First off, I missed this entirely. From everything I was seeing and hearing the economy was cooling. The housing markets had already stalled a bit after the recent changes to mortgage qualifying requirements in April, oil prices had dropped almost $10 from a few weeks ago, our dollar has dropped a nickel against the US, the crisis in Greece still has some huge ramifications and the general consensus is not much is happening right now as people wait for everything to play out.
Then again I don’t run the central bank, perhaps I missed something? I did see a report from the OECD predicting the Canadian economy has rebounded vigorously, but I don’t think vigorous was exactly the correct word? Really we aren’t doing bad, all things considered.
When you look at the horrors still facing the US (trillions in deficits, billions of pending foreclosures, huge unemployment rates) we are pretty stable. When you see what’s happening in Europe and how countries like Greece are becoming financially unstable, once again our situation doesn’t seem so bad.
I just think the rate hike may be a bit premature, our economy needs some more legs underneath it. The important part to remember is there is no additional indication of this being the trend. We all understand rates only have one way to go, but if it’s done gradually the impact should be minimal, only time will tell though.
How does the rate change affect you? Did you lock in your rate before today for an upcoming mortgage? Are you wondering whether it’s time to switch from variable to a fixed rate mortgage due to this? Ask me some questions and I will tell you my thoughts, even if I got this one wrong!
With interest rates poised to rise at any time, should I lock my variable rate mortgage in now? Or should I wait until summer when the rates start to climb to lock in my mortgage rate?
To answer this question correctly you have to understand that the variable rate mortgages and the fixed rate mortgages are based on two different rates. Variable rate mortgages are based on the short term rates which are tied directly to the Bank of Canada prime rate while fixed rate mortgages are linked to the bond markets.
The importance of these distinctions help to explain why they don’t necessarily both change at the same time. While nothing will change on your variable rate until the actual announcement of a rate increase, the bond market deals with future events occurring and usually occurs weeks if not months prior to an actual increase in the prime rate.
Translated, this means that while variable rates are likely to move upwards by a quarter point or quite possibly even more as early as April, but most likely in June or July, fixed rates could jump upwards by the same amount or likely more at any time on speculation of these potential rate increases. Of course, if the rates jump prior to the next Prime Rate announcement and Prime doesn’t change, it will slowly lower itself a bit to get back in line, at least until the next round of speculation as to the next upcoming rate announcement.
The important consideration for you is that fixed rates could jump as little as two weeks prior to Prime Rate changes or as much as two months prior. It all depends on what the people in the bond market decide.
So what does this mean for you currently? If it is crucial for you to be sure you get the lowest fixed rate mortgage possible, now may be the best time for you to lock your variable rate mortgage in. On the other hand, if you have a variable interest rate that is at prime or at prime minus a slight percentage and you only have a couple years left on your mortgage you might be better off riding the course.
Whiles rates are definitely going up, no one knows for sure how much the increase will be, and if your variable interest rate mortgage is currently sitting at a rate with a discount off prime, rates will have to increase substantially for your variable rate to be higher than the fixed rate currently. If you locked in now, you could cost yourself thousands of dollars of interest over the next year or two.
The other option if you are in the first few years of a 25 or 35 year variable rate mortgage, is to consider not only locking in, but actually extending it as well. This may involve some mortgage payout penalties and additional refinancing costs, but could ease your sleeping pattern if you have become concerned rates may sky rocket over the next several years. The trick with this is to determine whether the payout penalty would be offset enough by the savings of going with a fixed rate mortgage.
There is no right or wrong answer when it comes to locking in your variable rate mortgage as each situation, mortgage amortization period and stage in your individual mortgage differs from individual to individual. Plus the most important variable of all, the Prime Rate, is a moving target. It is going to come down to your comfort level, your ability to afford potentially higher rates in the future and what will keep your happy. For some this will be simply a matter of locking the rate in now and being content, for others it may involve just going with the flow for now. To help keep everything in perspective, we need to remember we currently have some of the lowest rates ever and there is only one direction for them to go, and it’s up, but even if they were to double, they will still be very attractive if we compare them to rates during the 80’s! So don’t get caught up in the fear, make sure you can afford the higher rates in the future, but if you can lock in at the lower rates currently and it doesn’t cost you it might be a wise decision.
With the recent headlines about the new mortgage rules you may have thought there were going to be some sweeping changes, fortunately these changes have only resulted in minor tightening.
If you haven’t been paying attention, here are the changes the Finance Minister has implemented. The biggest change will be that consumers will need to qualify for five year fixed rates even if applying for a lower interest variable rate or lower shorter term rate. This is an effort to protect consumers from rising interest rates, although from recent statistics, it appears 76% of Canadians who acquired mortgages in the last six months are currently locking in 5 year rates already. So this will have relatively little impact.
Another change of note, when refinancing consumers will now only be able to refinance up to 90% of the homes current value versus the former 95%. This is meant to protect ourselves from turning our homes into ATM’s which occurred heavily in the US where homeowners were using equity in their homes to finance their lifestyle, trips and vehicles. This is a wise move as it will protect some consumers from potential financial disaster.
The last major change is non-owner-occupied properties will require a minimum 20% down payment. This ranges from rental properties to properties which are intended to be flipped. For the majority of investors who purchase rentals, this will be nothing new as typically anything financed higher than 80% results in properties that don’t properly cash flow anyway. Its main intent though is to reduce speculators who purchase property with the only goal being appreciation from overheating the markets. In my opinion, this could have the most affect on prices over the next couple of years in several cities. Notably those with very active condo markets.
Previously there had been talk of increasing the minimum down payment required for purchasers and even a shortening of the amortization period of a mortgage, but neither of these came true. This is most likely the biggest positive for prospective new homeowners. They will still only require a 5% down payment, but with the tighter qualifying, they now have to be able to afford potentially higher five year term payments.
If the new changes had included an increased down payment amount this would have blocked out a significant number of potential homebuyers from entering the market as they would have to wait until their saving essentially doubled. The double whammy would have been shortening amortization periods from the current maximum of 35 years back down to 25 years.
This would have pushed affordability completely out of the window for a much larger group of individuals and would have led to a much longer term stagnation in the housing markets. Wisely this time, the government only implemented a couple of measures to curb the market versus completely stifling it.
Our current economic recovery depends largely on the housing markets to continue to grow as Real Estate creates everything from service jobs to construction jobs which help continue to stimulate the economy. The housing market is so tightly tied into economic recovery that anything to aggressive could have easily led us back into a recession, so thankfully with these minor changes we should continue to see our continued economic recovery and continued growth in residential values.
This seems to be one of the most frequently searched topics on my blog currently and there are no easy answers for this as every person’s situation and mortgage is different. Although there are some suggestions I have that may help to point you in the right direction and allow you to make a more informed decision.
Most of the concern for people currently is the rising mortgage rates on fixed term mortgages. People tend to be afraid they will miss out on a great deal and would prefer to lock in now, giving up some incredibly low variable rates for a guaranteed fixed rate. Perhaps some of it has to do with uncertainty, but most of it has to do with lack of understanding of their options and where rates will go.
Variable rate mortgages, prior to fall of 2008, were available for prime minus as much as .9%. So when prime was at 4.75% people were paying interest rates of only 3.85%. Compare this to a fixed rate in the fall which ranged from 5.35% to 5.7% and people were saving considerably. The variable rate was a great way to go then and looks even better now if you still have a variable rate mortgage from that time frame or earlier, as you could be paying as little as 1.35% interest now compared to a fixed rate of 3.5% to 4%.
Fixed rate mortgages are based on bond yields which can vary daily as they are traded in the open market. Usually they are a few percent higher than the current bank prime rates, but in times of uncertainty or with pending inflation, they can start to rise at a pace much faster than the Bank of Canada. This is partly what has caused fixed rate mortgages to rise currently.
Now over the next year the Bank of Canada has already announced there won’t be any changes to the prime rate. So if you have a variable rate than is prime minus, it will stay where it is most likely for a year or longer. Fixed rates will most likely rise a bit by next summer, but most forecasts are currently calling for the increases to only be a percent, possibly two on the high side.
This would increase a five year fixed rate to almost six percent, which is still incredibly low historically. This is where the difficult decision comes in for many. If you currently own a variable rate mortgage that is prime minus, locking in will cost you a hundred dollars a month per $100,000 of mortgage in increased payments. You might be better off maintaining the current variable rate and increasing your monthly payment each month and applying the additional to your mortgage principal. If your goal is to pay the mortgage off as quickly as possible this is the most efficient method.
If however you are more concerned with your payments getting out of control, you have entirely different motivations. It may help you to sleep better for the next five years to refinance your current mortgage to a five year (or longer) fixed rate mortgage as these types of rates are unlikely to get much lower. Just be aware whenever you terminate a mortgage and renew, you will be hit up with mortgage payout penalties, although this can be negotiated away if you keep the mortgage with the same bank.
If your variable rate mortgage is currently a prime plus type of mortgage, now indeed may be a great time to lock in a fixed rate at only a little bit higher than your variable rate and know you will be safe for the next few years. Everyone has a slightly different circumstance and with the variables you always have to be aware of are how much you can afford, especially if rates increase, how long your current term has before you have to renew, and what your current interest rate is. So take a close look at this when making your decision as it can make these decisions easier.
First off, I missed this entirely. From everything I was seeing and hearing the economy was cooling. The housing markets had already stalled a bit after the recent changes to mortgage qualifying requirements in April, oil prices had dropped almost $10 from a few weeks ago, our dollar has dropped a nickel against the US, the crisis in Greece still has some huge ramifications and the general consensus is not much is happening right now as people wait for everything to play out.
