Mortgage Rates are Going INSANE
Interest rates have gone insane, and everybody is asking, when will this end?
Will the interest rates continue rising for the rest of the year here in Canada? What should you expect moving forward over the remainder of 2022?
If you are a first-time seller considering refinancing your property or moving to a new home, how can you power through all these changes?
These questions have been revolving around the country as interest rates continue to increase. To help you understand what is happening and answer all your questions, we invited professional mortgage brokers Adam Mansbridge and Hugh Bullen.
Where are Interest Rates Going
Many millennials today are at the crossroad of taking a leap into owning their first home or moving up to a bigger one. But with how the financial world is turning up, it is inevitable to hear the older generation sharing horror stories about the crazy high interest rates during the 1980s, creating a lot of fear to move forward.
The buyers right now are one or two generations apart from those horror stories in the 1980s when mortgage interest rates skyrocketed to 15-20%. According to Adam, in this period of elevated inflation and rising interest rates, you only have to be mindful of two things, the cost of borrowing and the spread between incomes and the cost of living.
Could Mortgage Rates Hit Double Digits
We are in a different place now, and it is highly unlikely that interest rates will go up to double digits as they did in the 1980s. Economists recognize that we cannot be pushed that far; otherwise, there will be a bigger problem in the future.
The Bank of Canada has one mandate: to keep inflation at the 2% to 3% mark. And the only way they can do that is by managing the rising or lowering cost of borrowing.
Back in the 1980s, the incomes and the cost of living generally move proportionally. If you think about where incomes have gone now from then, they have not risen by the same proportional amount that the cost of living has increased, instead, it is causing a much bigger gap.
Most of the news spreading around Canada comes from the east, in major cities like Toronto and Vancouver, where the cost of living is so much different from Calgary. Although the market here is not the same, we can still feel the crunches because that is where decisions and news comes from.
Looking back, the Bank of Canada has been improving on stress test rates and doing better at protecting Canadians from periods of elevated pressure.
When Will This End
After the latest interest rate increase in September, which was a lot higher than what people expected, many can’t help but ask when these increases will stop.
Mortgage brokers like Adam and Hugh rely on chief economists and those who run mortgage companies, the mortgage lenders, and what comes from the Bank of Canada. Looking back to what was said in December 2021, some were calling for the overnight lending rate to finish up at 1.25% and yet here we are now pushing 4%.
Most economists agree that there is probably another maximum of 75 basis points coming before the end of this year, and hopefully, that will put a cap on this. The real question now is, how long does that last?
Some say there will be a recession much sooner than expected because recessions are typically when rates come down. Others say it could take a couple of years or up until the end of 2024 to see rates start to fall back.
There are so many factors affecting this movement, not just within Canada but globally, as the world is very much intertwined now. The government and economists need to look closely at every piece of data and adjust accordingly.
Fixed Rate vs Variable Rate
There have been ridiculously cheap rates in the recent years. Mortgage brokers have daily conversations with individuals that are wondering if they should go with fixed or variable rates.
The people who have just bought a house or can't own a home, ask if they can convert to a fixed rate. Those who bought their property in the past year or two, wonder if they should stay at a variable rate.
Right now, the variable rate and the fixed rates are basically the same. If one goes up a little bit more, it will probably come down soon.
The thing is, if you convert to a fixed rate, you are then stuck with this higher rate for the remainder of your term, however long that might be. So if you just bought your home, it will be better to keep a variable rate. There might be a little pain in doing that now, but it will be better in the long term.
If you are looking at buying now, a variable rate is still probably the way to go. But if you are somebody who will lose sleep at night and doesn’t want the stress of it, a two or three-year fixed rate may be the better way for you to go. Then do a reassessment from there on.
It all boils down to what you are more comfortable with. If you look back five years from now, will you be regretful if you stick with fixed rates, or will you be grateful for the long-term benefit of a variable rate, even if it had pain points along the way?
Historically, when you look at the data from the last 25-years, the variable has often outperformed the fixed in a five-year term. There are only a few periods where the variable hasn't topped the fixed overall.
Advice for First-time Sellers
Families move every five years as that’s the time frame when milestones typically happen, like having a baby or children going to school.
Talking to a realtor and a mortgage broker is of paramount importance as every need is different. The best way to go always depends on what is happening in your life at the moment.
For example, if you are expecting twins and you need a bigger house, it is best to move as soon as possible, rather than one month before or after your children are born as that would be very challenging!
If you have a house right now with a mortgage and are looking at buying a bigger home, you have to think how much bigger your mortgage will be. Now that there is a severe lack of inventory in Calgary, it is not advisable to sell your home without knowing where you will go. Talk to your broker and create a solid plan depending on your equity and your capacity to pay the new mortgage.
And here’s a pro tip, you can proactively increase your current payments to what you think you will be spending on your new place. So if you are paying $1,500 a month right now, and you know it will be $2,200 in the new property, then pay $2,000 per month in your current mortgage.
This is like financial training for your next move and there are a lot of benefits in paying that extra cash. This move will help you pay off the remaining amortization on your existing mortgage, which creates equity, resulting in less interest. It is a win-win-win!
If you have any questions about your mortgage, feel free to send us an email at email@example.com so we can connect you to Adam and Hugh. You can also book a call with us if you have any real estate questions or concerns.Posted by Jared Chamberlain on