Mortgage advice deja vu

[DGuller]

Once I obtained that information, I was able to use my understanding to almost immediately recognize the nature of such mortgages.

Its just too bad you didnt "almost immediately" use your rather impressive cognitive powers to communicate in some intelligable manner that you did in fact understand.  Now we are just left with your protestations that you understood.

I did say that what Canadian homeowners had was effectively an ARM, disguised as a series of "fixed rate mortgages".  Can't get much clearer or intelligible than that, I don't think.  It's not my fault if some people choose to not receive the communication.

The ironic thing is that you continue to make your orginal mistake - which I wont continue to bother to explain to you -  and so you continue to demonstrate that you dont actually understand despite your statements to the contrary.

Try explaining just once in analytic terms, instead of focusing on relatively meaningless mechanics such as that there are five entirely separate mortgages over 25 years.  How is such a series of mortgages analytically different from an ARM with a 25-year term that adjusts its interest every 5 years?  Just once will do, as long as it's valid.  Try focusing on the valid part, not the number of repetitions.

[crazy canuck]

Once I obtained that information, I was able to use my understanding to almost immediately recognize the nature of such mortgages.

Its just too bad you didnt "almost immediately" use your rather impressive cognitive powers to communicate in some intelligable manner that you did in fact understand.  Now we are just left with your protestations that you understood.

I did say that what Canadian homeowners had was effectively an ARM, disguised as a series of "fixed rate mortgages".  Can't get much clearer or intelligible than that, I don't think.  It's not my fault if some people choose to not receive the communication.

The ironic thing is that you continue to make your orginal mistake - which I wont continue to bother to explain to you -  and so you continue to demonstrate that you dont actually understand despite your statements to the contrary.

Try explaining just once in analytic terms, instead of focusing on relatively meaningless mechanics such as that there are five entirely separate mortgages over 25 years.  How is such a series of mortgages analytically different from an ARM with a 25-year term that adjusts its interest every 5 years?  Just once will do, as long as it's valid.  Try focusing on the valid part, not the number of repetitions.

Ok, I will try one more time.  I will type slowly so that you might understand it this time.

1) In the US the norm is to have long term mortgages of 25-30 years and perhaps longer.  In Canada that is very rare.  The norm here is to have a mortage of five years (although a mortgages can be as short as a year and some people I know who are very risk adverse have 10 year mortgages).


2) In the US if the long term mortgage has an adjustable rate then at reset times during the life of the mortgage the interest paid on the loan will be adjusted from time to time normally based on a variety of indices.  Wiki tells me that the most common indices are the rates on 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR).  In Canada the situation is quite different for fixed term mortgages.  As I have told you repeatedly, when that mortgage expires there is no automatic renewal nor is there any automatic adjustment in the rate because of course the mortgage no longer exists.  What does occur is that the mortgage can be renegotiated with any lender that the borrower may wish to deal with.  You seem to think there is no difference in these two systems but that is because you dont actually understand what is occuring.

3) Rather then simply accept the new terms that the current lender might offer (as they must in the US under a longer term mortgage with variable rates) the borrower can go to the market to get the best rate possible.  This new rate will depend on the particular bargaining position of the borrower so that borrowers with good credit ratings and 25% or more equity in their property will be able to negotiate a very good new rate.  Unlike the US person who appears to be stuck with whatever the indexes are saying the new rate must be.

4) Another significant difference, is that unlike the US were the amortization rate is the same as the term of the Mortgage, at the end of each term in Canada the amortization rate can be adjusted.  Therefore, if a Canadian is having trouble making their payments at the end of a five year term when they renegotiate the loan they do not need to reduce the amortization rate by five years.  They can keep the old amortization rate or even extend it out.  Similarly if a Canadian is feeling particularly bullish about their future income they can reduce the amortization rate substantially.

5) In the end our system is much more flexible then the American long term adjustable rate mortgages.  And your failure to recognize that is really what amuses me when you assert that you know more then us about our own mortgage system.

4) Another potential difference that comes to mind is the difference in payment penalties for early retirement of the loan.  It seems that under the US system - given the lengthy mortgage terms - the penalties for early retirement of the mortgage would likely be greater.  But I will not pretend to be an expert in another jurisdiction unlike some people.

[Agelastus]

3) Rather then simply accept the new terms that the current lender might offer (as they must in the US under a longer term mortgage with variable rates) the borrower can go to the market to get the best rate possible.  This new rate will depend on the particular bargaining position of the borrower so that borrowers with good credit ratings and 25% or more equity in their property will be able to negotiate a very good new rate.  Unlike the US person who appears to be stuck with whatever the indexes are saying the new rate must be.

Do a lot of Canadians shop around? It's noticeable over here that even when a market is liberalised, the majority of people have a tendency to stick with their original provider, regardless of terms. I am genuinely curious here.

4) Another significant difference, is that unlike the US were the amortization rate is the same as the term of the Mortgage, at the end of each term in Canada the amortization rate can be adjusted.  Therefore, if a Canadian is having trouble making their payments at the end of a five year term when they renegotiate the loan they do not need to reduce the amortization rate by five years.  They can keep the old amortization rate or even extend it out...

That is interesting. Do banks tend to offer less advantageous terms if you try to extend the amortization out out, or does it not matter?

[DGuller]

1) In the US the norm is to have long term mortgages of 25-30 years and perhaps longer.  In Canada that is very rare.  The norm here is to have a mortage of five years (although a mortgages can be as short as a year and some people I know who are very risk adverse have 10 year mortgages).

2) In the US if the long term mortgage has an adjustable rate then at reset times during the life of the mortgage the interest paid on the loan will be adjusted from time to time normally based on a variety of indices.  Wiki tells me that the most common indices are the rates on 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR).  In Canada the situation is quite different for fixed term mortgages.  As I have told you repeatedly, when that mortgage expires there is no automatic renewal nor is there any automatic adjustment in the rate because of course the mortgage no longer exists.  What does occur is that the mortgage can be renegotiated with any lender that the borrower may wish to deal with.  You seem to think there is no difference in these two systems but that is because you dont actually understand what is occuring.

So when the time comes to renegotiate the mortgage, and the LIBOR would be 3 percent points higher than last time, do you think the interest rate offers you will get would be about the same as last time, or about 3 percent points higher?

3) Rather then simply accept the new terms that the current lender might offer (as they must in the US under a longer term mortgage with variable rates) the borrower can go to the market to get the best rate possible.  This new rate will depend on the particular bargaining position of the borrower so that borrowers with good credit ratings and 25% or more equity in their property will be able to negotiate a very good new rate.  Unlike the US person who appears to be stuck with whatever the indexes are saying the new rate must be.

As I said, I am assuming that Canadian banking system works fairly efficiently.  That means that the market rates for the mortgages would still track the appropriate indices.  Whether you get the new interest rate automatically and without the ability to negotiate, or whether you get a new interest rate when shopping for it, should not matter significantly.  The same factors that affect the indices would also affect the rates at which the banks are willing to lend.

4) Another significant difference, is that unlike the US were the amortization rate is the same as the term of the Mortgage, at the end of each term in Canada the amortization rate can be adjusted.  Therefore, if a Canadian is having trouble making their payments at the end of a five year term when they renegotiate the loan they do not need to reduce the amortization rate by five years.  They can keep the old amortization rate or even extend it out.  Similarly if a Canadian is feeling particularly bullish about their future income they can reduce the amortization rate substantially.

You can refinance in US as well.  You can usually change the terms of the mortgage if you want for a price of a couple of fees.

4) Another potential difference that comes to mind is the difference in payment penalties for early retirement of the loan.  It seems that under the US system - given the lengthy mortgage terms - the penalties for early retirement of the mortgage would likely be greater.  But I will not pretend to be an expert in another jurisdiction unlike some people.

No, prepayment penalties are rare in US mortgages, even 30-year fixed mortgages.

Again, I'm not pretending to be an expert, I'm just thinking through the implications of a Canadian mortgage.  Because I thought things through, I came to conclusion that a series of such mortgages essentially amount to an ARM.  You still didn't point one significant valid reason why my conclusion is invalid.

[Barrister]

4) Another potential difference that comes to mind is the difference in payment penalties for early retirement of the loan.  It seems that under the US system - given the lengthy mortgage terms - the penalties for early retirement of the mortgage would likely be greater.  But I will not pretend to be an expert in another jurisdiction unlike some people.

Now unlike DG I don't claim to be an expert in things I am not an expert in, but I believe this is incorrect.  I believe early payment penalties are uncommon to rare in the US.

[DGuller]

Now unlike DG I don't claim to be an expert in things I am not an expert in, but I believe this is incorrect.  I believe early payment penalties are uncommon to rare in the US.

I never claimed to be an expert on this.  I also never made false claims about the claims of others.

[sbr]

4) Another potential difference that comes to mind is the difference in payment penalties for early retirement of the loan.  It seems that under the US system - given the lengthy mortgage terms - the penalties for early retirement of the mortgage would likely be greater.  But I will not pretend to be an expert in another jurisdiction unlike some people.

Now unlike DG I don't claim to be an expert in things I am not an expert in, but I believe this is incorrect.  I believe early payment penalties are uncommon to rare in the US.

Pre-payment penalties are usually in the first couple of years, if they are used at all.  /very inexpert views

[DGuller]

When I point out that this cheap money will likely become expensive money during the term of my mortgage they dont have as many glib answers.

Wait, I thought interest rates didn't change during the term of your mortgage?  Could it be that before this debate got heated and you dug in your heels, you actually knew that in practical terms, the real term of the mortgage wasn't the five years that it technically is, and that during the real term of your mortgage interest rate could change?

[sbr]

When I point out that this cheap money will likely become expensive money during the term of my mortgage they dont have as many glib answers.

Wait, I thought interest rates didn't change during the term of your mortgage?  Could it be that before this debate got heated and you dug in your heels, you actually knew that in practical terms, the real term of the mortgage wasn't the five years that it technically is, and that during the real term of your mortgage interest rate could change?

[crazy canuck]

When I point out that this cheap money will likely become expensive money during the term of my mortgage they dont have as many glib answers.

Wait, I thought interest rates didn't change during the term of your mortgage?  Could it be that before this debate got heated and you dug in your heels, you actually knew that in practical terms, the real term of the mortgage wasn't the five years that it technically is, and that during the real term of your mortgage interest rate could change?

What are you talking about. It is clear to me that you really dont understand now.

Interest rates dont change during the term of the mortgage.   Also try to get through your thick head that the term of the mortgage ends.

btw.  If I was to take a 10 year fixed rate mortgage my rate would only, in your words, be adjusted once before I was debt free (assuming a 20 year amortization).  In the US is it possible to get a 20 year variable rate mortgage that will only have the rate changed once?

[DGuller]

What are you talking about.

That part: "When I point out that this cheap money will likely become expensive money during the term of my mortgage".

Interest rates dont change during the term of the mortgage.

Go back in time and tell that to yourself.

If I was to take a 10 year fixed rate mortgage my rate would only, in your words, be adjusted once before I was debt free (assuming a 20 year amortization).  In the US is it possible to get a 20 year mortgage variable rate mortgage that will only have the rate changed once?

Probably not.  It doesn't make the entirety of your two mortgages to come out to be a fixed rate mortgage.

[crazy canuck]

Do a lot of Canadians shop around? It's noticeable over here that even when a market is liberalised, the majority of people have a tendency to stick with their original provider, regardless of terms. I am genuinely curious here.

It is becoming more usual.  Competition amongst lenders has increased considerably over the last 20 years.  The terms the average borrower can now negotiate are very flexible and favourable.

That is interesting. Do banks tend to offer less advantageous terms if you try to extend the amortization out out, or does it not matter?

No, in fact the banks try to encourage it because it means they will earn more interest over time.  It is sadly quite common for borrowers to have had a mortgage for 10-15 years but still have a 20-25 year amortization period when they come to renegotiate their new mortgage.  Its all about cash flow for the average borrower and the less they can make their monthly payment - by extending out the amortization period, the better the think they are but of course the increased interest payments really hurt them.

[crazy canuck]

What are you talking about.

That part: "When I point out that this cheap money will likely become expensive money during the term of my mortgage". [/quote]


Yes, during the term of my mortgate, while my interest rate will not increase, it is possible that interest rates in general may well increase so that when I come to renogotiate my mortgage I will not be able to negotiate a rate as low as I would wish.

I thought an expert in the financial field would understand such a simple concept.

[Agelastus]

No, in fact the banks try to encourage it because it means they will earn more interest over time.  It is sadly quite common for borrowers to have had a mortgage for 10-15 years but still have a 20-25 year amortization period when they come to renegotiate their new mortgage.  Its all about cash flow for the average borrower and the less they can make their monthly payment - by extending out the amortization period, the better the think they are but of course the increased interest payments really hurt them.

Ah, I see. I was thinking that trying to increase the amortisation period would be a sign that you were a worse risk than when you originally took out the mortgage. I hadn't considered that the potential gain of the extra accrued interest would counterbalance this.

[crazy canuck]

No, in fact the banks try to encourage it because it means they will earn more interest over time.  It is sadly quite common for borrowers to have had a mortgage for 10-15 years but still have a 20-25 year amortization period when they come to renegotiate their new mortgage.  Its all about cash flow for the average borrower and the less they can make their monthly payment - by extending out the amortization period, the better the think they are but of course the increased interest payments really hurt them.

Ah, I see. I was thinking that trying to increase the amortisation period would be a sign that you were a worse risk than when you originally took out the mortgage. I hadn't considered that the potential gain of the extra accrued interest would counterbalance this.

That is it exactly.  The risk to the bank is minimal and offset as you said by the gain in extra interest and the fact that the lender is better able to afford their monthly payments.

As I understand it part of the problem in the melt down in the American system is that people were tied into adjustable rate mortgages that they could not afford when the rate was adjusted.  In Canada that kind of problem is reduced in part because of this flexibility to amortization periods after the fixed rate mortgage terms end.


Its really too bad that our resident expert in all things he has heard something about (DGuller) cant understand these basic principles.