Quitcherbitchen
Posted by Gail | Filed under Home Buying
All the people who have been whining about their mortgage rate being higher than current rates have got to stop! And as for media folk blasting lenders for charging interest rate penalties to people who want out of those higher rates, this is just the kind of stupidity that gives the media a bad name.
When you sign a mortgage contract, you sign with your eyes open. You know how much interest you’re going to be paying, for how long and how often. If rates go down, hey… you guessed wrong. Suck it up and make your payments. If rates went up, you’d be laughing at your lender, right?
When you’re trying to decide what interest rate and term to use for your mortgage a whole bunch of factors come into play. The rates reflect where interest rates are headed and usually longer-term rates are higher than shorter-term rates. But the yield curve can become inverted. And nobody knows what’s going to happen and when, which is why choosing a mortgage term is a bit of a crap-shoot.
Mortgage lenders in Canada are a very different kettle of fish than lenders of consumer credit. Rates aren’t rapacious. Competition is healthy. And the terms and conditions can’t vary at the lender’s whim, as they have been apt to do in the credit card arena. When you make an agreement to borrow at a specific rate for a specific term, both you and the lender assume some risk. If rates rise, the lender is left holding the bag. If rates fall, you get stuck with higher than current costs. If you don’t like that idea, then you can choose a variable mortgage and ride the rate rollercoaster or simply choose a shorter term. To make a deal and then try to get out because that deal isn’t so good for you anymore is childish. And anyone in the media who is promoting the idea that FIs should eat the diff on the interest lost is delusional.
That’s not to say you can’t negotiate with a lender. If a lender is willing to negotiate, you should move heaven and earth to make your costs as low as they can be. So a blend-and-extend mortgage may work for you. Or asking for an early renewal with a rate guarantee can get you the current rate when you need it. Failing that, you’ll get another opportunity to pick a rate and term as soon as your current term is up. Some people believe that the three-year mortgage is the perfect vehicle for riding out the ups and downs of mortgage rates. Some believe the variable mortgage can’t be beat over the long term. Whatever you choose, it should be a thoughtful process you go through, as opposed to just a dart in the dark.
And as for the people who are hell bent on getting a lower rate RIGHT NOW, damn the cost, while that lower rate may hold until the end of your term, if you then have to renew at a higher rate because rates of gone back up, how much money do you actually end up saving when you take into consideration the interest penalty rolled into your mortgage for the rest of the amortization?
As borrowers we have to smarten up and figure out what we’re doing. It’s not enough to go blindly into deals thinking someone has our back. No one has our back. And sometimes, for the sake of a story, the media is not above stirring the pot to make people feel they’ve been duped. But you can’t say that about a mortgage contract where everything is laid out in black and white.
Maybe you need to ask more questions before you make your next deal so you feel better informed. As an illustration of what I mean, I received a letter recently from a young lady who had decided that she and her husband should negotiate a better rate for their mortgage with a new lender, which they did. They went back to their old lender and discovered that there would be a $4,000 penalty for breaking the mortgage. They put the penalty on their line of credit. Really! Then they discovered because it was a high ratio mortgage the new lender would have to be insured by CMHC, so they’d have to pay their high-ratio insurance again. Oooops. By the time they’d sorted that out, interest rates had fallen again and their new interest penalty was $10,000. After all the wheeling and dealing, they were $23,000 in the hole! OMG!
John Wayne said: “Life is hard. Life is harder for stupid people.”
June 11, 2009 at 6:42 am
My husband and I agreed that neither of us were in a position to remember to keep an eye on our mortgage rates and decided to go with a fixed 5 year rate that was great at the time. Of course we don’t necessarily like hearing how low rates are now for variable, but at the end of the day, we’re still paying for a home that will be our nest egg in 25 years or so and will be mortgage free by then, and stress-free right now because we don’t have to remember when to lock in before it’s too late. With kids and work and school and life and family and, and, and, it’s one less thing I have to think about before I go to bed and try to get some shut-eye. Nobitchinhere, despite the friends and family that think we were stupid to not try and reneogotiate!
June 11, 2009 at 7:31 am
I have a variable mortgage and I should be paid off in 3 years, so this is not a real issue for me. But I know many people who have re-negotiated their mortgage (and rolled up their debt into the mortgage) just so they could get a better rate…makes no sense to me, other than they didn’t want to see the debt around so they concealed in the mortgage..smart..NOT.
June 11, 2009 at 7:48 am
Great post Gail. I think that some people become so focused on the numbers that they lose sight of the bigger picture. Almost anyone who buys a mortgage product today will be paying a great rate for it. Mortgage rates today are low. Period. Mortgage rates have been low for years. Accept it and move on.
My wife and I recently renewed our mortgage to a 5-year fixed. Our original term 5 years ago was 4.25% – a great rate. As a matter of fact, rates were higher during the 5 years of the term. When the time for renewal came, we renewed at 4.10% – another great rate. But all I hear is that a month later we could have gotten 3.95% or 3.75% – I don’t care. When we renewed guess what? 4.10% was the best and if anyone dare look at the history of mortgage rates they would soon discover that 4.10% is an excellent rate.
It is a good practice to try and reduce your interest costs. But don’t become obsessed about it. And for goodness sake don’t be an idiot about it. Raising your mortgage to avoid mortgage penalty fees to save on your rate is silly. That’s the spending mentality folks. That’s the same thinking of it doesn’t make sense to have money in a savings account earning 2% while paying 29.9% on a credit card – but it does make sense when that savings account is your emergency fund.
Whatever rate you buy just know that in these days of historical low mortgage rates you are buying a great rate. Now sit back, pay it every month and enjoy your home knowing you made a great decision.
June 11, 2009 at 8:01 am
We are very lucky with rates (knock on wood!) We renew on June 26, and we have locked in at 3.64% for a fixed 5 year term. Our previous rate was 4.95%, and we were lucky to get that when we did. While renewing this time around, we talked to friends that were lucky to have renewed about a year or so ago with a variable rate which was prime minus, so now they are paying 1.65%! Amazing, however, I’m not comfortable with variable – I’m locking in and paying more each bi-weekly period. When the next renewal comes, it may be higher or lower, however we will have paid down more and won’t have much left to go. You can stress yourself out wondering if someone else got a better rate and wonder should I renegotiate. Ignore it. Pay your mortgage, and if you can pay extra do it. That alone will help you more than renegotiating.
June 11, 2009 at 8:04 am
Last summer the mortgage on my home came up for renewal. I renewed at at 5.75 % for 10 years. Obviously this was not strictly a dollars and cents decision.
I increased the amount of the mortgage on my home by enough to put 25% down on a rental property which I purchased last November. There is a clear paper trail showing the money was used to make an investment. Therefore, this portion of the interest paid on my principle residence is tax deductible (checked this out with my accountant and Revenue Canada before taking any action). At the time, the best rate I could get for the rental was a 5 years variable rate of prime minus 0.5%. I grabbed it.
Why did I pay so much for my home mortgage? Since joining my place of emloyment 6 years ago, we are on our 3rd parent company, we have taken one strike vote, and there is presently talk about moving our jobs and shutting our location down. Had I been without a job last summer it would have been very difficult for me to negotiate a mortgage on my own. Having Mummy co-sign is simply NOT an option. Also, I get a bit of a savings on my income tax. I know that come hell or high water, when other expenses continue to go up, have your checked your grocery, property taxes and utility bills lately, I can afford my fixed monthly mortgage payment $925/month for the next 10 years.
I went into this with my eyes wide open. I’m paying through the nose at 5.75%. A few months ago when I received a letter from my mortgage company stating the rate on the rental property was 1.8% I too had the urge to break the agreement on my home. I looked into the costs. I would have saved money but would it have been worth it as interest rates started to rise again? Monitoring rates on the rental property is enough. I left things as they were. Nobody put a gun to my head when I first signed. My reasons for what I had done didn’t change.
It is ludicrous to expect the financial institutions to stop charging penalties for breaking mortgage contracts. They wouldn’t be able to carry on their day to day business. People would be lined up all day long changing things and going back on their word. How could they set terms with fixed rates? They aren’t responsible for us WE are. We should know what we are signing and why. If we don’t, we should not be commiting to a loan of this magnitude and for periods of 20, 25 and sometimes 30 years.
June 11, 2009 at 8:49 am
This is my favourite blog title!
June 11, 2009 at 9:28 am
I will be the first to admit I am not mortgage savy. I did listen to the folks over coffee at work discussing their rates, one of whom was getting a blend and extend. Our rate is definitely higher than theirs and we did explore renegotiating. Ours is up for renewal in July 2010 and the ‘interest saved’ would not make it worth the penalty/fee for switching things up so we are staying put. I definitely need to learn more about mortgages though in the next year so that I can go into the next term of it with eyes open and informed.
June 11, 2009 at 10:09 am
Ya know, I don’t believe 5.75% is ‘paying through the nose’. My in-laws got their first mortgage many years ago for 8. something %. My mother-in-law would regale us with stories of 13%, and, I believe 18% back in the 80’s. I do understand the mentality of ‘get the cheapest rate while you can’-but right now, pretty much all the rates seem decent to me. We have a variable rate mortgage that started at 4.35% –BUT we had already done the math to figure out how high the interest rate could go before we’d have to tighten our belts (9% last time I looked, would be higher now with our raises). I always wondered why the banks didn’t just automatically help you figure that out-we had to ask a lot of questions.
Right now we use the ’surplus’ (amount we would be paying at 9%) to pay down the debt/build up the savings.
June 11, 2009 at 11:30 am
Mellow, I too remember the days in the 80s of high interest rates (I was in High School and listened at the dinner table). 5.75% is very comfortable and gives me peace of mind. I just meant compared to my other mortgage I’m paying a lot in interest.
However, I am also paying it down whenever I get a bonus or income tax refund – 1/2 to mortgage and 1/2 to RRSP. Nothing is stopping me from making additional payments up to 20% per year without penalty. I am going to save a lot over the course of the mortgage by doing it this way and am quite happy with my situation.
June 11, 2009 at 12:15 pm
I agree with the title of this blog. If you signed up for a fixed rate because you were afraid that the rates would increase, they you bought your peace of mind. This is the cost of the gamble.
I don’t know how many banks stilll do this,but some people split their mortage into to. 1/2 fixed and 1/2 variable. I don’t know if it pays off financially in the long term, but SOMETIMES, it pays off psychologically.
June 11, 2009 at 12:44 pm
In October we renewed our mortgage – I asked lots of questions at three different banks that we already deal with. I discovered that you can get a variable mortgage with a cap rate. Before this we had always been leary of a variable mortgage – but this option sounded great. The actual variable rate is slightly higher then an uncapped variable rate – but if rates go above 6.69% our mortgage won’t – and otherwise our rate is variable – are mortgage is a 5 rate term and currently we are paying 3.05% – if we had chosen a fixed rate mortgage we would be paying 5.15% for 5 years. This option made a variable rate mortgage a lot less scary for us – who knows what we will do when it come time to renew again.
I have also heard of the high interest rates in the 80’s – how in the world did people manage.
June 11, 2009 at 12:55 pm
I know it always amazes me how so many people will willingly spend a dollar to save a penny. And sometimes they don’t even save the penny, they just have the illusion of it.
Interest is very simple: if you want to pay less of it, then pay off more of your principal, sooner. If that couple had put the $23,000 they spent on penalties against their mortgage, they’d shorten by 4+ years and reduce the interest by almost $40,000 (assuming they continued the same payment schedule).
June 11, 2009 at 1:01 pm
Gail, I feel like a child that just got an important scolding.
I too have been fretting about the low rates and figuring if the penalties would be worth it. I even talked to a lender. In 5 years the interest saved minus the penalty paid would leave us about $2000 closer to totally paid off. I am not sure it would be worth all the paperwork. Normally I would be all over that $2000 but not after what you have said here.
I am not fond of the unkown, so we got a TEN year rate when we bought our place. I was FINE with the contract at 6.25% and when the mortgage guys called and offered a blended rate at just 5.5% I was delighted to take it (a few years back). The next renewal is in July of 2012, three more years to go….
Who knows what that 3 years will bring and how things may change for interest rates or for my financial situation! (Growing up, my family lost their house when the interest rates hit the double digits in the 80’s). BUT I know right now with my current contract EXACTLY how much I will owe by then, and it’s a smaller amount than the loan on a new car.
That gives me peace of mind. Our monthly payment is manageable, even if the rates skyrocket, we are okay, we are not over extended. The roof is over our head and we are not suffering daily to keep it there, and that’s the point isn’t it? More so than feeling “gouged” seeing current rates so low?
Thanks for straightening me around Gail!
June 11, 2009 at 1:46 pm
I went fixed rate because I like stability and knowing what my mortgage payments will be make it easier to do my annual and 3-year budgets.
I gnash my teeth every time my risk-taking buddy brags out the $10 PER MONTH interest on his mortgage because he locked in his bank at prime minus 0.5% for five years.
Then I stick my tongue out at him and tell him even though my fixed rate is 4.5%, I’ll be mortgage-free in another 13 semi-monthly payments. And the total interest on my mortgage will be significantly less than his because he had to borrow more and will take more than twice as long to pay it off.
June 11, 2009 at 2:03 pm
Someone did a study, and the finding was that a person’s feelings of being content with their wealth was overwhelmingly influenced by their perception of how wealthy they were in relation to their neighbours, family, friends, coworkers and to some extent the people they see on TV.
I really feel that these people who wildly cast about for the best mortgage rate to their own detriment somehow feel that “others” are getting a better deal then they were. If they considered their rate in the context of historical interest rates as other posters here have mentioned, they would probably feel a lot wealthier.
Personally, I’m on a variable rate and I love it. Our credit union allowed us to set our biweekly payment as though we were paying at a 2% higher rate. This way, if rates go up, our payment will not increase unless rates go screaming up by more than 2% (plenty of peace of mind for me). In the meantime, the extra amount we are paying biweekly goes directly onto the principal. We also bought a much smaller house than the banks told us we could afford. My spouse and I are both very risk tolerant though so I can see that this is not for everybody.
June 11, 2009 at 2:30 pm
Not that I want give away my age but our first house in 1986 had a 5 year 11% mortage rate! My older brother had to take a second mortage on his house in the early 80s to settle his divorce and that rate was 18% so relax everyone, you’re all doing fine. It all boils down to your sleep at night factor. That goes with just about everything financial.
June 11, 2009 at 3:35 pm
Gail, I do agree with your overall message but think that lenders could do a better job of explaining how penalties are calculated, using graphics and bold and colour, instead of tiny print stuffed in huge paragraphs. Ultimately it is the consumer’s decision but it wouldn’t be hard to show the consequences in an easier to understand fashion. Buying a house is very stressful, especially your first time out.
June 11, 2009 at 4:39 pm
I went with fixed, at what was a great rate at the time. Sure, variable’s always lower in the long run, but there’s always going to be short periods sprinkled throughout where it might be high. Predictability is worth something.
If you’re concerned about paying more interest, you can always save a bunch by paying down some extra principle!
June 11, 2009 at 4:51 pm
What a great topic for me at the moment. We just renewed our mortgage for 4.15% for 5 year term. I am very happy with the rate, and don’t think we could have done too much better at the moment.
June 11, 2009 at 6:12 pm
Ann makes such a great point about his friend who brags about the interest rate but had to borrow big bucks in order buy the house in the first place. With the low interest rates, I hear a lot of talk about how now is the time to buy. It’s only the time to buy if you are ready! If you have to borrow money and pay all kinds of interest on that loan, it cancels out the benefits of a low interest rate on your mortgage.
June 11, 2009 at 11:04 pm
We did the back and forth on variable vs fixed this year with our renewal. We went for fixed because the stability for a house with one FT and one freelance income out weighed intereset savings. Of course the rate dropped a bit farther after we signed on the dotted line, but when I did the math, the difference in the rate is equal to less than $20/payment. So if we lump sum that amount, we effectively pay the lower rate. We have to recognize that we make the best decision we can at the time with the information we have. Second guessing yourself will just make you crazy. Make the choice, do a budget and forget about it until renewal time–that’s how we have to approach it for our sanity.
Great post, Gail!
June 12, 2009 at 7:31 am
When we brought our home in the 80’s our interest rate was at 19%. Hopefully we will never see those types of interest rates again. The renewal on our home comes up in Feb. 2010. Our interest rate right now is 6%. Over the years we have had variable rates and fixed rates. Myself personally perfer the fixed rates. We usually sign in for a five year period.
Great post, Gail, as always.
June 12, 2009 at 11:51 am
I have had a recent experience (last week) that I’d like to share on the topic of lowering my mortage interest rate.
I bought a house in june 2008 (just one year ago). At the time we got a pretty decent rate, at 5.39% for a five year loan on a 40 year year term with Scotia (through a mortgage broker) (which, by the magic of bi-weekly paiments, should be fully paid in 33 years if we make no additional). Seeing the recent very low rates, I was curious if my rate could be made lower, so i called my banker. Since I read your column, I was not surprise to learn that to get the lowest rate possible, it would have to pay me 17000$ in interest rates differential penalties. The banker suggested that by reapplying for a new 5 year, he could “mix” my current rate with the current low rate prorated on the number of months left on the original contract (and maybe some other factors, I’m not sure), I could get a lower rate with no penalties to pay.
After he ran his numbers, I got a lower rate of about 5.17%, which translates into about a 20$ lower payment each two weeks.
That is not a whole lot, but I’ve instructed him to set the new payment amount to the same amount I used to pay, which means that I will pay my mortgage 2 years sooner…
I am satisfied, even though I didn’t get the killer rates they advertise, since I will still profit from the current low rates and end up paying less interest in the end (and finish paying the mortgage sooner).
Keep up your good work, you are always interesting to read.
June 13, 2009 at 1:23 pm
For those who are locked in at a fixed rate term, but would like to capitalize on the low new fixed rates, try a “Blend and Extend”. The bank blends your old rate with the new rate over the remaining terms and extends the term with no penalties.
My mortgage wasn’t up for renewal until next year, but I thought by that time, interest rates would be up again, so I did an early renewal this week with the blend and extend. My old rate was 4.2% for a 5yr fixed term. Now it’s a blended rate of 3.76% for a 5 yr fixed term and I don’t pay a cent in penalties.
This option would be good for those who don’t expect moving or breaking their mortgage anytime soon. Just thought this would be useful for some people to know.