Worried about Mortgage Rates? (Part 3)
Posted by Gail | Filed under Credit Wise
And now we come to all the toppings you can get on your ice-cream cones! Just as mortgages now come in multiple flavours, so too do sellers offer sweeteners to catch your fancy. From cash-backs to no-frills, these sweeteners are meant to entice you into their arms.
Let’s look at the 5-year cash-back down payment as an example. As of March 2010, you could find a 5-year cash back down payment mortgage under 5% making the mortgage comparable to the insured 100% financing mortgages of not so long ago. The downside: that cash-back comes with a much higher interest cost. Hey, they’re gonna get their pound of flesh no matter what.
The no-frills mortgage is positioned as a money-saver, and you could save .15% on your mortgage interest rate. But if there’s any chance you’ll use the annual pre-payment privileges that come with most mortgages, you’ll be a sad puppy if you choose a no-frills mortgage.
And then there’s the open home equity line of credit, which some people use instead of a mortgage. People are “sold” these as a way to aggressively pay down their mortgage debt. But all the people who write to me about them are using them to make interest-only payments, freeing up cash flow but doing nothing to pay down their principle. Unless you plan to aggressively pay off your mortgage in any given year – so 20% or more – this is just an excuse to keep more of your money to spend on stuff or buy a home that’s too big to manage comfortably.
You’ve no doubt seen the new hybrid mortgages: part fixed and part variable. Or part short-term part long-term. Or both. Designed to offer some rate diversification, most people just find them waaay confusing. If you’re on the team that believes prime will rise 2.50% or more over the next year or so, a straight 5-year fixed term is the better option.
Also keep in mind that if you’re getting part short-term and part long-term, your lender may be less motivated to give you a great rate at renewal on the shorter term when the current craziness at the Big Banks ends. Knowing you’re locked in with them on the longer term, they have no motivation to give you a deal on the short-term renewal.
Since insured mortgages are one of the best assets a bank can have no one should really be surprised at the Big Banks’ very aggressive mortgage strategy. And since Big Banks have billions of dollars under deposit on which they’re paying next to nothing (so their costs are very low) this could be a great opportunity to push out small lenders and consolidate the market.
In all likelihood, the rate sale will go right through the hot spring mortgage market. But what then? When it comes time to renew all these really low-rate mortgages, who among the customers will be prepared for substantially higher rates?
If you can’t stand the heat, you’ll go long-term on your mortgage. If you like the game, you’ll go short-term and see what interest savings you can eek out.
Once the Big Banks have blown small lenders out of the water with their latest pricing strategy, consumers will be left with fewer options when the Big Banks decide to start making money hand over fist again. In which case, you better have made the right choice.
Read Worried about Mortgage Rates? (part 1)
Read Worried about Mortgage Rates? (part 2)
April 1, 2010 at 6:00 am
[...] Worried about Mortgage Rates? (Part 3) « gailvazoxlade.comThe no-frills mortgage is positioned as a money-saver, and you could save .15% on your mortgage interest rate. But if there’s any chance you’ll use the annual pre-payment privileges that come with most mortgages, you’ll be a sad puppy … [...]
April 1, 2010 at 6:47 am
Anyone else having a hard time understanding how a couple of percent increase in mortgage rates can make people unable to make mortgage payments? I guess I’m just really having a hard time undersatnding how you could be so desperate to own a home that you’ll take a debt load that you can’t sustain. My other favourites are the ones who are in their late 40’s and extend their mortgage for 25-30 years so they can spend all the money they save in lowered payments and then hope for an inheritance to pay it off. Crazy.
April 1, 2010 at 6:55 am
everyone I know that has one of those crazy interest only home equity lines of credit, only ever pays the interest. I doubt many of them will be mortgage free in their life time. that sucks. A life time of debt just because of a product offered by a bank.
regards,
Jason
April 1, 2010 at 7:28 am
@Nadine- I can totally understand it, if you haven’t prepared for it.
Mortgage rates are INCREDIBLY low right now. We probably won’t see them this low again for a while. If you have a short memory, or are too young to remember, or were never in a position to even consider the implications of mortgage rates, it’s easy to think this is the normal, and not realize that you should calculate the cost of owning your home even if rates go up.
In our case, we recently bought a home again and the memory of our last interest rate is fresh in our minds. Although we got a five year fixed for 3.69, we calculated our potential mortgage payments using 4.5, 5.5 (what we used to have), and 6.5. There’s a big difference, but we can easily swing the changes because we took those potential changes into account when determining how much house we could afford.
Other things to take into consideration are rising property taxes (ours are already considerable and going up 10% this year), maintenance costs and/or condo fees and utilities (potential de-regulation hikes). Even with low rates, in our case, that turns a 1100$ mortgage payment into $2000 bucks.
We’re prepared for it, although many people aren’t, and we’re incredibly grateful we didn’t even CONSIDER taking what the bank approved us for (nearly 800k- we’d be bankrupt in a year or two!)
April 1, 2010 at 7:33 am
The people that work at the Big Banks have a brain and are human…so come in and have a conversation and you’ll see we are not just out for “our pound of flesh”…
April 1, 2010 at 8:55 am
@Nadine 2% of a 300K mortgage is 6K – over 12 months additional $500.00 2% doesn’t sound like a lot of money to people, it’s a small tiny number — and even 6K doesn’t sound like much, until you break it down into what comes out of your pay. And a lot of banks will approve you for more than you can truly afford — and if you’re not good with money, you think – the bank said I can afford this much — I must be able to.
I personally don’t have a mortgage, because I know on a single salary, I never want the responsibility/stress of carrying that large a debt.
I do wish that they taught money / finances in school so that when you graduate, you know about amortization, %, what portion of salary should go towards the different categories etc.
I remember as a child thinking “why wouldn’t my parents buy this…. they have money!” and as an adult I think “how the heck did they manage to do what they did with 4 kids??”
I feel sorry for ever complaining about 1 can of green giant corn for 6 people.
April 1, 2010 at 9:32 am
I am in the process of porting my mortgage. I was approved for 5.24% in August of 2007 and my penalty for breaking would be 13k. So I will stick with 5.24% until 2012 and then see what I get
People may think I am insane because I bought a little more house then I could afford at the time AND extended it to a 40 year ammortization. The difference is that I was agressively paying off debt (student loans) and now that they are gone, the extra is going to my mortgage. I also had a very secure job and had no worry of layoffs. I have enough disability insurance and sickness to cover me! In just over 2.5 years I have taken an extra 15k off the principle above and beyond what the regular payments have taken off. So I am pretty confident when the time comes that I will be able to handle any increases in interest rates AND reduce the ammortization!
April 1, 2010 at 9:41 am
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April 1, 2010 at 10:42 am
I am so glad tht I reasoned with my husband as to why not to move after our mortgage was paid. It is now time to save and pay off consumer debt – yes we almost became one of thoses late 40 people that Nadine mentioned.
Our first mortgage was 11% for 5 years. In year 3 another bank had a cash back offer if you switched your mortgage with them. The cash back paid for the penalty and we got a mortgage at 8%. 5 years later it was coming due our bank that we had switched all our accounts to have 4.25%. Went back to the 8% bank and asked if they would match it, they didn’t seem interested so we switched. On our last year the mortgage rate was 6%, but the payments were lower as we had less money owing. We kept the same amount and were mortgage free last August.
April 1, 2010 at 11:08 am
I have my mortgage as part HELOC (home equity line of credit) and part mortgage. I do enjoy the flexibility the HELOC gives me and I do pay down the principle every month. So, I don’t think it’s fair to say that a HELOC doesn’t work. I say it can work if you are dedicated about it. I think it’s working for me.
April 1, 2010 at 11:10 am
We *just* signed the paperwork for our first mortgage yesterday (5 yr fixed at 3.69%). We know that we won’t get that rate again in 5 yrs, and have planned for that. We stayed on budget when buying our home and spent much less than what we qualified for. DH is still apprenticing in his trade as well, so we know his income will be increasing significantly in the next few years. We figured it would be a good idea to qualify and buy on an apprentice’s wage, even though he’ll be a journeyman next year.
April 1, 2010 at 11:18 am
Kate brings up a great point for those who may have overextended on mortgages based on low rates. Here in Ontatio, we will see the change to HST which will increase your utility bills. Combine that with the change to smart meters in 2011 which Im sure will drive the bill even higher will result in at least$30-40 more per month on gas and hyrdo/water costs, not to mention all the other costs of running a house.
April 1, 2010 at 11:28 am
Our mortgage is up for renewal in 2013 and currently is at 5.1%. We have paid off 1/4 of it during the last few years, and are increasing payments so that we pay it off hopefully before the term ends. I know rates will be higher then with conventional economics and bond rates, unless we have a prolonged financial crisis…. and then all bets are off.
had we gone with a variable rate and not locked in when we bought the house, we would have had prime MINUS 0.95 on a completely OPEN mortgage. makes me queasy thinking about it. we would have had the thing paid off in 5 years easily.
April 1, 2010 at 11:48 am
@ Jason.
I’m one of those who had signed up for a HELOC because I wanted the flexibility to pay off my mtge as soon as possible. I had a traditional 5 yr mtge with TDCT (Canada Trust at the time) when I bought my house. I signed up for a declining rate mtge (1/4pt off every year). As such, I could keep my pmts the same (with more going towards the principal) or alternatively, pay the ‘reduced’ amount. I chose to keep my pmts the same, thus shaving off a few years from the amortization, Once that term ended, I re-financed for a 2 yr, and negotiated a reduction in the posted interest rate as CT had all my business. Then, friends of mine mentioned a HELOC (which wasn’t as well known or marketed back then) and I thought I’ll sign up for that as I wanted the option to pay down as much of the principal. Traditional mtges only allow you to pre-pay so much annually (usually 10%?). HELOCs aren’t for everyone – you have to be very disciplined – I usually paid more than the interest portion (basically the same amount as my traditional mtge payments) and have never used it as an emergency fund or inlcluded it as part of my income stream. The good thing is that there is much more flexibility to pay it down and at a lower interest rate. At Christmas time, I knew I could pay a little less (or interest only if need be) when the budget was a little tighter. You have to know what type of tolerance you have for debt. I’m debt adverse and can gladly say that my mtge (HELOC) was paid off in 11 yrs (single income, working p/t for 5 of those yrs). It can be done.
April 1, 2010 at 11:58 am
My Financial Advisor thinks mortgages will only go up 1 -1.5% in the next few years. She thinks that any higher would stall the realestate/ builiding business and really affect the goverment and economy negatively. I hope she is right but I am keeping my eyes open. I plan to talk to her about these new lower rates and talk possibilities.
April 1, 2010 at 1:47 pm
I think we’ve touched on this before but in the 80s when we bought our first home with a 14.5% mortgage (5 years) and we were pleased because the rates had just come down from about 19%. Now today we have experienced the mortgage rates swing to the other extreme. With our history, having a 3.75% mortgage locked in for 5 years doesn’t seem too bad but if your first mortgage was at the recent bargain basement rates then I imagine some will be shocked as rates increase.
Our first mortgage was for approx $65,000 at 14.5% and the payments on that were not much lower than on $235,000K at 3.75%. It’s an eye opener.
April 1, 2010 at 4:59 pm
That high interest situation that Leslie and Kathryn mention is what made my parents lose their homes in the early 80’s (and my huband’s parents too). Suddenly homeless with a young family was a humilating place to be for our blue-collar hard-working families. I think that is why my husband and I are seriously cautious. We only approved ourselves for about half of what the bank wanted to approve us for. And we try very hard to make sure our necessary expenses are within one income — just in case — so that we have loads of options if the axe comes down (whether that be a job loss, health issue or explosion in expenses-like interest or tax).
Strangely my sister grew up in the same house and is only a year younger, but she doesn’t remember the stress that the whole interest rate disaster caused for the household. She is mortgaged to the hilt and living a beautiful life of pretty new things all the time (it’s okay for me to be a little jealous, right?)
April 1, 2010 at 5:17 pm
I’m in the 4th year of a 5-year closed mortgage at 5.1%. With rates currently as low as they’ve ever likely to be, I’m tempted to break the mortgage and lock in for another five years at a lower rate (4 – 4.5%%). I wouldn’t be surprised to see mortgage rates of 6 – 7% next year.
My question is, will this save enough money over the new 5-year term to offset the penalty I’d pay now? The online calculaters I’ve seen only calculate the benefit from now to the end of the current term, but do not calculate the savings from lower interest in the following years.
April 1, 2010 at 5:27 pm
Wow, I thought I’d been pretty savy when we got our mortgage, but apparently I could use more education. Because I’m cautious we inadvertantly planned for an interest rate hike but didn’t really think it would happen. We had a range of mortgage payments we knew we could afford on one income and we bought a house in that range. So if the rates go up when comes time to renew (in 3.5 years), we should still be ok.
I’d never heard of the LOC interest-only thing until today.
April 1, 2010 at 7:37 pm
I’m with you Amelia, I have not heard of some of these mortgage terms HELOC & such. We had a standard mortgage with RBC and took advantage of every pre-payment option, double up & additional % that we could, We turned a 15 year amortized mortgage into 5 years by taking advantage of everything RBC offered. I think banks will steadily increase rates over the next few years if the economy keeps pushing along.
April 1, 2010 at 10:15 pm
In 1987, when my (now ex) husband and I bought our first home, the sellers were hopeful we’d take over their mortgage. It was at 18%. We declined, obviously.
Not long after, I recall the thinking of the day being “rates are under 10%! Lock in!”.
I’m a fan of the variable rate. Right now, I do wonder if it’s risky to renew with variable, but I’m likely to do just that. Thankfully, I’ve been paying more than is required on a mortgage for 13 months now, and that cushion will help me through a couple of increases before I see an impact. Still, wish the crystal ball was a little more clear!
JR, if you’re having difficulty figuring out if the mortgage penalty would be worth the longer term savings, have the new lender do the math for you. It’s the least they can do to earn your business!
April 2, 2010 at 8:53 am
As a lender I will do the math for any client any time…(we have all kinds of calculation tools available)…I have been able to find many better solutions for my clients this way…even if they were going to move their mortgage…there is always more than one solution for a client and I will gladly help them find it…even if the better solution at the end of it all is moving…so talk to your advisor, they can help you figure all of this out…at least provide you with all the information so you can make an informed decision….we provide the information YOU make the decision:)
April 3, 2010 at 1:27 am
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April 5, 2010 at 5:29 pm
Our mortgage was at 5.05%, and was up for renewal May 2012. My thought was we could try to do better, and so we did today (4.6%) locked in for 5 years. No penalty, and over the long haul we save a whole $1300 in interest payments. We kept our payments the same, so I dunno…I understand math a little, and this seemed to make sense to us Type A personalities. I it ends up we were wrong, there could be worst mistakes made right?