Variable rate mortgages and good information are still by far the best two ways to ensure you are saving money on your mortgages. The Bank of Canada meets tomorrow and most economists forecast an increase in our country’s overnight rate. This is probably the safe bet.  However, I believe that there is a strong argument for the Bank of Canada to hold rates as they are.

Although, with a U.S. economy that “appears” to be crawling out of a recession and “decent” Canadian economic numbers, the bank has more than enough reason to increase rates from these historical low levels.  My concern is that we are not in a normal period of growth. We seem to be in some sort of a new economic period where poor economic data is shrugged off by a market that has too many powerful stake holders to show pronounced losses.

My argument for the variable rate mortgage and for the eventual drop in all financial markets is the same.  Regardless of how well a structure is supported, eventually gravity will claim victory.  Our economic tower has already shown signs of cracking.  Let’s face it; the tower almost fell down two years ago.  Now, the tower appears to have been rebuilt, and the same powerful stakeholders feel it necessary to show that it is headed higher in hopes of more money in their coffers.  Variable rate mortgages are a tool that anyone with exposure to capital markets are (whether through mutual funds, a stock portfolio, or even real estate) should have to hedge themselves after a bull market.  Trying to predict what the stock market will do is more than a full time job, but looking at economic fundamentals —- and helping people to the best of my ability — is my job.  For the past four years, I continue to believe that we are best served by mortgage’s exposed to interest rates.  The Bank of Canada will most likely increase rates tomorrow, but if the same economists who now predict a rate increase as a certainty had been asked only two weeks ago their responses would have been very different.  Almost all would have told you that rates would stay as they are. They also would have told you that the probability of a double dip recession was increased due to the market’s temporary response to poor economic data (long term unemployment, overall savings, sovereign debt, and much more).  This data has not changed.  Their responses to the data were simply not allowed to be as pronounced as it should have been.

The Canadian economy is in great shape. We have all the natural resources a country could ask for.  We have one of the more transparent and well run governments in the world and we have incredible growth potential fuelled by our education system and our ability to embrace new immigrants.  Unfortunately, this is not enough when you are sitting next to a giant like the United States.  The problems that our neighbors are going through are ours as well.  As our major trading partner, we are tied to that country’s rise and fall.  In the last two years we have seen incredibly volatile markets. This is a battle between where the economy should be and where the major stakeholders of the financial markets needed it to be.

Variable rate mortgages are themselves decreasing. In the last 20 months they have come down from 1% over prime to their current position of 0.80% below prime.  This is proof that investors world wide have identified Canada as a safe haven in this volatile financial time.  So please stay variable.  Fixed rates are at incredibly low levels again and should probably be priced lower than they are.  Even with an increase tomorrow in the overnight rate, the variable rate will still be a great source of savings for Canadian home owners as we slowly recover from this financial crisis.  For those of you with higher premiums on your variable mortgages or high fixed rate mortgages, it is probably a good time to think of renegotiating.  We can help with some fancy new refinance calculators we have built just for the occasion.

As always, thank you for reading.  This newsletter comes from monitoring as much financial data that I can get my hands on, as well as my studies in this field.  It is the theory that I follow and as soon as I see an opportunity to switch from variable to fixed an updated newsletter will be sent. Until then, I hope you can bare my pessimistic view point and trust in my belief that everyone should be in a variable rate mortgage.

Marcus Tzaferis