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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Bond yields fall after Middle East turmoil

Earlier this month, we saw Fixed mortgage rates go up and the forecasts were calling for rates to continue to go up over the next 2 years.   It’s important to remember that all forecasts make certain assumptions and don’t allow for the unexpected… These forecasts may still be accurate but of course, no one was expecting the uprising in Egypt, now Libya and possibly other Middle East countries…

The Canada Bond yield has dropped around 22bps to 2.58% from a 10 month high of 2.80%.    This takes some of the pressure off to raise fixed rates… and we might even start to see some Fixed rate decreases if the Bond yields fall further…(or course, the Banks are famous for raising rates immediately but lowering them slowly and this was even identified by the most recent Bank of Canada quarterly review)

I can’t help but to reflect on Professor Moshe Milevsky’s article from a few weeks about how to deal with rising interest rates…. In this article he cautioned us about overreacting to warnings of huge rate hikes or calls to lock in your mortgage…    Wow, the timing of his article couldn’t be more perfect.   I recommend you take a moment and read what the Professor has to say.

When should I lock in my Variable rate mortgage?

A thought on the minds of many, with all the talk of ‘Historical low fixed mortgage rates’ and ‘rising Variable rates’.   “When should I lock in my Variable rate mortgage?”

Here’s a quick suggestion and rule that I follow… We only want to lock in our Variable rate mortgage when we think Variable rates will go way up and for an extended period of time…

But we must also look at what we can lock into… if you are in a 2.10% Variable rate mortgage, would you lock into a 3.89% fixed mortgage rate?   I’m not sure I would…. I think it will take a few years before my Variable rate mortgage approaches today’s Fixed rate…..  why pay more today when you don’t have to?

For me, I can’t see Variable rate mortgages underperforming Fixed Rates over the 12 to 17 years that it will take us to pay our mortgage off.  Having said that, we are always evaluating the Market Trends and will adjust our strategies when needed.  A mortgage is a huge debt and deserves a solid strategy to retire this debt with the lowest cost.

Ultimately, it will come down to risk tolerance, your personal budget and what you believe will be the better strategy.  Consult your Mortgage Broker to better understand the differences.

By the way, you might be interested in knowing that certain Banks and Trust companies have recently started to pay us more to offer fixed rate mortgages over Variable rate Mortgages…Good Mortgage Brokers don’t let the compensation dictate which product they recommend.  They recommend what they believe is right for the client.

Here come the calls to lock into a Fixed Rate

Last week we saw the Bank of Canada raise the Key Rate by 0.25% and the Banks quickly raised Bank Prime lending rate to 2.75%.  For those in a Variable rate mortgage, the question of whether to lock into a fixed rate is coming up again.

No surprise, the media has started the fear mongering and the so-called ‘Experts’ are suggesting that it’s time to lock into fixed rates, once again….  This article came out today and I’m not surprised that these ‘Experts’ have quickly jumped on the band wagon with talk of ‘rates hikes’ and ‘higher housing costs’ to get their name in lights…  click here and judge for yourself.

The real question is ‘how much does the Bank of Canada need to raise the Key Rate to control inflation and economic growth?’   And earlier this year, we reported on Ben Tal’s, Senior Economist with CIBC, forecast that the Bank Prime only needs to increase by no more than 3.00%….and that this is the most it should increase… but it will take around 2 years or longer to get there… if they get there at all….   click here for the full report.

So why would anyone lock into a mortgage at over 4.00% today, when they could enjoy rates of just over 2.00% and slowly see their rates rise?   If you know that answer, please share with me…

We all have different needs and there isn’t a ‘one size fits all mortgage’…  seek professional, unbiased advice…get a strategy in place…. monitor the market and stay informed and you’ll always make the right decision.

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