For your information - November 2009
Interest Rates Have To Go Up!?
You don't actually need to be a financial guru to determine that our recession can't last forever and eventually inflation has to increase. When inflation does go back to a more common level of 2-3%, we will also see more normal mortgage rates like 5-6%. I'm confident everyone understands that today's mortgage rates reflect our current economic crisis. Even though we have a long way to go to remedy our unemployment situation, we are all assuming 4-5 years from now our economy will be firing on all cylinders, and we have to remind ourselves that 5-6% mortgage rates are still amazing! Always assume you will have a higher mortgage payment in the future when determining your long-term housing budget. My website calculator is an interesting tool when projecting future payments and the effects of making prepayments.
So if we know rates are going to go up, why are we choosing a variable mortgage? Assuming our mortgage is paid off in 15-20 years, someone has yet to explain to me how we avoid paying 5-6% eventually? If I take a traditional 5-year fixed at 3.99%, I will pay 5-6% in 5 years anyway, and if I take a 10-year fixed I pay 5.25% right away. However, with a variable at 2.15% there's lots of room for it to get there gradually, so what's the rush? Remember that a variable mortgage is based on the Bank of Canada's rate policy that regulates inflation… currently they have announced no rate changes will be considered until the later half of 2010. The Bank of Canada meets 8 times a year and in a normal market they increase/decrease this rate by .25% only 2-3 times a year. I'd rather use my monthly savings in the short run to pay down my mortgage or invest it, rather than give it to the Bank sooner than I have to? We all know most of the interest is charged at the beginning of the mortgage, so why not in the beginning have a lower rate, a lower payment and make extra payments directly to our principal… it makes sense to me not to pay 5-6% any sooner than I have to.
All variable rate mortgages are NOT the same… 2.15% at Royal Bank can be a completely different cost than 2.15% at ING. It's important to understand how the mortgage interest is compounded, what the prepayment privileges are, what lock in fixed rate protection is available, are there any fees, and most importantly, does it include a re-advanceable line of credit? Please understand that these features can save you more money than the rate itself! I have encountered borrowers who have opted for a higher interest rate because they were effectively paying less by exercising the mortgage privileges.
Now for “The Dreaded Multiple Offers”. If you have spent anytime looking for properties in the GTA lately you will have noted inventories are low. CMHC is predicting the market will be more balanced next year with more listings, which will ease the price pressure. Late in 2009, many first time buyers jumped into the market because of low mortgage rates and tax incentives, while it appears that pent up demand will subside in 2010, making multiple offer situations less common. Regardless of market conditions, it is imperative to be financially literate before making an offer because a pre-approval from a lender does not ensure your mortgage financing. Be aware the property must appraise for what was paid for it and currently appraisers can be challenged when using recent sales for comparables. Generally speaking, if there is a 20% down payment the appraisal is usually not an issue. If there is only a 5-10% down payment, there is much less room for error. Let's not leave an important decision like this to chance and connect with me if there's any hesitation on how a particular situation should be handled… preparing thoroughly will avoid financial disappointment.
This year, the overall economy registered its worst performance since 1991 yet remarkably sales in the GTA resale market will exceed last year's levels. It appears the worst is behind us and 2010 will be a slow climb out of the disaster of 2009, but it's a climb nonetheless. I look forward to sharing more good news with you in the year to come.
