Is now the right time to choose a Variable Rate Mortgage?

“Should I take a variable- or fixed-rate mortgage?” is the question I get asked most by clients.  While we work with our customers to help them come to a decision on what’s best for their financial circumstance, here are a few questions to consider when deciding on a mortgage type.

Can you qualify for the mortgage you want?

The criteria to qualify for a variable-rate mortgage (VRM) is different than a fixed-rate mortgage. Remember the housing crisis in the U.S.A. almost five years ago? It had a significant impact on the qualifying criteria for people who now want VRM’s. VRM’s are more difficult to qualify for under the debt ratio guidelines because the government has built a buffer for borrowers should rates go up. For VRM’s, borrowers qualify based on the Bank of Canada’s qualifying rate of 5.34%. The impact is that it lowers ones ability to qualify for a certain mortgage amount by about $40,000 less in mortgage money compared to a five-year fixed rate. Many first-time home buyers would like the lower rate of a VRM, but can’t qualify for the mortgage on the home or condo they want to purchase because of the qualifying restrictions of a VRM.

What’s your budget?

Your current money-management practices have an impact on your choice of a VRM or a fixed mortgage. If the only reason you’re choosing a VRM and a lower payment is because it will allow you to spend more in other areas, the VRM is not the best choice for you financially. If you’re a saver and have money set aside if rates go up (and can make the difference in mortgage payments) you’re a good candidate for a VRM.

What’s the forecast?

Historically, borrowers who have a VRM tend to pay less in interest over the life of their mortgage, than a fixed rate. The interest rate on a five-year fixed mortgage is currently in the mid-three percent, while a five-year VRM is below three percent. The Bank of Canada’s overnight lending rate has an impact on a Bank’s prime rate, which is the indicator that VRM’s are based on. The current forecast is that rates may rise in mid-2015. Until then, those who choose VRM’s now should be aggressive in paying down the principal on their mortgage and take advantage of the lower rate.

I'd love to hear how you make your own decisions on the type of mortgage you choose. 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 follow me @Sandra_lastovic.

Canadian housing market is slowing, but what about Guelph and the surrounding area?

A recent article published in the Financial Post notes the slowing of the Canadian housing market. So what's happening in Guelph? Area statistics published by the local real estate board show we're actually seeing a year-over-year increase in home sales of about 6% for Guelph (from 1616 MLS sales in 2012 to 1715 sales in 2013). Areas like Centre Wellington and Guelph/Eramosa have also experienced growth.

Why is the housing market still moving in Guelph, while other regions are stalling? Guelph has been designated as a "place to grow" under the 2008, Places to Grow Act. Our unemployment level is hovering just over 5% and our vacancy rates are below 2%. People are buying houses because there are jobs in the community. It will be interesting to see what impact the restructuring at Blackberry in Kitchener/Waterloo will have on the Guelph market.

We haven't seen a drop in the pre-approvals at our office, but I'm noticing that first-time buyers are changing their expectations on the price-range they'll be buying. That's because of the tightening of the mortgage rules to shorter amortizations.

I've also highlighted some key points in the article below from the Financial Post, published on Wednesday, Oct. 17, 2013
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The housing market is already decelerating, making a discussion about overheated home prices premature at this point, says the association which represents realtors.

October sales could be the real test for the market as pre-approved mortgages, at rates long since gone from the marketplace but held in place for 120 days, are no longer boosting sales.

“While the momentum for sales activity began improving a few months ago, it may be losing steam after having just climbed back in line with an average of the past 10 years, said Gregory Klump, chief economist with the Ottawa-based Canadian Real Estate Association, which represents about 100 boards across the country.

“Take a look at month over month and we’re up a whole eight-tenths of a per cent. It’s a deceleration from what we saw in August [up 2.9% from July.].”
The month-to-month numbers are all seasonally adjusted and paint a different picture than the year-over-year results which show September housing sales were up 18.2%.

While Vancouver sales were 63.8% from a year ago in September a closer look at activity remains below the 10-year average in Canada’s most expensive city.
“If you are looking at the long-term average, I would suggest the numbers speak otherwise,” said Mr. Klump, acknowledging an overheated market could cause Finance Minister Jim Flaherty to intervene again with tougher mortgage rules. “He wouldn’t hesitate to reign it in, if there was evidence of overheating. But after tightening them four times in the past four years, he’s been successful, we are just at the long-term average.”

Some evidence would suggest prices continue to shoot higher with the average sale price last month reaching $385,906 in September, an 8.8% increase from a year ago. At the same time, the association’s MLS Home Price Index, designed to smooth fluctuations caused by anomalies in specific markets, was up 3.1% in September from a year ago.

“The 8.8% reflects the fact sales were very weak a year ago in some very expensive markets,” said Mr. Klump.

Almost everybody agrees the real test for housing will come in October, as the sector now adjusted to tougher mortgage rules, deals with the fact rates have climbed. The prime lending rate remains at 3% but five-year closed fixed rate mortgages are as high as 3.89% at banks on a discounted basis after dropping below 3% earlier in the year.

“We are starting to see some deceleration but the numbers are already inflated because [of pre-approved mortgages. I would not put too much weight on the [September] numbers,” said Benjamin Tal, deputy chief economist with CIBC World Markets.

He notes the markets has corrected in terms of sales activity but the larger question is why haven’t prices followed sales down. “The market is still a bit too strong,” said Mr. Tal, who believes it makes more sense for prices to drop.

In a down market, you need greater exposure to sell your property
David Madani, an economics with Capital Economics, suggests there might be another factor influencing the market which some realtors may not have even considered.
Mr. Madani says he hears anecdotal tales of people coming back to the multiple listing service after trying to sell properties through private for-sale-by-owner networks — something that would boost sales numbers. CREA only tracks MLS numbers so there is no data on how much activity occurs outside it, although evidence presented to the Competition Bureau has suggested organized real estate controls about 90% of the market.

“More prospective sellers are using the much larger MLS network than the smaller private network,” said Mr. Madani. “At the peak of the market, there was more liquidity [in the FSBO networks]. If you’ve got more people using the MLS, presumably you would be talking more sales. In a down market, you need greater exposure to sell your property.”

http://business.financialpost.com/2013/10/15/canada-housing-sales/

John and Melanie - this is the real thing!

I love sharing success stories from my clients. This story is the "real deal". Jonathan Sloot* and Melanie Grose* came in to see me about a year ago. They were living in a small house, and they needed more room. However, their current house made a perfect rental property. They came to me with the idea of keeping their current home, and buying a bigger more "family-like" house.

I was really impressed with Jonathan's and Melanie's financial discipline. They had done a really great job at keeping their amortization short on their current home and paying down on their mortgage. They had a a lot of equity tied-up in the house. I showed them how to release it through a secure-line-of-credit and that became the down payment on their new home. We also looked at the cash flow of their current home, which was to become the rental. We wanted to be sure the rents covered the expenses, plus the mortgage. 

Here's what they said about the experience,  

"We went to see Sandra because we wanted to purchase another home to live in and keep our old home as a rental property.  Although there was equity in our current home, we were unsure on how to release the equity and piece together the plan.  Sandra laid-out the strategy in a clear way that we could understand what would take place. She negotiated the mortgages for us and got us better rates than our own bank could. We basically came in and signed the initial paperwork and Sandra and her team took care of the rest"

*permission was granted by Jonathan and Melanie to share their names and story. 

Mortgage Changes: Where things are going wrong

We've seen an incredible tightening of mortgage lending in the last year. In an effort to slow the housing market to prevent the same issues the U.S faces, the Canadian government has worked to make it more difficult to qualify for a mortgage. This change would result in less people qualifying to buy a home and cool a possibly over-heated housing market.

The main change often referred to is a decrease in the amortization of mortgages from 40 years to 25 years. Only five years ago, I was qualifying people using 40-year amortizations. Now on high-ratio mortgages, (or mortgages where borrowers put less than 20%) amortizations have been shortened to 25 years. On mortgages where there is at lease 20% equity in the home, the majority of lenders are offering 30-year amortizations.

Shortening amortizations has had two major effects: 1) On average people can qualify for about $40,000 less in a mortgage and; 2) it has forced people to pay down on their mortgage principal. While I agree it's important to be fiscally responsible, there are consequences to this tightening.

In Guelph and the surrounding area, home prices continue to rise. It's becoming more and more difficult for first-time home buyers to purchase a decent place to live within a reasonable budget. As a result, the rental market for residential homes has increased, spurring a buying spree of residential homes for rent. As a real estate investor myself, I see the benefits of owning rentals but I believe that we'll see a major exodus in the next five years; real estate investing is not as passive of an investment as the equities market.

While some aspects of mortgage lending have been tightened other areas have relaxed. When The Mortgage Centre (Guelph) first opened almost 15 years ago, we were approving mortgages based on the debt ratio calculations of the Gross Debt Ratio (GDSR) and the Total Debt Service Ratio (TDSR). These debt ratio maximums compare one's gross family income to the carrying costs of the home (GDSR) and the out-side debt one may have (TDSR). With the recent mortgage changes these debt ratio requirements have actually relaxed.

As a result, I see people taking from one debt source to pay down on another debt source. For example, using their lines of credit to pay on their mortgages (should there be a short-fall for that mortgage-payment period). An often-overlooked aspect in the U.S housing market crisis is the period of growth before the crash, which was based on consumer spending. George Bush is often recognized as encouraging Americans to "spend their way out" of the recession. With the current debt-ratio guideline in Canada opening, are we doomed for the same?

In closing, it may be time to revisit how the current mortgage lending policies are really affecting Canadians and what could be done to improve on a model that's envied by the world!

If you have any questions about your own mortgage situation please call my at 519-763-3900 ext.1001 or e-mail at lastovic.s@mortgagecentre.com.

I would also value your comments!