Posted by genieSABRE on Oct 11, 2012
What if your mortgage rate went up 2 points?

What if your mortgage rate went up 2 points?

Bank of Canada desperate to stave off recession, cut its bank rate to its lowest level

Source: Hannif Highclass c/o Genie Sabre Realty Inc.
Publish:MY BLOG:  Toronto Real Estate:

“Many mortgage borrowers have seen their monthly repayments slashed as a result of low mortgage rates.. Unfortunately, genieSABRE as seen that many of its clients are opting out for a variable rate mortgage, simply because the rates are too good then the fixed 5 year mortgage. There are the 26% mortgage borrowers currently enjoying the banker’s standard variable rate of just 2.4%.- 2.99%
Over last few years, banks, economists, the mortgage industry and even Finance Minister Jim Flaherty have all been singing the same tune: That rates have nowhere to go but up.

“Rates will probably go up before the end of the year, but not by much,” says Hannif Highclass mortgage broker . “The Bank of Canada will have to look at inflation and if it rears its head they will have to control it,” he points out.

 

Mortgage Rates Going Up?

Inflation, as measured by the Consumer Prices Index (CPI), (Statistics Canada) has jumped to 1.9% and economic activity appears to be picking up with the Canada now emerging, out from a minor recession. BUT according to Moody’s Analytics Report — Canadian Consumer Debt Poses Recession Risk!

Personally, we wouldn’t be surprised to see standard variable rates increasing by more than the next base rate increase

The average prediction of independent forecasters, is that the Bank of Canada’s bank rate will rise to 1% by the end of 2012.
Some predict it will be even higher, at 2%. If rates go up and incomes do not, some people are going to be under pressure

 

What if your mortgage rate went up 2 points?

FULL ORIGINAL ARTICLE – FINANCIAL POST: Garry Marr | Mar 28, 2012 10:05 AM ET |

A new survey says 20% of Canadian households would be significantly hampered in their ability to afford their homes if rates rose by two percentage points.

Bank of Montreal stress tested Canadian households to see how they would stack up in a rising rate environment and found more than half of Canadian households could handle that 200 basis point increase. While 20% said they couldn’t, another 23% of respondents said they were unsure if a rate hike would affect them.

“Truthfully I think 2% is pretty reasonable to expect,” said Laura Parson, BMO area manager of mortgage specialists for the district of Calgary, Manitoba and Northwest Ontario.

Assuming a 5% down payment on the average sale price of a home in February of $372,763, you can assume a mortgage of about $350,000.

Based on the current BMO rate of 2.99% for a five-year mortgage,
the monthly payment on a 25-year amortization would be $1,654.57. If that 2.99% rate went to 4.99%, the monthly payment would climb to $2033.63. While the BMO rate expires March 28 and other banks have moved to end their rock-bottom discount, there are still lenders offering less than 3% for a five year mortgage.

“We picked that [stress test number] because it was the point where we thought clients would start getting uncomfortable,” says Ms. Parsons, whose bank has been promoting low rates with the proviso that people lock in for five or 10 years and amortize their loans over a 25-year period instead of the maximum 30-year length.

10 year mortgage

If you had told me when we were lending money at 21% that we one day be down to 2.99% I’d have been laughing
Based on the latest data from the Canadian Association of Accredited Mortgage Professionals, 31% of Canadians with a mortgage have opted for a variable product exposing them to changes in interest rates.

Asked whether people are locking in to take advantage of the low rates out of fear of rising rates they won’t be able to afford, Ms. Parsons said it could be a bit of both.

“At 2.99% that is the lowest mortgage rate in the past 50 years,” she says. “If you had told me when we were lending money at 21% that we one day be down to 2.99% I’d have been laughing.”

She adds the current situation is such that the five-year rate offered today is actually lower than a variable product linked to prime and that hasn’t happened since the 1970s. “There is always a spread, this is one of the first times we have a fixed rate that competes with a variable rate,” says Ms. Parsons.

variable mortgage dead

On a province by province basis, Alberta household scored the strongest on the stress test with 73% saying they could afford their mortgage if it went up two percentage points. Manitoba and Saskatchewan were second at 69%.

British Columbia, which has the most expensive homes in the country in Vancouver, had the worst record. Only 48% of households said they could still afford their home if interest rates were to climb by two percentage points.
END OF ARTICLE

genieSABRE Comments:

Tricky question
According to consumer reports, in the past year thousands of households have come off a fixed rate deal and are now mainly on their lender’s VR.  Should they move to a new fixed rate deal if they think variable mortgage rates will rise in due course?  Of course the whole point of choosing the fixed rate is for the sleep at night factor in case interest rates rise significantly during the 5-year term.

Hannif Highclass says that is a tricky question to answer, and depends on how quickly you think rates will rise, and how far.
“The money markets are already factoring in a rise to some extent which affects fixed-rate mortgage pricing already,” he explains.

For some people it may even be sensible to stay on a tracker deal for the time being.
“Bank rate has to go up a long way for current fixed rates to become cheaper than VRs,” he says.
“But if you want interest rate protection, you really need to go for a five-year fix – starting from 2.89% to 3.49%, depending on the loan-to-value,” he explains.
But can you save money while still protecting yourself against the risk of rising interest rates?

“My solution is to choose the variable rate, but adjust your payment to at least the 5-year fixed rate. That way you’re taking advantage of the lower interest rate and making extra principal payments, your payment stays the same, and you’ve built in your own insurance in case interest rates rise. Now that sounds like peace of mind to me.” says Hannif Highclass

Hannif Highclass is the editor of rebaterps.ca and a mortgage broker with Centum Mortgages & a real estate Broker with GenieSABRE Realty.

You can also follow him on twitter at @geniesabre AND
facebook at http://facebook.com/geniesabrerealty

cost of home ownership



REMEMBER: Real Estate

Home Owners: If, you already own a home – good for you!

May you be blessed with
warmth in your home,
love in your heart,
peace in your soul
and joy in your life.

However, if for any reasons you do intend to move due to upsizing, downsizing, moving to different town or ??? —
genieSABRE recommend you check out our main web site. You will not be disappointed!

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genieSABRE FREE consultation, will help you & guide you through the whole process from finding the right home, to mortgage approvals, home inspection, lawyers etc Visit our main web, you will not be disappointed!

Real Estate Investors: Home ownership should be your 1st. priority. If you own your own home – Good for you. But now is the time to take that second step – Buying Rental Property for investment. Commercial, retail or home.
genieSABRE has extensive knowledge and experience in this field. As a developer of commercial /retail plazas (built 3 so far) and owners of residential rental homes, we can guide and advice you as to what is best for you according to your personal financial position.

Call: Hannif Highclass @ 416.444.4252

http://www.geniesabre.com

 

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One Response to “What if your mortgage rate went up 2 points?”

  1. Amanda says:

    I just am in awe over the answers you have reeicved in this question. I am qualified to answer this simply because I AM A LENDER and secondly if it makes a difference I am also a Realtor/Broker.Here are the TRUE FACTS . I dont care if you have 20% to put down or not the simple truth is that PMI is avoidable. Secondly PMI is NOT a rip off it is a protection to your lender. Look at it from this stand point if you were lending YOUR money dont you want to see the lendee with some sort of INVESTMENT too rather than you as the lender giving 100%? Of course you do. PMI is an insurance that the Lender will recover ALL of their money they have loaned to the consumer. Yes sure the home is considered collateral but what about during times like now when the markets drop and the appraised value of the property DROPS and in come cases you owe more on the house than its worth WELL PMI helps here too. Purchasing a home is NOT ALWAYS a sound investment with appreciation. When your neighbor sells for cheap or goes into foreclosure this can HURT your value. This is currently taking place all over the US but in pockets.Feel free to see my websites listed below for more information and if you need more info contact me directly with the numbers in my websites. If you are on the East Coast I can surely help, but review my sites first. PMI is also a Tax Deduction as of Jan 2007 not always a bad thing but again you CAN get out of PMI with OUT having to pay 20% down. Credit does play a role in this to an extent and as a Mortgage Advisor I personally take the time to work with my clients to find the program that best fits their needs and gives them the lowest payment they search for. Let me know if I can help you.

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