Rob Carrick – Globe and Mail
There’s a brilliant reason to get into our expensive and quite possibly weakening housing market right now.
A 10-year mortgage is now available for under 4%. You can thank the banks for this unheard-of rate. In the past week or so, competition between them on mortgage rates has gone nuclear.
Have you caught all the warnings about how the house that you can afford now because mortgage rates are so low will crush you when borrowing costs rise? With a 10-year mortgage, you’ve got long-term cost certainty. “This is a fantastic opportunity for somebody to lock in and have peace of mind for 10 years without worrying about a renewal,” said veteran mortgage broker Vince Gaetano of MonsterMortgage.ca.
Now, about the housing market. Numbers released Monday show average prices are down almost 3% since April, even after ticking a bit higher last month. At a conference last week, some of the country’s top bankers talked as if a cooling in the market is a done deal.
Comment: And that is absolute hogwash. Comparing prices down, in a low point for the year, with April which is one of the high points. Let’s compare January 2012 to January 2011 – prices are up 8.5% in Toronto. December 2011 was up 4% over December 2010. Comparing to April is misleading and dishonest.
Price-wise, patience will very likely be rewarded in the housing market: Prices could easily decline enough to make a difference to buyers – especially in markets like Vancouver and Toronto.
Comment: They could, as they are in Vancouver. But they won’t in the GTA. At least not a meaningful enough amount. Prices were up 8% in 2011 over 2010, even if that slows to 0% over the next year or two, then drops 10% over the following couple of years – that means in 5 years, prices will be about where they were in 2010. That is not going to make a whit of difference to buyers. My house in Pickering has jumped 20% in the past 30 months, for instance. My street is not going to suddenly drop 20% in the short term.
But low mortgage rates also have a big impact on affordability, and that’s a point that supports buying now if you plan to live in your house for a good long while and can afford the costs of home ownership while meeting your savings obligations.
Low is a word that may actually undersell what’s happening in the mortgage market right now. Last week, Bank of Montreal announced a 2.99% rate for five-year fixed-rate mortgages amortized over 25 years or less. That’s the lowest rate on record for this type of mortgage.
Other banks announced a special rate of 3.99% for seven years, a deal that Vancouver mortgage planner Robert McLister said was not as good as the BMO offer despite providing two more years of rate certainty. “There’s no question in my mind that the five-year rate would work out better,” said Mr. McLister, editor of the Canadian Mortgage Trends blog.
It’s a different story with a 10-year mortgage for 3.99%, which became available late last week from online bank ING Direct. According to the RateHub.ca website, 10-year rates as low as 3.84% can be had through lenders working with mortgage brokers.
A 10-year mortgage at less than 4% “creates a much more interesting conversation,” Mr. McLister said. Monster Mortgage’s Mr. Gaetano said that when the cost of locking in for 10 years gets as cheap as it is now versus the five-year term, “you have to pounce on it.”
Not too long ago, Mr. Gaetano was one of many experts who believed variable-rate mortgages were superior to all fixed-rate options. But while the banks have been highly competitive on fixed-rate mortgages lately, they’ve pretty much ruined the variable-rate option by cutting way back on discounting.
You can get a variable-rate mortgage today for 2.8% to 3% at best, which is darn close to the cost of locking in for four or five years right now, and you’ve got zero rate certainty. Every time the prime rate rises in the next several years, so will your borrowing costs. “The variable-rate party’s over,” Mr. Gaetano said. “Those products are dinosaurs.”
Let’s get back to the housing market for a moment. The biggest support for prices right now are the low mortgage rates we’ve been talking about here. When rates rise, that support crumbles. Things could get ugly.
Comment: But they are not going to rise for the foreseeable future. The BoC and Mark Carney are leaving the overnight rate alone until 2013, then we see. And while predictions of rising mortgage rates have been shouted from the rooftops for years now, we actually have 5-year rates 2.5% LOWER than they were in early 2008. Even if they go back up to 5%, which is completely reasonable, that will not ruin the market. That means an extra $350/month on a $485,000 mortgage. Not chump change, but not enough to take the market down.
Why consider buying now? Because you can borrow money at 3.99% or a bit less for 10 years. It’s like freezing time at the exact best moment ever to finance the purchase of a house. If the price of your home declines, it’s bound to be on the rise again a decade from now. Meanwhile, you’d have the chance to put a decade’s worth of salary increases to work in ramping up your payments and making periodic lump-sum payments.
One hitch with 10-year mortgages is that you won’t likely get the best rates from the big banks. Mr. Gaetano said the banks don’t much like 10-year mortgages because they can’t easily securitize them, which means packaging them up to sell to investors. That means you’ll may need to visit a mortgage broker or check out ING Direct.
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Contact the Jeffrey Team for more information – 416-388-1960
Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
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