Fixed or Open Mortgage? - Pandemic is motivating young people to buy a home EP-137

Oct22ndpodcast

Thu, 11/19 11:25AM • 14:13

SUMMARY KEYWORDS

mortgage, bo, penalty, refinance, house, year fixed rate, product, locked, winnipeg, rates, lenders, interest rates, lowest rate, home, turn, selling, talk, buy, fixed, shipping containers

SPEAKERS

Announcer, Bo Kauffmann, Mike Schroeder

Bo Kauffmann  00:00

This week we'll talk to Mike Schroeder of mortgage architects about the differences of an open and a locked in mortgage. We'll take a look at a really unique local business and a few more surprises all in the next 15 minutes.

Announcer  00:15

You're listening to the Bo Knows Real Estate Podcast tips and advice for home buyers, sellers and owners with award winning REMAX Agent Bo Kauffmann.

Bo Kauffmann  00:32

All right, welcome to this week's episode of Winnipeg Real Estate Podcast. It's October 22. And we're going to start with some kadian Real Estate news. And I found a really interesting article on Canadian mortgage trends.com which indicates that the pandemic is motivating young Canadians more than ever to buy a house. There's a really interesting quote there from the the head of the real estates secured lending division of Scotia mortgage. And the quote goes, the pandemic has caused many Kenyans to turn their living rooms into classrooms, their dining rooms into offices and their basements into home gyms. So and this is motivating many to consider investing more of their current money into homes and upgrading them and expanding their use. After that the lower interest rates, actually they're down nearly a percent over a year ago. And that can save the average homebuyer around $13,000 over a five year mortgage period. And I've got the link to that article in the show notes below.

Announcer  02:28

Would you like to keep up with current real estate tips, news and advice for home buyers and sellers? Why not download my free podcast app available for iOS and Android devices? It's super easy. Just go to BoKnows.Homes/apps. That's Boknows dot homes slash APPS. That way you'll never miss an episode.

Bo Kauffmann  04:41

Alright, let's talk about whether we should lock in our mortgages or leave them open. And I'll admit I've always been fairly conservative and I've always been worried about interest rates going up. I bought my first house mind you in 1981 when interest rates generally were 18% and I was lucky enough that I had bought a brand new house It was Kensington homes and back then they subsidized the rate. And I only had to pay 14%. So I was a little worried about rates spiking even higher, and you know, rates going so high that I can't afford a house anymore, so I always locked them in. But turns out that might not have been the best strategy, especially these days. So let's, let's call Mike and get his take on this.

Mike Schroeder  05:26

Good afternoon. Hey, Mike, it's Bo Kauffmann calling. Hey, good afternoon. How are you doing today?

Bo Kauffmann  05:32

Good, good. Excellent. Listen, we're talking about fixed rate or open mortgages. And I was just finished saying that I had always opted for the fixed like the locked in rate for five years, just because in the past, I bought my first house in the 80s. And interest rates were really volatile. So I had gotten a sense of security. But I understand that there's a different take on this.

Mike Schroeder  05:56

Correct. So the big concern that often comes up that banks simply don't do a good job of addressing, and that is the cost of break the mortgage. So let me illustrate the perfect example. There is a realtor in Toronto, she had to sell her home less than two years into a five year fixed rate mortgage. On a mortgage of $550,000, she had to pay $30,000 penalty to pay off that mortgage because she was in a five year fixed rate. Right?

Bo Kauffmann  06:24

Okay, so you got to be careful if you if you lock it in what the penalties are for trying to get out early.

Mike Schroeder  06:29

Correct. And the worst part about it is that TD the the lenders, she's actually with even has a competitive product, they actually have a five year variable product, where if the interest rates go up, your payment actually doesn't change. Instead, a little bit more or less the payment goes towards principal, a little more goes towards interest with your payments stays fixed for the five year term. And if she would have taken that product, her penalty would have been $3,000. Okay. All right. So historically, which which saves you more money? Well, the numbers we have most lenders is that about 65% of people end up breaking their mortgage partially with the term. So if you think that 65% people are going to trigger a penalty, that penalty difference, more than offsets anything you would have saved in trying to get the lowest rate, that penalty can significantly define what you can and can't do. Now, if having a fixed rate have if you don't like any any instability all in your rate, then don't take a five year fixed rate, take a two or three year fixed rate, lock it in for a shorter term. That way, if somebody in your life does change that to a three year timeframe, you can still sell your house and not trigger a massive penalty, traditionally, which are lower the open rates or the fixed rates. So in most circumstances, the variable rates are lower than the fixed at about 90% of circumstances. Right now the variable rates are just a little bit lower than fixed, maybe point one 2.2 difference. So it's not a significant difference. It's just remembering that you're not going to save much money on a monthly basis, where you're going to see the money is if and when you have to break that mortgage. Right. And that that's the thing is people buy a house and the national average is five and a half to six years in the same house. But things do come up. So you got job transfers you, you know, your your family suddenly grows, or you get you know, transferred out of province or anything like that. So what you're saying is better be careful that, you know, if there is a change coming up, if it triggers that penalty, if you're locked in, that's going to be significant cost correct, or maybe not even the same move into a different house. I've seen situations where also the client has to put in 2030 $40,000 in to repairing work on their foundation, they have the equity in their home, they'd like to refinance their home. And I've actually had some lenders tell their clients Nope, you signed a mortgage product that does not allow you to break your mortgage unless you're selling the house. You cannot refinance it to do renovation work on it, putting the client is significant bind were announced that of boring mortgage rates, they may have to go get a loan, or a line of credit as significantly higher rates cost them more money in interest, all because they chose a restrictive mortgage product. While so even if they stayed obviously, obviously stay with the same bank. They can't reopen it up to get equity out of their house to fix their foundation with certain mortgage products. Yeah, so that's why it's not about who has the lowest rate. It's about putting you at the mortgage product. That's going to save you the most money over that term. Right. Excellent. Well, that's good information. Thanks. Thanks a lot, Mike. No problem call anytime. Okay, take care, buddy. Bye bye.

Bo Kauffmann  09:32

That was Mike Schroeder of mortgage architects. And he was kind enough to send along an accompanying article from CBC News outlining the case that he talked about the Toronto real estate agent who had to sell her house due to the pandemic and triggered a $30,000 Bank penalty. Now as I said, you may be getting into a house or renewing your mortgage with every intention of staying there for five years, or whatever the locked in term length will be but things Do come up. Like I said job transfers. Or, as Mike pointed out, if you have a significant requirement and need to refinance for whatever reason, whether it's to fix the foundation, or to help somebody out, you know, financially to help a family member and you want to refinance that house, just make sure you check the fine print that allows you to get out of that mortgage to refinance without paying significant penalties. That $30,000 example that's not the not the first and not the only time I've ever heard that size of penalty being triggered. So be careful what you go into that don't always just look for the lowest rates, make sure the mortgage product fits your needs now and into the near future. And today's spotlight on a local business, I want to talk to you about one of the most unique businesses you'll ever likely to find the brainchild of an entrepreneur named Brian Ross, innovation fabrication, there are metal fabricator, and they turn old shipping containers into just about anything you can think of the first time Brian and innovation fabrication came to my attention was under the name of box pools, that's one of the things that they do is they turn shipping containers into swimming pools that can be above ground in ground, they can be 20 foot long, 40 or even 60. A couple of the really neat aspects of this is if you have a tight back yard where a like a back hole or a digger can't get in, you can actually lift this thing over your house with a with a crane. And it can be an above ground, or they can dig a hole and go in ground. If it's above ground, the pool can have a window. It can have you know a TV, it could you can even turn a pool into a hot tub with a remote control on your phone. So when you're on your way home, you just turn up the heat and by the time you get there, it's nice and warm for you. But they do so much more than just pools. They also turn shipping containers into pop up kitchens, into restaurants, into garages, man caves and she sheds and lately even medical labs and testing sites. So I'm planning to have Brian on an upcoming episode and tell us more about his product. And there's a link to his website in the show notes below. And now for something completely different. Those people that know me know that I'm a comfort food guy. steak and potatoes, pasta, pizza. I mean you name it, it's got to have meat though. So the quote somebody's saying I don't always eat soup, but when I do, my wife found a great recipe for a soup that online. That's a meatball tomato and pepper soup. And I've got the link to that recipe in the show notes as well. It's thick, hearty and has a real kick to it. And you can use beef or turkey. So again, there's a link in the show notes. I hope you enjoy. I do hope you've enjoyed the show and I hope you come back next week for more local and national news and updates on real estate and tips on renovations and improving your home till then, bye.

Announcer  13:52

you've been listening to Bo Kauffmann of Remax performance Realty. Are you thinking of buying or selling house or condo in Winnipeg called Bo at 204-333-2202. Remember Bo Knows Real Estate