Mortgage & Market Update Articles

Mortgage & Market Update – Oct. 5, 2010

Hello,

 As a follow-up to our recent updates today’s IMF report reinforces the issues we have been highlighting. Unfortunately there is no quick fix to these issues so we expect interest rates to stay low in the near term. The combination of debt overhang in Europe & U.S. combined with weak employment and low inflation continues to provide some benefit to Canada due to its “Safe Haven” status. Our resource base and proportionately better economy continue to attract investors which are keeping bond yields and fixed interest rates at record low. Here is the excerpt from today’s report:

 Global stability has suffered ‘setback’ according to IMF

 KEVIN CARMICHAEL
08:57 EST Tuesday, Oct 05, 2010

WASHINGTON — Strain on the financial system has increased over the past six months, led by persistent worries over sovereign debt and a growing concern that banks lack the capital to operate effectively without government support, the International Monetary Fund said.

“The global financial system is still in a period of significant uncertainty and remains the Achilles’ heel of the economic recovery,” the IMF said in its biannual Global Financial System Review, released Tuesday in Washington. Even though the global economy continues to grow, “progress toward global financial stability has experienced a setback” since the previous review in April, the fund said.

The report further clouds the outlook for a global economy as central banks debate the need for further stimulus, politicians quarrel over whether to boost spending or cut deficits and investors drive the price of gold to record levels in a bid for safety.

The IMF actually lowered its estimates of bank losses since 2007 to $2.2-trillion (U.S.) from $2.3-trillion.But that sliver of good news is overwhelmed by the lingering effects of Europe’s sovereign debt crisis and concern that something similar could sideswipe Japan

 Vancouver Real Estate Returning to “Stability”

 The Greater Vancouver Real Estate Board has advised that housing market factors indicate stability in recent months. September sales were up 0.8% from August’s at 2,220 in total sales. This is a 37% decline from record sales set in Sept. 2009 and 20% fewer than the 2,776 sales in Sept. 2007. September’s 2,220 sales represents a 40.1% increase in sales from the 1,585 in Sept. 2008, which you’ll recall was the height of the economic crisis.

 REBGV President Mr. Jake Moldowan commented “ We’ve seen fewer properties coming on the market over the last 3 months. This trend combined with continued attraction of low interest rates, is likely having the effect of less downward pressure on home prices”. Overall prices remain fairly stable with a 2.7% overall decrease from the all time high set in April. For the full report please click on the following link:

  http://www.rebgv.org/sites/default/files/REBGVStatsPackage_Sept2010.pdf

 Have a great week & thanks again for your wonderful support! FYI – Francine and I are leaving tomorrow to celebrate our 20th anniversary and will be away until Oct 26th. We are off to enjoy an Italian & Croatian cruise. Our team remains keen to assist you with any mortgage related questions during our holiday. Take care and chat with you on our return!

 Best,
 Rob & Team

Mortgage & Market Update – Sept. 25, 2010

I hope you have had a fabulous week! As expected the U.S. Federal Reserve kept their target rate unchanged when they met on Tuesday.  Of note in their announcement was their willingness to implement more “Quantitative Easing” if unemployment remains elevated and inflation remains below 2%. According to Wikipedia:

“The term quantitative easing (QE) describes a monetary policy used by central banks to increase the supply of money by increasing the excess reserves of the banking system. This policy is usually invoked when the normal methods to control the money supply have failed, i.e the bank interest ratediscount rate and/orinterbank interest rate are either at, or close to, zero.”

The possibility of further government intervention, combined with fresh signs of labour market weakness in the U.S. rekindled concerns that the U.S. economic recovery has become anemic. This caused a move into bonds by investors, with long term bond yields dropping again this week. Fixed rates remain stable and at record lows!

With low fixed rates, we are being asked by many clients  “Should I lock in? ”. Unfortunately there are no simple answers as everyone’s financial picture and mortgage plans differ. This being said, we are able to share some general pros & cons to consider when determining if a fixed or variable rate strategy is right for you:

Pros of a “Fixed Rate” mortgage

1.     Guaranteed payment amount for the term selected (excellent for those on a tight budget)

2.     Fixed rates are at historic lows so the added “peace of mind” of a fixed rate is being provided with a relatively small increase in monthly payments over variable rate products. If Prime continues to increase, the fixed rate decision has less cost consequence.

3.     No need to keep an eye on interest rates.

Cons of a “Fixed Rate” Mortgage

1.     Less flexibility.  Most fixed rate term contracts cannot be opened for renegotiation during their term without penalty.

2.     Higher penalties.  Fixed rate mortgages generally charge the greater of “3 months interest” or “Interest Rate Differential” to open or break the contract prior to maturity.

Pros of a “adjustable/variable rate” mortgage

1.     Proven method of paying the least amount of interest over the life of a mortgage.

2.     Maximum penalty is 3 months’ interest to break the contract.  No “Interest Rate Differential” penalty to exit the term.

3.     Lowest cost “Open” term for those needing maximum flexibility due to planned sale or aggressive pay down of the mortgage beyond standard terms.

4.     For those with less budget flexibility, the option to convert to a “fixed rate”, if rising rates become a concern.

Cons of a “adjustable/variable rate” mortgage

1.     Fluctuating interest rate & payment amounts. Prime can vary as much as 3% or more during economic cycles.

2.     For true Variable Rate Mortgages where payments remain constant, the possibility of negative amortization exists in a rising rate environment. If payments do not cover minimum interest owed the mortgage actually increases – yikes!.

3.     The need to watch interest rates depending on budget and ability to handle payment fluctuations.

4.       Need to choose lender carefully.  Not all lenders offer a competitive lock-in rate at time of conversion. Beware of “Negotiated” lock-in terms as these may not be competitive with a 3 month penalty incurred to leave for better terms.

Whether its fixed, variable, or a combination of both, our team of Accredited Mortgage Professionals can assist in defining the best plan for everyone’s unique situation!

Have a great weekend!