Variable will be the winner for the next couple of years. The Bank of Canada came out on October 19th and decided to keep interest rates unchanged. This was no surprise. What may have been slightly surprising to those focused on the consistent gains of the North American equity markets was the language used in the statement that followed the decision. The Bank of Canada revised its forecasts for growth downward for 2012, leading us to believe that they see something on the horizon that will slow Canadian growth.
The Bank realizes that the eventual reduction of stimulus being poured into the Untied States will have a dramatic effect on the Canadian economy. In this current term of economic uncertainty the United States Government is propping up its economy with incredible sums of money. Some of this money is very transparently entering the economy through mortgage buy back plans, cash for clunkers, employment generating schemes, and infrastructure spending. The rest of it is entering the economy a little more secretly, through debt and equity market purchases by the Federal Reserve. Once these schemes are relaxed, or as the Federal Reserve would have us say, “When quantitative easing is reduced”, surely some change will occur?
The goal of this financial exercise is to prop up the US economy long enough for it to remember how to walk on its own again. What we should really be concerned with is what happens if it is not yet ready to walk?
The downward revision on the part of the Bank of Canada is one more example of how our forward thinking Governor Mark Carney is expertly maneuvering us through this time of uncertainty. That being said, we expect to see very few increases to the Bank of Canada’s overnight rate in the next 24 to 36 months. This is a great opportunity to stay in a variable rate mortgage and enjoy the significant savings over comparable fixed rate mortgages.
Bond yields continue to fall as investors search for risk free returns, these decreases in yields are being felt in the Canadian mortgage market, with fixed rates as low as 3.25% on a 5 year term. For some this may spell an incredible opportunity to lock in, while others view it as further proof of the fragile state of our economy.
To the many of you who have renegotiated into a variable rate or low fixed rate product in the past 6 months, congratulations you have made the right move, and the proof is most definitely in the pudding that you were able to buy with all your savings (unless of course you just used it to pay down your mortgage faster). To those of you who are considering breaking a mortgage, please call a trusted Mortgage Broker. Mortgages are too valuable to leave in the hands of your Bank, remember Banks are designed to make profits, not to make you happy. Branch Managers and employees have quotas and revenue goals to reach each month just like any salesperson. They will always be motivated to produce revenue for the Bank they work for.
A few things to consider:
- Penalties to break your mortgage should always be 15% to 25% lower than the first quote your bank gives you.
- As the prime rate does move up, the penalties to break variable rate mortgages that are prime plus (some percentage) will only increase. (These are the easiest and cheapest mortgages to break. If your mortgage is prime plus any amount it should be switched to a prime minus mortgage. Anyone who obtained a variable rate mortgage in the past 24 months should have a look to see what their variable rate is, in relation to prime.)
- Mortgage rates are important. It seems as though so many people that we speak to are more concerned over the poor performance of the mutual funds in their portfolio than the up to 1.5% extra they are paying on their mortgage rate.
- Mortgage Brokers are almost at 40% market share! With this perfect combination of Banks acting greedily and Mortgage Brokers offering mortgages through non balance sheet lenders it seems as though the Canadian Consumer is really starting to realize the incredible value added that a Mortgage Broker can provide.
As always if there is anything we can help with; evil IRD penalty reductions, help choosing a lender, some economic information, or to run numbers and see if it is worthwhile to break your mortgage for you, a friend or family member. Just give us a call.
Please forward this email to anyone you think may be making a decision regarding their existing mortgage, or who is buying a new home. Information can save, and sound unbiased mortgage advice can be hard to come by at your neighborhood bank branch.