure to discuss your options with your mortgage professional.

Monthly Review of Interest Rate Forecasts from the Major Banks

The year 2009 was a year of reductions in the Bank of Canada (BoC) overnight rate.  In little over a year, the BoC cut their rate by 3%.

Our roundup of the Big 5 Bank’s economic forecasts show that economists at these institutions are expecting rate cuts between 1/2% to 1% in 2009.  None of the banks were forecasting a rate increase in 2009.  It’s a safe bet that keeping your mortgage as a variable is a wise idea.

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

• TD Economics – TD expects a rate cut of 50 basis points in January 2009 – TD Quarterly Economic Forecast dated December 10, 2008
• BMO expects 1/2 percent rate cut in January 2009 – BMO 2009 Outlook dated December 19, 2008
• RBC forecasts 1/2 percent drop in January 2009 – RBC Economic and Financial Market Outlook for Dec 2008
• CIBC Wood Gundy expects a 3/4% rate reduction by February/March 2009 – CIBC World Markets Weekly Market Insight dated December 19, 2008
• Scotia is forecasing a 1% drop in the BoC rate for 2009 – Scotia’s Forecast Update for December 17, 2008

Stay up-to-date on interest rates and home buying trends by signing up for my e-newsletter at www.bcmortgage.ca/opt_in.htm .