Mortgage Rates to go up by week's end? . .

[MortgageQueen]

A little Birdie whispered to me that rates will probably be going up this week, so if you are arranging a mortgage and/or re-financing, consolidating or whatever, you might want to get a rate hold tomorrow.
Just an FYI. . .

[brunt]

I know that you are in the mortgage industry MortgageQueen, the following rant is not directed at you.

Not meaning to sound insensitive to the effects of the increase in rates, but it really is a good thing. When the problem with an economy is "too much debt", the solution surely is not to keep interest rates low so as to encourage more debt.

The Bank of Canada has been most irresponsible in actively encouraging Canadians to take of further debt by offering rates that are seriously below the rate of inflation and where the market would naturally set them. An untold amount of long term structural damage has been done to Canadian families by attractively packaging debt with low starting rates. Those rates are going to reset sometime, not like the US.

It has also caused a change in mindset, people have confused price with carry costs - particularly with houses. It has changed so that it is perceived to be OK to pay $500,000 for a 1,500 square foot house, since the mortgage interest with a 5% downpayment is just less than $1,184 per month. Lost is the fact that this house costs half a freaking million dollars!

Just think about that for a minute. Half a million for vinyl, particle board and sticks that really just keeps the rain off of your head. Unbelievable!

And don't get me started on the insanity of Vancouver (http://www.crackshackormansion.com/).

One further point, if increasing rates from the absolute lowest rate ever, to just over the absolute lowest rate makes a difference in being able to afford a house, it is time to consider a cheaper house.

By all means, a lower rate is better, since it saves money. But if a small increase makes it tight, then there is too much debt.

Rant over.

[Shwa Girl]

Thanks mortgagequeen. @brunt, what you say is true.

Remember, back in the day, 18% mortgages. What difference compared to today's 2.9%, eh?

[Carlotta]

I agree Brunt. If a 1% increase in mortgage rates makes a difference whether or not you buy a home, you are in big trouble. Although the feds tightened the rules regarding qualifying for mortgages, it seems like lenders are finding ways around these to make sure pretty much everyone can qualify I had young couple come in the other day for some advice and they had just been at the local credit union. They had 15% down payment, which was great. But then the CU offered them the mortgage plus line of credit valued at... 15% of the value of the home. So, in essence, they gave them back their down payment in a secured LOC. So they are now financed at 100%. Which is exactly what the feds were trying to stop..... The young couple thought they had a great deal and were happy because they had money now to go out and buy all new furniture and their big screen tv. When rates rise and they have to re-negotiate in 4 years, I'm going to bet they end up re-financing because they will still be in debt up to their eyeballs. But hey.... they will be homeowners..... they just won't actually OWN anything.
And there's the end of MY rant! LOL

[brunt]

True Carlotta.

I basically chewed out somebody online who was looking for ways to get around having to put down a 5% down payment!

I would suggest to go no less than a 20% down payment... ever. If you cannot afford that, then you cannot afford the house. If you have to wait ten years to get the down payment, or for house prices to fall sufficiently (a very real possibility, by the way), then so be it.

What we have now is a generation of people who honestly believe that they are "entitled" to own a first house that is more elaborate than their parents' last house.

Sorry to high jack the thread, it's just a topic that gets me going!

[croman7]

MortgageQueen... Is this supposed to say that PRIME is going up? Or just that lenders will be charging higher interest rates on new mortgages? I have a variable mortgage that is set at prime right now, so if prime goes up, my payment is allocated more to interest and less to principal. if it goes down, i'm happy! If it stays the same, that's ok too! Just wondering what your inside scoop was pointing too....prime changing or just new rates changing.
thanks for the tip.

[MortgageQueen]

MortgageQueen... Is this supposed to say that PRIME is going up? Or just that lenders will be charging higher interest rates on new mortgages? I have a variable mortgage that is set at prime right now, so if prime goes up, my payment is allocated more to interest and less to principal. if it goes down, i'm happy! If it stays the same, that's ok too! Just wondering what your inside scoop was pointing too....prime changing or just new rates changing.
thanks for the tip.

Not to worry Croman. Prime isn't going anywhere anytime soon. (barring some catastrophic financial event)
No . . .I was referring to fixed rates. As many of you know, they are at historic lows and have even dropped below prime rate. (wowser!)
I think it was a well thought out campaign to jump in . . .grab a portion of the market. . .and jump out.

Of course, other major Lenders had to respond by slightly dropping their rates. The fun is over now though, and the rates are going back up.

And for Brunt. . . you'll be happy to know the rules HAVE been tightened on stated income and self employed. . .which I don't agree with as most of these individuals can manage fine. You're right. The 5 percent down is the ones that need to be tightened ALTHOUGH. .you may not be aware of this:
EVERYONE getting a fixed rate mortgage has to qualify at what they call the "posted rate" which is 5.29 percent.
(Exceptions can apply to some who are getting a variable rate.)

Does that make you feel any better Brunt?. .

My final word for those re-mortgaging right now, is to seriously consider the 10 year terms. . . at as low as 3.89, that's pretty darn attractive! . . and as bad as that is for MY business (sigh), I feel obligated to always point it out for the best of my clients. (there ARE situations this would not be the best alternative)

[dagney]

To all those who complain about low interest rates (which I personally love as we are slapping down $ on loans as fast as we can) this also means the Government of Canada can pay cheap rates to those holding government bonds and pay down their high interest rate loans. Low loan rates help our government pay off our Canada's debt so if they raise prime their loan payments also go up in the form of higher interest payments to those holding government bonds.

[sweet sparrow]

Is re-financing something that can only be done to fixed rate loans? Or is it used to describe changing your payment on variable rates as well?

[MortgageQueen]

Is re-financing something that can only be done to fixed rate loans? Or is it used to describe changing your payment on variable rates as well?

Not at all. The most common time to refinance is when your existing "term" is up. (Whether fixed or variable)

At that time, you can shop for better mortgage and hopefully get lower payments and/or lower/better rate.

Less frequently, but still an option many take is re-financing before their term is up. That can be for many reasons. . .maybe the difference in rates are worth it, or a person needs to add to their mortgage for some reason (i.e. consolidate high interest debt, child university costs, etc.)

In regards "to changing your payment" . .that is often an option with most mortgages. If you wish to increase or change the amount of times you make your payments, just call your bank or broker.

[ashedfc]

Prime rate is not going anywhere (anytime soon). We are all sitting on epic levels of debts at all levels (public/private; corporate/households; all levels).. & any increase will bankrupt a lot of them. So enjoy the party while it lasts.

Regarding the interest rates going up on the fixed is a good thing, as it indicates more normalcy. Fixed mortgage rates are linked to the bond markets (whereas Variable rates are tied to Libor/Euribor/inter-banking rates)
The biggest bubble ever in human history is the bond bubble (its going to wipe out several institutions, individuals, corporations, whenever it bursts).

Note: Interest rates cannot stay here for ever. If it stays, than we all are guaranteed massive inflation (probably hyperinflation). If its doesn't... & goes up than the result is bond bubble explodes, as it can't go any lower... Federal Reserve is already at zero% for quite some time & they have promised zero% till end of 2014)..

Ideally we have only 2 choices: Inflation or Austerity.... It seems central bankers worldwide have already chosen inflation as the route for future. And high inflation with high unemployment is the worst combination to live in...
welcome to the New World Order..

Personally my individual opinion: "I kindof agree with brunt" I would suggest to sell your house (or exit an overvalued house) & move into rent & get adaptable....... it makes more sense to have mobility in these tough times & be ready to relocate if a new/better job is available elsewhere.

[brunt]

To all those who complain about low interest rates (which I personally love as we are slapping down $ on loans as fast as we can) this also means the Government of Canada can pay cheap rates to those holding government bonds and pay down their high interest rate loans. Low loan rates help our government pay off our Canada's debt so if they raise prime their loan payments also go up in the form of higher interest payments to those holding government bonds.

I certainly would agree that there exist people who benefit from prudent actions with low rates, that is not my concern.

Imagine, if you will, if the Government of Canada decided to set the price of large bags of potato chips at roughly 1/5 of their true market value. So rather than having them cost $2 per bag, they are available in pretty well any quantity for $0.40 cents per bag.

Certainly, there exist people, like your good self, who will take this as an opportunity to simply save $1.60 per bag of potato chips. But it is not difficult to imagine that many people would simply forgo more expensive (but healthier) foods since potato chips are so incredibly cheap, not to mention tasty!

In the end, rather than saving people money, you have created a large group of unhealthy people with high blood pressure, very likely to die prematurely. All by simply making a good available at a low price.

Such is The Law of Unintended Consequences. Human nature is not defined by some simple mathematical equation. It will change with the environment. It will adapt to find new successful strategies in this unfamiliar terrain (even those only successful in the short term) to adapt to the new environment. These new strategies will become "the new normal", and those who do not embrace these new strategies will be seen as being unsuccessful losers. Try telling people that paying 10 times the average wage for a 900 square foot concrete box in Vancouver is a bad idea, and you will see what I mean.

By creating an environment where there is less of a penalty for reducing ones debt load, and in fact a great temporary benefit from greatly increasing it, they are making possible the wholesale adoption of strategies that simply would not exist under normal conditions.

And beyond the social costs, there are financial ones as well.

The government does not directly set the rates for its bonds, that is not the way it works. They are effectively sold at auction, so the final rate is effectively set by the market. Where the government messes this up is that it tells the banks that they can borrow a virtually unlimited amount of money at say 0.5%. The bank then looks around and sees that it can get 1% for government bonds, so it takes the loan, and loans the money right back, and pockets a 0.5% profit for no effort whatsoever.

This is certainly not what the government intended. Banks have not necessarily lent out more money, but seen an opportunity for an easy, guaranteed return on borrowed money.

But I do not blame the banks, they are simply taking advantage of the current environment, and doing what serves their interests. We all do it all the time. This is the basic reason why capitalism works, we each get to use our money as we see fit. The banks are no different.

But some banks actually do what the government wants and loan out more money. But think about this for a minute, when more money is loaned out, it generally means one of two things:

1) People who did not previously qualify for loans will now get one, or
2) People who previously qualified for loans will get bigger ones.

#1 is precisely the direct cause of the "sub prime" market in the US. And don't think for a second that we don't have one here.

#2 can also be disastrous. Think about how people generally get pre-approval for a mortgage at a bank. They tell the nice loans officer how much money they can afford to pay in a mortgage payment, and then the officer tells them how much mortgage the bank will give them for that payment.

So far, it makes some sense. But where things go haywire is here. Assume that you can afford to pay $1,200 per month for housing. At 6% mortgage rate (historically quite low), you could afford a mortgage of $240,000. Now lower the rates down to 3%, and these same people can now afford a mortgage of $480,000.

This may look good on the surface, but current home owners and real estate agents aren't stupid. They will see these people with twice as much buying power, and start asking more for their houses. That's not evil, that is simply adapting to the new environment. And buyers are happy to pay it to buy an "asset" that has been appreciating in price.

Real estate agents just absolutely love to point out that houses are still "affordable", since mortgage rates allow for very low payments. But they miss the mark, the monthly payment is not the cost of the house, the selling price is. And selling prices by every conceivable measure - other than mortgage payments - is well past insane.

There simply ain't no free lunch. Keeping interest rates low has costs, and they can be disastrous ones. Inflation is an insidious beast, and one that attacks those on the lower rungs of the economic ladder far more than those on the top ones.

And lastly, while low rates are good for those in debt, they are lousy for those with savings. With inflation rates well above interest rates (especially after tax rates), you are literally punishing savers for not spending their money. And really, who should be rewarded, the thrifty, or the spendthrifts?

In short, it is not people like you who concern me. It is rather the majority who view low rates as an invitation to take out loans to buy the things that "they deserve".

Mark my words, the vast majority of people who have taken on cheap debt will rue the day that they did.

[MortgageQueen]

Very well explained Brunt. You should remit that to a newspaper as it is set out in simple easy to understand language. Really. . i'm not kidding. It's excellent timely information.

[Carlotta]

[QUOTE=brunt;4424213]True Carlotta.



What we have now is a generation of people who honestly believe that they are "entitled" to own a first house that is more elaborate than their parents' last house.

QUOTE]

Totally agree Brunt. Whatever happened to a starter home with used furniture scavenged from relatives and Goodwill? Nope.... gotta have brand new stuff and the 60 inch flat screen right off the bat. My question is "When you start off in a McMansion, where do you go from there?" My answer would probably have to be "In a run-down apartment when the housing bubble bursts and you can't afford your mortgage and your tv is re-possessed".

It scares me. I try to counsel young clients that just because someone has pre-approved them for a $500,000 mortgage does NOT mean they have to buy a $500,000 house. But they figure that if someone is willing to give them that much, they must be able to afford it. It makes me so angry. Most have come from living with Mom & Dad and don't even have a clue how much their heat, hydro, insurance, internet, cable etc., etc., are going to cost them. But hey... the bank says we can afford it, so it must be true.

So okay, I lied... it was NOT the end of my rant. But I will stop now!

[newb]

Wow!! what an interesting thread...thanks