Laurin Jeffrey | January 27, 2012
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Is a 2.99% mortgage too good to be true?

By Madhavi Acharya-Tom Yew – Toronto Star MoneyVille

Bank of Montreal made headlines with the 2.99% five-year mortgage it unveiled last week.

Most of the other big banks have followed suit, but before signing on the dotted line you should read the fine print. These mortgages have restrictions that you won’t find on other products.

“It’s the lowest rate available but I would only recommend it to people who are very sure of their circumstances for the next five years,” said Kerri-Lynn McAllister of RateHub.ca, a Web site that compares mortgage rates.   “You may want to look at a slightly higher rate that offers all the flexibility of a standard mortgage.”

The Bank of Montreal says this mortgage offers Canadians a way to be mortgage-free faster because it offers a great rate and a shorter amortization. But it differs from a typical mortgage in several ways.

1) The maximum amortization period is 25 years. A typical mortgage offers an amortization period of up to 30 years.

2) You can make as lump sum payment once a year equal and increase your monthly payments as long as the total doesn’t exceed 10% of the principal amount owed. Most mortgages let you make monthly and lump sum pre-payments of 20% or more.

3) You cannot skip or double-up on a payment.

4) You cannot refinance or switch your mortgage to another lender for five years. Most home owners who sign a five-year term don’t make it that long. On average, they last three years and 9 nine months, and then they either refinance or move.

McAllister said that because the amortization is capped at 25 years, you may not be able to borrow as much. That could hurt first-time buyers in markets such as Toronto and Vancouver where home prices are in the stratosphere.
The refinancing restriction means, the only way you can refinance is if you do so with BMO,” McAllister said. “They know you’re locked in to them so you don’t have any bargaining power if they don’t offer you a good rate or term.”

BMO agrees that this mortgage is best-suited for someone who plans to be in their home for awhile.

“Customers were telling us they wanted something simple and easy to understand that would allow them to be mortgage-free faster,” said Katie Archdekin, head of mortgage products at the Bank of Montreal.
Archdekin said the shorter amortization rate is designed to do just that.

While many home owners have good intentions when it comes to pre-payments, very few actually take advantage of these options, she added.

“This product carries fewer features than our other mortgage products but it’s very easy to understand,” Archdekin said. “This product really supports customers to pay off their mortgage faster by instilling that discipline directly into the regular payments.”

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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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Category: Buying Real Estate, Mortgages | Tags: , , , , , , , , , , , , , , ,
Laurin Jeffrey | January 25, 2012
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Buy now to get an unheard-of rate for a 10-year mortgage

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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Category: Buying Real Estate, Mortgages | Tags: , , , , , , , , , , , , , , ,
Laurin Jeffrey | January 23, 2012
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Our love affair with home ownership might be doomed

Preet Banerjee – Globe and Mail

We all know someone who’s worn love goggles. They start dating someone new and their whole world starts revolving around that special someone who can do no wrong, even though everyone else seems to think otherwise. Once the honeymoon phase is over, the goggles come off, a dramatic breakup ensues and suddenly everything seems so clear. “Why didn’t you guys say anything?” the friend asks. Human psychology is a powerful thing.

Meet Ben Rabidoux. He’s a friend who has been trying to warn Canadians about the love affair we have with home ownership. Mr. Rabidoux is an analyst with M Hanson Advisers, a U.S. research firm that caters to institutional investors. His website, TheEconomicAnalyst.com, provides easy to digest graphs that essentially explain themselves, but he also weaves together a sobering new reality we may soon be facing. Already offended by the premise? He’s used to it.

Here are a few observations of hard data from his site:

In 1975, the average size of a house in Canada was 1,050 square feet. Fast forward to 2010 and new homes being built almost doubled to an average of 1,950 square feet. This increase in house size is accompanied by a decrease in the average number of people living in a household. In 1971, it was 3.5; by 2006, that number fell by a full person to 2.5.

Comment: I do agree that we are buying more house than we need. I see it every day, people always want more. They want an extra bedroom – that will be used once a year. A finished basement that they do not use. A formal living room, when they only use the family room. Etc… We need smaller, smarter, more efficient housing. That is a bigger deal than prices any day.

Whereas in 1999 the price of a home was 3.2 times income, this had ballooned to 5.9 times income in 2010. Essentially, the amount of money we are willing to pay for a house has increased much faster than our incomes. Instead of buying beer we’ve switched to champagne, but we can still only afford beer.

Comment: But he forgets that people are not buying houses based on sticker price. They buy it based on monthly payments. That is then converted to a purchase price. As I keep pointing out in this blog, monthly payments are under $2,000/month for a $600,000 mortgage at 3.5% – the same as it was 30 years ago for a $200,000 mortgage at 18%. And that was in 1981 dollars. I do not have the 1971 numbers, but my point is made. Affordability is the same, if not better now, than it was a generation ago. The key is to buy what you need and not try to keep up with everyone else. Spend wisely and you will be fine. Blow your brains out and spend the max you can afford – that is where the trouble begins.

But wait, there’s more.

Research suggests that people reach their spending peaks at age 46, then spending decreases as they start to pay off debts and save for retirement. The youngest boomers turned 46 last year. That means the pig in the python should be slowly moving from spending to saving for the next two decades.

The problem is that if Canadians approaching retirement age feel as though they haven’t saved enough for retirement, they will likely turn to their fallback plan – downsizing their homes to free up cash. TD Canada Trust recently released a survey indicating that only 43% of boomers had a financial plan. Given the growth in housing prices and the rate of home ownership, it’s very likely that this large population segment is going to have a considerable impact on supply and demand for real estate in Canada.

Comment: I have said this as well – one of the only brakes I can see for the local real estate market is when all the expensive boomer homes come up for sale. This is the first generation that cannot afford to buy their parents’ homes. I know I can’t… my dad’s place will be worth $1 million or more by the time he decides to sell. That is well above my pay grade! And if enough of them come on the market, with not enough buyers… what happens then?

Those who resist the urge to keep up with the Joneses will be better off. While there might be selling pressure for the bigger homes as retirees downsize, they are downsizing into the more modest homes, which provides some buying pressure for smaller houses.

Comment: Or condos. Downsizers do not want small houses, they want condos. They want to be able to lock the door and take off for 3-6 months at a go. But they are going to want 1,200sf condos without the $1,000 condo fees. That is going to be fun.

Add it all up, throw in the highest debt-to-income ratios in history for the average Canadian and the long-term prospect of interest rates rising and it’s pretty easy to see why Mr. Rabidoux’s website could become incredibly popular after the fact: He’s trying to point out what the love goggles may be overlooking.

Comment: But it is all over the top and scare mongering, like most. People need to stop and think and be reasonable. Buy a decent house, but do not blow your brains out on it. Relax with discretionary spending, you really do not need the 70″ TV, the iPhone + iPad + iPod. Eat at home more, buy a used car. That is what will get people through, spending a little less here and there and trying to put a few bucks away for later.

It’s possible we could be looking at a two-speed housing market over the long term. Prices for larger homes may cool off as boomers downsize and smaller homes may benefit, which means moving to a house more within your means is more important than ever – just in case the Canadian love affair with real estate turns sour.

Comment: Interesting, but unlikely.

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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.
———————————————————————————————————————

Category: Buying Real Estate, General Real Estate, Miscellaneous, Mortgages, Real Estate Investment | Tags: , , , , , , , , ,
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