oil field

The United States Economy seems to be coming back, big time. Over the past 5 years, the level of stimulus that has been applied to reinvigorate the American economy has been incredible.

We have seen:

  • Monetary Stimulus with incredibly low interest rates and massive Government Bond buying program which reached $85 Billion a month.
  • Fiscal Stimulus with increased Government spending on social welfare programs and infrastructure.

And now we are seeing a new form of Fiscal Stimulus. The Government of United States has used its muscle to increase the domestic production of oil to a level not matched by any country in the world.

America’s oil is its piggy bank. It has long been understood by the US Government that the United States has great reserves of oil, which can be unlocked with some technological advances and great sacrifice to the environment. The full environmental impact of unlocking this oil is still not understood. The economic impact, however, soon will be. By unlocking their massive oil reserves, the United States has been able to significantly decrease and most likely eliminate the massive transfer of wealth to the Middle East and, to a much lesser extent, Canada. So far, the response from the Middle East has been to keep oil prices low by maintaining production. The resulting game of chicken was no doubt expected by the American Strategists and will, in the short term, greatly reduce oil prices and further stimulate the American Economy.

I believe that the real game of chicken is now over. It ended when the United States decided to begin Fracking and using their incredible oil reserves to stimulate their domestic economy. Over the next several years, the United States economy will go through a great bull market, disposable income will increase, and a greater amount of their wealth will stay within their borders.

What happens once the oil runs out, leaving environmental disaster, is not what will impact your mortgage in the medium term. How this resurgence of the American Oil Industry will affect the Canadian Oil producers certainly will.

Canada’s economy is fragmented. We rely on Ontario to export Goods and Services to the United States and we rely on our western provinces, namely Alberta, to export Oil and Gas. The cost to extract oil from our oil sands is far more expensive than the oil that is being brought out of the ground south of the border.  This means that Canada’s oil production will slow and our GDP will suffer. As oil production slows, many parts of the Canadian economy will be impacted.

Our Dollar will drop further in value relative to the US Dollar. Our Government will begin creating greater deficits as revenue from oil production falls off. Real estate prices in Alberta will drop and, because of the lower dollar, manufacturing will increase. The Ontario Government actually estimated in its last budget that when the price of oil falls by $10 it can potentially translate into between a 0.1% and 0.3% increase in the Ontario economy.

SO, what does this mean for your mortgage?

Stay Variable!

In the Bank of Canada’s most recent statement they address the impact that lower oil prices could have on inflation.

All of our Ontario clients should probably buy some US dollars now, convert to variable rate mortgages, and enjoy what might be a healthy economy as our dollar weakens.  Our clients out west should probably prepare for a tough couple of years while the oil price remains firmly in control of the United States Federal Reserve.

One more thing! If you are thinking of converting to a variable rate mortgage, it’s probably in your best interest to stay away from your bank. We’ve been saying this for years, but we’ll say it again: Beware of Banks! Let us explain why…

Let’s say you already have a variable rate with a bank and you decide to lock into a fixed rate (with the same bank). Much to your surprise, they will not lock you in at the lowest posted fixed rate. Why not? Because that rate is reserved for NEW clients, and you are a PREFERRED client (aka an existing client). So, that means that  you get the “preferred” client rate, which is significantly higher than the “new” client rate.

Need more proof? Well, let’s say you get a great, low fixed rate through your bank. You are so excited about getting this rate that you breeze through the signing documents. What you might have missed is the back page detailing what your penalty would be if you ever decided to break your mortgage.  It’s called an IRD (Interest Rate Differential) Penalty. Here’s a summary of how your bank calculates it:

Step 1: When you get a 5 year fixed rate mortgage from a bank, they will tell you what their posted 5 year fixed rate is. For argument’s sake let’s say it’s 5%.

Step 2: Then they will tell you that, because you are such a valuable client to them, they will offer you a rate of 3%. Wow! That’s a 2% discount off of their “Posted Rate”.

Step 3: This may cause you to get so excited that you don’t pay close attention to the rest of the document you are signing. What you won’t realize is that, at the back of that contract in fine print, there is an explanation as to how they will be calculating your penalty. Should you ever decide to break your mortgage, they intend to recoup all the money they will lose in interest by instead charging you a penalty.

Step 4: So, you decide you want to break your mortgage. Let’s say you only have 2 years left in your term. The bank begins to calculate how much you owe them.

Remember your rate was posted at 5% and discounted to 3%. Because you have 2 years left, the bank will then discount their posted 2 year rate by the same amount that they discounted your 5 year fixed rate. Let’s say the 2 year posted rate is 3%, discounted by 2%, making it a rate of 1%. In this case, they will subtract 1% from the mortgage rate you originally offered. Then that difference (2%) will be applied to your entire mortgage amount over the remaining term, and voila! A really high penalty.

So, how do you get around the “preferred” client rates and sky-high penalties? The answer is simple: call MorCan Direct! We don’t have “new” or “preferred” rates. We just have competitive, low rates. If you need to break your mortgage, you’re not going to have to get a loan just to pay the penalty. And, if that’s not enough, MorCan Direct not only negotiates with the bank, but we can also find you a competitive rate through other credible lenders that you may not even know exist. So, if you or someone you know has any questions about getting a variable rate or breaking their existing mortgage, please do not hesitate to contact us or pass this along to your friends! We are always ready and willing to give out sound, unbiased mortgage advice.