Mortgage rate outlook 2017.. Expect Fixed mortgage rates to go up…Expect Variable rate pricing to drop.

trudeau-trumpFixed mortgage rates have increased by about 0.40% in the last 6 weeks.   Today’s 5 year fixed rates are at around 2.89% and will could continue to go up in 2017.   There are political and fundamental reasons why rates have gone up. (oh, by the way..  it’s not panic time.. who ever said that 5 yr fixed rates were the best product to choose anyways? more on this later.)

FUNDAMENTAL REASONS

Govt of Cda bond yields have gone up around 0.55% since October (fixed rates are priced from govt of Cda bond yields).  It’s more expensive for Lenders to fund mortgages due to stricter government regulation and higher Capital holding requirements.  These increased costs are being passed down to the consumer.

Okay, this is the “how” the rates are higher.. but what’s prompted these fundamentals?  Why are rates higher?

POLITICAL REASONS.. IT’S ALL POLITICS

TRUMP… Yup, that guy has impacted Fixed rates.  Let’s be honest.. 6 months ago, who really thought he had any chance of winning?   (maybe the Russians if you believe the recent headlines).  Mr. President-elect Trump, has promised to stimulate the US economy with spending.  Spending means inflation.  Inflation triggers rate hikes.  The US stock market is at an all-time high.  The TSX is also up around 8% as are all stock markets.  Investors are betting on inflation.. hence, bond yields are at the highest level in almost 2 years.

TRUDEAU…The Federal Liberal govt shocked banks and financial experts when they announced stricter mortgage rules with no documented consultation (in other words, they just did it with no input from any experts..  kinda scary.  If I’m wrong and someone has documents to show they consulted any expert, please let me know).  They also thought it was a good idea to force the implementation in just 2 weeks, instead of the usual 3 months.

Here’s a link that explains the rules changes in common language.

But let’s stand back and take a look.  Historical average 5 yr fixed rates are well over 5%.  We are nowhere near that.  Variable rate pricing is at 2.35%.  These are still ridiculously low interest rates.  Should we really be in a panic?  No way.  Enjoy the low rates.

LOOKING FOR ANSWERS?stephen poloz

For the past 14 months, the shift has been away from Variable rate and towards Fixed rates due to the rates being priced so close.   (Variable rate has been around 2.35% and you could also get a 3 yr fixed for as low as 2.24%).   To better understand where rates are headed, we need to look at The Bank of Canada Governor, Stephen Poloz.   Poloz said he is keeping the Bank of Canada rate where it is, at least until we see the economy make significant improvements and only if we see inflation go above the target 2% level.

The Trudeau govt and the Minister of Finance, Bill Morneau, announced unprecedented new mortgage rules, like the ‘Stress Test’ and limiting your mortgage to homes with a purchase price of less than Bill Morneau$1,000,000.  Yup, if you buy a house costing more than $1,000,000, you will not be able to access a mortgage from a large number of Lenders (that use portfolio insurance) due to the new rules.

They also announced other rule changes..   like no rental property mortgages for single family dwellings.. Yup, only 2 units or greater, will qualify for a mortgage (for Lenders that use portfolio insurance).  How bizarre?  I’ve yet to see any written explanation on why this was introduced.. ??  Yeah, I’m puzzled by the Federal govt’s rules, changes and motives…in case you couldn’t tell.

PORTFOLIO INSURANCE

Most of us know that a mortgage requires default insurance (CMHC, Canada Guaranty, Genworth) when you buy with less than 20% down payment.  The lower your down payment, the higher insurance premium.  But, most of don’t know that mortgages with more than 20% down get insured… at the lender’s expense.  Lenders pay a reduced insurance premium to have a secured mortgage.  It’s protected from any loss.  This now becomes a safer investment allowing the Lender to offer a lower rate of return to investors, and giving Canadians access to a lower rate of interest.

Canadians have enjoyed the benefit of these low rates for over 15 years.     It’s been working extremely well.  Mortgage Arrears are at historical lows.  So, what’s the problem?  Our Federal govt wants to reduce access to this insurance.  End result is higher interest rates.   Hmmm.. there’s a phrase that comes to mind..   “If it ain’t broken, don’t fix it.”    Maybe the govt moto should be, “if it ain’t broken, we’re gonna fix it anyway.”

VARIABLE RATE PRICING WILL PROBABLY DROP

Variable rate products were not as attractive over the past 14 months.  But that’s about to change.  As Fixed rates have increased, Variable rates are offering some significant savings.   2.35% vs 2.89% is a substantial savings when it comes to a mortgage.  That’s $2300 annual savings on a $400,000 mortgage.  (there are even some variable products at 2.05% today with certain conditions and qualifying!)  Look for Variable rate pricing to become even cheaper as Fixed rates go up.  This is a trend that has occurred in the past.   Nothing new.  We just need to be aware of trends.

Here’s another phrase that applies to both our Federal govt policies and mortgage rate products.    The more things change, the more they stay the same.  I’ll let you interpret what this means.

Your best interest is my only interest.   I reply to all questions and I welcome your comments.  Like this article?  Share with a friend.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

 

5 Responses to “Mortgage rate outlook 2017.. Expect Fixed mortgage rates to go up…Expect Variable rate pricing to drop.”

  1. Tony Says:

    Hi. Has the market peaked and Should I sell and rent back or stay with home ownership? I don’t have a mortgage on our home. Thanks

    • Steve Garganis Says:

      Hi Tony, that’s a popular question.. the answer isn’t that simple.. I believe real estate serves a few purposes.. shelter and long term investment. by the way, great that you don’t have a mortgage.. congrats! so many questions to ask.. when did you buy? what are you plans in the future? you age? what other assets do you have? how big is your home? do you have other people living with you? how much will rent cost? etc..

      the answers will dictate what my own personal recommendations will be.. i’d be happy to chat with you.. feel free to call or email me . 416 224 0114 steve@mortgagenow.ca

  2. Kim Says:

    HI, I have a renewal coming due in July and have met with our bank regarding same. They have suggested that we take the remaining $241K owing on our $650K home and put it into a HELOC @ 2.74% 5 year fixed, with the total value of the available Heloc being 400K. It sounded like a reasonable idea at the time but now i am not so sure. Thoughts?

    Kim

  3. Karin Says:

    Great info. Thank you. I’m gathering data to help decide if I should sell my house. Or rather how. I’m either going to sell half to an investor or sell the whole thing. I need access to my equity and I do not qualify for any additional loans. It’s a semi in Toronto with 3 apartments and generates 22K net income. bought it in 2008. Still have a bit over 400K in mortgage on it. The inventory on the market is quite low and so demand and bids are high. I wonder if it’s time to pull out and invest in stocks fully. Or is it prudent to hold on to even part ownership in the long term, despite costs that will come up. The value increase plus the income has been 20% yearly.


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