Friday, November 30, 2012
Variable Mortgage - what does it mean? Most people don't know and wont ask
What is a variable interest rate mortgage?
A variable interest rate mortgage is a mortgage loan with an interest rate that can change during the term. The interest rate varies with changes in market interest rates (typically the bank's prime lending rate). The mortgage payments can be fixed, or they could change if the interest rate changes — it depends on the lender and type of product.
What are the benefits?
If market interest rates are stable or go down during your term, you could pay less in interest than with a fixed interest rate mortgage. By the end of your term, it is possible that you could have paid more toward your principal than expected and less towards interest, which would reduce the balance owing and shorten the time needed to pay off your mortgage.
What are the risks?
If market interest rates go up during your term, your interest rate would increase and you would pay more in interest to the lender. As a result, by the end of the term, you might have paid more in interest than if you had chosen a fixed interest rate mortgage. It also means that by the end of your term, you might pay less of the principal than expected, which would lengthen the time needed to pay off the mortgage.
Depending on the lender and the terms of the variable rate mortgage, another risk is that your payment could increase if the interest rates increase. Consider how much of an increase in mortgage payments you could handle. If you don't think you can handle the risk of your mortgage payment increasing, or do not have enough cash flow, you may be better off with a fixed interest rate mortgage. Below, you can see an example of how interest rate changes can affect a mortgage.
What makes variable interest rate mortgages attractive?
The interest rates on variable rate mortgages are often lower than the fixed interest rate offered at the time you sign the contract. However, whether you are better off with a variable interest rate mortgage compared to a fixed interest rate mortgage depends on the movement of market interest rates during the life of your mortgage, called the "term". This movement is difficult to predict. For example, between 2000 and 2009, the Bank of Canada Bank Rate varied from 0.5% to 6.00%.
What happens to mortgage payments when interest rates change?
When interest rates change, depending on the lender and the terms of your mortgage, the following scenarios are possible:
Example:John takes a mortgage with variable interest rate and the following terms and conditions:
The lender explains to John that his payments will go up and down with the interest rates. At first, John's interest rate is stable at 3.00 percent %. Starting in the second year, market interest rates begin to climb and so do his payments.
In this example, the interest rate goes up 2% over the five-year term. Keep in mind that interest rates could go up or down more or less than 2% over that period, and those changes would affect calculations.
John's alternative at the time was a five-year fixed-rate mortgage. In the example below, the bank offered him a fixed rate of 4.00 percent for five years.
After five years the amount of interest and the amount of principal John paid with a fixed or variable rate mortgage would be almost the same. The main difference is that with a variable rate mortgage, John's monthly payments would change from year to year, but with a fixed interest rate John would know that his payments would stay the same for the full five-year term.
Protecting yourself against a rise in interest rates
Some lenders offer interest rate caps or convertibility features on their mortgages. These features can offer some protection if interest rates go up. You can only get these features when you sign a new mortgage agreement that includes them.
A cap is the maximum interest rate that can be charged on a mortgage, regardless of the rise in market interest rates. For these types of mortgages, usually the payment amount is based on the cap rate and will stay the same for the term.
If you have a mortgage with a convertibility feature, you can change it to a fixed interest rate mortgage during the term. Although the lender will usually not charge a penalty for doing this, conditions may apply—check with the lender.
Questions to ask a mortgage lender
Monday, July 23, 2012
Additional mortgage changes
Still more new mortgage rules
The government has announced that as of July 9, 2012, new rules will apply to government-backs insured mortgages where the borrower has less than a 20% downpayment.
The government will:
• reduce the maximun amortization (pay back) period on a mortgage to 25 years from 30 years;
• lower the maximun amount borrowers can refinance to 80% loan-to-value (LTV) for 85%;
• limit the Gross Debt Service (GDS) ratio to a maximum of 39% or income. The GDS ratio represents the amount of household income spent on the mortgage, property taxes and heating;
• limit the Total Debt Service (TDS) ratio to a maximum of 44% of income. The TDS ratios represents the amount of household income spent on all debts including the mortgage; and
• limit government-insured mortgages to homes prices at less that $1 million. Buyers of homes prices at $1 million or more must have mumimum 20% downpayment.
The new rules apply to mortgages on residential property with four units or less. They DO NOT apply to:
Federal Finance Minister Flaherty explained that the reasons for the changes are to "keep the housing market strong, and help ensure households do not become overextended."
What will the new rules cost buyers refinancing a home values at $625,000?
• When refinancing at 85%, the home owner can access up to $531,250.
• When refinacing at 80%, the home owner can access up to $500,000.
What about the new rule limiting mortgage insurance on homes prices a $1 million or more?
Four years of tightening borrowing rules
This is the fourth time in four years that the government has tightened borrowing rules.
• In 2008, the government reduced the maximum amortization period to 35 years from 40, required home buyers to have a minimum downpayment of 5% (compate to the previous 0% down), and introduced new loan documentation standards.
• In 2010, the government required all borrowers to meet standards for a five-year fixed-rate mortgage, reduced the maximum amount borrowers could refinance to 90% from 95%, and for non-owner-occupied investment properties, requred a minimum 20% down payment.
• In January 2011, the government reduced the maximum amortization period for government-backed insured mortgages to 30 years from 35 years and reduced the amount borrowers could refinance to 85% from 90%.
What will the new rules cost home buyers?
Note: calculations assume a 10% downpayment. $625,100 is the benchmark price of a home in the REBGV area as of June 1, 2011.
Article from RealtorLink, July 13, 2012, Volume 13, Number 14
Tuesday, May 1, 2012
50 Ways to Green Your Home and Save $$$ in Greater Vancouver
1. Green neigbourhoods
2. Transit-orientated density (TOD)
3. Lower Cost Luxury
4. Score your location
5. Get an energy audit
6. Install a high-efficiency heating system
8. Insulate your pipes
9. Insulate your hot water heater
10. Install a programmable termostat
11. Clean your furnace filter
12. Get the most from your fireplace
13. Use curtains
14. Install ceiling fans
15. Use an electric fan
16. Fix leaks. Fix leaking taps
17. Instal a filter
18. Change your light bulbs
19. Sensor lights
20. Keep it dark
21. Holiday lights
22. Replace your fridge
23. Replace your dishwasher
24. Replace your freezer
25. Low flow shower
26. High efficiency or dual flush (you choose the amount of water used) toilets
27. Use smart strips
28. Buy energy smart electronics
29. Recycle your old electronics
30. Conserve Water
31. Drip irrigation
32. Elbow grease
33. Less lawn
34. Grow your own
35. Presever your produce
36. Bee friendly
37. Go chemical-free
38. Plant fruit trees
GREEN AND CLEAN
40. Clean freen
41. Green Laundry detergent
42. Upgrade your washing machine
43. Install a clothesline
44. Get a rack
46. Buy local
47. Don't use paper or plastic
48. Borrow green
49. Green Tool Kit
50. Loan programs
February 6, 2012, Real Estate Board of Greater Vancouver Article
Friday, January 27, 2012
Is record household debt a problem for home owners?
Continuous bad news about rising Canadian debt has been making headlines for the past few years – and now we’re hearing over and over again that mortgage debt has reached epic proportions.
Is all of this negativity accurate? We decided to find out by asking some credible sources.
The truth about household debt.
It is true: the overall household debt of Canadians is at a record of $1.5 trillion, growing from $147 billion in 1982. Two-thirds of the increase from 1982 - 2010 occurred from 1999 - 2010.
Why have we seen high mortgage debt?
Mortgage holders are also typically younger, who have bought their home within five years, and who carry higher mortgage debt than those who have been in their homes longer.
How does mortgage debt compare with other debt?
Annual Growth Rates of Canadians’ Debt
Excerpt from January 2012 Edition of Realtor Link, Volume 13, Number 01
Tuesday, October 25, 2011
Bank of Canada Interest Rate Announcement
As was universally anticipated, the Bank of Canada opted to hold its target overnight rate at 1 per cent this morning. Ongoing uncertainty in the Euro-zone continues to weigh heavily on the Bank's outlook. In its statement accompanying the interest rate decision, it was noted that the bank is now projecting a contained Euro-crisis, but also a brief recession in the Euro-area due to ongoing deleveraging and fiscal austerity. The Bank also expects continued weakness, but no recession, in the United States through the first half of 2012 before a resumption of stronger growth. Given various challenges in the global economy, the Bank of Canada trimmed its outlook for Canadian economic growth to 2.1 per cent in 2011, 1.9 per cent in 2012 and 2.9 per cent in 2013 which is in line with our own forecast. On inflation, the Bank now expects slack in the economy to persist longer than originally forecast, leading to a closing of the output gap at the end of 2013. This implies softer than expected inflation in coming quarters, with consumer price growth moderating before returning to the Bank's 2 per cent target by the end of 2013.
Overall, this morning's statement shows a very cautious Bank of Canada that is unlikely to make any significant movements on interest rates over the next two to three quarters. Further monetary tightening will be highly contingent on a brighter growth outlook in the United States and a credible solution to the Euro sovereign debt crisis. Therefore we expect the Bank of Canada to remain on the sidelines through the end of 2011 and the first half of 2012.
BCREA, Chief Economist
Friday, January 28, 2011
Federal government announces changes to mortgage financing requirements
The federal government recently announced three changes to the rules for government-backed insured mortgages.
First, the government will reduce the maximum mortgage amortization period from 35 to 30 years. Second, the maximum amount of the value of a home that can be re-financed will drop from 90 per cent to 85 per cent. And finally, government insurance will no longer be available to financial institutions wishing to insure home equity lines of credit.
“These are prudent measures that promote responsible lending practices and further strengthen our internationally recognized mortgage finance system,” Jake Moldowan, Board president said.
The adjustments to the mortgage insurance guarantee framework will come into force on March 18, 2011. The withdrawal of government insurance backing on lines of credit secured by homes will come into force on April 18, 2011.
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