Mother Needs Mortgage Advice - ASAP

[Spenny]

Hi there,



I don't know much about Real Estate but my mother asked me for advice today.

She has about a 60k Scotia Bank mortgage at 2.64% that needs to be renewed in June 2012.



They called her today and, for the next 2 days only, offered her a deal to renew it now for either:

3 years at 2.89%

or

4 years at 2.99%

or

she can wait until June 2012 to see what they rates will be



What should I advise her to do? Why are they offering this out of the blue?



She doesn't have a lot of disposable income, so cannot afford to pay at a much higher rate than she is at now..



Please any info would be greatly appreciated.



If you need any more info to make an informed analysis please ask, but I have to give her an answer by tomorrow.



Thank you very much if you can help her

 

[Sherilynn]

Usually banks mail a renewal notice about 3 - 4 months before, and sometimes calls as well. So if her renewal is June 1st, then it isn't really that early.



She is under no obligation to renew early. However, the bank may guarantee the offered rate, so if the rate does go down, she would get the lower rate.



And if payment size is an issue, she could extend her amortization. That could in fact lower her payments. The trick with that is to make extra payments whenever possible.



For instance, we took a 30 year amortization on our personal mortgage but then we signed up for automatic match-a-payment. We are paying it off at a highly accelerated rate but our official payment is very small so our debt coverage ratio is awesome. And we can cancel the extra payments whenever we like.

 

[Spenny]

Many thanks Sherilyn, that is very helpful to me.



I'm still not sure what to do though. Do you recommend locking in for a several years at this point? Since rates are expected to increase down the road?



Can you or anyone please comment if those rates look reasonable?



Rates shouldn't rise by June 2012 should they? Is it safe to wait?



Kind regards

 

[JimWhitelaw]

Banks offer early renewals in an effort to retain customers. They rarely put their best rates in those offers. In this case the rates quoted seem reasonable. Compare for yourself here:



http://www.redflagdeals.com/features/canadian-mortgage-gic-rrsp-savings-rate-comparison/

 

[Thomas Beyer]

[quote user=Spenny]3 years at 2.89%

or

4 years at 2.99%


Those are great rates. Take them IF

a) she doesn't wish to increase the mortgage

b) she intends to stay in that place for 3 or 4 years at least

c) she is happy with the bank thus far



She should decide on the amortization: keep it short, or extend it up to 30 years.



The bigger question is: for such a small loan a mortgage might be the wrong product. A line-of-credit, say to 75 or even 80% of the property value might be the better product. She can then pay the mortgage out and have room for other expenditures. However, it will be more expensive such as prime + 1/2 or 1%, i.e. 3.5 to 4%, but more flexible, as you can draw on it, or pay interest only, or do nothing for a few months and let the interest accumulate.

 

[Spenny]

Thanks for this Jim.

 

[Spenny]

Thanks for this Thomas, this is great advice.



I like your creative idea about the LOC. However I'm afraid that she can only pay 15% off the mortgage per year (not sure on this though).

 

[Thomas Beyer]

A LOC is more flexible, but also slightly more costly. But at 4% for $60,000 that is only $2400 a year or $200 a month, lower than any mortgage payment, as a mortgage must be paid down. If you have a 3% mortgage with a 25 year amortization you pay roughly $284 a month, or with 20 years $332 a month.



Calculate other options here: https://www.rbcroyalbank.com/cgi-bin/mortgage/mpc/start.cgi



This article here might be of interst to your mother:



http://www.vancouversun.com/news/pensions/savings+Home+equity+good+Plan/6018590/story.html

 

[Spenny]

Thanks for this.



But is a getting this type of LOC any use at this point if she can only pay down 15% on her mortgage annually? My brain isn't working well enough to figure this out.

 

[moparcanuck]

One comment that sticks in my mind. She is paying 2.64% and due to her limited income can not afford to pay a whole lot more than this? 2.64% is incredibly low, and rates can't stay there forever. We don't have all the details (like how long is left on the amortization, what the house is worth overall, etc). She'll be able to get a good fixed rate now, but is there any thought about what she'll do when the mortgage comes up for renewal in 3 or 4 years and rates are maybe 5 or 6%?

 

[Spenny]

Thank you Moparcanuck, that is a very important issue. One step at a time I guess!



FYI I guess this is the deal she was offered:

http://www.scotiabank.com/ca/en/0,,216,00.html



I think I am going to advise to lock in the 4 year rate.. any thoughts? Looks like a reasonable deal. I expect rates to be higher in 3 years.

 

[Spenny]

Also if anyone can chime in, I am wondering what questions I should be asking when considering:



1) If she should accept the payment option of prepaying up to 15% of the original principal amount



2) If she should accept the payment option of increasing her payments by up to 15% of the payment set



Admittedly I'm really bad at this, still quite young though!



Many many thanks

 

[Spenny]

More specifically perhaps, is there an argument that she should try to do either 1) or 2) to pay down as much as possible now, in expectation of higher rates after the 4 year term is up?

 

[invst4profit]

Couple of simple questions that have not yet been asked but may be relevant is how old is your mother and how is her health.



Her decisions may be impacted by how long term she needs to plan.

As a example my father is 85 and his health is only so so. As a result he does not make long term plans or financial commitments.

 

[BDFI]

Hello,



2.99% for the next 4 years is an extremely good rate (I am locking in two of my mortgages at the same rate on Monday). Yes, chances are the rates will be higher than 2.99% in 4 years. If money is tight she should lock in for as long as she can at a low rate and make preparations to deal with a higher rate in 4 years. Realistically if money is that tight paying down $60K in debt in 4 years is not achievable but positioning herself to deal with the higher payments is. She has four years to increase her income, decrease any other debt she may have, reduce the mortgage as much as she can, save some money to top up her payment, ect. She can wait until June to see what the rates will be but I am not sure how much lower than 2.99% they will go.



Good luck,

Bart

 

[Spenny]

[quote user=invst4profit]Couple of simple questions that have not yet been asked but may be relevant is how old is your mother and how is her health.



Her decisions may be impacted by how long term she needs to plan.

As a example my father is 85 and his health is only so so. As a result he does not make long term plans or financial commitments.




Thanks for this thought, although she is a healthy 65 year old lady. So it seems she's in the clear.

 

[Spenny]

Hi Bart, thanks for your very reassuring message. I think I'm on the same page now.



Cheers!

 

[tsb]

Hi Spenny,



I question the whole "You have only two days left so act now!" thing. We are in the process of resigning for a mortgage with Scotia and are going with the 2.99% four year. There are better deals out there but the service we have gotten from them has been exceptional and we want to stay put. I called today to confirm that the rate deal was disappearing and my advisor could find no evidence of that.



From what I have heard and from my own experience Scotia's service is fantastic if you know your advisor face to face and pretty questionable if you are a piece of data in the system. I would call the bank to confirm the rush on resigning if you feel uncomfortable. At the very least they should be willing to lock the rate for her personally for a few days to make a decision. Remember, they are doing you no favours. You pay them well for their money, even at a low rate.



I would also like to restate an earlier comment. If your mother's situation is so tight that a raise in rates would put her in financial trouble the time to think about that is now. As soon as you have solved this situation I invite you to consider helping her make a plan for four years from now.

Good luck.

Sean

 

[RobMacdonald]

From what I understand is that the bank's still have lots of room in the spreads at the current rate levels. I think we may just be seeing the start of a rate war for the spring market.



Scotia is offering those rates on a 60 day rate guarantee, so I would also question the 'for 2 days only' message. If Scotia is scrambling to lock in their clients at 2.99% for 4 years, doesn't that possible have an underlying message to it?

 

[tsb]

[quote user=RobMacdonald]

If Scotia is scrambling to lock in their clients at 2.99% for 4 years, doesn't that possible have an underlying message to it?




What? That they know the rates are going down and they want to lock people in at a higher rate?



I just can't believe that!



S