Forget the squirrel recipes! This guy obviously thinks the recession is more of the venison variety. And why waste precious gas getting it home? Thanks to Derek Court for sending this along, just before he swerved and stole the deer.
The last posting raised some questions about mortgage rates. Rightly so.
We live in uncharted times. The cost of money’s never been as low as now. The central bank rate is a half point. The primeâ€™s 2.5%, and short-term mortgages are in the 3-4% range.
Governments everywhere have engineered this as opiate for the masses. Borrowing is meant to be so cheap and painless that weâ€™ll be driven to do so. Only by embracing debt will we buy those unloved new Chryslers and suburban houses thatÂ languish. In Canada our government is now giving people money to renovate and buy a first home. Itâ€™s allowing retirement savings to be raided by up to $50,000 per couple for homebuying, and it has given us the lowest-cost mortgages since ever.
Whenever the finance minister speaks, what he’s really saying is, â€œBorrow, dammit.â€
But how shall we borrow to finance a home?
Some people read my prediction of substantially higher rates in five years and took that as a warning to lock in now at these cheapo levels. Others proudly proclaimed to have 10-year terms, giving them rate certainty for an entire decade. Both strategies are wrong.
The best possible course of action is to have a VRM â€“ variable rate mortgage. Currently you can get one close to the 3% mark. This rate may actually decrease by a quarter point over the next few months, when the central bank cuts its key rate an equal amount, as job losses (and unsold Chryslers) mount.
History shows us that VRMs save you money â€“ in almost every circumstance. The cash saved should, of course, be applied to the mortgage principal. One of the best ways of doing that is to convert your monthly payment into a weekly one. By doing so, youâ€™ll make the equivalent of one extra monthly payment a year, and retire your debt years sooner and with a savings of thousands â€“ maybe tens of thousands.
If rates start to rise (which they will in a year or two), the increases will at first be moderate and hardly worth bothering with. As the trip higher picks up speed, you can always lock in to a fixed rate at any point with just a phone call. So, why on earth would you do that now?
For example, $400,000 (enough to buy a garage in Vancouver) borrowed at 3% on a VRM costs about $1,900 a month. In comparison, the current 10-year rate is 6.8%, with monthly payments of $2,750. That is a difference of $850 a month, or $10,200 a year, or a stunning $51,000 over five years and $102,000 over ten.
This begs the question: Why the hell would you give the bank $51,000 that can be used to pay off your debt much earlier?
The usual answer: Fear of a higher interest rate in future years which would increase payments.
But how can anyone justify paying $10,200 a year in premiums to guard against something that can be avoided with a phone call when it becomes apparent?
Answer: You canâ€™t. This is a dumb, extreme and costly move, right up there with mortgage insurance and long amortizations. Oh yeah, and buying in Vancouver.