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Short Version

  • Watch Sharknadoas it is a better use of your time than reading inflammatory predictions.
  • Mortgage rates actually dipped lower this week.
  • For a BC resident with the provincial average variable-rate mortgage balance of $300,000.00 a 0.25% hike in interest rates increases their payment by $38.88.
  • Stay calm!

Long Version

Every year kicks off with a flurry of forecasts. Many predict doom and gloom.  Perhaps that is what we prefer to consume.

These stories tend to follow a familiar format of ‘If this bad thing, then this scary result’,  sort of like If a tornado picks up live sharks and drops them on our city then only Ian Ziering can save us.

It really looks like the chain is missing to me...

It really looks like the chain is missing to me…

Good stuff, thanks for that warning.  (OK, I am perhaps overcorrecting a bit here.)

Certainly some of the predictions making headlines seem about as likely to me as a SharknadoDeutsche Bank’s claims that Canada is in serious trouble, certainly.

Another example of a hyperbolic headline this week: CBC’s suggestion that we ‘Get ready for an interest rate shock in 2015’. Really? A shock?

Like a 10,000-volt heart-stopping shock?

Perhaps more like a 9-volt toy battery shock.

The ‘shock’ they allude to is a 0.25% increase in the US interest rates, possibly coming in May (not as per this link before April anyway), leading to a possible rate hike which Canada might implement later in the year. Possibly possible.

The frustration with stories like the above from CBC lies in the fact that interest rates were in fact reduced by .05% to 0.10% the same day by lenders.

Yes, rates are dropping as stories are written speculating that the opposite might happen in the future, triggering sleepless nights for readers who remain uninformed that rates, in reality, are currently flat or declining.

Stories about ‘what if’ rather than ‘what is’.

Sadly, the application of actual mathematics is lacking in most of these news stories as well.

I have addressed the mathematics of future fixed rate increases here.

  • A 0.25% interest rate hike in Prime translates into a payment increase of $12.96 per month per $100,000of mortgage balance.
  • The average mortgage balance in BC is a little below $300,000 – a $38.88 per month increase per 0.25% of rate hike for the average BC household.
  • A full 1% hike in rates would equate to a $155.52 payment increasefor the average BC resident.  The Bank of Canada tends to move in 0.25% increments.  There are eight preset meeting dates to make said move each year. It is unlikely that the BoC would move rates four times of the eight total meetings this year.

The average new mortgage balance I see within my own business (about 175 clients per year) is $450,000: a $233.28 increase for my median client. All of my clients can afford this with a modicum of discomfort. Many have already pre-inflated their payments as per my annual and repetitive Happy New Year suggestion. They are further insulated from any increases.

Again, the media speculation around rising rates is just that: speculation.  Not one lender has increased rates; instead they lowered them this week. When rates finally do rise, it will be a slower than expected and manageable (for most) adjustment. No increased expense is ever great news, but nor it will it result in blood in the streets.

Realistically the BoC might move Prime up by 0.50% by year end, although I suspect 0.25% is more likely, later this year, i.e., the fall.

Here is a link to some cooler heads (also via CBC) discussing what may or may not happen.

Also interesting excerpt from one of our lenders’ updates:

First National Market Commentary – Jan 7th

The path between the price of oil and the cost of your mortgage may seem long and winding and hard to follow, but it does exist.

Oil is a major component of Canada’s economy. Energy accounts for about 25% of Canadian exports and oil is a significant part of that. Oil is now selling for about half what it was just a few months ago.

Lower oil prices mean less royalty money for governments. Low oil also means the main driver of employment in Canada  — the Alberta oil patch — is likely to slow as well, as energy firms cut back operations. Employment is one of the key indicators the Bank of Canada watches when determining interest rate policy.

Falling oil prices are likely to have an, overall, negative effect on Canada’s economy, exerting downward pressure on the Bank of Canada rate, and therefore variable mortgage rates. The impact on GDP and employment will likely hold down government bond yields and, in turn, fixed mortgage costs.

Keep in mind that news stories like these are largely ‘fast food for your brain,’ with the resulting spike in heart rate and blood pressure just as unhealthy for you.  The best plan: avoid mass media’s exaggerated headlines of ‘what might happen’.  Grab a good book instead.

Here is one that I recently read and quite enjoyed. It shows us how to increase our happiness with the choices made around spending our money.  I plan to read it again just before the holiday season next year as well.

Stay Cool!

Dustan Woodhouse