Variable Rate Mortgage Holders Usually Come Out Ahead of Fixed Rate Mortgage Holders

Based on research done by Moshe Milevsky, associated professor of finance at the Schulich School of Business at York University, holders of variable rate mortgages came out ahead of fixed rate holders 90.1% of the time. The study was based on mortgages granted between 1965 and 2007. The resulting savings from the variable rate mortgages allowed borrowers to pay off their mortgage between 8 and 19 months sooner.

While it may be true that the odds favor variable rate holders, 70% of Canadian still opt for a fixed rate mortgage. To many, there is nothing like the certainty of knowing exactly how much you need to pay each month.

To learn more, click here to read the April 2, 2008 article of the Vancouver Sun.

The Top 5 Credit Misconceptions

(From Transunion’s September 2007 newsletter)

#5: Closing old accounts will improve your credit score
#4: Co-signing a loan doesn’t make you responsible for the account
#3: Paying off a negative record will get it removed from your credit report
#2: Paying off a debt will make your credit score jump up 50 points right away
#1: Checking your credit reports will lower your credit score

Pre-Approvals: What You Need to Know

When searching for a home, it makes sense to get a mortgage pre-approval and line up the necessary documents prior to house hunting.What is a pre-approval? Its the process of determining how much money a prospective homebuyer will be eligible to borrow prior to a formal application for a mortgage loan, based on information they have provided.

With a pre-approval, you’ll get a good sense of how much you can afford, and you’ll be assured of a particular mortgage rate for a set period of time. With a locked-in rate, there is no risk of interest rate increases while you are house hunting. A mortgage broker may be able to obtain a longer pre-approval rate hold. Another benefit of a pre-approval is that you’ll be in a much better position to negotiate with sellers.

On the other hand, a pre-approval is not a rock-solid guarantee of financing, does not eliminate the need to make a conditional offer, and you still must consider all closing costs.

I always recommend that you get a pre-approval in person. While it is possible to get pre-approval over the phone or internet, you will get the most value by meeting your mortgage broker one-on-one. This will allow you to ask questions, run scenarios and learn all your options different options. Remember, the amount you are qualified to purchase is not just ONE number. It is a range of amounts based on several factors such as your income, the lender, the interest rate, the down payment, your credit, the type of property, etc. When you are meeting your mortgage broker, he/she should be able to run through the various amounts you will be qualified to purchase.

Learn more about the pre-approval process at BCMortgage.ca by visiting our website.

The Cost of a Cashback Mortgage?

I often get asked whether a cashback mortgage is a good option for borrowers. While a cashback may seem attractive, be aware that unlike other cashback products, mortgage cashbacks are not free. Lenders will increase the interest rate to cover the cost of the cashback.

One cashback product to consider is TD Canada Trust’s 7 yr, 7% cashback product. This product is offered by Invis (www.BCmortgage.ca). The current interest rate on this mortgage is 7.7%. You may think that this is a high rate of interest but this is because you get 7% of the mortgage amount interest-free. Yes, it is still more expensive than a traditional mortgage. For example, on a $300,000 mortgage (where you get a cashback of $21,000 or 7% of $300,000), you would pay interest over a 7 year period of $156,608. If you took a standard (i.e., no cashback) mortgage, and paid the current 6.2% interest on a 7 year mortgage, you’d pay total interest of $125,555. That’s a difference of $31,053. We still have to deduct the cashback of $21,000 to arrive at the net cost of $10,053 (or $31,053 less $21,000).

In essence, you’ve spent approx. $10K to get a $21K cashback. Is this worth it? For most people, the answer is no. However, if you are cash strapped or would like to purchase furniture or need money for legal costs, this could be a solution for you.

Besides the added cost of a cashback, borrowers have to be aware that cashbacks are only available for fixed mortgage terms. There are no variable rate mortgages that offer a cashback. This is a major disadvantage since this precludes you from enjoying the lower interest rate of a variable rate mortgage. Secondly, if you were to break your mortgage, you would have to return a pro-rata share of the cashback. For example, if you were to break your mortgage on the 5th year of a 7 year cash back mortgage, you will have to return 2/7th of the cashback you received when you took out the loan.

There are many lenders offering cashbacks. Since most consumers will not have the software to analyze each offering, we suggest you consult a mortgage broker at Invis (BCMortgage.ca) to help you decide which cashback offering is the best one to take.

Mortgage Strategies to Control Your Consumer Debt

Consumer debt can come from many sources, such as credit cards, department store cards, car loans or other personal loans – with many Canadians paying much more in interest costs than they need to be.

Increasing equity in homes can offer a possible solution for homeowners burdened by high-interest consumer debt. While personal debt levels continue to rise, so too does the equity that many have in their homes, which opens a range of options to dramatically reduce one’s interest cost burden. Here are two common strategies for homeowners:

Home Equity Line of Credit

Another mortgage option for homeowners which offers greater flexibility is a Home Equity Line of Credit – or HELOC – which allows you withdraw funds as needed.

The advantage here is that you can put a HELOC in place and charge up when needed, then pay down the line of credit, never needing to re-qualify, provided payments are kept up-to-date.

Your payments fluctuate depending on current interest rates and the outstanding balance over the month, with interest-only payment options available. A HELOC can be convenient for paying off higher interest debts, as you withdraw and pay (relatively lower) interest on only what you need.

Mortgage Refinancing

Refinancing a mortgage can give you the opportunity to consolidate higher-cost borrowing with lower-cost mortgage financing – potentially allowing you to save significantly on overall borrowing costs.

With a lower interest rate on a refinanced mortgage, some borrowers decide on a lower monthly payment to improve their cash flow, while others choose to pay off the loan sooner, saving them money over the long term. What’s more, mortgage refinancing offers a plan to reduce your debt – after the elapsed amortization period, your balance is zero.

With Canadians now carrying increasing amounts of high-interest debt such as credit card balances and personal loans, how best to manage one’s borrowing costs is a concern for many. Talk to your Invis Mortgage Consultant – you may be surprised to learn how much you can save with the right debt management strategy.

Mortgage Solutions for Seniors: Reverse Mortgage vs. HELOC

What are the financing options for seniors?  It depends on the situation.   For those who still have income (pension income included), it may be possible to obtain a home equity line of credit (HELOC), irregardless of age.  With a HELOC, you can draw on the mortgage until you reach the limit approved by the financial institution.   If you are using this strategy to fund your living expenses, your final objective must be to sell and downsize within a few years.  Eventually, you will hit the limit of your HELOC and you will have no more funds to draw on for living expenses.  At this time, you will need to sell your home if you cannot afford to pay the interest on the HELOC.

If you don’t plan (or want) to sell and/or your income is not sufficient to qualify for a mortgage, you need to consider a reverse mortgage.   With a reverse mortgage, it is possible to obtain up to 50% of the value of the property.  The loan does not have to be repaid unless you sell the home.  The amount that is loaned does not depend on your income or credit rating.  It depends on the your age,  the type of property (e.g., single detached, townhouse, condo) and location of the home.  Of the three criteria, your age is the probably the most important factor.  For example, a person who is 60 years old can expect to be approved for a maximum of 15% of the home value while someone in their seventies may get 30% of the value of the home.

You should consider a reverse mortgage if:

1. You plan to stay in that home for a long time
2. You cannot qualify for a tradtional mortgage or HELOC
3. You don’t want to repay the debt

The downside to a reverse mortgage is the interest rate.  The interest rate starts at 8%.   You may also expect to pay a set up fee of approx. $2000 (legal and appraisal fees).  While the interest rate may be on the high side, you may be able to offset some of the costs by investing the proceeds of the mortgage and generating some tax deductible interest expenses.  A good financial planner can explain this strategy to you.

Lastly, you should also explore the option of downsizing.  Be aware that there are significant costs to downsizing such as realtor fees, transfer tax, moving costs to consider.

Where are house prices in Vancouver / BC headed in 2008?

You may find this hard to believe but I’m hearing that we can still expect house prices to increase in 2008. I was at the Mortgage Broker’s Association of BC Trade show this week and attended the presentation of two well respected economists - Cameron Muir of the BC Real Estate Association and Benjamin Tal of CIBC World Markets. Mr. Muir expects house prices to continue rising, albeit at a slower growth rate of between 7-8%, not the 20% growth rate we are accustomed to seeing during the past few years.

Unlike our friends in Ontario and Quebec, British Columbia is less impacted by the slow down in the US economy. For us, the biggest impact will be in the softwood lumber industry, which is reeling from the high Canadian dollar and from lower US housing starts. Thankfully, the forest industry now accounts for only 3% of our economy. Commodity and energy prices are at its peak and the pulp and paper industry is holding its own. With Central Canada being hit hard by the US slowdown, the Bank of Canada will be forced to drop interest rates. This will have a positive impact on BC’s housing market.

The key driver to the housing market is employment. With the unemployment rate the lowest it’s every been at 4%, it’s no wonder that our housing market will continue to remain robust. Wages have also been rising faster than inflation. The correlation between employment and housing makes a lot of sense. As people become confident of the job situation, they will want to own their own home (or upgrade to a larger home if their income increases).

What I take away from this is that if you don’t own your own home, you should seriously consider getting into the market as soon as it is feasible. Don’t bet against the experts. Even if you’re thinking that there will be a bubble (and I don’t know of any Canadian economist predicting a bubble), I suggest you hedge your bets a bit. Buy your own home. Since you’ll be there a while, you’ll be able to ride out any possible downturn while you enjoy the benefits of owning your own home.

Forecasts from the Big 5 Banks Indicate a Downward Trend

It’s unanimous. Interest rates are on its way down. Here’s what the Big 5 Banks are forecasting:

1) TD Canada Trust - 3/4% drop in the prime rate (see TD Economics Commentary dated Jan 24, 2008)

2) RBC - 1% drop in the prime rate (see RBC’s Central Bank Watch dated February 2008)

3) CIBC - 1% drop in the prime rate (see CIBC World Markets Interest and Exchange Rate Forecast for Feb 5, 2008)

4) BMO - 1% drop in the prime rate (see BMO’s Econofax dated Jan 22, 2008)

5) Scotia Capital - 1/2% drop in the prime rate (see Scotia Bank’s Forecast Update dated Feb 5, 2008)

With rates expected to decline significantly in the short term, you need to sit down with your mortgage broker to design the right strategy to take advantage of lower rates. One option is to switch to a variable rate mortgage. If you are currently locked-in on a fixed rate mortgage, it may be worthwhile to switch and absorb the prepayment penalty (if any). Your mortgage broker should be able to advise you on how to properly time your transaction so you obtain the maximum benefit.

What Features To Look For in a Variable Rate Mortgage

With interest rates poised to drop over the next few months, variable rate mortgages have been gaining popularity. For individuals looking to purchase or refinance their mortgage, it is important to understand what features to look for. Here are the top three:

1) Ability to lock-in your mortgage and the lender’s best interest rate - Most lenders allow you to convert your variable rate mortgage to a fixed (i.e., locked-in) mortgage. However, not many lenders guarantee whether you will get their best interest rate or their posted rate when you convert. You need this guaranty. Rates can sometimes move quickly so you don’t want to have to haggle with your lender for their best rate (which could be up to 1.5% lower than the posted rate) when rates are moving up. At this point in time, your options are limited since it can be costly to switch to another lender.

2) Introductory rate - Some lenders offer mortgages with an introductory rate. There are pros and cons to taking a mortgage with an introductory interest rate. Your payments are lower initially, then increase after a few months. To some, this is a benefit. However, there is a cost to this. I’ve had the opportunity to review a major bank’s introductory rate offer. For this scenario, the borrower was offered an introductory rate of Prime less 1.01 for the first 90 days and Prime less 1/4 for the remainder of the term. My offer was a variable rate at Prime less 0.6%. I compared the total interest cost of each offer and it turns out that the mortgage with the introductory rate would cost the borrower approx. $3200 in interest over 5 years.

3) Interest Rate Compounding - Standard mortgages are compounded on a semi-annual basis (in simple terms, interest is charged on interest every 6 months). There are some variable rate mortgages where the compounding is monthly. Monthly compounding is more costly.

Getting the best mortgage is all about getting the best advice. This is advise you can only get from your mortgage broker.

With Rates Dropping, Should You Consider Switching To A Variable Rate Mortgage?

Year 2007 was a crazy year for interest rates. The economists just couldn’t get it right. During the first half of the year, economists were expecting rates to drop. However, by July 2007, the trend reversed quickly. Due to strong economic indicators and higher inflation rates, interest rates shot up by 1/2% in a span of 2 months and another 1/4% after another month. The best 5 year discounted mortgage rate reached 5.99% sometime in October 2007. Many home buyers sought the peace of mind of a fixed (locked-in) interest rate mortgage.

We now know that rates are on the decline as the full effects of the US subprime mortgage mess is now being felt. The Bank of Canada has already dropped their overnight rates twice (by 1/2 percent) during the past 60 days. There are expectations that interest rates may go down by another 3/4%. If this happens, you can expect the prime rate to drop to 5% and the variable mortgage rate to 4.5% (assuming a mortgage priced at prime less 1/2%). Does it make sense to consider switching to a variable rate? Let’s run the numbers.

Let’s assume you have a $350,000 mortgage at 5.99% and there is still 5 years to go on your mortgage. Over a 5 year term, you would pay total interest of $101,810.86. If you were in a variable and rates dropped to an average of 5.0%, your total interest paid over 5 years would be $84,761.94. This is a savings of $17,048.92. If rate dropped even lower to an average of 4.5%, your total interest savings will be even higher at $25,655.12. This savings have to be weighed against any prepayment penalty your lender will charge you.

If you need clarification, please do not hesitate to contact me.