Monday, April 29, 2013

The low interest rate trap

I can't say it enough; this is an excellent opportunity to use today's low interest rates to your advantage by paying extra on your mortgage. I truly feel that if you cannot afford to do this, then you may be in way over your head. A five year fixed rate of 2.89% is not "normal" and is artificially low. My advice would be to pay your mortgage as if rates were at least 4%. Not only will you be setting yourself up for less shock when rates eventually rise, you'll make a big dent in your outstanding mortgage balance. As the article says "If you owe lots of money, it’s a good time to pay it down. You can make a big dent in what you owe with just a little discipline."  

Why Canadians are stuck in a low interest rate trap

It started with NASDAQ plunge in 2000: Cheap credit is blessing and curse. Bank of Canada’s challenge is how to let interest rates rise safely.
By:Adam MayersPersonal Finance Editor, Published on Sat Apr 27 2013

Western economies are caught in a low interest rate trap that is proving a difficult problem to fix.
Rates have been so low for so long, that the trick is how to wean the patient off the cheap-money drug without causing an economic collapse. Nobody knows how to do it safely, which is why rates are bound to stay low for a while yet.

My first mortgage in the early 90s was a one-year term at 14.25 per cent. It kept me awake at night, wondering how I’d cope if rates kept rising. This week you can get a five-year, fixed term under three per cent.

Back then, there wasn’t much borrowing slack either. A home-secured line of credit was a decade away. Businesses had credit lines, but everyone else had loans with fixed terms which meant you had to pay them off.

Now you can get a line of credit with a 3.5 per cent rate, secured against your house, with an option to pay only the interest every month. The banks use that as a selling feature. You can spend $10,000 on a holiday, or a renovation, or new furniture, anything you want and only pay $29.16 a month. Of course, you still owe the $10,000.
Savers, meanwhile, are being punished by pitiful rates of return that are less than inflation. It takes one dollar 37.9 years to double at a rate of 1.9 per cent, which is the best rate I could find for a one-year Guaranteed Investment Certificate (GIC) last week.

These artificially low rates have created the situation where, as of mid-March, according to Statistics Canada, we owed $165 for every $100 of disposable income. This isn’t far off where Americans were just as their housing market collapsed.
This great borrowing spree has deep roots, which is why it’s such an intractable problem. Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty go on about it, but they’ve caused it, moving in lockstep with central bankers elsewhere.

This all began on March 11, 2000 when the U.S. Nasdaq technology stock index peaked and the ‘dotcom’ bust began. Two years later, the Nasdaq had lost nearly 80 per cent of its value as internet stocks with high hopes, but no businesses disappeared. In the middle of that, on Sept. 11, 2001, came the attacks on the twin towers in New York
The George Bush administration wanted to cushion the economic impact and to keep consumers borrowing, so the U.S. Federal Reserve pushed rates down. The policy worked so well it created a super-heated housing boom. This disaster in the making galloped along until 2008, when at its last gasp, mortgages were being secured by people without jobs.

The housing collapse threatened to create a new Depression. The Fed pushed rates down again, as low as they could go. Not much more than a year later in 2009 came the European debt crisis. Countries, rather than people, had been living beyond their means for decades. With banking systems teetering, the answer was to lower rates. Even so, Portugal, Ireland, Spain, Italy, Greece and more recently Cyprus are all on life support.
The big surprise is that all the cheap money hasn’t fixed a thing. It can’t because consumers everywhere are tapped out. If not, we should have long since seen a wave of inflation leading to rising rates. That expectation saw gold, an inflation hedge, gradually rise to $1,900 (U.S.) an ounce by September, 2011. With no inflation in sight, gold is down 24 per cent from its peak.

Not much inflation is on the horizon either. In its recent quarterly report, the Bank of Canada downgraded economic growth to a meagre 1.5 per cent this year. Better times return in 2015, the bank says.
In the meantime, if you have a mortgage, you may want to lock in for five years and enjoy the security. A recent Bank of Montreal survey found that about half of first time buyers are doing that. If you owe lots of money, it’s a good time to pay it down. You can make a big dent in what you owe with just a little discipline.

Wednesday, April 10, 2013

Secrets of Buying a Great Condo

In the past year I have heard of many newer condos in Edmonton with some major building deficiencies. A Realtor that I work with often, Derek Hulewicz, has written a great article about the issue...

Wednesday, March 7, 2012
Secrets of Buying a Great Condo...

Wow! Can you find a condo building in Edmonton that hasn’t had special levies? And I don’t mean the ones just recently built that shouldn’t. Too soon? Too soon? (I had to quote Jeff Rose). What happened to quality of craftsmanship? Can we still build well and build to last? You would think that with present engineering and technologies we should be building better that those who constructed all the Pyramids, ancient cities, castles and churches that are still standing till now. You may say; we live in the age where quantity has replaced quality, I guess the latter costs too much, or does it?

It’s almost impossible to protect yourself from future special assessments or levies as a condo buyer or an owner. For some it has been a nightmare, for others who have been luckier a pleasant experience. In Downtown and surrounding neighbourhoods like Oliver, Rossdale, Riverdale, Westmount and Queen Marry Park, a disturbing number of the condominiums built after 2000 have had or are having deficiencies that are past developer’s warranties and have to be fixed with extra funding from the current owners. Here just some of them: Grandin Court, Terrace Court, Parkside Court, Omega, Imperial, the View, Rossdale Court, Glenora Gates, and St. Lawrence Court. Some of them were built by TESCO, we’ve all heard that name. I haven’t heard anything bad about Alta Vista or River Vista built by Christenson Development, so far so good. What about the Icons? Great location and design, not too fond of either of their lobbies constructed by Langham Properties from Edmonton.

The amount of special assessments can vary from $1000 to $30,000 and even higher. In some cases, the board will rather increase the condo fees than call for special levy. I suppose I wouldn’t be upset about couple of grand over say 5 years but $10,000 or $20,000 would definitely spike the blood pressure in my veins. It seems like the magical timeline of some of these major and expensive deficiencies appearing would be between 5 to 10 years down the road, when warranties are out, convenient for developer. I say, let’s implore the builders to give 10 year warranties on major items like structural, exterior, windows, roof, elevators, heating and cooling systems, main electrical and plumbing. Would that be nice?! It’s going to cost you!

So what is the secret to buying well? Older than 10 year? Like wine, condos get better with age? LOL! I would say yes to some and no to others, anything newer than 2002, give or take couple of years, and you are taking a chance. Anything older than 1990 and you are looking at possible levies to put new windows, roofs, upgrading the elevators, boilers, etc. (Keep in mind some of the older high-rises, lofts and walk-ups had the majority or some work already done). The funny thing is that there aren’t many condos in Downtown area that were built between 1980 and 2000, most are from 1960’s, 1970’s, and 2000 plus.

Conclusion: All this info does sound confusing and trying to generalize and find a definite answer to this puzzle maybe impossible. However, all things being equal, the secret is to take every building under the microscope and examine separately. Then, after doing your homework take a plunge and hope for the best, you are not alone. There are definitely great condo buildings out there and there are those that I would stay away from and would not recommend to my clients, but we are not here in business of bashing but just trying to provoke a discussion and find more information on this subject. By the way, I would be happy to hear what you have to say, just comment to this post or give me a call.


Derek H.

Tuesday, April 9, 2013

When you look for a mortgage, shop a Mortgage Broker!

By now you've probably all heard the news story about how RBC is laying off 45 Canadian workers to outsource their jobs to an offshore company, and, what's even harder to stomach, is that they are having their current workers train the individuals who will be taking over their jobs. I applaud these workers for going public on this matter. 

Here's an article on how this latest move by RBC is creating backlash from the public and furthering support for Mortgage Brokers who are local, small business people who make money in our community and then spend money back in our community. Using a Mortgage Broker versus one of the Big 5 Banks to get your mortgage is "shopping" at a local business. According to the 3/50 Project, for every $100 spent in a local business, $68 returns to the community. However, if the same amount is spent at a large corporation, only $43 returns to the community. 

Because you don't actually have to pay your Mortgage Broker to arrange your mortgage you may not see your choice to use the services of a Mortgage Broker as shopping locally. But, it is! We are paid to set up your mortgage, and while the money doesn't come from your pocket (we are paid by the lending institution), your choice to use a Mortgage Broker supports your local community by helping to foster small business. 

I am a small business. I shop in my community and I try to also support locally owned businesses. Do your community a favour, when you look for a mortgage, shop a Mortgage Broker! 

If you're curious how you can further support other small, independent business in Alberta, check the Live Local website! 

Monday, April 1, 2013

Where do mortgage rates go from here?

Here's a great article explaining what's going on with the current mortgage interest rate environment. As per the author, interest rates are unbelievably low right now and yet, the housing market is cooling in much of the country. That being said, the Prairie Provinces are "poised to avoid the downturn". Good news for us. 

What happens when interest rates inevitably begin to rise*? Marr states that it’s not a stretch to think the rate on both the 5 year and 10 year fixed rates "will climb two percentage points. And what of the prime lending rate? It’s still 3% but tied to the Bank of Canada, which has been threatening to raise rates for months."

While rates are expected to remain low for some time, it's imperative that "people really need to plan for a rainy day when rates will go up and that means having enough money to cover a mortgage based on that higher payment." My advice would be to set up automatic extra payments on your mortgage. Even though you may be paying less than 3.00% on your current mortgage, you would reap a number of benefits by setting your mortgage payment as if you were paying 5.00%. The benefits are twofold. First, you will pay your principal outstanding balance much quicker, saving thousands in interest over the life of your mortgage and shortening your remaining amortization (how long it will take you to pay off the balance in full). Second, you will be prepared for the eventual rise in interest rates because you have been paying your mortgage as if you had a higher rate all along. If you would like to figure out what your mortgage payment would be at 5.00%, please visit the calculators section of my website. 

If you have any questions about how to best take advantage of today's low interest rate environment, please feel free to get in touch with me anytime.

*How Are Mortgage Rates Set?

The Bank of Canada sets what is known as the target overnight rate. This overnight rate doubles as the interest rate chartered banks are charged to borrow money. In turn, banks use the overnight rate to set their prime lending rate - the rate they offer their best customers. When the Bank of Canada changes its overnight rate (they revisit it about eight times a year) it signals to the banks that it wants them to adjust their prime lending rates. Variable mortgage rates and lines of credit move in conjunction with the prime lending rate.

Fixed-rate mortgages are a little different. Banks use Government of Canada bonds to raise money for fixed-rate mortgages. In the bond market, interest rates fluctuate more often because they're subject to the changing moods of traders and bond investors. These people are constantly trying to figure out how fast the economy will grow and where inflation is headed. Tip: Watch the bond market for clues on where fixed mortgage rates will go next.