It was a little less than a year ago that the global financial crisis began to hit home, which is to say that mortgage rates spiked higher.
Now, the cost of mortgages is coming down. If you’re buying a home or renewing a mortgage, it’s time to review your options.
Fixed-rate mortgages declined a little last week, but the most dramatic changes can be seen in variable-rate mortgages. Pre-crisis, variable-rate mortgages came with discounts that ranged from 0.75 percentage points to as much as 0.90 points off prime. By late last fall, crisis conditions prompted lenders to start charging prime plus a full percentage point or more. Now, some lenders are starting to unwind their crisis-rate premiums. Can variable-rate mortgages fall back to their pre-crisis lows any time soon?
I don’t think so. But could the spread get to a little below prime? That could very well happen. One thing is certain: you need someone on your side to help decide which product is best for you.
So, it’s strategy time. With prime at 2.25 per cent and fully discounted five-year fixed-rate mortgages going for something in the area of 3.9 to 4.1 per cent, you’re got some thinking to do if you’re buying a home or renewing a mortgage.
The variable rate looks tempting. Sure, the prime is going to rise in the medium term, but it’s expected to stay put until next spring at least. Some economists say that it will stay put into 2011. Even when prime does move higher, it will have to increase by roughly 1.75 percentage points to get to where today’s five-year mortgages are.
The risk is there; rates could go up a lot more. Rates went down four percentage points from December, 2007, through April, 2009. There is the possibility that they could go back up four. It could happen.
Variable-rate mortgages allow you to lock into a fixed-rate mortgage, so there’s no reason why you have to ride interest rates all the way up. Still, you have to recognize that fixed-rate mortgages could be significantly more expensive by the time you decide to lock in. However, an academic study of rates between 1950 and 2007 found variable-rate mortgages were the money-saving choice over five-year fixed-rate mortgages 89 per cent of the time.
All of this is food for thought. Needless to say, you need a qualified person on your side to help you make the best decision. I’m happy to assist and apply this information to your individual case. Call me!
John’s Wednesday Words of Wisdom
A fixed rate is an interest rate that does not change throughout the course of your mortgage term. With the same interest rate, you have a regular interest payment and you know the exact amount your payments will be each month. This can make personal budgeting easier. Having a fixed rate makes it possible for you to figure out how much of your mortgage you will have paid off by the end of the year.
“Some people like fixed rate because if they fix the rate for three years, they know exactly what their mortgage payment will be for three years, and in three years’ time their interest rate will not have changed. It gives them peace of mind”
A variable rate is an interest rate that fluctuates with the market during your mortgage period. They provide a lot of flexibility and are especially appealing when interest rates are on their way down. Although your mortgage payment typically remains constant, the ratio between your principal and interest rate fluctuates. If interest rates go down, more money goes toward repaying your principal, helping you pay off your mortgage faster. If interest rates go up, you pay more interest and less principal. If they rise substantially, the original payment may not cover both the interest and the principal. The portion that is not paid is owed, and you could be asked by your lender to increase your monthly payment. Historically however, it is the variable product that has saved people the most amount of money. Please click on the following graph:
“Remember… not all mortgages are created equally. Variable rate products vary from lender to lender. Making sure that your variable rate mortgage has the ability to convert to floor rates of the day is only one of the benefits of having a mortgage professional in your corner.”
Some customers follow interest rates closely and will call their lender to switch from variable to fixed, but many customers do not. And if you’re not following interest rates regularly, you may miss out on opportunities to save money. This is where a competent mortgage broker comes in handy. They can alert you when rates are on the move, and their reasons for doing so.
As of July 2009, a five-year variable mortgage can be had for about 2.5% to 2.85% and a five-year fixed mortgage for about 4.09%, so there is a definite difference between the two at this point in time. But given the current challenging economic climate, some people still prefer the stability of fixed mortgages. The premium of over a percent is justified with the peace of mind borrowers get from having a fixed rate. Historically, a fixed-rate mortgage of less than 5% doesn’t happen very often, so perhaps this is as good as it gets or as close as it gets in terms of fixed-rate mortgages?
Either way, I am here to answer any and all of your questions. I can direct you in making the correct decision between fixed or variable. Each of them has their pros and cons. Once we have spoken, it will become evident what type of client you are. You will leave with the satisfaction of having a complete understanding of both fixed and variable rate mortgages.
Low interest rates and house prices are the driving incentives for potential first-time homebuyers across Canada, according to a new report by Royal LePage Real Estate Services.
“While [first-time buyers] appreciate government incentives such as tax credits, it is markedly improved affordability that is proving to be the powerful drawing card,” said Phil Soper, president and chief executive of Royal Lepage. “Our survey demonstrates how important affordability factors such as interest rates and house prices are in stimulating demand.”
In the survey, potential buyers were asked to rank their top incentives for buying a first home – 86 per cent cited low interest rates followed by 81 per cent who said lower housing prices were the top motivating factor. Job security and a stable economy were the next ranked incentives.
The International Mortgage Service offers Canadian residents the option to purchase or remortgage a holiday home, buy-to-rent or buy an investment property in 11 countries, including the UK, Canada and selected locations in the US. While payments are available in 10 different currencies, the currency selected must be the same as the applicant’s main income or the local currency of the property location.
Interest-only payments are an option for most international mortgages and Lloyds TSB also offers an international banking service for customers to set up their mortgage payments. The company’s Canadian representative offices are located in Toronto and Vancouver.
Mortgage rates are expected to remain within 25 to 75 basis points of their current level for the remainder of 2009, according to CMHC’s second quarter Housing Market Outlook, keeping them “very low in a historical context.”
“Movements in mortgage rates are difficult to predict due to volatile economic conditions,” the report stated. “Nevertheless, rates are expected to remain steady this year and edge higher in 2010.”
Along with mortgage rates, CMHC listed employment, net migration and low birth rate as having key effects on residential construction, and forecast housing starts to decline to 141,900 in 2009 (most notably in Alberta and Saskatchewan) before rebounding to 150,300 in 2010.
April 22, 2009 Comments Off
The Bank of Canada has cut its key lending rate to 0.25% Tuesday, and there are more credit-loosening measures on the way. Good news for you, my clients!
