Archive for August, 2006
50-year Mortgage Hits Market
As home prices and interest rates keep rising, lenders have figured out a way to keep the dream alive for millions of people who want to own their own home. It’s called the 50-year mortgage.
According to a report in USA Today, a handful of small lenders have begun offering 50-year adjustable-rate loans to buyers who need to keep payments low in the current economic environment.
Most banks already offer 40-year mortgages, which account for about 5 percent of all home loans, the report said.
“One of the biggest things in California is the high costs of homes. With rates going up, there’s demand from customers (for) longer loans,” Alex Diaz Jr., with Statewide Bancorp in Rancho Cucamonga, Calif., was quoted in the report as saying.
Statewide, which introduced its 50-year loan in March, has already received about 220 applications, Diaz said, according to the report.
The 50-year mortgage also signals that the cooling real estate market is heating up competition among lenders, the newspaper said.
“Mortgage lenders are getting craftier to get the attention of consumers,” Anthony Hsieh, CEO of LendingTree, told the newspaper.
But he added that consumers first need to understand the product.
Two issues to keep in mind: A borrower with the 50-year mortgage builds equity very slowly. And because rates on the loans are adjustable, a borrower’s monthly payments could rise, the report said.
Mortgage experts caution that the 50-year mortgage is best-suited for those who plan to stay in their home for about five years, while the loan’s interest rate remains fixed, the report said.
“If you’re going to be there for more than five years, you’re gambling,” Marc Savitt of the consumer protection committee for the National Association of Mortgage Brokers told the newspaper. “You don’t know what interest rates are going to be. I wouldn’t do it.”
The report of the new 50-year loan comes as the signs mount that the nation’s real estate market is cooling.
Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
Fixed Rate Mortgage or ARM - Which is better?
Variable Rate
Should you lock in?
Two weeks ago, the Bank of Canada bucked the trend it had set during the fist half of this year which featured seven consecutive increases in the overnight rate, with the most recent increase to 4.25% taking effect in late May. This last increase sent the Prime Rate to 6.00%. The Bank left the rate unchanged as it determined that the current rate was sufficient to hold inflation within the target range of 2% annually as the outlook for economic growth and inflation has not changed materially from the Bank’s last update in April, 2006. In its analysis, the Bank judged that the Canadian economy continues to perform slightly above its production capacity. This would usually signal the need for more rate tightening in order to hold inflation in check, but the Bank anticipated medium term weakness in US consumer consumption and further depreciation of the US dollar.
This forecast, together with the lagged effects of a higher Canadian dollar, lead the bank to hold firm on its overnight rate.
What does this mean for the Canadian mortgage market?
Have we reached the end of increases in the Prime Rate for now?
The answer of course is: perhaps and perhaps not. We can conclude that the recent decision and commentary from the Bank may renew consumer demand for variable rate, Prime based mortgage products. When the Prime Rate reached 6.00%, the spread between the five year fixed mortgage rate and variable rate mortgages reached its lowest point in more than five years. The reduction in significant interest savings from the increases in the Prime rate during the first half of this year lead many of our clients to choose the security of a fixed rate over the uncertainty of a variable rate in their mortgage product selection. With the Bank of Canada holding steady on the overnight rate and with most Canadian investment dealers predicting no further bank rate increases for the remainder of this year, consumer preference may shift back to Prime based, variable rate mortgage products. If you think a closed varibale rate mortgage is right for you, don’t look any further than our prime minus 0.95% mortgage. No Fees, Great Rates!
Sincerely,
The Team at True North Mortgage
www.truenorthmortgage.ca
Interest Only Mortgage
Interest only mortgages have been in the news and have already been widely available in the US. They have finally come to Canada. A few lenders are just starting to test the waters in Canada with this new product. Here are a few real-life examples from current clients that have used the product.
Client 2438
Johnny approached us a few weeks ago looking to purchase a rental property in Calgary. With great credit and good stable employment, Johnny was able to put 25% down. The mortgage (P&I) payment was going to be $1480 per month on the rental property. Unfortunately, Johnny believed that he would only be able to collect $1500 in rent for the property which would not be enough to cover mortgage payments and property tax. This is a common situation faced by our clients in many major city centers in Canada. Enter the interest only mortgage. We introduced the interest only mortgage product to Johnny for his rental property purchase and described how an interest only mortgage would reduce his monthly mortgage payment to $1,071. The interest rate is set at prime minus 0.8 which is a great rate for any mortgage. An interest only mortgage makes a lot of sense on a rental purchase because it not only reduces the monthly expense but also maximizes the tax advantages of a rental property. In the end, Johnny was able to buy a rental property which was likely to appreciate in value and provide positive cash flow.
Client 2228
Dave is an independent contractor who makes good money but his income while predictable, is not consistent. Many months go by when he earns nothing and then suddenly he earns a big chuck of cash. Dave wanted a mortgage that has the flexibility to match his income without sacrificing a really great rate. Traditionally, we would have offered him a secured line of credit, which offers total flexibility but it comes at a price. Most mortgage rates are set well below prime but a secured line of credit is often at prime. The difference can equate to hundreds of dollars every month. Enter the interest only mortgage. The interest only mortgage is perfect for Dave because he was able to get the great rate of prime minus 0.8% and when he receives his big chunk of cash he is able to make large lump sum payments towards his principle whenever he wants. Dave jumped on the interest only mortgage as a way to pay minimal monthly amounts while still paying off his mortgage in 25 years by making large lump sum payments.
Dan Eisner
www.truenorthmortgage.ca