Is Your Variable Rate Mortgage Adjustable?

For the past several years both fixed and variable rates have done nothing but fall. With such historically low fixed interest rates (and the spread between fixed and variable being close) I have, until recently, been recommending to my clients that they select the fixed rate option. This changed with the Bank of Canada reducing the Prime lending rate again (two rate reductions in eight months). This indicates to me that the Bank is still concerned about how poorly the Canadian economy is performing. As a result, I feel that the variable rate option will save the most amount of interest and have been recommending it to my clients. However, please understand not all variable rate mortgages are the same!

There are actually two kinds of “variable rate mortgages” – Variable and Adjustable.

1. Variable Rate Mortgage – these are typically offered by the big 5 banks. Here the monthly mortgage payment is set to be a certain amount and never changes even when interest rates move. So if interest rates go up, less of the monthly payment goes to principal and more to interest. If rates go high enough and the required monthly mortgage payment is now entirely interest only, no principal reduction takes place. If rates go even higher, the monthly mortgage payment no longer covers the interest portion. The portion not covered is added back to the mortgage balance – this is known as reverse amortization. This is what happened in the US in 2008. The client was making his mortgage payment but his mortgage balance kept increasing. Eventually the mortgage was worth more than the value of the house with the result the client walked away from the house. Some lenders in Canada even have a “trigger point” which they will trigger if they feel that the house value is not as high as they like compared to the mortgage balance. If this trigger point is reached, the lender then can call the mortgage unless the client can supply an appraisal to confirm the house has a certain value.

2. Adjustable Rate Mortgage – The monthly mortgage payment is set initially based on the rate but if interest rates climb, the portion paid to principal always stays the same. Since the interest component has now increased (with the rate increase) the monthly mortgage payment is also increased. This way the portion going to principal is maintained and the needed interest is paid. No risk of reverse amortization or reaching a trigger point.

Conversion Rates – Both variable and adjustable rate mortgages allow you to convert to a fixed rate mortgage at any time without cost. The key here is to ask what fixed rates the lender will offer you upon conversion. The big 5 have both posted and discounted rates. They will usually offer you something like one percent below posted rate. If you take the time to do the math, you will usually find that this reduced rate is still higher than their discounted rate offered to new clients – nice game. Monoline lenders (non big 5 banks) only have discounted rates and therefore only offer you the same rates they offer their new clients.

So, if you are now considering something other than a fixed rate mortgage, you need to consider the points above and determine which is best for you. Eight times a year I send out a Variable Rate Mortgage Watch to help you decide when the time has come to convert from a variable rate to a fixed rate mortgage. If you have any questions on this discussion or any other mortgage related matters, please feel free contact me and any time!

Is Your Variable Rate Mortgage Adjustable?2021-07-15T14:56:12-06:00

How to Win in Today’s Low Interest Market

A number of years ago lenders were offering 2.99% for a five year fixed rate mortgage and we thought “ Wow what a low interest rate!” Rates couldn’t possibly get lower. Well, they did with many lenders now offering 2.64%. These are the lowest rates in history and while I believe they will remain low for a while longer, they must eventually go up. Here are a few strategies to keep these low rates even longer.

1) Refinance early to preserve low fixed rate for five more years

With this strategy, you would payout your existing fixed rate mortgage, incur a payout penalty and renew into a new five year mortgage at a lower rate. This is partly a numerical exercise as we compare the interest savings with a new lower rate to the payout penalty incurred. Even in cases where the savings do not offset the penalty, you need to consider the possible future interest savings as a result of extending your term and possible higher interest rates in the future. I can calculate all this for you as well as let you know what interest rates would need to be in the future just to break even.

2) Refinance early for increased cash flow

This strategy is not as concerned with the interest savings by refinancing into a lower rate as it is in reducing the monthly mortgage payment. A lower monthly mortgage payment could free up cash flow which can then be used to invest in products that earn a higher rate of return than the current low mortgage interest rate. So you use the extra cash to invest, earn a higher rate of return and use this extra profit to offset the payout penalty as well as pay off your mortgage faster. This strategy typically works best when consulting with your financial planner.

3) Refinance your variable rate to a lower one.

At one time, lenders were offering Prime less .90% and that went away as lenders were not making any money with such a low Prime lending rate. Lenders started offering Prime plus 1 and over many years have now come back to offering Prime less .70%. It may be time to refinance your higher variable rate mortgage into a lower one. The nice thing with Variable rate mortgages (versus fixed) is the payout penalty is only three months interest. There is no Interest Rate Differential payout penalty for variable rate mortgages. You get a lower payout and better interest rate!

Please feel free to call me to further discuss and determine which of these strategies work best for you. As I mentioned previously, I can do all of the calculations for you.

How to Win in Today’s Low Interest Market2017-01-30T22:09:25-07:00

A Real Estate Strategy

We have all heard the doom and gloom reports from the media about how the drop in the price of oil and the possible negative impact of the NDP government will affect the Calgary real estate market.

Is this in fact the case?

The answer depends on what price range of home you are looking for. The Calgary Real Estate Board (CREB) released its sales numbers for May showing that while activity is 25 per cent lower for the overall market, the average price of $478,790 is only lower by 1.5 per cent from May 2014.

The numbers show that the average price for detached bungalows increased 3.8 per cent to $498,400 compared to last year while standard two-story homes increased 1.7 per cent to $480,656. Standard condominiums recorded moderate growth of 2.9 per cent to $286,913. Nearly 70 per cent of the homes sold in the Calgary region in May went for
less than $500,000.So no sign of a price drop here; in fact, houses located in high demand neighborhoods are seeing multiple offers!

However, where we are seeing a price drop and a slowing is in the luxury home market. In May, there were more than 600 homes for sale in the city listed at more than $1 million. Only 65 of them sold last month, which suggests there’s nine months of inventory on the market. For every 10 new listings, there were two sales.

How can you take advantage of this current market? Here is a strategy that I have put into play for a number of my clients. These clients have been looking at buying a luxury home for a few years now and always felt the prices were too high. So now is their chance. The approach we used was to keep their existing home as a rental and have the rental income to help them qualify for an underpriced luxury home. Calgary’s rental market is still strong and demanding good rents.

The theory being to buy the high end house while its prices are lower than before and hold on to the existing mid value house until the prices in that sector climb. Then sell it. I even have lenders that will use a Market rents report to determine what the rental income will be. This removes the need to have a tenancy agreement in place. Some lenders allow me to use a rental worksheet that can, depending on the rental income, completely offset the cost of owning the house. The end result is my clients really end up qualifying with full income just to buy the new home!

I am aware that this strategy only works for a few prospective buyers. However, now that the May numbers are out (May is the busiest month for real estate) maybe consumer confidence will improve as we are not seeing a massive price fall in the majority of house sectors. This market is similar in price to previous markets where people where buying.

Now you have more inventory and time within which to buy! If you would like to discuss this approach or have any other mortgage needs, please let me know!

A Real Estate Strategy2021-07-15T14:56:12-06:00

Myths of Lending

When you have been in any industry long enough, you hear all sorts of comments about the industry. Some are factual and then there are the urban myths. I thought I would highlight a few of the more common ones. Mortgage lending is typically misunderstood as it is so myths don’t help.

Myth 1) Mortgage Brokers will issue pre-approvals higher than banks

The client that told me this was concerned that I would give him a higher preapproval amount than his bank would so I would get paid more. This would result in him being house rich and cash poor and more likely to go into foreclosure. All lenders use the same funding ratios when determining how much a client can afford. These ratios apply equally to brokers as they do to banks so this is a complete myth and probably a scare tactic put forward by the Big Five banks to dissuade clients using mortgage brokers.

Myth 2) Mortgage Brokers charge fees

I have been in this industry for 14 years and never charged a client a fee. Brokers are paid a finder’s fee by the financial institution where the mortgage is placed. This finder’s fee is based on the size of the mortgage and has nothing to do with the interest rate. Employees at the Big Banks are also paid a commission – however, their commission is based on the interest rate that they can negotiate you to pay!

Myth 3) Lenders want you to go into foreclosure

Not true at all. Lenders are in the business of lending money, not owning real estate. As highlighted in number 1 above, lenders have two funding ratio perc