Category Archives: mortgages

Flaherty’s Changes to Mortgage Rules

What will the changes to Canadian mortgage rules announced on January 17 mean to you?

If you already have a mortgage – not much. If you buy a house within the next 60 days (before the changes take effect) – not much. If you plan on buying a house during the next few years – not much.

If you are ass deep in debt, and looking to refinance to the hilt with a nice low interest rate, flexible payment, Home Equity Line of Credit in order to bail yourself out – lots.

New rules will restrict the number of years you can stretch out a normal mortgage to 30 years. No more 35 year mortgages with CMHC. You will also need to come up with a minimum down payment. No more “no-money-down” mortgages.

But that’s not the big news. The big news is that the Government through CMHC will no longer insure Home Equity Lines of Credit – called HELOCs.

For the last number of years home owners have been flocking to the banks (and others) to refinance their homes with Helocs. This allows them to use the equity they have built up in their homes to refinance debts like credit cards, or buy things like fancy cars, boats and cottages, or heck, just pay for a trip to Aruba.

These Helocs are sold to people by highlighting the flexibility of the payments, the low interest rates and your ability to pay off as much as you want. In reality most people only pay the minimum interest payment, never reduce their principal, and will get killed if the interest rates go up by more than a percentage or two.

Helocs are a form of never-never plan. Most of them allow you to make minimum or interest only payments, and never actually pay down the principal. I  can’t tell you how many of these things I helped people convert into real mortgages during the last few years I was advising clients.

You could live in your house forever and never succeed in paying it off. These lines of credit are as bad as credit cards, they’re a guaranteed source of monthly income for the banks that you never escape.

And with their floating interest rates on a principal that never declines, they are a time bomb waiting to happen in a world where interest rates have no-where to go but up.

As soon as CMHC insurance for these Home Equity Lines of Credit dries up, expect to the see the banks pull back their helping hands, and tighten up their credit granting procedures.

With any luck Mr. Flaherty will have prevented the banks from letting a few unlucky people from getting in over their heads in the future. If these rules work as intended, uninhibited, intemperate consumer spending will be marginally reduced, and those least able to cope will be protected from the bank’s grasping fingers.

What can you do?

If you have one of these never-never plans, talk to your mortgage lender. You have two options, set up a declining balance payment, which will pay off both principal and interest – or – convert to a regular mortgage with a defined amortization and a fixed interest rate on regular monthly payments.

As soon as you can, stop giving your life away to the banks, and get your house in order.

 

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Filed under CMHC, Economy, Finance, HELOC, Home Equity Line of Credit, interest rates, mortgages, Saving

Get Ready for Inflation

Ben Bernanke’s comments today underline my hunch that the US would try to inflate their way out of their fiscal mess.

Don’t take the Fed’s low interest rates policy at face value. In the long term this kind of policy causes inflation, and eventually we will see that higher interest rates will be necessary to bring the inflation it creates under control.

If you are a saver you will be penalized, as your savings and investments become devalued. People invested in Bonds and Bond funds, and GICs are especially in the firing line. It appears that the best strategy for the next little while will be to think short term. Don’t lock your investments in to contracts longer than 12 months.

Mortgages should be treated the opposite way. If you are not planning on selling, lock in for as long as you can. If inflation gets out of control, it isn’t unreasonable to expect mortgage rates to pass the 10% mark some time in the next 2 to 5 years.

Right now interest rates and mortgage rates are being held down by the lasting dregs of the recession and the appalling housing market in the US. But this will not last.

In Canada the housing market is relatively healthy, prices have not dropped, and anyone with a large mortgage at the high end of carrying capacity will be vulnerable to large jumps in interest rates.

http://www.reuters.com/article/idUSTRE69D5XW20101014

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Filed under Economy, Inflation, interest rates, mortgages, Saving, Uncategorized, US Debt

Rising Mortgage Rates

I have to admit I was a bit shocked today when someone asked me if they should lock in the interest rate on their mortgage .

Shocked mainly that they hadn’t already done it.

Historically mortgage rates have run in the 6% range, I’m talking 100 year averages here. So I consider it a general rule of thumb, that if mortgage rates are below 6% you are in bonus territory, and should lock in for as long as possible.

We are now just beginning the process of making a transition from a period of falling interest rates into what I think will be a fairly protracted period of gradually rising interest rates.

Now, I am not saying that I see rates rising to the levels we saw in the mid-eighties (god forbid) unless some unforseen financial crisis hits (of course that’ll never happen, right). But it is not unreasonable to expect to see mortgage rates climb into the 6-8% range in the next few years.

It is possible that there will be a political imperative which keeps rates lower than this, but honestly, with the mess the deficit mess the US is in, and the bumpy ride the Euro zone is going through, I can’t see the current low rate environment continuing indefinately.

So what to do?

Generally, in a rising interest rate environment you want to be locking in the low rates as long as you can, for as long as they exist.

In the opposite case, in a falling interest rate environment you want to be in short term, variable rate mortgages so that you can take advantage of savings as they occur.

But both scenarios have end points. This is where you must make a personal judgement call based on your own comfort zone. For myself, I called 5% the bottom, and considered anything offered less than 5% as bonus territory. This is probably true of many of us who struggled with 14 and 16% mortgages years ago.

But when mortgages are rising, when do I want to stop locking in, and go short term in hopes that rates will begin to fall again? This is tougher. What happens if you go variable and the rate shoots up to 16%? What a killer that would be. But do I take the chance on a variable if rates are 12% and I think they will fall?

I can only fall back on historical averages again. Personally I would probably only lock in for a year at a time once rates get higher than 8%. If rates go over 10% I am going to be looking to a variable mortgage, knowing that I am going to have to ride the rollercoaster until the rates fall again.

But you can be sure that once they fall, and eventually they will, I will again lock in for as long as I possibly can. Because I know, that one day interest rates will rise again.

And if you ever needed an argument for paying off your mortgage as quickly as possible – this is it.

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Filed under Economy, How It Works, Inflation, interest rates, mortgages, Saving, Uncategorized, US Debt