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!  

Refinancing or Renewing? What is the difference?

The other day I had a client call me looking to renew his existing mortgage that was coming up to it's expiry date.  We started talking about the particulars of his mortgage and the question came up...do you need any extra $$ for debt consolidation?

I explained that now really is the time to do this if he wanted to he would not incur a penalty because the mortgage was already expiring.  He thought for a moment and then said "no" but was curious about the process if he did need cash.

This is when I realized that many people do not think of their mortgage as something they can adjust in the event they need $$. 

Here is the lowdown in Canada right now.  Say you have an existing mortgage that is coming up for renewal.

To be clear, a renewal is when your existing mortgage term is expiring with your bank and you need to do one of three things:

1. Renew with the bank you have your mortgage at by calling and having them roll you over into another term & rate.  
2. Call your local Mortgage Broker to inquire about rates available at other lending institutions.
3. Pay off your mortgage all together

Now of the above three options, most people select option #1 because it is convenient and easy at the time. BUT many times it can cost you BIG $$ in the long term.

Why?

Because banks do not always offer you the best renewal rate when you are rolling over from one term to the next.

If you are not paying attention, they can put you into a term that is too long, or worse, give you a rate that is way higher than what is currently available from other banks.

They know and hope that you DO NOT do your homework to see if they are being competitive. 

This is more common than you know and a serious argument for people to really do their due diligence!

Now with Option #2, this is usually the best way to ensure that you are receiving the best rate and time of term for you.

I know I am biased when it comes to Mortgage Brokers, but really Independent Brokers spend the time to ensure that you don't get into a long mortgage term that requires a penalty to break...AND they ensure that you are getting the best rate available for your specific circumstance.

ALSO, the best part is that the Broker is FREE to you as the new bank pays them when the mortgage funds!  Really a win win situation!

Now with Option #3, unless you have recently won the lottery or have come into some major $$ through an inheritance or other windfall, most people do not have this as an option at all.  But in fairness, it is an option so I had to include it.

Now once you have selected your option of what you would want to do, you need to consider if you need more $$.

This could be for a variety of reasons:

• Pay off debt
• Renovations
• Tuition for school
• Investments in a business or the stock market
• Buy another property

If you choose to refinance (add more to your mortgage) there are a few things that you will have to do regardless of whether you change banks or not.

1. You will need an appraisal to determine the current value of your property (unfortunately, most times the property assessment is not good enough)
2. Lawyer or Notary to re-register the new $$ amount on your property title

Both of the above do cost you a bit of $$, of which you can guesstimate the costs and add it into the refinance amount if necessary (your mortgage Broker can help you with this too).

In the end, a renewal is a simple switch into a new property and is worth the effort to investigate your options.

Don't go to all the trouble of getting the best deal on purchasing a property, finding the best rate once purchased, and then drop the ball 5 years later because it was easy.

Really, if you don't fight for the best use of your money, who will?

Until next blog...

Liz

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