Credit Crunch

[Observer Walt]

Investor, as you probably know rates across the board tend to move in tandem, but Ricky was specifically referring to residential mortgage rates, and so was I.

At some point he should lock in, but I wouldn't be in a huge hurry to do so right now. It's almost a universal consensus now that rates will go down before going up.

 

[yyzer]

As far as fixed or floating, unless you can afford to chance it you should also try and lock in your mortgage rate for as long as possible.

Investor....this would be unwise 'advice' right now....if rates are poised to fall in Canada in 2008, as everyone is predicting, then variable rates are the way to go....as of this past week, you can get a variable rate residential mortgage at about 5.15%, versus a fixed 5-year closed at the preferred rate of about 5.9% - a fair savings, that will only increase as rates fall....nobody should lock in until it seems that there is a risk of rising rates.

Rates are going to go lower in 2008...the government doesn't want the dollar to go any higher, and they don't want to kill the real estate market, so they will do what they can to lower rates throughout next year...

 

[investor]

At some point he should lock in, but I wouldn't be in a huge hurry to do so right now. It's almost a universal consensus now that rates will go down before going up.

I would agree that the BOC rate will most likely fall before rising however a 5 year mortgage rates is computed based on the 5 year govt of canada bond. The 5 year bond yield has pulled back significantly to under 4% and if you are a strong credit you should be able to lock in now for under 5% for 5 years. Why chance it that inflation spikes as your floating rates spikes along with it? Prime is 6% so at .50 under prime he's paying 5.5% today.

In the business world we look to fix as many costs as possible- why would someone differ in this personal spending habits?

 

[Chuck]

Any time you enter a variable rate mortgage you are taking a risk because no one knows what will happen the next day. Many people are having to foreclose because their interest rate jumped 2% overnight. Anyone can speculate what the interest rate will be in 6 months, but no one actually knows.

Personally, I'd prefer to lock into one interest rate that I can afford and stick with it. Better that than deal with the unknown. Sometimes you'll be ahead, other times you'll get dinged. In the long term it averages out.

 

[yyzer]

Many people are having to foreclose because their interest rate jumped 2% overnight.

really? I have never heard of any such problems here in Canada, are you talking about the U.S.?....actually, interest rates have never jumped 2% overnight anywhere in North America, in the modern era, or at least since the inception of variable rate mortgages....an overnight 2% increase in lending rates would likely cause a stock market crash, and would pretty much kill the real estate market...most rate increases or decreases tend to be a maximum of a quarter point these days..

Personally, I'd prefer to lock into one interest rate that I can afford and stick with it

Umm..are you aware that when there are interest rate increases, the actual monthly payment on a variable rate mortgage stays the same?...the only change is the ratio of principal to interest (i.e. you can end up paying only interest)......which bank are you dealing with??

 

[Chuck]

really? I have never heard of any such problems here in Canada, are you talking about the U.S.?....actually, interest rates have never jumped 2% overnight anywhere in North America, in the modern era, or at least since the inception of variable rate mortgages....an overnight 2% increase in lending rates would likely cause a stock market crash, and would pretty much kill the real estate market...most rate increases or decreases tend to be a maximum of a quarter point these days..

I'm talking about the US. And the 2% increase would be for the interest rate that forms the basis of your mortgage.

Umm..are you aware that when there are interest rate increases, the actual monthly payment on a variable rate mortgage stays the same?...the only change is the ratio of principal to interest (i.e. you can end up paying only interest)......which bank are you dealing with??

Monthly payments do not change on a month to month basis, however they are also not constant with an ARM. I'm not dealing with any banks because I'm still renting.

 

[Bloor West Villager]

Personally, I'd prefer to lock into one interest rate that I can afford and stick with it. Better that than deal with the unknown. Sometimes you'll be ahead, other times you'll get dinged. In the long term it averages out.

It doesn't average out in the long term. A popular study has shown that variable rate mortgages are more advantageous to the consumer: http://www.ifid.ca/pdf_workingpapers/WP2001A.pdf

Risk is always dependent on a personal level of comfort and you did hit the nail on the head with the beginning of that quote - it's a personal choice based on what you're willing tolerate. By that same logic, I assume your personal investment strategy is bonds vs. stocks/mutual funds if it's better than dealing with the unknown.

 

[rbt]

Umm..are you aware that when there are interest rate increases, the actual monthly payment on a variable rate mortgage stays the same?...the only change is the ratio of principal to interest (i.e. you can end up paying only interest)......which bank are you dealing with??

Depends on how you set it up. It is possible though rare to get a calculated variable payment. Instead what you get is an open payment plan where you can choose how much you want to to pay -- more like a line of credit.


Variable rates typically win over the long haul unless you lock in while the interest rates bottom out. Anybody who locked in at ~5% or less probably did the right thing, particularly if they are making accelerated principal payments or took a shorter than usual amortization (15 year instead of 25 year) on their principal home.

 

[TrickyRicky]

Another point regarding mortgage rates is if your position is so weak as to be imperilled by the rise of interest rates in a variable mortgage position than I would consider you over leveraged. The real danger is the renewal period. This is where people get hammered. The luck or intelligent timing of your renewal period seems to me as the primary variable of importance, neither a closed nor an open position can protect you from an inopportune renewal period. So for instance if conditions are bad in the 2010-2011 period I will have to take a hit. If at that time lenders are still willing to lend to 75% of the appraised residential property value my home can depreciate to less than 76 percent of it's current market value and I will still be in a safe borrowing position (assuming I don't make any supplemental payments to reduce the mortgage). What people don't realize is they assume banks are willing to lend on renewal. History suggests that renewal can often come with draconian requirements like mandatory pay down if your mortgage becomes too great relative to the current market value. You may be stuck with your current lender and forced to take what they give you because no other lender would adopt your position if the lending enviroment is tight.

 

[investor]

It doesn't average out in the long term. A popular study has shown that variable rate mortgages are more advantageous to the consumer: http://www.ifid.ca/pdf_workingpapers/WP2001A.pdf

Risk is always dependent on a personal level of comfort and you did hit the nail on the head with the beginning of that quote - it's a personal choice based on what you're willing tolerate. By that same logic, I assume your personal investment strategy is bonds vs. stocks/mutual funds if it's better than dealing with the unknown.

Long Term- ie during the 20 year bull market for bonds that ended around 2004. I love how the pundits gerrymander stats to suit their needs. (not referring to you nhincomp)

I bet the guy who locked for 10 years at 3.90% in 2003 isn't regretting his decision now!

Agreed that it's personal risk tolerance issue however let me tell you guys that in the real estate business everyone locks in for term debt because we never know when lenders will turn off the tap- like they are doing now!

 

[lowesthangingfruit]

Rick, the credit crunch is the proverbial term that describes the virtual meltdown in the financial system across north america. Overzealous lenders originated billions and billions of loan that just were not underwritten with proper scrutiny while rating agencies gave the packaged pools of these loans an undeserved blessing. As a result, it is much, much more difficult for borrowers to obtain financing of any kind- mortgages, car loans, debt for corporate takeovers etc. This has had a softening affect in Canada in the securitization market and is trickling up through the system to prime loans as well. Some Canadian lenders securitize residential mortgages and as a result portfolio lenders had to be more competitive. As a result of the credit crunch they can once again tighten up their lending standards.

As far as fixed or floating, unless you can afford to chance it you should also try and lock in your mortgage rate for as long as possible. People who were smart enough to do so in the earlier part of the decade enjoyed incredibly low mortgage rates while people like yourself have seen the prime rate slowly creep up.

Here is my 2 cents (or basis points).

1) Ppl should NOT buy stuff that they cannot afford.
2) Lenderrs should NOT lend stuff to ppl in #1)
3) Now, if only there was world peace and the tooth fairy left $10K per tooth, then all will be well.

But the reality is this shit will happen AGAIN because ppl are greedy.

Now, having said that, here is what I had in mind. Bought a property recently for 250K (actually, it was kinda low suprisingly,....maybe the seller was reading your posts and you guys scared the shit out of him). Gonna sell off some of my investments. Take some tax losses this year to write off against gains from this and prior years. Take those proceeds and pay for the property. Wait 30 days for the superficial losses to kick in. Go to the bank or credit union and borrow against the property. Repurchase those investments I still like or have the option of keeping my powder dry and deploy these funds when the market really crash and burns. Now my interest payments are deductible regardless if I live in the property or rent it out or combination of both.

It sounds good on paper, but any feedback from anyone ?? Thanks.

 

[investor]

I see where you're going fruit, but why go to all that trouble (and fees) to access a little leverage on your equity? Why not just open a margin account and leverage up the equity in your stock portfolio? Sell the dogs, take your losses, and buy more stocks. Why bother involving a property unless of course you believe that the property is such a winner.

Give me some details and I'll give you my unbiased opinion- if you want it.

 

[lowesthangingfruit]

I see where you're going fruit, but why go to all that trouble (and fees) to access a little leverage on your equity? Why not just open a margin account and leverage up the equity in your stock portfolio? Sell the dogs, take your losses, and buy more stocks. Why bother involving a property unless of course you believe that the property is such a winner.

Give me some details and I'll give you my unbiased opinion- if you want it.

Yeah, already have margin accounts.

In short, that is exactly what I thought. The details is that it looked underpriced at the time (248K, 2BR/2WR, with parking at King and Bathurst), but the agent neglected to tell me (she said she didn't know this even though she was the freakin' listing agent) that the property is like up the road from a fuckin' slaughter house. HAving said that, I did sign the deal so just as much my fault as well for jumping into something that looked too good too quickly and trusting the agent that told me there is nothing stigmatizing about the property. (lesson,....don't trust agents even if it's ur mother, DD always). Anyways, a great deal has now turned into somewhat of an unknown deal (which investors HATE as you know) as I honestly don't know how to price in the "slaughter house factor". But having said that, I now have the option of leveraging the property and write off the interest and play on the rumour that the slaughterhouse is closing down soon. So that is the long winded story of what I had posted. Unbiased opinions are cool, thanks.

 

[BUGEYEDBRIT]

so you have a slaughter house near you condo? I wouldn't worry too much, the meat packing district in NY is a hot neighbourhood as far as I can remember....why are you worried? Can you hear the shrill screams of a thousand dying calves ? This wouldn't even warrant disclosure to my mind, caveat emptor applies I think, people should always do their own DD, as you say yourself.

 

[lowesthangingfruit]

so you have a slaughter house near you condo? I wouldn't worry too much, the meat packing district in NY is a hot neighbourhood as far as I can remember....why are you worried? Can you hear the shrill screams of a thousand dying calves ? This wouldn't even warrant disclosure to my mind, caveat emptor applies I think, people should always do their own DD, as you say yourself.

Well,...funny you should ask that. Apparently at peak operations, one can hear the animals according to some in the area. But that would not be the main issue in my mind. Enough ppl have consistently quoted to me that the area "smells like ass" in ths summer and the building is like about 200 metres down wind (geez, I guess that is why they are selling in the dead of winter near Xmas when the fuckin' plant is shut down,...smart, I would do the same probably). It may very well be a great deal still, and maybe ur right that there is a weird charm factor of being so close to a slaughter house, but I personally don't know how to price in "the smell of ass" as a factor. Anyways, the "good" news is that I had an out in the review of the status and discovered some upcoming work that is gonna drain the reserve funds significantly which can only mean one thing. Let someone else price in "ass smells".