Just how low can fixed mortgage rates get?

The only thing more exciting than buying a new home is knowing that you were given a super low mortgage rate, and the only thing that can add to that excitement is knowing that they may be coming down even further.

Bond yields are what fixed mortgage rates are determined by, and after seeing some large increases to the yields throughout the month of August and early September, we saw fixed mortgage rates rise with some lenders.   That trend has reversed over the past few weeks, putting downward pressure on mortgage rates.    

While this trend has already encouraged some mortgage lenders to drop their rates, we can expect to see some further drops if the trend continues.

Right now, you can still get a 5 year fixed mortgage as low as 2.99%. Possibly even lower if you know the right people (wink wink), but I am confident we will start seeing some rates even lower than this over the next week to two weeks. Even at 2.99% for a 5 year fixed can be placed into the 'ridiculous' category given just how low it is by historical standards. The lowest I have been able to offer in the past was 2.79%. Let's see if the new trend can bring us back into that ballpark.

Last day for 30 year amortization and refinancing up to 85%

As everyone is already aware, the maximum amortization available will be dropping from 30 years to 25 years and the maximum refinance will drop from 85% of your homes value to 80%.  Although these changes don't become firm until this Monday, July 9th, the last day mortgage applications will be accepted will be by the end of day tomorrow, Friday July 6th.  Some lenders have already stopped accepting applications and have already fully implemented the new rules early, which was expected.

If you are looking at refinancing up to 85% and/or looking for an amortization of 30 years, make sure you don't delay any further in getting your mortgage applications submitted.   3 year fixed mortgage rates are currently as low as 2.69% and 5 year fixed as low as 2.94%.

The real truth behind the new mortgage regulations

Canadian Finance Minister Jim Flaherty introduced new, tighter regulation this morning in attempt to slightly cool our red hot housing market.  The first change is the maximum amortization will drop from 30 years to 25 years, making it harder to qualify for a mortgage for many people.  While amortization length really doesn't affect the amount of debt someone has, it does affect the amount of interest they pay.

But is it really going to affect qualification that much?  

One thing many people tend to forget is that mortgage rates are ridiculously low right now.   If we look back four years ago when we had a 40 year amortization available to us, 5 year fixed mortgage rates were 5.99%.  At this rate, a $300,000 mortgage with a 40 year amortization would carry a monthly payment of $1,633.23.   At today's 5 year fixed rate of 3.19%, the same $300,000 mortgage with a 25 year amortization would be only $1,449.14. (There are 5 year fixed rates as low as 2.94% right now, but 3.19% is more widespread).  Even with the lowered amortization, the lower payment still makes it easier for home buyers to qualify for mortgage today than it would have been 4 years ago.

That being said, I think the drop in amortization is a good idea overall.  It well help home owners build equity much quicker over the term of our mortgage.  

Another major change made today is the maximum refinance will drop from 85% of the homes value to 80%.  This I have mixed feelings about, as it can actually cost some people a lot more money than need be.  Rather than implementing this regulation across the board, I would just restrict it based on the use of the funds.  For example, if someone is refinancing their home to raise money to take the family to  Disney World, than they are just going into further debt unnecessarily. This type of equity take out is what should be restricted.  

What should be still allowed however, is equity take outs for debt consolidation.  

If John and Mary Homeowner have $40,000 in credit card debt at 19.99% interest, why not let them consolidate that into their mortgage at a 5 year fixed rate of 3.19% (or lower)?  Even if they had to go up to 90%, as long as the regulation required them to than cancel those cards, or at least lower their limits to a manageable $1,500 to allow them to maintain a healthy credit score.  If this were the case, instead of having a $1,200 MINIMUM monthly payment on their credit cards, John and Mary Homeowner would only have to pay an additional $193.22 per month as part of their mortgage, saving them $1,006.78.  

The regulation could even take it one step further and require them to put that savings toward their mortgage which would pay it down SIGNIFICANTLY saving them literally tens of thousands of dollars in interest in the first 5 years alone.  Under the new regulation, they are stuck with this debt and added strain on their finances. Hmmmmm... maybe I should be the finance minister? 

The third change in regulation is lowering the gross debt service ratio (GDS) to 39% from the current 44%.  The GDS is your principal, interest, property tax and heating costs divided by your gross income.  It will definitely affect some home buyers, but at the same time, gives them flexibility to carry other debts as well, without feeling any added financial strain.  It is the homebuyers with little to no current monthly debt obligations that this will affect the most. 

The fourth regulation is to limit CMHC insured mortgages to $1 million.  Definitely not something that is going to affect the masses by any means. 

One thing that we know, is that we will eventually see fixed mortgage rates increase.  History shows that 5 year fixed rates were often between 5 and 6%.  If the mortgage regulations continued to let people buy with extended amortization and higher qualifying ratios, many homeowners may find themselves in tough situations at time of renewal when they find out that their mortgage payment has now increased by several hundred dollars.  These tighter regulations open the door for them to loosen them back up again one the mortgages rates are higher, which will give people more options to keep their payments affordable at time of renewal.

[Edit] These new mortgage regulations will be implemented on July 9th.

Prime lending rate remains unchanged

As you know, a variable rate mortgage or line of credit is based on the prime rate. At 9:00am this morning (Tuesday, June 5th, 2012), the Bank of Canada did what we expected them to do once again.....they maintained their overnight rate (which is what prime rate is based on). What this means to you is that the prime rate on your variable rate mortgage or line of credit will remain unchanged at 3.00%. This is great news as anyone on a variable rate mortgage or with a line of credit can continue enjoying their low rate and low payment. Here is an excerpt from the announcement made by the Bank of Canada and what they had to say about their decision: "Although economic growth in Canada was slightly slower than expected in the first quarter, underlying economic momentum appears largely consistent with expectations. However, the composition of growth is less balanced. In particular, housing activity has been stronger than expected, and households continue to add to their debt burden in an environment of modest income growth. Despite external events, business and household confidence has held up and domestic financial conditions remain very stimulative. The contribution of government spending to growth is expected to be quite modest over the projection horizon, in line with recent federal and provincial budgets. The recovery in net exports is likely to remain weak in light of modest external demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar." While it states that economic growth in Canada was slightly slower than expected, the key word is is 'growth' which means we are not in recession. This growth is expected to continue, although we still may not see an increase in prime rate until well into 2013. When it does start to increase, it will be gradual, slow, controlled increases to be in line with economic recovery. Changes in prime rate are typically only 0.25% at a time and it has been this way since 1992. This doesn't affect fixed rates, which remain at 3.19% - 3.39% for a 5 year fixed, although I have 5 year fixed rates as low as 2.97% at the moment. Given this information, I would recommend anyone currently enjoying a deeper discount (prime -0.50 or more) to stay where they are, unless they are feeling uncomfortable with all the economic volatility. Anyone with less of a discount may want to consider switching to take advantage of today's historical low rates, which may be very similar to what you are paying right now. It may also be a great time to consolidate any higher interest debt into your mortgage to take advantage of such low rates and lowering your overall monthly payment significantly.

Don't make the variable rate mortgage mistake

In the past, mortgage borrowers have typically come out ahead by taking a variable rate mortgage.  However that was then and this is now.  Today’s market is an entirely different situation, making past performance irrelevant.  Right now, the ‘market’ 5 year fixed is between 3.29% and 3.39.    The lowest available 5 year variable is prime -0.25% , which is only 0.54% cheaper.  While this may sound like quite a savings, the difference was always around 1.50% - 2.00% when borrowers typically came out ahead with a variable rate mortgage.   A much narrower gap means elevated risk.  The Bank of Canada makes an interest rate announcement 7 times per year.  They only have to increase the prime rate twice (at 1/4 % each time) for the variable rate to equal the fixed in this example. That doesn’t leave much room for it to play.  We also know that it isn’t going to get any lower than what it is, so the only direction it can move is up.

For those die-hard variable rate seekers, here is what I am going to suggest for you.   Take out a 3 year fixed at 2.99% instead.  This is only 0.24% higher than the variable rate of 2.75%.  The Bank of Canada only has to increase the prime rate a single time for the two rates to be even, and that could come at any time.   At the end of the three year term, chances are that there will be deeper discounts on variable rate mortgages, and a larger gap between fixed and variable rates.  At this time, a variable rate mortgage may once again be the route to go.  In the meantime, this is not only the safest option, but most likely the one that will save you the most money over time as well.

The lowest rate doesn’t always mean the most savings for you.  Make sure you choose a mortgage professional who is going to take the time to put a plan together for you to ensure you are saving the most amount of money over the course of your mortgage, and not someone who will forget about your after your mortgage closes. 

How A Past Bankruptcy Affects Your Mortgage Approval

Just because you have a past bankruptcy, it doesn’t mean that you won’t qualify for a mortgage.   In order to qualify for the lowest market mortgage rates, and a minimal down payment of five per cent, your bankruptcy will have to have been discharged for a minimum period of two years.  CMHC (Canadian Mortgage and Housing Corporation), the leading provider of mortgage default insurance in Canada, also requires two re-established credit lines.  These can come in the form of a credit card, a car loan, a bank loan, or a line of credit from a bank.  These two credit lines need to have been established for a minimum period of one year, which doesn’t have to come after the two years of re-established credit. 

Not all credit lines are created equally, so it would be ideal to have at least one of them as a revolving credit account, such as a credit card or a line of credit.   These credit lines must have a minimum credit limit of $1,500 in order for them to qualify as sufficient enough for credit re-establishment for a mortgage in Toronto.   If you are able to set these limits over $2,000, then it will help your case even more so. 

So what happens if your bankruptcy has been discharged for less than two years?   It doesn’t mean that you can’t get approved for a mortgage, it just means that you will need to have a larger down payment and you will pay a higher rate.   How much more?  Typically a minimum down payment of 15-20% would be required in this particular case.   The mortgage term should be kept shorter as well for a couple of reasons.  The first would be to keep the rate as low as possible.   Shorter term mortgages carry lower interest rates.   Typically, these mortgages will be placed with an equity type lender, which is a lender that lends based on the ‘equity’ in the home, more so then on your credit.   You can expect to pay about 1% higher, give or take, on a one to two year term with an equity lender over the discounted five year fixed rate with an ‘A’ type lender, such as a bank.

The second reason for keeping the mortgage term as short as possible is that you will most likely want to refinance with an ‘A’ type lender at the time of your mortgage renewal in order to lock into a lower interest rate for a longer period of time, in order to keep your interest costs as low as possible.  It is best to discuss all these points with your mortgage broker to ensure that he or she understands your situation and puts a plan together to maximize your savings over time.

Bankruptcies sometimes happen to good people, and it certainly isn’t the end of the world.   It is good to know that there are options open to when seeking a mortgage after a bankruptcy.   

Is a 10 year mortgage term a good idea?

With 10 year mortgage terms now available for as low as 3.89%, they are now starting to catch the attention of many mortgage seekers.  But is taking out a mortgage for 10 years a good idea?   The answer is yes and no.  I really depends on the person borrowing the money.  For some, it will make sense, but for most it won't. 

One thing is for certain....mortgage rates won't always be this low.  We know they are going to go up as the economy improves.  In a healthy economy, 5 year fixed mortgage rates commonly fall between 5-6%.  Will someone save more money over a 10 year period if they take out a 10 year mortgage?  While anything can happen, it is a reasonably safe expectation that 5 year fixed mortgage rates will be higher in 5 years than they are today.  IF you stick with the 10 year mortgage for the entire 10 years, than the answer is yes, you will most likely save more money over that period in a typical situation.  But that is a very big 'IF', as 10 years is a long time, and we really don't know what our situation is going to be like down the road. 

Many people refinance their mortgage about 3 - 4 years into it, breaking their 5 year term early.  Why do they do this?  It could be to get a lower mortgage rate (unlikely in the future, as we are already rock bottom on rates).  It could be to withdraw money from the equity in their home for whatever reason, which is probably the most common reason for refinancing.  Maybe you choose to move and refinance at that time (although, MOST mortgages are portable and you can move your mortgage to your new home). 

My point is that the future is not set, and we cannot predict it.  Maybe 4 years from now you decide to start a new business and need to borrow money against your home? Or you decide to go back to school?  Or you need money for medical purposes not covered by insurance?   Maybe your employment gets transfered to another province or country and your mortgage can't be ported?  My point is, there are numerous curves life can throw at you that are unexpected.   After all, if homeowners thought they would need to refinance in 3-4 years, then they wouldn't have taken a 5 year mortgage to begin with.  

Life has unexpected changes.  I am not 'against' 10 year mortgages, but just make sure your mortgage broker or mortgage banker takes the time to explain the pitfalls, and doesn't just drop you into the mortgage term that makes them the most money (10 years).