Purchasing your home is one of the biggest and most important decisions that you can make. Tammy Wandzura is a Trusted Saskatoon Mortgage broker and the team at Elite Mortgage Choice believe that buying a home should also be an exciting experience with little to NO stress. By trusting your Saskatoon Mortgage Broker, you are ensuring that any stress you may have had in previous encounters can be eliminated! Tammy truly believes that all you should have to worry about is opening the door to your new home for the very first time. In her latest Saskatoon Mortgage tip she shares information on the 2022 mortgage industry landscape!
Tammy Wandzura Explains What Clients Can Anticipate With Rate Hike Hype
As we anticipated, the APRIL 13/2022 Bank of Canada increase by .50%
Many economists are currently predicting faster and higher increases to the Bank of Canada (BoC) prime lending rate than previously suggested.
Information, speculation and predications are changing by the day.
As the issues surrounding Canada’s inflation concerns remain the same (funds being injected into the economy due to COVID-19 programs and aid, and never ending supply chain issues), inflation numbers are coming in stronger than expected and the BoC is considering aggressive actions to fight rising prices.
As you hear of increasing rates, it’s important to know HOW and WHY rates move and are adjusted.
This information MAY assist you in making a plan and decision moving forward.
The Bond Market (and how affects FIXED rates) WHY are fixed rates moving UP faster than the Bank of Canada (BoC) Prime lending rates.
- Bond yeilds are determined buy 100000's of people, investors, institutions, pension funds and massive amounts of investors buying and selling each day.
- Bond yields move up and down (like stock) based on what someone is willing to buy for and what someone is willing to sell it for in real time. These trades happen on a Government of Canada bong yield probably every 10 seconds.
- The Bond market is like a big voting machine - 100000's casting thier votes (should I buy, or should I sell) based on what they are seeing in the market. (speculation)
- That is why when you look at a chart on Bond yields, they look volitile, they go up and down quite a bit.
- That is what our fixed rates are priced at - the Government of Canada bond yields move when the Goverment of Canada bond yeilds move.
- More volatillty than Bank of Canada.
VS The BANK OF CANADA
- Very stern - carefully measured institution that calmy meets 10 x a year.
- The BoC is considered and measured in thier decisions - as they put their hand on the policy rate lever and decide whether they should raise rates or not.
As information changes, we are here to help you and assist in making decisions moving forward.
Deciding between FIXED and VARIABLE/Adjustable rate options comes down to weighing the pro’s and con’s and information available at the time you make the decision.
If you currently have a Variable/Adjustable rate mortgage – considering the long game is essential.
- Statistics show that a Variable/Adjustable rate mortgage will save you, 80-85% of the time (based on the last 25 years of historical data)
- Fixed rates will always be higher than they would have been when you booked your mortgage in an inclining rate environment
- Going Variable as a short term strategy will always be more expensive
- Remember: your variable/adjustable rate has a DISCOUNT locked in OFF of the BoC prime rate
- Although Prime is moving up, you must consider your discount (and) what current fixed rates are sitting at in comparison
- Reviewing current fixed rates vs speculation on increases is important
- A reminder: (if you have not done so already) set your payment as if you are paying a fixed rate mortgage. This is a fantastic strategy to encompass interest savings and principal balance reduction between BoC rate bumps
- Remember: Prime rate does not go up all at once
An increase to Prime rate will have a direct impact on everyone that has a VARIABLE rate / ADJUSTABLE rate and Line of Credit.
The increases and impact does NOT mean your payment will double or triple, but it will adjust and move up.
The age old question: FIXED vs VARIABLE/ADJUSTABLE mortgage rates.
- Risks of VARIABLE/ADJUSTABLE rate mortgage
- Prime could increase faster than expected through 2023 or continue rising to a higher peak than expected in 2024/25.
- Today, most economists expect that Prime will increase by about 2% over the next two years, but that could change if inflation continues to be stronger than anticipated.
- Reasons to Stay Adjustable/Variable
- Short term savings: If you have a competitive discount on your mortgage rate, you will be guaranteed to continue saving interest costs for the next 12-24 months even as prime increases.
- Long term possible savings: If you believe that Prime won’t continue rising through 2025-27 because the national and global economies and supply chains will be recovered by then, you will stand to save further interest costs in those years if the Bank of Canada starts to reduce Prime to avoid recession.
- Flexibility: If there is a significant chance you may sell the mortgaged property in the next few years (to upsize for more space, downsize as kids move out, to relocate for a new job, etc), the penalty for canceling an adjustable/variable rate mortgage is usually much lower than that of a fixed rate mortgage.
- Risks of LOCKING into a FIXED rate mortgage
- If Prime increases over 2022-23, but then starts to decrease as supply chains recover and governments want to avoid a recession, you are stuck paying a higher interest rate or paying a hefty penalty to refinance.
- If you cancel your fixed rate mortgage mid-term, you can potentially be charged an Interest Rate Differential penalty which is much higher than 3 months interest (the penalty on an adjustable/variable rate mortgage).
- Peace of Mind: if you are uncomfortable not having control over if/when your mortgage payments increase or any type of financial risk makes you worry and stress, you should lock in your mortgage to a fixed rate.
- Fixed Income: If you have a fixed income (pension, annuity, etc) or your family finances are tight, then you may not be able to adapt to mortgage payments higher than a specific threshold. In this case, the security of a fixed rate mortgage might be best, even though it means paying more in interest and having higher payments over the next few years. It’s like buying insurance – you spend more money in interest today for the guarantee of knowing your payments will stay within your budget.
As your Mortgage Consultant, we are regularily sitting in on calls, listening to the narrative, reading the articles and the economist predictions.
Overall, we are here to collect as much information and data to share.
Recently (December 2021) I sat in on a call with other industry colleagues as we reviewed current events and discussed what to consider moving forward.
Although, speculation continues to eb and flow as we lead further info 2022, there are a few points made that need to be considered now and in the future.
MORE FOOD FOR THOUGHT......( as taken from a call in December, but a few points still hold merit )
- There is a disconnect between Bond market and the BoC and US Federal reserve (aka central banks).
- Central banks continue to think that inflation will be transitory and that economies need a lot of stimulus.
- Bond market things that the BoC will be forced to raise by more than what it expects.
- Right now, the BoC expects will start start increasing middle quaters of 2022.
- Bond market does not belive that.
- Bond market is already pricing in speculated rate hike (therefore fixed rates have gone up based on that Speculation).
How likely is it to happen?
- Bond market is betting on a future outcomes and a lot of the time gets it wrong.
- Its not to say they will be wrong - but there is alot hype and noise in there.
Bank of Canada
- increases take 12-18 months to bake into the economy.
- Remember- the momentum that we have in our economy right now was earned by CRAZY amounts of government stimulus and aggressively loose monetary policy. IF the BoC were to hike rates right now it would kill the same momentum so why go to all the trouble to hike rates aggressively unless you have absolutely no choice.
- The Bond market thinks its going to happen - they are pricing in - but the BoC is pushing agaisnt the narrative.
- That is why you see the spread in rates.
- Variable rate discounts have onlyu slightly changed as they are based on the BoC policy rate.
- And bond yeilds have pushed fixed rates much higher.
Even if we were to get a ton of rate hikes - bottom line...would push us into a recession and we would likley see decreases coming down the other side.
What's going to happen when then BoC starts starts to increase.
- They meet 10 x a year (if they increase, historically speaking they increase by .25 at a time) they generally let one meeting go by before they hike again.
- The BoC is on record saying they may not have to increse as much as they have had to in past cycles to bring inflation to heel.
- How many times in total - hikes?
- Historically (past cycles = 6 hikes)
In the end, it’s a very personal decision.
Call Tammy Wandzura today Saskatoon mortgage needs OR visit www.elitemortgagechoice.com