Rates went up, so now what do you do?

fearOn July 12th, for the first time in seven years, the Bank of Canada increased the overnight rate by .25%, withdrawing some of the stimulus that was needed after the oil price collapse and 2008 financial crisis. Variable rate mortgages and lines of credit will see higher rates and modest payment increases. Fixed-rate mortgage – which are based on the bond market – had already been trending slightly upward, although if you have a fixed mortgage, you aren’t affected until it’s time to renew. Keep in mind that this is a very small increase, and we’re still in an ultra-low rate environment and an incredibly stable market. We’ve also seen increases before to only see them decrease again. But rates have risen, so here are answers to the questions I’m getting:

Should I jump into the market now? Actually, my advice is always the same: buy when you are financially ready. Don’t jump the gun just because rates “may” go higher. But by all means, if you’re thinking about buying, I can arrange a pre-approval so you’re protected from rate increases while you shop around.

Should I lock in my variable rate mortgage ASAP? 
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Variable rate is out, Fixed rates are in…. But, which term…?

Variable rate mortgageFor more than a decade, I’ve been recommending Variable rate mortgages, as the product of choice. My clients have saved $thousands.  It’s been a great 11 year run..   But now, the strategy has changed slightly.   Read on, to see my newest recommendations..

QUICK VARIABLE RATE HISTORY.

First, you need to understand the history..  Variable rate had lots of pluses.   It had a lower rate of interest, the penalty can never go over 3 months interest, and you have the option to lock into a Fixed rate at any time.

Being in a Variable meant paying lower rates.  In fact, the difference, compared with Fixed rates, ranged between 1.00% and 3.00%.  This translated to several $$thousand in less interest each year. Read the rest of this entry »

Senior Deputy Governor says lower rates are the new normal.

Carolyn Wilkins In her first public speech as Senior Deputy Governor for the Bank of Canada, Carolyn Wilkins brought some good news to Canadians with mortgages.    Interest rates should remain low for some time….. and we can expect lower rates to be the “new normal”.

Ms. Wilkins went on to say that “the recovery has had repeated false starts and still faces considerable headwinds.”  This seems to be the new message coming from the Bank of Canada.  And I must say, it’s a refreshing change from the previous high-profile Governor, Mark Carney.

UNPOPULAR COMMENTS

Remember our previous Bank of Canada governor?  Mr. Carney earned high praise for helping Canada avoid any U.S. style recession.   But in the years leading up to his 2013 departure, his repeated warnings of pending interest rate hikes never materialized.  In fact, we now know they were way off.  Interest rates went down and have stayed down.    Looking back, Carney’s rate hike warnings sounded more like ‘the boy who cried wolf’. Read the rest of this entry »

Variable or Fixed? an update on how to choose.

Variable rate mortgage

FIXED OR VARIABLE?

The debate over fixed vs variable never seems to end.   For the past 5 years, the Federal govt and the BIG SIX BANKS have been doing everything in their power to force us into choosing a 5 year Fixed rate.    The govt says it gives us security and protection against the anticipated interest rate hikes.   BANKS jumped on this bandwagon because 5 yr fixed is the most profitable mortgage product.. and with fixed rates hovering at 3.00% for the last 3 years, it’s been an easy sell.

On the surface, it’s not bad advice.    Fixed rates were supposed to go up.   The spread between Fixed and Variable has been less than 1.00% over the last 3 years.     My rule of thumb is that Variable rates should be 1.00% lower than 5 yr fixed in order to benefit from the possible rate fluctuations.   So naturally, 5 yr fixed was a better choice.

DO YOU TRUST YOUR GOVT AND YOUR BANK? Read the rest of this entry »

2.99% is back… does that mean we should take it?

record low rates5 year fixed @ 2.99% is back.   This is NOT a NO FRILLS product (for those of you that saw a similar rate elsewhere earlier this year) but there is tougher qualifying.   This seems to have become an annual event.  For the past 3 years, we’ve seen 2.99% or less, being offered each Spring.   So, why haven’t rates gone up like the Bank’s economists, government analysts and other so-called ‘experts’ had predicted?

There are several reasons but, to sum it all up, the global economies haven’t recovered from the 2008 recession.    The US recovery is slower than expected.   Canada’s inflation rate is below target levels.   There were even concerns we could see deflation, which would cause the Bank of Canada to lower rates… those concerns have gone away…. for now!

WHAT’S THE FORECAST NOW?

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Bank of Canada says no rate hikes, but possible rate drops!!

stephen poloz  Last week, the Bank of Canada governor, Stephen Poloz, held the first of 8 scheduled meetings to set the Target Rate.    This is the rate used to set the Bank Prime rate which currently sits at 3.00%.   No surprise, no change in the rate.  It has been the same since Sept 2010.

From 2011 to 2013, the previous Bank of Canada governor, Mark Carney, continually announced of a pending rate increase.   But late last year, Poloz changed the tide when he announced it could be a few years before rates go up.   One of the key drivers for rate hikes is inflation.  The BoC target for inflation is between 1% and 3%.  If inflation goes above 3%, we can expect rate hikes.

Inflation is not a concern.  In fact, there are concerns about deflation as the current inflation rate sit at 1.2%.  Some experts believe we could see the BoC rate drop.  Great news for anyone in a Variable rate.   We are also seeing the govt of Cda bond yields drop.   Friday’s close was down to 1.59% for 5 yr bonds.  Haven’t seen that level since June 2013.   This means Fixed mortgage rates will probably go down further. Read the rest of this entry »

Long term is almost always more expensive.

long term contractsEver wanted to change cell phone providers?  How about internet providers?  Move your investments or rrsps?  Cancel that hydro or gas contract because you moved?

And how about mortgages?  When interest rates started heading down about 4 years ago, thousand of borrowers in fixed rate mortgages wanted to get out of their higher rates and start benefiting from the record low interest rates.

But borrowers were shocked to hear of unbelievably high early prepayment penalties…   Penalties of $15,000, $20,000, $30,000.    One recent situation had CIBC charging a $33,000 penalty on a $500,000 mortgage.  I’ve seen dozens and dozens of situations like this.   Almost all of these high penalties were from one of the BIG SIX BANKS…    Read the rest of this entry »

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