Here is a great summary of what is causing mortgage rates to be nosing up in the near future. They really should have gone up by now but the anticipated “Spring housing market rush” competition with the banks is holding them down.
Mark Herman, top Calgary, Alberta mortgage broker for home purchases and mortgage renewals
The latest round of economic data has real-estate watchers returning their focus to interest rates.
- Activity in the bond market and the latest employment numbers are fueling predictions there will be a bump in fixed-rate borrowing costs in the near future.
- Employment improvements are generally seen as a harbinger of inflation. That, along with other domestic and international considerations, is pushing up government bond yields, which in turn drive fixed mortgage rates.
- There is also the notion that the big, trend-setting lenders will be looking to move rates up to bolster profits.
- As well, Bank of Canada Governor Stephen Poloz has hinted he might be willing to let inflation run in order to avoid hiking the policy rate. That would also put upward pressure on government bond yields.
The graph we watch to show us this is here:
- As for variable-rate mortgages, the betting is there will not be a Bank of Canada increase until the middle of 2016, holding variable rates in place for the foreseeable future.
This is a great article with the perfect math example.
Remember, there is also the catch of the collateral charge by the big banks that makes it cost about $2500 to leave your bank when your term is up.
Add these 2 things together and the better overall deals are from mortgage brokers.
Mark Herman, Top Calgary, Alberta Mortgage Broker for renewals and home purchases.
by: Angela Calla, AMP.
When choosing between mortgages, knowing how different lenders calculate penalties can be essential. The market and your needs easily shift during the term of your mortgage and the last thing you want is a painful penalty in order to get out early.
Penalty formulas differ radically, depending on the lender. A major bank, for example, will have a considerably higher penalty than a broker-only wholesale lender. Advice on how to avoid painful penalties is a key benefit of working with a mortgage broker.
You need to ask one important question right off the bat: What rates does the lender use to calculate its penalty? The actual discounted rates that people pay, or some artificially high posted rate? Hopefully the former.
Below is an example of how two lenders calculate the same “interest rate differential” penalty in different ways. Ask yourself, which one would save you the most money?
|Penalty #1 – Broker Lender|
|Contract Rate (The rate you actually pay)||4.19%|
|Current Rate (Today’s new rate, closest to your remaining term)||3.09%|
|Differential (Contract Rate – Current Rate)||1.10%|
|Penalty Formula: Remaining Balance x Differential ÷ 12 x Remaining Months||$3,358.67|
|TOTAL APPROXIMATE PENALTY||$3,358.67|
|Penalty #2 – Major Bank|
|Contract Rate (The rate you actually pay)||4.19%|
|Current Posted Rate (Today’s new posted rate, closest to remaining term)||3.39%|
|Original Posted Rate (At the time you got your mortgage)||5.99%|
|Original Discount (That you received off the Original Posted Rate)||1.80%|
|Differential (Contract Rate – (Current Posted Rate – Original Discount))||2.60%|
|Penalty Formula: Remaining Balance x Differential ÷ 12 x Remaining Months||$7,938.67|
|TOTAL APPROXIMATE PENALTY||$7,938.67|
As you can see, there can be quite a difference in prepayment charges when you leave a lender early – over $4,500 in this example. And this is a modest hypothetical calculation. Bank discounts today are on the order of 2.00 percentage points off posted, instead of the 1.80 I’ve used here.
Some lenders will even charge an abnormally high penalty (like 3% of principal) despite you being close to the end of your mortgage term. They do this as a retention tool to keep you from leaving. Others will charge a “reinvestment fee” on top of the penalty, tacking on another $100 to $500 in expenses.
In short, penalties can be thousands—or even tens of thousands—higher depending on the lender’s specific calculation formula, mortgage amount, rates and time remaining until maturity. Extreme penalties are not only more expensive, they can even keep borrowers from moving because the amount eats into the money they’ve got for a down payment and closing costs.
Worse yet, some lenders have a “sale only” clause in their mortgages, meaning you can’t even leave them unless you sell the home. If you think, “Oh, that’s no big deal. I don’t plan on selling,” think again. Throughout every path in life, there are moving parts and uncertainties. When you get married, do you plan on divorcing? Likely not. Did you predict the company you were with for 20 years could downsize, or your pension would be reduced or cut? Can you guarantee your health will never throw you a curve ball?
We all want to believe that none of the above scenarios will come to pass, but they can and do. And when they do, what a relief it is to have options.
And last but not least, there is the refinance consideration. If interest rates fall 0.5-0.8%, (which may seem unlikely but is certainly a possibility) there may be opportunities to lower your borrowing costs. But you can’t do that unless you’ve got a low-cost way to renegotiate your existing contract. And as we’ve seen above, that cost is not based on just your interest rate alone.
Another example: When the rates are the same at the bank and the broker = broker deal is significantly better.
Here is what happens when the Current Posted Rate (Major Banks) = the Current Rate (Broker Lender) at 3.09%
Differential (Contract Rate – (Current Posted Rate – Original Discount)) = 2.90%
==> (4.19% – (3.09% – 1.80%)) = 2.90%
==> (4.19% – 1.29%) = 2.90%
Penalty Formula: Remaining Balance x Differential ÷ 12 x Remaining Months
==> $229,000 x 2.90% / 12 * 16
Moral of the story – talk to a broker and understand your penalty calculations.
You can talk to your major bank as well, although I don’t think they can spin the penalty calculation conversation into a favourable one for themselves.
We watch all kinds of indicators for when mortgage rates may change.
This is the main one, the CMB – Canadian Mortgage Bond. As you can see it is on the way up and mortgage rates and the graph are directly related.
Rate Watch Program
When rates go up the banks call us and give us at least 2 hours – and sometimes 2 days – notice. This lets us send in all the files that we are working on for 120 day – or 4 month – rate holds. All the files that have enough data in them – at least an application and the disclosures and a payslip – get rate holds at today’s rates.
The banks do not do this for you! Another reason to use a broker that works the system to your advantage at no cost to you!
Mark Herman, top Calgary Alberta mortgage broker for new home purchases and mortgage renewals.
The graph below shows the expected Alberta GDP growth rate for the end of 2015 and 2016. The numbers are still positive – just not as high as they were before.
If the Calgary to Edmonton corridor was a country it would have the 2nd highest growth rate in the world after China.
Now these numbers are back to earth, things will continue as normal as oil slowly works it’s way back to about $70 a barrel.
Mark Herman, Top Calgary, Alberta mortgage broker
Click on the chart to see it larger.