Mortgage Rates, Products and Insights in No Particular Order
Mortgages are NOT an investment, they are the debt (leverage) to help you buy real estate, which is the actual investment.This mental shift is key, knowing fixed rates or variable rates have pros and cons but the purpose of the mortgage is to buy real estate. There is a risk in any investment, but the risk of the leverage portion of real estate is thousands of dollars in either losses or savings. Mortgages are cool… but not that cool. 😉 Meaning, thousands of dollars can be saved or lost on the average Canadian mortgage, but if you don’t own real estate you have the potential to lose out on tens of thousands, or even, hundreds of thousands over your life time! Own real estate and see mortgages as their intended use and nothing more.
Rate holds make a difference!
For the first time since 2018, they are a helpful tool if you are looking to get a mortgage right now. We highly recommend getting one if you are thinking about getting a mortgage this year and next.
Cash flow costs of rate hikes on your variable / adjustable rate mortgage. Per $100,000 a 25bps increase (0.25% rate increase) = $12.69 monthly payment increase. This is based off of a 25 year amortization. For example, on a $300,000 mortgage if the rate jumps up by 25bps, then your mortgage payment would increase by $38.07/month.
Fact: no one knows where inflation and interest rates are going to go (both up or back down).This goes both ways, we don’t know how high, and we don’t know how low. There will be an active pursuit by the government to stop both inflation and rising interest rates. That is their goal and to do their very best to stabilize the key inflation rate in Canada to 2% by 2024. How will that go, how fast, how slow, does this trigger a recession of any kind, if so, what will that do for interest rates, etc, etc? No one truly knows and is why there is opinion by economists all over the map… and yet we have fear all over the market right now. Not even the Bank of Canada knows and they are the one making the decisions. Yikes! Please remember the number shown above is the actual math for your mortgage and how it affects your cash flow. $12.69 monthly increase per 100k…. with inflation that may be the cost of a Caramel Macchiato at Starbucks?! Ha.
2019 Prime was 3.95%. As of today, June 13 2022, prime is 3.7%.It is still 025% cheaper than it was in 2019, and there was not mass fear, or confusion, or locking in at all costs during that season. Why now? Only because of the conversation surrounding inflation, but your actual mortgage rates are incredibly low historically speaking, and also recent history! As recent as December 2019. It is normal for us to return to pre-Covid era rates, this shouldn’t be alarming or scary, but expected and something we can manage! 🙂
Life is variable, maybe your mortgage should be too?Variable rates are an excellent product, not just an interest rate. The payout penalty on a variable rate mortgage is typically 3 months of interest. This product and feature of variable often makes all the difference in the world when calculating the true cost of a mortgage. The interest rate is one factor, but when you calculate the penalty it changes the APR (annual percentage rate), the penalty on a fixed rate is a huge factor. That 2% locked in fixed rate sometimes can have a $15,000 payout penalty on that… your APR on that 2% is no longer 2%! That “risky” variable that is increasing that has a $2,000 penalty is now looking very good at that APR calculation. APR being the actual cost of borrowing the money on that mortgage. Therefore, if there is a chance of paying out the mortgage by refinancing, or selling, the variable rate could be your best friend!
Should you lock in?You should consider locking in when you are losing sleep over rates. Or when your date night with your significant other is about interest rate announcements and the upcoming Bank of Canada meeting. Those are key signs that a fixed rate is probably the right move. Notice my answer has nothing to do with the rate itself? Because fixed rates or variable rates, you are winning already. You are buying Canadian real estate! People all over the world, literally, want to own Canadian real estate, which is directly tied to one of the strongest banking systems in the entire world. You have already won by being a homeowner. I believe that well over half the time the variable rate is the right choice, but if you are worried about all of it and can’t handle variable rate fluctuations, don’t worry about it, just lock in. There is strategy to this and you should be aware of it and think through topics such as payout penalties with major banks. If there is a well thought out plan with my team and I, then the risk is calculated by taking a fixed rate mortgage. I see the value of variable rate financially, but I also see the value of the fixed rate too. When we advise our clients what to do, we walk through them and are not married to either product because there are pros and cons to both. The purpose is owning real estate!
Another option right now is the idea of “riding the wave”. With any economic recovery there are peaks and valleys and are constant for years. This may be a great time to lock in, but for 5 years? 5 years is sure a long time when the average mortgage is still broken before the 4 year mark, and that was before 2020/2021 interest rates! It will be much shorter statistic now! If variable still makes your stomach churn, then a 2 or 3 year fixed rate may be the happy medium. Safety and security in rate and payment, and you are renewing on pace with the average point of breaking a mortgage. This could be the sweet spot for many people during a time of inflation and economic worry.
True Variable VS Adjustable.As mentioned above, variable rates are a winner of a product for home owners. WIth that said, for those that have a tighter budget, a “true” variable rate mortgage means that the payment is static and does not change, even though prime is going up or down. For those that see the value in variable/adjustable rate mortgages, but run a tight budget then this is a huge win. Almost seen as a win win and best of both worlds scenario. It takes away the risk of the fluctuating costs and you can have the lower penalty feature, the ability to lock in if you really needed to, and the ability to ride the wave of interest rates going up and potentially back down again.
Should I wait to buy a home?Ever talk to someone who bought in the last 50 years about buying a home and if they regretted it? Never! Unless they bought in rural Saskatchewan… sorry rural Saskatchewan, you grow very slow. Real estate in Canada is a unique market and it continues to grow and grow and grow. It is a long term investment, a drawn out over decades type of investment. Focusing on which month or what half of the year to buy doesn’t matter when you start zooming out and looking with a birds eye view over 10, 20, or 30 years. Those that bought at Toronto the peak in 2007 just before the housing and mortgage crisis, are not wondering if they did the right thing in. They lost for a period of time and then saw their home double in the following 10 years, all the way to 2021. It is a long term game and getting in is the goal, please make the point! Should you buy, yes, please do! When you are able, and feel financially ready and comfortable to take the plunge I recommend it. Not just mortgage brokers and realtors recommend this that may be a bit biased. 😉 Economists and financial advisors for decades recommend it because it grows over time and paying down your mortgage is a forced savings account that you don’t see and have limited access to.
Fixed vs Variable is a long term game.If we look at a typical mortgage amortization of 25 years, the last 25 years would be a shining example of the benefits of variable rate/adjustable rate mortgages. The overall win over that time line would have outweighed the choice of fixed by tens of thousands of dollars saved. Mortgages are not just 1-5 years, they are 25 years, and sometimes longer. The birds eye approach once again is a key perspective when looking at your mortgage. Now, we of course want to do the right thing every time we get a mortgage and choose the smart product. But to time it perfectly every time is almost impossible just like a stock broker, therefore the variable rate mortgage takes away this worry and risk and puts you automatically in a spot of winning! Lastly, winning financially on your debt is secondary… the goal is to purchase real estate and the mortgage savings is the bonus. It is just the bonus!
Every situation is unique and we love giving custom advice to our clients, past, present and future. Sorry for the eclectic and random post, but it was fun to get my thoughts out on mortgage rates, products and insights in no particular order.
Please reach out to my team and I if you have specific questions about your situation and we can make you a plan for now and the future.
Thank you! You got this!
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