Monday, August 31, 2015

Don't Jump the Gun Locking Into a Fixed-Rate Mortgage

We have all heard that mortgage rates are likely about as low as they can go, and you may think it is a sure bet to lock into a fixed rate. However, homeowners should be focused less on rates and more on the bigger issues. Such as affordability, eligibility and most importantly, maintaining good credit.

First things first. Many people do not understand the difference between a fixed and a variable mortgage. A fixed mortgage is locked in for a set term at a set rate, and offers no flexibility. A variable mortgage fluctuates with the market index rate, which can be beneficial in the long run as low rates leave room for you to potentially get ahead on payments. There are pros and cons to both fixed and variable.

On the fixed side. You now what you're paying for the next three, four, or five years, and you don't have to worry about the ups and downs of rates. At the same time, being locked in means just that: a hefty penalty that can wipe out any potential equity, defeating the purpose of a low rate in the first place.

On the variable side. There is a risk. Rates can go up, increasing the amount you are required to pay and reducing how much of your payment is actually going toward paying off your mortgage, since you'll be paying more towards the interest. At the same time, the likelihood of rates skyrocketing in the short term and making your payments unmanageable is extremely low.

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Tuesday, August 18, 2015

Low Mortgage Rate Not Always Best

It is always satisfying to get yourself a really low mortgage rate, knowing even a 0.5 percentage point reduction in your rate can mean substantial savings in interest payments over the lifetime of any deal.
However, advisors urge clients to carefully examine the offer as some terms and conditions could, in the long term, prove to be more costly than a higher rate with flexible terms.

"Some lenders advertise a really good rate but you're not allowed any pre-payments during the term," says John Filice, a mortgage broker with Invis in Toronto. The rate is suitable for a first-time buyer with a limited cash flow, he says, but not for someone who can make extra payments.For clients who have the ability to make extra payments, Mr. Filice says it may make more sense to pay a slighter higher rate and increase the frequency of payments, rather than take longer to pay off a lower-rate mortgage with no pre-payment facility.

" You want to make sure that the mortgage is portable to another house," says Mike Missere, a mortgage broker with Mortgage Intelligence in Thunder Bay. He says taking one of today's low-rate deals with you when you move could save early repayment penalties for your existing mortgage, as well as higher interest costs on a future new deal, but cautions that you check how the early repayment penalty is calculated."There's two formulas, either three months' interest or the interest rate differential," Mr. Missere says. "Depending on your interest rate and how much time you have to maturity, those interest rate differentials can be substantial."

Mr. Filice says borrowers need to check what documentation a lender requires and when this material needs to be submitted. He says customers should check how long it will take to actually get the money from the lender. "Some banks will need 30 days once a file is complete to fund a deal, whereas some lenders can do it in five days," Mr. Filice says. "If you're refinancing, or you need funds for a certain timeframe, that does affect it."

Mr. Filice says some lowrate offers can be short-lived. "Some lenders will have a quick-close special and if it doesn't fund within 30 days, the rate will jump," he says. "Either have a backup plan or be sure you can meet [documentation and closing] requirements." Again, for refinancing Mr. Filice says check conditions carefully.

"If you're doing a refinance to pay off some debts, do the lenders want you to pay off those debts up front?" Mr. Filice says. "Or will they just allow you to pay out the debts on your own?"
"A lot of people spend more time looking for a fridge or a stove than they do for the right mortgage," Mr. Missere says. "The right mortgage makes more sense. It's the largest expense they're going to have. They want something that can be managed properly to reduce costs over time. Interest rate is important, but so are all the features." (Source:

Thursday, August 6, 2015

More on Benchmark Changes

Our recent story on changeovers in the benchmark 5-year bond sparked some good questions about how and when the benchmark changes. As noted in that previous story, when the market rolls over to a new benchmark bond, it can play havoc with bond yield charts (which many mortgage pros watch for clues on rate direction).
Here are some related FAQs on bond issuances and benchmarks:

Question: How often does the Bank of Canada (BoC) auction off new 5-year government bonds?
Answer: The Bank of Canada currently auctions two new 5-year bonds per year. Thereafter, each of those bonds is re-opened (re-auctioned) two to four more times. More info

Question: Does the benchmark change because the Bank of Canada designates a new benchmark? Or does the market decide on the official benchmark?
Answer: The market decides. “Benchmark bonds are not determined by the Bank of Canada,” says the BoC. “Benchmark bonds are market convention.”

Question: When does the benchmark change for the 5-year bond?
Answer: “The benchmark bond usually changes after the last re-opening of the new bond,” says the Bank of Canada. At that point, the new bond takes over as benchmark and becomes the bond that you see quoted by the media, displayed in charts and so on. The old bond sticks around, but it becomes less and less traded as time goes on. 

It’s sometimes hard to know when the benchmark will change because “the number of re-openings is not pre-announced,” says the BoC. “The decision on the number of re-opening depends on multiple factors, like borrowing need, benchmark target size and market condition.”

If you’re interested, here’s a list of the benchmark bonds and the dates they came into being: You can use this link to confirm whenever Canada has switched to a new benchmark. Our thanks to the Bank of Canada for this information. (source: Canadian Mortgage Trends)