Where’s it all headed?
The text below is very much the script from the 3 parts above. View and/or read as you prefer.
Part 1.
The fact is there’re more questions being created by daily twists and turns in all areas of our lives than there are answers.
What we each do is we try to make the best decision we can with the information at hand at that moment in time. And if we left it at that we’d be fine.
However the human brain cannot help but persecute our decisions of yesterday as new information arrives today.
If you’re in a variable rate mortgage… congrats, you’ve done well thus far along.
Although your brain may now be focusing purely on the rate you could have had, set against the rate it looks like you’re going to wind up with over the coming months.
Keep in mind, rate was only ever part of the decision.
That was the ‘small bet‘, not the big one.
The critical factor in deciding whether to opt into a fixed rate mortgage is understanding that 2/3 people break their mortgage early, and when they do they trigger a penalty that is on average 900% higher than the penalty to break a variable rate mortgage.
Recently a client with a 1.78% 5yr fixed had to break their mortgage, and the penalty amount was just under 8% of the balance. $84,000 on a 1.1M mortgage. Had that individual been variable… the penalty would have been closer to $4,000.00 at the time. Perhaps $6,000 now.
There’s more to a mortgage than rate.
Don’t ask your lender what to do, their answer will be tilted in the shareholders favour, not yours.
Call/Email your Broker.
Discuss prepayment penalty risk.
Ask if you’re able to lock into a shorter term fixed rate, perhaps a 2, 3, or even 4 yr as this will give you greater flexibility along with comfort… perhaps.
I myself, will stay in my variable rate mortgage.
Full disclosure, I’m on a true variable rate mortgage, not an adjustable rate mortgage, so my payment is static during this little ride – thus my blood pressure remains low as well. However my strategy re debt mgmt, cash flow, and investment planning may vary from your own.
Again, call your Broker and talk it out before you do anything at all.
Mortgage world is littered with people who’ve locked into a fixed rate and then just a few months later triggered a massive prepayment-penalty they’d no idea was coming.
It’s a bit like a street hustle really, many of us get staring too hard at the left hand (rate) while the right hand (penalty) is the one fleecing us.
Talk to your Broker, their focus is on you – not on shareholder returns for the lender.
Part 2.
If you’re still tuned, perhaps the question remain; ‘should I lock my variable rate mortgage to a fixed?’ the answer is no… probably. Results will vary though, so speak to an expert.
No not your lender, your lender wants you to lock in.
In fact the person who calls you from a lender to ‘check in with you about locking in’ is often paid a tidy little bonus for every convert they get moving out of variable – why do you think this is?
Because you locking in you mortgage is a guaranteed lock in for the lender of (much) higher profits for the lender.
And if you think about it, you’ll still have a pending renewal date to lay in bed awake worrying about.
Although why are you worrying at all?
You’ve enjoyed ~1.20% for a while, now you’re at ~1.95% which is still pretty amazing (ask your parents) and by the end of this year it certainly seems like you might get all the way to 4% sure… but for how long?
How far up will rates go?
The BOC has actually offered clarity on this.
The BOC upper range of increases is a total 2%, which would take is to Prime @5.25 – minus your discount… with rates more likely to settle out closer to 4.25% or 1.75% – less your discount… based on today’s intel.
Keep in mind that the BOC has been trying to push rates back up into that range since 2008.
To no avail.
The bigger question today is will higher rates fix inflation?
I think not, because of the root causes of inflation today.
No, I’d say higher rates have a strong chance of hammering the brakes hard on the one area of our economy that has been creating unlimited employment opportunities – housing.
Combine this with the opposing force of political pressure to create new housing. Which means stimulating the construction industry… not paralyzing it.
If steadily increasing rates stagnate home building and by extension home sales, then we may beging to hear the R word.
Recession.
And what does a central banker do when an economy slides into recession?
They lower interest rates to stimulate said economy.
Going much higher with interest rates runs the risk of treating the ailment of inflation (caused by neer before seen supply chain issues) with the same old medicine used to fight regular inflation – but this is not normal inflation at all, and it seems unlikely to this laymen that responding with the standard medicine of simply jacking up interest rates will not work.
In other words, what goes up (Prime)… could well come back down.
Yes, in a way I’m still clinging to part of my pre-war predictions from the start of this year.
And so for now, I’ll stay variable.
As much as I believe there’s ‘no way I’m selling my home’… well let’s just say that I’ve been around the block(s) enough times to know that I don’t know what I’m talking about when I say ‘I’m not moving’ – and frankly, neither do you.
The fact is that 2/3 of us will not be in the same mortgage product an average of 33 months from now.
Life is variable, so my mortgage will be too.
Part 3.
Now we get into the weeds of what is happening in the world today.
And so much is happening.
This is where it gets more interesting/confusing/uncertain all at once. Which is not a good state to be living in at all.
We humans, we crave certainty.
One of us craves the certainty of being able to broadcast whatever they want to millions of people so badly that they’ve spent 44B$ purchasing a megaphone. Partly because they were worried someone might take away their megaphone.
Elon buying twitter makes me think of that ultra rich kid in school, the bossy one that always wanted to set the game, the rules, the boundaries etc. He wanted to rule the playground.
But if that kid had bought the playground, would we’ve actually hung around there and played with him? Or would we have been more likely to pick up our toys and go home?
If the rich kid bought the community pool, we’d probably never have gone swimming in it again.
To be honest this seems like a plot dynamic written for a Bond villain given the power and influence we know apps like twitter have over us.
Full disclosure; I signed out of twitter in 2017 and have not returned.
I’m sure my mental health and IQ are the better for it.
My life contains all the outrage I can handle, I don’t need to add more as recreation.
What’s this got to do with Brokering, well hey somebody wrote up the 25B financing package from Morgan Stanley, what’s the Brokers commission on that deal?
Did Elon go Fixed or variable?
Amortized or interest only?
Was there a stress test?
Was there any kind of test?
Person.
Woman.
Man
Camera.
TV.
…
OK – back to interest rates
interest rates are being driven upward due to what?
Inflation.
Inflation is not 6.7% for many CDN’s.
Depending on how you live, inflation may well be much worse.
IE
Gas up 11.8% in a month, up 39.8% in 1 year.
Heating oil up 19.9% in a month, 61% in 1 year.
Food prices carry on upward along with the price of cars, trucks, and furniture if you can find any of these things to buy.
So you forget the new car, keep the old couch, and take a trip…
Restaurants, hotels and air travel, all up.
Services up 4.3% – a 20yr high.
Goods up 9.2% – a 40yr high
OK, all this inflation, it’s linked to what?
Mainly to the supply chain… not so much low rates.
- Money has never been cheaper, but it’s never been tougher to get.
- Once you get the money, there isn’t much available to spend it on.
OK, the supply chain – the issues there are linked to what?
- To 2020 & 2021 shutdown induced issues with labour & materials. Which sounds like old news because it is, it’s old news like the word ‘transitory’ is old news.
- Issues like fuel shortages and increased fuel costs, costs that were already skyrocketing prior to the Ukraine invasion. Also old news.
- New-news… The invasion… Putin’s Ukraine invasion; I wonder if the economic havoc this is being triggered across the globe is Putin’s actual goal, the war itself being a tool to create global economic upheaval. If Russia takes Ukraine, that’s perhaps just seen as a bonus. As of April 30th the saber rattling continues to grow louder.
- Also screwing up the supply chain, our old friend that seems to get less attention than ever, Covid. Because much of the supply of well… everything… flows from China where there remains a zero tolerance approach to Covid, much like March of 2020.
And so what does the Bank Of Canada say in the face of all this?
That they ‘have no interest rate policy, they have an inflation policy’
Yo Tiff, this is neither calming nor helpful.
But I get it you’re not in the calming business these days, and hey, unlike Pierre P. I’ll cut Tiff and the gang some slack, because of two things;
- The BOC bunch, they’re a pretty intelligent crowd. And they’re people who care about the stability of our country via the stability of the economy, they’re not partisan politicians with unrelated agendas.
- Pierre is just riffing for Elon’s approval when he says arguably dumb things like ‘Cryptocurrencies will protect CDN’s from inflation’ – even if it were somehow technically true it still sounds unhelpful… because joe CDN is not setting up a crypto wallet any time soon. Joe CDN still doesn’t have etransfer figured out.
And speaking of Elon just a bit more…
Gas up 40% year over year – Dude’ where’s my Cybertruck?
Stop with self-indulgent bond-villain antics and get back to basics.
I get it, it’s a billionaire baller move of the Mt. Everest sort; ‘I bought it because it was there, and I could’
History is unlikely to look kindly upon many of the billionaires of our time.
The real business move for Elon would’ve been to have been the first mover on an electric half-tonne truck. Every single full size electric truck that sells prior to the launch of the cybertruck is a piece of profit forever lost to Tesla and thus to Elon… 40,000 F150’s and counting out of Ford, another 150,000 next year.
Ouch.
It really would’ve been shooting fish in a barrel, especially as I look at the Ford, the Nissan, and the Toyota car lots – there’s hardly anything to be seen.
But how’s The Bank of Canada jacking rates fixing that supply shortage?
They aren’t.
And so a new Dodge, or GM will sell for $10,000 over list, because why?
It’s in stock.
Windows, garage doors, appliances, will all sell at a premium – not because rates are low – because supply is low.
So on April 13 the rate increase of 0.50% affected who?
Fundamentally very few.
Nobody with a fixed rate mortgage, nobody without a mortgage, nobody with a car loan, boat loan, RV loan, or a credit card balance.
No.
It affected some of the people currently in variable rate mortgages, but not all.
In other words, the rate hike did not impact many folks at all dollar for dollar.
And those who were affected, it wasn’t by much.
But it created uncertainty, and that uncertainty creates stress.
And yes, many clients are learning the different between an Arm Vs VRM
Many clients are discovering an inflated payment stills gets bumped… if they’re in an ARM
Many clients are looking at mortgage commitments issued pre April 13th for a completion date afterwards that don’t reflect the new prime rate which will apply at close.
And thus have a false payment expectation.
A commitment is not a commitment, not really.
And for anyone with a commitment in hand dated April 12th or earlier, who also has a closing date of June 2 or later… there is some math to be done.
Closing after June 1?
Not good for the payment if you are in a VRM, not good in an ARM and not good to not know what the real deal will be.
And so I close this 3 part series with this advice.
Seriously consider staying variable, or going variable if taking a new mortgage.
Have real conversations with your broker about penalties, that’s the bigger bet… and the odds are not in your favour.
DW