Wednesday, May 20, 2009

Mortgage Planning Going Forward

So you currently have a mortgage and you're wondering what direction to go. When does it renew? Is it a variable or fixed rate mortgage? When will rates increase?

These questions are becoming very important in the eyes of homeowners in Canada. The following will attempt to explain the types of mortgages and provide some guidance on what to do over the coming months and years. The following summary of current market conditions was "borrowed" from a blog on mortgages. Here are the basics in the various types of mortgages.

Popular Fixed Term

1-year fixed: With rates under 3%, they’re a good alternative to 5-year variables—which should hopefully be at prime by the time these puppies mature next May.

2-year fixed: If convertible (mortgages with a convertible rate feature allow borrowers to move into a fixed rate at any time with no penalty - you generally need to choose a fixed rate term that is at least as long as the term you have remaining), then they’re another decent alternative to 5-year variables. You get an extra year of rate security for 0.20% more than the best one years.

3-year fixed: A nice combination of risk and reward. Versus a 5-year, you’ll save significant interest the first three years. The trade off is more risk in years 4 and 5.

4-year fixed: The ugly baby that no one wants. There’s no value here. Go 3 or 5 instead, unless you plan to break in four years and want to avoid a penalty.

5-year fixed: Canadians love their 5-year terms. Now may be the time for the risk averse to grab one, with rates expected to jump later this year or next.

Longer Fixed Term

7-year fixed: A rate near 5% is not as exciting as 3.79% for a 5-year, so 7-years don’t sell very well. If you’re that concerned about risk take a 10-year for the same price.

10-year fixed: The decade mortgage is available under 5% for the first time in modern history. Nonetheless, you may pay thousands more in interest versus a 5-year.

Variable Term
5-year closed variable: They say prime is not going any lower. So why gamble with prime+ variables? Get a convertible 1 or 2-year and wait for prime- to return.

5-year capped variable: You’ll get 3.25% today and never pay over 5.25%. Sounds good, but if you’re that worried, why not pay a little more for a fixed now?

5-year open variable: Closed variables are portable and have just 3-month interest penalties. So, unless you’re going to terminate early, save 0.30% and go closed.

Several people have asked me over the past few weeks "what should we do"? Here is a simple answer. Look at your current mortgage.

For old style "variable" rate mortgages, you are likely paying prime minus .4-.8 percent. Stay there for the time being. If you are concerned about long term rates, lock in once the five year rate starts to climb. For people in existing five year terms with 2-4 years left, the fee to get out of the mortgage is too high to make it worthwhile. Consider the idea of doing a blend and extend (for 5 years from now). It will reduce your rate BUT WAIT FOR A WHILE TO DO THIS. Rates are expected to remain relatively low for the next 2-4 months and the prime rate is not expected to change for 6-12 months. The shorter time let in your 5 year term, the better. When your lender does the blend and extend, it will mean a slightly lower rate.

Find a mortgage broker. They earn their incomes by placing mortgages with various lenders. If you were to go shopping around to various lenders, it will actually hurt you as it reduces your "beacon score" which is what creditors look at to consider your credit worthiness. Mortgage brokers apply once on your behalf to 20-30 different institutions. They do all of the work.

Lastly - we never can tell where mortgage rates will go. Current rates are at the lowest levels ever. Governments are flooding markets with cash. For anyone under 35, ask someone what it was like to pay 10-18% for a mortgage. Think it won't happen again? Unlikely, but let me ask this one simple question.
If rates were to go to 8%, could you afford your current mortgage?
Stay Well and Pay It Forward.

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