Rates Are Moving (and what that means)
A big bank increases rates and they get a lot of press. Our last communication in October predicted this, so we are not surprised (and it is great to give insight that turns out correct, because looking through the rate crystal ball is never easy). So why the increases, what do they mean, and is it time to panic?
First and foremost, the rate increases are more a result of the increase to the cost of capital than actual economic conditions. New government regulations and pending ones coming November and January are making it cost more for lenders to lend. How does a bank or lender deal with higher costs? Well, they pass it on to the consumer. In order to maintain profit spreads, a change had to happen.
The second issue is a somewhat unexpected US President Elect that has caused uncertainty in the market and the bond market in particular. Mortgages are priced off bond yields and when the market went a bit crazy, rates had to rise. We saw a similar thing happen in 2013 when the US Fed announced they would no longer buy bonds. The difference is this rate increase is likely staying due to the points regarding the cost of capital. However, a slight continual rise, followed by further rate stagnation is in our opinion what will happen. Keep in mind rates are moving from all-time lows to next to all-time lows.
There is also talk that a Trump presidency will lead to inflation and that too will further fuel higher rates. That may be the case, but we need to see a more robust Canadian economy before the Bank of Canada will have major concern on inflation and look to increase the overnight rate. As a result, existing variable rate mortgage holders will likely see little impact. Unless of course banks go ahead and increase Prime on their own (which would be crazy talk, except TD Bank did just that unprecedented move a few weeks ago)
So, rates are increasing, but what does this actually look like to you as a mortgage holder? If you have a fixed rate already – it means nothing. If you have a mortgage renewing or are looking to buy this year – it means something. If you are in a variable - it maybe means something. 5 year fixed rates jumped about .15% and this equates to about a $6/month increase per $100,000 borrowed amortized over 25 years. If you were to take out a mortgage of $400,000 monthly obligations would be about $24 more. A change yes, but time to run around like Chicken Little? Not really.
However, if you are fence sitting and have a pre-approval, you might want to capitalize on the lower held rate. If you are in a variable rate and want to review options on locking in, please connect with us. If you just want to discuss mortgages, we are also happy to use this opportunity to review your personal plan.
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