Mortgage advice deja vu

[Barrister]

Huh - I just looked it up at the RBC does offer a 25 year term mortgage.   

[DGuller]

WHen I read up on what an ARM is, I think you are mistaken in calling a 5 year fixed term, 25 year amortization mortage an adjustable rate mortgage.  An adjustable rate mortgage has the interest rates vary, or adjust, over the term of the mortgage.

http://en.wikipedia.org/wiki/Adjustable-rate_mortgage

They are in fact a fixed rate mortgage, since the interest rate is fixed for the term of the mortgage.

http://en.wikipedia.org/wiki/Fixed_rate_mortgage

Now maybe in the US you can get much longer terms of a mortgage then you can in Canada.  But that doesn't make a shorter 5 year term suddenly 'adjustable'.

Of course, the trick is in redefining what "term of mortgage" is.  If you allow the amortization term to be different from the mortgage term, then any loan can be called fixed if you strain your imagination hard enough.  Have a mortgage term of 1 month, and the amortization term of 30 years, that would also be a fixed rate mortgage by your definition.

[Barrister]

Of course, the trick is in redefining what "term of mortgage" is.  If you allow the amortization term to be different from the mortgage term, then any loan can be called fixed if you strain your imagination hard enough.  Have a mortgage term of 1 month, and the amortization term of 30 years, that would also be a fixed rate mortgage by your definition.

It's not my definition.   

Of course a 1 month term would be silly, but you can go as low as a 1 year fixed term.

And I don't know what you mean by "if you allow the amortization term to be different".  There's no reason they have to be the same. 

[DGuller]

It's not my definition.   

It's not a common definition either.  If you read the Wiki article that you quoted, you will see this:

Outside the United States, fixed-rate mortgages are less popular, and in some countries, true fixed-rate mortgages are not available except for shorter-term loans. For example, in Canada the longest term for which a mortgage rate can be fixed is typically no more than ten years, while mortgage maturities are commonly 25 years.

The very article that you quoted implies that Canadian "fixed rate mortgages" are not true fixed rate mortgages.

Of course a 1 month term would be silly, but you can go as low as a 1 year fixed term.

Interestingly enough, 1 year fixed term is what many US ARMs are.

And I don't know what you mean by "if you allow the amortization term to be different".  There's no reason they have to be the same.

They don't have to be, unless you want the mortgage to be a true fixed rate mortgage.  The point of the fixed rate mortgages is that you have a commitment from bank that you will be able to extinguish the entirety of the loan for the terms that are not going to change in the middle of your repayment plan.  In US, if you take out a 30-year fixed rate mortgage, then for every month of those 30 years you will be paying the same exact monthly amount, guaranteed.  As long as you make the payment every month, you're not going to worry that some time down the road you'll be left holding a big debt without the means to finance it.

[Malthus]

I don't see why you're being so needlessly aggressive about this.

Touche.

In Canada a fixed rate mortgage has a fixed interest for the period of the mortgage, which is different from the amortization period.  A variable rate mortgage varies with the Bank of Canada rate, this too lasts for a number of years which is different than the amortization period.

Yes, I understand the Canadian terminology now.  I was just bemoaning the dangerously misleading nature of the "fixed rate" Canadian mortgage.  That mortgage is really an ARM, and ARM is indeed a considerably more risky type of mortgage than an American fixed rate mortgage. 

The ARM mortgage protects you from inflation to a lesser degree, it doesn't protect you from a hike in interest rates, and for all practical purposes it doesn't contain an embedded option related to the fact that the fixed interest stays fixed regardless of what happens elsewhere.  All those features make this type of mortgages far less suited to be used as a relatively safe source of cheap borrowed money.  That explains why Canadians on this board are so much more risk-averse with thier mortgages;  flirting with an ARM mortgage is indeed often a lunacy.

Well, it is possible i understand to get a rate locked in for a decade. The risk is low *if* you also pre-pay, so that the effective term is also a decade.

In short, there are two features of Canadian mortgages that make them much less attractive for speculative borrowing than in the US;

1. Fixed rates limited to 10 years, max (more usually 5 years) - so eventually the borrower must face interest rate risk; and

2. No interest-rate tax deductions.

That being noted, I *still* do not think it is a great idea to speculatively borrow against the equity of your house to invest in equities, even in the US - the difference in rates is simply not good enough once that difference is 'written down' to account for the risks of equity investments, at least, for most average idiots like me. If one has some sort of investment insights or skills and can beat the index, then sure.

You are quite right that only fools plug the "it can't go down in value!" about real estate. Likewise, it is unwise to boost too much the notion that equities will always perform better than mortgage rates (even taking into account the tax break). That may be true over very long time horizons, but there is many a senior not dining on caviar in retirement right now because they overexposed themselves to the risks of equity investments ... 

[Barrister]

Speaking of mortgage advice...

My wife and I are doing some renos to the house in advance of baby arriving.  We didn't have enough in savings for what we wanted to do, so went to talk to the bank.  What the bank suggested was a new mortgage.

When we bought 3 years ago we didn't quite have 25%, so we god a CMHC gov't insured mortgage (we had ~20% down).  However the bank felt that due to increasing house prices our house was worth $80k more, which meant we had more than 25% equity, so we re-financed the mortgage (fees waived), and now have a line of credit where we can draw against the difference between the 25% equity and or remaining loan.

It all makes sense, but I felt kind of nervous because it was all due to an increasing housing market.  Now there's little risk of the market here collapsing, as much of the pressure is due to a lack of available lots, and the Yukon's twin industries of government and mining are both doing well right now, but still... 

[crazy canuck]

I was just bemoaning the dangerously misleading nature of the "fixed rate" Canadian mortgage. 

Its only dangerous to people that dont know that they are talking about.

[crazy canuck]

Speaking of mortgage advice...

My wife and I are doing some renos to the house in advance of baby arriving.  We didn't have enough in savings for what we wanted to do, so went to talk to the bank.  What the bank suggested was a new mortgage.

When we bought 3 years ago we didn't quite have 25%, so we god a CMHC gov't insured mortgage (we had ~20% down).  However the bank felt that due to increasing house prices our house was worth $80k more, which meant we had more than 25% equity, so we re-financed the mortgage (fees waived), and now have a line of credit where we can draw against the difference between the 25% equity and or remaining loan.

It all makes sense, but I felt kind of nervous because it was all due to an increasing housing market.  Now there's little risk of the market here collapsing, as much of the pressure is due to a lack of available lots, and the Yukon's twin industries of government and mining are both doing well right now, but still... 

The key thing is that you are not paying a premium for falling below the magic 25% barrier.  Btw lets leave DGuller to figure out why that is important.

[Grey Fox]

Huh - I just looked it up at the RBC does offer a 25 year term mortgage.   

ING has a 35 years one.

[DGuller]

I was just bemoaning the dangerously misleading nature of the "fixed rate" Canadian mortgage. 

Its only dangerous to people that dont know that they are talking about.

On the contrary, misuse of terms is most dangerous to people who do know what they're talking about.  Those that don't wouldn't know enough to be misled.  Real fixed rate mortgages and ARMs are considerably different types of mortgages, and have many contrasting features that are extremely pertinent to this thread's topic.  It's extremely unfortunate when one is called by the other's name.

[DGuller]

Speaking of mortgage advice...

My wife and I are doing some renos to the house in advance of baby arriving.  We didn't have enough in savings for what we wanted to do, so went to talk to the bank.  What the bank suggested was a new mortgage.

When we bought 3 years ago we didn't quite have 25%, so we god a CMHC gov't insured mortgage (we had ~20% down).  However the bank felt that due to increasing house prices our house was worth $80k more, which meant we had more than 25% equity, so we re-financed the mortgage (fees waived), and now have a line of credit where we can draw against the difference between the 25% equity and or remaining loan.

It all makes sense, but I felt kind of nervous because it was all due to an increasing housing market.  Now there's little risk of the market here collapsing, as much of the pressure is due to a lack of available lots, and the Yukon's twin industries of government and mining are both doing well right now, but still... 

The key thing is that you are not paying a premium for falling below the magic 25% barrier.  Btw lets leave DGuller to figure out why that is important.

Why what is important?

[crazy canuck]

I was just bemoaning the dangerously misleading nature of the "fixed rate" Canadian mortgage. 

Its only dangerous to people that dont know that they are talking about.

On the contrary, misuse of terms is most dangerous to people who do know what they're talking about.  Those that don't wouldn't know enough to be misled.  Real fixed rate mortgages and ARMs are considerably different types of mortgages, and have many contrasting features that are extremely pertinent to this thread's topic.  It's extremely unfortunate when one is called by the other's name.

Its interesting how the only one that could potentially be misled is the one that tries to sound like he knows what he is talking about.

[crazy canuck]

Speaking of mortgage advice...

My wife and I are doing some renos to the house in advance of baby arriving.  We didn't have enough in savings for what we wanted to do, so went to talk to the bank.  What the bank suggested was a new mortgage.

When we bought 3 years ago we didn't quite have 25%, so we god a CMHC gov't insured mortgage (we had ~20% down).  However the bank felt that due to increasing house prices our house was worth $80k more, which meant we had more than 25% equity, so we re-financed the mortgage (fees waived), and now have a line of credit where we can draw against the difference between the 25% equity and or remaining loan.

It all makes sense, but I felt kind of nervous because it was all due to an increasing housing market.  Now there's little risk of the market here collapsing, as much of the pressure is due to a lack of available lots, and the Yukon's twin industries of government and mining are both doing well right now, but still... 

The key thing is that you are not paying a premium for falling below the magic 25% barrier.  Btw lets leave DGuller to figure out why that is important.

Why what is important?

What! I thought you were the expert here.

[DGuller]

Its interesting how the only one that could potentially be misled is the one that tries to sound like he knows what he is talking about.

I'm not trying to sound like I know what I'm talking about, I do actually know what I'm talking about.  I'm sorry if I'm knowledgeable enough to hurt your feelings by pointing out that a mortgage whose rate resets every five years is not a fixed rate mortgage, and is in fact significantly different from a fixed rate mortgage.

However, it doesn't mean that I'm wrong about what I'm saying.  The fact that Wiki agrees with my knowledge of terms is also not an indication that I'm wrong about what I'm saying.  The fact that my finance book, the one I'm using to study for an actuarial exams about investments right this moment, agrees with my knowledge of terms* is not an indication that I'm wrong about what I'm saying.

Sometimes the fact is that I'm just right about what I'm saying, and trying to mock me for actually daring to claim knowledge when I do actually have knowledge is a cheap way out.


* Investments by Bodie, Kane, and Marcus, page 34.

[MadImmortalMan]

To be fair, it is kinda weird that you'd call an adjustable rate mortgage a fixed one just because it does contain a fixed period. That's what we'd call a 5-year ARM. Your average bumbling immigrant from the US would sign his mortgage thinking it actually fixed.