MORTGAGE SOLUTIONS

Another rate hike...

As many in the industry expected, the Bank of Canada increased its overnight rate by a quarter of a percentage point this morning, bringing it to a rate of 1%. Here is a summary of the reasoning behind the announcement:

- The Bank revealed that the global economic recovery is uneven - some emerging market economies are proceeding full steam ahead, while some advanced economies are experiencing rather weak growth. The Bank of Canada will likely keep its eye on this when it comes time for its next rate announcement on October 19.

- When it comes to the Canadian economy, a slightly softer-than-expected second quarter has caused the bank to revise its recovery predictions. The recovery is now expected to be more gradual than previously predicted, although it still believes consumption growth and business investment will continue to be strong. Low credit - particularly fixed rates, which have seen a dip due to global bond yields - will keep these areas running on target.

- It appears that this may be the last rate increase for at least a little while. According to the Bank: "Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook." 

If you have a variable rate mortgage and are wondering whether it's time to lock in, please feel free to give us a call.

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Tomorrow's rate announcement

Tomorrow, the Bank of Canada is scheduled to announce whether or not it will change the prime lending rate - and experts can't seem to agree on which way the Bank will go!

While some believe recent GDP numbers and talks of housing bubbles will force the Bank to stand pat, others believe - for inflationary reasons - the Bank has to increase it, likely by 0.25%. Which way will the Bank go? Tune in tomorrow to find out...

This wallpaper looks good and smells good too!

If you ever had a sticker collection, you know the true and utter joy that comes from an aromatic scratch n' sniff. Now imagine you could coat your walls in them. Well, now you can!

U.S.-based Flavor Paper - which has offices in New Orleans and Brooklyn, New York features a delicious brand of hand screened fruit wallpaper that offers visual and olfactory satisfaction for your walls. Launched in 2007, the Fruit Cocktail Collection comes in three flavours: B-A-N-A-N-A-S!, Cherry Forever and Tutti Frutti. A percentage of the proceeds go to the Human Rights Campaign.

As of yet, the wallpaper isn't available in Canada, but it is available in a variety of cities in the U.S. as well as online at www.2modern.com.

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The housing bubble debate: Continued

Two think tanks came out with two conflicting reports about whether Canada is, indeed, on the brink of a housing market collapse. The C.D. Howe Institute believes we're in the clear, while the Canadian Centre for Policy Alternatives has a significantly less positive outlook. Below is a summary of their arguments:

C.D. Howe

- A U.S.-style housing bust - with its influx of foreclosures and collapse of housing prices - is unlikely in Canada due to our difference in mortgage policies.

- A decline in underwriting standards was largely to blame for the U.S. crash. While Canada offered similar "risky" products - by means of interest-only loans, 40-year amortizations and zero-down loans - between 2003 and 2008, these products were eliminated in 2008, and policies were furthere tightened in April of this year.

- Throughout it all, Canadian banks - unlike those in the U.S. - were required to purchase mortgage insurance on all loans. Those with less than 20% down payments had to meet even stricter criteria to ensure that applicants were within a certain debt load level and credit rating.

- The result of Canada's stricter policies is that there are significantly less high-risk mortgage loans in the market.

Canadian Centre for Policy Alternatives

- A housing bubble emerges when housing prices increase more rapidly than inflation, household incomes and economic growth. Low mortgage rates, easy access to credit, net immigration and stock of available housing contribute to this scenario.

- All six major cities in Canada - Vancouver, Calgary, Edmonton, Toronto, Ottawa and Montreal - are showing signs of a bubble. This is the first time all six have been in a bubble in the past 30 years.

- Historically, housing prices have been between three and four times provincial annual median income. Today they're costing between 4.7 and 11.3 times Canadians' average income.

- Rising interest rates will be the biggest driver behind a crash. If mortgage rate increases can be kept under a 1% average increase over the 24 month rolling average, we will see a soft decline rather than a drastic collapse.

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Are you taking full advantage of low interest rates?

While it's definitely satisfying to score an ultra-low mortgage rate, truly savvy homeowners will put the money they're saving back into their mortgages.

With five-year fixed rates currently sitting at 3.69% - and variable rates sitting even lower - the chances of seeing these rates again is slim-to-none. When it comes time to renew, you could be looking at significantly higher rates - remember, the posted average is somewhere around the 7% mark - so the lower your principle balance, the less of a shock that rate increase is going to be.

Let's look at an example. Say you took out a five-year fixed mortgage for $225,000 at 3.69%. If you pay biweekly payments on a 25-year amortization pay schedule, these are what the numbers will look like:

Payments: $528.51 biweekly

Balance at the end of 5-year term: $194,799.66

Interest paid: $7,251.64

Monthly payment upon renewal (at 7% interest): $628.72

Years until mortgage is paid off: 20

Alright, so say - instead - you made hay while the sun was still shining, and put as much money into paying down that mortgage while interest rates were low, and you were able to tackle as much principle as possible. One easy way to do this would be to opt for accelerated biweekly payments - so you're paying your your mortgage every two weeks, rather than twice a month. The second would be to either put a little bit extra towards your mortgage each month, or put a lump sum down once a year - say, around bonus time.

Payment: $573.02 (accelerated biweekly) plus an extra $100/month (or $1,200/year)

Balance at the end of 5-year term: $181,876.80

Interest paid: $6,831.82

Monthly payment upon renewal (at 7%): $636.95

Years until mortgage is paid off: 15

If you wanted to keep your payments closer to those that accompanied lower rates, you could always go back to biweekly payments, rather than accelerated biweekly. The bottom line being, it's better to tackle principle now - while it's affordable.

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