Worried about Mortgage Rates? (Part 1)
Posted by Gail | Filed under Credit Wise
My girlfriend, Sandra, and I were catching up on each other’s live the other night. During our conversation she described the line-up — way long and three days early — for new houses in her area. “They must have sold every house,” she said.
“Yup,” said I. “No doubt. People are in a mad dash to get a house before rates jump.”
I’ve been getting a lot of questions from people recently about what to do with their mortgage renewals. Hey, trying to predict where rates are going is a little like crystal-ball gazing. But I will tell you that the markets are behaving strangely (and that’s never a good thing) and that lenders are behaving even more strangely, which I suppose we should be used to by now.
If you want to try looking into the future, the place to look is at bonds. Since fixed-rate mortgages are guided by the bond market, you can get a glimmer of the future there. In fact, by the time the Bank of Canada says, “Hmm, time to raise rates…” the bond traders will have already factored in the hike.
As for lenders behaving strangely, once upon a time mortgage rates were tied pretty closely to the bond market and when bond rates stepped up, so too did the rates on fixed mortgages. Then, in March 2010, lenders decided to go against the trend.
Before the beginning of the “liquidity crisis” in 2007, spreads between Government of Canada bonds and market rates averaged 125 points (1.25%). From mid last year to now (March 2010) fixed-rate spreads dropped by 70 points and adjustable rate spreads fell by about 55 points. Most recently, when yields went up on bonds, mortgage lenders actually reduced their rates! Whazzup with that?
Apparently the Big Banks are determined to hold on to their market share (or increase their grab from smaller lenders) so they’ve started buying customers with really, really low rates. Rates so low, in fact, that some people have called them “unsustainable.” Hey, anyone see a parallel with what happened in the U.S. here? And is this all in an effort to buoy up the housing market and keep people buying?
In an effort to hold on to the real estate party that’s been swinging in Canada, the Big Banks are pricing 5-year fixed mortgages at fire-sale prices: just 70-85 points above the Bank of Canada rate. (You can go to www.ratesupermarket.ca to see where rates are today.)
This isn’t the first time fixed rates have divorced bond yields. Spreads were out of whack during the credit crisis, which kept mortgage rates high even though bond yields had dropped to all time lows. Back then lenders made a killing on the spread. Now the shoe is on the other foot. And since lenders pay bond rates for mortgage money, their costs are eating their profits.
So will they be able to sustain this “unsustainable” trend? Nope. Will spreads normalize at some point down the road? Yup. And what will happen to all the poor suckers who have to renew their mortgage at that point? Hmmm.
There is absolutely no way to predict where rates will go. You might a well just flip a coin. But know for certain that at some point the bond yields and mortgage rates will reunite. Over the long haul you’ll be right far more than you’re wrong by assuming fixed rates will track bond yields.
So where are rates going? Well the folks who make money trading money think that when the moratorium on rate hikes comes off at the Bank of Canada, they’re headed up. The Bank of Canada made a promise to hold their key policy rate at 0.25% until July, unless the “current” inflation outlook shifts. Economists think they’re going up 1.25% by the end of the year. Some think the first hike could come as early as June.
Next Thurs: Worried about Mortgage Rates? (Part 2)
Have you voted on this week’s poll yet? If not, go to the front page of the blog (the one with the picture) and scroll to the bottom. Look on the right. There it is!
March 25, 2010 at 7:07 am
If you are within 120 days of your renewal you can do it now without penalty…good time to take advantage of the current rates…also, a blend and extend may still be beneficial to you…it’s worth taking the 5 minutes to find out if you are currently paying 5% or more…
March 25, 2010 at 7:21 am
[...] more here: Worried about Mortgage Rates? (Part 1) « gailvazoxlade.com By admin | category: canada in mortgage rate | tags: bank, housing, mortgage-rates, [...]
March 25, 2010 at 8:04 am
We have 2 more yrs left on our mtg with BMO. We’ve done the math and even though we’ve got to pay a hefty penalty fee (about $12000) after 2 yrs that penalty will have been whittled down to $4K – and then for the remaining yrs 3, 4 & 5 we’ll quite sure we’ll be ahead of the game. The reason? Our present mtg is at 5.08% and BMO is offering us a 5 yr fixed rate at 3.75%. So in the long run these are big savings, at least for our situation.
March 25, 2010 at 8:08 am
I’m curious to see how the market will react (if at all) to the HST coming July 1st in Ontario, the impact on real estate, associated businesses and the economy will be interesting.
March 25, 2010 at 8:10 am
Which type of bond is the best to use as an indicator of mortgage rates? I was a little confused when the article mentioned “If you want to try looking into the future, the place to look is at bonds” but which bonds? I know later the article mentions government of Canada bonds, but what time horizon? 1 year? 5 Year? 30 Year? if there was a specific crystal ball to look I’d love to know.
regards,
Jason
March 25, 2010 at 8:24 am
Funny you should be talking about mortgages today…My husband has been promoted that involves a move to another city, so we’ve got to sell the house that we bought less than a year ago…the house that we looked for carefully and made sure that we got a good mortgage rate and we wouldn’t be “house poor”. Yet here we are a year later trying to sell the house and talking to our mortgage company about how we can work our mortgage without having any penalties…it’s going to be a hard move, but the promotion is worth it. Hopefully we’ll find someone who loves the house as much as we do.
March 25, 2010 at 8:59 am
Good luck to you & your husband Lauren! Wonderful news on the promotion.
Rates will go up, they will come down, it’s life. I don’t worry about it because I bought what I could afford and will still be able to afford if my rates rise dramatically.
March 25, 2010 at 9:06 am
I’m one of the crazy ones who actually has the Bank of Canada rate announcement schedule in my daytimer. I have been following it like a hawk as I have a couple of variable rate mortgages. They are really low (1.35% & 1.50%) and we are preparing for the rate increase.
Our 5 year term expires in 2 1/2 & 3 yrs respectively and what we would like to do is to not renew. What that means is we are trying our best to max out the prepayment the banks allow each year. If we can do that, we’ll be very close to being done.
March 25, 2010 at 9:07 am
We renewed ours three months early last December. We received a 5-year fixed rate of 3.95%, down from 4.75% when we bought the house in 2005. I am hoping to have the house paid off by the end of this five year term, so that I won’t have to worry about where mortgage rates are going.
March 25, 2010 at 9:17 am
Our mortgage lender (ING) has offered us one of the low “blend and extend” rates – 3.75%, I believe, it we lock in for 5 years (we have 2.5 left on our existing mortgage). We’re currently at 5.09%, but at the rate we are currently paying off the mortgage, we will only have $2500 or so at the end of the 5 years. I will be SO HAPPY to be mortage free before I am 35!!
March 25, 2010 at 9:22 am
Our mortgage is up for renewal as of July 1st. I confess the last time it got renewed I had nothing to do with it and I am guessing the husband just signed whatever they gave him.
This time I am going to be involved and I was just starting to try to figure out what I needed to know before going in. The 120 days sparky mentions above is exciting so I will need to check into that. Trying to get a day off (or afternoon) to negotiate a mortgage at the end of June when you’re teaching is just really hard when so much is happening.
I need to look to see what our current rate is. My gut tells me somewhere in the 7 % range, which is high compared to some of the 3% or lower I see folks mentioning above.
Thanks for this post Gail. I will be reading!!
March 25, 2010 at 9:38 am
This has been my biggest concern over the last while so again….great timing Gail.
Our mortgage is up for renewal at the beginning of September so I am watching rates and waiting for the very earliest possibility to lock in. Right now our mortgage rate is 4.74% and we only have about 7 years left. If I could lock in for a lower rate I might be able to handle a slightly higher payment to get the mortgage down to 5 years.
Crossing my fingers.
March 25, 2010 at 9:38 am
For more information on how variable and fixed mortgage rates work and what factors in the market effect them, check out http://www.fiscalagents.com/newsletter/4ca_gi_mortratesup.shtml
March 25, 2010 at 9:51 am
What I get from this is:
- mortgage interest rates are bound to go up, and more likely than not, they will rise pretty soon, so when/if I’m deciding whether i can afford to buy a home, i better factor in a higher interest rate than is currently being advertised, to find out if i can truly afford it
- the fact that rates are so slow right now, and are bound to go up, creates the “mad dash” to buy a home, creating a sellers market
- unrelated to gail’s article, the fact that the HST will be applied to the sale of a home in july, coupled with the pending increase in interest rates, means that people are madly trying to buy to save themselves some money. but if this means that sellers can charge more, will i save more or less in the long run (ie. hypothetically, if i SAVE $500 by avoiding the HST and SAVE 2% on my interest rate for the first 5 years by buying today, but because of competition i OVERPAY for a home by $5000-$10,000, will i save or lose money? On the flip side, if I wait until after the HST has come into effect and interest rates have already gone up, which could decrease interest among buyers, might I be able to save more money on the price of the home?)
March 25, 2010 at 9:52 am
and when i said slow, i meant low, lol
March 25, 2010 at 9:59 am
Jolie; also see about using a Mortgage broker. We have been VERY happy with our Mortgage broker and I am willing to bet that they would likely beat the banks rate – it is their job to negoitate with the lenders (they also have the volume of mortgages behind them to get a good rate based on your circumstances – ie; credit, etc) and that is why they do what they do. We have only ever used a broker and honestly I wouldn’t know where to start when negoitating with a traditional lender. The lenders pay the brokers so you don’t have a fee to use a broker.
March 25, 2010 at 10:17 am
All I can think of is thank heavens we don’t have a mortgage anymore. We finished last August, but stupidly didn’t bank that ‘extra’ money or put it on consumer debt. Husband was looking at moving to a newer house until I pointed out the advantages of staying where we were. Got honest about the consumer debt, showed him the budget and away we go to paying off debt and saving money to fix up what we have!
March 25, 2010 at 10:19 am
@Jason – in Canada the best measure are the Canada Mortgage Bonds or GoC bonds for the equivalent term for mortgages your are looking at (ie don’t pick a bond with 25 years remaining)
The issue with breaking a mortgage is that you have to recoup the penalty within the remaining time — if you don’t get your money back in interest savings by the end of your scheduled term you aren’t really saving anything — the best measure of this is the blend & extend — if it doesn’t end up lower with the same term (not longer) than you aren’t going to save on breaking the mortgage. I for example have a rate of 5.45% with just of 3.5 yrs left — to justify the penalty of about $12K I need a new mortgage rate to be max 3.6%, since most are just around or above that I won’t recoup the cost and I won’t save anything so there isn’t a point of going through the hassle.
Something to remember – HST only applies to new builds not used houses (same as GST)
March 25, 2010 at 10:27 am
Today’s Globe and Mail online personal finance section has an article on mortgage calculators for people looking to break their existing mortgage.
March 25, 2010 at 11:06 am
Mortgage Brokers (yellow pages) are good for checking mortgage rates. When we got ours in 2008 the bank offered us a better rate than the mortgage broker could — because we had investments with them. We got the rate information by phone from the bank and mortgage broker.
Can you negotiate the amount of penalty? Say you could choose to move to another institution or stay with yours? Who offers the better deal?
March 25, 2010 at 11:08 am
I’m often surprised how confusing the media makes the current situation that we’re in. More often than they seem to spin a VERY positive message about how things are doing – i.e. housing sales & prices going up, job rate steady, etc. – and then as a side blurb mention the fact that Canadians are more extended than ever – for every $100 of income coming in, $145 is going out. Now that is unstainable. At some point or another those who are owed that $45 will want it sooner than later. Companies may have stabilized, and the job losses have stopped bleeding…for now. When rates go up by 1% over the next year, the shakeout will be interesting. It may not seem much, but for those stretched as is, it just means less consumption on other goods, possibly necessities.
Hopefully everyone has some cushion in their budgets and some savings on hand, because unlike the media and the “experts”, I’m anticipating a world of hurt coming up.
March 25, 2010 at 11:10 am
I don’t really understand the mortgage rate stress, for two reasons:
One – the rates WILL go up. They have nowhere to go but up, so why worry about something that’s a definite?
Two – if you purchased a home with a variable rate mortgage and you aren’t able to accommodate a rate increase, then you had no business buying that house in the first place… or at least, no business taking the risk of a VRM.
March 25, 2010 at 11:15 am
There is really no way to determine the “perfect” time to get financing for a mortgage as we cannot predict the future. The best advice as a commenter stated earlier is to purchase a home based on what can be afforded.
Is mortgage financing the same in Canada as in the U.S.? Is there an option for a 30 yr fixed financing in Canada?
March 25, 2010 at 11:48 am
@ Saver Queen – just to be really clear, HST will apply to new house sales directly, not resale homes. Indirectly it will apply to resale (ie lawyer fees will be taxed at 13% not 8%, etc) but the price itself of a resale home will not go up 13% due to HST.
As to your question, in general I’d rather save $10-20,000 and pay a higher interest rate then pay it and save 1 – 2% on the rate. Reason being that saving it puts money in my pocket today and it’s my option to pay the extra percentage point out (ie if I sell it the next year, I only paid 1-2% more on that $10,000 for a year).
March 25, 2010 at 12:35 pm
How Timely! I am working with my mortgage company now and its a royal pain! I got a great promotion that requires moving to a new city. My mortgage is at 5.24% with 2.5 years left. To break would cost $13k. I did the math and its not worth it. Luckily I was able to buy a place for only 3k higher then what I bought this place for, so I can port my mortgage and pay the difference in cash.
The mortgage company is giving me such a hassle. They are reviewing my file to see if I “requalify” which is wierd (I can see ensuring the new home is properly valued and getting an appraisal, but I can’t believe I have to requalify to move . . . the payments won’t change!). To be honest, I would love for them to say no, and then I can leave and get a better rate without paying the penalty.
In the meantime, I am busy prepaying my heart out so that when the rates go up and I have to renew in 2.5 years, I won’t feel the impact.
I have to say, if it wasn’t for implementing Gails jars a year ago, I wouldn’t be in the position to move. Thankfully I had enough in my savings and planned spendign accounts to cover the intial cost of the move and to hold me over until my new paycheck kicks in. And the extra money from the sale of my house is allowing me to rennovate and pay off my small student loan!
Thanks Gail!
March 25, 2010 at 12:44 pm
Al the reason to pay off your mortgage quickly to save worries about mortgage rates.
March 25, 2010 at 12:45 pm
When we bought our home (10+ years ago) the interest rate we locked in at was 6.55% (better than bank rates at the time), then when we renewed the first time it was 5.75% and we just renegotiated (with a stupidly large penalty) last fall for a new rate of 3.79% for the next 5 years — at the end of which we will owe practically nothing because everytime we got a lower rate we kept our payments the same or even increased them marginally to reduce our bottom line faster. And increasing our payments from monthly to every 2 weeks made a big difference too.
Between that and a lump principle payment of $7000 when I got a small enheritance, we dropped our 25 year mortgage to just shy of 17 years and saved us MANY thousands of dollars in interest payments. We have kept our debt load small enough to be handled on one income (just to be safe) and as circumstances have improved we made sure our options were open to put more towards it (without locking in just in case the situation goes sideways).
If I can be satisfied living here until the mortgage is done we will be mortgage-free before the kids are done highschool!
I am not terribly worried about the mortgage rates anymore because when this locked rate runs out we will owe less than a lot of people’s car loans. We won the mortgage rate gamble on this one mostly by playing it very safe.
My sister may be in more trouble. They are quite maxed out on their home, and have 2 very decent incomes to support their nice house. They bought only last year at an enviable interest rate, so if they go up too much after their locked-in rate ends, they may be suffering to make up the difference to live in their place.
March 25, 2010 at 12:55 pm
We are dealing with this right now. Our mortgage (4.5%) comes due on August 1st and last month when I checked with the bank they offered me a blended rate of 3.99%. Now I did not know that if you are within 120 days there should be no penalty to renew so if I understand correctly I shouldn’t be offered a blended rate. I see other banks offering 3.75% for 5 years or with CIBC some percentage back on the mortgage if you switch over. I am calling my bank right now to see what their best rate would be given this information. I don’t relish the idea of switching and all that entails but since we’ve been with this bank for 25 years with mortgages for different houses I think they can do better than they have offered. Is it much of a hassle to switch your mortgage to another bank?
March 25, 2010 at 12:55 pm
I think it’s important that if you are considering buying a new home you allow for a good cushion for rising mortgage rates – you’d still be financially comfortable if your rate was to double when it was renewal time.
March 25, 2010 at 1:39 pm
Well good news. I spoke to my bank representative. I guess when we first discussed this I was just outside the 20 week window. She has offered us 3.75% for 5 years on our mortgage (a savings of .75%) with no penalties or blending. We are going to lock in at this because I fear the rates will be higher by the end of the year. By keeping our payments the same we will pay the mortgage off quicker and that’s certainly our goal.
March 25, 2010 at 2:56 pm
I currently have 18 months left on my mortage term. I have a variable mortgage with a “rate capper” and at the moment it is sitting at 1.5% ….. the rate is capped at 5.25% and it has never gone over 4.5% since I got the mortgage. We’re paying the full amount every month and adding $200 to each and every payment. I am really happy with the variable rate – with the 1.5% rate at the moment there is just so much more going to my principal. I log my balance on a spreadsheet each and every month and it feels so good to see the balance decreasing considerably each and every month.
Can you ever imagine paying 18% on a mortage? When I husband and I purchased our first home 22 years ago in South Africa that is what the rate was!
Great article Gail – will look forward to the next one.
March 25, 2010 at 3:02 pm
It is good to know all of this information. Our mortgage is up Oct 10th. I didn’t know about the 120 day rule. thanks sparky, you have saved me a lot of money I think.
We have been aggressively prepaying our mortgage for the past 2 years. Now that I am looking at a maternity leave of several months, this won’t be an option. Has anyone every tried a mortgage where you can pay interest only some months? One of my friends suggested it.
March 25, 2010 at 3:12 pm
When my husband got sick last year we had only 5 years left to pay. We were overpaying by a lot but we didn’t realize how much until my husband got sick. We asked the bank to switch to minimum payment , because we were struggling financially on one income. On the minimum payment, they told us we have 16 years left to pay!
When my husband got better we went back to the bank to ask to put our payments back to the high payments we were paying before. We couldn’t because that was more then double and the bank doesn’t allow (that’s fine). Now we have 6 years left hah… not bad though!
The most important thing is to stay healthy !! everything else will be fine then.
March 25, 2010 at 3:16 pm
Please enlighten me.
I’ve heard before and in the comments today that people who have variable rates are in trouble when the rates go up because their payments will increase.
How is this so?
I have a variable rate mortgage and my mortgage payment does not increase when the interest rates increase. The only thing that changes is the amount that goes toward principal versus interest.
The only thing I have to think about is when we go to renew once our term is over.
So is do other banks raise the amount of the payment when interest rates rise within the term?
March 25, 2010 at 4:20 pm
@ Megan – the amount paid would only usually increase if the rates increased to a point where the amortization would change significantly. Typically you’re right. Personally I regret going with a 5 year fixed rate (though at the time, I had to budget for a new baby, a new job, a new house, renovations, and my wife’s mat leave, so taking some certainty was understandable at the time) and so will go variable forever from now on. If only because life can change a lot in 5 years, and those penalties are bigger threats to me than a higher interest rate.
March 25, 2010 at 4:26 pm
Hi Megan,
You can do variable mortgages both ways – Your payment stays fixed, in which case your interest/principal ratio fluctuates. Alternatively one’s payment can fluctuate with interest rates, meaning that the amortization on your mortgage (amount of time before being paid off) occurs as expected.
Both have their advantages, I prefer it your way, since the primary advantage is known payments. However, in your case, know that should your interest rate rise enough that insufficient principal is being covered, the bank can increase your payment (check your individual mortgage for thresholds).
March 25, 2010 at 4:53 pm
Haha, Gail L, we come fro the same part of the world!
Another thing to consider with mortgages when renewing besides the interest rates is the pre-payment options, especially if going to pay down the mortgage aggressively. When we first bought I couldn’t imagine us having anything extra to throw at the mortgage, but life changed in a good way then wished we had more flexibility. With the renew we then went with ING just before the interest rates went down. So fixed rate now over 5% with 3.5 years remaining, but able to throw some extra at it every month to a max of 20% of the borrowing amount per year.
March 25, 2010 at 5:25 pm
Thank you Jay and Geoff I appreciate it.
I have tried to find this info on my mortgage papers and banks website but couldn’t.
March 25, 2010 at 6:22 pm
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March 25, 2010 at 11:16 pm
I am counting the days until we can renew our mortgage. It comes due in Feb 2011, but I can talk to the bank (without penalty) on Oct 4… I am hoping that this means that I can beat the BoC rate announcement in Oct and also that there are only 2 increases between now and then… I refuse to pay the penalty, but if I were going to pay the penalty, I would be further ahead to pay it directly on my principle.
Oct 4th can’t get here quickly enough.
March 26, 2010 at 2:20 am
[...] V-O asks Are You Worried About Mortgage Rates?, you should be, if you can’t withstand a hefty increase in the near [...]
March 26, 2010 at 5:57 am
We tried the blend and extend, as we ended up locking in at 5.1% when the rates were heading upwards. The bank says ‘no’.
Oh well. We’re not living the high life, so we can stomach the payments. In fact, we’ve ratcheted them up at least a dozen or so times, we’re paying weekly, and we’re making extra lump sum payments every year.
We’ve taken a 25 year amo down to 9 years… and we’re going to be so aggressive as to try to pay it off around the time that it matures (in 3 years).
…hopefully, we’re not dreaming.
March 26, 2010 at 6:07 am
We should say that we don’t have any other consumer debt (credit card, LOC, auto) or any other debt than the mortgage. We are skimping on a lot of things, like vacations, in order to devote all we have to the mortgage.
Think about it this way: you are using your after-tax dollars, so it’s more than just 5.1% that your are effectively paying.
Though the markets have rallied over the last year, it doesn’t take a rocket scientist to understand that they’re not ‘free’ markets. Just read http://www.zerohedge.com. At least if the house goes down, we know that we won’t be underwater.
March 26, 2010 at 6:19 pm
Geoff, thanks so much for the clarification about the HST – great to know.
And you’ve made good points; I agree completely.
March 27, 2010 at 10:41 am
It is usually best to watch the 10year bond prices for mortgage rate direction. Yields have been climbing, yet as Gail said mortgage rates dropping. It is called bank arrogance. They want the party to continue as long as possible. Why? well because they do not take on any risk for writing a mortgage. You can thank the taxpayer/CMHC for that….oh and Harper et al who not only bought ~75billion of mortgages from the banks in 2008?early 09? they also raised the insurance limit for CMHC to 600billion $$….yes, we the taxpayer *will* be saving the banks when the housing market has its inevitable severe correction.
Gail is also correct that bonds/yields and long term mortgage rates will meet again, but only after the latest and the last sheep have their new boat anchor tied to their hip (i.e house). Then they have got you. Then watch rates go. Then watch when renewal time comes around and we will see if it was such a good idea to “rush” into a house before rates climb, before rules change, before the HST comes in….etc etc etc….see the irony here?
Thanks Flaherty….I guess you really do know what you are doing.
March 27, 2010 at 5:12 pm
Still about mortgages but on a slightly different topic…
I just read a post on Canadian Capitalist and he mentioned that some insurance companies give a discount on home insurance if you mortgage is paid off. It sounds like this doesn’t apply if you have a HELOC but for those of you who are mortgage free – and it looks like many from Gail’s poll this week – give your company a call! Commenters on his blog have mentioned anywhere from 0-24% discounts so definately worth the dime
April 1, 2010 at 5:12 am
[...] Read Worried about Mortgage Rates? (part 1) [...]