Thursday, June 27, 2013

Wondering why fixed rates are up but not variable?

 Here's a great explanation on why fixed rates are going up. 

I've been receiving panic calls from clients regarding their variable rate mortgages with the concern that their rates where climbing. Variable rate mortgages are priced off of an institution's prime rate (which can be impacted by the Bank of Canada overnight lending rate), which is a different indicator than the bond market.

Thanks to www.canadianmortgagetrends.com for the below article!

 

 

Yields, Swap Rates & Fixed Rates — Higher Yet Again

Bond yields have been going vertical.
By early Thursday, the 5-year yield—which influences long-term fixed rates—was up as much as 20+ basis points in less than 48 hours. That's an unusual move and it was driven by optimistic economic comments from the U.S. central bank.
This spike in yields has led dozens of lenders to announce fixed rate increases. The most notable today was RBC, which is boosting certain discounted fixed rates by 20 basis points on Monday.
But it’s not only bond yields that are flying. So is the 5-year swap spread, and that also has mortgage rate implications.
Swaps Basics
A “swap” (interest rate swap) is an agreement to exchange two different types of interest payments:  fixed-rate payments and floating-rate payments. Financial institutions buy swaps to hedge interest rate risk and lock in profits.
A simplified example of hedging: A bank with 5-year fixed mortgages receives fixed-rate payments from borrowers. That same bank also has short-term deposits. If short-term rates rise, the bank would have to pay higher rates to depositors, but be left with the same fixed rate payments from its mortgages. To solve that problem, the bank buys a swap that lets it receive floating-rate payments (at a higher rate than it has to pay out to depositors). In exchange, the bank must give its fixed-rate payments to the swap seller.
Why swaps matter
The difference between the 5-year swap rate and the 5-year government yield is called the "swap spread."
When the swap spread gets wider, fixed mortgages can become more expensive to hedge, other things being equal. That often happens when bonds sell off and yields soar. Lenders then pass along that added cost to borrowers.
Here’s a chart of the swap spread from earlier Thursday. As you can see, it has been making new relative highs.
Swap-Spread
(Click to enlarge)
Swap spreads may continue to widen if Canadians rush to lock in low rates. In that scenario, banks would have even more fixed-rate mortgages to hedge in the swap market.
It’s hard to say how long rising yields and widening swap spreads will exert upward pressure on rates. So if you need a mortgage in the next 180 days, call your broker or banker soon for rate hold. Some protection is better than none, and you can always cancel a rate hold if needed.

Tuesday, June 25, 2013

Money-saving advice on renewing your mortgage




Being proactive with your mortgage renewal is the best way to ensure you get the most competitive rate possible.Your financial institution or mortgage lender will send you a renewal notice one to two months prior to the mortgage renewal. My recommendation is to seek the advice of a broker six to four months in advance. This is especially relevant in the current market place as rates are forecast to increase.

How does this work? Mortgage brokers work with lenders that can hold the interest rate on a mortgage for four to six months, which guarantees the rate. Once you've submitted an application we track interest rates on a weekly basis, so if rates decrease as you get closer to your mortgage renewal we can make a downward rate adjustment. Mortgage brokers work with multiple lenders so if another institution happens to have a more competitive rate, we can switch the rate hold to that institution. Your bank will not call you and suggest you go see another lender because their mortgage rate is more competitive. That's one of the benefits of working with a mortgage broker.

Mortgage brokers are also motivated by different factors than banks. Both parties are in the business of making money… however mortgage brokers have the flexibility and authority locally to make the right decisions for their individual clients. When I describe the difference between brokers and banks to my clients, I term my industry as the "Walmart of the mortgage world." Let me explain… when you buy something from Walmart the product is often deeply discounted because they buy 1000's of the same product making their unit costs lower. Walmart deals in volume, much like a mortgage broker does.

Your bank branch is like a mortgage boutique. Because they may only be buying 100 mortgages per month they have to price them accordingly (normally at a higher rate, unless you beg them to give you a deal). Mortgage brokers don't have a posted mortgage rate and a discounted rate like banks do. We only work on the discounted market rates which vary slightly. Conversely, a bank has a posted rate and they decide how much of a discount you'll get off of your mortgage. Clients benefit from using a mortgage broker because they don't need to negotiate the interest rate. When that's the case you can ensure your mortgage is setup in the most financially beneficial way possible. You can plan for the liability enabling you to pay it off within your financial goals.

Remember there's more to mortgages that just the interest rate. Getting a rate locked in by a mortgage broker four to six months before your mortgage renews will help you get the best available rate on the market. This is especially critical because we are in an increasing mortgage-rate environment.



I'd love to hear your experiences on renewing your mortgage with a bank or a mortgage broker! Please e-mail me at lastovic.s@mortgagecentre.com or visit my blog at www.lastovic.s@mortgagecentre.com and offer your comments. If you're on twitter you can follow me @Sandra_lastovic.

Wednesday, June 19, 2013

Here's a great tip if you're doing things with a mortgage...



If you're buying your first home or selling and moving to another home, you should always get a interest rate held for you to protect you against increases in the interest rate. In the last two weeks we've seen a increase in the 5-year fixed-rate mortgage.

While most wholesale banks have been offering below 3% on a 5-year fixed mortgage, the rates have bumped up to over 3%. Most mortgage lenders are now at 3.09% and 3.19% on a 5-year fixed-rate mortgage. The reason for this jump is that the forecast for future inflation is up slightly. This has an effect on the bond market. When the bond yield moves up, so do fixed-rate mortgages.

Check with the institution that's helping you with your mortgage to find out when your mortgage rate hold expires. Buying before your low mortgage rate expires can help you save thousands of dollars in interest.

I'd love to hear your experiences on negotiating your own mortgage. Please comment or e-mail me at lastovic.s@mortgagecentre.com.

Monday, June 3, 2013

The hidden costs of mortgages your bank won't tell you.




I have a love/hate relationship with banks. I need them for day-to-day banking but I'm always disappointed at the fees that I'm charged. I've switched my banking to another institution promising lower fees and better services, but it's almost always the same.


As a mortgage broker, I also have access "bank" mortgages at no extra cost to my clients. I can access TD Canada Trust, CIBC, and Scotiabank to mention a few. I stay unbiased for my clients, because as a mortgage broker they expect unbiased advice.

Here are some things that irritate me about mortgages and the hidden costs & fees:

Skip a payment option
I sometimes cringe when I'm waiting in line at my bank and they advertise "skip a mortgage payment" or "take a holiday" from your mortgage. Most financial institutions have an option built into the mortgage to "skip a payment." It's designed for people who are facing financial difficulties, allowing for some flexibility. Skipping a mortgage payment on your home may not seem harmless but there are often extra administrative costs that the borrower is charged. If you need to skip a payment because you're under financial hardship then this is indeed a viable option for you. However, If you want to skip a payment just because you want to take a vacation - you'll want to reconsider the vacation.

The "skip-a-payment" option is also means to increasing monthly cash flow on a rental property that is vacant. I've had some real estate investors who owned several rental properties, where mortgage payments on the properties where close to $20,000 per month. By skipping a payment on all their rental properties, they managed to generate enough cash flow that they were able to increase the down payment on another rental property purchase.



Interest rate differential penalty calculations
Penalties on fixed-rate mortgages are calculated two ways: 1) three months interest; or 2) the interest rate differential or IRD (whichever is greatest). Without getting too technical there are a few banks that calculate the IRD based on the original discount that the borrower received on the mortgage. For example most chartered banks posted rates are just over 5%. Borrowers know this isn't the rate they will pay and negotiate a better one.

For example, if they negotiated a 1.5% discount off the posted-rate the penalty will be significantly higher. I've run this calculation on a $200,000 mortgage that had an IRD penalty and the penalty based on the original discount was almost $5000 more. That's one of the reasons why I recommend going with a wholesale bank, especially if you may need to sell the property before the five year term is up. You could also consider going with a shorter term to avoid the IRD penalty.


Refinancing a mortgage
The bank promises to "pay you" if you bring your mortgage to their branch. It's not a secret that one of the most profitable sectors for banks are mortgages. Although rates are at historical lows, they are higher than they should be. Five year fixed rate mortgages are based on the bond market and bond yields; given that the bond yields have been below 1.5 % in the last three months, and the premium that is charged is typically 1.5%. Therefore a five year fixed rate mortgage could be closer to 2.5%. Although banks are charging most clients close to 3%, there’s still is a little wiggle room with the rate.

If there is a penalty with the mortgage, banks will often tell you they won't charge you but rather capitalize the penalty by charging you a slightly higher interest rate. Ensure your mortgage professional reviews the option of staying with your existing mortgage lender, and reviews another option available on the market.

I'd love to hear your feedback on mortgages and your own "pet peeves" please e-mail me at lastovic.s@mortgagecentre.com or comment below!