Is it time to lock in your mortgage?
I’ve heard a number of times that ‘historically’ a variable rate mortgage saves you money over a fixed rate locked in mortgage. This sounds good, but it’s never been clear to me if that ‘history’ only includes the last 25 years or so when rates went from extremely high levels (in the 20% range) to the extreme lows of this decade.
With the Bank of Canada joining other world banks now expressing concern over inflation the assumption is that mortgage rates will be going up. If you currently have a variable rate mortgage is now a good time to lock in? Rob Carrick at the Globe and Mail says no -although locking in now would get you a pretty good deal, rates would have to rise by at least 1% to make a five year locked in mortgage a better choice.
If you prefer the security of a locked in rate your choices as a Canadian are limited. Unlike mortgages in the US where you can lock in a rate for the entire term of the loan, in Canada the longest lock-in I’ve seen is for 10 years. My own gut feeling is that with a small enough premium the full-term US style lock-in would be the best deal - five years might see you renewing at much higher rates. The problem is that nobody can predict how far or how fast rates will move, and if they start to move quickly the best time to be locked in will have already past.
Even if you’re not a homeowner these expected rate changes will affect on you, either with higher rates on consumer debt, changing bond and equity prices in your portfolio or just higher rates paid to you on high interest savings account. So what do you think - am I being to gloomy in my expectation of higher rates?
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July 8th, 2008 at 9:41 am
First, if you believe that interest rates will rise substantially over the next five years, and you’re using this as a reason to purchase a home (i.e., “purchase a mortgage”; by the way wouldn’t it be good for everyone–except the REIC–if this phrasing were to catch on?), you’re a fool.
You can always refinance, but if you buy a place that takes a $100,000 haircut (or more), then that is money that you have lost.
Second, if you already have a mortgage, rates would have to go up fairly substantially to make it worth your while. Will rates go up substantially? I don’t think so, for a variety of reasons, but the most important of which is government paper will still be a relative safe-haven for the short-term.
July 8th, 2008 at 10:01 am
July 8th, 2008 at 10:11 am
July 8th, 2008 at 10:32 am
Well no, you’re not purchasing the mortgage, you’re selling it. The bank is purchasing the mortgage, along with any secondary buyers.
A mortgage is a secured bond sold by the borrower to the lender, like any other bond.
July 8th, 2008 at 10:33 am
July 8th, 2008 at 10:34 am
July 8th, 2008 at 10:34 am
July 8th, 2008 at 10:37 am
That’s dumb for two reasons:
1. The interest you are paying on the mortgage is higher then what you will get from your savings.
2. The interest on your savings is taxable, but the interest on the mortgage isn’t deductible for a principal residence.
If we get the TFSA next year #2 goes away, but not #1.
Instead, just use the extra cash to pay down the mortgage.
July 8th, 2008 at 11:01 am
July 8th, 2008 at 12:02 pm
That being said, the most sensible thing to do is figure out what the mortgage payment would be at the fixed rate (or some other higher rate), and pay that amount into your mortgage instead of the actual variable rate payment required. That way you pay down the mortgage faster while the going is good, and you’re insulated from rate increases, because you’re already making the higher payment.
July 8th, 2008 at 12:57 pm
A friend of mine who owns a $4M rental building (hah, well, it used to be worth that!) is using a 10yr fixed rate mortgage. He negotiated a 4.5% rate through hard bargaining back in 2006. The reason for seeking a fixed rate over a long term was that it reduced the risk of the investment somewhat. He can deal with a bit of vacancy, but if the interest rate shoots up 40%, the whole thing wouldn’t work anymore and he’d be forced to sell during bad times.
If you own a house now and don’t already have a VERY long fixed rate mortgage, the best course of action is, of course, to sell it as quickly as possible until the market returns the rent-price ratio to sensible levels. Never mind fixing your death pledge if the asset is set to drop by 40%…
In fact, even if you do have a great mortgage on a 10yr term, perhaps it’s best to sell. Take the cash off the table and rent for a while until the blood is really all over the floor.
July 8th, 2008 at 2:13 pm
July 8th, 2008 at 2:56 pm
3. The interest you are paying to a bank is a sure thing. The interest you might receive is conditional (except GIC that is usually lower) and could be negative.
From my perspective, the best would be a balance of repaying and saving at the same time.
July 8th, 2008 at 3:29 pm
July 8th, 2008 at 4:11 pm
http://tinyurl.com/6ahsne
They are repackaging those rotten fish (the CDO’s of the subprime mortgages) and trying to sell them again! Called ABCP in our Canadian version. I was in a rush and only skimmed it, but it blew my mind that anyone would get fooled again by a new name. The whole credit crunch is nowhere near over. This is the deflation Alistair Cookie was talking about on previous thread. All those imaginary dollars going poof and turning back into thin air.
July 8th, 2008 at 4:34 pm
I saw that too and had a little chuckle. Apparently these “re-remmic”s are better (how many times do you have to remix it before it stops being poison?). They’re not backed by subprime mortgages, they’re Alt-A mortgages “issued to borrowers with higher credit scores who don’t prove their incomes, seek higher debt ratios or buy investment properties.” Oh, good, sounds as rock solid as a t-bill.
Mish periodically looks at a pool of Alt-A mortgages originated in May 2007. As of March 25% were 60 days delinquent or more, and 13% were in foreclosure. And that’s after one year!
Which is why I say it’s a mistake to talk about “the subprime mortgage crisis” in the US. Subprime fell first and may be the worst, but there are a ton of bad Alt-A loans and I’d bet a bunch more so-called “Prime” loans to follow them. I’ll be very surprised if these re-branded re-remics do anything to stop the writedowns by big US investment banks.
July 8th, 2008 at 5:00 pm
July 8th, 2008 at 5:11 pm
New chapter in the leaky condo crisis, not entirely unexpected, but this bad publicity will surely hasten the turn in the condo market…
July 8th, 2008 at 5:30 pm
Strataman has said a lot about shoddy work and problems in newer buildings. Lots of special assessments coming in a few years, helping to drive this great boom into the great bust.
July 8th, 2008 at 5:43 pm
http://www.cbc.ca/canada/british-columb … owers.html
July 8th, 2008 at 6:11 pm
love the way Concord Pacific suggests that strata
was not “proactive” enough to prevent these problems…..
July 8th, 2008 at 6:12 pm
To paraphrase Shakespeare, the problem lies not with the borrowers, but with the collateral.
The root cause of the mortgage crisis in the US is that loans were made far in excess of the fundamental value of the collateral. Now that the market price of the houses is adjusting back to fundamental value, as was inevitable, the mortgages are defaulting. The creditworthiness of the borrower matters little, because this is an incentive for the borrower to default.
That’s really all there is to it.
July 8th, 2008 at 6:27 pm
Nice!
July 8th, 2008 at 8:10 pm
…or to shoot his real estate agent in the head… six of one, half a dozen of the other, really…
http://tinyurl.com/3edxkg
July 9th, 2008 at 11:16 am
On the other hand, if the economy is strong then inflation will be a problem long bond rates will rise but the downward pressure will be off property prices.