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Mortgage Time - Provider & Term Recommendation Please
February 19, 2023
2:25 pm
Save2Retire@55
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Hello,

I asked this question months ago when we started shopping. What a journey it has been. The housing market is still crazy. We lost the bid twice but this time ended up getting the thumps up as we did the inspection prior to sending the offer. Oh well.

Mortgage time. I'd like to know what you recommend during this climate? I know everyone has a different opinion but I'll see what others might think.

I am going to put the min 20% down but if I get a better rate with more down , I'll do that. Here is what I am shopping for. The property is in Quebec.

Which option?

20% down
2 yrs fixed @ 5.74
3 yrs fixed @ 5.44
5 yrs fixed @ 4.89
5 yrs variable @ 5.90

30% down
2 yrs fixed @ 5.69
3 yrs fixed @ 5.39
5 yrs fixed @ 4.84
5 yrs variable @ 5.70

35% down
2 yrs fixed @ 5.49
3 yrs fixed @ 5.24
5 yrs fixed @ 4.64
5 yrs variable @ 5.65

Also thoughts on Nesto or Wiseday? Trying to avoid dealing / contacting big banks directly. I don't even have an account with any of them (Unless Tangerine owned by Scotiabank or Simplii by CIBC count).

Thanks,

February 19, 2023
3:39 pm
Loonie
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I'm glad to hear you found a place! Congratulations!

I don't have anything to add that I didn't say before, as far as I remember.
I would consult a mortgage broker. You don't have to go with them, but I think it would be useful to at least hear what they have to say.
I don't know the current rules on mortgage insurance, but I would avoid it, even if it means bigger down payment.
Generally, the more you put down, the better deal you can get. I hope that by now you have bought adequate life insurance. Essential.
That aside, I recommend putting down as much as you reasonably can.

February 19, 2023
3:55 pm
Dean
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Save2Retire@55 said

Hello . . .

.
No pre-approved mortgage ?

    Dean

sf-cool " Live Long, Healthy ... And Prosper! " sf-cool

February 19, 2023
4:35 pm
AltaRed
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I second the comment about seeing what a mortgage broker has to say. It is almost always about the best rate but not always just the best rate. It is the combination of rate and flexibility as regards pre-payment options, penalties to pay out (such as moving), portability (take to next property), etc. All other things being equal, 35% down looks to be the direction to go.

If this is a first house, I would probably go with a 2 year fixed term to avoid any further surprises on variable rates this year, and if this is a first home, there will be a lot of other household expenses in the first year or two. The two year fixed term might land you in a sweet spot for a considerably lower rate in 2 years.

February 19, 2023
4:44 pm
Save2Retire@55
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Loonie - Thank you. I had 30% in mind but seems I get a better deal with 35% but the extra 5% requires a bit of work (Need to sell some stocks $CNQ did well, maybe I trim it now and buy back later).

No life insurance yet but yes that will be next. First mortgage, then home insurance, then life insurance.

Re mortgage advisors, they are online nowadays. Nesto is one of them and yes those rates are from them.

Thanks.

February 19, 2023
4:47 pm
Save2Retire@55
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@AltaRed - Thank you. I am debating between 2 and 3 years fixed.

The rates above are from the same provider so same contract rules / fees.

February 19, 2023
5:35 pm
savemoresaveoften
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The 7-10 bps savings btw 20% to 30% is not worth it, assuming that 10% worth of principal can earn u a higher after tax return of more than 1%.

U have to do the break even math for the 35%, same idea.

It’s either 20 or 35% in my mind, 30% seems worth net ‘return’

February 19, 2023
6:32 pm
mordko
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Are you 55? If so, I would minimize the amount borrowed. Doing that while investing = leveraging. Makes no sense if you are within a striking distance from retirement.

Other than that… We always took variable rate because we could “self-insure” for scenarios with rates going against us. Assuming Mr Market is correct, variable always wins. And over long periods of time it does.

February 19, 2023
6:35 pm
Save2Retire@55
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@savemoresaveoften - The main calculation is between the 5.74% on the extra 10% IMO. It is not just about how much more / less in the rate but also how much less payment in interests, right?

February 19, 2023
6:38 pm
Save2Retire@55
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@mordko - No, I am in my late 30s and plan to pay off the mortgage in 5-6 years (before 45). Not sure if it is possible but will see.

February 19, 2023
6:51 pm
AltaRed
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My view on the matter is whether 5% or 6%, it could be very hard to earn a risk adjusted After Tax return of 5-6% per year over the next few years. At a 40% MTR, it means you need a guaranteed 8% or so in investment returns to beat that non-deductible debt interest.

If you think you will be able to pay accelerated payments, then those terms are rather important.....so as not to have to wait until term is up to make a big lump sum payment.

As is usual in these sorts of things, it is highly situational and personal. There is no single right answer.

February 19, 2023
10:59 pm
Loonie
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I would never advise that any particular strategy around rates will always win, no matter how appealing hindsight may be. If it were that clear, there would be no debate.

Your guess is as good as the next person's. It comes down to what you are comfortable with, given your overall financial situation. Earlier, I think I said to go with five year fixed because it creates certainty in the early years of a mortgage when things can be tight and you may have unanticipated expenses. It now sounds like you have a lot of flexibility, much more than most first time buyers would have, so just pick what seems best to you.
There is no perfect answer.

I support your intention to pay it off fairly quickly. Seems to me that a high down payment would match that intention. Who knows where markets will be in a few years? But debt is very sticky until you discharge it! - and the cost of it fluctuates.

I support AltaRed's last post too.

February 20, 2023
5:32 am
savemoresaveoften
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mordko said
Assuming Mr Market is correct, variable always wins. And over long periods of time it does.  

Variable only always win in the last 20 years, partly because the banks were not pricing in a big enuf spread initially for the "true value" of the risk they are taking on offering a variable rate. If you look at the spread they now price in last few years vs what it had been, you will know what I mean. Same with they were pricing in 1y rate way too cheap years ago.

Also keep in mind variable ONLY wins IF one can survive the rate hike onslaught at renewal. Its NOT a sure win.

February 20, 2023
5:38 am
savemoresaveoften
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Save2Retire@55 said
@savemoresaveoften - The main calculation is between the 5.74% on the extra 10% IMO. It is not just about how much more / less in the rate but also how much less payment in interests, right?  

The way I think of it, you are saving 5.74% on the extra 10% down payment, which is a good thing as others point out u need to make 8% return pre tax to "break even" on that. The downside is it reduces ur liquidity flexibility.

On the portion where a higher downpayment resulting in a lower mortgage rate, thats the part that I dont see it juicy at all 20% vs 30% down. The extra 10% down is not saving you enuf on the interest payment like you said. Extra the 35% down is prob not enuf to offset the opportunity cost. And if you can afford to fast track and pay down your mortgage quicker anyway, the interest saving will be even smaller.

So yeah other than what you think u can earn on the 20% vs 30% downpayment post tax consideration, its up to whether your goal is pay down your mortgage first or not.

February 20, 2023
10:20 am
mordko
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savemoresaveoften said

Variable only always win in the last 20 years, partly because the banks were not pricing in a big enuf spread initially for the "true value" of the risk they are taking on offering a variable rate. If you look at the spread they now price in last few years vs what it had been, you will know what I mean. Same with they were pricing in 1y rate way too cheap years ago.

Also keep in mind variable ONLY wins IF one can survive the rate hike onslaught at renewal. Its NOT a sure win.  

Fixed = banks take on the risk of rates going up faster and for longer than Mr Market thinks. Someone has to pay if the bank takes on this risk. If you can’t handle unexpected increases then you need to pay for insurance. Otherwise, in the long term, it will be cheaper to self-insure.

Variable = the bank has a positive spread between the cost of money and what it gets paid. Income might drop if the rates drop but so will the costs. Profit stays the same, so no rate risk and no need to “insure” (aka provide for loss of income).

Ok, its more complex than this; banks can issue bonds, etc… But I think the logic still works

February 20, 2023
10:27 am
mordko
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Save2Retire@55 said
@mordko - No, I am in my late 30s and plan to pay off the mortgage in 5-6 years (before 45). Not sure if it is possible but will see.  

Save2Retire@55 said
@mordko - No, I am in my late 30s and plan to pay off the mortgage in 5-6 years (before 45). Not sure if it is possible but will see.  

Given you are young, there could be an argument for taking on more risk and borrowing more for longer while investing at the same time.

February 20, 2023
11:35 am
savemoresaveoften
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mordko said

Fixed = banks take on the risk of rates going up faster and for longer than Mr Market thinks. Someone has to pay if the bank takes on this risk. If you can’t handle unexpected increases then you need to pay for insurance. Otherwise, in the long term, it will be cheaper to self-insure.

Variable = the bank has a positive spread between the cost of money and what it gets paid. Income might drop if the rates drop but so will the costs. Profit stays the same, so no rate risk and no need to “insure” (aka provide for loss of income).

Ok, its more complex than this; banks can issue bonds, etc… But I think the logic still works  

It’s actually the exact opposite. Banks are much happier when a mortgager goes fixed rate, as the bank can just lock in the profit spread if they want to. What you describe is bank treasury using floating deposit to match fixed mortgage, that’s a treasury decision, just because it’s variable mortgage does not add more risk than a fixed mortgage from that perspective.

On the contrary, variable rate mortgages can subject a bank to a much higher earnings volatility, as mortgagers switching to fixed rate etc subject the bank to a potential funding mismatch, that risk is similar to prepayment risk but much bigger from a notional pt of view. In the past, bank treasury does not necessarily charge enough to cover for that, makes it much easier to break even / win for the mortgager. Nowadays it’s much more properly priced, makes the decision making a lot harder for the mortgager to decide floating vs fixed.

Just like banks use to do mortgage rate lock for any time up to 6 months, those are much harder to come by these days.

February 22, 2023
7:10 am
Save2Retire@55
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@AltaRed - Totally. My main questions in addition to the rate itself is double payment and annual lump-sum.

February 22, 2023
7:14 am
Save2Retire@55
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@Loonie - Thank you. I agree. I decided to do 3 years. Best I found was with Desjardins 4.99% 39 months. Double payment + 15% lump-sum. Applied last night. They said this rate will go up today. Hopefully they approve.

And yes, I hate all kinds of debt even though many people keep saying "No rich person got rich on their own money" and encourage HELOC, etc. Different conversation but not my taste.

So I will go with 25 years but will double pay and do lump-sum plus decided to do 30% down payment.

February 22, 2023
9:16 am
AltaRed
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4.99% for 39 months is spectacular just looking at current 3 year GIC rates on the GIC chart.

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