This quarter’s Mortgage Market Update is a good news/bad news story.

I’m an optimist at heart so let’s start with the good news. Barring a global and systemic financial meltdown, our mortgage rates will probably stay at their current rock-bottom levels for an extended period of anywhere from one to five years.

The bad news is that these ultra-low rates will be the by-product of a massive global deleveraging process, which will be as necessary as it will be painful to the world’s most indebted economies. While Canada will not be at the epicentre of this debt purge and while we are somewhat uniquely positioned to endure the coming downturn (more on that later), we will not be immune from the negative effects that deleveraging will have on global economic growth.

Read more… 

David Larock is an independent full-time mortgage planner and industry insider. Visit his blog  for many more interesting articles and some great mortgage advice.

The Bank of Canada has once again held it’s key overnight rate at 1%.

Changes to the overnight rate sends a signal to banks about which direction the Bank of Canada wishes to see short-term interest rates go.  This usually leads to movement by commercial banks’ prime rates and can also affect lending rates for loans and mortgages in non-commercial banks as well as the interest rates paid on deposits, savings or GICs.  When interest rates are lower, people spend and borrow more money.  This affects the economy in a positive way.  If, however, the economy grows too fast, this can lead to inflation.  In that case, we will see the Bank of Canada raise the rate, in order to slow down spending and borrowing, curbing inflation.  According to their website, “The Bank of Canada sets the target for the overnight rate at a level that  will keep inflation low, stable, and predictable over the medium term. Low and  stable inflation provides a favourable climate for sustainable growth in output,  employment, and incomes.”

As an aside, please check out the historically low, low interest rates currently being offered at most financial institutions right now, especially if you’ve been considering locking in your variable rate mortgage!  Bank of Montreal made a BIG splash this week with their ultra-low 2.99% 5 year term (no-frills) mortgage.  Other banks answered back with their own incredible deals, so be sure to check with your lender if it’s time to lock in or renew.

Let’s begin the new year where we finished off the last one – in the euro zone.

After a brief period of calm as the calendar flipped to 2012, bond yields in the euro zone’s vulnerable member states are moving higher again. Most notably, Italian bond yields closed at 7.13% on Friday. This is significant because Greece, Ireland, and Portugal all sought bailouts shortly after their ten-year government bond yields breached the 7% threshold, and Italy’s bond market, the third largest in the world, is simply too big to save.

Italy’s current high borrowing costs will be of increasing importance in 2012 because the country must refinance more than US$ 400 billion worth of its existing bonds over the next twelve months. Having to roll over that debt at today’s rates will substantially increase Italy’s borrowing costs, expanding its budget deficit and further straining its government finances. It’s hard for me to see how Italy’s fragile economy, already absorbing harsh new austerity measures, will grow its way out of its current debt problems. I find it much easier to envision the knock-on effects of higher borrowing rates heightening investor fears and pushing interest costs higher still, in a self-perpetuating vicious cycle.

I’m not just picking on the Italians here. Spanish ten-year bond yields spiked up 0.6% last week, as the country revealed a wider than expected budget gap in 2011 (Spanish bond yields closed at 5.71% last Friday, but were as high as 6.7% only six short weeks ago). Keep in mind that Italian and Spanish bond yields are this high despite the fact that the European Central Bank (ECB) has bought about US$ 250 billion worth of sovereign debt since the euro-zone crisis began.

The ECB also recently extended three-year loans totalling about US$ 600 billion to more than five hundred European banks at a super-low 1% interest rate. This was done both as an attempt to ward off the immediate threat of a bank-induced credit crunch, and in the hope that the re-liquified banks would then lend that money to euro-zone governments in need. This attempt by the ECB to stave off a threat and to exit the sovereign debt buying business in one fell swoop may have been controversial, but it’s chilling to think where Europe would be without the ECB’s unprecedented actions.

Closer to home, Statistics Canada released its December employment report, and it was weak across the board. Employment reports are important indicators of where mortgage rates are headed because they tell you whether labour is likely to become more expensive in future. Labour is a pervasive cost that spreads throughout the economy, and higher labour costs spur broad-based price inflation and, by association, higher mortgage rates,

While we gained 17,500 jobs last month, the bad news in the detail was that we lost 25,500 full-time jobs and gained 43,000 new part-time jobs instead. Our overall unemployment rate is now at an eight-month high of 7.5% and average hourly earnings have fallen 0.7%. So we have increasing slack in the labour market and the cost of labour is falling – no signs of inflationary wage pressure threatening to drive our mortgage rates higher at this point.
 
Five-year Government of Canada (GoC) bond yields were down about three basis points for the week, closing at 1.25% on Friday. Of the world’s fifteen largest economies, only three still enjoy stable AAA credit ratings (Canada, the U.K. and Australia). In an increasingly uncertain world, our government bonds are viewed as ultra-safe, and Canadian mortgage borrowers are direct beneficiaries with five-year fixed rates available at 3.29% or better. Variable-mortgage rates are still at or a little below prime, which just isn’t compelling for most borrowers. With the spread between five-year fixed vs. variable-rate mortgages now down to .5%, it is much harder to justify the risk vs. reward trade-off of going with a variable rate. 

The bottom line: As we begin the new year, all signs point to both fixed and variable-mortgage rates staying at their current levels, or edging lower for the foreseeable short-term future. The euro-zone crisis continues to stoke demand for our ultra-safe government bonds. Domestically, unemployment reports, like the one that Stats Can just released, suggest that growth, not inflation, will be our main concern in the coming months.

David Larock is an independent full-time mortgage planner and industry insider. Visit his blog for many more interesting articles and some great mortgage advice.

Most people start with the basic idea of looking at rental income versus expenses to see if there is a positive cash flow.  That would of course be nice but is also a very limiting view of the true hidden value of owning income properties.  The real value is in leverage – that means you are getting a return on every dollar you invest by borrowing money and then having someone else retire the debt thereby creating a financial gain for you.  As your mortgage gets paid down, your equity increases and therefore, so does your return on your investment.  In simple terms, if you invested $50,000 in an income property and the value never increased a single cent, you would still have doubled your money at the point your mortgage principal has been paid down by $50,000.

This is a rather simplistic view and there are many other factors to look at.  Last year, I posted an article by David Larock that I think explains it very well.  Dave points out that one of the keys is low interest rates.  We’ve all heard for the last year that interest rates are poised to go up and while I don’t think that is in the next few months, I do think we’ll start to see that over the next year so 2012 may really be a good time to look seriously at starting your real estate investment portfolio.

John and I own income property and the experience has been good.  There have been learning curves and some bumps along the way however, it is something we would and will do again.  It would be my pleasure to assist you by sharing those lessons learned.

It certainly is confusing because of the common language we use which is, all wrong.  When buying a home, we go to a lender “to get a mortgage” but actually, that is that is not what we are doing at all.

A mortgage is a financial claim against your property. You sign a document giving that claim to the lender, and in return they give you the money.
 
In effect, YOU are giving the lender something and that is, a personal promise to pay. It is YOU who mortgages the property.  The lender doesn’t GIVE a mortgage, they TAKE a mortgage.  They are taking a financial claim against your property and you are giving them a promise to pay.

So, you don’t go to a lender to “get a mortgage” but you do go to a lender to have them take a mortgage. The person who performs the action is the “or” or “er” actor. Think of “employer” or “donor”. That makes YOU, the borrower, the “mortgagor”. You’re doing the mortgaging. 

The lender on the other hand, takes your mortgage. And the recipient is always the “ee” figure. That makes the lender the “mortgagee”.
 
I read a tip somewhere that said you can remember the difference by noticing that “borrower” has two “o”s in it, and so does “mortgagor.” “Lender”, on the other hand, has two “e”s, and so does “mortgagee”.
 
So now you know.  Clear as mud?

Friday’s much-anticipated meeting of European Union (EU) leaders in Brussels was the region’s latest attempt to reassure the markets that its financial crisis is being brought under control. Here are the highlights:

• Twenty-six of the EU’s twenty-seven member countries agreed to limit their future structural deficits to .5% of GDP (the UK rejected this proposal).
  Over-indebted member countries agreed to reduce their debt loads by one-twentieth each year.
  Failure to comply with either commitment will, in most cases, trigger sanctions and penalties.
  Participating countries agreed to submit their budgets to a pan-European body in charge of fiscal oversight to ensure compliance.
  EU members also agreed to boost the IMF’s reserves by another 200 billion euros and to move up the launch date for a new bailout fund, called the European Stability Mechanism, to next summer.

 But was it enough to reassure the markets? Based on their initial reaction, the answer appears to be “no”.

While monitoring EU sovereign budgets more closely should help prevent a future crisis, it will actually exacerbate the current one. Member countries must now hack and slash their budgets to bring them in line with new fiscal standards at the same time that the region is tipping into recession. These new austerity measures will hammer the EU’s fragile economies at the worst possible time, causing deficits to soar higher as growth slows sharply, and this is very likely to spook investors even more. Without economic growth, EU countries cannot get out in front of their spiraling interest-rate costs. The Germans got what they wanted, but the phrase “Be careful what you wish for” comes to mind.
 
The experts I read believe that there are only two remedies that will ultimately save Europe: 1) the European Central Bank (ECB) announcing that it will provide unlimited support to the sovereign debt of member countries (to scare off speculators), and 2) the EU launching a new euro bond that is backed by all member countries (which will give struggling member countries access to German-level borrowing rates).
Neither remedy appears imminent – Germany has adamantly opposed any notion of a euro bond, and the ECB reiterated just last week that it had no plans to step up its sovereign bond-buying programs. (The ECB did cut its benchmark interest rate by .25% last week, citing “high uncertainty”, and “substantial downside risks”…so at least there’s that.)

Five-year Government of Canada bond yields dropped another 6 basis points this week, closing at 1.33% on Friday (ahh…stability). We were hoping for a round of five-year fixed-rate mortgage cuts last week but instead, lenders have launched new promotions based on shorter-than-normal rate-hold periods (called “Quick Closes”). Gross spreads on standard five-year fixed rate mortgages are still as plump as jolly old Saint Nick, so we’ll hold out hope for a discount in borrower’s stockings in the near future (after all, with minuscule default rates borrowers have certainly been good this year).

Variable-rate mortgage holders saw the Bank of Canada (BoC) maintain its 1% overnight rate last Tuesday. The BoC’s accompanying commentary reiterated concerns over the “weakening external outlook” and there was nothing in the report to suggest any material change in its overriding views.

The bottom line: The EU’s latest summit made the threat of more sovereign defaults in the region less likely, while making the threat of a long and protracted recession all but inevitable. From a Canadian mortgage perspective, this is the best we could hope for. Sovereign defaults can spook global financial markets and drive up borrowing rates everywhere, and this was our greatest contagion threat. An extended period of European economic malaise isn’t anything to celebrate, but from a systemic risk perspective, it’s far better than the alternative.

David Larock is an independent full-time mortgage planner and industry insider. Visit his blog  for many more interesting articles and some great mortgage advice.

In a financial crisis, bond yields provide a real-time gauge of whether a country’s prospects are getting better or worse. If a country’s outlook is worsening, the market will demand higher yields on its new bond issues and the government will have no choice but to pay. But those higher yields raise a struggling country’s borrowing costs, intensifying the debt burden on its already cash-strapped government. This creates more investor fear, and subsequent bond yields must be raised again, and again, and again. It is a cycle of fear that feeds on itself.

Last week, the yields on the euro zone’s latest round of new bond issues indicated that the region’s financial crisis has reached a new level of urgency. Simply put, the bond-yield gauges for Italy and Spain are now red-lining. Let’s check out the difference in their government bond yields last week versus one month ago:

 
These yields are simply unaffordable over the long term for Spain and Italy, whose economic growth rates have been  moribund for years. If either (or both!) countries reach their debt tipping point, there is no mechanism in place to save them. Italy alone has to refinance $300 billion of its outstanding debt in the next twelve months, so their interest-cost tourniquet will continue to tighten rapidly.

It looks as though the only two possible outcomes left are sovereign default, almost certainly followed by the break-up of the euro, or unlimited money-printing support from the European Central Bank (ECB), which will essentially be paid for by Germany.

Which brings us to last week’s most shocking bond-market news. Germany, the euro zone’s cornerstone of economic and financial stability, had a failed bond auction. Last Wednesday it tried to sell $6 billion of its ten-year government bonds, but investors only bought $3.64 billion worth. This means that Germany (!) is now responsible for the euro zone’s biggest failed bond auction since the euro-zone crisis began. While the main reason for the failure was that Germany misjudged the market and tried to sell at a rate that was too low, the steadfast Germans had to have been taken aback when they saw their issue fail that badly, especially at a time of European crisis when they are supposed to be the safe-haven currency.)

That was a curve ball no one was expecting. It now seems that investors have changed their fundamental crisis question from “Will Germany support the euro-zone’s over-leveraged countries”  to “Can Germany, with a GDP of roughly $3.5 trillion, backstop the debts of the rest of the euro zone, with a combined GDP of $9 trillion?” To put the implications of Germany’s failed bond auction another way, if investors don’t have an unlimited appetite for German debt on its own, will they buy Italian/Spanish/Irish/Portuguese/Greek/ Belgian/Austrian or French debt even if it is backed by Germany? 
                                           
On the other end of the spectrum, five-year Government of Canada (GoC) bond yields finished last week where they started, at 1.39%. Mortgage lender gross spreads are still well above 200 basis points, and while it’s true that their costs have increased lately, there is still plenty of room for them to discount five-year fixed-mortgage rates while still maintaining healthy margins. Somebody just has to be the first to blink.

Meanwhile, variable-rate mortgage discounts shrank again last week and it looks like any discount off prime will soon be hard to find. If you’re thinking about a variable-rate mortgage pre-approval, best to grab prime minus .15% (or better) while you still can. 
 
The bottom line: If you’re a cautious investor there are fewer and fewer safe havens where you can park your money these days. GoC bonds are among the best options available anywhere, and that has driven our bond yields, along with the mortgage rates that are tied to them, to record low levels. Expect that trend to continue until the global economic weather improves – and by the looks of things, that will be later rather than sooner.   

David Larock is an independent full-time mortgage planner and industry insider. Visit his blog for many more interesting articles and some great mortgage advice.

I’ve been thinking about this topic because while I love seeing the holiday displays, I’m also an energy miser and have a bit of a problem with all that electricity being used.  I think there are some compromises we can make and I’m really interested to hear other people’s thoughts on this topic.

First, it now goes without saying that getting rid of the old traditional Christmas lights is long over-due.  LED lights use 90% less energy. 
 
Consider using solar powered Christmas lights outside.  I see Canadian Tire offers a fairly large selection of these but reviews are mixed.  If they work, great but if they don’t, they are simply landfill.  Has anyone used them locally?

Use fewer lights.  There is no need to go over the top unless winning a contest is critically important to you for some reason.  I’ve seen some really nice displays using natural materials illuminated by a single flood lamp.  How about a solar powered flood light?

I’d really appreciate your input, comments and ideas on this.

1.  Go buy some metal backed duct-tape and seal all of your exposed duct seams in any unfinished areas such as your attics, garages, basements and crawl spaces.  Add a wrap of ductwork insulation if accessible.

2. Install a programmable thermostat to lower the temperature in your house when you are sleeping or away.  Just one degree can reduce your bill by as much as 3%.

3. Best bang for your buck is air sealing.  Close all your windows and doors and then light a stick of incense and go around to fit air movement.  Window frames, doors, baseboards, ceiling penetrations, wall outlets – they are all culprits.  The biggest single heat loss is usually through an improperly fitted and sealed attic hatch.  Have you checked yours lately?  Install foam gaskets behind all of your outer wall outlets and under your ceiling light fixtures.  Use clear caulking to seal around baseboards and foam larger gaps around toilet stacks and outside holes.

4. Clean your outside vents so they close properly when not in use.  The grease build up on things like a hood fan or laundry vent can cause the flaps to remain open when not in use allowing warm air to escape.

5. Check the temperature oh your hot water heater.  Most installers set it at 140 degrees.  You can safely reduce it to 120 degrees.  While you are at it, install an insulation jacket if it is an electric heater.

6. Make sure your heating vents and cold air returns are open and that air can move in and out freely.

7. Use your curtains to allow passive solar heating to come in during the day through south facing windows and then close them all up at night.

8. Have your furnace serviced, ducts cleaned if necessary and change your air filters every month through the heating season.

9. Run your ceiling fans in reverse to allow accumulated warm air to push down.  This is especially good if you have a fan on a cathedral ceiling.

10. Buy flannel sheets.  Ok, I have no idea if this helps but being a person who hates having cold feet when I got to bed at night, I went and bought a set (40% off of course) and think this may be warmer and cozier than cool, crisp cotton sheets in winter.

Do you have other inexpensive and quick tips to share here?