Hi Everyone. Thanks for tuning in. I'm primed for all types of questions about debt and interest rates, so fire away. Glad to talk mortgages, housing, savings rates, bond and dividend yields and pretty much anything else.
MJH, I believe it's fairly standard for mortgages to compound semi-annually. Kind of nasty for your mortgage person to give you this crumb of information and not explain the bigger picture. Suggest you ask for a briefing from your mortgage person on the compounding policy used by the lenders your mortgage person has access to. Then, check with your bank and maybe another to get some context.
Gary, we tend to focus a fair bit on the personality of the Bank of Cda governor, expecially in Mark Carney's case. But I thnk the decision of whether to raise rates or not really comes down to the level of inflation and economic output. Right now, there's too much global economic uncertainty to warrant higher rates. Carney has warned over and over about high debt levels, and he has hinted broadly that rates might have to rise to cool new borrowing. And yet, borrowing growth has started to fall on its own. The housing market is a good example. Bottom line, rates will certainly rise over the long term, but in the short term there's no need for an increase.
JKL, I'm a five-year fixed kind of guy right now, for reasons explained below. I have no idea what rates O'Leary Mortgages is offering, and I wouldn't jump in without extensive comparison shopping not only on rates, but also on pre-payment privileges and other factors.
David, risk is a part of these decisions. But the risk being evaluated is strictly focused on whether the borrowers will repay what they owe in a timely fashion. The lender doesn't really care how pinched a family will be with a mortgage, just that there's enough money coming in to pay make the payments on time. The underlying foundation of this line of thinking is that people will cut corners all over the place before falling behind on their mortgage.
AKM, the #1 mission of a central bank is to prevent hyper inflation. So if there 's even the remotest risk of that, you'll see the Bank of Canada jump into action, with or without the US Federal Reserve. By the way, the housing market seems to be cooling right now, in part thanks to the new mortgage regs introduced last summer. Takes a bit of pressure off the central bank.
Scott, a very interesting question. Mortgage lenders are OK with you having monthly mortgage payments + property taxes + heating costs + all other monthly debt costs = 40% of your gross income or less. I think 30 per cent is much more sensible and comfortable, but then I'm not trying to buy a house in today's market. A 40%, you're wearing a mortgage straightjacket as soon as rates start to rise.
Vince, rising rates are a good-bad story for REITs. On one hand, yield investments of all types may come under pressure if rates rise. A 5% yield on a REIT might not look so appealling if you can get something similar on a five-year GIC, for example. Also, rising rates make it more expensive for REITs to finance their operations.
But if you look at the bigger picture, rising rates suggest strong economic fundamentals. That means REIT landlords should have low vacancy rates, and the power to bump up rents. In turn, that could help REITs increase the amount of money they pay out. Bottom line, I wouldn't be quick to bail on REITs simply because of a rising rate outlook.
MJH, there may be cases where the cheapest rates on a mortgage come with restrictions on how much money you can pay down every year. Not saying that's certainly the case, but worth checking out. A lot of people never make prepayments, so not sure how relevant that would be to you.
Hmm, that's an interesting take. Might be that we've seen hyper inflation in housing - hard to say at this point. We do know that housing price appreciation has gotten ahead of itself in recent years, and that affordability in some cities is stretched. The hyper-inflation view would be more urgent if housing was still on the rise, but it's not. Toronto and Vancovuer numbers for November were ugly, and the most recent national numbers showed a flat market overall.
Jeff, I'm not familiar with how Australia measures inflation, but I can tell you that I've heard tonnes of cricitism about our consume price index over the years. The basic complaint is that it undersells the degree of inflation lots of people feel in their everyday lives. All I can tell you is that economists seem OK with our inflation gauge as it is.
Gary, the convention here in Canada is for monthly debt payments to be measured as a percentage of household pre-tax income (40% is the ceiling) . I find this more useful than comparing total debt and total income.
Tom, I haven't heard of any impact on our housing market from Fed activities to support the US economy. I'd be curious to hear about it if anyone else has.
Vince, S&P used to do "stability ratings" for some REITs and income trusts. Not sure if they still do. Basically, the idea was to look at how sustainable a REIT or trust's distributions were. REITs are much more like stocks than bonds, so factor that into your analysis.
Mike, glad you asked this question because it gives me a chance to save you some potential grief. Use a high interest savings account for your downpayment savings fund, not mutual funds with any exposure to stocks or bonds. Nothing against these types of funds - they're fine for long-term investing. A two- or three-year horizon isn't long enough, though. You could easily lose some of that money you're struggling to save to reach that 20% threshold.
I suggest you do some shopping around for the best rates on high interest accounts. 1.8% isn't hard to get.
Dana, may i ask which fine, upstanding financial institution allows people to do this? It sounds like a disaster waiting to happen, unless you have steely discipline in terms of paying your card balance in full each month. The risk is that you end up paying credit card-size interest on mortgage payments that themselves include a big interest component.
Bruan, most people stick with their original amortization period, I believe. At renewal, ask your lender what your new am period is down to (it shrinks as you pay off your mortgage), and then ask to see what your payments would be if you took a shorter period. If you can swing it financially, you'll save a lot of interest.
Joel: You probably won't know it's time to lock in until the first rate increase happens. Given that rates don't seem to be going anywhere in the near future, that may not be a bad approach. ideally, you lock in at today's rate + one-quarter of a percentage point.
MJ, the smartest comment I've read on the fiscal cliff comes from not a financial person, but the political writer Frank Rich. He compared the fiscal cliff to the Y2K scare - lots of dread, but the end result was a complete fizzle. Worst case, the fiscal cliff causes a nasty but temporary shock for the market. Then, U.S. politicans get their act together and fix things. Best case, there's an agreement before the deadline and the cliff melts away.