Mortgages - Edmonton Housing Bust

Category: Mortgages

Monday, June 8, 2009

Of bonds, banks and mortgages

TUESDAY UPDATE: Reports are circulating TD is about to raise their 5-year fixed rates another 0.4%

We’ve been hearing lots about central bank rates being at historic lows, and it’s influence over mortgage rates… but anyone following my Twitter feed the last while has no doubt noticed my little obsession with the bond market.

While on the surface there doesn’t seem to be much reason for a site like mine to concern itself with such things, but in fact the bond market is very influential on mortgage rates, and thus has a very big effect on the real estate market.

Mortgages themselves are essentially bonds, in exchange for the banks money, the buyer agrees to pay it back over a specific time at a specific interest rate. The bond and mortgage back securities markets are closely tied, and thus so are mortgage rates (which are usually slightly higher then bond rates).

So today I’m going to take a look at the relationships between bond yields, bank rates and mortgage rates. Here is a look at these rates since 1981.

As we can see, all three tend to track quite similarly. Also of note, mortgage rates are usually the highest of the three. For the sake of this post we’re going to be using Government of Canada 5 Year Bond Yields, and the average lending rate for 5-year fixed mortgages (as they are the most popular here in Canada).

We will start by looking at the relationship between the central bank rate and mortgage rates. As we can see here, there is a significant relationship between the bank rate and mortgage rates (these are through December of 2008), with an R² value of 0.9064, the pattern is also obvious from the chart.

We’ve been hearing lots of late about how Mark Carney has been pledging to keep the Bank of Canada’s key policy rate at 0.25% until next June. Which from the trendline equation would suggest a mortgage rate of about 3.25%, which was never quite realized as 5-year fixed rates never got much lower then 3.95%, but that is certainly within the expected range.

The issue though is that even despite the assurance that the bank rate will not change, mortgage rates have started to creep up, advertised rates went up to 4.15% last week with suspicion it could be headed higher shortly… why is this? Well, the simple answer is we’ve been seeing a lot of upward movement in the bond market (and a huge jump in US T-Notes).

As we can see from this graph, there is an even stronger relationship between mortgage rates and bond yields then there was between mortgage rates and bank rates. This is evident in how the plots more tightly hug the trendline, and the R² value of 0.9647, which is extremely high (1.0 would be a perfect relationship).

So while the bank rate may not change, if the bond yields rise it would appear that we should expect mortgage rates to rise as well. Especially since at this point the bank rate is being intentionally depressed, thus a short term decoupling would not be unexpected as the other two are still largely at the will of market forces.

Finally, we’ll do a scatter plot for bank rates and bond yields. The relationship of these two appear to be very similar to that the bank rate and mortgage yields, complete with a similar R² value of 0.9046. Which is again a very strong relationship in its own right, but not as significant as bonds and mortgage rates share.

So, while the bank rate is expected to stay low for the foreseeable future (though we are hearing increasing reports that it will be heading up by year end, well before next June as initially promised), that is no promise that mortgage rates will stay down. For a better idea of where mortgages are headed, keep a close eye on the U.S. Treasury Note market, and Bank of Canada bonds (though they largely follow T-Notes).

If bond yields continue to rise, mortgages will follow. Which in turn will force the governments hands when it comes to quantitative easing (which is aimed at keeping bonds and financing rates down, but is intensely disliked by most debt holders).

20 comments

Tuesday, May 26, 2009

Latest Mortgage Arrears Figures

Filed Under: Alberta, Canada, Foreclosures, Mortgages

The Canadian Bankers Association released their latest mortgage arrears stats today, these are for March.

As we can see, they’re continuing their meteoric rise, and have now passed the 0.50% threshold. 2,416 Albertans now find themselves three or more months behind on their mortgages (typically at the point foreclosure proceedings begin, though it often takes another six months before such properties hit the market). There are now over three times as many Albertans in arrears then there were two years prior (740 in March ’07), and well over double the number from a year ago (1,054 in March ’08).

We still haven’t neared the levels witnessed in ’96/’97, but are well above the long term average (0.37%) and the current acceleration is showing no signs of slowing down (if the current trend holds (~0.03% MoM, we could hit the 0.70% level by October).

Last month it was requested to take a look at the year-over year change in these figures, so here those are (this is of the % of mortgages in arrears, NOT the raw total of mortgages in arrears)

From mid ’07 on we’ve seen an explosion of mortgages going into arrears, and in the last 8 months this has leveled off at roughly 120% year-over-year increases, which means the figures have more then doubled over any given 12 months. Such year-over-year increases haven’t been seen in the last twenty years, and likely not since the early 80′s when the first bubble burst.

It is interesting to note the contrast with the first graph, where we saw that as many as 0.70% of mortgages were in arrears during the mid-to-late 90′s… and this second graph we can see that was reached after an extended period of more moderate year-over-year increases (30-50%).

This time around it’s been a result of rather explosive year-over-year increases (110-130%), and while it has leveled off, it has leveled off incredibly high and as of yet shows no sign of slowing yet… beyond that, much of the economic turmoil (layoffs, etc) experienced in the new year would still be largely unfelt in these figures.

On a national level, arrears ticked up to 0.39% from 0.38%. Like last month, Alberta again has the highest rate in the country, and is opening it’s lead, as the Atlantic has dropped to 0.44%, while Ontario remained at 0.41%.

At the opposite end of the spectrum, Manitoba and Saskatchewan now enjoy the lowest rates, at just 0.22% each. B.C. is next at 0.29%, but the effects of their housing bust is starting to be felt as the rate there is growing rapidly (they were a nation low 0.16% a year earlier).

34 comments

Monday, May 18, 2009

Hit the bottom or sitting on a trapdoor?

Filed Under: Mortgages

Curious times we’re in.

We’re hearing a lot of bluster, doom, gloom and just generally conflicting messages from all over the economy the last little while. Shouldn’t really be surprising, we’re in this massive economic fugue, and there is no consensus about what will come next so everyone is grasping at straws.

One day they’re talking about green shoots and how the stock market has been rallying for weeks on end… the next the market tanks. One day you’re getting all kinds of bravado from the realtors associations about how great things are and that the bottom is a thing of the past… the next there are reports the Canadian Real Estate Association of all outlets is telling everyone prices will be dropping through 2010 (truth be told, price wise, their predictions for Alberta in ’09 and ’10 were exactly the same as their February forecast).

Anyway, with the amount of shilling the media does for the real estate industry, sometimes it’s almost nice to see their know-nothing cut-and-paste writers can get it so wrong both ways… would be nicer if they could get someone who actually knew shit from shinola and could write, but evidently it’s that’s not as profitable.

In any case, we’ve been witnessing what the bulls are claiming as a resurgence… really just a pretty typical spring. But I guess pointing out much the same thing happened last year at this time and prices still fell off the table in the fall doesn’t get the gullible off their wallets.

What is different then last year is that we are actually approaching something resembling affordability. How can this be when six months ago prices were about the same but were considered very unaffordable?

In two words… interest rates. The governments have been slashing central bank rates to the bone, bond rates are negligible and finally mortgage rates followed. So, prices didn’t need to go down to meet affordability… affordability rose to meet prices.

The question now is, are current interest rates sustainable in the long term?

If you think they are, perhaps we have reached a new balance and current prices will prove sustainable… but if you think rates are destined to rise, this so called bottom is nothing more then a trapdoor with another long hard fall for prices still to come.

What will happen? Who knows, there are far smarter and more worldly people then I that are completely lost trying to figure this economic situation. It’s fairly safe to say that as long as the central banks rates stay so low, shorter term rates don’t have much more room to go down, but we will likely see longer term rates continue to get closer and closer to their short term companions.

What I do want to take a look at is the impact of a change in interest rates has on financing. (Admittedly, I lifted this idea from a post I read on another blog, just to give credit where it’s deserved)

Here we see how much one could qualify for on a conventional mortgage (25 years) given certain monthly payments. This shows us why with rates hitting these historic lows, suddenly the same amount of money can qualify one for a lot more money.

With rates at 3.5%, even as little as $1,500 a month will qualify a person for $300,000… back in November, the average rate was 6.51% and all a person with $1,500/month could qualify for was 222,000. As anyone who has every looked at finance could attest, that’s HUGE.

Prices are largely the same (at least statistically, though asking prices still appear to be dropping), but in November $1,500 a month couldn’t even buy an average condo… today, just six months later, it could probably get you a decent bungalow.

So, it’s not hard to see why prices are holding at the moment. At these rates even a slight rise in price isn’t out of the question. With interest rates getting so low, they have caused a massive increase in the buyers pool.

But, big but, the real question should be, can these rates hold for years if not decades. Cause if they don’t, and start going back up, even to historically moderate levels like 6-8%, that buyers pool contracts in a hurry… and we again have severe unaffordability, and prices will again have to make up that gap.

And that’s not the only problem…

To examine interest rates from another perspective, here we look at things from a post-purchase angle. The price is locked in, the principle is owed and now it’s a matter of can those who bought when rates were low, survive rates going up when they renew?

Lets say a person bought a $350,000 home when rates were 3.5% and locked in for 5 years, so they’re paying about $1,750 a month… come renewal, the question is, what will the rates be then and what will their payments be?

If they’re at 6%… $2,250

If they’re at 8%… $2,700

If they borrowed well within their means, and/or gotten some raises in the meantime, would still hurt a little, but they can probably swing it… if they leveraged themselves to the max though, they’re in trouble. A 25%-55% increase in your largest monthly expense is not easily swallowed. And 6-8% is still at the low end of historical values, gawd forbid rates hit the double digits.

So, people thinking of buying today, just keep that in mind… and buy based on your needs, not just according to what the bank is willing to give you.

5 comments

Saturday, April 25, 2009

We’re #1!

Filed Under: Alberta, Canada, Foreclosures, Mortgages

It’s been a tough week for the province… first we find out that the provincial government thinks our beaches and children are too damn ugly to use in advertising, so they have to co-opt some from England. Okay, and yeah, that foam finger is actually one for the Oakland A’s, but what can I say, our foam fingers here in Alberta just don’t stack up… err, I mean, its use was intentional and to give a more global focus… yeah, that’s it.

If stock photography is good enough for the Province of Alberta, dammit, it’s good enough for my blog! And, honestly, as a marketing type, whomever thought up that “It was intentional” defence, should be given a one-way ticket to Northumberland to find new employment.

Then, as Two-third pointed out, Alberta had the biggest decline in retail sales in the nation in February. Add to that Mark Carney lowering the bank rate and telling Canadians to start spending like crazy or he is going to unleash “quantitative easing.”

So yeah, it’s been a tough week… but fear not, the Canadian Bankers Association had news that is sure to erase all those bad memories. They released their February numbers, and Alberta is now leading the nation in mortgages in arrears.

So suck on that Atlantic Canada, we’re the champs now!

As of February 0.48% of all mortgages in Alberta are now three months in arrears or more. Up from 0.45% in January, and 0.22% a year earlier. Alberta has seen something of a meteoric rise in this regard since bottoming out at 0.14% in 2007, at which point we were neck-and-neck with B.C. for lowest rate in the nation.

Arrears were up all across the country though, the national average now stands at 0.38% (up from 0.36%). Manitoba has the lowest rate in the country at 0.23%, followed by Saskatchewan (0.25%) and British Columbia (0.27%). At the opposite end of the spectrum, Atlantic Canada comes in at 0.46% and Ontario at 0.41%.

So what does it all mean… well, if you’re looking for new business opportunities, I’d say repossession is going to be a real growth industry for the next year or two. Arrears are showing no sign of slowing down, and if people are behind on their mortgages, they’re likely behind on all kinds of credit.

A lot of boys will be parted with their toys, so if you’re liquid and in the market for quads, trucks, plasma tv’s, etc… you can probably get a helluva deal.

Not that these are situations necessary to cheer… but that’s reality. For those with cash in hand, recessions can be a great time to acquire assets, business, personal and luxury… unfortunately real estate is still grossly overpriced, give it time though, even that will one day correct, then it’s vulture time!

Sidenote: I’m trying something new with the comments, because the amount of people posting as “anonymous” was out of hand and you never knew whether you were dealing with one person or six. So please enter some kind of handle to identify yourself as if you want to comment.

I’d rather avoid forcing people to register with Blogger or OpenID, but if this doesn’t work that’s what we’ll have to do. So, if you have any comments or questions, fire away.

14 comments

Tuesday, April 7, 2009

Mortgages – Fixed Rate Mechanics

Filed Under: Mortgages, Personal Finances

Some of you may recall a month ago I did an entry on why weekly and bi-weekly payments really were not as good as they were cracked up to be. Today I’m going to be my second piece in the mortgage series, this time looking at fixed rate mortgages and their mechanics.

Despite homes being the largest purchases most people make, and mortgages often being a households largest monthly expense, I’m never ceased to be amazed at how many people really don’t have a sound understanding of how they work. So this is my little attempt to shed some light on them.

We’re not going to get into the whole buying high/low thing today, just examine the basic structure of mortgages and how they work.

A lot of people are likely familiar with graphs like the one above if they’ve taken out a mortgage… at least I’d hope they would be, at the very least your bank or mortgage broker should have tried to explain one to you regardless of what type of mortgage you have.

It shows you how over time your equity builds exponentially, while your principle owing correspondingly decreases. The values of these and the proportions paid off can change substantially depending on the variables, but the general pattern remains the same.

The basic gist is that it shows you how little equity you make up in the early years, but as time goes by, more and more of your payments go toward equity rather then interest. Just from this example you can see you make up more equity in the last 9 years then you do in the first 16.

While it’s a pretty pattern, the only number in there that matters to me is the amount owing. The equity really doesn’t mean a lick. All that matters is what you owe.

When your mortgage comes up for renewal, at that point it matters what the bank thinks your place is work matters in relation to what you owe… or if you are selling it matters what someone is willing to pay for it… but the rest of the time, what you think your home is worth, or what your neighbours house sells for, or what the cities median price is, really doesn’t mean a damn thing.

Alright, end of rant. Now lets get on to how 5 year fixed rate mortgages work, and I think the best way to do that is to work through an example. So lets say we purchased an “average residence” in Edmonton in January of 1988, with a conventional 25 year amortization, 5-year fixed terms. These a probably the most popular type of mortgages in Canada.

In January 1988 we bought a house, and paid $77,792 for it, which was the residential average at the time. In reality we would have needed a significant down-payment, but for the sake of this example we’re going to ignore that and say we financed the entire thing. Down-payments are really not material for what we’re doing here today.

So we walk into the bank, finance $77,792 at the going rate for a 5-year fixed of the day at 11.73%. Which result in monthly payments of $804 for the next 5 years… at which point our mortgage comes up for renewal.

Here is a graph kind of incorporating the first two graphs. We have the monthly payments and we see the amount owing declining, telling us what we owe the bank as of each January. We now find ourselves in January of 1993, and owning the bank $74,271… which means we haven’t made up a whole lot of equity in the first five years, less then 5% in this example.

This doesn’t give us all the variables needed to give us our next payment though (ignoring that you can already see in on the chart), for that we need the interest rates…

If the interest rate in 1993 was still 11.73% like it was five years earlier we would still be paying $804 a month… but fortunately for us, interest rates came down!

Now the 5-year fixed rate is 9.47%, we owe the bank $74,271 and now our amortization is down to 20 years… so for the next five years our payments will be $691 a month.

Skip ahead to 1998, our term is up and we do it again, we owe $66,274, rate are down again, now at 6.9% and amortization is 15 years… so we’ll pay $592 a month.

Do it all again in 2003, $51,213 at 6.26% over 10 years… equals $563 a month.

Finally we get to 2008, only five years left, the last renewal! $29,272 owing, the rate actually rose slightly to 6.81% so we’ll be paying slightly more, $577 a month…. but come 2013, that house will be entirely paid off.

What I want to show in the graph is that with our style of mortgages, even with fixed rate ones, every five years your payments will change depending on the going mortgage rate of the time. In our example we were very fortunate in that interest rates just kept on going down, so the monthly payments kept dropping for the most part.

What the fixed rate mortgage shields you from is upward fluctuations of interest rates. As you can see from the graphs, the only interest rates that mattered to us were in the shaded areas, but outside of that they shot up and down quite a bit.

Just take our first renewal for example… if it hadn’t came up until 1994, we would have saved even more since rates dropped over 2 points in that year… but if it had came up in 1995 we would have paid even more since rates spiked that year. So, it can kind of be luck of the draw when your mortgage comes up for renewal, but over time it tends to even out.

The advantage of fixed rate mortgages is that you know what you’ll be paying every month, you don’t have to worry about your payments swinging as they would with a variable rate. The drawback is that you often pay a premium of a point or two more for this stability when you lock in.

So, should interest rates shoot up, at least your protected until your next renewal… should they stay about the same, you lose out because you’re paying a premium for the fixed rate… and should rates go down, you really lose out because you’re not only paying a premium, but you’re paying it on top of a higher rate.

Over the last quarter century we’ve seen rates consistently dropping, which have made variable rate mortgages very attractive… but today, the thing to keep in mind that that we’ve reached a point where rates really cannot get any lower… which means they can only go up, and it’s when rates are rising that fixed rate mortgages are not only safer, but often cheaper.

So it really depends on what you’re comfortable with, and whether you feel the premium you pay is worth it.

The last thing I want to touch on is the differences between Canada and the US when it comes to fixed rate mortgages. As mentioned before, traditionally 25 years has been the normal amortization period, and 5-year fixed the most popular terms.

South of the border, it’s a little different. There, 30 year amortizations are the most common period, and 30 year fixed the most common term. That’s right, with one of those you know exactly what you’ll be paying the entire life of your mortgage.

So using the purchase from our example above, and the going rate for 30-year fixed mortgages in January of 1988, we would have been paying $715 a month (for a better apples-to-apples idea, if the term was 25-year fixed it would have been $737 a month).

So, as you can see, by doing it with traditional Canadian 5-yr terms, we saved a lot of money… but this is because interest rates were dropping. If rates were going up, we would have done a lot worse. Basically it just boils down to that we’re more exposed to market fluctuations here in Canada, and that can be both very beneficial, or very detrimental.

One interesting thing you may have noted is that in 1988, the US 30-year fixed rate is actually lower then the Canadian 5-year fixed rate. This seems counter-intuitive as generally when you go into a bank, the longer the term you ask for, the higher the rate.

TD for example, their current advertised rates are 5-yr fixed at 5.45% and 10-yr fixed at 6.7%. Pretty typical.

Same actually also holds true in the US… this is really more a statement about the rates in the US just being more competitive, cause today you can get a 30-yr fixed from Wachovia for 4.75%… lower then our 5-yr fixed. So if you didn’t think it was bad enough that they can deduct mortgage interest from their taxes, they also get much better interest rates. So, if you’ve ever wondered why our banks are so profitable, there is a big part of the answer, Canadians pay a whole lot more interest.

11 comments

Saturday, March 28, 2009

Record number of Albertans in mortgage arrears

Filed Under: Alberta, Canada, Foreclosures, Mortgages

The real estate bulls out there will say I’m being sensational… and I’ll say, gee thanks! I always thought I was pretty good, but sensational?! Really?! I mean, I’ve been working out, and my girlfriend has told me I’m the best she’s ever had… but I’ve told her the same thing… and lets just say I know for a fact at least one of us is lying. Not saying which one of us though.

Where was I? Oh yeah, sensationalizing. Okay, yes, yes my title is somewhat sensationalized… but it is also true, and if the pushers out there can cherry pick figures, why not I?!

By now I’m sure you’re all wondering what I’m rambling about, so, lets get on with the show. Today the Canadian Bankers Association released their January numbers of Canadians in arrears on their mortgages, complete with provincial breakdowns.

As the title implies, as of January, there are more Albertans in arrears on their mortgages then anytime since they started recording such things. A graph of that can be found here:

As of January, 2,168 Albertans were three months or more behind in their mortgages. The first time it has eclipsed the 2,000 mark. The previous high water mark February 1997 when it was 1,835, and that number stood until December last.

As you can see, during the boom the number took a big dive, bottoming out in May of 2007 at just 649… since the market has cooled though, the number or those in arrears has skyrocketed up more then three-fold, increasing by more than 100 per month through 2008.

Now, some will argue it’s not really fair to compare straight numbers because the population has swelled greatly, as has the number of mortgages outstanding… and I agree. I just wanted to justify my “sensational” title… now we’ll get on to a better measure, the ratio of mortgages in arrears to the total number of mortgages.

So yeah, by this measure things aren’t so bad… yet anyway. Currently we are sitting at 0.45% of mortgages being in arrears. Slightly above the long term average of 0.37%, but well below the previous high of 0.69% in February 2007.

What should be troubling is that this number is rising quite rapidly, having bottomed out at 0.14% in June of 2007, and increasing every month since, and more then doubling since a year prior.

Some may blame the recent downturn in the economy for this, but remember, the stock markets and oil didn’t plunge until autumn of 2008… and this measure is only of those at least three months in arrears as of January. So the effects of that shouldn’t really be seen yet.

We should also remember all the layoffs that started hitting in the new year, piled up quickly, and continue to… the number of those in arrears is bound to really take off as for savings erode and EI benefits start to expire. When the full effects of that is felt this figure could very well surpass those heights reached in 1997.

Rising numbers of those in arrears will obviously increase the number of foreclosures, and should those start hitting the market en masse its going to put even more downward pressure on prices. This is an emerging issue, and something that will be very interesting to track over the next couple years.

For those curious, here is how Alberta stacked up against the national average:

Alberta was in the same range as the rest of the country, especially since 1995. Since 1990 the national average has been 0.42%, while Alberta came in at 0.37% as mentioned earlier. Also interesting to note that the rate has started to increase nationally over the last six months, and currently stand at 0.36%.

For an idea of how the rest of the provinces stacked up, here is the chart for western Canada.

Here we can see the western provinces have been pretty close for the last decade. It is interesting to see how much of an outlier Saskatchewan was during the early 90′s. Since 1990 B.C. has had the lowest average in the nation at 0.32%, Alberta was second. Saskatchewan (0.54%) and Manitoba (0.49%) on the other hand were on the opposite end of the spectrum.

Here is the eastern half of the country. Quebec is a bit more erratic then the rest, but nothing like Saskatchewan. The average for Ontario was 0.41%, Quebec was 0.49%, and the Atlantic provinces come in at 0.41%.

11 comments

Monday, March 16, 2009

The subprime dilemma

Filed Under: Canada, Mortgages, United States

The Globe and Mail article from yesterday got me thinking about our subprime mortgage situation in Canada.

Some people say it’s just as bad as in the US, but they aren’t talking about truly subprime as much as they are about effectively non-prime or non-conventional lending

On the other extreme, a lot of people had been saying we don’t have them here, so, it was only a US problem.

That isn’t true, we had, and still do have them. Now, it is important to note that they were not as common here, at least so far as the quote, unquote, subprimes went. As the article mentioned, in the US during their run-up they made up about 22% of the all mortgages, whereas here in 2007 they only made up about 7%.

I’ve spent a couple days digging for numbers online, and haven’t been able to come up with much if any hard numbers on those subprime loans. As good as I could find was in that article was their quoting Benjamin Tal as saying their were about 85,000 of them in 2006… and this would jive with the aforementioned 7% figure and CMHC reporting there were 1,220,765 mortgages issued in 2006.

So, as far as an apples-to-apples comparison goes, “subprimes” were only about one-third as prevalent north of the border, as they were south of the border.

The problem in Canada was that we had several other “innovations” that were efffectively doing the same thing… they just kept lowering the bar and caused a rapid expanding of the pool of potential buyers.

At the beginning of 2006 in Canada, to buy a home one had to be able to (a) pay it off in 25 years or less, and (b) have at least a 5% downpayment.

In March of 2006 it was decided you could take 30 years, and you could borrow that 5%, so effectively you no longer needed a downpayment.

By June, you could take 35 years, and pay interest-only for the first 10.

And in November of 2006, the coup-de-grâce, the 40 year amortization was introduced.

So, over the course of nine months, the lending standards had went from requiring you to have 5% down and pay your home off in 25 years… to requiring zero-down, you can take up to 40 years to pay it off, and you don’t even have to put a dime toward equity for ten years.

And those 40 year amortizations were some kind of popular too. TD Bank, Deputy chief economist, Craig Alexander in an April 2008 interview said that by a year after their being introduction, 37% of all new mortgages issued were 40 year, as were 9% of outstanding mortgages.

Even more telling, he quipped,

“About 60 per cent of first-time buyers are opting for a 40-year mortgage”

So 60% of first-time buyers we either borrowing more then they would have qualified for, or would not have qualified for a mortgage, in 2005.

Needless to say, the buyers pool was increased just a tad by these lending innovations.

As you probably know, late last year the government axed those 40-year amortizations and re-introduced the need for 5% down after seeing the negative effects the lax standards produced during their two year run.

While it was certainly not the only contributing factor to the run up in prices we saw here in Edmonton, and really all across Western Canada, they definitely added fuel to the fire.

The timing certainly looks suspiciously similar to the time frame of the price explosion here in Edmonton, but as I’ve said before, there were many factors in that perfect storm… though I still think it’s safe to say we quite likely wouldn’t have reached the extreme heights we did had lending standards not been eased like they were.

That’s not to say the US didn’t have 40 year amortization, they actually brought them in first back in ’05 IIRC… and they still do offer them. Though they didn’t seem to quite catch on the way they did up here.

While clearly not a perfect comparable to subprimes, I don’t think it’s a stretch to label them as non-conventional… another non-conventional comparison other for 40 year mortgages, are the Alt-A mortgages in the US. For the unfamiliar, Alt-A’s are kind of in the middle ground, they aren’t quite as bad as subprime, but aren’t quite as good as prime. Subprimes not quite as ugly sister, if you will. So, something of an apt comparison to our 40 year mortgages.

Alt-A’s often get lumped in with subprimes since that’s the word most are familiar with, but we are starting to hear more and more about them as some are expecting they are the next time-bomb to go off in the US housing crisis.

Last year Alt-A’s made up 67% of the non-prime mortgages in circulation, or about 10% of all mortgage debt. During the peak of the US housing boom, Alt-A’s made up 15.4% and 17.7% of all new loans made in 2005 and 2006 respectively. At the same time, subprimes made up 21.6% and 21.7% in those years.

Collectively, Alt-A’s and subprimes accounted for 37.0% and 39.4% of all loans made in 2005 and 2006… sounding eerily familiar to that figure cited for the marketshare of 40 year mortgages a year ago?

COUGH** 37% **COUGH

So, a subprime by any other name may not be a subprime… but I don’t think it’s much of a stretch to say we had eerily similar figures when it came to non-prime or non-conventional lending during our respective booms.

10 comments

Monday, March 2, 2009

Mortgages – The myth of acceleration

Filed Under: Mortgages, Personal Finances

This is the first in something of an intermittent series I’m going to do on mortgages. Despite often being a persons single biggest monthly expense, all too often people really do not understand how they work. And since I also get all geeked up doing this sort of stuff… behold.

I sometimes hear people talking about how much faster and cheaper they’re paying off their mortgage by going to accelerated weekly or bi-weekly payments… this isn’t really true. What they’re really doing is just increasing how much they pay in a month.

They basically work by taking what a person typically pays in a month, lets say $2000 (to use a nice round number), and if one wants to pay bi-weekly, they’d just start paying $1000 every two weeks ($2000/2) or $500 every week ($2000/4).

Then, instead of paying $24,000 a year ($2000 x 12), they are paying $26,000 ($1000 x 26 or $500 x 52). So yes, it would be paid off sooner, and they would save a little on interest…. but the same thing can be accomplished just by upping one’s payments to $2167 per month though, which is effectively what they’d be paying anyway.

You’re not really gaining anything by changing the number of payments. To take a look at just how little one saves on interest, lets use $200,000 over 25 years, at 6% example. That could be paid off for $1288.60 per month, or $297.12 per week.

Over the course of one year a person would save a grand total of…. $12.79.

Slightly over a dollar a month. Which, if you’re on a automatic withdrawal, by all means, go weekly, it’ll earn you a free lunch once a year.

But if you’re doing the old school method of mailing in or dropping off a cheque at the bank, it’s really not worth your time…. between postage, time and/or gas you will probably end up going out of pocket.

Another thing to consider is your monthly budgeting. If you’re not carrying a decent balance and depending on your work pay schedule on the months you have to make an extra payment could obviously lead to some headaches.

So, in conclusion, there is little to be gained by going to weekly or bi-weekly payments that can’t be accomplished by merely increasing your monthly payment… which, if you can afford it, is a good idea regardless of your circumstances.

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