January 15th, 2012 | 
Category: The title is a mouth full – eh? I read an article over the weekend about the current low mortgage rates offered by many banks and the comments were most entertaining (more about that in a bit). The title was intriguing: “Why are mortgage rates hitting record lows?“. Who wouldn’t be interested if they have a mortgage. The article simply goes over the new mortgage rate promotions by the banks for a short period of time and how it could be beneficial to refinance your mortgage. I have written a number of posts on refinancing and accelerating your mortgage but the article is not what caught me; the comments caught me!
Banking Propaganda
When you read the comments, it would seem like there is a propaganda but the reality is that the Banks are in it for the money – what business isn’t? Obviously, they will compete with each other and try to get more loans coming their way. As a customer, you are responsible for ensuring YOU get the product that works for you. When it comes to a mortgage, it’s your choice to pick the number YOU want to borrow, not the bank. I don’t remember ever reading in the contract that the bank will decide the amount I should borrow. They tell you what they are comfortable lending you (I’ll agree that the limits are sometimes high) but YOU choose to pick what you can afford. They don’t know what new car you’ll get or what new services you’ll suscribe to 
Ok. I am being sarcastic here but it seems that everyone is ready to blame the banks and the financial system for their inability to manage their finance …
Canada’s Laws aren’t the same as U.S. Laws
I am not too familiar with the U.S. laws around mortgages and home ownership but in Canada, you just can’t walk into a bank and give the keys back. First of all, if you have problems with making the payments, the bank will work with you to see how they can help. First thing they will probably do is extend your amortization to see if it helps since it will reduce the payments. Next, they’ll work with you and look at all your assets. Everything is fair game since you signed the papers – your RRSPs, TFSAs and so forth. Remember that banks aren’t in the real estate business so it’s in their best interest to have you make the payments. Even if a bubble was to burst, don’t expect to see many walk into a bank and return the keys as we saw happened in the U.S. during the financial crisis. These individuals would have to declare bankruptcy and that means you are really broke as opposed to having a house valued under your mortgage.
Real Estate Bubble ?
The low interest rates obviously got many buyers looking and buying but is it the banks that are guilty? Remember, they are in the business of making money and mortgage rates are tied to bond rates. As long as bond rates will be low, so will the rates. I won’t go into the sub-prime fiasco here as I don’t think one can use that as an excuse for taking a mortgage larger than they should. At which point in life do you stop being accountable for your decisions?
As far as I can remember, the bubble started 7 years ago in the Vancouver area – that’s when I started hearing it anyways. It’s got to be massive by now Every time someone can’t afford to buy anymore, it would appear we are in a bubble. It’s worth noting that newspapers sensationalize the value of housing in Vancouver. An average house in Vancouver is greater than $800K, but all you got to do is drive 30 minutes away and you have one for $500K. Those are houses; apartments and condos can be lower. The Greater Vancouver Area is quite large and you can find an affordable place if you really look, but you won’t be living in the swanky area. As a homebuyer, you need to plan a down payment though. Seriously, consumers have to really question their buying habits if they want to buy everything with no down – homes, cars, furnitures, … Enjoy today and pay tomorrow isn’t a sustainable model. It’s the model business offer you though.
I am not saying there isn’t a bubble, more so in some areas, but I am not sure if an interest rate increase will burst the supposed bubbles we are in. Most people have 5 year terms, and if you assume an average 3 year term, it would take 3 years for the pain to really surface. I think job losses are more concerning than the interest rates when it comes to housing prices but that’s just me. I expect the housing prices to flatten and correct themselves within a 10% range over the next couple of years.
Got it off my chest!
I took the opportunity to rant a little here after reading the comments. At the end of the day, YOU are responsible for your actions. YOU choose how much YOU save and how much YOU spend. Try to live within your means and understand the life style your finances can really offer. If you do that, it won’t matter what the interest rates are.
Readers: Are the interest rates a concern to you? What actions do you take to avoid being in trouble?
Off YOUR chest indeed
Good stuff, totally agree with you man.
Mark
My Own Advisor recently posted..My Favourite Takeaways – MoneySense Guide to the Perfect Portfolio – Part 1
I couldn’t agree more. We have to remind ourselves that at the end of the day we are/were the one making the calls.
Simple Rich Living recently posted..Family Finance Interdependence
Great post! I’m sick of hearing people complain about the banks. People need to look in the mirror. – I also have an unrelated question for you – I am just wondering what you do with the income you generate from this website? Do you use this money to invest? Are you like the FinancialBlogger and try to purchase other blogs? How do you spend it?
@Shawn
Thanks for the comment. With the *little* money I make, I invest it in my DRIP account through computershare and CIBC Mellon. I don’t buy web sites and I don’t have much extra time for an online business. Not that I would not want to but my day job keeps me on my toes along with my kids. However, I do have a couple of extra ventures that I am trying to get going in parallel with my blog.
I am sorry to say it, but you either work in the financial sector or closely related to it.
You would not agree with the such statements about… health care, or cars? If somebody would say to you – YOU are responsible to select the right doctor, surgeon, anesthesiologist, etc..
YOU are responsible no know your car in each and every small details, YOU are responsible to select right air company, etc…
No, somehow, when buying a ticket you expecting it to be intuitive and to get from point a to point b. Same should be the financial industry.
All they are trying to do is to transfer responsibility, for what they have been over paid already.
Financial Independence recently posted..Is real estate (property) worth investing as rental income?
@Financial Independence
Thanks for your comments – I appreciate all perspectives and discussions. I knew I was a little controversial here and for the record: I am no where near the financial industry. My point was about not blaming others for decisions that you make with your money. If you buy a place that you really can’t afford but you stretch yourself, it’s not someone else’s fault for it – even if the bank loaned you the money. It was your decision. There are loads of information out there to help assess what size house one can afford. Everyone is responsible to seek out information.
Bad luck happens though so not every situations is the same but generally speaking, if you decide on the spending, you should be comfortable with the movements of interest rates. Echo @ Boomer & Echo just had a similar comment around bank fees: http://www.boomerandecho.com/why-you-should-own-bank-and-utility-stocks/. We, as individual, have some controls over our decisions with money.
As for houses and cars and such … I agree with you. We cannot be specialist in all areas but when it comes to making a decision about what we can afford or not, I don’t believe as adult that we can blame others. My point is that if people spend according to their budgets, bubbles or no bubbles would not matter. The same goes for interest rates. There comes a point where personal money management cannot be the fault of credit cards or other financial institutions. Do we have to regulate everything to ensure no one makes a faux pas?
I’ll ask this question: is it the fault of the credit card companies that many have credit card debts? or is it the government for not regulating it more? or is it the lack of money management individuals have that causes it? Again, there are exceptions and people losing their jobs but many carry credit card debts – why? I’ll even ask why people have more than one or two credit cards? I changed cards every now and again to make use of different benefits but as soon as I change, I cut the other one and close the account. I know I may open a can of worms here but if you take unfortunate circumstances out, why do people have credit card debts?
One disclaimer to future comments is that I am not familiar with the U.S. banking at all. My comments are strictly about Canadian banking and finances.
@The Passive Income Earner
Many thanks for your clarifications and time. I agree with your point completely. Some people spend the money they do not have on the things they do not need.
I have no sympathy at all to most of the credit card debt holders, however I can say that it is not easy to understand terms & conditions of most of the financial products I have touched so far.
Financial Independence recently posted..Is real estate (property) worth investing as rental income?