Tell Me About Interest Rates…

Tell Me About Interest Rates…
Some facts, and some thoughts on the recent movement we have seen with regard to interest rates.

VARIABLE & SHORT-TERM FIXED

Variable-rate and short-term (1, 2, & ~3 yr) fixed are largely dictated by Bank of Canada decisions.

The last Bank of Canada decision was Dec 7, 2016 and once again Prime was held steady.

Consider that the Canadian unemployment remains at 6.8%, with Alberta unemployment at 9.0% – the highest level in 20 years – and you start to see that the ability of the Bank of Canada to increase Prime is hampered.

What drives Prime rate up?

Economic good news, inflation running wild, all of us on wild consumer spending sprees. When you see that happening, when you see dozens of big shiny new trucks loading up giant TVs at Best Buy and loads of new furniture from… well wherever furniture comes from these days… then we might see some upward pressure.

But what about the US? 

Canadian prosperity being a driver of higher rates, if you believe that President Trump is going to do amazing things for the Canadian economy, maybe then we have a concern.

Personally I think that if P.T. goes after Mexico through crushing NAFTA then we Canadians, and our economy, might just be collateral damage. Sure the US could start buying more of our oil, but then what would they need to spend those trillions on the military for?

As long as we have our own federal government deficit-spending billions in an effort to stimulate our economy and get inflation back on target, little will change. This is our government putting their foot firmly down on the gas pedal.

For the Bank of Canada to raise Prime, that would be akin to the government putting their other foot firmly down on the brake pedal.

For the hoonigans in the audience, we know this as a ‘brake-stand’ and it is a great noisy, smoky, festival of tire-spinning fun in your parents’ car, or a rental car, but less fun to do in your own… or with the economy of a country.

AND SO?

Plan to enjoy stability in your variable-rate mortgage for some time to come.

Footnote: The last change by the BoC was a 0.25% drop July, 2015 to the current 0.50% overnight rate. The last increase was September, 2010. It was one of three hikes in a row from 0.25% to 1.00%.  So yes, Prime has been lower, and no, Prime is just not a volatile animal these days. Next BoC meeting is Jan 18th 2017 and no movement is expected.

WHAT ABOUT LONGER-TERM FIXED RATES

Longer-term (4, 5, 7, & 10yr) fixed mortgage rates are dictated by the bond market, and no doubt the bond market has been a volatile as teenager without an Internet connection.

Again, what is happening with 5-year fixed rates has zero connection to variable rate mortgages.

But what is happening?

Two things.

#1. The government is at work protecting you from yourself again.

November 30 saw the enactment of federal guidelines for mortgage lenders that effectively created two-tiered, and in some cases three-tiered mortgage rates.

The federal government changes increased costs for lenders to hold the highest-quality mortgages on their books, and thus rates went up 0.15% – 0.25% for Mom & Dad’s upcoming mortgage renewal. You know, that $140,000 mortgage on a property worth in excess of $600,000.00 for the borrowers who have never missed a payment in 15, 20, 25 years. Yes, they will pay more.

Guess who will not pay more…

Their twenty-something kid, making $20.00 per hour, buying a 40-year old condo for $200,000 with a gifted down payment. Sounds higher risk right? Yet such a borrower will be able to access rates ~0.25% lower than the previous example.

This is the sort of logic we get from government decisions made with zero industry consultation.

#2. Five-year bonds have been trading between 1.00% and 1.05% recently, a healthy jump based on speculation about what might happen in the US  since their election. When bond yields rise by 0.40% or so, five-year fixed mortgage rates follow. Will things calm down over the coming months? Will this teenager be able to snap and chat? Time will tell, but the bandwidth of volatility is not expected to be much larger than we have seen.

This is not the ‘inevitable return to 21%’ that your parents, or maybe your grandparents at this point like to keep suggesting.

CONCLUSION

Lots of noise, lots of smoke, lots of nonsensical policies, lots of unintended consequences of best intentions. Little traction, and little movement.

If you are variable – stay variable my friend.

If you are in a fixed – then why are you even reading this far? You are not affected until renewal time and cannot do much until about six months out from said renewal time. Then we should be chatting.

Keep calm.

 

Dustan

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