The Tortoise and the Hare (Short vs. Long Term Mortgage Rates)

When buying a new home, there are a lot of decisions to be made: Realtors, Lawyers & Mortgage Brokers.
This can be a stressful decision, mainly because we have so many choices that are pushed on us each and every day through advertising on the radio, newspaper, billboards, tradeshow...you name it.
So how do you confidently choose the team that will help you with one of the largest purchases you may ever make? If you are lucky enough to have a friend or family member refer you to someone that they have had a positive experience with, then you are already ahead of the game. Its always comforting to have that word of mouth to vouch for someone who is trustworthy, capable and working in your best interest; And the professional that was referred will be very appreciative as well.
I have been in the financial industry for five years, now a mortgage broker for RBC Royal Bank. Before truly understanding RBC's slogan "Advice You Can Bank On", I saw each bank as a generic industry. Do I spend a premium for the Charmin toilet paper or just get the generic brand. Isn't it all the same? Banking is the same, based on what your needs are, "Double Ply or Single Ply".
I am not going to sit here and bad mouth any other financial institution claiming they are the generic, but what is it that separates the quality of a financial institution?

ADVICE!

As a Mortgage Specialist with RBC, I pride myself on giving the best
advice possible with the information I have on hand and collect from interviews with clients that are hoping to achieve the goal of home ownership. We live in a global economy, making the job to forecast and predict mortgage trends very difficult. This is why economists get paid very well, as they are responsible in forecasting and predicting trends based on quality data and strong indicators. Are they always 100% on the mark? No, of course not. Unfortunately they don't have the magic crystal ball that knows all, however, it does give us a direction to move in.

I guess my main motivation for writing this is from a recent experience. I had pre-approved a client for a 5 year fixed rate, as they indicated Fort McMurray was going to be there home for the years to come. Right now, we are living in a time when there is a lot of uncertainty around the cost of funding for credit. So where are rates going? In the short term, it is hard to say. I am not an economist, but I do listen to what is being said, with a lot of focus on the forecast to see the Canada, 5-Year Conventional Mortgage rates increase by the 2nd quarter of 2013 to over 6%. So is now the time to lock yourself into a longer term?
Again it goes back to your goal, which is different for everyone. My warning is when someone is trying to sell you a mortgage on rate alone. I will admit, I have gotten caught up in the excitement before, when RBC put a big sale offer in the market, but I am not here just to sell a rate. I don't want to be the generic brand, I want to the Charmin. And the Charmin comes with "Double Ply = Advice & Solutions".

So back to my motivation for this entry.
My client received a rate of 3.74% for 5 years from me. Decent rate, competitive, and affordable.
Now the client is being swayed over to a competitor with a 2 year fixed rate of 2.49%. I know what your thinking, GREAT RATE! you got to take it. At first I thought the same thing, but something about it bothered me, other than losing the clients business. So I started to run the following calculations.

To keep things relevant to Fort McMurray and simple I will use a purchase price of $500,000.
With an amortization over 30 years and monthly payments.
Mortgage Payment Calculator: https://www.rbcroyalbank.com/cgi-bin/mortgage/mpc/start.cgi

Based on a 5 year fixed rate of 3.74%

	Total Payments	Cost of Borrowing
Monthly Payments	over 5 years	Over 5 years
Principle & Interest	Principle & Interest	Interest Only
$            2,304.59	$        138,275.40	$        88,369.46
Total Principle Paid over 5 years		$        49,905.94
Total Principle remaining after 5 years		$      450,094.06

Based on a 2 year fixed rate of 2.49%

	Total Payments	Cost of Borrowing
Monthly Payments	over 2 years	Over 2 years
Principle & Interest	Principle & Interest	Interest Only
$            1,969.68	$          47,272.32	$        24,229.48
Total Principle Paid over 2 years		$        23,042.84
Total Principle remaining after 2 years		$      476,957.16

So where is the downside? Your payments are $334.91 less per month.
Sit down cause this is were the advice portion comes in. Going back and understanding that the client is planning on living in this home longer than 2 years I would advise to lock in for a longer term. The competitor is aware of all the same market conditions and forecasts that I am. So why offer a great rate, if rates are going up? Won't they lose money? In the short run of two years, probably, but there is a plan to their madness. Psychologically, when its time to renew our mortgage, we don't typically put the same effort into shopping around again, as we don't want to apply and go through the credit checks and produce documents like we had to the first time. So typically we just choose a new term with our current lender, cause its easy.

By the renewal date the forecast for the Canada, 5-Year Conventional Mortgage rate is predicted to be around 6.79% - 6.99%, based on forecast statistics by The Conference Board of Canada. http://www.conferenceboard.ca/

In order to break even, you would have to achieve a rate of 4.62% for the remaining 3 years to match the 3.74% for 5 years.

Based on a 3 year fixed rate of 4.62%

	Total Payments	Cost of Borrowing
Monthly Payments	over 3 years	Over 3 years
Principle & Interest	Principle & Interest	Interest Only
$            2,520.41	$          90,734.76	$        63,718.17
Total Principle Paid over 3 years		$        27,016.59
Total Principle remaining after 3 years		$      449,940.57

In the first 2 years of your mortgage term you would have paid $334.91 less per month = $8037.84
In the last 3 years of the mortgage term you would have paid $215.85 more per month = $7769.52, if you are able to obtain a rate of 4.62% at the time of your renewal.

Do I know 100% rate will be going up as forecasted? No, but I am using the data and indicators we have today to make an educated decision and provide the best advice possible for my clients.

In the end you have to make the choice.

Run this race like the Hare and take the risk of higher rates before reaching the end.

or

Take the slow and steady pace like the Tortoise for a strong finish despite rate changes.

Please leave any comments as I would love to know your thought around this topic.

Cheer,

Eric Dunham

RBC Mortgage Specialist

Canadian housing market remains resilient

Canadian homebuyers remain unshaken by the recent volatility during the last few months in global financial markets, according to data released this week by the Canadian Real Estate Association (CREA) and Canada’s Housing Market Update from RBC Economics Research. Home resales rose modestly by 2.7% in September overall in Canada, after staying relatively flat in August (relative to July), with the majority of provincial markets posting gains.

Housing markets continue to be generally balanced across the country – CREA indicated that the sales-to-new listing ratio was in the ‘balanced zone’ in two-thirds of local markets, and the remainder was evenly split between markets where conditions were favourable to sellers and buyers.

The resilience of Canada’s housing market in August and September, at a time when renewed turmoil in global financial markets raised concerns that this might spook homebuyers, is reassuring on many levels. In general terms, it speaks volumes to the continued strength of the market’s underpinnings –  balance between demand and supply, positive employment trends, and low interest rates. But perhaps more importantly, it says much about the confidence Canadians continue to have about making a major purchase and the financial commitment that comes with it.

While further global anxiety could unsettle homebuyers, we believe that the confidence Canadians have expressed to this point indicates that they are placing a greater focus on domestic economic conditions and market fundamentals than the volatility taking place outside of Canada’s borders.

RBC Royal Bank® is ready to help you

If you have clients in the market for a new home, talk with an RBC Mortgage Specialist about getting a mortgage pre-approval. A pre-approval provided by an RBC Mortgage Specialist will guarantee the rates on fixed term mortgages for up to 120 days.  Not only will you know how much your clients can really afford, but they’ll have our guarantee that if the rates increase in the next 120 days their rate will not. Furthermore, RBC’s ability to provide a quick turnaround means you can close the deal faster and get your clients in their dream home sooner.

Your new home doesn't come with mortgage advice. I do.

Contact me today:
Eric Dunham

Mobile Mortgage Specialist
RBC Royal Bank
(780) 370-6663

eric.dunham@rbc.com

Is it time to switch from a variable to a fixed rate mortgage?

With rates so low on fixed term mortgages these days, more and more Canadians are asking if it’s time to switch to a fixed term mortgage. 

Deciding what to do depends on a number of factors, but a good place to start is a closer look at your goals.

If you’re trying to save money or lower your payment, a variable interest rate is usually one of the lowest mortgage rates offered. The downside is that in an increasing rate environment, your interest rate will rise as the Prime Rate rises —  possibly costing you more in the long run.

If peace of mind is what you’re after, a fixed rate provides the security of knowing what the interest rate will be for the term of your mortgage.

In addition, your goals or circumstances may have also changed over time. Perhaps you’re thinking about starting a family and want the predictability of knowing what your interest rate will be. Or maybe you’re finding it hard to sleep at night because you feel that interest rates are likely to rise. These are good indications that you might be a good candidate for switching.

If you still can’t decide between a fixed or variable mortgage, the RBC Homeline Plan® account may be the right option for you. The RBC Homeline Plan account lets you choose both fixed and variable interest rates. Think of it as a way to diversify your housing investment, much like you would your investment portfolio. How you split up the percentage of fixed to variable is entirely up to you.

In the end, choosing the right mortgage term is a personal decision. Whatever your circumstances or concerns, come and talk to me and I can help you decide what would be best for you.

Personal lending products and residential mortgages are provided by Royal Bank of Canada and are subject to its standard lending criteria.

® / ™ Trademark(s) of Royal Bank of Canada. RBC and Royal Bank are registered trademarks of Royal Bank of Canada.

Your new home doesn't come with mortgage advice. I do.

Contact me today:
Eric Dunham

Mobile Mortgage Specialist
RBC Royal Bank
(780) 370-6663
eric.dunham@rbc.com

®Registered trademarks of Royal Bank of Canada.  RBC and Royal Bank are registered trademarks of Royal Bank of Canada.

Residential mortgages are offered by Royal Bank of Canada and are subject to its standard lending criteria.