The Gord Piper & Associates Real Estate Blog

Some thoughts from Bob Alexander with Verico Maximum Mortgage Inc.

The number 10 has recently become quite significant in my world.

Next month, I will have been a mortgage broker for 10 years. It has gone by quickly and I would like to say a big thank you to all who have supported and trusted me to obtain financing for the largest investment of their lives. It is indeed an honour and a pleasure.

The other historical event happening involves the current 10 year fixed mortgage.

I have always stressed having a strategy when deciding on what mortgage product is best for my clients. This strategy involves paying the least amount of interest over the life of owning a home and not necessarily the lowest rate. We are now at a perfect time in history to show the benefits of this strategy. Currently the 5 year fixed mortgage has a rate of 3.09% which is the lowest 5 year fixed rate I have seen. This is not what I am recommending to my clients. I am, however, recommending a 10 year fixed rate mortgage with a current rate of 3.89%. (The lowest 10 year rate in over 60 years)

If fixed rate mortgages are currently the lowest they have been in a very long time they can really only go up. If you review the history of fixed and variable rate mortgages in Canada for the last 25 years, each low interest period is followed by a rather quick increase in rates. This increase will surely happen again but by how much? No one knows for sure but historically (per the Bank of Canada) the average posted 5 year fixed rates have averaged 8% over the last 25 years. Discounted rates (the rates that I can get) are approximately 2% below this, so 6%.

The key to considering the 10 year is the understanding that you will pay more interest in the first 5 years (3.89% versus 3.09%) and gamble that fixed interest rates in 5 years’ time will be high enough to more than offset this. To see how much higher future interest rates will need to be, I have done a calculation based on a mortgage of $550,000.00 with a 25 year amortization. The math showed that as long as 5 year fixed interest rates were higher than 4.75% in 5 years’ time, the 10 year was a better option and cost the client less in interest costs. So, if history is a help at all and rates are 6% in 5 years’ time taking the 10 is largely a no brainer.

Clients should also be aware that the 10 year mortgage is fully portable (you can take it with you when you buy another home) and if you decide to pay it out early, the only penalty will be three months interest. This is because the chances of IRD (interest rate differential) applying are slim to none. IRD only applies where current rates are lower than the mortgage rate you have. Today’s rates are the lowest I have seen so the chance of even lower rates in 5 years’ time is almost unthinkable.

Consider the 10 year – you will be glad you did!

Please Contact Bob Alexander For Further Information About This Commentary or To Discuss Your Mortgage Action Plan

Your Mortgage Doctor
Bob Alexander, B.Comm, CMA, AMP

Phone: 403-875-5270
Email: bob@mortgagedoctors.ca
www.mortgagedoctors.ca

As part of the Government’s continuous efforts to strengthen Canada’s housing finance system, the Honourable Jim Flaherty, Minister of Finance, today announced further adjustments to the rules for government-backed insured mortgages.

The Government is announcing four measures for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent:
Reduce the maximum amortization period to 25 years from 30 years. This will reduce the total interest payments Canadian families make on their mortgages, helping them build up equity in their homes more quickly and pay off their mortgages sooner. The maximum amortization period was set at 35 years in 2008 and further reduced to 30 years in 2011.
Lower the maximum amount Canadians can borrow when refinancing to 80 per cent from 85 per cent of the value of their homes. This will promote saving through home ownership and encourage homeowners to prudently manage borrowings against their homes.

Fix the maximum gross debt service ratio at 39 per cent and the maximum total debt service ratio at 44 per cent. This will better protect Canadian households that may be vulnerable to economic shocks or an increase in interest rates.

Limit the availability of government-backed insured mortgages to homes with a purchase price of less than $1 million.

Minister Flaherty said the new rules will take effect on July 9, 2012.
So what does this mean to you?
Based on previous history, pre-approvals currently with lenders that do not go live prior to July 9th will NOT be grandfathered and will be re-issued with 25 year amortization.
Live deals approved by CMHC prior to July 9th with dates of possession after July 9th will still have the option of 30 year amortization if needed.
So, if you are still debating about buying a home, you should call me to see how this might affect your buying power!

Sincerely,
Bob Alexander ( Accredited Mortgage Professional )

Verico Maximum Mortgage Inc

phone: 403-241-3949

web: http://www.mortgagedoctors.ca

If you would like further information on how these changes might affect the Real Estate market please contact me.

Gord