After a month of nail biting, furrowed brows and bated breath in the US, a resolution has finally been met. The Republicans and Democrats have reached an agreement to allow the debt ceiling to be raised, bringing an end to an arduous negotiation process which had all the civility and amicability of a Paul McCartney divorce settlement. So now that we edge away from the precipice and the four horsemen have been rerouted back towards Athens, it is time to assess the winners and losers arising from this war of attrition. President Obama is not happy, John Boehner is not happy and we’re even led to believe that somewhere beneath Michelle Bauchman’s taut, leathery exterior lies a disgruntled frown eager to show itself. So who are the winners in this torrid affair? The answer appears to be the Canadian mortgage holder.

In the aftermath of the debt ceiling agreement the US was hit by data showing their services sector had fallen in July to the lowest level since Feb 2010, troubling news which was further compounded by weaker-than-expected manufacturing data. All this while the possibility of a US downgrade still lingers ominously on the horizon. This huge uncertainty has seen foreign investors flock to nations with the soundest balance sheets. Canada’s current debt stands at about 34% of gross domestic product, about a third of the U.S. ratio at 94% and significantly better than other major economies such as Germany (83%), the U.K. (149%) and Japan (226%). While Canada’s economy is hardly firing on all cylinders, in the land of the blind, the one eyed man is king and as long as Mark Carney can keep that one eye open, Canadian bonds could become a safe haven in a time of increasing global uncertainty.
Those of you who have been following our bond tracker will have seen Canadian 5-year bond yields plummet over the past few days. It was no surprise as we have seen equity markets around the world fall like Congressional approval ratings.  Even with a stronger than expected U.S. jobs report, investors were not reassured given the slowing American economy and no headway in the European debt crisis. The S&P/TSX composite index fell 217.96 points, or 1.76 per cent this Friday after having plummeted almost 500 points earlier in the session.

None of this should be taken as good news for the Canadian economy, for we do not thrive in isolation and any drag on the US economy has massive ramifications for us, it is good news for those currently in search of a mortgage or those of our clients who took our advice and went with a variable rate mortgage. Here’s what it means:

Fixed Rates: Fixed rate mortgages have already started to come down to correspond with the fall in bond yields. Fixed rate mortgages were already quite low and a further drop would make this option an increasingly attractive prospect for those of you uncomfortable with the inherent risk of a variable mortgage.

Variable Rates: Here at Morcan Direct we don’t indulge in “we told you so’s”. Yes, we have been telling our clients for two years now to break their fixed rate mortgages and start enjoying the savings of a variable rate. Yes, we have saved a great deal of our clients thousands of dollars by putting them into rock bottom variable rates but it is to the future, and not the past, that we set our sights. The news from our southern neighbours means that any chance of the Bank of Canada increasing the prime rate before the end of the year now appears to be somewhere between Slim and none (and word has it Slim has been asking for directions out of town). In fact, the Overnight Index Swap (OIS) traders are now pricing in a potential rate decrease in the overnight rate as soon as the May 2012. While this remains to be seen, it is music to the ears of our variable rates clients.

As we, at Morcan Direct, have been advising our clients for the past two years, the optimum plan to maximize savings is to switch into a variable rate mortgage and allow us to put you with a lender who will give you prepayment privileges that will allow you to match the payments of a five year fixed rate. This will dramatically decrease your interest and your amortization while mitigating the risk of future interest rate increases. If you are currently in a fixed rate or would like to hear how we can drastically reduce the discount on your current variable rate, we advise that you contact one of our mortgage brokers today. For more sound, unbiased mortgage advice, or for further details on anything that has been outlined here, we invite you to contact us at 416-214-9000.

Marcus Tzaferis