For your information - November 2007
Some interesting economic developments!
Who would have ever imagined a U.S. $1.06 Canadian dollar? It does make sense though. Internationally, Canada is perceived as a healthy well-managed commodity-based economy. Conversely, the U.S. has low consumer confidence and is flirting with a mild recession. The U.S. continues to be affected by the sub-prime mortgage crisis. In Canada, underwriting standards have always been far more prudent so we're not expecting a similar setback. Although as a major trading partner with the U.S. we'll likely feel some economic rumblings from their slowdown. As a result, interest rates will need to be kept in check or we'll see some downward pressure in order to keep the 2008 economy healthy.
Again changing economic environments cause us to wonder which is better - fixed or variable-rate mortgage. Simply put, there is no right or wrong answer. Historically, variable mortgages have proven to average out with less total interest paid for our homes. Currently though there is a marginal spread between fixed and variable. Fixed mortgages are hovering around 5.8% while variable is around 5.6% ... so what do we do?
Variable is predicated on two things. No one can actually forecast if rates will go up or down, yet we know if they go up, they must come down and vice versa. If you also consider that most Canadian mortgages are paid off in about 18 years, it's clear that we should focus on overall average interest paid.
The rationale behind variable mortgages is very similar to mutual funds. When you purchase a mutual fund, you don't expect steady appreciation for the next 20 years. You expect strong periods and weak periods, but an overall strong long-term return. Another similarity is that you are not locked in. You can convert a variable mortgage to another term free of charge whenever we feel the time is favourable ... just like you can do anytime with a mutual fund. If instead we choose a five year fixed and want to change to a better alternative before the five years is up, we can't without paying a penalty. Everyone knows someone who wanted to change their mortgage early to something more appropriate yet they couldn't until their maturity date.
Fixed mortgages certainly have their place too. Although historical data indicates there are long term savings when taking a variable rate mortgage, there is no immediate gain with variable because the rates are so similar. So many first time buyers, and those with restricted budgets, may choose fixed for now with the intentions of going variable in the future. Certainly a sound plan for many new home owners with low downpayments.
Building the right mortgage is what I do best. Keep in mind mortgages are not necessarily considered bad debt, but rather a powerful financial tool to be leveraged for your advantage. That's why is important to know all the facts about mortgages. In the last three years there have been more advancements in Canadian mortgage products than in the last thirty. My responsibility to my clients is to ensure they are treated fairly by the lenders and to keep them abreast of the changing mortgage environment. Did you know that longer amortizations actually help you pay less interest, and mortgages can be set up for tax deductible investing? Other exciting developments include zero downpayments at the best mortgage rates, which is now available for rental properties. It's easier and more practical to borrow mortgage money then ever before.
Watching the economy will be very interesting in 2008. I will keep you posted on any further developments that can save and make you money!
