The Fear and Reality of Rates Rising

....I read too much....

When will the sky start falling? It's a question put forth nearly every 3 days by some financial expert about the current state of real estate in today's day and age. I read articles constantly about the real estate bubble bursting and unfortunately, none of them are about how to be prepared.
The consensus among those pessimists is 'soon, any day now, like really, it's going to happen, this can't last forever, the real estate bubble will burst.'

But man, doesn't it feel like they have been saying this forever?

I admit I am fairly new to the mortgage broker business. I've never seen a public lender rate at above 6% (which was my 1st house mortage). I can't fathom my parents' mortgage, where they had loans of 11-18% interest. So what's happening?

I'm not financial expert, but here's one thing; Money is not infinite. There has to be balance. This is kept in check by 'inflation'. You may remember discussing this in high school economics or socials class. At one time, governments thought the easiest answer to nobody having money was just to make more. I remember my teacher using Post-Germany WW1 as an example of inflation.

And then I found the Internet using this as an example.

But that was centuries ago! Well, not really. More like only 1 century ago. So this idea of inflation or cause and effect, taken as a moment of time in all known history is relatively new.

Amending a Point About the IRD Buy-out/Penalty

So previously I wrote a definition of the Interest Rate differential (see below w/ classic Family Guy moment). I am going to avoid my opinion on the preference for lenders to call the IRD a 'buy-out' instead of a 'penalty' (which it is, oops). 

Interest Rate differential (IRD) If you wish to perhaps buy out your mortgage as you found a better rate elsewhere or wound up with a lot of extra cash, an IRD is what your bank will charge you for breaking the term's agreement. It handcuffs a lot of owners who may wish to take advantage of lower rates as an IRD can run into the thousands of dollars. Simply put, the IRD can be equivalent to a kick in the balls when you check into how much it would cost to pay out your mortgage.

there's your IRD!

Anyways, the large kick to the balls when you find out that if you wish to take advantage of lower rates will cost you $2000-$20,000 is the #1 reason people stay with their current mortgage lenders. 85% of these people inquiring as to penalties buy-outs are with the Big Banks. They, in turn, are being pro-active in keeping you (their best, loyal contributor to their shareholders) from switching over to a smaller lender that offers better savings.

That's just the interest I'm paying for my mortgage?

YET, is that penalty buy-out enough to stop you from investigating your options? 

Top 20(ish) Must Know Definitions when talking about Mortgages

A typical mortgage broker class

Sometimes us mortgage brokers forget that not everybody has gone through an all you need to know about applying for a mortgage course. Websites and MBs will throw certain words at you repetitively as if you know them. Here are some of those words for a handy quick reference guide. Of course, most lenders will also have a glossary of common terms on their websites.

Interest Rate  Simply put, it's the cost of borrowing money from a lender. The higher the interest rate, the more you pay for borrowing.

Amortization The time over which all regular payments would pay off the mortgage but not to be confused with 'term'.

Term The length of the current mortgage agreement, after which time the mortgage contract can be renewed or renegotiated with no penalty to the borrower.

Consider a Term as being a base hit. Amortization is a home run. 

Variable or Fixed Rate  lenders offer you 2 types of interest rates when creating your mortgage agreement; variable and fixed.

Variable  fluctuates with the established Interest Rate which can change 8 times a year. It is also called a Floating Rate. It's a gambler's rate as if the rate starts climbing you may pay more in interest or conversely most lenders allow you to 'lock in' your rate at any time in the first 3 years of your term.

Fixed Rate  the interest rate is agreed upon for the term of the mortgage. You can 'lock in' on a fixed rate and forget about it until the end of your term.

Open Mortgage  A mortgage which can be prepaid at any time, without requiring the payment of additional fees.

Closed Mortgage A mortgage agreement that cannot be prepaid, renegotiated or refinanced before maturity, except if agreed upon beforehand.

Loan to Value (LTV) A lending risk assessment ratio that lenders examine before approving a mortgage. High LTV ratios are seen as higher risk and therefore the loan will generally cost the borrower more in interest. They will also need to purchase mortgage insurance.

LTV = mortgage requested divided by the appraised value of property.

Total Debt Service Ratio How much do you need to be making in order to cover all monthly debts that will occur for your new household? Your TDSR should not exceed 40% of your gross monthly income.

Beacon Score aka Credit Score All lenders require a credit check. The result that is returned to them is your beacon score. A score of 650 or higher is good, 650 or below may cause concerns in approving a mortgage.

has excellent beacon score

Maturity Date  Last day of the term of your mortgage agreement. Most lenders look to lock in another mortgage term before the maturity date.

Appraisal Value  An estimate of the market value of the property in question

Conventional Mortgage A mortgage that does not exceed 80% of the purchase price of the home. Mortgage insurance is not need in a conventional mortgage.

High Ratio Mortgage If you don't have 20% of the purchase price or appraised value of the property, your mortgage must be insured against payment default by a Mortgage Insurer, such as CMHC.

CMHC (Canada) or Genworth These are companies that provide mortgage insurance to the lender against loss in case of default by the borrower. The premium is paid by the borrower. CMHC is federally run and is the number one reason why mortgage insurance rates remain low.

Interest Rate differential (IRD) If you wish to perhaps buy out your mortgage as you found a better rate elsewhere or wound up with a lot of extra cash, an IRD is what your bank will charge you for breaking the term's agreement. It handcuffs a lot of owners who may wish to take advantage of lower rates as an IRD can run into the thousands of dollars. Simply put, the IRD can be equivalent to a kick in the balls when you check into how much it would cost to pay out your mortgage.

there's your IRD!

Porting This allows you to move to another property without having to lose your existing interest rate. You can keep your existing mortgage balance, term and interest rate plus save money by avoiding early discharge penalties.

Principal  the easiest for last; the principal is the actual amount of money you borrowed from the lender, not including interest

Hope it helps! Good luck. Contact me with any questions or clarifications. 

Mortgage Penalties

Or ... How much will I really save? Like, really? 

It's been a crazy millennium so far for mortgages. Long gone are the olden days of what at the time seemed reasonable 6-10% interest rates pre Y2K (remember that fun?). Instead we have had a steady mantra of 'rates won't go lower' and yet they continue to do so - just months ago the industry-shocking rate of below 3% was announced and experts were all like 'WTF!!! That's insane.'

Then this monthin Canada, another mortgage lender announced a 1.99% interest rate and industry experts heads exploded.

DO NOT PRESS PLAY IF YOU DO NOT WANT TO WATCH SOMEONE'S HEAD EXPLODE:

ah...science.

Moving on...now keep in mind that the interest rate in it's essence is the amount that a lender charges you for lending you money. If I lend you $100 and then get you to fill out a bunch of forms that legally say you will be paying me back $110 in six months then I am charging you a flat 10% interest fee.

Pretty simple at it's core. But nothing is simple in banking finances. There are a lot of little tricks to hide that true number, as consumers all love a deal. You got a weed whacker for $129 at Canadian Tire? I bought one at Sears for only $125! Sucker! Banks charge you a semi-annual interest rate, meaning that 10% isn't actually 10% but rather 5% charged to your amount owing 2x a year. And that's just the tip of the iceberg and also maybe for another column.

Investing In Real Estate? Or How Many Mortgages Make a Mortgage Mortgage?

Too Much Money, Not Enough Mortgages...

There are many variables to consider when/if you decide to jump into real estate investment. Like...how do I do it? Can I afford it? Do I even want to do it? Before you jump into looking for your first investment property, here are some important considerations to make.

So much money to burn...

Investable Funds Sit down with your financial adviser (first step; get a financial adviser). Talk with them about how much can you actually afford to invest? 

What are your expenses? How much do you have set aside for emergency funds? Real estate investment will tie up your funds for some time and if you need to liquefy your assets quickly, this could become an issue. You may need to consider a moderate initial investment amount and strategize accordingly - investing in smaller deals, partnering with others or investing in assets that you can readily exit from or all the above.