Breaking up with your mortgages

Variable rates are looking good


Its a dicey decision whether to break your mortgage or not. Most banks are not encouraging it but in some cases it makes sense.Anybody who bought their first house in the 1980s must marvel at mortgage rates today. Or perhaps fume.

Another rate cut this past week from the Bank of Canada led all of the major banks to lower their prime lending rate to a new low of 2.5%. (since this article prime is now 2.25%)

Consumers who locked into variable-rate mortgages tied to prime before credit markets tanked are getting as much as 90 basis points below prime and borrowing as low as 1.6%. It’s the deal of the century.

In October, the banks suddenly changed the rules on borrowing and demanded consumers pay a 100-basis premium over prime if they wanted to go variable. The banks have eased up since and the premium on a variable-rate product is 80 basis points above prime for a 3.3% rate.

It poses an obvious question for anyone who has locked into rates as high as 5.75% on a five-year fixed-rate mortgage: Should they break that mortgage?

“It probably does make sense to break it now,” says Vince Gaetano, vice-president of Monster Mortgage.

He gives the example of one client who came into his office this past week with a $205,000 mortgage and a 5.24% interest rate. The customer had 3½ years left on a five-year mortgage. The penalty to break his mortgage is the greater of three months interest or what is called the interest rate differential. The interest rate differential is the lost interest between your current rate and market rates.

In that client’s case, his interest rate penalty is calculated based on the current four-year rate at his bank, now 4.14% on a discounted basis. The lost interest to the bank is about $7,800, which is what the customer will have to pay.

It’s a big penalty but Mr. Gaetano argues that if that same customer breaks his mortgage and goes with the variable-rate mortgage at 3.3%, the savings would be in the $13,000 to $14,000 range over 3½ years — more than offsetting the penalty.

There is also a nifty little trick you can pull off if you have a prepayment option on your mortgage. Mr. Gaetano’s customer has a 25% prepayment privilege, so he can knock $57,000 off his mortgage and lower his penalty by about $2,800.

“You can access [that 25%] from an unsecured line of credit or some credit cards for a few days and reduce your penalty because the penalty is based on the balance outstanding,” says Mr. Gaetano.

While not encouraging people to break their mortgages, the banks are acknowledging that some consumers who locked into higher rates can save money if they refinance at the new lower rates.

“I think it does make sense as an option for some people trying to lower their rate,” says Joan Dal Bianco, vice-president of real estate-secured lending at TD Canada Trust.

She says if you are refinancing your mortgage, you can take the interest rate differential penalty and tack it on to your new mortgage. If you have credit card debt, you can add that on too, and the refinancing makes even more sense.

The office of consumer affairs for the federal government has a great site to help you make the decision: http://www.ic.gc.ca/eic/site/oca-bc.nsf/%20eng/ca01817.html. Moshe Milevsky, a professor at York University’s Schulich School of Business, who created the calculator used on the government site, says it ultimately comes down to how much money you will save on your mortgage if you break the contract.

“To me, it’s pure mathematics. There is nothing speculative or probabilistic about the decision to break a mortgage. It is the classic example of undergraduate finance time-value-of-money calculations. If the homeowner can refinance into a mortgage with an identical term that reduces monthly payments above and beyond any penalty costs, then go for it. Plain and simple,” says Mr. Milevsky.

Breaking your mortgage based on a decision to go into a variable-rate mortgage is an entirely different decision.

“This decision shouldn’t be confused or muddled with the classic long or short decision, or whether real estate prices or interest rates are headed up or down from here,” he says.

So, it comes down to two choices: The first is to break your locked-in mortgage and renew for another fixed term. If it saves you cash, that is a no-brainer.

The second choice is whether to switch products and go with a variable-rate mortgage. Historically, consumers have saved money 88% of the time going variable, according to Mr. Milevsky’s own studies.

I’m still in the camp that favours a variable rate.

Dusty Wallet This will not save you any money, but if you are strapped for cash because one of the breadwinners in your home has lost a job, the banks will let you lengthen your amortization period. If you have a 25-year amortization you can lengthen it to 35 years without any service charges — other than the huge jump in interest charges!

Gary Marr, Financial Post
Note: Today’s variable rate mortgages with most lenders are being offered at prime (2.25%) plus .75% giving you a rate of 3.00%.

More Cash in our homes

Canadians continue to have more than two-thirds more equity in their home than Americans, according to a new survey.

The study for the Canadian Association of Accredited Mortgage Professionals shows Canadian homeowners have, on average, 72% equity in their house, compared with 43% for Americans.

"It is a very positive part of the Canadian housing story," said Jim Murphy, chief executive of Toronto-based CAAMP. "Canadians pay down their mortgages. Canadians are just more conservative than Americans."

The study also found that Canadians have dramatically reduced the amount of equity they are taking out of their home. A year ago 22% of Canadians had accessed the equity in their home through measures such as lines of credit. Today that is down to 15%.

"This speaks to the whole thing about people belt-tightening," said Mr. Murphy.

Despite the drop in prices in the Canadians marketplace, only 2% of Canadian mortgage holders have negative equity, in which the value of their mortgage is higher than the value of their home.

About the only new risk Canadians seem to be taking on is longer amortizations. While 83% of Canadians have an amortizations of 25 years or less, the number with 30-year and 35-year amortizations is rising. In the past six months, 46% of new mortgages have been for amortization of more than 25 years.

"I don't think it's a worry because [Canadians] are paying down their mortgages," said Will Dunning, chief economist with CAAMP, noting the percentage of Canadians in arrears on their mortgage is rising but the total is still 0.38% of all mortgage holders. "That's the middle of historical averages."

Mr. Dunning said the study also indicates that subprime mortgages are likely a very small percentage of the Canadian marketplace. Only 2% of all Canadian mortgages have interest rates of 8% or higher -- the low-water level for what would constitute the rate on a sub prime mortgage.

The survey did show that Canadians are also taking advantage of continued drops in interest rates by increasingly buying into variablerate products. CAAMP says 28% of Canadians have variable-rate products that are tied to prime. The number is rising, with 36% of new mortgage orientation in the past 12 months going into variablerate products.

With the Bank of Canada's decision to lower rates another 25 basis points and its commitment to not change rates for another year, Canadians are expected to continue to take advantage of a record-low prime rates, which are 2.25% at most financial institutions.

Gary Marr, Financial Post

NOTE: If you have been in your mortgage for over 2 -3 years now, it may be worth your while to review your current mortgage and interest rate and consider if refinancing your home makes sense, or if your in the market to buy your first or second home, its another good time to do so! Housing prices are down a bit and rates are as low as they are going to get! Dont wait much longer you could be missing your greatest opportunity.

How will Bank of Canada rate cut affect mortgages

The latest rate cut means consumers buying a house can borrow for as little as 3% interest on their loan if they are willing to buy into the Bank of Canada's statement Tuesday that it won't be changing rates until June, 2010.

If you don't believe the bank will hold steady on its promise, you can lock into five-year, fixed-rate mortgages for as low as 3.85% on a discounted basis -- the lowest rate in Canadian history. Note: some lenders are offering under 3.85 (some conditions may apply) so there is an even better rate opportunity out there if your sourcing out rates...

But all of that may amount to nothing when it comes to soothing a Canadian housing market in which new construction has fallen below 200,000 on an annualized basis for the first time in seven years. March existing-home sales were off 13.7% from a year ago.

"What is 25 basis points among friends? It's really nothing," said Benjamin Tal, senior economist with CIBC World Markets. "This is not something that is going to change the course of the market. It only helps at the margin."

Mr. Tal did say mortgage refinancings have risen dramatically in the past few months as Canadians who might have borrowed at 5.75% just over two years ago are ready to eat any interest rate penalty because a five-year rate mortgage is now so low.

The penalty to break an existing mortgage is the greater of three months interest or what is called the interest rate differential. The interest rate differential is the lost interest between your current rate and market rates.

Mr. Tal says while there is not much lower for variable-rate mortgages to go, the gap between short-term money and long-term money is still significant enough that the temptation is not to lock in.

"You might do better the first two years [of a five-year mortgage] but not the remaining three. I'm convinced long-term interest rates will rise. I can see [long-term] rising 200 basis points. These are emergency rates and at some point this emergency will end," says the economist.

John Turner, the director of mortgages at the Bank of Montreal says he's never seen anything like what is going on in today's market.

"There is a possibility of another drop," says Mr. Turner. "But does your tummy feel good about something that has a higher possibility of going up than going down any further."

He is convinced these lower rates will boost the housing market. The 13.7% decline in home sales in March was the smallest year over year decline in six months. "I think there is a segment of the market that couldn't afford a home before," said Mr. Turner.

Don Lawby, chief executive of Century 21 Canada, said while rates are declining, banks are getting tighter with how they hand out credit.

"If you are self-employed, the banks are demanding more documentation. Appraisals are getting harder too. It's not what you bought the house for but what it's appraised for," said Mr. Lawby, who also heads up a mortgage broker business. "There is not a lot of subprime out there for people with any credit problems in their history."

Garry Marr, Financial Post

Knowing your budget is half the battle

Affordability is a necessity for first-time homebuyers regardless of their financial situation

Paul Anderson and his wife, Sue, felt like they could only dream of home ownership. After having some credit problems, the effects of which lingered on for several years, they got their financial house in order and got up the courage to apply for a mortgage a few weeks ago.

Much to their surprise, and after some negotiating, the couple were approved. "I looked at my wife with a tear in my eye and realized ... I might get a house," says Paul, 42.

The couple have three children.

"There's good people out there with good jobs that really don't have a lot to bring to the party, but they're already paying $1,600, $1,800 a month [in rent] anyway," he says.

"At the end of the day, I'm a proud owner of a new home."

It's one of the best buyers' real estate markets in years, with interest rates at historic lows, falling house prices and new incentive programs available. But many consumers -- including many first-time homebuyers -- lack the knowledge and preparation to determine how much they can afford.

Banking experts say this is the first crucial step toward making any successful real estate transaction. Yet many consumers are missing out on opportunities to determine how much they can afford and they are overlooking tools available to help them get into home ownership.

The , for example, had no idea what to expect before they were approved for a $400,000 mortgage for a new home.

"It should start with getting pre-approved and not being intimidated by the process," says Laura Parsons, area manager in specialized sales with Bank of Montreal (BMO).

Many people think home ownership is out of reach because they haven't done the calculations or sought expert advice about their options.

"We look at university professionals or trades people coming out of school with all this student-loan debt, but it doesn't mean you cannot get into home ownership," says Parsons. She notes banks can consolidate debt to reduce monthly payments.

A pre-approved mortgage establishes realistic expectations about what you can afford based on your gross debt service ratio -- your gross annual income relative to the principal and interest of the mortgage plus typical heating costs and property taxes.

Canadian guidelines state those costs cannot exceed 32 per cent of your gross annual income.

"Pre-approval ... really demonstrates that a buyer is serious and that can help you with negotiating with sellers and agents," says Bernice Dunsby, senior manager of home equity financing with Royal Bank of Canada (RBC).

It also allows buyers to lock in their interest rates for 90 days in the event that rates go up, or they can take a lower rate during that time frame if rates go down further.

You must now have at least five per cent of the cost of the mortgage as a down payment.

If it's less than 20 per cent, it gets classified as a "high ratio" mortgage and will require insurance.

Despite gloomy public perception, banks are working with all types of people to develop home ownership plans and doing everything they can to get you a mortgage that works for you.

It's not just young couples with children who are buying these days, either.

"It's not your traditional buyers," says Parsons. "There are options for everybody."

While it's one of the best markets right now to buy, be realistic and work with an expert since each individual's affordability is different.

"Don't get caught up in the hype of the opportunity, but sit down with a specialist and determine what's right for you," says Dunsby. "You don't want to stretch yourself too thin."

By Derek Sankey, For Canwest News Service

Your once-in-a-lifetime Investment Opportunity

Heres an interesting article from MSN Money- these days most consumers are holding tight to their earnings , after watching some of their hard earned retirement savings go down the drain....

Is it time to consider taking a leap, break open the piggy bank of savings, and buy stock in hopes of making that money back and then some. Will the market currently at an all time low, bounce back...whats the saying "what goes down must go back up" you decide...

Heres the article....

"Panic" might be too weak a word for what we've been going through. Beyond the substantial shocks that stocks have sustained, the far larger lending market has seized up as well. Banks don't want to lend to each other, much less those of us out here in the real world, and the bond markets remain off-limits to all but the strongest of borrowers.

And all of that has left everyone terrified. The long-term future simply doesn't matter all that much to a company that risks oblivion in the next week if it can't roll over its maturing debt or cover tomorrow's margin call.

The companies hit hardest by this mess were built on the presumption of easy, cheap, and unlimited credit. Homebuilders such as MDC Holdings (NYSE: MDC) and KB Homes (NYSE: KBH) are in a world of hurt. In addition, even the strongest automobile titans, including Toyota, are feeling the impact of the credit crunch, while weaker ones like Chrysler teeter on the edge of collapse. But investment banks and financial institutions -- the largest and fiercest players on Wall Street -- were literally ground zero for this implosion.

The list of companies brought down by the implosion -- Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac -- includes some of the most notable names on Wall Street. The list of companies struggling to survive the economic downturn grows longer by the day. And that's creating a once-in-a-lifetime investing opportunity -- for you.

It's your turn
There are unbelievable bargains available now, the likes of which we haven't seen since the days of Benjamin Graham. Under less unusual circumstances, Wall Street's financial wizards would be leveraging themselves to the hilt to take advantage of the market's current conditions. But with their funds cut off, redeemed, or diverted into mere survival, they're forced to sit on the sidelines, rendered completely unable to act.

That's where you come in. As long as you have the patience to wait out the volatility, you can buy those very same bargains (without the leverage) and be richly rewarded when things return to normal.

The country, the stock market, and the strongest companies of the era survived the Great Depression. We'll get through this mess, too. Much the way Benjamin Graham and his protege Warren Buffett did after past catastrophes, the superinvestors of this generation will make their fortunes buying on the heels of this one.

Where to play
Even if you don't aspire to be the next Graham or Buffett (and don't have $5 billion sitting around with which to invest in a struggling company), there are plenty of bargains available to you right now.

But be careful out there -- not every company that has fallen is legitimately cheap. We're in the throes of a global economic rout, after all, and many companies deserve their slashed share prices.

Those whose prices have dropped as a result of forced selling or general market malaise, on the other hand, are the most likely to reward their shareholders for holding on through this mess. They typically have

Strong balance sheets,
Reasonable or cheap valuations, and
Moats protecting their core businesses.
Companies like these, for instance:


IBM (NYSE: IBM)
Unparalleled global reach in end-to-end technology hardware / software / implementation / consulting / services.
Earnings easily cover interest payments, trading for 11 times forward earnings.

Coca-Cola (NYSE: KO)
Rated world's most valuable brand by Interbrand, generally viewed as an affordable indulgence
Well-capitalized, trading for 12 times forward earnings.

Abbot Labs (NYSE: ABT)
Patent protection + FDA hurdles for competition assures profitability for a definite period, strong pipeline protects future outlook.
Minor debt, trading for 12 times forward earnings.

United Technologies (NYSE: UTX)
Has military contracts, which are largely recession-resistant, large footprint in HVAC, power, & other long-cycle equipment
Low debt levels, trading below 11 times forward earnings.

Kraft (NYSE: KFT)
Basic foods and drinks (like Maxwell House Coffee) are largely recession-resistant, and Kraft's brands lead in many segments.
Trading for 11 times forward and trailing earnings, generated $2.8 billion in free cash flow last year.


Although these companies are affected by the U.S.'s recession and the general tightening of consumer credit, their basic businesses are solid. Solid businesses, clean balance sheets, and cheap prices compared to intrinsic value mean these are the types of opportunities you should be taking advantage of right now -- while you still can.

This won't last forever

In ordinary times, companies this strong would not be available at such attractive prices. These deals are available only because the global financial meltdown has knocked out so very many of the institutional investors who would ordinarily bid these companies up much higher.

If you want to pay bargain-basement prices for some of the strongest businesses around, this is when you should pounce. It's not easy to buy when everyone is panicking, but it's precisely how generations of successful value investors have made their fortunes.




Although these companies are affected by the U.S.'s recession and the general tightening of consumer credit, their basic businesses are solid. Solid businesses, clean balance sheets, and cheap prices compared to intrinsic value mean these are the types of opportunities you should be taking advantage of right now -- while you still can.

This won't last forever
In ordinary times, companies this strong would not be available at such attractive prices. These deals are available only because the global financial meltdown has knocked out so very many of the institutional investors who would ordinarily bid these companies up much higher.

If you want to pay bargain-basement prices for some of the strongest businesses around, this is when you should pounce. It's not easy to buy when everyone is panicking, but it's precisely how generations of successful value investors have made their fortunes.

Choosing The Right Mortgage

New tack stresses sense, not cents

Ray Turchansky, Canwest News Service Published: Monday, March 30, 2009 FP Mortgages-Special Report

Traditionally, the most important consideration in choosing a fixed or variable mortgage has been which strategy would save the most money.

But that might no longer be the case: Choosing a type of mortgage and term today may come down to what makes sense for the individual homeowner rather than what saves cents.

"If you were buying a house 10 years ago, fixed versus variable was the biggest decision you made," says Moshe Milevsky, finance professor at 's and executive director of the Individual Finance and Insurance Decisions Centre. "But now there are more important things in place. Equity prices are falling, housing prices are falling. I think there are three or four things more important than fixed versus variable now."

Mr. Milevsky's 2001 study of five-year rolling interest rates from 1950 to 1999 showed that 88.6% of the time, homeowners would have been better off with floating or short-term mortgages rather than five-year, fixed-rate mortgages, saving an average of $22,000 on a $100,000 mortgage amortized over 15 years.

"The last time I looked at it, a year ago, the same strategy was holding up. Roughly ... 85% of the time, you were better off going with variable rates, rather than fixed rates."

Another, lesser consideration was peace of mind: New homebuyers might sleep better when essentially paying an insurance premium as part of locking-in payments for five years.

But saving a few dollars should no longer be the determining factor in the fixed-variable dilemma.

"Too much emphasis has been based on this study," Mr. Milevsky says. "It's the most-downloaded item on our Web site. But if you look at interest rates right now, you're debating over a per cent. When fixed rates were 9% and variable rates were 5%, that's a big difference. That's another issue."

The flattening of the bond yield curve in recent years meant you might pay only 1% or 1.5% more to lock in a long-term rate, and that made the stability of fixed rates much more attractive than it was five years earlier.

Many homeowners with variable rates below prime are now offered renewal rates above prime. Discounts can sometimes be negotiated on longer terms, and other times on variable rates.

"Renewing is not just a day at the bank, it's a major event in the life of your house," says Mr. Milevsky, adding that low rates make other considerations more important in the fixed-variable debate. "If you're going to renew in a year or two, what if your housing price is lower than the value of the loan, and the banks won't give you that again? What about locking in as long as possible? If I get the five-year rate, they're not going to bother me.

"No. 2 is how much money is put down. If you put down only 5%, how much of an effect will that have on your credit rating? Banks are more cautious. Getting a deal might depend on whether you go fixed or variable.

"[Then] there's the question of employment. If you do not have a mortgage with flexibility, what if you can't make a payment for months?"

One compromise may be a combination mortgage that is part-fixed and part-variable.

"I'm getting to be a bigger fan than I used to be," Mr. Milevsky says. "I used to say 'diversify your assets, not your liabilities,' but if you can make the deal to lock in some of your mortgage, that might be a good thing. But that's two mortgages, with two sets of prices, and if it's an extra $200 that's one thing, but an extra $1,000 is another."