Are interest rates taking off without you?

Are interest rates taking off without you?

The image is of an actual flight leaving without me July 14, 2017. Despite being given 90min extra due to a delay…I missed it! A first in 25 years of solo travel.

I also missed calling this rate hike accurately.

It was that kind of week folks.

 

Initial confidence, held by smarter humans than I, that the Bank of Canada would hold off at least one more meeting was dispelled Wednesday morning. However the fact that an increase has now been triggered gives us the advantage of watching the economic impact of this increase over the coming months and more easily gauging the odds of a second increase.

 

So, what happened with rates, and what does it mean to you?

On July 12 Lenders increased variable rate borrowing costs by 0.25% to match the Bank of Canada increase.

 

Fixed rate mortgage holders are not impacted during their term. (they opted for 0.50% to 1.00% higher interest rates to start with)

 

A 0.25% rate increase = a payment increase of $13.00 per month per $100,000 of outstanding balance.

 

i.e. A $300,000 mortgage balance will see payments rise by $39.00 per month

 

***Unless your variable rate mortgage is held by TDCT or WSCU, in which case the payment is static during the mortgage term. The payment does not rise (or fall) unless you specifically ask for it to move – instead the length of the mortgage life is adjusted slightly***

 

You can lock into a fixed rate (usually 0.50% to 0.75% higher) if you choose, without cost or penalty. To do so would be based on the belief that the Bank of Canada is going to increase Prime by more than 0.50%-0.75% in the next year or two. Speak with an advisor independent of the lender themselves – many lender staff have special incentives to convince to lock in (the get paid to convert you).

 

I do not see Prime rising another 0.50% – 0.75% or beyond anytime soon.

 

I personally am not locking in.

 

Smarter men than I have researched this matter of ‘locking-in’, men with ‘Dr.’ before their name, over a 50 year span – click here for the CBC article on said study. Their advice – ‘stay the course‘.

 

We have seen this movie before, back in 2010 when Prime went up 0.75% through the course of the year (three 0.25% hikes) and then stalled for five long years, the few clients that locked…  not happy about having done so at all.

 

In 2015 the Bank of Canada cut Prime twice, dropping the rate by 0.50%, where it has sat for 2.5 years.

 

That has been the pace of volatility. Slow, small blips here and there, and it is how it appears the future volatility will play out as well.

 

And do not forget the difference in prepayment penalties, this is significant.

 

Bottom line – Stay Cool.

 

P.S.

 

It was a bit disappointing to see logic and fairness fail to enter the picture, after the last two Federal cuts of 0.25% we saw decreases of just 0.15% by the lenders (every single lender moved in unison, not one went the full 0.25% down… almost as if all lenders had the same idea independently from one another – cough cough, right?!?!)

 

And amazingly enough not a single one, despite all lenders operating totally independently of one another, saw fit to increase rates by the exact same 0.15% as they had decreased by in 2015. Nope, every lender passed 100% of the increase on to their borrowers.

 

Not cool man, not cool at all.

 

We share the pain, and pay a premium on the gain.

 

Like the parent of an unruly teenager (ours were actually pretty awesome) I wish I could look the Banks various Presidents in the eye(s) and say with complete sincerity that ‘I am not mad at you, but I am deeply disappointed in you’

 

That is all.

 

Dustan 

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