Why Mark Carney’s speaking to more than you and your neighbour

Mark Carney rarely speaks without a clear purpose.

So when he warned ominously that Canadians have too much debt and need to change their behaviour, who was he talking to?

You and your neighbour? Not really.

Imagine you’re shopping for a house in Vancouver – the country’s most overheated real estate market. The average house price is $660,000. You figure out what cash you have available for a down payment, look at your monthly disposable income, shop around for the best interest rate, and then you figure out what you can afford.

Maybe you plunk down $165,000, and take out a 25-year mortgage for the rest at an annual interest rate of 4 per cent. Your monthly payment would be $2,612.

It’s doubtful you’d look to the central bank Governor for sage advice. Your father, maybe, but not Uncle Mark.

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Idiot Sales Techniques

We've all seen them - the idiot sales people with the repetitive yet non-informative sales pitch, wasting our time while trying to be your best friend.

No one in their right mind does business with them so why are they still around?

Here's a little humor to spice up your Friday!

Taming a Line of Credit

In September 2010, Anya met with her banker to collapse her home equity credit line (HELOC) and roll it into a refinanced fixed low-rate mortgage.

She explained she wasn’t getting ahead because it was too easy to dip into the credit line. “But, you’ll be thankful for it when it comes time to renovate,” the bank responded.

Frustrated that they were encouraging her to carry revolving credit, Anya contacted an independent mortgage broker who consolidated her credit line and secured a low-interest, fixed-rate five-year mortgage resulting in savings of over $6,000. She’ll be mortgage-free in ten years.

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First home likely to be lofty affair

The dream of home ownership is no longer pie-in-the sky, it's just up in the air. Literally.

The crux of a Re/Max Ontario-Atlantic Canada report released this week reveals Canadians have stopped dreaming of "white picket fences" and are now focused on "funky loft apartments."

But even the real estate company had to admit in its press release that this desire to live in condominiums is principally being driven by the fact that's all many people can afford the first time they dip their toes into the housing market.

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House price or interest rate: Which is more important?

Two housing market shifts encourage potential homebuyers to call real estate agents: drops in housing prices and low interest rates. But deciding which factor is more important than the other can make a difference in monthly payments, the ability to move if your home value drops and HOA fees.

Monthly payment

Let's say you started the home search process when interest rates were 7 per cent. You saw a one-bedroom condo for sale for $100,000. You calculated your 30-year monthly mortgage payment on $80,000 – the amount you are mortgaging after a 20-per-cent down payment and your closing costs. Your monthly payment would be $532. You decide you don't like this payment and rate, so you wait six months and the interest rate drops to 5 per cent. However, a condo in the neighborhood you want now averages $120,000. You put down 20 per cent plus closing costs, and you are left with a mortgage amount of $96,000. Your monthly payment on a 30-year mortgage is $515. Your payment dropped by $17.

But does a payment drop financially make up for the higher down payment? Factoring in that your down payment was $4,000 more, you still save about $5 to $6 per month - around $2,100 of savings over the course of 30 years. If real estate prices never rose in your perspective neighbourhood from the $100,000 price point you started your search with - and you snagged a 5-per-cent interest rate - your mortgage would be $430. However, the volatility of housing prices and interest rates cannot be accurately predicted to move in your favour.

Down payment

Regardless of your interest rate on a lower-priced home, you can get into a home with less money. In the example of the condo that rose from $100,000 to $120,000, your monthly payment dropped. But would the lower payment help you if you didn't have an extra $4,000 for a larger down payment? The down payment amount difference could eliminate the possibility of buying the home you want, or knocking you out of the buyer's market altogether if you can't find a cheaper neighbourhood.

Plus, the extra $4,000 can affect your ability to pay for unexpected home repairs, your emergency savings and ability to afford to furnish your new home.

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Mortgage rates remain home buyer friendly

Each month, homebuilders receive a two-page Canadian Housing Industry Economic Update authored by Dr. Peter Andersen, consulting economist to the Canadian Home Builders’ Association. This internal newsletter tells it like it is, for better or worse. This month, the news was all for the better.

Speaking directly to homebuilders, Andersen writes, “we remain positive for the housing market outlook in Canada. Mortgage interest rates are not going up sharply anytime soon and the next recession is unlikely until mid-decade at the earliest.”

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Gap narrows between variable and fixed mortgages

Just as you'll be recovering from the long weekend and Thanksgiving dinner, the Bank of Canada will be gearing up for its interest rate announcement on Oct. 19. However, economists are not expecting rates to rise, so holders of variable rate mortgages can rest easy, for now.

"We think the Bank of Canada is done for this year. We think it's going to keep its rate at 1% . . . but it will start to think of gradually raising rates again late in the first quarter of next year and continue through the rest of the year," says Robert Hogue, senior economist at RBC Economics in Toronto. "We're looking at a 125-basis-point (a 1.25-percentage-point increase over the) next year."

The perennial debate over whether to take a fixed-or a variable-rate mortgage has increased as the gap between the two rates is narrower than it has been in the past.

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