what kind of mortgage to get??

[Fat Tone]

There's not much I can add to this that hasn't already been said, except to say watch out for the hidden costs:

First there's all the setup costs - arrangement fees, insurances etc, then there's the cost of getting out of any deals. I've had to buy myself out of fixed term mortgages twice (one for moving house, once because the rates fell so quickly it was better to take the hit).

Oh, and a lot of them say "we'll just add that on to the mortgage for you"...

[GNEP]

The US mortgage market is different to that in Canada due to the presence of Freddie Mac and Fannie Mae. So don't base advice on what is available locally unless you are also in Canada.

And I'm also surprised no-one has talked about forward curves yet (yes Umf I mean you).

Also Umf makes a v. good point - for us foreigners can you let us know what the tax position on interest costs is?

[Umfriend]

GNEP, old fart!

I happen not to believe in the pure expectations theory, or at least not that they predict well (which is different but for this case results in the same). Fact of the matter is *IMO*, that any long term interest product has an exposure to the general economy and I therefore believe it incorrect to say that 10 yr govvies have a beta of zero. As a consequence of this, I believe long term rates include a non-diversifiable risk-premium (i.e. Beta > 0) and therefore are always higher than (after discounting/compounding and the works) actually expected short term interest rates. I also believe liquidity preference is an explanatory factor of the shape of the yield curve.

So, GNEP, although forward curves are exteremely important when actually hedging out positions (as they give you the price you pay *today* for a cashflow in the future), that is not at all the issue here, is it? The guy is swapping the yiueld on a house against the yield on a mortgage. The question is, what is the lowest yield on a mortgage he can pay, without to much risk etc.

IMO, short is the way to go normally because of the above. Of course, because of limited capital budgetting issues, liquidity remaines a constraint that need to be taken into account. That is why I included saying that having cash or income in excess of what you need to pay a higher rate is sorta a requirement to survive spikes.

But I'm still not sure. Tax position and prepayment penalties/options need to be taken in account as well.
I am sure this has helped him a lot.

[GNEP]

That's a better explanation Oh the memories...

[Umfriend]

Yeah, I remember getting furious with this guy who claimed the best proxy for the "risk-free rate" was the 10-yr govvies (as opposed to the shortest gov available, which I favoured). He got this out of a book by a partner of Mckenzie or sumting. I never liked Mckenzie before nor since

[GNEP]

I've been working with McKinsey consultants rather too much for my liking recently... gave up all hope when I had to teach one of these supposed "hotshots" that (1+x).(1+y) wasn't equal to (1 + x + y)

[Umfriend]

I had to explain once to a big shot accountant of E&Y that to get the discount factor for 2 months money is NOT obtained by discounting from t=2 to t=1 using the 2-month rate and then from t=1 to t=0 by using the 1-month rate.

He was sure it had to be, as for 2 year zero rates, you also had to use the 2 AND 1 year cash rates someway...

[Umfriend]

Meanwhile, we;re darn helpful to tjalfe....

Any other questions mate?

[GNEP]

[Tjalfe]

hmm.. I talked to the bank person.. seems that the variable with a cap is at prime, which currently is 4% and caps at 5.75%

prime for the last 5 years has been as follows:
I guess I should just get the fixed for now ( will make my girlfriend happy too ) and sign for 5 years at 4.85%

Thanks so much for your input


31 Oct 1999 6.25
30 Nov 1999 6.50
31 Dec 1999 6.50
31 Jan 2000 6.50
29 Feb 2000 6.75
31 Mar 2000 7.00
30 Apr 2000 7.00
31 May 2000 7.50
30 Jun 2000 7.50
31 Jul 2000 7.50
31 Aug 2000 7.50
30 Sep 2000 7.50
31 Oct 2000 7.50
30 Nov 2000 7.50
31 Dec 2000 7.50
31 Jan 2001 7.25
28 Feb 2001 7.25
31 Mar 2001 6.75
30 Apr 2001 6.50
31 May 2001 6.25
30 Jun 2001 6.25
31 Jul 2001 6.00
31 Aug 2001 5.75
30 Sep 2001 5.25
31 Oct 2001 4.50
30 Nov 2001 4.00
31 Dec 2001 4.00
31 Jan 2002 3.75
28 Feb 2002 3.75
31 Mar 2002 3.75
30 Apr 2002 4.00
31 May 2002 4.00
30 Jun 2002 4.25
31 Jul 2002 4.50
31 Aug 2002 4.50
30 Sep 2002 4.50
31 Oct 2002 4.50
30 Nov 2002 4.50
31 Dec 2002 4.50
31 Jan 2003 4.50
28 Feb 2003 4.50
31 Mar 2003 4.75
30 Apr 2003 5.00
31 May 2003 5.00
30 Jun 2003 5.00
31 Jul 2003 4.75
31 Aug 2003 4.75
30 Sep 2003 4.50
31 Oct 2003 4.50
30 Nov 2003 4.50
31 Dec 2003 4.50
31 Jan 2004 4.25
29 Feb 2004 4.25
31 Mar 2004 4.00
30 Apr 2004 3.75
31 May 2004 3.75
30 Jun 2004 3.75
31 Jul 2004 3.75
31 Aug 2004 3.75
30 Sep 2004 4.00

[Paddy]

Mine is variable rate for 35years and discounted for the first three. I chose a variable rate over a fixed rate because I want the option to switch mortgages w/o paying any penalties. And to be honest.. all mortgages are bad... just make sure you get one you can afford!

[Fat Tone]

Originally posted by Paddy
.. all mortgages are bad...

I suppose you could live like a church mouse for 10 years and save up a 100% deposit Or inherit by some means

[Paddy]

That's an evil smiley I wouldn't want to be your rich relative... hey wait a min, I would!

[Umfriend]

I don't see why the 5 yr. Look at the diff between 1 yr and 5 yr -> over 1.5%
If you are keen on avoiding risk, the 10 year is at a spread of less than1% to the 5 year rate. IMO, it's on eway or the other.

You might even take out a 10 year and 1 year part, the 1 year part to the amount you expect to pay off early in 5 or 10 years.

Of course, fiscalities, prepayment options/penalties etc are not taken into account yet as I still don;t know how that works in Canada (For instance, with us, if you prepay you pay a penalty in case rates have declined to make up for the loss of income. Exception: 10% or 20% of loan amount penalty free per annum (it could be gone in 5 years) and, if you move and sell the house, you may redeem the whole loan penalty free)