Why Bad News Is Actually A Good ThingApril 24, 2019
Rate Update – Something Spooky on the Horizon?October 30, 2019
Surprise! The Bank of Canada (BOC) left the prime lending rate unchanged today!
Reading today’s press release, I had to admire the prose of an incredibly well crafted statement. Peppered with phrases like: “accumulating evidence”, “job growth suggests”, “it appears” – and my favourite – “evolving largely as expected”.
It reminds me of a saying I heard back when I was studying for my mutual funds licence: “If you laid all the world’s economists out from head to toe, they still wouldn’t reach a conclusion”.
But back to the news …
I may poke fun at the Governor, but today’s BOC announcement was squarely aimed at the politicians who, in an effort to gain your vote this October, are talking up a lower prime rate. I agree with the Governor (I’m sure he finds that comforting) that we don’t need a rate cut given that the interest rate policy is still stimulative. We just need to give the economy space to “evolve largely as expected”.
So with Prime on hold, what is going on with fixed rates? That’s what I’ll be covering below in today’s blog post.
Key Points From The Bank of Canada Announcement
- Prime rate remains unchanged at 3.95%
- Oil production increasing
- US/China trade still causing issues
- US/Canada trade ratifications could be a good thing
How Your Mortgage Is Impacted
- Fixed rates continue to lower – albeit at slower pace
- Bond Yields continue to drift lower
- Rate holds available almost to Thanksgiving!
What does this mean for your mortgage?
The message continually coming from the BOC is the reason inflation is contained isn’t so much due to economic policy, but primarily the economic noise going on around the world; specifically “The Donald” trade wars, and the Democrats doing everything they can to sour the election chances of the aforementioned “The Donald”.
The fallout from these events is the insanely high stimulative policy that The Donald was implementing in 2017/2018 are now stuck in the fiscal mud. The this what has caused bonds to retreat back to their July 2nd 2017 yield – which explains why mortgage rates have lowered. This also explains why we often see lower interest rates in a US election year.
The million dollar question then becomes where are rates going from here, and how do we capitalize on the current conditions?
The Bottom Line:
So with the above in mind what are we advising our clients?
- Consider a variable rate mortgage
- This is a tricky option because there isn’t a big spread between the fixed and variable rates, so you aren’t being properly compensated for the risk you are taking on.
- The strategy here would be to see if the economy “evolves as largely expected” and then make a switch to a fixed product later on.
- The good news is with most lenders you can go from variable rate to fixed rate without a penalty, you just need to take a term that is equal or longer than the remaining time left in your variable term.
- Fix it and forget it
- Going with a variable rate mortgage means you are taking on risk. So it’s important to understand your risk tolerance and your monthly budget first.
- If your budget doesn’t have room for payment increases, or the thought of not having a locked in rate is keeping you up at night, then go with the fixed rate. At this time we are recommending the 5 year or potentially the 2 year – depending on your life goals.
As we always say, focus on your life goals first, then the mortgage product and then the interest rate. In this current real estate market and interest rate environment it’s even more important to keep this in mind.
Do you have a mortgage maturing before Christmas?
There are things that you need to know about your mortgage options!! There has been some significant rule changes that allow you to either avoid the stress test (yes you read that correctly) or access what’s called an “insurable rate”. Give me a call, it only takes a 15 minute conversation to see if you can fit into these programs. The money you could save could pay for that summer vacation you’ve always wanted to take!
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