To Lock In or Not?
Fixed Vs Variable
To Lock In or Not?
The above video applies 100% if you are taking a new mortgage, whether a purchase, refinance, or renewal. The variable is the main contender.
But what about all the economists saying if you are in a variable rate mortgage current then lock in?
You mean the economists that are employed by profit driven shareholder owned institutions that directly benefit from your locking-in (banks) via instantly increased profit margins and massively higher (up to 900% higher) prepayment penalties that 2/3 mortgage holders will trigger?
A bit biased, that crowd.
Also they are generalists, the are not specialists.
But what about independent real estate experts?
While these experts may have their finger on the pulse of many facets of the real estate market, many remain totally unaware of how exactly mortgage prepayment penalties are calculated, and just how likely you are to trigger them.
Also generalists, unaware of many nuances of mortgage products.
So whats my game?
Ive never really had game. so to speak. And I dont stand to profit from your locking in, or from your staying variable. In fact as I type this on a stunning day Im wondering just what Im doing in my office at all.
Im just a Mortgage Broker offering an opinion. An opinion that reflects my personal policy, an opinion shaped through 25 years of experience with my own mortgages, an opinion based on 11 years of experience with 1,673 clients mortgages.
Ive seen a few things, mortgage specific things.
Ive watched 2/3 of my clients break their mortgages and trigger penalties. Almost every single one of them a small and relatively painless penalty thanks to staying variable.
But what about these rising rates?
If you are currently in a Prime -.65% to Prime -1.00% variable then to lock-in would be to inflict an immediate rate hike on yourself that might take the government another 12-18 months to pull off... if they pull it off.
If you are in a Prime -.35 or shallower mortgage, we should discuss restructuring that into a Prime -1.00% mortgage and reducing your rate by .65% or more.
My crystal ball says yes, perhaps another two or three 0.25% hikes through 2019, but at that point the odds favour (heavily) an economic contraction that will in turn trigger a corresponding reduction in interest rates.
It is my theory, and that of others smarter than I, that the fed is pushing rates up aggressively to beat said economic contraction, because they want to have the tool of reducing interest rates back in their toolbox when the rainy days come. And we are overdue for stormy economic times.
In short, life is variable - your mortgage should be as well.
The above is credit to Dustan Woodhouse.
Why renting to own a home won’t make it any more affordable to buy a house...
Haider-Moranis Bulletin: If anything, a rent-to-own housing option is likely to limit housing and career choices of struggling households instead of expanding them
Special to Financial Post
Updated: October 31, 2018
When it comes to affordable housing, there are no silver bullets. Still, election campaigns deliver catchy slogans for stubborn housing problems, which at times defy economic fundamentals and common sense. The rent-to-own housing option, which surfaced as an electoral promise in Toronto, is one such idea is likely to limit housing and career choices of struggling households instead of expanding them.
Many supporters of rent-to-own (RTO) housing naively believe that it offers an affordable and viable alternative to mortgage finance for home ownership. The proponents argue that households who could not save for a down payment or are deemed uncreditworthy by mainstream lenders could rely on RTO for homeownership.
The reality is far more complex, and, in many circumstances, RTO programs can hurt the long-term financial prospects of struggling households. Before one signs off on an RTO housing contract, some basic facts must be understood.
An RTO contract enables a household to rent a dwelling that the household may buy in the future at a predetermined price. The RTO thus enables households to select a neighbourhood and dwelling of their choice. In instances where the household may not have enough for a down payment to secure a mortgage, the RTO might put such households on the path to homeownership.
At a predetermined date in the future, the transfer takes place from the landlord to the renter. The prearranged price offers protection to renters against unexpected housing price inflation.
What could possibly be wrong with such a benevolent arrangement? The answer is a lot. The devil, as always, is in the detail.
To begin with, a typical RTO client is one with a down payment that is not adequate to qualify for a mortgage from mainstream lenders, who charge lower interest rates than the lenders who lend to highly leveraged borrowers. As the loan-to-value increases, so does the charged interest rate.
Given the way RTO contracts are structured, they may hurt the financial interest of a struggling household. For starters, a renter household cannot avoid a down payment, which is called the option money and is likely to be less than 20 per cent but is still required. The one-time, often non-refundable, payment at the initiation of an RTO contract buys renters the option to purchase the dwelling in the future.
The predetermined future purchase price serves as a hedge against rapidly increasing housing prices. Yet, if housing prices were to decline in the future, the renter must pay the higher agreed upon price. Equally important is the realization that the rent in RTO contracts is usually higher than the rent for a comparable property because part of the rent is credited towards the purchase price. So, from a cashflow perspective, an RTO contract carries a higher burden than a comparable rental unit.
While an RTO dwelling is not technically owned by the renter, it is still the renters responsibility to maintain the property. Thus, if the furnace blows out during the renting phase, the renter might be on the hook for it, depending on the terms of the agreement.
When the renting period ends, the renter has the option to purchase the dwelling. During the renting period, part of the rent accrues towards the purchase price, which is akin to building equity. However, the renter must borrow the balance from a lender. At this point, depending upon changes to interest rates, a mortgage could be cheaper or more expensive than when the RTO contract was signed.
RTO contracts are predicated on the assumption that the renters finances in the future will improve in terms of creditworthiness. Should that fail to happen, the renter will have to walk away, leaving the equity built over the years behind. Furthermore, such contracts restrict one to the same location, making it expensive to relocate to more lucrative job markets in other cities.
Sanjiv Jaggia and Pratish Patel in the Journal of Derivatives analyzed RTO contracts in the U.S. after the Great Recession when many homes faced foreclosure. Their analysis concluded that RTO contracts were no silver bullet.
They found that lenders could benefit from entering into an RTO contract when a borrower was about to default on a mortgage. If the borrower faced severe financial constraints, the option to buy the dwelling in the future was essentially worthless.
RTO contracts have existed with limited success in certain niche markets. But without subsidies, market-based RTO solutions to promote housing affordability are unlikely to succeed.
A preferred option to improve housing affordability is to increase the supply of new housing by aggressively releasing land suitable for development and streamlining the development approval processes.
Murtaza Haider is an associate professor at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached at www.hmbulletin.com.
Give your homes, cars an insurance tune up...
Its no surprise to Canadians that the fall and winter seasons can bring some very severe weather of high winds, heavy rains, sleet, hail, ice, snow and any weird combination of all of them.
The Insurance Bureau of Canada reports that severe weather has resulted in nearly one billion dollars in insured damages so far this year, just in Ontario alone. With summer behind us and winter looming, Annie-Marie Thomas, an insurance expert with insurancehotline.com, an insurance rate comparison website, says this is a great time to look at the insurance coverage on your homes and cars to prepare for possible weather-related damages in the months ahead.
She recommends taking advantage of multi-line discounts. Many insurers will offer a discount of anywhere from five per cent to 15 per cent off one or even both policies when you bundle both your home and auto insurance with the same company. If you have both policies the insurance company at their discretion may even have just one deductible for losses on both policies in the event of a catastrophe.
When it comes to insurance, fire used to be the main peril to peoples homes. Now there are a lot more claims for water damage than damage from fire. Water is the new fire, Thomas says. Basements are often the centres for a familys entertainment with recreation rooms, equipment, appliances, good flooring and other good furnishings. When water comes in it can cause a lot of damage.
The cause for water damage to your home and/or cottage may determine whether or not you are covered. There are a few things you can do to help keep water damage from occurring.
For water to drain off freely from the roof, make sure your downspouts and eavestroughs are in good repair, are cleaned regularly and make sure the downspouts extend at least two metres from the foundation so water drains away properly.
When undertaking maintenance or home improvement projects, use water-resistant materials. Repair any cracks in the foundation and if the caulking around windows and doors is showing signs of age re-seal them.
Insurance for water damage caused from sewer backups and overland floods usually are not covered in general policies and need to be purchased separately. Installing a backwater or backflow valve could be your last line of defence against an overloaded storm system thats trying to flow water (often sewage) back into your basement. Disconnecting your downspouts if they drain directly into your municipalitys storm system can help prevent overloading of the system and the possibility of a sewer back-up into your basement.
An auto insurance policy that includes comprehensive or all perils coverage can help to offset the cost of repairs to your vehicle by damage caused from hail, heavy rains that flood roads and toppled trees from high winds.
Damage to your home or cottage caused by fallen trees or branches usually is covered by your home insurance. Damage caused by debris also can be covered as long as the debris is not from a lack of maintenance or poor upkeep.
If you have a cottage and plan to rent it for the fall and/or winter, Thomas recommends you contact your insurance provider and confirm that your plan allows for rentals. Many providers will void coverage if they find out you are renting your cottage without their knowledge.
For Canadian snowbirds, arrange to have someone check your house every few days and make sure they know how to get in touch with you if something goes wrong. This arrangement can be informal and verbal.
Thomas also recommends that any fireplaces in the house or cottage be inspected each year to make sure that those pesky raccoons and squirrels havent made winter lodgings in your chimney.
A little preventive maintenance can help protect your valuable assets from potential damages from the harsh Canadian fall and winter climate.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.
Copyright 2018 Talbot Boggs
Talbot Boggs , The Canadian Press