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Fixed Mortgage Rates Lock inOver recent years, banks have been trimming the interest rate differential offered for variable rate mortgages. Not surprisingly, the percentage of buyers now chosing variable mortgages is dropping. The new belle of the ball is the old standby. That's right, the boring, bland, fixed rate mortgages have become Miss Popularity.

Why have fixed rate mortgages become more tempting to more daring mortgagees?  Well, that's because home owners who gambled on a variable rate mortgages are no longer seeing enough upside. 

Let's go back to the basics of why, despite the uncertainty, variable rates were appealing to these mortgage mavericks in the first place. They chose variable mortgages mainly for three reasons:

     1.  They were more risk tolerant
     2.  Interest rates on variable were generally significantly lower than fixed
     3.  They were gambling that over time the average variable rate mortgage would be
            lower than the fixed and they will save money

So let's deal with the risk aspect first.  The risk involved in a variable mortgage is that if a home purchaser choses the lower variable rate, then the interest on their mortgage can change up or down with no warning. They have the option to lock in later, but if the rate goes up and they chose to lock in to a fixed, then the rate will be higher than if they had chosen to lock in before the rates increased. Also, their ability to negotiate a fixed rate is bootstrapped because they are already on contract for the variable mortgage to their financial institution. 

Despite this risk, buyers that have chosen variable rate mortgages have, in most cases, saved money over the course of the mortgage given the interest rate spread (lower variable than fixed rate) and the stable interest rates we have experienced.  "Anyone who would have selected a variable-rate product over the last 10 years will have done very well" says John Turner, director of mortgage at Bank of Montreal in Toronto".  


Let's move on to the second reason; the interest rate differential.  As they say, all good things must come to an end. Well, in this case, not exactly an abrupt end; but just not such a good thing anymore. Up until a few years ago, variable rates were at either prime, or prime minus. Now they are at prime plus. The interest rate spread between a variable and fixed rate mortgage has narrowed. This in effect, has decreased the upside of variable rate mortgages.

Mortgage interest rates increasingThe third reason is the gambling on the interest rate differential in favour of the variable rate. If you had five advisors, all with doctorates in economics, you will still not have a lot of luck timing the market. It's very difficult to predict when interest rates are going to change and by how much.

Many buyers are now less tempted by the variable rate mortgages and opt for the security of fixed. If you take this week for example, the difference between the best five year variable and the five year fixed, is that the variable rate is about .5% less.  This is significant but with interest rates so low, mortgagees are realizing the bottom is close. The reason that you would pick a variable over a fixed rate is that you believe over time that the variable rates will average lower.  How much lower can interest rates go?

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My daughter, Jessica, recently received her mortgage renewal papers in the mail.   As the end of her first mortgage term grew near, the bank had automatically sent her paperwork for another 4 years.   

Jess said her proposed new mortgage rate was 5.3% for four years.  I thought I'd misheard, or maybe her young eyes were deceiving her.  Maybe she needed her dad's new trifocals.   Surely, she must have mistaken the 5.3% for 3.3%.  But no, the rate truly was 5.3%, which is at least 2% above the market

Good grief, don't sign those papers!  Jess and I talked about the rates currently posted in the paper, her doing online research, and her calling competing banks for quotes.   She had used a mortgage broker when she initially signed her mortgage.  But it is common practice on mortgage renewal for the bank to negotiate directly with their clients.  Once Jessica did her homework she called the bank and questioned the rate.   The bank on reflection told her that they'd inadvertently given her an old rate.   Really like from back in 2009?  Given my daughter's experience, here are eight tips for mortgage renewal:

    • Do not automatically accept the rate proposed by your bank
    • Prepare early  --- don't let the renewal date get too close and lose your negotiating power
    • Remember if you are changing financial institutions you'll have to requalify (which likely will not be a problem if your financial situation is the same or better as when you first qualified).   
    • Keep yourself informed, learn what the market is doing 
    • Get better than the bank's posted rate  
    • Watch out for the blend and extend.  Tell the bank want to know the rates they are using and compare to market
    • Don't be afraid to change lenders.   There is no penalty at the renewal time. 
    • If you don't like to negotiate, use a mortgage broker, they will get you the best rate available 

I ran a quick amortization schedule using Jess' proposed rate and the rate she ultimately received.   The difference she would have paid in interest over the four years would have been approximately $17,000!  

Mike Alleyne, Real Estate Agent
HomeLife Benchmark
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Barry McKenna wrote an interesting article in the Globe & Mail yesterday.   The crux of the article was that are banking regulations only partially saved us from the effects of the Lehman collapse and subsequent world credit crisis.

Canada is living in a world of artificially low interest rates as a result of the crisis.     Bank of Canada Governor Mark Carney has warned of Canada's household debt being far too high and growing.    When interest rates increase (and they will) there will be a deflation of home values as households struggle with their debt load.    Although analysts expect a correction ... it is still impending, not yet here.   As long as U.S. interest rates stay low, Canada will too.

If you are contemplating selling your house, price it right.   If you are planning on buying a home, I recommend that you get a good mortgage broker (I can recommend several) and negotiate hard for a good long-term rate.

If you would like to read the article n full, here's the Globe & Mail story from September 10, 2012.    

Mike Alleyne, Real Estate Agent
HomeLife Benchmark
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Financial analysts in Ottawa have been eyeing the hot condo market in Toronto and other Canadian cities with concern for some time. 

To cool things down they made changes to amortization periods for government insured mortgages.  The history of the changes to these mortgages are: 

     From maximim 40 years to 35 years in 2008

     From maximum 35 years to 30 years in 2011

     From maximum 30 years to 25 years effective July 9, 2012

Although this move provides longer term stability and reduces foreclosures    it also has an effect on the housing market.   In particular, hardest hit is the hottest moving condo markets such as Vancouver (and surrounding areas such as Surrey, South Surrey, Langley, North Vancouver, White Rock, Coquitlam, Port Moody, Ladner, Tsawwassen) and Toronto. 

BC realtors are finding the summer of 2012 to be the quietist market since 2008.




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