Perspective - Crisis or Opportunity?

Low mortgage rates

You may get tired of hearing it, but now more so than ever before is a time to have perspective. Every day we hear people complain that they have lost so much in their stock portfolio or their house value and every time I say "Did you sell your house?" and the answer is always 'No' - 'Well then you haven't lost anything!'

Remember, you only gain or lose on an investment when you sell it. Between the time you buy and the time you sell, the value is quite irrelevant unless you are trying to refinance. If you are buying, then this is a great time. Vendors are motivated, prices are down, cash flow is up and rates are dropping.

Benjamin Tal was quoted last weekend as saying that he expects the markets to recover in early 2010 and when we look back at this time period many will be regretting that they didn't buy. Are you going to spend the next few months focusing on the crisis or the opportunity?
What mortgage product is best in today's market?
Given the current economic turmoil and a downward trend in the market - what is the best mortgage product to choose? The Bank of Canada lowered the overnight rate by 0.75%, followed by a 0.50% cut in Prime by the chartered banks. Wouldn't that mean it would make sense to go with a variable rate mortgage today? That is exactly what most people think however there is one thing you need to keep in mind.

Given the increased cost of borrowing between banks and the lack of liquidity, banks have increased the cost of taking a variable rate mortgage (VRM). Whereas you could have gotten a VRM at Prime - 1% a year ago, today you're paying Prime plus 1%. If you take a VRM today, you'll be locked into a 5-year rate at Prime plus 1% - so even though Prime may be dropping, you will be paying more.
If predictions hold true, the cost of borrowing amongst banks will lessen with increased liquidity in the markets. We've already seen TD Bank soften their VRM with Prime plus 0.6%.
I predict that we will be back to Prime or Prime plus 0.25% within the next year. It seems that the days of Prime minus 0.90% are gone forever, but we may see Prime minus 0.25% again, and if so, you wouldn't want to be locked into a 5-year term at Prime plus 1%.
So what product should YOU choose?
The best product to choose in a market like this is a 12-month convertible mortgage. Firstline is currently offering this product. This is a 1-year mortgage that acts like an open mortgage. The 12-month rate is 4.49% (as of today's writing) which makes it comparable to a Prime plus 1% product but the benefit is you can convert it to a VRM product if and when the discounts on variables return.

Alternatively, if the long-term rates continue to drop (which they are expected to do) the 12-month convertible can be converted to any term that is 3 years or greater at no cost. The key point is that there is no penalty or cost for converting out of this product into another Firstline product.
In my opinion, this product is by far your best bet in today's market. However, if you decide you are more comfortable locking in for the long term, consider going beyond simply taking the 5-year term. Have you ever wondered why Canadians always choose 5-year terms?

Did you know that there is no logical reason for it? In fact, if you were a betting person you'd choose a 4 or 8-year term so that it renews in the year of a US Presidential election - no guarantee, but it may increase your odds that you'll be renewing your mortgage in an environment of lower rates.

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