Variable will be the winner for the next few years. The Bank of Canada said on October 19th that mortgage interest rates will remain steady. This came as no surprise. The language used in the announcement that followed the decision may have surprised some who have been following the consistent increases in North American equities markets. The Bank of Canada reduced its growth predictions for 2012 downward, prompting us to conclude that they see something on the horizon that will limit Canadian GDP.
The Bank recognizes that the eventual reduction in stimulus pumped into the United States will have a significant impact on the Canadian economy. During this period of economic instability, the United States government is bolstering its economy with enormous sums of money. Some of this money is entering the economy in highly visible ways, such as mortgage buyback plans, cash for clunkers, job-creation initiatives, and infrastructure spending. The remainder is entering the economy in a more covert manner, via Federal Reserve purchases of debt and equities markets. Surely, some change will come once these plans are relaxed, or as the Federal Reserve would have us believe, “when quantitative easing is reduced.
What is the purpose of a financial exercise when you planning to break your mortgage?
The purpose of this financial exercise is to keep the US economy afloat long enough for it to regain its independence. What we should be worried about is what happens if it isn’t yet ready to walk.
The Bank of Canada‘s downward revision is yet another illustration of how our foresighted Governor Mark Carney is effectively navigating us through this period of uncertainty. Having said that, we anticipate very few hikes in the Bank of Canada’s overnight rate over the next 24 to 36 months. This is an excellent time to keep your variable rate mortgage and benefit from large savings over comparable fixed rate mortgages.
Bond yields continue to fall as investors seek risk-free returns; these yield decreases are being reflected in the Canadian market, with fixed rates as low as 3.25% on a 5-year term. Some may see this as an amazing opportunity to lock in, while others see it as additional indication of our economy’s fragility.
Congratulations to those of you who have renegotiated into a variable rate or low fixed rate product in the last 6 months; you made the right decision, and the proof is most definitely in the pudding that you were able to buy with all of your savings (unless you simply used it to pay down your mortgage faster). If you are thinking about breaking your mortgage, please contact a reputable broker.
Mortgages are far too valuable to entrust to your bank; remember, banks are in business to make money, not to make you happy. Branch managers and workers, like any other salesperson, have monthly targets and revenue goals to meet. They will constantly be driven to succeed. Discover the Four Facts to Consider When You Break Your Mortgage. Make informed decisions to safeguard your life.
Consider the following:
- Mortgage break penalties should always be 15% to 25% lower than the first price your bank gives you.
- The penalty for breaking variable-rate that are prime plus (some percentage) will only increase as the prime rate rises. These are the simplest and least expensive mortgages to break. If you have a prime-plus mortgage, it should be converted to a prime-minus mortgage. Anyone who has taken out a variable-rate in the last 24 months should check to determine what their variable rate is in respect to prime.)
- Mortgage rates are critical. Many of the clients we contact seem to be more concerned about the poor performance of the mutual funds in their portfolio than the up to 1.5% premium they pay on their rate.
- Mortgage brokers have nearly 40% of the market! With this ideal combination of greedy banks and brokers offering mortgages through non-balance-sheet lenders, it appears that the Canadian consumer is finally realizing the amazing value added that a mortgage broker can bring.
As always, if there is anything we can assist you with, please let us know: evil IRD penalty reductions, assistance in selecting a lender, economic information, or running figures to determine if it is worthwhile to break your mortgage for you, a friend, or family member. Simply give us a call.
Please share this email to anyone you believe is considering refinancing their current mortgage or purchasing a new house. Information can save you money, yet quality, unbiased finical advice might be difficult to find by at your local bank branch.
Marcus Tzaferis
