Comments on: Is it time to lock in your mortgage?

By: Humble Studen of the Markets

Humble Studen of the Markets — Wed, 09 Jul 2008 19:16:38 +0000

You can’t have it both ways. If the economy weakens then inflation and commodity inflationary pressures will weaken…and so will property prices. With lower inflationary pressures the long bond rates will fall.

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.

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By: Deliverator

Deliverator — Wed, 09 Jul 2008 04:10:18 +0000

The creditworthiness of the borrower matters little, because this is an incentive for the borrower to default.

…or to shoot his real estate agent in the head… six of one, half a dozen of the other, really…

http://tinyurl.com/3edxkg

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By: RJB

RJB — Wed, 09 Jul 2008 02:27:23 +0000

“The cost of repairs to the tower was estimated at $29 million, and each of the 237 condo owners had to fork over at least $118,000, with the cost depending on the size of their apartments, Fox said.”

Nice!

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By: patriotz

patriotz — Wed, 09 Jul 2008 02:12:28 +0000

Which is why I say it’s a mistake to talk about “the subprime mortgage crisis” in the US.

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.

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By: blueskies

blueskies — Wed, 09 Jul 2008 02:11:21 +0000

re: leaky condos

love the way Concord Pacific suggests that strata
was not “proactive” enough to prevent these problems…..

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By: Bizznitch

Bizznitch — Wed, 09 Jul 2008 01:43:33 +0000

Good link here…re. leaky condos.

http://www.cbc.ca/canada/briti.....owers.html

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By: alexcanuck

alexcanuck — Wed, 09 Jul 2008 01:30:56 +0000

LaLaLand;
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.

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By: LaLaLand

LaLaLand — Wed, 09 Jul 2008 01:11:49 +0000

Sorry…news item is on their TV news at 6pm. Buildings are Concord Pacific, Yaletown. Problems with their earlier tower buildings built 14 years ago. Only caught a few details: one building cost $8 million to repair. Strata and Concord reached a deal, but the settlement reached included a strict confidentiality clause as to the details.

New chapter in the leaky condo crisis, not entirely unexpected, but this bad publicity will surely hasten the turn in the condo market…

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By: LaLaLand

LaLaLand — Wed, 09 Jul 2008 01:00:20 +0000

Off Topic to mortgages: CBC Radio just said that they will have a news item about newer downtown condos leaking at the windows. Owners being asked to cough up $ and the builder trying to keep the problem hush-hush.

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By: Aleks

Aleks — Wed, 09 Jul 2008 00:34:26 +0000

Alexcanuck,

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.

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By: alexcanuck

alexcanuck — Wed, 09 Jul 2008 00:11:59 +0000

Did anyone see this on Bloomberg this morning?
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.

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By: Rocker Guy

Rocker Guy — Tue, 08 Jul 2008 23:29:45 +0000

Look at me: Okay, so maybe it was 5%. 2006 was different: The real estate market looked great. Investors WERE stupid.

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By: Anonymous

Anonymous — Tue, 08 Jul 2008 22:56:41 +0000

Let me add my few cents to patriotz’s post #8.
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.

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By: Look at me.

Look at me. — Tue, 08 Jul 2008 22:13:44 +0000

Umm a commercial mortgage with a fixed rate of 4.5% for 10yrs none the less… Let me be the 1st to call BS. All commercial mortgages no matter if they are fully backed or not command a higer interest rate. There is no one (not even via private investors) stupid enough to lone money at that rate for that long. If you can prove me wrong there’s $10K in it for you as it would save me and others I know $100’s of K in interest.

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By: Rocker Guy

Rocker Guy — Tue, 08 Jul 2008 20:57:41 +0000

patriotz: Good idea - use the difference to pay the balance off faster. That provides a guaranteed high rate of return.

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.

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By: foo

foo — Tue, 08 Jul 2008 20:02:51 +0000

One reason to keep the excess cash in a savings account rather than paying down the mortgage is to have an emergency fund. If you ever need some cash for something, you will pay through the nose to either get a line of credit or re-finance the mortgage.

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.

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By: Aleks

Aleks — Tue, 08 Jul 2008 19:01:55 +0000

One other thing to note is that mortgage rates are not directly tied to the Bank of Canada rate or even the lender’s own prime rate. They’re set in the bond market, so even if the BoC keeps its rate artificially low, mortgage rates could rise if bonds start pricing in higher inflation, or even just if bond yields rise because of lower demand.

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By: patriotz

patriotz — Tue, 08 Jul 2008 18:37:59 +0000

Instead of locking in, put away the difference between your variable rate and the fixed rate into a high interest savings account, or other secure investment.

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.

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By: patriotz

patriotz — Tue, 08 Jul 2008 18:34:17 +0000

Forgot to add “mortgage” means “death pledge”. In other words you are selling your future income in return for cash now.

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By: Rocker Guy

Rocker Guy — Tue, 08 Jul 2008 18:34:15 +0000

.. BTW, nobody knows the future of interest rates. Don’t fool yourself by thinking you know better than the market.

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By: Rocker Guy

Rocker Guy — Tue, 08 Jul 2008 18:33:51 +0000

Instead of locking in, put away the difference between your variable rate and the fixed rate into a high interest savings account, or other secure investment. When rates go up as they inevitably will from time to time, your savings account can pay the difference. This will always work out more cost effectively in the long run. Another option is to invest the difference in long term risky investments, and have a large line of credit to tap in the case that rates go up.

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By: patriotz

patriotz — Tue, 08 Jul 2008 18:32:54 +0000

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?

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.

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By: Booya

Booya — Tue, 08 Jul 2008 18:11:08 +0000

Can anyone explain why it is that you can get a 30-year fixed mortgage in the US but not in Canada?

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By: mohican

mohican — Tue, 08 Jul 2008 18:01:02 +0000

Lock in - for as long as possible. The future is uncertain and I would want as much certainty as possible. If we look at the period of 1971 to 1981 as an example of a worst case scenario for variable rate mortgage holders that would be bad but many people have compared our times to those times.

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By: mrjauk

mrjauk — Tue, 08 Jul 2008 17:41:48 +0000

I’m no expert but here’s my 2 pennies.

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.

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