In a thread on another board, someone posted this article:
http://www.ricedelman.com/cs/education/article?articleId=232
Basically, advocating taking out as big a mortgage as you can handle, not paying it off fast, but rather using that cheap money to invest in equities. Those who nattered about risk were dismissed as follows:
QuoteFirst, understand that everything you know about mortgages — and particularly what you fear about them — is wrong. The myths you believe were told to you, bless their hearts, by your well-meaning parents and grandparents. They told you that mortgages are dangerous, that having one means you can lose your home. They told you this because they remember the Depression era, a time when millions of Americans lost their homes. Although mortgages were indeed dangerous in the 1930s and 1940s, the rules of money have changed and, unfortunately, your elders don't realize this. So, by learning why your elders were correct in their desire to pay off their mortgages, you'll come to understand why you should keep yours.
I was overcome with nostalgia. This advise used to be everywhere pre-recession. Obviously, during the recession, with people losing theior jobs, homes, and shirts in the stock market and house prices tumbling, it looked like a bad joke.
Is its tentative re-appearance, like the first tender green shoots of spring, a sign of returning normalicy - or only that some people have very short memories? :D
I've always done the 30 year mortgages. I'd rather have a lower payment in case I was temporarily unemployed and I could maintain payments for longer.
Quote from: Ed Anger on March 18, 2010, 10:13:50 AM
I've always done the 30 year mortgages. I'd rather have a lower payment in case I was temporarily unemployed and I could maintain payments for longer.
You make it sound like you are older than Methuselah. Just how many 30 year mortgages have you had? :D
I always overpay as much as I can when I can, for which I am exceptionally grateful at times of low to zero income. Like now.
Quote from: Malthus on March 18, 2010, 10:28:22 AM
Quote from: Ed Anger on March 18, 2010, 10:13:50 AM
I've always done the 30 year mortgages. I'd rather have a lower payment in case I was temporarily unemployed and I could maintain payments for longer.
You make it sound like you are older than Methuselah. Just how many 30 year mortgages have you had? :D
3
Grumbler can get 300 year mortgages from his bank.
Early green shoots I'd say :D
Once more round the cycle of boom-and-bust, it's always the same whilst also being different each time. I would say that taking out a large mortgage and holding onto equities is likely to be more profitable than paying the mortgage down over the next couple of years or so. OTOH, faced with that choice quite recently I payed the mortgage down rather than increasing my equities. The security is more important to me. Where your chap in the quoted post goes wrong is in not admitting the risk. Also, the easy gains in stocks have just been made in the past year; they are arguably at "fair value" atm, so he is behind the curve.
Quote from: Richard Hakluyt on March 18, 2010, 10:45:46 AM
Also, the easy gains in stocks have just been made in the past year; they are arguably at "fair value" atm, so he is behind the curve.
I think that this is an important caveat: one is playing the stock market of the future, not the one of the past.
Quote from: Malthus on March 18, 2010, 10:04:10 AM
In a thread on another board, someone posted this article:
http://www.ricedelman.com/cs/education/article?articleId=232
Basically, advocating taking out as big a mortgage as you can handle, not paying it off fast, but rather using that cheap money to invest in equities. Those who nattered about risk were dismissed as follows:
QuoteFirst, understand that everything you know about mortgages — and particularly what you fear about them — is wrong. The myths you believe were told to you, bless their hearts, by your well-meaning parents and grandparents. They told you that mortgages are dangerous, that having one means you can lose your home. They told you this because they remember the Depression era, a time when millions of Americans lost their homes. Although mortgages were indeed dangerous in the 1930s and 1940s, the rules of money have changed and, unfortunately, your elders don't realize this. So, by learning why your elders were correct in their desire to pay off their mortgages, you'll come to understand why you should keep yours.
I was overcome with nostalgia. This advise used to be everywhere pre-recession. Obviously, during the recession, with people losing theior jobs, homes, and shirts in the stock market and house prices tumbling, it looked like a bad joke.
Is its tentative re-appearance, like the first tender green shoots of spring, a sign of returning normalicy - or only that some people have very short memories? :D
My ears are very sensitive to retarded real estate wisdom, and all the various bogus reasons for investing in it, but I'm not detecting any BS here.
If you have a mortgage on an over-valued house, and it takes a large portion of your income to make payments on, then you already made the mistake. If you have a mortgage that is manageable, and you have sufficient safety funds tucked away like everyone should, then the question about the wisdom of paying it off becomes much more complicated.
In many cases it is indeed wise to not prepay the mortgage, and instead invest the surplus funds. Pre-paying the mortgage is a safe, but low-yielding investment, and in US it also reduces your subsidy from the US gov't known as interest tax deduction. If you're very risk averse and don't want to invest the borrowed funds, no matter at how favorable the terms are, then go ahead and prepay. However, there is such a thing as too much risk aversion, and prepaying a safe mortgage is IMO a sign of it.
Quote from: Richard Hakluyt on March 18, 2010, 10:45:46 AM
Also, the easy gains in stocks have just been made in the past year; they are arguably at "fair value" atm, so he is behind the curve.
Not a fan of efficient market theory?
Quote from: Richard Hakluyt on March 18, 2010, 10:45:46 AM
Early green shoots I'd say :D
Once more round the cycle of boom-and-bust, it's always the same whilst also being different each time. I would say that taking out a large mortgage and holding onto equities is likely to be more profitable than paying the mortgage down over the next couple of years or so. OTOH, faced with that choice quite recently I payed the mortgage down rather than increasing my equities. The security is more important to me. Where your chap in the quoted post goes wrong is in not admitting the risk. Also, the easy gains in stocks have just been made in the past year; they are arguably at "fair value" atm, so he is behind the curve.
Heh, I'm reasonably certain that the article itself was written before the recession. ;)
But yeah, I totally agree: the advice downplays risk to a degree that looks, with benefit of hindsight, to be even more charmingly naive than the author is accusing "aged parents" of being. :D
Quote from: DGuller on March 18, 2010, 11:03:26 AM
Quote from: Malthus on March 18, 2010, 10:04:10 AM
In a thread on another board, someone posted this article:
http://www.ricedelman.com/cs/education/article?articleId=232
Basically, advocating taking out as big a mortgage as you can handle, not paying it off fast, but rather using that cheap money to invest in equities. Those who nattered about risk were dismissed as follows:
QuoteFirst, understand that everything you know about mortgages — and particularly what you fear about them — is wrong. The myths you believe were told to you, bless their hearts, by your well-meaning parents and grandparents. They told you that mortgages are dangerous, that having one means you can lose your home. They told you this because they remember the Depression era, a time when millions of Americans lost their homes. Although mortgages were indeed dangerous in the 1930s and 1940s, the rules of money have changed and, unfortunately, your elders don't realize this. So, by learning why your elders were correct in their desire to pay off their mortgages, you'll come to understand why you should keep yours.
I was overcome with nostalgia. This advise used to be everywhere pre-recession. Obviously, during the recession, with people losing theior jobs, homes, and shirts in the stock market and house prices tumbling, it looked like a bad joke.
Is its tentative re-appearance, like the first tender green shoots of spring, a sign of returning normalicy - or only that some people have very short memories? :D
My ears are very sensitive to retarded real estate wisdom, and all the various bogus reasons for investing in it, but I'm not detecting any BS here.
If you have a mortgage on an over-valued house, and it takes a large portion of your income to make payments on, then you already made the mistake. If you have a mortgage that is manageable, and you have sufficient safety funds tucked away like everyone should, then the question about the wisdom of paying it off becomes much more complicated.
In many cases it is indeed wise to not prepay the mortgage, and instead invest the surplus funds. Pre-paying the mortgage is a safe, but low-yielding investment, and in US it also reduces your subsidy from the US gov't known as interest tax deduction. If you're very risk averse and don't want to invest the borrowed funds, no matter at how favorable the terms are, then go ahead and prepay. However, there is such a thing as too much risk aversion, and prepaying a safe mortgage is IMO a sign of it.
You seriously think that the paragraph I quoted could have been written with a straight face today, rather than a couple of years ago?
Someone poo-pooing worries about mortgage risk in that cavalier manner is hard to take seriously, and the "historic gains" from the stock market are looking awfully limited these days. It certainly isn't an *automatically* good strategy to invest mortgage money in equities.
He has a point--but only so far. If you have to get a mortgage anyway, it's usually the cheapest money most people can get. And the US tax code makes it very useful as a way to offset other incomes. If you have a lot of equity and can afford the payments, then getting a mortgage and using the cash to invest in something with a yield as high or higher than your mortgage interest kinda makes sense on paper. You take on the obligation, but you also take on assets with an offsetting return that is more than the obligation. Even for Canadians, if the yield is high enough. If the assets you invest it in are fairly liquid, then there's always the option of cashing them out and eliminating the mortgage if you have to.
There's always going to be that sense of putting your home at risk--I wouldn't do it if that makes the person uncomfortable. Being afraid makes people make bad decisions with their investments.
It's something I might consider under certain circumstances, maybe. I'm not doing it now though. Whatever equity I have is still in my house.
Quote from: Malthus on March 18, 2010, 11:18:08 AM
You seriously think that the paragraph I quoted could have been written with a straight face today, rather than a couple of years ago?
No, no one would write this today, but the reason would the fear of looking ridiculous for unjustified reasons.
The people who lost their houses in the recent recession didn't lose them because they invested their suprlus funds instead of prepaying the mortgage. Most people lost their houses because they bit off more than they could chew when buying a house, and would not have been able to keep their houses even without recession, due to all the funny business with ARMs. They also lost their house because they bought one for way too high a price, falling under the sway of religion that told them that it's always better to own than to rent.
Make no mistake, my main advice to someone buying a house would be to make sure that you can safely handle the mortgage, even after a couple of shocks to your personal finances. However, if that's satisfied, my second advice would be to not pay too much towards equity unless you're extremely risk averse. There are just so many better options to someone who doesn't mind a little risk (and by risk I mean risk of losing money, not losing a house).
Quote from: Malthus on March 18, 2010, 10:04:10 AM
In a thread on another board, someone posted this article:
http://www.ricedelman.com/cs/education/article?articleId=232 (http://www.ricedelman.com/cs/education/article?articleId=232)
Basically, advocating taking out as big a mortgage as you can handle, not paying it off fast, but rather using that cheap money to invest in equities. Those who nattered about risk were dismissed as follows:
QuoteFirst, understand that everything you know about mortgages — and particularly what you fear about them — is wrong. The myths you believe were told to you, bless their hearts, by your well-meaning parents and grandparents. They told you that mortgages are dangerous, that having one means you can lose your home. They told you this because they remember the Depression era, a time when millions of Americans lost their homes. Although mortgages were indeed dangerous in the 1930s and 1940s, the rules of money have changed and, unfortunately, your elders don't realize this. So, by learning why your elders were correct in their desire to pay off their mortgages, you'll come to understand why you should keep yours.
I was overcome with nostalgia. This advise used to be everywhere pre-recession. Obviously, during the recession, with people losing theior jobs, homes, and shirts in the stock market and house prices tumbling, it looked like a bad joke.
Is its tentative re-appearance, like the first tender green shoots of spring, a sign of returning normalicy - or only that some people have very short memories? :D
that's very simple actually.
If you take the mortgage, invest the money and lose it all, are you in deep shit? (i.e. will you be unable to make the payments and lose your home?)
If the answer is yes, don't do it.
If the answer is no, by all means do invest that money.
Makes one wonder why banks lend to people to buy a property, since there are more profitable ways of investing the money. Must be altruism; they will recieve their just reward in the next cycle of existence :goodboy:
Quote from: Richard Hakluyt on March 18, 2010, 12:17:52 PM
Makes one wonder why banks lend to people to buy a property, since there are more profitable ways of investing the money. Must be altruism; they will recieve their just reward in the next cycle of existence :goodboy:
At least two reasons. They can't invest the money themselves, and they have fractional reserving working for them when they deal with traditional savings and loans. At least that's my understanding of it, I can be wrong.
After I bought our new house I am once again experiencing the reality of a mortgage. I am sticking to my same policy of pre-paying as much as possible as soon as possible and I am constantly amazed at all the people that advise me that I am doing something silly - that I should be taking advantage of this cheap financing and use my money for other investment purposes.
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.
Quote from: Richard Hakluyt on March 18, 2010, 12:17:52 PM
Makes one wonder why banks lend to people to buy a property, since there are more profitable ways of investing the money. Must be altruism; they will recieve their just reward in the next cycle of existence :goodboy:
they don't make money on mortgages.
The mortgages is there to get you inside their bank.
Once you're there, you put some money into an account, wich they invest or loan at higher interests.
They charge you monthly fees.
They will offer you overpriced insurances.
They will offer you credit cards.
They will...
Last mortgage I took out was with a bank that I don't bank with; this is quite standard in the UK, maybe not elsewhere.
We also have to account for German bonds, which yield a mighty 3.16%!! There is quite an appetite for security rather than potential profits out there.
Quote from: viper37 on March 18, 2010, 12:52:00 PM
they don't make money on mortgages.
I dont think that is accurate.
Quote from: crazy canuck on March 18, 2010, 12:51:50 PM
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.
You know, you're not silly :)
Every individual has its own relation to risk.
I wouldn't mind using my mortgage for investments, as I think it could be a good move (just not right now). But I wouldn't advise my father to do the same, and I wouldn't advise some members of my family to do the same, while I'd recommend it for some others.
The principle is sound, depending on many factors.
How much you're paying now (interest rate), how much you can reasonably expect to gain via your investment strategy (borrowing at 2,5% to put that money in bonds giving you 0,75% because you're scared of the stock market is not a bright move), the variability of interest rates, etc, etc.
There's never a clear cut answer that will fit in any time period to any individual.
The only golden rule: any money you invest is money you can afford to lose.
Quote from: MadImmortalMan on March 18, 2010, 11:20:26 AM
He has a point--but only so far. If you have to get a mortgage anyway, it's usually the cheapest money most people can get. And the US tax code makes it very useful as a way to offset other incomes. If you have a lot of equity and can afford the payments, then getting a mortgage and using the cash to invest in something with a yield as high or higher than your mortgage interest kinda makes sense on paper. You take on the obligation, but you also take on assets with an offsetting return that is more than the obligation. Even for Canadians, if the yield is high enough. If the assets you invest it in are fairly liquid, then there's always the option of cashing them out and eliminating the mortgage if you have to.
There's always going to be that sense of putting your home at risk--I wouldn't do it if that makes the person uncomfortable. Being afraid makes people make bad decisions with their investments.
It's something I might consider under certain circumstances, maybe. I'm not doing it now though. Whatever equity I have is still in my house.
Yeah, it's the rah-rah boosterism of only one strategy I'm laughing at - especially given that the assumptions that strategy was explicitly based on (that mortgage risk and the risk of equities losing value are both negligible) have both been demonstrated to have been wrong.
Sure, the main question is not biting off more mortgage than one can chew, but after that for the personal investor, there are a buncha factors I'd consider:
1. The tax treatment of investment income vs. the tax treatment of mortgage interest - this varies by jurisdiction;
2. The different interest rates available and the *risk* associated with them - is the mortgage fixed-rate, variable or renegotiated periodically?
Generally, rates from more speculative investments (for example, equities) will be higher over the long term but risks in the short term are likely to be higher;
3. Liquidity. Money you put into the mortgage is not very liquid - that is, if you want that money back, you must either sell the house or take out further loans against it. It is often much easier to sell investments like equities if you want money *right now*.
There is going to be no "right answer" for everyone. I'll tell you what I do - I try as best I can to diversify; I take half my surplus income and use it to make extra payments on mortgage; I take the other half and invest it in various vehicles that give positive tax advantages (I'm Canadian, so that amounts to RRSPs, RESPs, and TFSAs) - part in equities, part in bonds, and part in safe but staid GICs.
The notion that it is
always and invariably correct to put money in equities because you can make more on equities over the long term then reinvesting in your mortgage, without carefully weighing the risks and rewards, is IMO foolish, and does not comport with the most basic advice - not to put all of one's eggs in one basket.
Quote from: crazy canuck on March 18, 2010, 01:09:34 PM
I dont think that is accurate.
let me rephrase it then: they don't make much money on mortgage.
My own mortage is at 4,5%. At the same time I took my personal mortgage, my company borrowed for "an incredible rate of 8%".
My personal credit margin was around 6-7%, I think.
But what they always hope to gain with a mortgage is getting your feet in the bank to invest there (the 401k for the US, REER for Quebec, etc). And all the byproducts.
Just remember that on every investment they make for you, they will perceive management fees. There they make money.
A bank makes as much money on a mortgage compared to other products that a lawyer will make on public service instead of private practice.
Quote from: crazy canuck on March 18, 2010, 12:51:50 PM
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?
Quote from: viper37 on March 18, 2010, 01:12:33 PM
The only golden rule: any money you invest is money you can afford to lose.
How many people can afford to lose their homes and retirement savings? They are also "investments". ;)
Quote from: viper37 on March 18, 2010, 12:52:00 PM
Quote from: Richard Hakluyt on March 18, 2010, 12:17:52 PM
Makes one wonder why banks lend to people to buy a property, since there are more profitable ways of investing the money. Must be altruism; they will recieve their just reward in the next cycle of existence :goodboy:
they don't make money on mortgages.
The mortgages is there to get you inside their bank.
Once you're there, you put some money into an account, wich they invest or loan at higher interests.
They charge you monthly fees.
They will offer you overpriced insurances.
They will offer you credit cards.
They will...
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. :lol:
In my case, I use different banks anyway, and I pay off my card all the time.
They must make money somehow because one thing is sure Canadian banks make money & lot of it.
They make a ton of money on mortgages. Look at the average amortization table.
Quote from: DGuller on March 18, 2010, 01:21:46 PM
Quote from: crazy canuck on March 18, 2010, 12:51:50 PM
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).
Quote from: crazy canuck on March 18, 2010, 02:03:03 PM
Quote from: DGuller on March 18, 2010, 01:21:46 PM
Quote from: crazy canuck on March 18, 2010, 12:51:50 PM
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.
Quote from: crazy canuck on March 18, 2010, 02:03:03 PM
Quote from: DGuller on March 18, 2010, 01:21:46 PM
Quote from: crazy canuck on March 18, 2010, 12:51:50 PM
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.
Quote from: DGuller on March 18, 2010, 02:12:32 PM
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 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
Quote from: Malthus on March 18, 2010, 02:21:13 PM
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.
Quote from: MadImmortalMan on March 18, 2010, 02:30:41 PM
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.
Quote from: crazy canuck on March 18, 2010, 02:29:47 PM
Quote from: DGuller on March 18, 2010, 02:12:32 PM
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.
Quote from: Malthus on March 18, 2010, 01:35:47 PM
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.
Quote from: Malthus on March 18, 2010, 01:36:39 PM
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. :lol:
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!!! :D ), 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 :D
Quote from: MadImmortalMan on March 18, 2010, 01:59:35 PM
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.
Quote from: DGuller on March 18, 2010, 02:40:34 PM
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%.
Quote from: Malthus on March 18, 2010, 02:21:13 PM
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.
Quote from: DGuller on March 18, 2010, 02:40:34 PMI 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.
Quote from: Jacob on March 18, 2010, 03:17:28 PM
I don't see why you're being so needlessly aggressive about this.
Touche.
QuoteIn 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.
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'.
Huh - I just looked it up at the RBC does offer a 25 year term mortgage. :huh:
Quote from: Barrister on March 18, 2010, 03:56:49 PM
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.
Quote from: DGuller on March 18, 2010, 04:14:08 PM
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. :huh:
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.
Quote from: Barrister on March 18, 2010, 04:28:48 PM
It's not my definition. :huh:
It's not a common definition either. If you read the Wiki article that you quoted, you will see this:
QuoteOutside 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.
QuoteOf 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.
QuoteAnd 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.
Quote from: DGuller on March 18, 2010, 03:42:24 PM
Quote from: Jacob on March 18, 2010, 03:17:28 PM
I don't see why you're being so needlessly aggressive about this.
Touche.
QuoteIn 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 ... ;)
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... :unsure:
Quote from: DGuller on March 18, 2010, 03:42:24 PM
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. :P
Quote from: Barrister on March 18, 2010, 05:20:35 PM
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... :unsure:
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.
Quote from: Barrister on March 18, 2010, 04:06:53 PM
Huh - I just looked it up at the RBC does offer a 25 year term mortgage. :huh:
ING has a 35 years one.
Quote from: crazy canuck on March 18, 2010, 08:04:39 PM
Quote from: DGuller on March 18, 2010, 03:42:24 PM
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. :P
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.
Quote from: crazy canuck on March 18, 2010, 08:07:56 PM
Quote from: Barrister on March 18, 2010, 05:20:35 PM
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... :unsure:
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?
Quote from: DGuller on March 18, 2010, 09:05:00 PM
Quote from: crazy canuck on March 18, 2010, 08:04:39 PM
Quote from: DGuller on March 18, 2010, 03:42:24 PM
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. :P
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. :P
Quote from: DGuller on March 18, 2010, 09:05:39 PM
Quote from: crazy canuck on March 18, 2010, 08:07:56 PM
Quote from: Barrister on March 18, 2010, 05:20:35 PM
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... :unsure:
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.
Quote from: crazy canuck on March 18, 2010, 09:10:07 PM
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. :P
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.
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.
Quote from: Barrister on March 18, 2010, 05:20:35 PM
as much of the pressure is due to a lack of available lots
That sounds like something that could change from one day to the other at the whim of some civil servant or local council or so... :huh: I wouldn't bet my fortune on that. It's not like there is a severe scarcity of land in Yukon.
Quote from: Malthus on March 18, 2010, 04:57:10 PM
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 ... ;)
it's all about your relation to risk. No matter what anyone tells you about this, it's about how you feel.
I believe it's a good move over a long term horizon, especially at current interest rates. You can trade bonds, equities, derivatives, etc. It's all fun.
Buying 40 000$ of RIM's stock might not be a good idea. Diversification is the key, keep one part (from 5 to 50%) in fixed, safe assets and make sure you can afford to wait a few years for the market to come back, because it always will.
If you're losing sleep over it, just don't.
Quote from: Barrister on March 18, 2010, 05:20:35 PM
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... :unsure:
look at your contract, it's gotta to be written there in the tiny characters, on the back of the before-last page. :P
I'm not sure that in Canada they can recall a loan, or even the mortgaged line of credit due to a devaluation of your house prices. Besides, when was the last time this happenned anywhere?? :P
Technically, on a loan, even if the house drops in value, they can't force you to pay it back, especially if it's insured.
For the line of credit, I'm not so sure... but, worst case scenario is they're going to ask you to repay the difference between the current value of your house and your credit line.
Say, you have 80k at 80%=64 000$.
In 5 years from now, you balance is of 55 000$
The price of your house drops 40k.
Max you could loan would be 32k, so they want a refund for 23 000$, or an additional guarantee, wich can be an increased insurance from CMHC (or GE capital or any other), or other equity, or change one part of it into a personal loan at an higher interest rate.
Now, reasonably, if you used your new mortgate to improve your house, the current value of your house would way exceed the 80 000$ of today.
Say, you borrow 60 000$ to make renovations for that amount, it is reasonable to assume that your house values increases by another 60 000$.
So, in effect, even if the price of your house dropped, the added value you gain with your renos would cover the depreciation of the housing market.
Of course, if you decide to spend that 60 000$ mortgage on a gambling spree at the Charlevoix Casino, you might be in trouble...
It's not risk free, really nothing is, but it's relatively safe if you use the money wisely.
My understanding is that in general, the renovations are not worth it on their own. By all means do it if it's going to make you happier or more comfortable in your own home, but you will at best get back only a fraction of your investment. Making expensive renovations is also a good way to drive yourself into a financial hole, if you're not careful. I'm not an expert on this, though, so take it with a grain of salt.
Quote from: MadImmortalMan on March 18, 2010, 10:00:08 PM
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.
But the interest rate doesn't 'adjust'. Your 5 year ARMs have the rate change automatically based on some criteria.
A 5 year term mortgage has to be re-negotiated after 5 years.
Quote from: DGuller on March 18, 2010, 11:22:36 PM
My understanding is that in general, the renovations are not worth it on their own. By all means do it if it's going to make you happier or more comfortable in your own home, but you will at best get back only a fraction of your investment. Making expensive renovations is also a good way to drive yourself into a financial hole, if you're not careful. I'm not an expert on this, though, so take it with a grain of salt.
I feel pretty comfortable. We are building a new bedroom and bathroom in the half finished basement, which will add some value. We're also re-doing another bathroom to add a stand up shower (and take down the hideous wallpaper).
We're doing the renos for us, not as an investment, but I doubt we'll lose money on them.
How long do you plan on staying up there, Beeb?
Quote from: Barrister on March 18, 2010, 11:32:33 PM
A 5 year term mortgage has to be re-negotiated after 5 years.
I think that this is what is throwing DG off. It isn't an adjustable rate mortgage, it is a five-year mortgage (that isn't paid off in 5 years).
Quote from: Barrister on March 18, 2010, 11:32:33 PM
Quote from: MadImmortalMan on March 18, 2010, 10:00:08 PM
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.
But the interest rate doesn't 'adjust'. Your 5 year ARMs have the rate change automatically based on some criteria.
A 5 year term mortgage has to be re-negotiated after 5 years.
Same concept, slightly different execution. The bank is probably going to offer an interest rate that would depend on the same criteria that ARM rates depend on.
Quote from: grumbler on March 19, 2010, 08:20:30 AM
Quote from: Barrister on March 18, 2010, 11:32:33 PM
A 5 year term mortgage has to be re-negotiated after 5 years.
I think that this is what is throwing DG off. It isn't an adjustable rate mortgage, it is a five-year mortgage (that isn't paid off in 5 years).
That or he was just in the mortgage club in college and doesn't really know anything about them.
Quote from: grumbler on March 19, 2010, 08:20:30 AM
Quote from: Barrister on March 18, 2010, 11:32:33 PM
A 5 year term mortgage has to be re-negotiated after 5 years.
I think that this is what is throwing DG off. It isn't an adjustable rate mortgage, it is a five-year mortgage (that isn't paid off in 5 years).
Nothing is throwing me off, now that I know exactly how the Canadians are misusing the term. A five-year mortgage that isn't paid off in 5 years is an adjustable rate mortgage (or variable rate mortgage if you like), and it's going to have the characteristics of a an adjustable rate mortgage. It's called that because the interest rate is subject to change before the loan is paid off.
For a mortgage to be fixed rate, the rate has to be the same until the mortgage is paid off. This isn't a debate about values, the definitions about this are pretty clear cut. It isn't also a pointless semantics debate, there is a huge difference in implications to the borrower, the bank, and the buyer of the mortgage pass-through security between those two types of mortgages.
Quote from: Razgovory on March 19, 2010, 08:39:07 AM
That or he was just in the mortgage club in college and doesn't really know anything about them.
:lol:
I was in Model UN, so I'm pretty sure I could run the world better than all y'all bitches....
...as the Central African Republic. :blush:
Quote from: Caliga on March 19, 2010, 08:42:31 AM
Quote from: Razgovory on March 19, 2010, 08:39:07 AM
That or he was just in the mortgage club in college and doesn't really know anything about them.
:lol:
I was in Model UN, so I'm pretty sure I could run the world better than all y'all bitches....
...as the Central African Republic. :blush:
Did you: Eat your opponents?
Quote from: DGuller on March 19, 2010, 08:42:01 AM
Nothing is throwing me off, now that I know exactly how the Canadians are misusing the term. A five-year mortgage that isn't paid off in 5 years is an adjustable rate mortgage (or variable rate mortgage if you like), and it's going to have the characteristics of a an adjustable rate mortgage. It's called that because the interest rate is subject to change before the loan is paid off.
For a mortgage to be fixed rate, the rate has to be the same until the mortgage is paid off. This isn't a debate about values, the definitions about this are pretty clear cut. It isn't also a pointless semantics debate, there is a huge difference in implications to the borrower, the bank, and the buyer of the mortgage pass-through security between those two types of mortgages.
If both folks using a term understand its definition, what's the harm? :huh:
Seem to me that Canadians use the term "fixed rate" to refer to their 5 or 10 years of fixed rate because, in Canada, there are no real "fixed rate" mortgages (as the US defines the term). They use it in opposition to a mortgage whose rate varies more frequently.
Anyway, the point os that it adds an incentive to pay off the bulk of the mortgage before the 5 years are up; you can get the benefit of locking in low rates for 5 years, at a lower rate than if you locked in for 25 years.
Quote from: DGuller on March 18, 2010, 09:05:39 PM
Why what is important?
I believe that if you fall below the magic percentage, the bank makes you buy mortgage insurance - a whopping additional fee. Which sucks.
Quote from: Malthus on March 19, 2010, 09:04:18 AM
If both folks using a term understand its definition, what's the harm? :huh:
Once both folks do understand the definition, then there is no harm apart from the need to use clunky language to make sure that American and Canadian fixed rate mortgages are not mixed up. However, this thread started with me thinking that Canadian mortgages are much like US mortgages, and with Canadians on this board thinking that the advice tailored for US fixed rate mortgages was designed to be applicable to their own mortgages. That's a pretty big potential for harm, as there usually is when you don't just use a different term, but you use a close to opposite term.
QuoteAnyway, the point os that it adds an incentive to pay off the bulk of the mortgage before the 5 years are up; you can get the benefit of locking in low rates for 5 years, at a lower rate than if you locked in for 25 years.
Yes, it does. Of course, someone not aware of the "black is white" terminology reversal in Canada might stumble upon that US advice and erroneously conclude that it applies to him, and could make a bad decision based on bad information.
Quote from: Barrister on March 18, 2010, 11:34:55 PM
Quote from: DGuller on March 18, 2010, 11:22:36 PM
My understanding is that in general, the renovations are not worth it on their own. By all means do it if it's going to make you happier or more comfortable in your own home, but you will at best get back only a fraction of your investment. Making expensive renovations is also a good way to drive yourself into a financial hole, if you're not careful. I'm not an expert on this, though, so take it with a grain of salt.
I feel pretty comfortable. We are building a new bedroom and bathroom in the half finished basement, which will add some value. We're also re-doing another bathroom to add a stand up shower (and take down the hideous wallpaper).
We're doing the renos for us, not as an investment, but I doubt we'll lose money on them.
My attitude is: if you are doing renos for yourself and you can afford them long-term, don't worry about resale value - anything you get back is icing on the cake.
There are guides out there as to which renos "make back" the most. In general, finishing up a basement pays back the least and re-doing kitchens and bathrooms the most; again, you generally do not make any sort of premium or profit, with the reception of cheap but flashy renos to kitchens and bathrooms (which is why so many places 'done up for sale' have them - most annoying for buyers!)
I converted the garage in my 2nd house into a throneroom/entertainment room. Then sold the damn house within two years. whoops. :lol:
Quote from: Caliga on March 19, 2010, 08:42:31 AM
Quote from: Razgovory on March 19, 2010, 08:39:07 AM
That or he was just in the mortgage club in college and doesn't really know anything about them.
:lol:
I was in Model UN, so I'm pretty sure I could run the world better than all y'all bitches....
...as the Central African Republic. :blush:
I don't know, I still think that being closely involved with building a car that works is a good enough proof of me knowing how cars work, and there is nothing mockable about bringing that up. I think more than anything, some key people assumed from the start that I didn't know what I was talking about, and instead of revising their initial assumption they just dismissed anything I said afterwards that showed that I did have some knowledge that's not common.
Quote from: DGuller on March 19, 2010, 09:16:22 AM
Quote from: Malthus on March 19, 2010, 09:04:18 AM
If both folks using a term understand its definition, what's the harm? :huh:
Once both folks do understand the definition, then there is no harm apart from the need to use clunky language to make sure that American and Canadian fixed rate mortgages are not mixed up. However, this thread started with me thinking that Canadian mortgages are much like US mortgages, and with Canadians on this board thinking that the advice tailored for US fixed rate mortgages was designed to be applicable to their own mortgages. That's a pretty big potential for harm, as there usually is when you don't just use a different term, but you use a close to opposite term.
QuoteAnyway, the point os that it adds an incentive to pay off the bulk of the mortgage before the 5 years are up; you can get the benefit of locking in low rates for 5 years, at a lower rate than if you locked in for 25 years.
Yes, it does. Of course, someone not aware of the "black is white" terminology reversal in Canada might stumble upon that US advice and erroneously conclude that it applies to him, and could make a bad decision based on bad information.
Speaking for myself, I was well aware of the differences when I posted the OP. The most obvious difference quite aside from the availability of fixed-rate mortgages is the tax break on mortgage interest.
The reason I found the article laughable is that it was boosting one particular investment strategy as the obviously right answer, and poo-pooing the risks, when in hindsight those risks were real and cogent.
That is true even though there exists a mortgage tax deduction and 25 year "gen-u-ine" fixed rate mortgages, which make borrowing for mortgages more attractive. It *still* is not *always* a great idea to use mortgage money to invest in equities. And while the guy opens his advice with the ritual "don't borrow more than you can pay", and closes it with the ritual "equities can be risky, folks", the bulk of his advice is obviously going to incentivise people to borrow more than they otherwise would and invest in equities - a strategy which, if followed over the last few years, would have left the person following it
broke rather than rich.
Seems to me that offering incentives to borrow has not overall served the US well as compared to Canada; using the leverage as an investment tool adds to the problem - an insufficient attitude of caution towards the risks inherent in borrowing. Sure, there are also risks involved in being overly cautious, but I think in this case the cautious have the better case ...
Quote from: Ed Anger on March 19, 2010, 09:21:39 AM
I converted the garage in my 2nd house into a throneroom/entertainment room. Then sold the damn house within two years. whoops. :lol:
Did you take a bath on the resale value of the Throne Room of Doom? ;)
For myself, I'm planning an addition with a library - carved wood shelves and a central skylight. Even if books become obsolete. :D
If money were no issue I'd go for something like this.
(https://languish.org/forums/proxy.php?request=http%3A%2F%2Flh5.ggpht.com%2Fcotedetexas%2FSDdcC2_-6-I%2FAAAAAAAAHQ8%2FcBRthcvjHkE%2Fimage_thumb%255B30%255D.png&hash=6c717c21f5aa6e9b0a19a220523b5e49d6fee4d0)
Quote from: Barrister on March 18, 2010, 11:34:55 PM
We're doing the renos for us, not as an investment, but I doubt we'll lose money on them.
that'd be a pretty crappy investment, since at most, you'll get 1x the value your investment...
Quote from: Malthus on March 19, 2010, 09:19:10 AM
My attitude is: if you are doing renos for yourself and you can afford them long-term, don't worry about resale value - anything you get back is icing on the cake.
There are guides out there as to which renos "make back" the most. In general, finishing up a basement pays back the least and re-doing kitchens and bathrooms the most; again, you generally do not make any sort of premium or profit, with the reception of cheap but flashy renos to kitchens and bathrooms (which is why so many places 'done up for sale' have them - most annoying for buyers!)
that and the tax incentive for renos makes it worthwhile, I believe, and not risky at all.
Quote from: Syt on March 19, 2010, 09:53:14 AM
If money were no issue I'd go for something like this.
Awesome. Is that Hadrian?
The thing that amuses me about your posts DGuller is you say that when a Canadian using the term "fixed term mortgage" is "dangerously misleading" even though every single Canadian understands what the means. You seem to think it dangerously misleading because you did not understand it. You then go on at length as to how the American term is correct and we are wrong. It is an odd kind of cultural egocentrism you seem to have.
If you want to get really picky, you are completely incorrect in calling our mortgages variable rate because in fact what occurs at the end of the term is that the mortgage ends and the money is due. There is no obligation on the bank to renew the loan if they decide the borrower is a bad debt risk. This is part of the reason BB is a bit nervous about borrowing more money on a notional increase in the value of his home.
In practice of course people have enough equity in their homes that obtaining a new mortgage either at the same bank or with another lender that offers better terms is available. This is also an important difference between your notion of a variable rate loan. At the end of the term it is a completely new negotiation - not a rate based on some predetermined calculation. If there is a "dangerous misconception" out there it is that a lot of Canadians fall into the same misconception you have that their mortgage remains the same throughout the amoritization period and they never bother renogiating at the end of the term - they just simply accept the new rate the Bank offers them which then becomes something much more similar to what you are talking about.
Quote from: viper37 on March 19, 2010, 10:24:36 AM
Quote from: Barrister on March 18, 2010, 11:34:55 PM
We're doing the renos for us, not as an investment, but I doubt we'll lose money on them.
that'd be a pretty crappy investment, since at most, you'll get 1x the value your investment...
Well since we're not doing it as an investment, but rather for livability with the baby coming...
BB doing renovations as an investment is a terrible idea. Your house is your home first and foremost. Making it a nice place to live is never a bad idea so long as you can afford the expense.
Quote from: crazy canuck on March 19, 2010, 10:57:01 AM
The thing that amuses me about your posts DGuller is you say that when a Canadian using the term "fixed term mortgage" is "dangerously misleading" even though every single Canadian understands what the means. You seem to think it dangerously misleading because you did not understand it. You then go on at length as to how the American term is correct and we are wrong. It is an odd kind of cultural egocentrism you seem to have.
If you want to get really picky, you are completely incorrect in calling our mortgages variable rate because in fact what occurs at the end of the term is that the mortgage ends and the money is due. There is no obligation on the bank to renew the loan if they decide the borrower is a bad debt risk. This is part of the reason BB is a bit nervous about borrowing more money on a notional increase in the value of his home.
In practice of course people have enough equity in their homes that obtaining a new mortgage either at the same bank or with another lender that offers better terms is available. This is also an important difference between your notion of a variable rate loan. At the end of the term it is a completely new negotiation - not a rate based on some predetermined calculation. If there is a "dangerous misconception" out there it is that a lot of Canadians fall into the same misconception you have that their mortgage remains the same throughout the amoritization period and they never bother renogiating at the end of the term - they just simply accept the new rate the Bank offers them which then becomes something much more similar to what you are talking about.
All of those are distinctions with little difference. What matters is the pattern of payments, and the guarantees relating to the pattern of payments. Those make the Canadian mortgage a variable rate instrument, regardless of technicalities of the administration, and whether you're really having a series of separate agreements for the life of the loan.
The important part is the fact that you will have a debt outstanding five years in with no (or limited) guarantees about the terms of financing it. That's pretty much the key characteristic of a variable rate mortgage. As for dangerous misconceptions, you're the one who's for some reason trying to trick yourself into believing that you're not having a variable rate mortgage. Whatever is making you want to believe that will probably also make you fail to truly appreciate the implications of the key feature of a variable rate mortgage.
:frusty:
Quote from: Malthus on March 19, 2010, 09:41:34 AM
Quote from: Ed Anger on March 19, 2010, 09:21:39 AM
I converted the garage in my 2nd house into a throneroom/entertainment room. Then sold the damn house within two years. whoops. :lol:
Did you take a bath on the resale value of the Throne Room of Doom? ;)
For myself, I'm planning an addition with a library - carved wood shelves and a central skylight. Even if books become obsolete. :D
I was happy to sell the house for about the same as I paid, considering the imploding market.
And carved bookshelves? snob. :P
Quote from: Ed Anger on March 19, 2010, 12:33:39 PM
Quote from: Malthus on March 19, 2010, 09:41:34 AM
Quote from: Ed Anger on March 19, 2010, 09:21:39 AM
I converted the garage in my 2nd house into a throneroom/entertainment room. Then sold the damn house within two years. whoops. :lol:
Did you take a bath on the resale value of the Throne Room of Doom? ;)
For myself, I'm planning an addition with a library - carved wood shelves and a central skylight. Even if books become obsolete. :D
I was happy to sell the house for about the same as I paid, considering the imploding market.
And carved bookshelves? snob. :P
It fits with Malthus's house, actually.
Quote from: Ed Anger on March 19, 2010, 12:33:39 PM
I was happy to sell the house for about the same as I paid, considering the imploding market.
And carved bookshelves? snob. :P
Heh, if having carved bookcases makes me a "snob", what does having a throne of doom make you? :D
Quote from: Malthus on March 19, 2010, 01:05:50 PM
Quote from: Ed Anger on March 19, 2010, 12:33:39 PM
I was happy to sell the house for about the same as I paid, considering the imploding market.
And carved bookshelves? snob. :P
Heh, if having carved bookcases makes me a "snob", what does having a throne of doom make you? :D
Thusla Doom.
My child, you have come to me my son. For who now is your father if it is not me? I am the well spring, from which you flow. When I am gone, you will have never been. What would your world be, without me? My son.
Quote from: Malthus on March 19, 2010, 09:12:39 AMI believe that if you fall below the magic percentage, the bank makes you buy mortgage insurance - a whopping additional fee. Which sucks.
It's not the bank that makes you, it's the government that does so through the CMHC.
Quote from: Ed Anger on March 19, 2010, 01:24:08 PM
Quote from: Malthus on March 19, 2010, 01:05:50 PM
Quote from: Ed Anger on March 19, 2010, 12:33:39 PM
I was happy to sell the house for about the same as I paid, considering the imploding market.
And carved bookshelves? snob. :P
Heh, if having carved bookcases makes me a "snob", what does having a throne of doom make you? :D
Thusla Doom.
My child, you have come to me my son. For who now is your father if it is not me? I am the well spring, from which you flow. When I am gone, you will have never been. What would your world be, without me? My son.
Wrong. You need a Mountain of Power for that.
Quote from: Jacob on March 19, 2010, 04:14:45 PM
Quote from: Malthus on March 19, 2010, 09:12:39 AMI believe that if you fall below the magic percentage, the bank makes you buy mortgage insurance - a whopping additional fee. Which sucks.
It's not the bank that makes you, it's the government that does so through the CMHC.
Yup, not that it makes any difference - you still have to pay. ;)
Quote from: Malthus on March 19, 2010, 04:51:16 PM
Quote from: Jacob on March 19, 2010, 04:14:45 PM
Quote from: Malthus on March 19, 2010, 09:12:39 AMI believe that if you fall below the magic percentage, the bank makes you buy mortgage insurance - a whopping additional fee. Which sucks.
It's not the bank that makes you, it's the government that does so through the CMHC.
Yup, not that it makes any difference - you still have to pay. ;)
Thankfully since it's a fixed rate mortgage that can only be an issue when the term expires and it comes up to be re-negotiated. ;)
Quote from: Malthus on March 19, 2010, 09:04:18 AM
If both folks using a term understand its definition, what's the harm? :huh:
I think (???) the point was that Americans and Canadians use the term differently and thus there is a risk of lack of understanding as between the two nationalities.
What the Canadians call a 5 year fix is analytically similar to an American 5/1 ARM, except without any cap on the upward adjustment of the interest rate (i.e it is actually more variable and risky than the American adjustable product).
Quote from: The Minsky Moment on March 19, 2010, 05:22:27 PM
Quote from: Malthus on March 19, 2010, 09:04:18 AM
If both folks using a term understand its definition, what's the harm? :huh:
I think (???) the point was that Americans and Canadians use the term differently and thus there is a risk of lack of understanding as between the two nationalities.
What the Canadians call a 5 year fix is analytically similar to an American 5/1 ARM, except without any cap on the upward adjustment of the interest rate (i.e it is actually more variable and risky than the American adjustable product).
Yes, we've established that some time ago.
But what's frustrating is DG 's insistance that the Canadian terminology is 'wrong' or 'misleading'. It is not. incorrect, it is merely different.
Quote from: Barrister on March 19, 2010, 05:24:57 PM
Quote from: The Minsky Moment on March 19, 2010, 05:22:27 PM
Quote from: Malthus on March 19, 2010, 09:04:18 AM
If both folks using a term understand its definition, what's the harm? :huh:
I think (???) the point was that Americans and Canadians use the term differently and thus there is a risk of lack of understanding as between the two nationalities.
What the Canadians call a 5 year fix is analytically similar to an American 5/1 ARM, except without any cap on the upward adjustment of the interest rate (i.e it is actually more variable and risky than the American adjustable product).
Yes, we've established that some time ago.
But what's frustrating is DG 's insistance that the Canadian terminology is 'wrong' or 'misleading'. It is not. incorrect, it is merely different.
DG assembled dictonaries in a club in college, and knows what he is talking about
Quote from: Barrister on March 19, 2010, 05:24:57 PM
Yes, we've established that some time ago.
But what's frustrating is DG 's insistance that the Canadian terminology is 'wrong' or 'misleading'. It is not. incorrect, it is merely different.
No, it's wrong or misleading. If you have a five year fixed mortgage your house is paid off at the end of five years. And Canadian 25 year mortgages are not fixed for the life of the loan. DG said exactly what it is: a series of 5 year fixed loans with 25 year amortization.
Or maybe not. I suppose you could argue that the word "mortgage" is flexible enough to include a loan that doesn't pay off the entire house.
Finally some reinforcements from the sanity brigade.
"Mortgage" and "fixed rate mortgage" are technical terms, and technical terms should really transcend the borders. If some countries used "meter" to refer to 1 foot, we would have a big problem, even if everyone in that country knew what they were talking about.
Quote from: Admiral Yi on March 19, 2010, 05:38:38 PM
Quote from: Barrister on March 19, 2010, 05:24:57 PM
Yes, we've established that some time ago.
But what's frustrating is DG 's insistance that the Canadian terminology is 'wrong' or 'misleading'. It is not. incorrect, it is merely different.
No, it's wrong or misleading. If you have a five year fixed mortgage your house is paid off at the end of five years. And Canadian 25 year mortgages are not fixed for the life of the loan. DG said exactly what it is: a series of 5 year fixed loans with 25 year amortization.
Or maybe not. I suppose you could argue that the word "mortgage" is flexible enough to include a loan that doesn't pay off the entire house.
In canada it would be incomplete to describe it 'only' as a 5 year fixed mortgage. It would be called a 5 year term, 25 year amortization, mortgage (which is the standard, and is what I have).
And a mortgage is any loan secured against real estate, so it's quite a bit more flexible than you think.
Quote from: Barrister on March 19, 2010, 05:57:30 PM
In canada it would be incomplete to describe it 'only' as a 5 year fixed mortgage. It would be called a 5 year term, 25 year amortization, mortgage (which is the standard, and is what I have).
And a mortgage is any loan secured against real estate, so it's quite a bit more flexible than you think.
Then I don't see the problem. What were you guys arguing about again?
And here's the very legal definition of a mortgages, courtesy of the Ontario
Mortgages Act, R.S.O. 1990, c. M-40
Quote"mortgage" includes any charge on any property for securing money or money's worth;
Quote from: Admiral Yi on March 19, 2010, 05:59:37 PM
Quote from: Barrister on March 19, 2010, 05:57:30 PM
In canada it would be incomplete to describe it 'only' as a 5 year fixed mortgage. It would be called a 5 year term, 25 year amortization, mortgage (which is the standard, and is what I have).
And a mortgage is any loan secured against real estate, so it's quite a bit more flexible than you think.
Then I don't see the problem. What were you guys arguing about again?
Was this the fascist firefighter one?
Quote from: Admiral Yi on March 19, 2010, 05:59:37 PM
Then I don't see the problem. What were you guys arguing about again?
The use of "fixed rate mortgage" to describe a 5 year term, 25 year amortization mortgage.
Quote from: DGuller on March 19, 2010, 06:02:58 PM
The use of "fixed rate mortgage" to describe a 5 year term, 25 year amortization mortgage.
With Beeb's definition I think I have to side with him now.
Quote from: sbr on March 19, 2010, 06:02:19 PM
Quote from: Admiral Yi on March 19, 2010, 05:59:37 PM
Quote from: Barrister on March 19, 2010, 05:57:30 PM
In canada it would be incomplete to describe it 'only' as a 5 year fixed mortgage. It would be called a 5 year term, 25 year amortization, mortgage (which is the standard, and is what I have).
And a mortgage is any loan secured against real estate, so it's quite a bit more flexible than you think.
Then I don't see the problem. What were you guys arguing about again?
Was this the fascist firefighter one?
Fun with memes. :)
Quote from: Admiral Yi on March 19, 2010, 06:06:20 PM
Quote from: DGuller on March 19, 2010, 06:02:58 PM
The use of "fixed rate mortgage" to describe a 5 year term, 25 year amortization mortgage.
With Beeb's definition I think I have to side with him now.
:punk:
In your face Flanders!
Quote from: Admiral Yi on March 19, 2010, 06:06:20 PM
Quote from: DGuller on March 19, 2010, 06:02:58 PM
The use of "fixed rate mortgage" to describe a 5 year term, 25 year amortization mortgage.
With Beeb's definition I think I have to side with him now.
Oh, fuck, it spread to Iowa already.
Quote from: Admiral Yi on March 19, 2010, 05:38:38 PM
No, it's wrong or misleading. If you have a five year fixed mortgage your house is paid off at the end of five years. And Canadian 25 year mortgages are not fixed for the life of the loan. DG said exactly what it is: a series of 5 year fixed loans with 25 year amortization.
Or maybe not. I suppose you could argue that the word "mortgage" is flexible enough to include a loan that doesn't pay off the entire house.
You are just as bad as DG. The "loan" does not have a "life". It is not a "25 year mortgage"
If you have a 5 year fixed rate mortgage the mortgage is a 5 year mortgage and for the whole period of the life of that mortgage the is fixed. Each time the mortgage is renegotaited it can have a different amortization period.
The concepts are different. Its just that some Americans here cant understand the differences and want to plug everything into their model for doing things. ;)
Quote from: crazy canuck on March 20, 2010, 08:46:44 AM
You are just as bad as DG. The "loan" does not have a "life". It is not a "25 year mortgage"
If you have a 5 year fixed rate mortgage the mortgage is a 5 year mortgage and for the whole period of the life of that mortgage the is fixed. Each time the mortgage is renegotaited it can have a different amortization period.
The concepts are different. Its just that some Americans here cant understand the differences and want to plug everything into their model for doing things. ;)
The alien concept to Americans is that there is such a thing as an amortized debt that has a lifespan not equal to the amortization period. Its not about mortgages in particular. I find it a bizarre concept, even understanding the mechanics.
Quote from: Baron von Schtinkenbutt on March 20, 2010, 09:01:15 AM
The alien concept to Americans is that there is such a thing as an amortized debt that has a lifespan not equal to the amortization period.
MiM figure it out immediately. Not sure why it is taking DGuller so long to figure it out, given he is an expert in the field and all, but in any event it is amusing watching him try to convince me that all Canadians are wrong and he is right. Particularly given our mortgage system didnt fail and the one that he is convinced is the shining light for the world did.
Quote from: crazy canuck on March 20, 2010, 08:46:44 AM
Its just that some Americans here cant understand the differences and want to plug everything into their model for doing things. ;)
I'm surprised Marti hasn't tackled this language problem by now.
Quote from: crazy canuck on March 20, 2010, 08:46:44 AM
You are just as bad as DG. The "loan" does not have a "life". It is not a "25 year mortgage"
If you have a 5 year fixed rate mortgage the mortgage is a 5 year mortgage and for the whole period of the life of that mortgage the is fixed. Each time the mortgage is renegotaited it can have a different amortization period.
The concepts are different. Its just that some Americans here cant understand the differences and want to plug everything into their model for doing things. ;)
I believe I have shown many times that I do understand the difference, and know exactly how your mortgages work. In fact, I understand it so well that I also understand what it effectively is, despite what it claims to be. The point is that this mechanic of "5 year term, much longer amortization" really papers over the true nature of the mortgage, which is variable rate. As I already said, by your definitions, the mortgage with a term of 1 month and an amortization period of 30 years would be fixed rate mortgage as well by your definition, since you'll just renegotiate it 360 times during the amortization period, but clearly that's ridiculous.
Quote from: crazy canuck on March 20, 2010, 09:39:19 AM
Quote from: Baron von Schtinkenbutt on March 20, 2010, 09:01:15 AM
The alien concept to Americans is that there is such a thing as an amortized debt that has a lifespan not equal to the amortization period.
MiM figure it out immediately. Not sure why it is taking DGuller so long to figure it out, given he is an expert in the field and all, but in any event it is amusing watching him try to convince me that all Canadians are wrong and he is right. Particularly given our mortgage system didnt fail and the one that he is convinced is the shining light for the world did.
I figured it out immediately as well once Canadian mortgages were explained to me, so I'm not sure why you keep blabbing about me not understanding it. I just understand your mortgages better than you do, which is why we're still in disagreement. I'm also not an expert in this field, and never claimed to be one. However, I do know quite a bit about this subject, and more importantly, I also understand quite a bit about the subject and am willing to think about it.
Quote from: DGuller on March 20, 2010, 10:58:13 AM
I figured it out immediately as well once Canadian mortgages were explained to me, so I'm not sure why you keep blabbing about me not understanding it. I just understand your mortgages better than you do, which is why we're still in disagreement. I'm also not an expert in this field, and never claimed to be one. However, I do know quite a bit about this subject, and more importantly, I also understand quite a bit about the subject and am willing to think about it.
How's that whole "I am the smartest guy in the room" thing working for you, overall?
Do you see it damaged at all by statements from the Department of Redundancy Department like
Quote from: DGuller on March 20, 2010, 10:53:52 AM
As I already said, by your definitions, the mortgage with a term of 1 month and an amortization period of 30 years would be fixed rate mortgage as well by your definition...
?
Quote from: grumbler on March 20, 2010, 11:03:18 AM
Quote from: DGuller on March 20, 2010, 10:58:13 AM
I figured it out immediately as well once Canadian mortgages were explained to me, so I'm not sure why you keep blabbing about me not understanding it. I just understand your mortgages better than you do, which is why we're still in disagreement. I'm also not an expert in this field, and never claimed to be one. However, I do know quite a bit about this subject, and more importantly, I also understand quite a bit about the subject and am willing to think about it.
How's that whole "I am the smartest guy in the room" thing working for you, overall?
Do you see it damaged at all by statements from the Department of Redundancy Department like
Quote from: DGuller on March 20, 2010, 10:53:52 AM
As I already said, by your definitions, the mortgage with a term of 1 month and an amortization period of 30 years would be fixed rate mortgage as well by your definition...
?
Leave it to grumbler to contribute nothing of substance, and to point out when someone misspeaks.
I know. He's totally stealing my shtick!
Quote from: DGuller on March 20, 2010, 11:07:05 AM
Leave it to grumbler to contribute nothing of substance, and to point out when someone misspeaks.
You would know about contributing nothing of substance, wouldn't you? The whole post I am mocking was a mass of nothing other than you beating your chest about how you understand people's contracts better than they do, while contributing nothing to the discussion whatever! :lol:
I just cannot resist pricking puffed-up egos when they brag about their smarts right after committing a blunder. I generally ignore typos and brain farts but have to make exceptions when they offer the opportunity to make a humorous point.
Quote from: Razgovory on March 20, 2010, 11:13:09 AM
I know. He's totally stealing my shtick!
Sorry, but the opportunity was too tempting to pass up. I was afraid DG would read what he had written and delete it before you got around to it.
Quote from: grumbler on March 20, 2010, 11:35:14 AM
Quote from: DGuller on March 20, 2010, 11:07:05 AM
Leave it to grumbler to contribute nothing of substance, and to point out when someone misspeaks.
You would know about contributing nothing of substance, wouldn't you? The whole post I am mocking was a mass of nothing other than you beating your chest about how you understand people's contracts better than they do, while contributing nothing to the discussion whatever! :lol:
I just cannot resist pricking puffed-up egos when they brag about their smarts right after committing a blunder. I generally ignore typos and brain farts but have to make exceptions when they offer the opportunity to make a humorous point.
What kind of blunder did I commit?
Quote from: DGuller on March 20, 2010, 10:53:52 AM
I believe I have shown many times that I do understand the difference, and know exactly how your mortgages work. In fact, I understand it so well that I also understand what it effectively is, despite what it claims to be. The point is that this mechanic of "5 year term, much longer amortization" really papers over the true nature of the mortgage, which is variable rate. As I already said, by your definitions, the mortgage with a term of 1 month and an amortization period of 30 years would be fixed rate mortgage as well by your definition, since you'll just renegotiate it 360 times during the amortization period, but clearly that's ridiculous.
Except it isn't the same thing. A variable-rate mortgage is still a commitment between the lender and the lendee for a certain period of time. The relationship doesn't end until the lendee either defaults or pays off the balance of the debt.
In Canada, in theory, at the end of 5 years or whatever term was negotiated, the lender can simply demand full and immediate payment of the balance of the debt. Your assertion about Canadian mortgages all being the same as US ARMs assumes the renegotiation is just a formality.
Quote from: Baron von Schtinkenbutt on March 20, 2010, 12:13:28 PM
Quote from: DGuller on March 20, 2010, 10:53:52 AM
I believe I have shown many times that I do understand the difference, and know exactly how your mortgages work. In fact, I understand it so well that I also understand what it effectively is, despite what it claims to be. The point is that this mechanic of "5 year term, much longer amortization" really papers over the true nature of the mortgage, which is variable rate. As I already said, by your definitions, the mortgage with a term of 1 month and an amortization period of 30 years would be fixed rate mortgage as well by your definition, since you'll just renegotiate it 360 times during the amortization period, but clearly that's ridiculous.
Except it isn't the same thing. A variable-rate mortgage is still a commitment between the lender and the lendee for a certain period of time. The relationship doesn't end until the lendee either defaults or pays off the balance of the debt.
In Canada, in theory, at the end of 5 years or whatever term was negotiated, the lender can simply demand full and immediate payment of the balance of the debt. Your assertion about Canadian mortgages all being the same as US ARMs assumes the renegotiation is just a formality.
Yes, it's a difference, and that makes the Canadian "fixed rate mortgage" more risky than a US ARM mortgage. You've got a risk that you would be unable to roll over your debt (which will almost always happen precisely when you don't want it to happen), and you've got no cap on interest rate change.
However, my contention is that it isn't a significant difference, and I think that my assumption that there will be someone out there to offer you a financing deal is reasonable for the vast majority of cases (whether it's the same bank or not doesn't matter). I'm merely assuming a fairly efficient working of the banking industry, and thus focusing on the analytic differences, to use JR's language. And the point is, the analytic differences are pretty stark between a true fixed rate mortgage, and what Canadian call a fixed rate mortgage. The analytic differences between Canadian mortgage and the US ARM are pretty minor by comparison; the differences are mainly in the mechanics of administration.
Quote from: DGuller on March 20, 2010, 10:58:13 AM
I just understand your mortgages better than you do
Yes, since this was explained to you yesterday you have become a real master. I can see now why you think you are a master of all subjects.
Quote from: DGuller on March 20, 2010, 12:24:12 PM
And the point is, the analytic differences are pretty stark between a true fixed rate mortgage, and what Canadian call a fixed rate mortgage.
Ya keep claiming you get it, and yet use language which indicates that you just don't get it.
Canadian fixed rate mortgages are not untrue. They are simply fixed mortgages wherein the amortization period and load length are not the same.
It is quite true that the analytical differences between the 30-year fixed mortgage and 5-year fixed mortgage are pretty stark. That shouldn't surprise anyone.
Canadian 5-year fixed rate interest rates have been far less volatile than US 1-year ARMs over the last ten years, though - and arguably less volatile than US 30-year fixed-rate interest.
Quote from: crazy canuck on March 20, 2010, 12:34:20 PM
Quote from: DGuller on March 20, 2010, 10:58:13 AM
I just understand your mortgages better than you do
Yes, since this was explained to you yesterday you have become a real master. I can see now why you think you are a master of all subjects.
Don't be childish, I don't think I am a master of all subjects. However, I will speak up if I think I understand something better than other people do, even if that pits me against a majority. I'll fight on even without a finance textbook and Wiki on my side, but that helps a lot as well.
I also didn't become a real master yesterday, I understood how mortgages work for a long time in general terms. What I didn't have until a couple of days ago is the specific information about Canadian "fixed rate mortgages". Once I obtained that information, I was able to use my understanding to almost immediately recognize the nature of such mortgages.
That's the advantage of being the kind of person who tries to understand things rather than know things. If you have the proper framework in your mind, you can quickly and correctly absorb new information.
You're welcome to challenge my analytics, but don't take the cheap grumbler way out by trying to mock me for claiming to understand something in lieu of challenging my conclusions. That's just a type of ad hom, and you can do better than that.
Quote from: DGuller on March 20, 2010, 12:51:43 PM
Quote from: crazy canuck on March 20, 2010, 12:34:20 PM
Quote from: DGuller on March 20, 2010, 10:58:13 AM
I just understand your mortgages better than you do
Yes, since this was explained to you yesterday you have become a real master. I can see now why you think you are a master of all subjects.
Don't be childish, I don't think I am a master of all subjects. However, I will speak up if I think I understand something better than other people do, even if that pits me against a majority. I'll fight on even without a finance textbook and Wiki on my side, but that helps a lot as well.
I also didn't become a real master yesterday, I understood how mortgages work for a long time in general terms. What I didn't have until a couple of days ago is the specific information about Canadian "fixed rate mortgages". Once I obtained that information, I was able to use my understanding to almost immediately recognize the nature of such mortgages.
That's the advantage of being the kind of person who tries to understand things rather than know things. If you have the proper framework in your mind, you can quickly and correctly absorb new information.
You're welcome to challenge my analytics, but don't take the cheap grumbler way out by trying to mock me for claiming to understand something in lieu of challenging my conclusions. That's just a type of ad hom, and you can do better than that.
Wow.
You know - some of us Canadians know a thing or two about mortgages as well. Myself, I've drafted and registered, oh, about 100 mortgages for clients over the years. Part of my practice is to sit down and actually explain all of the terms to my clients of the mortgage contract. I've drafted mortgages for all of the major banks, and a few credit unions too.
So you'll forgive me if I call you a jackass for your supposed being able to 'understand" Canadian mortgages after having their terms explained to you a couple days ago.
Quote from: DGuller on March 20, 2010, 12:51:43 PM
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.
Quote from: grumbler on March 20, 2010, 12:49:46 PM
Ya keep claiming you get it, and yet use language which indicates that you just don't get it.
Canadian fixed rate mortgages are not untrue. They are simply fixed mortgages wherein the amortization period and load length are not the same.
From the point of view of the homeowner, a series of such 5-year fixed rate mortgages is effectively an ARM that resets every 5 years. You can claim that you can have a fixed rate mortgage whose term is a fraction of the amortization term, and then just turn the one real mortgage into five such mortgages separately negotiated, but then what you're doing is merely defining away the problem.
QuoteIt is quite true that the analytical differences between the 30-year fixed mortgage and 5-year fixed mortgage are pretty stark. That shouldn't surprise anyone.
Actually, there are few analytic difference between those mortgages, except that one is a shorter term instrument than the other, and thus would probably have lower interest. The real analytic difference is between a fix rate mortgage whose term matches the amortization term, and "fixed rate mortgage" whose term is much shorter than the amortization term.
QuoteCanadian 5-year fixed rate interest rates have been far less volatile than US 1-year ARMs over the last ten years, though - and arguably less volatile than US 30-year fixed-rate interest.
You couldn't find anything on the Internet that wasn't a non sequitur?
Quote from: Barrister on March 20, 2010, 01:00:32 PM
Wow.
You know - some of us Canadians know a thing or two about mortgages as well. Myself, I've drafted and registered, oh, about 100 mortgages for clients over the years. Part of my practice is to sit down and actually explain all of the terms to my clients of the mortgage contract. I've drafted mortgages for all of the major banks, and a few credit unions too.
So you'll forgive me if I call you a jackass for your supposed being able to 'understand" Canadian mortgages after having their terms explained to you a couple days ago.
I'm sure all of you understand the terms of your mortgages, that's not in question. What seems to be an incredibly hard task is getting you to understand the financial implications of those terms.
Quote from: crazy canuck on March 20, 2010, 01:01:37 PM
Quote from: DGuller on March 20, 2010, 12:51:43 PM
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.
Quote from: DGuller on March 20, 2010, 01:15:14 PM
Quote from: crazy canuck on March 20, 2010, 01:01:37 PM
Quote from: DGuller on March 20, 2010, 12:51:43 PM
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.
Quote from: crazy canuck on March 20, 2010, 01:20:15 PM
Quote from: DGuller on March 20, 2010, 01:15:14 PM
Quote from: crazy canuck on March 20, 2010, 01:01:37 PM
Quote from: DGuller on March 20, 2010, 12:51:43 PM
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.
Quote from: DGuller on March 20, 2010, 01:23:49 PM
Quote from: crazy canuck on March 20, 2010, 01:20:15 PM
Quote from: DGuller on March 20, 2010, 01:15:14 PM
Quote from: crazy canuck on March 20, 2010, 01:01:37 PM
Quote from: DGuller on March 20, 2010, 12:51:43 PM
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.
Quote from: crazy canuck on March 20, 2010, 01:46:16 PM
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.
Quote from: crazy canuck on March 20, 2010, 01:46:16 PM
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?
Quote from: crazy canuck on March 20, 2010, 01:46:16 PM
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).
Quote
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?
Quote3) 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.
Quote4) 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.
Quote
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.
Quote from: crazy canuck on March 20, 2010, 01:46:16 PM
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.
Quote from: Barrister on March 20, 2010, 02:09:14 PM
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.
Quote from: Barrister on March 20, 2010, 02:09:14 PM
Quote from: crazy canuck on March 20, 2010, 01:46:16 PM
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
Quote from: crazy canuck on March 18, 2010, 12:51:50 PM
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?
Quote from: DGuller on March 20, 2010, 02:25:12 PM
Quote from: crazy canuck on March 18, 2010, 12:51:50 PM
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?
(https://languish.org/forums/proxy.php?request=http%3A%2F%2Fi195.photobucket.com%2Falbums%2Fz133%2Fsbr32%2Fsmilies%2Fsnap.gif&hash=13aa4a164817bea2ae9840ed8dd1dabe5e728a47)
Quote from: DGuller on March 20, 2010, 02:25:12 PM
Quote from: crazy canuck on March 18, 2010, 12:51:50 PM
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?
Quote from: crazy canuck on March 20, 2010, 02:55:30 PM
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".
QuoteInterest rates dont change during the term of the mortgage.
Go back in time and tell that to yourself.
QuoteIf 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.
Quote from: Agelastus on March 20, 2010, 01:53:35 PM
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.
QuoteThat 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.
Quote from: DGuller on March 20, 2010, 02:59:38 PM
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.
Quote from: crazy canuck on March 20, 2010, 03:01:03 PM
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.
Quote from: Agelastus on March 20, 2010, 03:05:14 PM
Quote from: crazy canuck on March 20, 2010, 03:01:03 PM
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.
Quote from: crazy canuck on March 20, 2010, 03:02:51 PM
Yes, during the term of my mortgate, while my rate will not increase, it is possible that interest rates 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.
That doesn't make your money expensive. When you're choosing whether to prepay or not, the cost of your money is the interest on the mortgage that you have right now. The cost of money doesn't change for you while your interest rate stays the same, in fact the interest rate you have is the cost of money.
Let's say the interest on your current mortgage is 5%, the market interest at time of mortgage renewal would be 8%, and the rate of CD that expires when your current mortgage ends is 7%. Ignoring taxes and stuff like that, would you rather prepay or invest in CD? What is the appropriate cost of your money then to use?
Quote from: crazy canuck on March 20, 2010, 03:10:14 PM
Its really too bad that our resident expert in all things he has heard something about (DGuller) cant understand these basic principles.
I can see that you're a brilliant lawyer. You're certainly not used to losing an argument.
Quote from: DGuller on March 20, 2010, 03:18:50 PM
Quote from: crazy canuck on March 20, 2010, 03:02:51 PM
Yes, during the term of my mortgate, while my rate will not increase, it is possible that interest rates 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.
That doesn't make your money expensive. When you're choosing whether to prepay or not, the cost of your money is the interest on the mortgage that you have right now. The cost of money doesn't change for you while your interest rate stays the same, in fact the interest rate you have is the cost of money.
Let's say the interest on your current mortgage is 5%, the market interest at time of mortgage renewal would be 8%, and the rate of CD that expires when your current mortgage ends is 7%. Ignoring taxes and stuff like that, would you rather prepay or invest in CD? What is the appropriate cost of your money then to use?
That is why I said in my post that you partially quoted from that the investment would have to be good enough to make up for the interest I would otherwise by paying
during the term of my mortgage which is something you have ignored in your analysis. Of course if I can find a secured investment that gives me the kind of spread you are talking about it makes sense to invest but the whole point of this thread is that people are making the argument that equities are are such an investment when in fact they are much more risky. Also, there are no guarranteed investments that will give me that kind of spread.
I said I might be tempted to invest rather then prepay if I could be guarranteed that the cost of money would continue to remain low but given the risk is that it will not I am not tempted. The equities I invest in could underperform in which my conservative repayment looks much better.
It is not surprising to me that you missed the context of the comments. Such is your difficulty in digginf yourself out of your comment that you know more then us about our own system. A mistake of overreaching you make frequently.
Quote from: DGuller on March 20, 2010, 03:21:05 PM
Quote from: crazy canuck on March 20, 2010, 03:10:14 PM
Its really too bad that our resident expert in all things he has heard something about (DGuller) cant understand these basic principles.
I can see that you're a brilliant lawyer. You're certainly not used to losing an argument.
When I lose one I will let you know.
Quote from: crazy canuck on March 20, 2010, 03:28:40 PM
That is why I said in my post that you partially quoted from that the investment would have to be good enough to make up for the interest I would otherwise by paying during the term of my mortgage which is something you have ignored in your analysis.
I didn't ignore it, I just assume it's a given and doesn't even need to be said. If you're gong to put your money in an investment that you're not expecting to return higher than your mortgage rate, then you're just a moron.
QuoteIt is not surprising to me that you missed the context of the comments. Such is your difficulty in digginf yourself out of your comment that you know more then us about our own system. A mistake of overreaching you make frequently.
I can only go by what you say. If you're saying that the cost of your money could change during the term of the loan that you can tap into, then either your loan is not of fixed interest type, or you fail to understand what cost of money is.
Quote from: DGuller on March 20, 2010, 03:35:21 PM
I can only go by what you say. If you're saying that the cost of your money could change during the term of the loan that you can tap into, then either your loan is not of fixed interest type, or you fail to understand what cost of money is.
Wow am not sure if you are being wilfully blind or you are really that stupid.
Quote from: crazy canuck on March 20, 2010, 03:38:14 PM
Quote from: DGuller on March 20, 2010, 03:35:21 PM
I can only go by what you say. If you're saying that the cost of your money could change during the term of the loan that you can tap into, then either your loan is not of fixed interest type, or you fail to understand what cost of money is.
Wow am not sure if you are being wilfully blind or you are really that stupid.
I can understand your desire to keep leveling personal insults. What I don't understand is your inability to recognize that a series of Canadian fixed rate mortgages collectively forms an ARM.
So, I'll be generous and give you another chance to try to say something smart, instead of just having you spew more insults my way. Let's say that you, in Canada, have a choice. The first choice is the usual series of 5 year term, 5+ year amortization loans. The second choice is is a hypothetical ARM with a 25-year term, whose interest is resets every 5 year according to an appropriate index, and where interest rate changes are not capped.
Assuming an efficient and competitive working of the Canadian banking system when it comes time to renew the mortgages, what is a significant difference to the homeowner between the effect of two such mortgages? Is the homeowner in one case going to pay significantly more in interest than in another? Is he going to be more sensitive to interest rate changes in one case than in another? Is one going to be in more danger of winding up unable to finance his mortgage than another? Go ahead, point out one significant difference that applies in general.
Quote from: DGuller on March 20, 2010, 03:51:24 PM
Quote from: crazy canuck on March 20, 2010, 03:38:14 PM
Quote from: DGuller on March 20, 2010, 03:35:21 PM
I can only go by what you say. If you're saying that the cost of your money could change during the term of the loan that you can tap into, then either your loan is not of fixed interest type, or you fail to understand what cost of money is.
Wow am not sure if you are being wilfully blind or you are really that stupid.
I can understand your desire to keep leveling personal insults. What I don't understand is your inability to recognize that a series of Canadian fixed rate mortgages collectively forms an ARM.
So, I'll be generous and give you another chance to try to say something smart, instead of just having you spew more insults my way. Let's say that you, in Canada, have a choice. The first choice is the usual series of 5 year term, 5+ year amortization loans. The second choice is is a hypothetical ARM with a 25-year term, whose interest is resets every 5 year according to an appropriate index, and where interest rate changes are not capped.
Assuming an efficient and competitive working of the Canadian banking system when it comes time to renew the mortgages, what is a significant difference to the homeowner between the effect of two such mortgages? Is the homeowner in one case going to pay significantly more in interest than in another? Is he going to be more sensitive to interest rate changes in one case than in another? Is one going to be in more danger of winding up unable to finance his mortgage than another? Go ahead, point out one significant difference that applies in general.
I have already answered these questions but apparently your understanding of our system does not extent as far as you think.
By the way, every other American here has understood. If I were you I would stop billing myself as an expert in anything for a while.
Quote from: crazy canuck on March 20, 2010, 04:47:14 PM
I have already answered these questions but apparently your understanding of our system does not extent as far as you think.
And I posted a rebuttal, which you ignored in favor of more insults.
I understand that sometimes people can have a good idea, but be unable to express it well in a debate. If you think you have such an idea, express it to someone more articulate and even-tempered, so that he can continue the debate for you. I will not mind it, I prefer having intellectual conversations rather than verbal brawls.
Quote from: DGuller on March 20, 2010, 04:55:22 PM
Quote from: crazy canuck on March 20, 2010, 04:47:14 PM
I have already answered these questions but apparently your understanding of our system does not extent as far as you think.
And I posted a rebuttal, which you ignored in favor of more insults.
I understand that sometimes people can have a good idea, but be unable to express it well in a debate. If you think you have such an idea, express it to someone more articulate and even-tempered, so that he can continue the debate for you. I will not mind it, I prefer having intellectual conversations rather than verbal brawls.
This is getting circular and pointless. For some reason, no matter how many times I explain it, you fail to understand the fundamental distinction between having an amortization period tied to the term of a mortgage and an amortization period which is independant of the term.
Your failure to appreciate this difference makes any intelligent conversation with you on this point entirely useless.
DG, I grew tired of this earlier, but will give it one more try:
It is clear you do know the basics of mortgages. And you have a point when you say that a 5 year term mortgage has some things in common with a US ARM mortgage.
The real problem I have is when you make value-based statements like 'calling a 5 year term mortgage a fixed rate mortgage is misleading'. It is not. You understand the concepts, but seem to want everyone to use the words you think are correct, not the words everyone uses. It is frankly a very bizarre argument.
Quote from: Barrister on March 20, 2010, 11:28:37 PM
DG, I grew tired of this earlier, but will give it one more try:
It is clear you do know the basics of mortgages. And you have a point when you say that a 5 year term mortgage has some things in common with a US ARM mortgage.
The real problem I have is when you make value-based statements like 'calling a 5 year term mortgage a fixed rate mortgage is misleading'. It is not. You understand the concepts, but seem to want everyone to use the words you think are correct, not the words everyone uses. It is frankly a very bizarre argument.
Ok, I'll give that to you. For better or worse, Canadians use the terms that Canadians use, and I'm not going to change that. Debating whether they should use the term or not is pointless. Now can you please explain the part that you agree I have a point on to your colleague?
Quote from: crazy canuck on March 20, 2010, 11:17:38 PM
For some reason, no matter how many times I explain it, you fail to understand the fundamental distinction between having an amortization period tied to the term of a mortgage and an amortization period which is independant of the term.
With all due respect (which is really none at this point, given how you behaved in this thread), if you really think that, and are not saying this just to piss me off, then you obviously fail to even begin to comprehend the point I'm making.
I understand exactly the fundamental distinction of a Canadian mortgage. It's a mortgage which you will have to roll over at yet undetermined rate at some time in the future (like five years), because you will not fully amortize the outstanding loan before the term of the mortgage expires. Are you with me so far?
Quote from: DGuller on March 21, 2010, 12:29:48 AM
Quote from: Barrister on March 20, 2010, 11:28:37 PM
DG, I grew tired of this earlier, but will give it one more try:
It is clear you do know the basics of mortgages. And you have a point when you say that a 5 year term mortgage has some things in common with a US ARM mortgage.
The real problem I have is when you make value-based statements like 'calling a 5 year term mortgage a fixed rate mortgage is misleading'. It is not. You understand the concepts, but seem to want everyone to use the words you think are correct, not the words everyone uses. It is frankly a very bizarre argument.
Ok, I'll give that to you. For better or worse, Canadians use the terms that Canadians use, and I'm not going to change that. Debating whether they should use the term or not is pointless. Now can you please explain the part that you agree I have a point on to your colleague?
He can read.
But the part you missed is how there is nothing wrong with the terms we use. Saying that our mortgages have some similarities to an ARM is NOT the same as saying they are not fixed term mortgages.
Quote from: Barrister on March 21, 2010, 12:49:57 AM
But the part you missed is how there is nothing wrong with the terms we use. Saying that our mortgages have some similarities to an ARM is NOT the same as saying they are not fixed term mortgages.
Is there anything wrong with saying that your mortgages are not "true fixed rate mortgages"?
Quote from: DGuller on March 21, 2010, 12:55:14 AM
Quote from: Barrister on March 21, 2010, 12:49:57 AM
But the part you missed is how there is nothing wrong with the terms we use. Saying that our mortgages have some similarities to an ARM is NOT the same as saying they are not fixed term mortgages.
Is there anything wrong with saying that your mortgages are not "true fixed rate mortgages"?
Yes. When you put the word "true" in there. They are "true" fixed term mortgages. They are not a fixed term mortgage like you are used to, but there is nothing "false" about the terminology.
Quote from: Barrister on March 21, 2010, 01:04:00 AM
Yes. When you put the word "true" in there. They are "true" fixed term mortgages. They are not a fixed term mortgage like you are used to, but there is nothing "false" about the terminology.
In that case I'm going to side with Wiki, which describes the Canadian mortgages as exactly that. While I realize that Wiki is not fool-proof, when it comes to definitions about well-traveled topics such as mortgages, the burden is on the guy who contradicts it to show why it's wrong.
In addition to that, I also showed by reductio ad absurdum how some hypothetical mortgage (or more precisely 360 of them) which fit the Canadian definition of fixed rate would in effect be far more variable to the homeowner than any actual variable rate mortgage. When you can easily use the terminology to arrive at absurd results, it's usually an indication that the terminology used is not very robust.
Regardless, while I by no means will concede this point, I also don't want to belabor it. The analytic aspect of mortgages interests me much more than the terminology.
:frusty:
I'm done. You're a jackass.
Quote from: Barrister on March 21, 2010, 01:24:55 AM
:frusty:
I'm done. You're a jackass.
Wow, I didn't know Canadians had such a strong national pride about their mortgage terminology. I really, really do not understand why this discussion makes several normally reasonable posters with significantly above average intelligence froth at their mouths and completely refuse to reason. :huh:
Quote from: DGuller on March 21, 2010, 01:38:33 AM
Quote from: Barrister on March 21, 2010, 01:24:55 AM
:frusty:
I'm done. You're a jackass.
Wow, I didn't know Canadians had such a strong national pride about their mortgage terminology. I really, really do not understand why this discussion makes several normally reasonable posters with significantly above average intelligence froth at their mouths and completely refuse to reason. :huh:
You are being absurd. I was silently with you the first few pages but now you have lost me.
Who gives a shit? They call small pieces of ham "bacon". They call a 5 year loan for a portion of the total value a "fixed mortgage"; as long as everyone understands, which I think we all do by now, who cares whether they call it a fixed mortgage or a cinnamon roll?
Is it a candy or a sweet?
Quote from: crazy canuck on March 20, 2010, 03:10:14 PM
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.
To that point, the people who got bulldozed by these ARMs were encouraged to take loans that were much larger than they could afford by having ridiculously low teaser rates dangled before them. In most cases these loans were 30-year amortizations to begin with, and that first adjustment was within 1-3 years of the loan initiation; a re-amortization would have done nothing. There was nothing stopping these people from refinancing with another lender, except that they borrowed way more than they could really afford, and that is the reason the loans failed.
Quote from: sbr on March 21, 2010, 02:57:49 AM
Who gives a shit? They call small pieces of ham "bacon". They call a 5 year loan for a portion of the total value a "fixed mortgage"; as long as everyone understands, which I think we all do by now, who cares whether they call it a fixed mortgage or a cinnamon roll?
The loan is for the full amount borrowed; it just has an amortization longer than the agreement. At the end of the mortgage the lendee needs to either negotiate a new mortgage or pay off the remaining balance of the loan. The life of the loan is the length of the mortgage term; its just a loan that will not zero out at the end of the term unless the amortization period happens to be the same as the term.
Quote from: Baron von Schtinkenbutt on March 21, 2010, 07:56:20 AM
To that point, the people who got bulldozed by these ARMs were encouraged to take loans that were much larger than they could afford by having ridiculously low teaser rates dangled before them. In most cases these loans were 30-year amortizations to begin with, and that first adjustment was within 1-3 years of the loan initiation; a re-amortization would have done nothing. There was nothing stopping these people from refinancing with another lender, except that they borrowed way more than they could really afford, and that is the reason the loans failed.
why didnt they borrow with another lender with another "teaser" rate?
Quote from: crazy canuck on March 21, 2010, 09:04:38 AM
why didnt they borrow with another lender with another "teaser" rate?
Usually they got the loan in the first place because somebody, usually an unscrupulous middleman, cooked their original application to get them a loan they should have never been approved for in the first place. Therefore, when people tried to refinance no one would touch them.
There is also the problem of falling house values. Some of these people bought houses at greatly inflated prices and ended up upside down on their loans when the housing market tanked. These people also couldn't refinance because no bank was willing to loan them more than their property was currently worth. In many of these latter cases the people who bought the house could afford it at the time, but one or more incomes were reduced or disappeared during the recession and made the loan unaffordable.
Quote from: crazy canuck on March 21, 2010, 09:04:38 AM
why didnt they borrow with another lender with another "teaser" rate?
There is an up-front fee associated with originating a new mortgage, that ranges from 1% to 4% (maybe more, but I haven't seen it) of the total amount borrowed. This is the penalty for switching mortgages, and amounts generally to some thousands of dollars. A teaser rate even 3% below what they would be paying otherwise doesn't necessarily pay off before the teaser rate expires.
Quote from: Baron von Schtinkenbutt on March 21, 2010, 10:15:31 AM
Quote from: crazy canuck on March 21, 2010, 09:04:38 AM
why didnt they borrow with another lender with another "teaser" rate?
Usually they got the loan in the first place because somebody, usually an unscrupulous middleman, cooked their original application to get them a loan they should have never been approved for in the first place. Therefore, when people tried to refinance no one would touch them.
There is also the problem of falling house values. Some of these people bought houses at greatly inflated prices and ended up upside down on their loans when the housing market tanked. These people also couldn't refinance because no bank was willing to loan them more than their property was currently worth. In many of these latter cases the people who bought the house could afford it at the time, but one or more incomes were reduced or disappeared during the recession and made the loan unaffordable.
I think the second element here is far, far more important than the first. Yeah, some people qualified for mortgages who should not have, but I think the economic downturn (with associated drop in home values) was the bigger problem.
Quote from: sbr on March 21, 2010, 02:57:49 AM
You are being absurd. I was silently with you the first few pages but now you have lost me.
Who gives a shit? They call small pieces of ham "bacon". They call a 5 year loan for a portion of the total value a "fixed mortgage"; as long as everyone understands, which I think we all do by now, who cares whether they call it a fixed mortgage or a cinnamon roll?
Maybe the difference is that I view terms as part of technical language, not as part of a language dialect that's part of a cherished culture. I view them as an analyst, not as American trying to be a mortgage term imperialist.
In any case, I'm not stressing it anymore either, but I"m not going to back away from the notion that it's not a robust term and the like as it's used in Canada, even if a couple of posters here flip out for some unknown reason.