Rate Hikes: Not If, But When...(but also if)

One headline suggests interest rates are bound to rise soon, the next suggests they may drop to new lows, and a third suggests no changes anytime soon. This has been the case since rates dropped to 50-year record lows in 2009.

Many were adamant that rates could go no lower at that point, and yet they have, with a few short-lived blips upward, in defiance of all who are calling for a return to normal... whatever normal is now.

Keep in mind that a key driver of interest rates is the economy in general. What drives interest rates down? Economic bad news. What will drive rates up? Economic good news.

Economic good news seems in short supply since 2008.

Interest rates are a very large economic lever, far too large to be used simply to cool the arguably overheated real estate markets of two particular cities (Vancouver and Toronto). Cooling of real estate is addressed not through interest rate hikes, but through policy changes. Most commentators forget that only a few short years ago there existed a 40-year amortization, 100% financing not just for owner-occupied but for investment properties, and variable-rate mortgage qualification based on the three-year fixed discounted rate.

All of those things are gone or changed radically, and reality is that borrowers in 2008 – at nearly double the current interest rates – qualified for larger, and arguably riskier, mortgages than borrowers do today.

Interest rates will not be adjusted based on the detached home frenzy of Toronto and Vancouver. Lending guidelines have already been adjusted accordingly.

Nor is it valid to argue that rates have been so low for so long. How long they remain low is a function of inflationary and deflationary forces in the general economy.

The sign on the streets? Watch for a bunch of our peers spending money like those proverbial sailors on shore leave that we mentioned last month. A brand-new truck in each of your neighbours' driveways, each unloading brand new 80" flatscreeen TV’s... that is what will give the economy a strong boost and shift inflationary numbers into the 'exceeding expectations' category.

Until that time the steady stream of lackluster economic news is likely to serve mortgage holders well. The big beneficiaries will be those in fixed rates approaching renewal dates over the next 12 - 18 months, and those enjoying the ride in their variable rate mortgages.

Be sure to start the renewal conversation with me six months out from the mortgage renewal date. Your current lender may suggest that rates are about to move and locking into something early is the right move, but always consult with me first to determine if the move being suggested is right for the lender, or right for you.

Happy summer!

Liz 

(604) 290-4835

Liz@LizReid-Mortgages.ca

Prime Rate Reduction...What Does This All Mean?

Shock & Awe! 

Yesterday turned out to be a pretty spectacular day for many reasons in the financial world for Canada! I hope you enjoy the read – I've tried to ensure that it is not too technical, but if you have any questions on what is outlined below, I’ll be happy to break it down further!

In a stunning announcement yesterday, the Bank of Canada (BOC) issued a statement that they were cutting their Key Interest rate by 1/4 point - down from 1.00% to 0.75%. This is the first change to the overnight rate since Sept 2010, and a decision that none of the 22 economists in a Bloomberg News survey predicted. 

Note: I was planning on sending this update out immediately after the announcement yesterday, but I wanted to wait to hear if the chartered banks (RBC, BMO, TD, etc) would be following suit in cutting their consumer Prime Rate down accordingly by 1/4 point, to 2.75% (from it’s current level of 3.00%); however there has been very little in the way of updates that this will happen. In fact, there is speculation in the opposite direction that banks may not pass along the rate cut to consumers, thus pocketing the difference for themselves. A tweet from Rate Spy suggested: “Just got official word (direct from TD) that it is not changing it’s prime rate 'at this time’.” -https://twitter.com/RateSpy/status/558298960629366784 

Obviously there are a lot of factors that would go into a decision like that from the banks, but as is the nature of a free market all we would need is one lender to make the call to adjust their consumer Prime Rate downwards, and it’s likely that the rest would follow suit - and thus mortgage rate wars could ensue. 

An interesting point to note for those of you that remember, is that if the banks choose not to pass on this rate cut to consumers, it wouldn't be the first time. The spread between consumer prime rate and the overnight rate was 175 bps (1.75%) back in November 2008, but then grew to 200 bps in December 2008 when banks chose not to pass on a rate cut then. So if they do it again this time, the spread would grow to 225 bps. 

If the banks do choose to pass the rate cut on to consumers, then that would be good news for those of you holding a variable rate mortgage or LOC product as you will see your rate drop - and thus your payment to follow suit as well. Less interest costs would mean it continues to be a great time to pay down your mortgage faster! I would suggest you keep your payments at the same level and enjoy the additional benefits of becoming mortgage free faster! 

It’s tough to predict what the future may bring, because as you all know from reading my updates in the past – 2015 was supposed to be a year that the BOC started to increase the overnight rate, not cut it. But interestingly now, Bloomberg financial markets are now pricing in a 100% change of another rate cut by April. "Source: https://twitter.com/RateSpy/status/557929467151400962 "

There could be a downside to all of this of course. It’s very likely that banks would reduce the spread on their variable rate mortgage discounts. That means that we could potentially see variable rate mortgages reduce from their current level of Prime -.60% (the current average variable mortgage discount). The last time we had a big drop in prime rate, we did see the spreads on mortgage rates change from as low as Prime -.90%, to Prime +.60% within a few short months. It’s all very early on at this point, but there is a very real possibility of this as it would be harder for banks to hit their profit margins. So if you have any interest in securing a variable rate mortgage, it would be a good time to discuss this.

Lastly - one of the most interesting things to happen yesterday, is that it was completely overshadowed by the news of the BOC rate cut, but the Canada 5-year government bond yield dropped below 1.00% for the first time ever in history. At it’s lowest point during the day, it hit 0.799%! Bonds are what our fixed rate mortgages are priced off of, and if these continue to drop (or even stay at the deflated levels they are at) then we can expect further rate drops on the 5-year fixed mortgage rates. Currently the lowest unencumbered 5-year fixed is 2.89%, but it’s worth watching what the next few weeks bring - as I could see this dropping lower should things continue on the path we are on. 

So is it time to start talking about locking in, or is it time to start looking at going variable? I would love the opportunity to discuss this further with any of you!

Some great articles to read on what happened yesterday, and what to expect moving forward:

#1)  Canadian Mortgage Trends 

#2) Rate Spy

As always, I am available at anytime to discuss, plan, help, and listen to your questions, concerns, and feedback. And please forward any of my blogs to anyone who you know would be interested in receiving it, because your referrals of friends, family, and co-workers are the life blood of my business!  

Sexy, Smart Mortgage Advice

Bet you never thought the words "smart", "sexy" and "mortgages" would ever be used in the same article, but in my blog I am going for it :-).

Every day I converse with people regarding their mortgages and whenever I bring up the subject of extra payments most people's eyes glaze over.

As a Mortgage Professional I see how people "manage" their $$ and it is not always a pretty picture.  So many people have been there...credit cards are building up because they are paid at their minimum and then a new car is bought...YIKES!  Not the best way to get ahead.

Smart, sexy money advice to you is live within your means and try to pay off your larger debt purchases (like a mortgage) faster!  

"How" you may ask?

It is easier than you think, but it does take some work.  Nothing good comes for free.

Start with an accurate household budget. Mint is a great way to start a budget with help and be realistic and include such things as "entertainment" and "coffee/snacks", etc.

Now, look at where you could possibly save $$ by cutting back.  Do you really need a designer coffee everyday...could you instead just buy a regular brew or better yet, make it at home?  

With this new "found money" you can apply it to your mortgage in a way that will save you hundreds, if not thousands of $$ over the length of your term. 

Also, consider another income source that you may have but not factored in, such as your yearly bonus or tax return $$ as a way to come up with the extra payment.  It is well worth it as shown below...

Here is an example based on a mortgage amount of $300,000 & a monthly mortgage payment $1,426.56* (*based on a 5 year fixed mortgage rate of 4.00% & a 30 year amortization).

• Total interest paid in 5 years = $56,791.31
• Total principal paid in 5 years = $28,802.29
• Balance at maturity of mortgage rate = $271,197.71

Here is the switch, for starters, consider taking a bi-weekly payment instead of a monthly payment.  It is slightly more $$ commitment to be paid, but once you get used to the payment it is easy.  Now the money savings starts...


Comparing the above mortgage amount of $300,000 & an accelerated bi-weekly mortgage payment of $713.28* - which would have you automatically make 2 extra payments/year...BONUS! (*based on a 5 year fixed mortgage rate of 4.00% & a 30 year amortization)

• Total interest paid in 5 years = $55,958.05 (difference of $833.26)
  
• Total principal paid in 5 years = $36,768.35 (difference of $7,966.06)
  
• Balance at maturity of mortgage rate - $263,231.65 (difference of $7,966.06)
• Reducing your mortgage amortization to 25 years and 9 months from 30 years!
  

Where the numbers really get interesting is when you add an extra payment of $100/month or $1,200/year, every year, to your regular payment.  The savings is not immediate but in the long term scheme of things it is HUGE. 

Over the 30 year amortization of the mortgage with just making those $1,200/year payments in the first 5 years, you would save an additional $7,164.30 in interest AND would reduce your mortgage to 20 years and 4 months!  Pretty interesting stuff.   

This is how people pay off their mortgage faster and save $$ in the process.  


The only down side (if you even want to call it that) is that during the original 5 year mortgage term, the extra payments cannot be used as a "emergency" payment if needed.  That extra payment money is applied directly to your principal and the benefit comes after the first 5 year term is up.  This is when the bank calculates your new mortgage payment (with new interest rate) for the new term, on the lower principal mortgage amount.  This lower mortgage $$ needed will keep your new payment down because as rates rise (which we all know they will) things should still be affordable for you to make ends meet.  

Food for thought and certainly smart money management!

Remember, as old Ben Franklin says..."If you want to know the value of money, try to borrow some".



Liz