Archive for the ‘Mortgages’ Category

Variable rate may no longer win

September 1st, 2010 1 comment

The answer to the age-old question of whether to go long or short on your mortgage is unclear yet again.

The popular variable-rate product tied to prime that helped people buy a lot more house with more debt is going up. The prime rate at the major banks, which tracks the Bank of Canada’s rate, is now at 2.75%.

At 2.05%, a variable-rate product today may look as attractive as ever, but the five-year fixed-rate closed mortgage is falling fast. It can now be had for under 4%.

Bank of Montreal senior economist Sal Guatieri does agree that variable-rate products have worked out better than fixed-rate mortgages throughout history, but says the tide may be turning.

Bank of Montreal is forecasting another 25 basis point move in September and says rates will climb another 1.5 percentage points by the end of 2011. If Mr. Guatieri and others are right, by 2012, the variable-rate products out today would clock in at just above 3.75%, if the discounting remains the same.

“If you are still in that variable-rate product then, you’d have to sweat out the next three years because there would still be possibly more increases,” says Mr. Guatieri, who adds his bank sees the overnight rate eventually going to 4% in the following three years. Based on the present gap between the Bank of Canada and prime, that would place the variable-rate product you get today at 6% by around 2015.

Fears of such a scenario are driving people into fixed-rate products again. That, plus new mortgage rules that make it easier to qualify for a mortgage if you go for a fixed-rate product with a term of five years or longer.

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Home prices rise in Canada’s biggest cities

July 5th, 2010 No comments

Financial Post · Wednesday, Jun. 30, 2010

OTTAWA — Home prices in some of Canada’s biggest cities rose 0.8% in April, according the latest Teranet-National Bank house-price index released Wednesday.

That followed a 0.3% rise for March, and marked the 12th straight month that prices have risen.

“At the national level, April continues the best string of consecutive monthly price increases since September 2006,” Marc Pinsonneault, economist with National Bank Financial, wrote in a report. “Home prices are now 2.9% above their recession peak, a situation that contrasts with the one prevailing in the U.S., where prices are down 30% from their peak.”

The index takes into account price trends in six urban areas. Prices in Halifax were up 1.9% for the month, Montreal and Ottawa home prices were ahead 1.1%, Toronto was up 0.6%, and Calgary and Vancouver were both ahead 0.8%.

It marked the first time in five months all local areas saw monthly gains. Calgary, however, remains the only area among the six still short of its pre-recession high, which it achieved in August 2007.

For the year, the national composite home price index was up 12.9%.

Canwest News Service

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The New Face of Debt

June 18th, 2010 No comments

For retirees, the golden years have become a series of tough compromises. The trouble is, a lack of employment income combined with debt stalk the good times they thought they would have after they left their careers.
One case study stated their jobs paid them a total of about $100,000 per year. Today, as a result of too much house and the repairs it entails — repainting, new floors, new electrical circuits, new kitchen counters, custom French doors and other elegances — they carry a debt of almost $70,000, nearly twice their retirement income of $37,000 a year.
If they pay off the debt, they will face a cash shortage. They could do it, but it would wipe out all of their RRSPs and other retirement assets built up over their working lives. A tough choice.
“We used to think that our house would go up enough in price to cover our debts,” they explain. “But I don’t think you can rely on that.”
Their situation could be resolved by selling the house, yet they fear that having paid too much in renovations, even downsizing might leave them house broke — with a nice abode and nothing else.
“As I approach the age of 60, I don’t want to carry so much debt. There has to be an end to the debt. I want my mind to be clear that when we get our Canada Pension Plan and Old Age Security, we will be able to keep those benefits. We don’t want to go into our sunset years paying off our debts.”
First was Investors Group, which said 62% plan to carry debt such as a mortgage into their golden years. Then Royal Bank of Canada came out with its Ipsos Reid poll, which found four in 10 Canadians retired with some form of debt, and one in four began retirement with a mortgage on their primary residence.
“More and more, Canadians are carrying debt into retirement,” said Lee Anne Davies, head of retirement strategies at RBC.
Just this week, BMO Financial Group noted less than half of Canadians 55 and over have a post-retirement income strategy in place and only a third have considered that they might outlive their savings.
It’s a new and dangerous trend.
The risk of senior bankruptcy grows with age. A study for the Canadian Institute of Actuaries released June 2007, shows that longevity risk — the chance of living to a very ripe old age — poses the problem of running out of personal savings.
It would be wrong to label all debt foolish and all debtors in peril of financial catastrophe, argues Tina DiVito, head of retirement solutions at BMO Financial Group. “There is bad debt and good debt. Bad debt may be what one borrowed for a transitory pleasure, such as a vacation, after which the borrower has to pay high interest rates and gets no tax breaks.
“Good debt bears moderate rates of interest and is payable in a reasonable time period, perhaps as a part of an investment that makes interest tax-deductible,” Ms. DiVito says.
For good debt, consider the case of 61-year-old Montreal retiree Ioanna Jakus, who has maintained a mid-six figure investment portfolio while living on an after-tax income of less than $2,000 per month.
A former bank employee, she has a $10,000 line of credit with her stock broker. “I use the line to buy stocks and bonds,” she says. “I can deduct the interest I pay from my taxable income. My investments have been successful and have more than paid the cost of credit. What’s more, rates of interest are so low that borrowing to invest just makes sense for me.”
Not only has Ms. Jakus made intelligent use of credit, she has done so expertly, selecting low-risk GICs, bonds and blue-chip stocks with strong dividends. “I have always been motivated by the knowledge that only I can control my destiny,” she explains. “My husband and I paid off the mortgage — that was when interest rates were near 20% — and we never borrowed again for spending.
“Of course, I can clear my investment debt in a moment by using cash in one of my accounts. My philosophy has always been not to take risks that I cannot afford, especially when it comes to borrowing money.
“Nobody can look after me as well as I can,” she adds.
That’s a lesson a lot of retirees have yet to learn.

Andrew Allentuck, Financial Post ·

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Housing Starts to Rise

May 20th, 2010 No comments

House prices will increase this year and next despite the challenges posed by higher mortgage rates, Canada Mortgage and Housing Corp. said Wednesday.

An “improved balance between demand and supply” will stabilize prices through the rest of this year, it said in its second quarter Housing Market Outlook. Prices will “rise modestly” in 2011, it said.

The agency, which insures almost $500-million of Canadian mortgages, said the average cost for a home by the end of 2011 should be $350,000. That would be a gain of 1.4 per cent over April’s record high of $344,968.

Forecasting higher prices next year puts it at odds with both the Canadian Real Estate Association and Toronto-Dominion Bank, which are calling for prices to drop by 1.5 per cent and 2.7 per cent respectively in 2011.

“It all comes down to the economy and what we’ve seen so far this year is a strong end to 2009 and through 2010 we’ve seen some effects from various fiscal measures,” said senior economist Bill Clark. “There was a big April gain in employment, and as the economy gets moving again people become more interested in housing.”
Source: CMHC

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Why Choose the Variable Rate Mortgage?

April 13th, 2010 No comments

With the Canadian economy doing surprisingly well over the past six months, many see higher interest rates from the Bank of Canada in the not so distant future, but according to a report released Thursday from CIBC’s chide economist Avery Shenfeld rates are likely to remain at a very low 2.5% through to 2011.

Historically, as far as interest rates are concerned, it is better to float your mortgage interest rate (i.e., choose a variable rate mortgage). This is a result of the “yield curve.” The “normal” yield curve is positively sloped, with interest rates lower for short-term maturities (one to two years) and higher for longer-term maturities (five to 30 years). When the economy strengthens, the Bank of Canada will raise short-term interest rates (they only have control over short-term rates) and the base for variable-rate mortgages (usually the prime rate) is moved higher. This action signals a period of “tightening” of monetary policy to cool the economy and reduces inflationary pressures.

The vehicles that determine longer-term interest rates — bonds — tend to move according to inflationary expectations: If bond investors anticipate inflation (because of economic growth), they demand higher returns (interest rates) as protection from inflation. When the Bank of Canada is perceived as “fighting” inflation by raising short term interest rates, long-term rates have a tendency, in most cases, to remain stable or improve, because long-term bond investors are content that inflation will not grow.

In essence, while short-term interest rates may go up, they do so only until the Bank of Canada has slowed the economy enough to curb anticipated inflation. Then, as economic growth slows, the bank starts to lower them. The yield curve will flatten (with higher short-term interest rates) for a time, but when the economy slows, short-term rates will go back down and the yield curve returns to its “normal” positive slope.

Over this time, variable-rate mortgages will move up to being approximately equal to locked-in five-or 10-year rates, but that’s followed by a period when they return to lower levels. More often than not, over this time, it is less costly to have held the variable rate debt. Exceptions to this situation would be times of hyper-inflation (like in the 1980s) when short-term interest rates went to extreme levels.

The economy is strengthening and short term rates will go up a bit over the next couple of years, but I don’t think it will be dramatic. The case for variable-rate mortgages remains strong.

Source: Financial Post Magazine, Tuesday April 6th & Julie Fortier, Financial Post, Thursday April 8th 2010