How not to borrow

deer-biker1

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 prime’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 we’ll be driven to do so. Only by embracing debt will we buy those unloved new Chryslers and suburban houses that  languish. In Canada our government is now giving people money to renovate and buy a first home. It’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, “Borrow, dammit.”

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 – 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 – 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, you’ll make the equivalent of one extra monthly payment a year, and retire your debt years sooner and with a savings of thousands – 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 can’t. This is a dumb, extreme and costly move, right up there with mortgage insurance and long amortizations. Oh yeah, and buying in Vancouver.

117 comments ↓

#1 Sun Yat-sen suit on 03.21.09 at 5:23 pm

Love the photo LOL..

Hope he doesn’t have any exposed skin or he could get Lime’s disease from a deer tick.

#2 Paul B in London on 03.21.09 at 5:33 pm

Garth – Thanks – very helpful post. I like the capped rate mortgage that National Bank offers. You get the prime rate in effect and the interest rate varies with the prime..but it is capped (mine is capped at 6%). Over the last few years, my mortgage rate has been up and down (it hit 6% at one time), but it is now down around 3%. I like the feature of a capped rate since it hedges against the risk of rising rates in the future.

Great blog. Bought your last 2 books and they were worth the money. Thanks for dedicating your time to this subject. Your passion to bring light to the economic situation is appreciated.

Paul

#3 Sun Yat-sen suit on 03.21.09 at 5:36 pm

Apologies ‘Lyme disease.’ correct spelling.

#4 RW in Calgary on 03.21.09 at 5:38 pm

What is general opinion on splitting a mortgage (property valued at $435k, remaining mortgage at $275k) into half VRM (P+.5, 5yrs) and half HELOC (P+1), refinance (from 5.2% down to 3%) on a VRM, extend your amortization from 17 back to 25yrs, but then apply all the “savings’ directly to the principle? (I negotiated 20% prepayment yrly and annual increases in payments).

#5 Concessionman on 03.21.09 at 5:59 pm

I guess it ultimately depends on your risk tolerance and particularly budget.

Personally, I’ve had an open VRM since I upgraded to the Concession lot (you’d be proud Garth, Well, Septic, lots of wood and insert in the fireplace, generator, big garden) and at last renewal I negotiated prime less .9%….right now my mtg interest is 1.6%!! Fast tracking the Mortgage, done in 4 years before I’m 45.

That works for me, but for someone with a large mortgage on a tight budget that can’t tolerate rate fluctuations, locking in may be the way to go. NOT right now of course, as you mentioned.

Prudence would dictate that everyone that has a mortgage should sit down and work out what the highest rate of interest they can afford to pay, stay open with a VRM now, and watch for that “strike” point to lock in.

#6 Barb the proofreader on 03.21.09 at 6:18 pm

” right up there with mortgage insurance”
— Garth”

Never buy mortgage insurance. I’ve known this for 20 years. It’s a leg of insurance that should be cut off permanently. I have firsthand knowledge it is a rip-off scheme. Then I had a lawyer, banker, insurance expert and investigator confirm what I know.

If required, use those dollars toward a separate and more legitimate disability/life policy of equal value. But only with a reputable company — but always check the wordings before signing.

(Note: Firstly, “mortgage insurance” clauses severely — and cunningly — hide the limited circumstances under which disability payout could occur — to almost nil. It is a trick in the wording that no one would notice, until they suffer the big denial of claim. You have to wonder why it is allowed in a legal document.
Secondly, the mortgage insurance payout diminishes whilst premiums remain the same. That’s just insane.
Thirdly, payout ONLY to the bank.
… YET, if you had instead used those premiums toward a robust disability/life policy, payout is
(a) far more likely, under well-defined and understandable payout circumstances
(b) to a named beneficiary
(c) for the full amount, and of course with money left over after paying the remaining mortgage.)

#7 Gonzo on 03.21.09 at 6:19 pm

Hey Garth,
I agree people should not lock in now, but I think one has to be careful, and do not totally agree with your reasoning. The gap between variable rates and fixed long-term (5, 10 year) rates will always be present. Thus, one will always have to take a hit when you want to lock in. (You could run through the exact same calculations you did above at any point in time). Also, when interest rates begin to rise, banks will realize the projected rates for the next 5 years or 10 years could be much higher, and the gap between variable and fixed rates will likely increase… thus making the hit even more painful to take.
For example, what is better: keeping a variable rate now at 3.5% for 1-2 years and then locking in at 9%, or locking in now for a ten year term at 6.8%.
I didn’t do the math, but you see my point.
When you say variable rates can not go much lower, fixed rates can also not go much lower.
People should decide what is the mortgage payment that they need to be under to live how they want to live for the next ten years and lock in when it approaches that rate.
The problem is that most people will be oblivious to the coming rise in interest rates… once it starts to happen, they will not be able to lock in, because they fixed rate would kill them financially.
Just my thoughts.

#8 WillsDad on 03.21.09 at 6:43 pm

Very straight-forward, easy to understand post Mr.Turner. Should be (along with yesterdays post) required reading for all over-excited home buyers.

#9 Comrade Okie on 03.21.09 at 6:51 pm

“Thanks to Derek Court for sending this along, just before he swerved and stole the deer.”

The first rule of marauding is;

there are no rules.

Another bit of survival advice from the Rednecks handbook. Road kill is best aged at least a day, and better still if properly squished.

#10 JoeCalgary on 03.21.09 at 7:23 pm

A person has to be careful with VRM’s. In 2005 I was told I could lock-in to a fixed rate at any time. Three weeks ago the Bank of Nova Scotia said I could lock-in for free only in the six months prior to term.

Otherwise, I would have to pay a fee. And I imagine that fee varies.

#11 Future Expatriate on 03.21.09 at 7:30 pm

Hope that wasn’t a “downer” deer… “mad cow” prion disease has been hitting deer population for awhile now.

#12 ts harpoon on 03.21.09 at 7:43 pm

HOW TO BORROW:

Googled “cheap mortgages” and this is what I found. I want a mortgage – this looks good to me as I am a first time buyer…

Did You Know?

You can get the BEST mortgage rates, terms and products, without shopping, negotiating, hassles, changing banks or leaving your house!

Negotiating with one bank can be a HUGE mistake.
Negotiating with more than one bank by yourself can also be a BIG mistake.

You can review every Canadian mortgage lender’s rates and products with one phone call.

You can choose what you want from any one of these lenders and have their written approval within hours!

Most banks at first, NEVER quote their best rates, especially over the phone.

Getting the very best rate from a banker usually means that you have to meet with them and be prepared to NEGOTIATE.

Some bank mortgages are better for the bank than for you.

Lenders often offer better rates to new clients than they do to existing clients.

If you want the best mortgage rate, terms and conditions WITHOUT negotiating or hassles then you should call…

We only quote the best mortgage rates.

With one call to us you’ll have more than 25 mortgage companies products & rates available to you without any hassle or negotiating, possibly your own bank.

Home owners, can and do save THOUSANDS of dollars with our FREE Mortgage Transfer Program.

You can have your mortgage rate guaranteed for one year if you are purchasing a new home from a builder.

Our discounted rates are for everyone, not just for home purchasers, but also for all pre-approvals and mortgage transfers.

You can refinance your home to 90% at first mortgage rates without a second mortgage!!

Our services for all of the above and MORE, is available to you for FREE. Be sure to check out our FREE Mortgage Service information.

We mortgage property anywhere in Canada.

Anywhere in Canada you saaay?

Yeesh. Who could resist this spiel?

Do your own damn research. — Garth

#13 Rog on 03.21.09 at 7:56 pm

I live in vancouver B.C. , you can buy yourself a dumpy house about 70 years old and cost you a thrifty $400,000 to start , that a good price in a real poor location. Busy road , crappy neighberhood you get the picture

#14 Bruce on 03.21.09 at 8:03 pm

Hey Garth,
Why not have your mortgage on a secured line of credit at 2.5%. If the banks pass on the interest rate drop from the BOC’s lending rate you win. You still can convert your secured line to a VRM anytime and still save .5% or more if we hit 0% in the meantime?You still can do that within a phone call???

Bruce

#15 dekethegeek on 03.21.09 at 8:05 pm

Hilarious photo, should have taken that jacket as well. Its a collector’s item fer sure. Alway had a Variable mortgage, paid off a $160k mortage in 12.5 years.
Just collecting toilet paper ,beans and bullets now :)-
I’ll be a gazllionaire in the coming crash.

#16 Too Old Bob$ on 03.21.09 at 8:06 pm

“Oh yeah, and buying in Vancouver.”

Dam you Garth! Had to go change my depend after that.

How about this “conspiracy theory”.

Get them into a low interest mortgage (cause that’s the in thing) for tens years or more. That’s right get into debt, now we’ve got you. Then jack interest rates big time. Oh Oh! how are we going to remortgage, we have no money. Wait a minute, remember when the Parents, Grand Parents or Uncle passed away (bless their souls) they left us some inheritance. You know, the one where all the money originated from sucking all the resources out of the system prior to the 2009-2010 recession. (that’s if there is anything left).
Now if this were true, wouldn’t they just take the inheritance and pay the mortgage off. Possibly, but we all know that temptation for a bit of luxury is always knocking on the door.
Ok! I know, you think I’m nuts, mean, old and grumpy or all the above. As much as I hate to say this, it has happened. I know 3 separate familys who have come into inheritance. Did they pay down the mortage, hell no, why do that when the value of the house is always going up.
Here’s what they all bought: New Hummer, Hot Tub, Vacation Trailer, trips to Mexico, Hawaii, Florida….., Swimming Pool (huh!.. oh it’s heated) Breast enlargement and who knows what else.
Life is pleasant and easy.

PS: actually one of the above was a wise investment. I’ll let you figure it out. :)

#17 Republic_of_Western_Canada on 03.21.09 at 8:11 pm

Alternatively, you could all just SAVE YOUR DAMN MONEY, encourage house prices to reset to 3 x median income, then just buy a small simple one outright.

(Worst photoshopped deer I’ve ever seen, BTW).

#18 NewFather on 03.21.09 at 8:18 pm

Agreeing with Gonzo. When interest rates are going up, and I want to lock in, the bank will also know rates are going to rise and they will charge more.

Locking into a fixed rate is basically a gamble that you are forecasting interest rates better than the bank is.
Or am I missing something?

You’re missing that mortgage rates are set in the bond market. — Garth

#19 North Vancouver Citizen Jr. on 03.21.09 at 8:34 pm

…”””and buying in Vancouver.””” Garth

http://www.theglobeandmail.com/servlet/story/RTGAM.20080912.welxnharper0912/BNStory/politics

…If the shift is now and for the forseeable next 50 years is “West”…..how can Vancouver/Hongcouver not become the next New York/London?

You all discuss here how “Finance/Auto/Manufacturing Industries” are dead…so that eliminates NY, Detroit, London & Toronto…..(Mtl. is but a seasonal single industry city, “snow removal” and Boston still has some bio tech)….(Did you know China now manufactures 1–% of North America’s penicillin)…

http://www.nytimes.com/2009/01/20/health/policy/20drug.html

…So if China/Asia are the World’s new future bosses, Hongcouver will be its lead North American Ambassador Venue.

…Please pass the Dim Sum/Pad Thai

#20 Jonathan on 03.21.09 at 8:41 pm

haha redneck, stealing some roadkill? lol

I agree that variable rates are more than likely to decrease by 1/4% in the next couple months. Having said that as soon as the banks get whiff of inflation or expect rates to rise in the near future, their long term fixed rates start to rise.

Scotiabank has 5.25% for 10 year. Probably get RBC to beat it by a 1/4%. So 5% is likely to be the best deal you’ll get on a 10 year fixed for probably the rest of our lives.

You would have to do a NPV analysis to see how much rates would have to rise over the 10 year term to make it worthwhile.

It is an excellent point Garth made regarding VRM. If you go with a VRM rather than FRM then you should apply all the cash savings from interest to the principal. Your monthly payment should not go down. That is because VRM is more riskier in the long-term and you need to mitigate that risk by paying the debt down faster than you would with a FRM.

#21 john m on 03.21.09 at 8:54 pm

Great advice on mortgages. Personally i think we have not seen the bottom or nowhere close yet and by next March we will have a pretty clear view of where we are headed.I have made my living off of real estate development for many years and i am not touching anything.I see potential in small houses when recovery starts,people are going to need smaller spaces with low energy consumption,wages are dropping,jobs are scarce and energy costs will increase as well as taxes. The Mc Mansions of today will no longer be practical or affordable to reside in.I predict a rebirth of the wartime housing type of home?

#22 Jay Currie on 03.21.09 at 9:36 pm

Once again, great advice and lots to think about.

One question I keep coming back to is where is “reasonable” in real estate price? Trying to pick a bottom is a fool’s errant; but what would look reasonable in the new economy.

One commentor mentioned 3x income but is that average income or is it average family income? Or is it 3x your income? Even with the correction, Vancouver housing is running 10x average family income – which is nuts.

#23 rory on 03.21.09 at 9:36 pm

Watched a story on NBC news tonight on what they are calling ‘foreclosures pets’. Owners consigning their pets to animal shelters due to economic hardship.

The owner they should still had jewellery on her fingers, good clothes, shoes on her feet and nice red nail polish on her nails. Hardship indeed, IMO these people (for the most part) would rather give up Fluffy then Sunday nights out at Denny’s.

Canadians and our American brethren no nothing about real hardship, we are pussy’s (excuse me). Get responsibility for something and then fold like a house of cards when the going gets tough.

Three things I detest – poachers, gamblers that do not pay their debts, and people that do not live up to their responsibilities of the creatures in their care.

Just makes my blood hot as these 3 items are symptoms of what is wrong with us. Lots more but these are the 3 that set me off. Shame on the three groups of people.

And yes entry this has something to due with RE, this lady lost her home.

My new dog, Bandit, is a foreclosure refugee. — Garth

#24 JO on 03.21.09 at 9:37 pm

Shot term rates will likely remain very low for most of teh next 2 yrs or so. However, rates will eventually rise – even on the short end. The greatest risk for now remains a collapse (30-50 % decline) in the prices of long term bonds (10 yr +) which would cause fixed mortgage rates to explode and kill th ehousing market. The yield curve will likely look shockingly steep – imagine leaning a stick against a wall on a slight angle.

A collapse in the long bond market due to high inflation remains a very low probability. If that happens, it will likely be due to a sudden, shocking collapse in confidence in the USD, not due to large numbers of consumers/companies borrowing and spending to buy big ticket items. This last possible case of high inflation becomes much more likely once homes stop dropping/unemployment stops increasing.

We may very well get a hell of a bond scare / serious decline in bonds before the year end. The chart, daily sentiment, and CDS spreads are all flashing huge red flags that a major drop/possible collapse in long bonds is in fact the most likely result in the fall/before end of 2009 – after the sharp rise likely to continue for the next 2-3 months.

So VRM is still the best. But if you cannot afford to take the risk of a variable rate or want peace of mind, locking in a long term fixed rate now is not a bad idea…even though VRM is the best. Fixed rates will face huge rising pressure from the inevitable serious drop in long bonds (drop in prices) and also from escalating default premiums which banks will add to cover rising unemployment-related losses on bad debt.

# 6 – while most of your comments on “mortgage” insurance are correct, Garth might be talking about CMHC mortgage insurance that is added (usually, but not required to be added to principal) to your mortgage when the downpayment is less than 20 %. This insurance gaurantees the bank against losses if the borrower defaults. In practice, the CMHC (and related programs that flow from the NHA) effectively allowed the weakest borrowers to buy homes they couldn’t afford thanks to loosened underwriting and the taxpayer guarantees that banks wanted in exchange to make loans to people who have no money or wanted to speculate. This is one good example of how your friendly government directly caused the crisis. Keep that in mind next time you hear some left wing politican blaming the “free market” for these problems. You do make good comments about creditor insurance though.
JO

#25 jt on 03.21.09 at 10:11 pm

i agree with VRM. right now my rate is 1.75% (prime-.75) and if the rate stays low for a year or two, the extra money i am saving that is going towards principle more than covers the higher rates that may occur down the road. Hopefully by year 5 my house is paid off and i can use my money and buy some bonds at the higher rates.

#26 go green on 03.21.09 at 10:21 pm

#6 Barb the proofreader on 03.21.09 at 6:18 pm

Never buy mortgage insurance. I’ve known this for 20 years. It’s a leg of insurance that should be cut off permanently. I have firsthand knowledge it is a rip-off scheme. Then I had a lawyer, banker, insurance expert and investigator confirm what I know.

Barb – When we bought we did not take out mtg insurance – like we don’t take those extended warranties that all those min. wage guys have to flog at the Source, etc.

But, maybe it was different 30 years ago?? Don’t know for sure. I knew a young lady back then – early 30’s with 2 young children. Her 30+ husband died suddenly from a major heart attack. They had bought mtg. insurance. It saved her butt financially. Back then it was common for couples with kids to buy it. They probably would have paid far less having life insurance policies on each other.

#27 ralph on 03.21.09 at 10:38 pm

Loan insurance like extended warranties is a license to steal money.

#28 Gord In Vancouver on 03.21.09 at 10:46 pm

Garth,

Thank you for another great post.

I initially started visiting this site for strictly for entertainment but have learned a lot from your posts.

#29 go green on 03.21.09 at 11:24 pm

#16 Too Old Bob$ on 03.21.09 at 8:06 pm

My DH & I are one of those couples who’ve benefited from parent’s money. Not exactly an inheritance as my PIL’s are still alive. But, they are frugal people, old Europeans who lived through WWII, and still live frugally in most ways. I also grew up frugally. My MIL’s parents were frugal & it turned out when her died she left a tidy sum to her only child. While her parents were alive they hoarded money & never helped my PIL’s. My MIL’s dad was a pompous silly servant who felt my FIL was not good enough for his daughter. Au contraire. Anywho, my MIL said she would not do what her parents had done to them. So instead, my PIL’s always put money in each of their childrens’ & granchildrens’ bank accounts for their b’days, Xmas. etc. If not, the govt. will take a good portion in inheritance tax. We’ve used what we’ve rec’d wisely. Some not so much. When we go overseas to see them & travel, its money from my DH’s parents that pays for it. They wanted to give it to their children while they could enjoy it and, in our minds, to ensure that we could visit them annually or semi-annually.

My Mom, who had very little, did the same before she died.

#30 Xnexus on 03.21.09 at 11:28 pm

I wonder if anyone knows the answer to this one, what’s the history with variable rates in regards to the prime rate? A few months ago, you could get VRMs for significantly under the prime rate. Once the current unpleasantness started, they jumped to 1 percent above prime, and now have seemed to settle at about .8% above prime. Was it unusual to have variable rates under prime, and we’ve now gone back to something more normal, or are we now in the unusual phase, and we’ll see rates come closer to prime in the future?

#31 Banklender on 03.21.09 at 11:37 pm

As a bank lender, a CFA and a CFP, I totally disagree with Garth regarding VRM. I had been recommending VRM for my clients until around 6 months ago. Rightnow, if you choose VRM, the best you can get is P+0.75% (3.25%). But remember it is closed mortgage. For a fully open VRM, you have to pay P+1.5% (4%). The best 5 year fixed term is 3.8%. A closed VRM allows you to lock up at any time. But remember it is closed so you can not transfer to a different lender without paying a big penalty. You lost most of your bargaining power with your lender. If you have a VRM you want to lock up now, there is no way your lender will give you 3.8%. Normally when you see the prime rate going up, the long term rate went up long time ago. The mortgage rate following bond market. Without the Telepromter Kid pouring in 1.5 trillion dollars into the bond market last week, the bond yield probably went up already. With the past 40 year average inflation over 4.2% and all the governments printing money like crazy, I will bet on the high inflation side in the next decade. I am recommending all my new clients to go for fixed rate and telling my clients with a VRM below prime to keep an close eye on the interest rate. I would consider someone crazy if he declines a 3.8% fixed rate 5 year term and takes a 3.25% 5 year VRM (p+0.75).

What kind of financial advisor are you, who believes you can transfer a mortgage between lenders seamlessly? Anyway, glad you’re not mine. — Garth

#32 Banklender on 03.21.09 at 11:51 pm

A long term deflation is nearly impossible in modern time. All currencies are detached with gold reserve so governments can print unlimit money to starve off the deflation. So far all the governments around the world are doing it. The inflation is around the corner.

#33 Dan in Victoria on 03.22.09 at 12:02 am

Post# 21 John M – They just announced in the local newspaper last week out here in the Western Communities that they were going to start building 400 to 700 square foot houses starting at around 300 thousand dollars.Your right Garth,size of a garage here in Victoria also.Yes, that reminds me of the war time houses that my grandfather built in Belmont Park.He called them the alphabet houses,apparently the plans were all letters,he built the “J” plan.Great Posts last couple of days Garth,now if my nephew and his wife would listen and read this blog,LIKE I Told Them, do some simple math and use their brains, they would NOT be thinking of buying,or trying to buy a house right now.They to have become infected with this first time houseitis plague that is sweeping the country.I have explained to them the 3x rule on income,the low interest rate trap,35? year mortgages, and the upside down equity problem that may arise, but apparently I am going through one of my stupid periods.Oh well, Natural selection in progress.

#34 Dave on 03.22.09 at 12:56 am

1)Explain to me how you can have hyperinflation when no one is borrowing, everyone (except the bloggers here ;)) is in debt up to their eyeballs, and unemployment is on the rise.
2)Help us understnad the here and now, not 4 years from now.
3)Stop sleeping with your Peter Schiff doll

Thanks.
—————————————————

actually this is probably my biggest concern and one thing i can’t put my finger on. Up until 2 years ago, everyone was borrowing like crazy. You could say the economy was inflationary. Now, govn’ts everywhere have printed a ridiculous amount of $$$, however people aren’t borrowing. I’m wondering which situation will be more inflationary. I’m assuming people have to borrow like crazy in order for inflation to jump significantly. I don’t think interest paid to the fed and other central banks for the new money could solely have enough impact to drive up inflation…

does anyone understand the above? someone please share your thoughts..

#35 Zoronqueen on 03.22.09 at 12:58 am

Hello bloggers

Word out on the street is that greater recession is getting bad in Edmonton. The oil sands projects are on hold. I live in Magrath, Edmonton and in this neigbourhood, where houses are 450+K people are getting laid off from 100K + jobs, wonder how long till people start not being able to pay their mortgages.

Also I have a dumb question but I heard that if you have a HELOC the interest is based on simple interest so even at prime you are still paying less than a mortage of prime minus 0.5, is that true?

#36 Jack the Lad on 03.22.09 at 4:31 am

I’m not in the country, but based on what I’m reading here it appears the great big housing collapse we expected for Canada is not coming to fruition?

#37 Darryl on 03.22.09 at 7:01 am

IMO it’s simple

If you can get a 10 year for 5% and you have a large mortgage and /or you have future financial concerns of any type, Do it. 5% is diddly, squat for the security of knowing what your payments are for the next 10 years. This rate is a bonus.

If you have good control of your mortgage and no fear of future finances. Go VRM.

In each case though, pay off the mortgage as soon as possible . Stocks can go to zero but your home will alwys

#38 Darryl on 03.22.09 at 7:02 am

be worth something .

#39 OttawaMike on 03.22.09 at 8:57 am

“AIG is what happens when short, bald managers of otherwise boring financial bureaucracies start seeing Brad Pitt in the mirror”
Here is another scathing piece on how the world financial crisis came about and how the present status quo won’t fix it:
http://www.rollingstone.com/politics/story/26793903/the_big_takeover/1
After reading that I think of similarities to the tech bubble where there were the “experts” and the rest of us mere mortals.

#40 David Bakody on 03.22.09 at 9:26 am

The world’s 3 billion poor, especially the 1 billion poorest of the poor, are suffering powerful and destabilizing blows from the crisis, and these will get worse and threaten global security unless there is specific attention and action.

This from the most recent G -20 Summit. Think? America is at the cross roads and must find a way to rebuild …. because if the day ever came their population revolted with the millions of fire arms that the people have it would be too late.

Harper & Co have put our pending housing mortgage crisis on the back burner along with the falling economy for gun registry once again, “Can you imagine that” …. not to limit long guns but to sell more! What does this have to do with this blog …. everything …. why? because they should be working day and night on the economy. For starters not creating more high paid government positions.

… our government and the upper class has to start thinking about people not their own personal interests.

#41 anne on 03.22.09 at 9:40 am

A few years ago, my son, DIL and I bought a small house in Toronto together. Got a VRM, they moved in and after another year or two so did I. I sold my condo in Vancouver at a reasonable but not huge profit (it was a former leaky condo) and paid off a third of the Toronto house mortgage. Now, my son and DIL are paying off the remaining VRM at a phenomenal rate while I contribute to taxes, utilities and maintenance. Everybody questioned my sanity in moving from Vancouver to Toronto in 2006, but not now. With my retirement savings in tatters I am grateful for a reasonably secure roof over my head.

#42 Basil Fawlty on 03.22.09 at 10:22 am

#34 Dave, “3)Stop sleeping with your Peter Schiff doll”
The monetary inflation is already occuring, your question appears to be how will this transfer into price inflation given that people are not borrowing. Well the Fed realizes this and they are now buying debt for dollars, they are “monetizing” the debt. This is the unmitigated disaster that Peter Schiff has been warning about for years. This is a good part of the reason that seasoned investors such as Jimmy Rodgers and Marc Faber are coming out publicly and saying that the US financial officials, such as Bernanke, are complete incompetents. This policy, if continued, is the road to hyper-inflation, a falling US dollar and increases in asset prices (in terms of dollars). In terms of gold, if this policy is continued, asset prices will fall, just as the Dow has been falling in terms of gold.
Listen to what Schiff say’s, buy his books and search Youtube and his website for video interviews. Just because he was wrong on his decoupling theory, does not mean he was wrong on his entire analysis.
Please do not think I am some fawning Schiff disciple, as he has other faults, however he understands the US financial system very well.

#43 timbo on 03.22.09 at 10:23 am

If all of you are wanting inflation to come rolling back it might happen soon with no one buying us bonds forcing the fed to buy their own debt.This will bring a real risk of flight from the US dollar which will force rates up. This is worst case, hope it does not happen.

We all need rates to stay low until most of the overpriced mortgages can be refinanced at lower rates to keep people in their house. To think higher rates solve anything begs the question would you be able to re-fi your house at 9% if your already underwater or borderline but your payment goes thru the roof?

I believe that what the g20 is doing is about the only thing they can, all print money to cover losses so that the money supply does not shrink.this will allow debts owed offshore to be paid which keeps confidence that people will get their money back. If they loose even just a little confidence that we will not pay then there will be a flight from bonds and into a urn buried deep in a garden.

Again , if rates go up the world is telling all of us that they think we will default and force credit to almost stop.

Lastly , if you hear about bonus’s paid out, follow the real money trail….this is but a diversion to focus attention away from where the insurance payments are issued. Look at the fed who runs it and who has received the most compensation. The press will beat a drum to the left and the money will go to the right.

rant over, going to watch braveheart again and cry freedom

#44 Got A Watch on 03.22.09 at 10:36 am

The ‘3X Income Rule’ relates to the classic affordability formula for real estate from the 60’s or 70’s, but still generally valid.

The average price of a home should be 3 X the average annual family income for that region. This is assuming an average market condition, flat prices, not too hot of a market, nor too cold.

It is a rule of thumb, not a law. It refers to the stereotypical totally average home and Mr & Mrs Average family.

The totally average 3 bedroom home, on the average lot, in neither the best nor worst neighborhood. You would adjust that price up or down depending on size (bigger up, smaller down), waterfront (up), good neighborhood (up), bad neighborhood (down), bad location like busy street (down) etc etc for individual homes of course. Not every home should be priced at 3X, good areas more, bad areas less.

The income part is easier to define, statistics are readily available from the government.

So, for example, the average family income is $65,000/year in your region. So the average family home should be priced at $195,000, roughly.

If you apply this math to your area, you can see if it is still in a real estate bubble. Some areas may never go as low as 3X, butat more than 4X warning lights should start flashing.

In California, at the height of the bubble, this ratio exceeded 12X, and something like only 3% of the residents made enough money to qualify to buy the “average” home = enormous bubble, guaranteed to crash.

If Vancouver is still at 10 X now, look out below.

Interestingly, the UK is now talking about making this a law – you can’t get a mortgage for more than 3X your annual family income. Good in the long-term, but it will cause UK real estate to crash even harder now, as they are way above the 3X ratio still.

Imagine what would happen in your area if this became law here. LOL.

A commenter from Thunder Bay, Ontario posted that in their depressed area, the ratios have fallen below 3X, well below in fact. That takes, as they stated, 20 years or more of economic decline, but it is the real worst case.

Do the math for your area, and ponder.

#45 Taxpayer like you on 03.22.09 at 10:59 am

35 Zoronqueen asked:

“Also I have a dumb question but I heard that if you
have a HELOC the interest is based on simple interest so
even at prime you are still paying less than a mortage of
prime minus 0.5, is that true?”

I dont have a HELOC but I can give example of how mortgage interest is calc’d. In Canada, mortgages are compounded semi-aunually. So a 6% mortgage is compounded at 3% twice per year ie the compounding effect is about 6.09%. The bank will compound it monthly to get the same 6.09% annual result. This give 0.49386% charged monthly on the unpaid balance.

Consumer loans are compounded monthly. Same 6% is charged at 0.5% per month on unpaid balance giving 6.168% effective annual rate.

People rant about compound interest, but as you can see the difference is pretty small. Even at 12% monthly compounding, effective rate is only 12.68%, semiannual 12.36%.

I dont know if a HELOC is considered a mortgage or not.
People speak of “simple” interest but I’m not sure what particular method they are talking about. My personal LOC is as per the consumer loan.

#46 ralph on 03.22.09 at 11:00 am

To the CFP that’s recommending locked in mortgages: Not sure how you managed to pass your securities exam but I agree with Garth. I have had both types of mortgages and VRM are the only way to go.

On a VRM your payment amount stay the same as in fixed mortgages, for the length of the term. The interest portion of the payment is what changes (variable). When interests rates are low then more of your payment goes to towards the principal.

Plus on VRM you can pay any amount at any time towards the principal over and above your regular payments without penalty. As for transferring a mortgage it still depends OAC from the bank. (Which until recently didn’t mean much.)

Hope this helps. At least that’s the way it was with my VRM.

#47 Dave on 03.22.09 at 11:30 am

I”m having difficulty understanding how the Fed buying U.S debt (bonds) differs from a bailout. In each case the Fed is issuing money that didn’t exist into the U.S economy which the american taxpayer pays interest on. The U.S govn’t will be paying interest on that debt the fed bought and the U.S govn’t will be paying interest on the bailout money they co-signed for for companies like AIG, Goldman Sachs etc

How is monetizing debt more inflationary than a bailout? Correct me if I’m wrong please…

#48 LS on 03.22.09 at 11:45 am

Sorry but without the math this post is not very convincing. You make it sound like one could lock in to the same rate whenever you want at any time, but of course when rates are going up the fixed rates will be much higher than they are now.
It’s not nearly as clear cut as you make it out to be, especially since the 10 year rate one could get is not 6.8, but 5.something. I suspect which one is cheaper depends on circumstances, but it’s definitely not as clear cut as “lock in, pay more” as you keep saying.

Actually, it is. Rates will move up slow, in quarter-point increments, and not start that process for more than a year. Switching to a fixed term can be done in mere moments. Or, you can lock in now and pay more. Your bank will be grateful. — Garth

#49 timbo on 03.22.09 at 11:57 am

#43 Basil
yes you could be right but if this were a real true market but it is not.

all g20 countries are printing. no inflation because it is used either to clear debts or to go back to the US dollar to prop it up. A circle…..same as china, china bought debt to make goods to sell back to us. A circle..but the banks made the profit on the interest….moneychangers…

I’ll bet you a dollar that if there is some flight from the US dollar it will be short lived as everyone will print money to run back into the dollar to keep it stable. All economies will suffer but it is not in anyones interest to destroy the dollar . Show me an example where it would be in anyones interest to completly shut down the US economy?
We are not tied to a gold standard hence fiat so we can print forever and if everyone is printing where is the inflation if it goes to wipe debt.

China pulling out of the dollar, lol, that would be a declaration of war.Schiff thinks numbers not politics.

If gold goes to 3000 the goverment will knock at your door, trust me, . Even worse, you better buy guns, as you probably told everyone about your call and if there is a collapse your starving friends and family know where you live and where the gold is hidden.

this is planned period, hyperinflation would kill all economies with debt and that is not in anyones interest.slow deflation, huge borrowing by all G-20 nations to clear books and prop currencies. 2010 should see things level. but 2009 is where your eyes should be as we are making history.

When AIG levels its over, they are the insurance company to all the toxic crap and when they stabilize- buy a house and not till then…that is when confidence will come back and greed will run again.

again you could be right but I think this is political now and no math model works. good luck selling your gold if it gets ugly because goverments will have new laws with long fingers.

#50 LS on 03.22.09 at 12:26 pm

Actually, it is. Rates will move up slow, in quarter-point increments, and not start that process for more than a year. Switching to a fixed term can be done in mere moments. Or, you can lock in now and pay more. Your bank will be grateful. — Garth

Well I’m not going to argue about this, since I don’t have a definitive answer one way or the other, but you can’t just ignore the other side of the equation. In a couple years when rates edge up a few points and you want to lock in, your fixed rate will be higher than what you can get now.

Your advice to go VRM might still be good, but you’re presenting your argument without even considering that you’re going to be paying more once you lock in, compared to someone that locks in now. Pay less first, pay more later, or vice versa. Only a detailed calculation can answer what is best in the long run.

And even then it will depend on how long this recession drags on.. The joke’s really going to be on the people that locked in if nothing recovers for 5+ years.

#51 Paul on 03.22.09 at 12:39 pm

However you get a mortage you better hurry up.

Kelowna

And prices keep trending up…

SFD Month To Date as at March 22
Median Original List: $459,000,
Median Reduced List: $449,000,
Median Sale: $425,000,
Median DOM: 79

At my last update Median Sale earlier this month was $422,500. Am I turning into a Bull? Is this that Dead Cat Bounce? Or is this the start of a turnaround? Tune in next week for find out…

#52 dbg on 03.22.09 at 12:49 pm

“Oh yeah, and buying in Vancouver.”

Just a link to put some salt in that gash of Vancouver.

http://www.vancouversun.com/Business/Vancouver+office+vacancy+rate+jumps+cent/1406283/story.html

#53 JO on 03.22.09 at 12:59 pm

Garth, just finished reading After The Crash. I know you recommend small towns and cities close to rail lines and binglaows/condos in good urban areas with public transit. Would you be able to list 3-5 small towns/cities that are on your list so I can do more research on my own. For now, I am leaning on renting, then buying a place with 1-2 acres of good land in an area withing driving distance of GO but not in a built up area or any of those subdivisions. The actual home would be bungalow, no more than 2K sq ft. Off the top of my head, I am thinking quiet areas of Burlington, Caledon, Dundas ON…would you be able to suggest 2-3 of the ones you consider top. ? Good book BTW, the level of detail is astonishing.
JO

#54 Bill-Muskoka (NAM) on 03.22.09 at 1:24 pm

Well, with all the absolutely sure fired advice on mortages I guess there is no need for philosophical wisdom at this point, but here it is anyway!

Luke said ‘No man builds a tower without first counting the cost!’

And Solomon wisely said ‘Vanity, vanity, all is vanity!’

You all go ahead and jump on whatever Bandwagon suits your taste, I will stay with reality and knowledge gained from historical experience. Interest rates will go UP, and when they do, well, what do I know?

But, hey, what do I know, I am no ‘economist’, not an RE broker either. My only claim to fame is I have survived all the VooDoo Economic Theories and am still happy and alive. Oh, did I mention the other wisdom of Solomon? ‘There is nothing new under the sun!’

#55 Bill-Muskoka (NAM) on 03.22.09 at 1:33 pm

Funny thing I noticed yesterday. I have been thinking about trading in our 2007 vehicle for a 2009 just to keep well under the bumper to bumper warranty period.

Sure there are ‘special deals’ requiring us to ACT NOW! So, after all is said and done we would end up taking a $6K hit on the trade-in because the dealers still haven’t quite caught on that we are in a deflationary period, but they still expect to haul in the cash on all sales. They no longer sell the used vehicles themselves but move everything by auction which adds another three middle men (dealer, auction house, and reselling dealer) who want to make money at our expense.

Well, so sorry, but I will consider selling the vehicle privately, paying off the balance and then getting a better deal later on. I just can’t see paying twice, actually three times, for a vehicle. No wonder vehicle sales are DOWN and will remain DOWN until the basic philosophy of the car dealers changes.

Oh, and of course the government wants their tax cut too. Sorry, NO DEAL!

#56 Investx on 03.22.09 at 1:54 pm

#45 Got A Watch

“So, for example, the average family income is $65,000/year in your region. So the average family home should be priced at $195,000, roughly.”

That’s roughly the average household income in Toronto/GTA , yet homes are NO WHERE near that price and I find it hard to believe they will correct that low.

I’m starting to doubt the usefulness of this 3x rule of thumb. It might be better to calculate affordability dictated by 32% of monthly gross income for house payments (mortgage, property tax, etc), which takes into consideration the actual cost of the house (interest rates and amount owed).

#57 Basil Fawlty on 03.22.09 at 2:21 pm

Dave “How is monetizing debt more inflationary than a bailout? Correct me if I’m wrong please…”
At least a portion of the bailout was borrowed money through the sale of US debt instruments. Monetizing is the government purchase of debt ie. bonds, mortgages, car loans or credit card balances could all be monetized.
Timbo,” Even worse, you better buy guns, as you probably told everyone about your call and if there is a collapse your starving friends and family know where you live and where the gold is hidden. ”
Diversification reduces risk. If nothing is safe then we are all screwed. However, I am not trying to paint as gloomy a story as you portray, it is a great big world and many possibilities exist.
“Show me an example where it would be in anyones interest to completly shut down the US economy?”
It was not in anyones interest to see 45% of the worlds financial wealth eliminated over the last 18 months, but it happened. Also, who is predicting the complete shutdown of the US economy? That notion is absurd.

#58 David on 03.22.09 at 2:45 pm

This blog recent blog does provide some very useful information. Other than do I pay down my mortgage or take out an RRSP this is the most frequently asked question do I take a VRM or do I lock in.

There is no doubt according to statistics the VRM is the way to go. There is a hugh savings to be made.

I believe it all depends on the individual and if they wish to enjoy peace of mind for a certain period or can they they stand the volatility. Interest rates do move slowly in a normal environment. However, we have witnessed rates drop very quickly the past year. This could happen just as well the other way if we happen to see run away inflation.

Hey !! if you are good at managing your money go with the VRM and keep you eye on interest rates. If you have dificulty in balancing your monthly budget I would say lock in for a period that you are comfortable with and if you have any extra money do the paydown that institutions allow normally 10% to 15% annually. It will all work out for you in the end.

After a lengthy discussion my son took a VRM last fall and is very happy.

#59 JM on 03.22.09 at 3:05 pm

Garth’s reasoning on fixed vs variable rates is flawed for two reasons. First, while bankers are not all mensa, they do know more than the average joe. At the first hint of inflation on the horizon, and long before variable rates start to increase, the gap between the fixed rate and variable rate will start to grow. Presently, the gap between the best variable and the best fixed 10 year is about 250 basis points(2.5% to 5%). That gap will creep up to 500 basis points before the variable rate jumps. Once happens, those following Garth’s imprudent advice will be screwed. They will either accept a much higher fixed rate, or, worse, they will ride the variable rate up -way up- to double digits (the historical norm)

The second flaw with Garth’s thinking is that he ignores the fact that a 10 year low interest mortgage is an asset as well as a liability. In the 80’s, when rates topped out at 20%, homeowners who wished to sell had the option of selling their fixed mortgages back to bank at a substantial gain. This, of course, is the opposite of the penalty that is incurred when a homeowner breaks his mortgage to sell his house after rates have fallen.

Garth’s idea that it is generally better to have a variable mortgage reflects the reality of the past 30 odd years. However, times have changed. Following his flippant advice now is a bad move.

Mortgages are to be paid off as quickly as possibly, not toyed with. They are not assets, but very expensive liabilities. A ten-year loan drains away money in needless premiums that should be put against the principal. My advice guts yours. — Garth

#60 Barb the proofreader on 03.22.09 at 3:08 pm

#26 go green: “Barb — When we bought we did not take out mtg insurance – like we don’t take those extended warranties that all those min. wage guys have to flog at the Source, etc.”

Go Green, you’re right, as far as straightforward death benefits, it’s pretty hard for them to deny the claim although my grandmother had a horror story to tell.
But as far as the payout “amount”, your friend could have been better off with a separate Life policy not through the bank mortgage insurer. This is because as the mortgage gets paid off, the potential death “payout” actually diminishes. Yet all that time, the premium never decreases accordingly. Yet go and buy a separate Life Insurance Policy for about the same money, the payout would be constant — it doesn’t diminish like the mortgage insurance payout does.

The second point to consider in her case was that the mortgage insurance payout went only to pay off the mortgage, in other words, it goes only to the bank. But a “separate” Life Policy would pay directly to her and in an amount greater than the remaining mortgage. For instance, if a separate “Life Insurance Policy” was taken out with their regular insurance agent for the amount of the initial mortgage, the death benefit is paid to her, and after she pays off the remaining mortgage, she would have some money leftover from that policy, (all for about the same premium she was paying).

Thirdly, and most importantly, the bank’s Mortgage “Disability” Insurance Option.. It’s a big rip-off scheme and an even worse scenario. It’s not worth the paper it’s printed on. There is ongoing investigative reporting about this. I have been inside the industry — the “Disability” wordings I’ve read are set up so as to enable the Mortgage Disability Insurer to deny nearly ALL claims, short of you being in a permanent coma — and even that doesn’t payout because they can claim it might not be “permanent”. The question surrounds the wording’s clause. They get out of paying by stating that they won’t pay out unless it’s a permanent Disability (without chance of curing it or getting better). For instance, they deny people who get Multiple Sclerosis because it could potentially be cured. I’m not kidding. I’ve talked to quite a few professionals who all agree, when the time comes to pay, Disability Insurance is not the product we thought we were buying. Be very careful in buying it, and certainly not through the bank.
***
Go Green, so glad to see a few recognizable names. Calgary weather teased us with some warmth and crocus last week, but then we had a foot of snow overnight. Our neighbour’s son-in-law came by and did our walk and driveway this morning. We have always shovelled all our elderly neighbour’s walks for years, still do, but now one of them “gets us back” by getting his son-in-law to return the favour. :) Good folks. We gave him a wave and a cheer.
At least it’s sunny and warmer now.

#61 Barb the proofreader on 03.22.09 at 3:29 pm

#29 go green: “My DH & I are one of those couples who’ve benefited from …. old Europeans who lived through WWII, and still live frugally in most ways. I also grew up frugally”
***
Go Green, we’re lucky to have such great parents. My PIL’s are also Europeans, worked hard, saved, very frugal. When my MIL’s dad died, she sold his farm and gave us a down payment. Without that, we wouldn’t be owners now. And both sets of parents have helped us in our semi-annual treks to visit them over these 30 years. Not a day goes by I’m not grateful for what we have and what our parents did for us.

#62 Outlaw on 03.22.09 at 3:45 pm

#31 Banklender

I completely second your thoughts and opinions about the current mortgage market. Variable was a way to go last year when P-0.75/0.8 was available on a fully open mortgage. In today’s market with P+1/1.5 its complete stupidity going with a FMR unless you think that historically low rates will be around for a while. Well they won’t and rates will go up way before you will be informed by your bank or FP.
Please do yourselves a favour and lock in if possible sub 4% before inflation really starts kicking in before the year end. Its worth paying a premium of 1% for a peace of mind for the next 5 or 7 years.

Outlaw, CFP, MBA

That is advice from a CFP? And an MBA? There will be no rate increases of note (if any) this year or next, and those locking in now are simple paying money for the right to be weenies. Some outlaw. — Garth

#63 Chris L. on 03.22.09 at 3:47 pm

Mortgages are to be paid off as quickly as possibly, not toyed with. They are not assets, but very expensive liabilities. A ten-year loan drains away money in needless premiums that should be put against the principal. My advice guts yours. — Garth

I agree with this. Even a 25, 20 year amortization is for lunatics. If you can’t pay your house down in 17 years or 13 years you probably can’t afford the house. With limited means everyone should be able to pay a house down within a decade. This is especially easy with two incomes. I’ve already paid one mortgage down and am working on my second and this is inside 8 years with the help of tenant income and a good downpayment. Why do you want to pay double for everything you have? It’s really silly to think of a mortgage like a long term idea. You spend your money on trinkets, but don’t protect that which is most important. Don’t lock in, lock down and chew that debt off! When your house is paid for, you’ll really experience freedom and choices. When you have debt, you have no choice. Even the poorest have choices…our middle class have non. You’re stuck.

#64 Dave on 03.22.09 at 3:55 pm

At least a portion of the bailout was borrowed money through the sale of US debt instruments. Monetizing is the government purchase of debt ie. bonds, mortgages, car loans or credit card balances could all be monetized.

———————————————————-

okay, so the government purchases this debt, and when there is too much of it, the Fed simply steps in and purchases this debt as they did last week.

The Fed seems like the last resort in all cases. If somehow the bond market bubble burst, the Fed once again could step in and purchase these bonds leaving the U.S govn’t paying interest to the fed rather than the original bond holders….In the end, the U.S government keeps paying interest on debt just to different sources.

I might be confusing the heck out of myself!

#65 Ben's a Clown on 03.22.09 at 4:40 pm

When hyperinflation comes, you choose between buying a can of coke or paying off your mortgage.

You are such a clown. — Garth

#66 Fearing on 03.22.09 at 4:48 pm

I just locked in a 10 year fixed rate at 3% (negotiated through the municipality as a condition for me setting up my medical practice in their city). I figure it won’t go down much more than that so why not and with the way the US is throwing money around inflation is bound to be an issue in the next few years.

Sounds like you could have arranged a VRM at zero. — Garth

#67 Too Old Bob$ on 03.22.09 at 5:01 pm

“#33 Dan in Victoria They just announced in the local newspaper last week out here in the Western Communities that they were going to start building 400 to 700 square foot houses starting at around 300 thousand dollars.”

What the.. You got to be kidding. To build a basic house, no Granite, Marble, blah blah. I’m guessing anywhere from $100 – $200 /sq.ft. So I’m going to use $150/sq.ft. $60000 – $105000 for house. That leaves anywhere from $ 195000 – $240000 for the land. But wait, if the house is only 400 – 700 sq. ft. how much land do you really need. 20×20 or 20×35 house. Don’t need a big lot here. Again, you can see where the numbers are skewed. People see the number $300000 and say wow! that’s better than anything else on the market, plus it’s a new house. Oh please don’t do this. This is corruption in my books. “We don’t have much to offer, but we have this.” CROOKS!

#68 Too Old Bob$ on 03.22.09 at 5:13 pm

“#41 David Bakody
Harper & Co have put our pending housing mortgage crisis on the back burner along with the falling economy for gun registry once again, “Can you imagine that” …. not to limit long guns but to sell more!”

This may not be a bad idea. Lots of people have their bomb shelters, food, batteries, water supplies and solar panels, but it’s hard to get the final item, a gun with ammo. Harper is looking long term here. Now just prove your a hunter or farmer (which you basically are with the above items) and off you go.

#69 Ben on 03.22.09 at 5:20 pm

Echoing LS @ 51, first paragraph of JM @ 60, and Chris @ 64.

#70 rory on 03.22.09 at 5:39 pm

“My new dog, Bandit, is a foreclosure refugee. — Garth”

Bandit is a fortunate & lucky dog, rural spaces to play in and protect and a guardian with food/water stashed for him. Bandit has one other treasure in his owner – knowing he will not be left behind or abandoned. What more could a dog ask for. If only more of us had such high ideals.

Take Garth’s advice from his books and make sure your pets’ needs are looked after even before the 20% chance happens. They are part of the family.

Dumping your dog/pet at a shelter is not a badge of honour but getting your next pet from a shelter is. Go Bandit.

Little disappointing the “bike” doesn’t have a sidecar for Bandit …lmao.

#71 CS on 03.22.09 at 5:47 pm

Garth is so right about the VRM – and rates don’t suddenly jump up several points overnight leaving you trapped. For the person pointing out that your bank isn’t going to tell you their rates are going up, well no they don’t babysit you, nor should they. If you can figure out how to hold a mortgage, you can figure out how to check the rates on a fairly regular basis all by yourself. When they start moving, make decisions. To the person who laments how high the 10 year rates might be, who said it’s either VRM or 10 yr? The longer the term, the higher the rate – the best decision might be to go from VRM to a FRM of 1,2 or 3 years. Many possibilities down the road, but right now, why pay more than you have to given there is ALWAYS enough time to lock in the second rates even start to change if you so wish.

#72 john m on 03.22.09 at 5:48 pm

33 Dan in Victoria on 03.22.09 at 12:02 am ….i built many houses in the fraser valley.I seen the light when land prices went out of control in BC. In fact the last house i built was in North Van on a $375,000 lot which was approx 100×200 the lot was on a 45degree angle ,good view but so far from reality i could not comprehend. We all lived far above our necessities for many years,huge houses are no longer practical.If your paying for space it should be a necessity and it should be used,so many of us maintain 2000 sq,feet and live in 700.It will change …look at europe they have been doing this for many years (Holland for example)

#73 Dan in Victoria on 03.22.09 at 5:50 pm

Post#72 Too Old Bob$ Yeah, I read that when I was bunching up the newspaper to start the wood stove,that really caught my eye and got me wondering also.Their description was” condo’s on the ground”or something like that.Geez,I’ve got a 600 square foot finished detached garage on the property that I’ll sell them for 300 grand.I can change that steel work bench top to granite and put in some fancy accesories for an additional charge.Just got back from a run up island to Cowichan Lake,great big sign on the side of the Cowichan Hiway, 5 acre parcels starting at 49000 dollars,and no, I didn’t go and look if its too good to be true, well you know the rest.

#74 john m on 03.22.09 at 5:54 pm

Spend ,Spend ,Spend….listen to Harper and the Bankers,disregard whats actually happening around us make them shine and drag yourself into destruction (is that the goal?).My solution to beat the system is listen to Garth,make every dollar you spend work for you. A bet on beating the present economy by getting in now is like betting on a lame horse thats falling.

#75 Basil Fawlty on 03.22.09 at 6:05 pm

Dave, monetary procedures are confusing and this was addressed by Henry Ford many moons ago. “It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
If you want to gain a better understanding may I suggest the book ” The Creature from Jekyll Island” by G. Edward Griffin.

#76 youbou dude on 03.22.09 at 6:35 pm

78 dan 81 dd

Heard about this. Friend checked it out. Its 49K per acre.
Sorry, the Western rock isnt that cheap yet…..

#77 Grumpydawgs on 03.22.09 at 6:46 pm

It’s not a matter of intrest rates being at all time lows and enticing FTB’s to buy. It’s the fact the real estate prices are still far too high on every fundamental matrix. In Vancouver the average SFH costs 9,8 times the average annual income. Most people just cannot afford real estate at these still inflated bubble prices. We are STILL in high bubble territory. A drop of 10% is simply still far over inflated as compared to basic fundamental value equations.

Leave intrest rates alone, thats what got us into this mess in the first place, stop supporting ‘asset values (lol) , let market forces bring down prices. It is not deflationary to let bubble prices come back to earth. The price was never real in the first place.

#78 Grumpydawgs on 03.22.09 at 6:51 pm

BTW, the income to house price ration was 3X income in the 60’s and 4X’s in the 70’s. 10x’s income is just completley out of whack. Thats why the developers and lenders were pushing for 50 year amortizations. No one could afford the payments anymore. Garth it was just a big pyramid scheme and deserves to die. Like all pyramid schemes there simply isn’t enough people on the planet to keep on paying off perpetually. We hit the wall , now let it die. The market will create it’s own new direction. Invisible hand , remember, 1776, Adam Smith, Wealth of Nations, Economics 101.

#79 What would you do? on 03.22.09 at 7:26 pm

Hi, I am a future prospective homebuyer currently saving money for a downpayment. I am a first time buyer, and would like to start with a Condo around 160-180 k range. So far I have saved 35 k, currently sitting in a savings account (2,25% interest) and in my RRSP (invested in a precious metals fund). I am adding 1 k per month.

How much longer would you wait to buy? Condo prices are still going down, but I am a bit uneasy about interest rates. Also, I am good in saving money but too risk averse to put the money in growth investments – it’s so volatile still and I feel the market has a good chance to dive to another record low later this year. Where would you put your money if you were me?

Thanks for all who respond to give advice!

#80 Mike B on 03.22.09 at 7:33 pm

Although there is much debate and chest pounding testosterone “I’m an MBA… I’m a CFA” most physicists on this blog fail to point out the rather obvious. The principal is the most important part of the equation. If you overpay for a house and have a huge mortgage you have committed financial suicide regardless of fixed or variable . When I had a mortgage several years ago the first priority was to have a tiny one… and make double up or lump sum payments as often as possible. This comes right of principal and more significantly impacts the remaining mortgage than a mere low interest rate will especially if you pay only the minimum monthly…

#81 Chris L. on 03.22.09 at 7:34 pm

For those fixed rate guys….what happens if you lock in for 5 years and when it comes time to renew you’re only option is some rediculous rate? No choices then, but if you take advantage of the low rate now, then lock in when rates start to go up you can have the longest possible run of reasonable interest rates. If you lock in now for 5 years, you’re going to be locking in, in 5 years and then 10 years and so forth. No choices there! Anyway, go for it and lock in, I like 2.5% and am paying it off with triple principle versus those locked in at 6%. Fools, I told them to unlock that sucker and even gave them a good mortgage broker. I managed to convince two people though. The rest were shaking in their boots due to unpredictable payment schedules…or is it that every dollar has been pre-spent and allocated? Live below your means and you wont have to worry. Save a rainy day fund too.

#82 Dave on 03.22.09 at 7:35 pm

Dave, monetary procedures are confusing and this was addressed by Henry Ford many moons ago. “It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
If you want to gain a better understanding may I suggest the book ” The Creature from Jekyll Island” by G. Edward Griffin.

———————————

I”m reading it, and am still left wondering.

#83 Herb on 03.22.09 at 7:42 pm

Muskoka,

what are you doing to the one book of the bible I believe in wholeheartedly? Both quotations in your #55 have nothing to do with Solomon – they are by Qoheleth, the Prophet, author of the Book of Ecclesiastes!

Highly recommended to all who seek wisdom vice blind faith. Thus endeth the lesson for this Sunday.

#84 Bemused in Victoria on 03.22.09 at 8:03 pm

Vancouver Sun: There’s no secret subprime mortgage problem in Canada.

“A foreclosure on a family home is a heartwrenching human tragedy. As the recession takes its toll on household income, the number of foreclosures is increasing. Fortunately, they remain relatively rare, and pose no systemic threat to Canada’s financial system, in stark contrast to the subprime mortgage meltdown that ravaged the U.S. economy. Despite what you may have read elsewhere, Canada does not have a subprime mortgage crisis…”

http://www.househunting.ca/buying-homes/story.html?id=0e0a540b-68a9-45e9-9697-f990afce0ef3

#85 lgre on 03.22.09 at 8:11 pm

What would you do? – if you are living rent free currently, well then keep living like that..if you are renting then do some math..what would it cost you to own that condo with condo fees, property taxes and whatever payments are affiliated with ownership. If the realtionship is close to your current rent then buying is an option. You also have to think about how long you are staying in this unit, if you plan to sell in 3 years then dont bother buying as you will lose money.

I have never been a fan of condos, as the condo fees rise your proerty value drops..just remember that also. I would keep saving and maybe buy a freehold townhouse. Buying property based on interest is not smart. Buy the property if it makes sense..interest rates will rise and the principal remains the same. My 2 cents

#86 . . . fried eggs and spam . . . on 03.22.09 at 8:18 pm

#85 What would you do? at 7:26 pm — “How much longer would you wait to buy?”

Good question. FWIW, I would wait until the 2010 Winter Olympics are over and done with, observe during that time how condo prices are fluctuating — better yet, second-hand townhomes.

If possible, look at a good-sized TH where a room can be rented out to help with the mortgage payments.

#87 jwkimb on 03.22.09 at 8:45 pm

@ #57 Investx
———————
“So, for example, the average family income is $65,000/year in your region. So the average family home should be priced at $195,000, roughly.”

That’s roughly the average household income in Toronto/GTA , yet homes are NO WHERE near that price and I find it hard to believe they will correct that low.

I’m starting to doubt the usefulness of this 3x rule of thumb. It might be better to calculate affordability dictated by 32% of monthly gross income for house payments (mortgage, property tax, etc), which takes into consideration the actual cost of the house (interest rates and amount owed).
——————————-

Right, so why guess when the math is pretty simple?

65k/12*.32 = 1733 per month for housing coverage

take off $200 for property tax (minimum)

That leaves about $1500 for the actual P&I

At 8%, over 25 years that buys a house of…wait for it…$194,346.78.

The 3x median income rule is a very quick way of calculating the average home price at 8% rate.

BTW at 3.5% that same 1700 gets you $300,000 in mortgage….
BTW2 at 11% (which used to be a ‘normal’ rate) that 1700 gets you $153,000

There are entire neighbourhoods, cities, towns in the GTA where EVERY home is over $800,000. All you are buying is neighbours who have as much money as you. There is no great ‘value’ in these neighbourhoods other than ‘everyone has a huge payment’. They are like beanie babies. The average will come down. People like myself will look at a 900,000 house in the middle of nowhere and wonder the value is…

#88 Bill-Muskoka (NAM) on 03.22.09 at 8:52 pm

#89 Herb on 03.22.09 at 7:42 pm

Well, I am not sure what version you are using, but I quoted from the King James and New American Standard.

The Luke quote is NT, and the Solomon is OT!

Regardless, it is sound advice.

#89 Bill-Muskoka (NAM) on 03.22.09 at 8:54 pm

All you are buying is neighbours who have as much money as you.

#93 jwkimb on 03.22.09 at 8:45 pm

Did you mean ‘debt as you’? LOL

#90 Bill-Muskoka (NAM) on 03.22.09 at 9:18 pm

#73 Too Old Bob$ on 03.22.09 at 5:13 pm

I suggest waiting until the first round is fired from a long gun at Harper and then we will see what his position is, eh? Well, we will if he survives the experience!

I doubt he will be able to dodge that bullet like Bush did several shoes?

#91 Bill-Muskoka (NAM) on 03.22.09 at 9:22 pm

#60 JM on 03.22.09 at 3:05 pm

I agree with you whole heartedly, but then I do not have a pension to support a gambling habit like Garth does as a former MP!

Funny how that makes a world of difference!

#92 Got A Watch on 03.22.09 at 9:40 pm

#93 jwkimb – Thank you. Nicely put.

#57 Investx – see comment # 93

That is an old-time rule, when it was made I doubt they envisioned today’s inflated prices. But it does relate income directly to house prices, in a quick’n’easy fashion.

The historical average interest rate IIRC is 8% – 8.5% for mortgages. What happens to affordability when mortgage rates revert to the mean? It gets killed in over-priced areas.

The logical conclusion from your argument is – Toronto is over-priced. Who knew. Now that over-pricing is due to many factors like desirability, more and better paying jobs etc … which all amount to those 3 prime requirements in real estate, location, location and location. But most of it is bubble.

When family incomes fall, home prices cannot stay elevated. If family incomes fall on average to $50k in Ontario during this Great Recession, which seems likely to me, real estate price levels have to reflect that.

So no matter what happens, even if the economy were to begin to recover tomorrow, I would expect house prices in the Toronto-GTA region to fall at minimum 30% from peak values, and that would be a best case scenario. Worst case, 50%-60% range.

The people who have bought in the last 5 years will be hit the hardest, as they purchased near or at the peak. And anybody who took a HELOC or 2nd mortgage or re-fi’d back up to more than 60% equity. They are in danger of not being renewed by their banks – underwater or close to it, no equity.

Toronto was not as bubbly as California, where they seem headed for 70%+ declines from peak.

#93 Bill-Muskoka (NAM) on 03.22.09 at 9:44 pm

#72 Too Old Bob$ on 03.22.09 at 5:01 pm

At that price per square foot the Suckers are still being fileted. Modular homes are available for well under $100 per SF and with far more usable space. Real housing was about $25-40 per SF a few decades ago!

Now, figure out the cost per SF of a parrot cage, lined with the Financial Section of most MSM papers, and you will be about right for most Condos. ‘Like the Yuppie who walked onto the pharmacy and asked for a package of ‘condominiums!’ Did he get screwed? Oh yeah!

BTW, you can get better accommodations in most prisons than most condos and at taxpayer expense! Free cable, laundry, and meals included and with library privilegded with home delivery included! Living next to the cream de le cream of your genre as well. LOL

#94 Got A Watch on 03.22.09 at 10:00 pm

# 85 – here’s my advice: Keep renting for at least 3 more years. No reason to buy now, prices will fall further. Especially on condos, which are over-built in most areas.

You don’t say what region you are in, hard to give more specific advice.

If you can, avoid the condo. The maintenance fees can get excessive, and you are subject to the whims of a Board of Directors, who usually seem to be retired busybodies with nothing better to do than harass people. Try and buy a house, even if you have to rent out the basement or whatever. As someone who has lived in 3 condos, I say – never again for me.

As to the investments, if you are unsure, just keep buying Canada Savings Bonds or similar for now, but keep the term short. The interest is low, but you won’t have to worry about loss. The time to buy good stocks will come in the not too distant future, the stock market starts to move back up 12-18 months before the recovery becomes general knowledge, in anticipation. Some precious metals is good, but not 100% of your portfolio, if you are not trading the price action.

#95 RM in Oakville on 03.22.09 at 10:39 pm

All this talk about fixed vs. variable mortgage rates is interesting but I still don’t understand why more people haven’t considered or even talked about a secured line of credit (SLOC) mortgage.

My SLOC mortgage is locked in at prime (currently 2.5%), fully open, I can pay as much as I want off the principal whenever I want, and it’s guaranteed to be less than any conventional closed mortgage right now (since it’s locked at the prime rate).

Garth, correct me if I’m wrong but I believe if you must hold a mortgage, this is the only one worth having. Is there any chance in the foreseeable future that the prime rate will rocket ahead of closed mortgage rates?

#96 Too Old Bob$ on 03.22.09 at 10:39 pm

“Now, figure out the cost per SF of a parrot cage, lined with the Financial Section of most MSM papers, and you will be about right for most Condos.”

True! but Parrots don’t pay Condo fees.
Also all they do is crap on financial papers..Hmm! may not be a bad idea.

#97 nonplused on 03.22.09 at 10:43 pm

Don’t steal road kill from a redneck. As with all groups, they have a code of conduct. It would be treated worse than if you stole the engine he has up on blocks in the front yard. They will know who took it, and they all have guns.

Same as hunters don’t try to claim each-other’s kills. Bad move. Help him make sure he has a good kill (minimize suffering) and then naturally help him haul it out, and you are likely to get a lot of sausage. But if you try and claim the kill then you get no sausage and a bad rep, redneck style. They have long memories and a black and white sense of motors-on-blocks and hunting morals. I wouldn’t mess with a redneck until you’ve spent enough time grabbing everyone a cold one from your cooler to know them. (Which happens after they’ve emptied their cooler, but you better stay up until you can empty yours.)

They all still help each other build garages for X’s sake and then leave off the siding so they don’t have to pay full tax! They really think differently than the dudes in the city.

#98 What would you do? on 03.22.09 at 11:16 pm

## 91, 92, 100 – thanks for your feedback and advice!

I live in Calgary and plan to stay here for the long term, hoping I can keep my job during the downturn. I work for the municipal government, but as I am limited term it’s not sure what will happen if things go really nasty. I am glad I am not in the energy and construction sector though.

Have a nice evening!

#99 MarcFromOttawa on 03.22.09 at 11:29 pm

#88 Dave

When the Fed buys U.S. government debt, like it did this week (over 1trillion$ worth), it does so with freshly printed money (or electronically nowadays). This increases the money supply and it is a direct tax on every dollar that is in circulation.

#100 Republic_of_Western_Canada on 03.23.09 at 12:47 am

#85 What would you do –

At 1K per month increase, just keep adding to it for a few more years. Keep the cash in a flexible GIC, and live as cheaply as possible. Right now, cash is king. When inflation starts, target higher-rate GICs, or commodity-based stocks; primarily oil.

If you are nervous about equity trading stay away from housing ‘ownership’; that’s even worse. Remember the two biggest losers of individuals net worth worldwide have been housing and stocks; and there’s no serious indication those will balloon back up anytime soon regardless of how desperately governments try to keep the bubble going with artificially low rates.

#101 Lana on 03.23.09 at 8:00 am

Mortgages are to be paid off as quickly as possibly, not toyed with. They are not assets, but very expensive liabilities. A ten-year loan drains away money in needless premiums that should be put against the principal. My advice guts yours. — Garth
——————
I wish I had read this advice a few weeks ago. We just signed an early renewal agreement with Scotiabank so we could lower our mortgage payments, so we could keep our house. My husband’s severance pay ends next month, and we will probably have to wait 6 weeks for the first E.I. cheque. He also filed for early CPP which begins next month. He has tried for a year to get a job–no one will hire a 62 year old man, with poor health, and little transferable skills (he was a colour shift supervisor in a manufacturing plant that supplied vinyl to car companies).

We just locked in to a fixed mortgage at 4.85% that matures in 2013, when we will both be over 65 (he’ll be 68). Our payments are cut in half (we always paid aggressively every two weeks) but it is a 20 year mortgage now.

We felt our only other option was to sell our house (which would need several thousand dollars we don’t have to not only “stage” it, but replace soffits, replace the fence, etc.). Rent would have been higher than the payments we will now be making ($400.00 every two weeks).

Our fear was that I may not have a job between now and 2013, and we would lose everything. Now I think we acted in haste, and don’t know if there is anything we can do to fix it.

The mortgage is $137,000 (value of house around $225,000) because we remortaged in 2006 to consolidate debts. We have no other debts now (other than $2500.00 a year in taxes–which I hear are going up).

I do know we won’t give up our cat, Oscar, though!

#102 Halifaxfamily on 03.23.09 at 8:59 am

VRM – you take the interest rate risk.
Fixed – you don’t take the risk.

VRM, the Central Bank has their hand on the spigot and can dial up and down the economy at will. The more people do VRM, the Central Bank will have more and more control over more and more individuals.

Either way, rates are still historically low. The only way to go is up. Live frugally and pay off non-deductible debt fast.

#103 barrista on 03.23.09 at 9:20 am

Despite the best of intentions, I can’t help feeling that Garth’s advice is somewhat distorted by greed and euphoria, the same factors that preciptated the stock market crash.

Historically low interests rates only have one way to go. With the spread between fixed and variable being at less than one percent, it would see like a reasonable hedge to secure at least a portion of one’s debt at a low fixed rate. Most finiancial advisor advocate diversification of investments, so why not apply the same principle to debts?

In my case, that means keeping half my mortgage in a HELOC at prime and the other half in a fixed rate mortage at about 3.5% for one year. I would go for 5 years at 4.15%, but plan to move to a larger home in 1-2 years and want to avoid the “blend and extend”.

You accuse me of ‘greed and euphiria’ and you plan on moving into a larger home? Get a grip, dude. — Garth

#104 barrista on 03.23.09 at 9:50 am

A larger home may be a necessity. I suppose our two oldest could sleep in bunk beds to make room for a third child.

Timing markets, be they equities or interest rates, seems like an inherently risky and dubious proposition. I have always been repelled by the idea of getting a VRM, then locking in when things look bad. With little bargaining power with your lender, it would be pretty hard to come out a winner unless you have already made very significant gains while variable rates are low.

This is coming from a guy who has just paid 5.66% for the past 5 years. I am tempted to swing the other way now, but this feels like it would be like buying stocks at their peak. Thus my concern about being caught up in the frenzy around the currently exceptionally low rates.

#105 EcoInsurgent on 03.23.09 at 12:57 pm

45 Got A Watch….the 3X income rule was ALWAYS based on ONE income per household. To say *Household Income* in very misleading. These days we are supposed to assume that it is TWO incomes per household, which means that we have doubled the expected value of a house right off the bat.

The equation is 3X ONE INCOME

According to the UN, at 3X income, a house price is becoming unaffordable. Affordable housing is 1 or 2X one single income.

So if the average single income for an area is $35,000, then the average home should be between $35,000 and $70,000 and possibly as much as $105,000. Anything more than that is the ponzi scheme in the process of swindling people out of their money.

#106 Dave on 03.23.09 at 1:34 pm

When the Fed buys U.S. government debt, like it did this week (over 1trillion$ worth), it does so with freshly printed money (or electronically nowadays). This increases the money supply and it is a direct tax on every dollar that is in circulation.

————————

actually, there’s no additional money inserted into the economy. The debt is simply transferred from the U.S government to the Fed. The only thing that is inflationary is the interest earned on that debt

#107 Dave on 03.23.09 at 1:39 pm

just to clarify my point above, the U.S government was paying interest on $1 trillion to its bond holders or whoever it was that was owed money. The Fed stepped in because of the excess debt, and swept up the U.S bonds/debt and purchased the $1 trillion. Now, interest is paid to the Fed rather than the bond holders or country that was owed that money

#108 jeff on 03.24.09 at 8:48 pm

so if you can get a 5 yr @ 3.8, the concensus is to still go for a vrm at 2.9..

lets say thing stay the same for 1.5 years.. is it possible to lock in 5 years at any time or is there a penalty to be paid?

#109 Leon on 03.26.09 at 7:30 am

I chose a VRM 4 years ago at 3.65% from President’s Choice Financial, which was the best rate I could find in NB. A little over a year later when the VRM rates took two jumps in a relatively short period of time I decided to lock in to the going 5.02% fixed 5 year rate, with no penalty. One short phone call, returning a signed fax back to them and I was good to go.

BTW Jeff, who is offering 2.9%? The best VRM 5 year rate I could find around here is 3.3%.

I tried once before to negotiate a better rate with TD Canada Trust and they would budge from their posted rates in spite of my excellent credit history. How do you negociate a better rate… What do you say…

#110 jube jube on 04.07.09 at 3:29 pm

Garth, you make soem interesting points, however, you should know that the option to fix is not a good one. In fact, the best deal you can get when you do decide to fix from a vrm is posted less one. Posted today is about 5.4, so best case 4.4, unless of course you take a completely open mortgage, which your looking at a rate of prime plus 1, best case 3.5…AS a discount, i can get 3.5 for 7 years, so really, why wouldnt i take that, the interest difference is about 200 bucks per year in my case, and i dont have to worry about watching rates everyday.