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Market news, economic insights, mortgage strategies & tips. For all things mortgage, come enjoy our blog!
Market news, economic insights, mortgage strategies & tips. For all things mortgage, come enjoy our blog!
What a week we’ve had… Yesterday the US Fed did something they hadn’t done since oct 2008. Oct 2008, for some reason that time period stands out but I can’t quite put my finger on why, OH YA, Lehman Brothers went belly up & the global financial system was in shambles!
So what did the Fed do? The Fed had a scheduled meeting for 2 weeks from now but decided to do an emergency rate cut of not 0.25% but 0.5%.
Fast forward to this morning & the Bank of Canada matched them with the same 0.5% drop. This was the first time Canada has done such a move since spring 2009. Not very encouraging precedents…
The reason for the big move was due to the corona virus. Regardless of whether you think this is overblown hype or a legitimate concern, the reality is covid19 brought China’s economy to its knees. China consumes about half of the world’s resources so that alone poses a problem for a commodity based nation like ours.
But what can Central Banks really do to interest rates that are going to counter that? They’re not buying oil. They’re not buying plane tickets. Earlier in the week we saw the Bank of Japan step in with 500 BILLION yen in liquidity injections, followed by the Bank of Australia cutting rates, but both their respective markets, just like the US, rose briefly then fell. What we are seeing is Central Banks losing their ability to actually impact markets & growth.
So what happens from here? Is this big move the only we’ll see? If you’ve been following these summaries of mine then you’ll know that I’ve been expecting lower rates since the summer. The US has a dollar shortage & strength problem they’re trying to fix. You’ve got the eurozone on the brink. I think this is going to be a race to the bottom. And all that was before coronavirus.
I’ve been following this virus since mid January & it was pretty clear even back then that this is an incredibly contagious virus. Anyone who looks at how exponential growth works can see how quickly this can overwhelm a country’s resources, particularly healthcare, & that, to me, is the big risk here at home. Call me a fear monger or buying into the hype, or whatever… a country like China doesn’t completely shut down if it wasn’t absolutely necessary.
So in summary, big rate drop today. Bond yields are either at or near all time lows. The loonie is weak. Business investment is down. It’s not a pretty sight & it appears this could just be the beginning.
How’s that for a happy morning update? I’m Ryan, thanks for watching & have a great day.
Goooood morning & welcome back from summer,
A LOT has happened. First thing’s first: the Bank of Canada held rates steady this morning but the expectation is that will only last until Oct or Dec at the latest before hopping on the rate drop train.
Global momentum has slowed & commodity prices have drifted down accordingly. The trade war has escalated over the summer & is now turning into a currency war. It’s something like ¼ of all government bonds, $15 TRILLION dollars worth, are negative yielding. Take a moment to consider what that really means.
Bonds have traditionally been where you place money for safety. A negative yielding bond means you are PAYING for the privilege of lending a government money. Think about that. You are guaranteed to lose money if you carry the bond to maturity. This is bananalands. What happened to save your money & be rewarded by having more tomorrow than you’ll have today? What are the implications when you lose money keeping it in what has traditionally been the safety trade? It’s very difficult to wrap your head around how backwards this has become & what impacts this is going to have to the world. Central banks are losing the fight against deflation.
The Bank of Canada expects economic activity to slow in the second half of the year. From what I’m reading, the US needs to drop 50bps at their next meeting & I’ve read as much as 100 bps by the end of the year. That is going to put pressure on Canada to start heading in the same direction. That all sounds great on the mortgage front but when you consider that central banks traditionally need 5% worth of rate cuts to pull an economy out of a recession & we’re a hair under 2%, it’s worrisome to imagine how this is going to end.
I love talking about this stuff so if you have any questions please get in touch. Otherwise, have a lovely day.
Here is a link to the Bank of Canada release: https://www.bankofcanada.ca/2019/09/fad-press-release-2019-09-04/
The federal budget came out yesterday & there were some minor actions targeted to first time buyers I wanted to highlight.
First off, don’t get excited. The impact in Vancouver is likely going to be limited, but basically the gov’t is increasing the home buyers plan RRSP withdrawn from $25k to $35k, effective immediately. Note that the funds still need to be repaid in the same 15 year window.
The second incentive is from CMHC which will provide 5% of a first time buyer’s down payment on a resale property & 10% on a new build. The buyer still needs at least 5% down, but this will help reduce borrowers mortgages to lower their payments.
The loan is interest free so from that perspective, why not take it. Lower payments, less interest. The funds will be repaid upon the sale of the home, but so far it is unclear how this would work exactly. CMHC might share in the capital gain or loss, receiving a portion of the sale price, but we will wait to see how this will be rolled out exactly.
There are requirements to meet this program, namely:
-household income under $120k
-borrowers must have the min 5% down
-the purchase price cannot exceed 4 times the buyers household income.
Based on this, the effective limit on purchases will be less than $500k so the impact of this is going to be limited in our market.
While the budget does allocate $10billion over 9 years for new rental homes, it does not bring in any tax breaks or reduced red tape to developers, which, in my view is a more productive & efficient way to attack these issues, but, hey, I’m not running the country!
Today we’re going to talk about variable rate mortgages & whether you should lock in. Earlier this week I put out a blog which dove into fixed versus variable & outlined some of the key factors which could impact rates one way or another. We also looked at what history suggests is the best strategy, so for anyone who wants to take a bigger bite out of this, I’ll link to that in the show notes below but this video is going to build off that & give some practical questions to ask yourself if you’re debating whether to lock in your variable.
When ppl talk about fixed vs variable, you’ll often hear them saying a fixed rate mortgage is for the risk averse, as you know exactly what your payments are going to be for the length of your term. In reality, though, the biggest downside of a fixed rate mortgage is the penalty. If you break the term, which happens to the vast majority of borrowers, there is a penalty attached & on the fixed rate side the penalties have the potential to be much much much higher than with a variable. Given that most ppl end up breaking their term & paying that penalty, taking a fixed rate comes with more downside risk than a variable & when you consider that the variable has outperformed the longer term fixed rates close to 90% of the time, the variable actually seems to have much less risk than a fixed. If you’re in a variable currently, keep this in mind. The decision of whether to lock in should weight the probability of potentially breaking the mortgage just as heavily, if not more heavily, than concerns of rising rates.
Moving on, if you’re 10000% certain you will not be breaking your mortgage & therefore are not concerned with penalty risk, the question of locking in really boils down to your own piece of mind. If talk of rates rising keeps you up at night, or if your budget is tight & increases to your payment are going to but strain on your finances, then the first thing you want to do is contact your lender & ask what your options are to lock in. Compare the difference in payment & see what your buffer is – how many Bank of Canada increases would it take before that variable catches up to the fixed? If one increase is going to bring you to par, then that decision is going to be easier than if it would take 3 increases. Compare the risk & reward. Think of it as an insurance policy against rates really taking off.
With all this said, I’d like to again point out that history suggest locking in a variable isn’t a great idea from an overall cost of mortgage perspective. You’re better off just riding it out. For more info on that, again I’d recommend reading the blog I put out earlier this week, or feel free to give me a shout.
DLC City Wide Mortgage Services
Amidst worries of inflation finally starting to creep in with our American neighbors, and concerns that, after 35 years of declining rates, this long term declining rate trend may finally be reversing, the question of whether to lock in that variable rate that has done so well for borrowers has become a valid concern. In this blog we’re going to give some perspective to these rate increases, outline reasons for & against future increases & discuss the questions you should ask if considering locking in your own mortgage.
We are currently just off the basement of a multi decade long term trend of declining interest rates, which began in 1981 when prime rate dropped from its high of 21.25%. Since then, the overall course has been down & we have hit historical lows for interest rates in what has been an unprecedented experiment in central bank policy. In fact, over the 5000 years of interest history, the world is at the lowest level ever recorded. From that perspective, one would assume we’re closer to the end of this long term cycle than the beginning, but the question is what is going to happen in the near term.
– lowering rates incent borrowing which leads to spending & investment, while raising rates are used to slow the economy & reel in inflation. While Canada had a far better year than expected in 2017, we are facing some major headwinds to overcome in the year ahead. For one, rising rates slows housing, which has been a big driver of the economy to this point. Higher rates can also strengthen the loonie, which negatively impacts exports & therefor manufacturing.
There is also the overall indebtedness of Canada to consider. Too many rate increases too quickly can effect repayment of loans & put Canadians under water on their debts. Additionally, NAFTA renegotiation & the lowering of the corporate tax rate in the States (making Canada less competitive) are two other pressing concerns for our economy. Overall, there is anything but an assured path to aggressive tightening of interest rates in the short term.
The yield curve plots short to long dated government bond yields (interest rates are priced off of these bond yields). A normal shaped yield curve is upward sloped & indicates investors expect longer maturity bond yields to be even higher in the future. Despite the short term yields rising roughly 1% over the last year in Canada, long dated bond yields have barely moved. The yield curve is still relatively flat, which suggests investors are not optimistic for long term growth & therefore skeptic to see higher interest rates.
The best research on fixed versus variable has come from York University professor Dr Moshe Milevsky. He found that borrowers were better off taking a variable rate over a longer term fixed rate nearly 90% of the time. Fixed rate borrowers pay for stability, while those with a higher risk tolerance, who can handle fluctuations to their payments, would benefit from that uncertainty by paying less interest. Years later he updated his study to determine if borrowers would be better off trying to time the market & lock in their variable mid-term. Even under the generous & unrealistic assumption that borrowers would be able to accurately forecast the future of interest rates, he found that individuals who attempted to lock in & time the market underperformed (83.3%) those who stuck with the variable (88.1%) & rode out their term.
You could be right in timing the bottom of this 36 year trend within 5% & still be off by 22 months. Given that fixed rates are priced off bond yields, and that the bond market has generally priced in increases by the Bank of Canada before they have happened (meaning fixed rates will go up before you’ll hear talk of prime rate increasing), don’t bother trying to time the market. Take a fixed term mortgage & sleep easy knowing exactly what your payments will be for the coming term, or take the variable & don’t worry about the impossible task of trying to time the market. Choose a path & stick with it.
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City Wide Mortgage Services – Zupan Mortgage Services (E, & O, E.).