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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!
I’ve been getting a lot of questions about how the coronavirus will impact mortgage rates so wanted to get this out there to cover what those looking to buy a home, or have mortgages coming up for renewal, or are thinking of maybe refinancing, should expect. A lot of people you know have mortgages & are going to benefit from watching this so please forward on to friends or family or whoever you think is going to want to know what’s going on.
I’ll try to keep this simple: LOWER RATES. Until the world has gotten this virus under control there will be no pressure on rates to go up. The Bank of Canada dropped rates by twice their usual 0.25% cuts last week, something they haven’t done since the great financial crisis, and that was just as this virus was entering Canada. Is that the last of them? No. Bond yields, which are what fixed rates are priced on, have been finding new bottoms, I expect us to see rates follow suit & continue to hit new all time lows.
Regardless of your personal thoughts on Covid19, what is very clear is how contagious this is. Forget death rate & how many ppl die compared to the seasonal flu. What this boils down to is the potential of exponential growth.
Consider this example: if the number of people in a stadium doubles every day, and it takes 50 days for the entire stadium to be filled, how many days does it take before half the stadium is filled? The answer is 49. On day 48 = 25% full. On day 47 = 12.5% full. On day 46 it’s 6.25% full. So in the span of 4 days we go from 6.25% full to 100% full. That gives you an idea of how quickly things can get out of hand & why authorities want to act early.
The path I think we can expect are schools shutting down, employers allowing people to work from home, conferences & sporting events being cancelled. The countries that have gotten a handle on this thing have done so by implementing draconian measures of more or less locking people inside their homes to prevent the spread & that is where I think things are likely to head. To frame all this from the perspective of the economy, it’s not good. Canada’s growth had already been slowing BEFORE corona had shown up. Look at commodity prices. Look at the price of oil right now. That decline started before the Saudi / Russia feud.
Think about the knock on effects of what happens when people aren’t going out for dinner, going to the mall, taking trips, booking flights. When companies aren’t making sales, they cut costs through layoffs. When people don’t have jobs, they don’t spend money. You can see how a deflationary shock like this can be self reflexive. All of this points to rates continuing to drop.
What does this mean to you? Looking purely from the mortgage perspective, this is obviously good. If you have a mortgage that is over 3%, get in touch because in the last week we have found a ton of opportunities for clients to save money refinancing their mortgage. I still think it’s a bit early, but we’re at least knowing these opportunities exist & waiting for the timing to be optimal before finalizing anything.
If your mortgage is coming up for renewal in the next 6 months, DO NOT take your lender’s early renewal offer. At least, not without checking in with me. I have yet to see one in the last few months that is attractive enough to make moving early worth it but I can at least promise to shoot you straight & can tell you quite quickly what you should do.
If you’re looking to buy a place, as always, be patient. There is going to be opportunity out there & on the mortgage front, you’re going to be looking at rates we have never seen in Canada’s history.
The final piece I want to add here is that there is already a ton of government debt in the system & we’re going to see a lot more. The way governments are going to eventually get out of this debt burden is by trying to create meaningful inflation. Any of us who have spoken to our parents about mortgage rates in the early 80s & 90s, have heard of rates in the high teens & even above 20%. We got there because the government was trying to reel in inflation. I’m not saying we’re going to go to 15%, but even rates going from the mid 2% to the mid 5% is going to create a shock to a lot of borrowers. There is a lot you can do in advance of that to prepare.
Once this worm has turned, it is going to be essential for you to have your mortgage not with a bank specialist, not with your account manager at the branch, neither of those avenues get compensated to service their existing book of business. It is very rare for your banker to approach you with a refinance opportunity.
That is really where us brokers are worth our weight in gold. That’s how we make money is by finding these opportunities & saving you money. You want to work with someone who has your best interests at heart, who knows what’s going on & knows when to do things so you can time it appropriately.
The last thing I’ll add, if you are concerned with the risk of inflation, not in the near term, but down the road, get in touch. I have some awesome strategies for that, one in particular the “inflation hedge,” which I would love to share with any who are interested.
Thanks for watching & have a great day!
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.
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City Wide Mortgage Services – Zupan Mortgage Services (E, & O, E.).