Mortgage advice deja vu

[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.

If there was a guarrantee that this cheap money would remain cheap then I would be more tempted but that does not seem to be the prevailing view.

I'm not sure what you mean by this.  Do you have an adjustable rate mortgage?

No its a fixed rate mortgate.  But when it comes to renogotiate the mortgage after the 5 year term expires I dont want to take the risk that interest rates will be considerably higher.

So lets say, not actual numbers but for argument sake, that I pay off 300,000 over the next 5 years in extra payments and at the end of the 5 years my mortgage payments jump 5% or more over what I am paying now.

I will be happy that I repayed that 300,000 rather then paying for what will become rather expensive money unless I can find an investment that will give me a better return (after calculating the money I save on my current interest amount and the hit I avoid after the term ends).

That doesn't sound like a fixed rate mortgage to me.  In a fixed rate mortgage, your interest is fixed for the entire term of the mortgage.  Obviously equation changes in a major way when you have an adjustable rate mortgage.

[Malthus]

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.

If there was a guarrantee that this cheap money would remain cheap then I would be more tempted but that does not seem to be the prevailing view.

I'm not sure what you mean by this.  Do you have an adjustable rate mortgage?

No its a fixed rate mortgate.  But when it comes to renogotiate the mortgage after the 5 year term expires I dont want to take the risk that interest rates will be considerably higher.

So lets say, not actual numbers but for argument sake, that I pay off 300,000 over the next 5 years in extra payments and at the end of the 5 years my mortgage payments jump 5% or more over what I am paying now.

I will be happy that I repayed that 300,000 rather then paying for what will become rather expensive money unless I can find an investment that will give me a better return (after calculating the money I save on my current interest amount and the hit I avoid after the term ends).

I have a similar deal - 15 year term, rate fixed for 5 years, negotiable on the 5th anniversary. You get some of the benefits of a fixed-rate combined with a lower rate than a fully-fixed rate over the whole term.

Combine that with no penalties for pre-payment, and it makes sense to pre-pay ASAP if you think rates are likely to rise (and they can hardly fall!) - your principal is a lot less, so you are going to pay less interest on it after the 5 year term.

Knowing what I know now, I'd have tried to arrange a longer term, 25 or 30 years, with the same deal - fixed for 5 years - because presumably, I could have gotten an even lower rate. If you plan to pre-pay and the terms allow for this the length of the term is irrelevant to you other than that it sets the minimum you can pay per month and it affects the rate.

[crazy canuck]

That doesn't sound like a fixed rate mortgage to me.  In a fixed rate mortgage, your interest is fixed for the entire term of the mortgage.  Obviously equation changes in a major way when you have an adjustable rate mortgage.

I think we have established in other threads the mortgages can and do work differently in the States.  Here a fixed rate mortgage of 5 years amortized over 20-30 years is pretty standard stuff.  That is what we  call a fixed rate mortgage.

[MadImmortalMan]

I think I read somewhere that Canada doesn't have the 30-year fixed mortgages Americans are used to. All theirs have the 5-year thing.


Edit: Ninja

[crazy canuck]

Knowing what I know now, I'd have tried to arrange a longer term, 25 or 30 years, with the same deal - fixed for 5 years - because presumably, I could have gotten an even lower rate. If you plan to pre-pay and the terms allow for this the length of the term is irrelevant to you other than that it sets the minimum you can pay per month and it affects the rate.

Agreed.  But at the time I did my mortgage longer terms were going to cost me a considerable premium.  I got a very low rate and so I am able to save a wad of cash to meet my max prepay limits without penalty.

[crazy canuck]

I think I read somewhere that Canada doesn't have the 30-year fixed mortgages Americans are used to. All theirs have the 5-year thing.


Edit: Ninja

Yeah, that is the difference.  It is possible to work something out, as Mathus was referring to but the premium on going that long is often not worth it.

[DGuller]

That doesn't sound like a fixed rate mortgage to me.  In a fixed rate mortgage, your interest is fixed for the entire term of the mortgage.  Obviously equation changes in a major way when you have an adjustable rate mortgage.

I think we have established in other threads the mortgages can and do work differently in the States.  Here a fixed rate mortgage of 5 years amortized over 20-30 years is pretty standard stuff.  That is what we  call a fixed rate mortgage.

I see.  Canadians may know how to regulate their banks, but they sure are struggling with English.  Over here, when you have a mortgage whose interest rate is periodically adjusted, it's called an adjustable rate mortgage.  It's called adjustable in honor of the adjustments that are made periodically.

[viper37]

How many people can afford to lose their homes and retirement savings? They are also "investments". 

Let's say you (or make it your couple) make 300 000$ a year.
Your house is worth 1 million$.

Your current mortgage balance is 650k.

You could borrow an additional 100 000$ and invest it.
Assuming the worst case scenario, you won't lose your house for 100 000$, you make enough money in a year to be able to repay the loan.  It's not a pleasing situation, your wife may yell at you a couple of times, but eventually, you will live through it.

Now, let's say you make 100 000$ a year.
You house is worth 600 000$.
Your mortgage balance is 450 000$.
You borrow an additional 90k to invest on the market.
Your budget is now so tight that any adverse situation would force you to drastically cut on your lifestyle.

You lose all the 90k$.
You are in deep shit, and you will probably lose your house, compared to the other situation.

[viper37]

Heh, using mortgages as a "loss leader" makes no sense. The amounts of money involved in mortgages are orders of mangnitude greater that the fees received from credit card debt and the like. 

In my case, I use different banks anyway, and I pay off my card all the time.

actually, they really are loss leader.  And they will bow before you to offer a mortgage, because they don't risk much.  If you don't pay, they get the house.

All you have to do is make sure you can handle a short term tough situation and you're ok.
Nobody likes to lose money (yeah!!!  I juste lost 18% today!!!  Let's make it 20 by next month!!! ), but some can afford it.
Bill Gates can lose a million and recover from it, you and I probably can't.  I know I can't

[viper37]

They make a ton of money on mortgages. Look at the average amortization table.

Option A: They loan you money at, say, 2%, while the Bank of Canada's rate is 0,5%.
Option B: They loan you money at 5% while the Central bank's rate is 0,5%
Option C: They invest on the stock market, get an average of 12% (hypothetical, I haven't check lately).

It's true that there isn't much risk for the bank with a mortgage (except for cascade failures, but then, it's not really the simple individual mortgage that is the problem), but still, it's not nearly as profitable as other options.

Assuming the bank would loan you the money, and simply wait for you pay it back, it would lose money at these rates, considering everything.

[viper37]

I see.  Canadians may know how to regulate their banks, but they sure are struggling with English.  Over here, when you have a mortgage whose interest rate is periodically adjusted, it's called an adjustable rate mortgage.  It's called adjustable in honor of the adjustments that are made periodically.

Barclay's bank:
Our fixed rate mortgages give you the security to set your monthly repayment for a specific period depending on which product you choose, no matter what happens to interest rates.

It's the same as in Canada.  They fix they interest for a period, not for the entire lenght on wich the loan is amortized.  Look at that table:
http://www.bank.barclays.co.uk/Mortgages/Fixedratemortgages/P1242557963470
2 years fixed, 3 years fixed, etc.  Not 20-30 years.

Variable rate: rate that changes every month.
Fixed rate: rate that won't warry for the duration of your term.

At the end of your term, you can pay back your mortgage at 100% with no penalty, otherwise here you are limited at 15%.

[viper37]

Knowing what I know now, I'd have tried to arrange a longer term, 25 or 30 years, with the same deal - fixed for 5 years - because presumably, I could have gotten an even lower rate. If you plan to pre-pay and the terms allow for this the length of the term is irrelevant to you other than that it sets the minimum you can pay per month and it affects the rate.

it's exactly what I did.  Always sound to go for the higher term.  If you get hit by some bad luck, you won't be as squeezed as you would be with a shorter terme loan.  And you can pay as much as 15% every year, and more before resigning it, if things go well.

[Jacob]

I see.  Canadians may know how to regulate their banks, but they sure are struggling with English.  Over here, when you have a mortgage whose interest rate is periodically adjusted, it's called an adjustable rate mortgage.  It's called adjustable in honor of the adjustments that are made periodically.

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

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.

[DGuller]

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.

[Barrister]

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'.