The secret to the sudden increase in variable rate mortgages

Why could I get Prime minus .90 last week and today it is Prime minus .25?

September 22, 2011 (Vancouver)

A great question, says the Mortgage Brokers Association of BC (MBABC), especially when fixed interest mortgage rates are remaining the same. The quick answer? As with many things, it all boils down to money.

Over the last couple of months, banks and other lenders have been offering historically low variable interest rates to qualified homebuyers in an effort to attract new clients and mortgage business. In the short term, lenders have been prepared to accept these low profit margins with the knowledge that, as the prime rate inevitably rises, so too will their profit on variable mortgages – a similar ‘loss leader’ tactic used by retailers to get consumers into their door.

“However”, says Geoff Parkin, MBABC’s president, “the recent announcement by Bank of Canada governor, Mark Carney has changed the mortgage lending landscape.” Carney stated that, because of poor performing global markets and continuing economic uncertainty, the benchmark interest rate would remain unchanged. The long-term outlook indicates continuing low fixed interest rates with no significant increases to the Prime rate. “In a nutshell”, says Parkin, “the bank’s theory of anticipating rising profits on variable rates was proven wrong. They’ve had to quickly respond to this situation by reducing the variable rate discount in order to gain back profit.”

What does this mean for consumers who have variable rate mortgages? Much of the same, says Parkin. “We continue to see low fixed rates and the variable rate is under 3.0%. There may still be value in going variable over fixed, but because consumers all have different financial situations and mortgage needs, we recommend they obtain expert financial advice from their MBABC mortgage broker.”

courtesy of MBABC

LawlessBrown.com

HIGHLIGHTS OF THE WEEK

United States

• A coordinated move among leading central banks to provide short-term U.S. dollar funding in Europe helped instill confidence, and contributed to a solid rally in equity markets this week.

• Yet worries about the economy have not changed, so markets will be carefully tuned into the Fed’s policy meeting next week.

• This should prove a most interesting meeting indeed, as the ongoing divergence of opinions at the Fed come to the fore. Proponents of more stimulus will point to a weak economy and sluggish job growth, meanwhile the hawks will point to the ongoing rise in inflation.

Canada

• Stricter mortgage insurance rules have taken some steam out of the Canadian housing market. Home sales fell 0.5% in August, a fifth contraction in the past seven months, while home price pressures eased. However, the impact has not been overly dramatic and the level of housing activity remains healthy.

• Shaky consumer confidence will likely weigh on the housing market in the near term. However, a continued low interest rate environment will likely help support a modest pick up in housing demand in early 2012.

• The key implication of a lower-for-longer interest rate environment, and the resulting elevated level of housing demand is that the Canadian household debt-to-income ratio is likely to rise further.

Courtesy of TD

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BoC holds key rate at 1 percent

* Cites Europe, U.S. woes as backdrop for policy shift

* Sees Canadian growth resuming in second half of year

* Says inflation pressures dampened

* Cdn dollar gains, markets pare rate cut expectations (Adds details)

By Louise Egan and Randall Palmer

OTTAWA, Sept 7 (Reuters) - In a dramatic policy shift, the Bank of Canada said on Wednesday it saw less need to raise interest rates, becoming the latest major central bank to take a more cautious stance about the worsening global economy.

The bank held its overnight rate unchanged at 1 percent, where it has been for the past year, and took its previous talk of a rate hike off the table.

"In light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished," the central bank said in a statement.

In its July interest rate announcement, the bank said stimulus "will be withdrawn" provided the economy kept growing, leading markets to expect a rate hike later this year.

That forecast looks outdated now, given the European debt crisis, slowing U.S. growth and volatile markets.

Investors were not surprised by the more dovish tone, although many had expected a sharper policy reversal. Most economists still expect the next move in rates to be up rather than down, but it could be a year or more before that happens, and the bank's cautious language left the door open to an eventual move in either direction.

Goldman Sachs this week became the first major financial institution to forecast a Canadian rate cut later this year.

"There is really not much hint that the bank is considering cutting rates, but at the same time, they've pretty much put rate hikes firmly on the shelf," said Doug Porter, deputy chief economist at BMO Capital Markets.

Courtesy of Reuters

LawlessBrown.com

Misconceptions about mortgage brokers

A Few Misconceptions

Misconceptions occur in every business and the mortgage business is no different.

A recent example is this post by Boomer & Echo (B&E), a prominent blog that we typically enjoy. In it, B&E opines on why not to use a mortgage broker.

In the piece, the author gets some stuff wrong. As often happens, we came across it in our weekly blog scan and feel obliged to offer some counterpoints.

B&E makes four claims. They are:

1. Brokers push 5-year fixed rates.
   
   Counterpoint: Brokers sell a higher ratio of variable-rate mortgages than bank salespeople, and have for quite some time. That’s per executives we’ve questioned at banks with both broker and retail channels (e.g. CIBC and Scotiabank). In general, however, all mortgage professionals (bank or broker) sell a lot of 5-year fixed product. It’s the most popular term (has been for decades), it’s the easiest to qualify for, and it has the most competitive discounting (albeit, not presently).
   
2. Loyalty to your bank pays.
   
   Counterpoint: The Bank of Canada concluded exactly the opposite (more). To summarize, it’s research found that existing customers pay more than new customers. What’s more, no one lender continually has the best mortgage options. By comparison shopping, good brokers can save homeowners interest and identify the lender with the right flexibility/value tradeoff. The best brokers provide expert term analysis, proper deal structuring and helpful strategies to reduce a borrower’s amortization.
   
3. Bankers have better reputations
   
   Facts: The RBC specialist incident last April proved that reputation should be judged individually, not by virtue of where a mortgage advisor works. Generally, brokers and bank specialists are both paid by commission and the commission is similar whether they sell a 5-year fixed or variable. Neither is holier that the other in that respect, except that bank reps are hired to push only one brand.
   
4. Your better off doing it yourself
   
   Counterpoint: We have visions that people will someday get a mortgage online like they buy a stock at iTrade. But we’re not there yet. Good brokers provide counsel that saves time and money. Do-it-yourselfers sometimes discount the value of advice, mesmerized instead by brokers/bankers who can save them a few basis points in rate. For most, that’s a mistake because:
• Few individuals grasp the mortgage math needed to perform proper term selection. Term selection impacts borrowing cost far more than rate selection. A “good rate” alone does not equal a “good deal.”
• There are lots of creative techniques that skilled advisors can use to help people whittle down principal quicker.
• Lenders rarely disclose all of their mortgage restrictions until you sign their contracts. Brokers know the benefits and pitfalls of multiple lenders, and advise borrowers in advance.

It is possible to pick your own investments, do your own taxes or write your own will, but people still hire financial planners, accountants, and lawyers. There’s only so much time in a day and we can’t specialize in everything.

In all of those industries there are great and not-so-great practitioners. Brokers are no different. Interview several before picking one. Ask questions like:

• Which lenders they use most often and why
• How long they’ve been in business full-time
• Why their term recommendation is mathematically sound for your specific needs.

Sense if you can trust them. If they seem to care about you, and are competent, and make you feel comfortable, you’ll be glad to have them on your side

Courtesy of Canadian Mortgage Trends

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HIGHLIGHTS OF THE WEEK

United States

• It was a particularly turbulent week for financial markets. On Monday, the S&P 500 was down 6.6%, but is poised to end to week only 1.5% lower.

• In an attempt to shore up confidence in the economy, the Fed replaced its promise to keep rates low for an extended period with a conditional commitment to leave interest rates unchanged through mid-2013.

• Retail sales and initial jobless claims were both stronger than expected and point to a modest acceleration in Q3 growth.

Canada

• Global financial markets were put through the wringer this week – there were some up rallies, but mostly lows. The S&P/TSX composite index remains down so far in August.

• The apparent crisis of confidence that permeated markets came from all angles: (1) the ramifications of Standard and Poor’s downgrade of the U.S. government; (2) lingering concerns about the debt crisis in Europe and whether big players like France will be swept up in the fiscal troubles plaguing the continent; and (3) disappointing international trade numbers which have raised the risk of a Canadian economic contraction in Q2.

• In this environment, the Bank of Canada (BoC) is put in a difficult position. With the Fed on hold until mid-2013, the BoC is likely unable to raise rates by more than one percentage point over the next two years.

Courtesy of TD

Lawlessbrown.com

Five costly reno mistakes to avoid

Shelley White Globe and Mail Update

I recently wrote about my kitchen renovation for Home Cents, detailing how I managed to keep my budget under $25,000 while still ending up with a functional and beautiful room.

There were a lot of comments (thanks for those, by the way) - some people thought I’d paid too much, some thought I’d paid too little. But there did seem to be a consensus that the post demanded some photographic evidence. So, due to popular demand, here are the before and after photos of my kitchen renovation. And please note: I took them myself, so excuse my not-quite-awesome camera skills.

Although I’m enormously pleased with how the renovation turned out, I certainly wouldn’t say the project was free of mistakes. In fact, there are some small things I might do differently if I had to do it all again (you may spot a couple of those in the photos, in fact).

So how can you avoid renovation missteps before they happen? HGTV has put together a useful collection of the 25 Biggest Renovating Mistakes. It’s quite a comprehensive list, but here’s a sampling of some of the factors I could relate to:

Gutting Everything
It can be tempting to want to just tear everything out - including the walls - and start from scratch. But that is where the additional costs can come creeping in. My contractor wisely elected to take a look inside the wall we were going to take down before totally ripping it out. Once we found out that tearing the wall would add challenges and money to the job, we changed the plan and kept the wall.

“I see this time and time again where people just start, and they think they’re going to pull a piece of wallpaper off, and by the time the process is over, they’ve completely gotten themselves into a deep, dark hole that’s very difficult to get out of,” says Mr. Eric Stromer, host of home reno show Over Your Head.

Inaccurate Measurements
I measured once, twice, three times and then again before ordering cabinets. My contractor was also meticulous with his measurements, but I could see how things could go quickly off the rails is someone was sloppy or rushed.

When dealing with counter tops, always choose a company that will come and do the measuring for you, preferably using a cardboard template. That way, the onus is on them to ensure it fits correctly. That also allows you can take a look at the template and make sure you’re getting the shape you want. When you’re talking about a slab of stone worth thousands of dollars, you don’t want to take any chances.

Going Too Trendy
“People often make the mistake of wanting to be too hip and trendy in their new home by picking the latest, hottest, coolest things,” says Ms. Carmen De La Paz of HGTV show Hammer Heads. “What they don’t take into consideration is that trendy means that it’s short term.”

Five years ago I had my heart set on aqua-colored glass tile for my kitchen back splash. Sure, it would have looked good for a couple of years, but take it from someone who really loved her royal blue and bright yellow kitchen when she painted it 11 years ago – your taste will change. Unless you’ve got the extra cash to redo your kitchen, the best thing to do is keep it classic and simple. I think our choices will stand the test of time, but you can be the judge of that.

Ignoring Lighting
Hammer Heads carpenter Ms. De La Paz put it this way: “Another mistake that homeowners will often make is not taking into consideration the lighting in their home. The lighting in your home can completely change the colors, the feeling, the ambiance.”

In other words, ignore lighting at your peril. When I first planned our new kitchen, I completely forgot about lighting. Our old kitchen had one overhead lamp that cast a lot of shadows. Thanks to our contractor’s suggestions, we’ve got a number of pot lights on a dimmer plus under-cabinet lighting, and the difference is vast.

Failure to Anticipate Chaos

Now that it’s over, I can look back on our renovation experience and think, “It was a piece of cake.” But around week three, our kitchen was an utter mess. For readers that wondered why my family and I spent $2,200 to rent a condo instead of sticking it out at home – that place was a dust pit. Moving out was essential for our sanity and our health - drywall dust is not good for anyone.

Your reno might go smooth as molasses, but just in case, it’s a good idea to assume it will be dustier, messier and more annoyingly inconvenient than you ever could have imagined.

lawlessbrown.com