Tag Archive for: variable rates

Prime Rate Change

Yesterday at 11am Atlantic Standard Time, the Bank of Canada increased it’s overnight interest rate from .25bps to .50bp. Thus all the banks followed by increasing their prime rate from 2.45% to 2.70%. Except for one key lender who was at 2.60% and has now increased to 2.85%.

As a quick comparison for those who are on variable rates and are thinking of switching to a fixed, the 5 year fixed rate is now between 3.04 -3.24 depending the lender. However remember that your discount to the prime rate will not change over the length of your term. So the people who took a variable at Prime -1% are still sitting quite pretty. Make sure that you do the math before you make any harsh decisions.

I look forward to hearing from you in regard to your mortgage needs.

Patrick

p.s- You can click on this link to start the process whenever you are ready. Schedule your meeting with me here.

p.s.s- I should tell you that I am licensed in Nova Scotia, Ontario(M18001555) & in British Columbia(BCFSA #504098).

p.s.s.s You can download my new mortgage app here

Mitigate your risk

With all the talk about possible impending interest rate increases in the new year, there is still a way to have your cake and eat it too. As it stands today lender are still offering deep discounts on variable rates. For example a AAA client purchasing and putting down less than 20% may get access to prime ( 2.45%) less 1.3%. This means your new mortgage would start at 1.15%. This is pretty sweet considering the same 5 year fixed rate is around 2.59%. So you start off at a discount of 1.44% compared to those who take the fixed rate.

While I have no crystal ball and can not predict what the governor of the bank of Canada may do. It would take quite a few interest rate increases to even meet the current fixed rate of 2.59%. This is because when the bank of Canada has moved the rates in the past they are normally at .25% at a time.

So the best way to mitigate your risk and get access to the best rates on the market ( for those who qualify), is to go variable and set your payment as if you took a fixed rate. So for example a 400K mortgage at 1.15% will give you a payment of $1,534.30 ( 25 year amortization as well). By setting your payment at the fixed rate of 2.59% you will pay 1,809.84. The $275.54 extra that you are paying goes directly towards your principal further reducing your mortgage by 4.3 years and saving you $10,726 in interest. There is a link to my mortgage calculator below, where it says mortgage app.

Today I am thankful for warm chocolate challah bread which was the best post workout snack ever, the opportunity to practice my french yesterday which always makes me feel better and Christmas music in every store.

I look forward to hearing from you in regard to your mortgage needs.

Patrick

p.s- You can click on this link to start the process whenever you are ready. Schedule your meeting with me here.

p.s.s- I should tell you that I am licensed in Nova Scotia, Ontario(M18001555) & in British Columbia(BCFSA #504098).

p.s.s.s You can download my new mortgage app here

The Rate Game!

Over the last few weeks the rates on five year fixed mortgage have steadily risen as the corresponding bond yields have also increased. This all has to do with recent concerns with inflation or better yet a game of cat and mouse between bond traders and the FOMC ( Federal Reserve’s Federal Open Market Committee) which sets the US federal funds rate. You see the traders believe that the FOMC have the funds rate set too low so as a result they are pushing the yields up higher to see if the FOMC will react.

You may be asking how does this effect you and me here in Canada. Well their actions have increased the yield of our five year bonds and thus drove our fixed rate mortgages higher. Mortgages which as of late were at historic low rates. So if you have heart set on a 5 year fixed mortgage rate and are currently shopping for a new home, now is the ideal time to lock in your rate with a pre approval.

However do you know what may be a better option? Historically the better option has always been to go with a variable rate. Not only do you get a lower rate, but you also have a much better penalty if you have to break it. This would three months interest vs a very probable Interest Rate Differential penalty.

Another differentiator is the fact that the variable rate mortgage is based on the Bank Of Canada prime rate rather than the whims of the bond market in general. The bank of Canada meets 8 times a year and current the over night rate is set at .25%. The current bank forecast says that the overnight rate will remain unchanged for the rest of 2021 and also for 2022. As for 2023 and beyond it will depend on how the Canadian and global economies recover from Covid-19.

While this is no crystal ball as it is very difficult to predict the market. Generally 9 times out of 10 you will save more money with a variable rate as compared to a fixed rate. Right now, I like these odds and think that people will prefer the variable.

I look forward to hearing from you in regard to your mortgage needs.

Pat

p.s- You can click on this link to start the process whenever you are ready. Schedule your meeting with me here.

p.s.s- I should tell you that I am licensed in Nova Scotia, Ontario(M18001555) & in British Columbia(BCFSA #504098).

38 Months in

Doesn’t mean anything to you? Well it should if you are planning on signing a 5 year fixed mortgage rate in the near future. 38 months is the average when people break their five year fixed mortgages. They could be broken for any number of reasons, marriage, divorce, job loss, job transfer or big promotion. The point is that I want to make the experience of you breaking your mortgage ( if you choose to do so) as painless as possible.

So there are a few things you need to know and I will then explain them a little bit further. Interest rate differential, posted rates, discounted rates and three months interest.

The penalty to break a five year fixed mortgage is either 3 months of interest or interest rate differential, which ever is greater. The formula to calculate out this penalty varies greatly between lenders, where most of the big 5 banks using posted rates in their calculation and the broker channel using discounted rates.

Since variable rates are tied to the Bank of Canada prime lending rate and these are short term investments, the penalty to break a variable is based on three months interest.

Five year fixed mortgages on the other hand are based on bond yields. Your lender takes the five year bond yield marks it up then sells it to homeowners as either 5 year posted or discounted rates. Then packages up these mortgages sells them to investors as mortgage backed securities with a guaranteed rate of return over the 5 years. If you break your contact prior to the end of the term you will still owe the bank the missing return, thus the reason the the penalty.

However as I have said not all lenders calculate out the penalty the same way. The big 5 banks use posted rates in their calculation. So I have just run two examples: 1st from big bank blue ( you know who they are), and the 2nd from one of my broker based banks First National. I have used an imaginary start of your mortgage of Feb 26th 2018, 5 year fixed with a rate of 2.79 from both lenders, and a balance of 225,000. Now because they use different rates in their calculation you will have an estimated penalty from big blue bank of $9,925 and an estimated penalty of $2,750 from First National. That’s a difference of $7,175 and yet you both started with the same rate.

This is because the rate you received from Big Blue bank was the posted rate minus a discount, giving you your rate of 2.79. So to figure it out take the non discounted rate from the date your mortgage was advanced, say there is 24 months remaining so the lender will get the rate for the remaining term, and now they get the difference between your non discounted rate and the rate for the remaining term, divide that by 12 to get monthly interest rate and multiply that by 24 the number of months remaining on your term and multiply this by the mortgage amount to get your penalty.

Long story short, if you really must go with a fixed rate then do it with a broker channel lender, if not then variable is defiantly the way to go.

I look forward to hearing from you in regards to your mortgage needs.

Pat

p.s- You can click on this link to start the process whenever you are ready. Schedule your meeting with me here.

p.s.s- I should tell you that I am licensed in Nova Scotia, Ontario(M18001555) & in British Columbia(BCFSA #504098).

#TuesdayVibe

Well after several months of mortgage rates going down, they turned the corner and started going back up yesterday. As fixed mortgages are tied to bond yields, they hit a 10 month high on Monday with the 5 year bond closing at 0.67% forcing lenders to pass the increase on to borrowers.

The bond yields are increasing because there is belief that the US inflation with rise much quicker than initially expected. Thus taking our Government of Canada bonds up with them. While I have no crystal ball, we have been very fortunate lately with our current rock bottom fixed mortgage rates. Nothing stays low forever, so if you have been on the fence about buying a property then now is the time to get pre approved and lock in your mortgage rate in advance of future increases.

While these increases have only affected fixed mortgages. The variable rate is based on Bank of Canada Prime Rate. Which after their last meeting in January 2021, they kept their overnight rate at .25% and said that it will likely stay unchanged till 2023. So if you are comfortable with a variable rate, and 9 times out of 10 people have saved more money that way, then I would highly suggest sticking with a variable rate mortgage. As an added bonus even if you every break it, your penalty is only 3 months interest vs a much larger penalty for breaking a fixed rate.

Irregardless of slight changes in the 5 year fixe rate, don’t forget that to get a mortgage these days that you must qualify based on the 5 year posted rate of 4.79%. Also known as the stress test. So while your overall potential payment may have increased by a small amount your buying power remains the same.

I look forward to hearing from you in regards to your mortgage needs.

Pat

p.s- You can click on this link to start the process whenever you are ready. Schedule your meeting with me here.

p.s.s- I should tell you that I am licensed in Nova Scotia, Ontario(M18001555) & in British Columbia(BCFSA #504098).

Fixed or Variable Rate Mortgage?

“Wow”! You say to your wife as you hit the bakes on the car. “Did you see the mortage rates those guys are advertising”? Your worries are over you’re thinking. Just lock in a rate like that for the next 10 years and you’ve got it made!

 

Not so fast. That rate may not be the one for you. Typically, the lowest available rate – and the one that makes the rate sign look great from the street – will be for a variable or adjustable rate mortgage. That rate has the potential to be like a roller coaster. The posted variable or adjustable rate is the rate that you’re getting today. Unless you have an economic ouija board, you will not be able to predict what kind of ups and downs are ahead of you.

 

Let’s take a closer look. A lender will offer different rates for different types of mortgages. The rates are determined based on financial risk to the institution and to you. When a customer is willing to take on the risk, they are rewarded with a lower rate. If the lender is taking on the risk ( by that I mean that the customer is promised a particular rate for a set period of time regardless what happens in the market) then the rate is higher. The loner the term then the higher the risk for the financial institution. 

 

So how do you decide? Fixed rate mortgages, because they require a low risk tolerance are usually better suited to first time home owners or those who do not keep an eye on the financial markets. 

Ask your self these questions:  

Do you like or need to know exactly what your payment is going to be over a long period of time?

Do you want to avoid the need to constantly watch rates?

Do you prefer the piece of mind of set it and forget it?

If you answered “yes” to all or most of these questions, then a more fiscally conservative fixed rate may be best option for you.

 

A variable or adjustable rate mortgage is best suited for people who have a flexible budget and can tolerate higher risk. Ask yourself these questions:

Do you watch market conditions?

Could you handle any sudden rate increases that would increase your payments?

Would you take a lower rate if it meant the possibility of your payment changing several times over the life of your term?

If you answered “yes” to all or most of these questions then a variable or adjustable rate may be the best option for you.

 

Some lenders offer a special promotional or teaser rate for the first few months of a variable rate’s term. Ask your mortgage professional how this could be good for you in the long term. Also discuss what your rate will be based on, will it be prime, prime minus   .3, .5 or .8%. Also you should know that most lenders will offer you an option to lock in your variable rate to a fixed rate at any time for the remaining portion of your term or for a longer term. 

If the uncertainty  of going with a floating rate will cause you to have sleepless nights, then that is not the option for you. In fact many Canadians choose the security of a fixed rate mortgage. They know exactly how much they will pay over the term of their mortgage, and they can plain accordingly with not financial surprises. However if rates do drop, then you committed to the promise that you have already made. You should know this that during the past 10 years 5 year fixed rates have averaged 5.5% while variable rates have averaged 5%. As a mortgage professional I can help you make the best choice, call me so I can find out what works for you.

 

Cheers,

 

Pat