Posts Tagged interest rate
Skip a Payment and Rainy Day Options; How to use these Options Effectively
Posted by Top Home Loans in General Banking, Mortgage Advice, Retirement Planning on September 26th, 2009
When you get a mortgage, it could come with several different features and options, one of those options will most likely be the skip a payment option or the rainy day option; however, very few people know what this option is or how to use it effectively. When you get a mortgage, make sure you have this option because it may be critical to prevent missed payments or financial hardship in the future.
What is a Skip a Payment Option?
Skip a payment allows you to usually skip a months worth of payments (principle and interest) every year. In order to qualify for this, your mortgage must not be in arrears, and you have not missed any mortgage payments in the last 12 months. You will still be responsible for paying your usual insurance premiums and property tax installments, where applicable.
There is usually no fee to using this option, and your mortgage payments will not change during the course of your term. The interest that would have been paid will be added to your mortgage balance. When skipping payments, you can either skip one monthly payment, two consecutive bi-weekly payments, or four consecutive weekly payments.
Additional requirements apply for CMHC-insured mortgages.
If you decided to skip any payments through out the course of your term, then you can repay the interest that was added to your principle at any time using the lump sum payment option.
How to use a Skip a Payment Option Effectively?
There are several reasons why someone would want to skip a mortgage payment. Some of these reasons include the following:
Financial Hardship: If you have an unexpected major expense and you need the money to cover the expense, then this is the best time to skip a payment. Make sure you inform your bank before your mortgage goes into arrears. If your mortgage is in arrears, then the bank cannot proceed with the skip a payment request.- Lowering yourAnnual Mortgage Payments: If your monthly mortgage payments are $2000/month, and your budgeting suggests that you cannot afford that high of a mortgage payment, then you can use your skip a payment option to reduce your effective annual payments from $24,000/year to $22,000/year.
- Job Loss or Disability: If you cannot work for a short period of time, then you can use this option to avoid your mortgage payments until you get back to work. Make sure your mortgage is not in arrears if using this option.
- Renovations, Debt Repayment, or Major Purchase: If you know that in a month you have to make some renovations or major purchases, then you can skip a payment and use your mortgage payment to pay for these items instead of charging it to your credit card. Also, if you find your credit card bills are getting high, then skip a payment to pay down your credit cards instead of your mortgage payments.
If you plan your use of your skip a payment or rainy day options effectively, then you can ensure that you do not fall behind on your finances; however, the interest that you would have paid that month is added to your principle balance,s o it is in your best interest to pay off this interest as soon as you have extra money. This will allow you to pay off your mortgage faster and keep your finances in check.
Do you know any other effective ways to use skip a payment options? What are some other good mortgage options?
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Prime Rate is Expected to Rise Quickly and Dramatically
Posted by Top Home Loans in Economy, General Business, Mortgage Advice, Mortgage News, Mortgage Rates on September 17th, 2009
Why is Fiscal Policy so Critical in determining the Market?
The government has the ability to deliver the inflows and outflows of money in and out of the economy at anytime. They also have the ability to increase or decrease taxes to take more an less money from the economy. The third item is interest rates. The government has control over prime rate which is the key lending rate. By adjusting these 3 critical elements, then they can make major changes to everyone’s spending habits, companies hiring policies, consumer confidence, and inflation. If the government allows for too much money to enter the economy too quickly, then this can cause great inflation and an overinflated currency, higher house prices, and overinflated equity prices. The market will then cause a recession to bring these prices back in line. On the inverse, if the government takes too much money out of the economy, then deflation will occur and prices will decrease to match the levels of currencies available.
During the last 7 years, the US government had set the key lending rate lower for a longer duration of time than usual. This caused the markets to flourish with all this extra money in the economy. House prices inflated, and equities went on a several year winning streak; however, once that was over, then we has a major recession. This cycle the government cannot afford to make the same mistake again.
The Governments next move
The government is planning on keeping the key lending rates at their all time lows until after the unemployment level peaks. Once unemployment levels begin to subside, then this is a key indicator for banks to begin rising prime rate. When prime rate moves up it usually moves by 25 points or 50 points; however, in an effort to not make the same mistakes as the past, then the government will move up the interest rate as much as possible as long as it will not cause shock in the market place. The goal of the government is to have slow continual growth. By having rates at the current level for too long will cause dramatic inflation, so in order to counteract the inflation, then the government must make decisive actions to protect the future economy. The goal of the Canadian economy is to achieve a target inflation level of 2%, so usually prime rate is above the inflation rate. In order to achieve this, an aggressive tightening of the interest rates is necessary, and the rate must move up quickly.
An increase of prime rate within a short duration of time to above 3% would not be unlikely. If this were to occur, then we could see bank prime rates at 5% and higher and fixed rates in the 6% levels.
Unfortunately, no one knows exactly what the future has in store, and many analysts have made observations that have been wrong over the past few years, so you will need to take this with a grain of salt; however, a word to the wise is to prepare for the worse. It is never a good idea to have a mortgage payment that is greater than 40% of your monthly income.
How are Fixed Rate Mortgage and Variable Rate Mortgage Interest Rates determined?
Posted by Top Home Loans in Credit Information, Economy, Mortgage Advice, Mortgage News, Mortgage Rates on July 3rd, 2009
There are many factors that can influence the economy at any time. Some of these factors include inflation, CPI, consumer confidence, unemployment, and commodity prices. To have a full understanding of the economy, you must follow all of the economic indicators on a daily basis. Almost everyone believes that when the Bank of Canada makes an adjustment to the overnight lending rate, then this will adjust all mortgage rates; however, this is not true. Variable interest rates and fixed interest rates are determined by different factors that are not dependent on the overnight lending rate.
How are Variable Mortgage Rates determined?
With variable rate mortgages, the Bank of Canada plays a much larger role in determining prime rate for most major financial firms. The Bank of Canada determines the target overnight rate which they describe as:
“the average interest rate that the Bank wants to see in the marketplace for one-day (or “overnight”) loans between financial institutions. Changes in this rate influence other interest rates, such as those for consumer loans and mortgages.”
Lender’s base their prime rate on what the Bank of Canada sets the overnight lending rate as. The Bank of Canada does not decide what each bank sets their prime rate at; however, most major banks will match other banks prime rate. Prime rate is based on the cost of short-term money.
Variable mortgage rates are always shown as a spread above or below Prime Rate. This means that your interest rate is directly related to what prime rate is at anytime, and what the overnight lending rate is. So, if the Bank of Canada raises or decreases the interest rate of the overnight lending rate, then you can expect that prime rate will move as well. When interest rates are declining, then choosing a variable rate mortgage is obviously a better choice.
The problem with Prime rate is that banks had become afraid to lend to each other. This is because banks have become afraid that the other bank may default, and they won’t get their money bank. As a result, this has caused banks to charged a higher spread between the overnight lending rate and the final rate on a variable rate mortgage. Due to the decreased profitability of a variable rate mortgage, banks have changed the spreads of variable rate mortgages from prime minus to prime plus. These new prime plus interest rates are quite a change since most people are accustom to receiving prime minus rates.
How are Fixed Mortgage Rates determined?
The Canadian government and the Bank of Canada plays a major role in setting fixed mortgage rates as well. Fixed mortgage rates are influenced by the major bond yields. Bonds have always been considered a safer investment than equities and stocks. This is especially true when considering Government bonds.
When an economy is booming, most investors will invest in stocks and equities because they will earn a higher rate of return. This causes demand for bonds to decrease, and when bond demand decreases, then the bonds must increase the yields of the bonds to entice investors.
When an economy is in a recession, investors will search for a safe place to store their money. Stocks will decrease or have a negative yield, which will cause investors to put money into bonds. This will cause bond yields to go lower because of the increased demand.
When the economy changes, the government of Canada is forced to increase or decrease long term bond prices. When this happens, it will reduce or increase the lending costs for banks. The banks will then pass on these new rates to borrowers by increasing or decreasing fixed mortgage rates.
However, due to the negative economic climate, banks have had more difficulty raising capital to lend to borrowers. This causes the banks to offer higher yields on their bonds which result in higher lending costs to those who get a mortgage. Since there is so much fear in the economic market, banks have had to pass on these increased costs to the borrowers through higher interest rates.
Locking in a Low Mortgage Rate
When purchasing a new house or refinancing your current mortgage, make sure that you have the additional security by locking in your mortgage rate. You can do this by going to any lender or broker and applying for a mortgage pre-approval. A mortgage pre-approval will lock in an interest rate for you usually for up to 120 days. Speak to your lender directly to see what they have to offer.
Fixed Mortgage Rates or Variable Mortgage Rates; What will save more money for you?
Many people have attempted to make a definitive answer on which mortgage product is better. Many results have determined that historically Canadians would be better off by choosing a variable rate mortgage. An analysis had been completed from 1950 to 2007 that determined that 90.1% of the time, homeowners would save money with a variable rate mortgage; however, this is only based on past results.
A good rule of thumb is that when mortgage rates are low, you should lock in, and when mortgage rates are high, then you should get a variable rate mortgage.
If you are nervous about a fluctuating interest rate, then a variable rate mortgage will keep you up at night; however, if you are willing to take the extra risk, then a variable rate mortgage may be for you.