I was asked for a short video regarding Variable Rate Mortgages and whether or not to Lock In…
Short Answer; No.
No don’t’ lock in.
Also no to the short video – you want short – tune out now.
The Longer Answer?
OK here it is in 1,400 words…
Rising Prices are a thing yes.
But what about Interest Rates?
Will they rise too?
Well, as always, it depends.
The media wants to feed us fear, because we click on fear, and clicks pay the bills. Thus (most) headlines are just that – fear inducing (nonsense). The economist with the most fear inducing theory gets the most airtime – more on this point to follow.
When it comes to inflation the debate is around the meaning of the words ‘temporary’ & ‘transitory’
Trying to pin down the meaning of these words – as defined by economists results in answers that sound like;
Ah well… How long is a piece of string?
Hey man, Time…. Time is a flat circle.
Or…
Dude – time is a construct!
Yes, an economists version may be 1,000 words longer, yet somehow it remains about as enlightening as these examples.
The reality is while some things are getting pricier…
Gas prices alone are up 33% year over year – Ouch!
Where is my Cybertruck Elon?
And inflation is the entire worlds problem, everything is up everywhere.
In particular fuel, and what’s the result in the past of massive spikes in fuel prices? A drop in consumption of goods and services leading to….
A Recession?
If so, a recession results in what?
Low interest rates.
So, Inflation… well it’s an interesting topic. But for just how long? Lumber prices seem not to be news these days, supply is back on line.
Admittedly we live in an era of the greatest unreported inflation ever – IE under 2% per year for more than a decade… yet year over year house prices have moved at more than 10%
So… what gives?
Well, it turns out that the actual cost of a house isn’t part of the Consumer Price Index…
For real?
We’re tracking the cost of a bunch of goods, and services, and saying inflation has been modest, and the current levels are going to be ‘short lived’ but where I am supposed to put the goods that are costing me 4.4% more to buy?
(3.5% if we strip out fuel)
It begs the question; How meaningful is the CPI?
and should macro interest rate movements be made based on it?
Given that all evidence indicates low interest rates are not the thing driving inflation, a lack of supply is.
For instance – over the past 7 years it’s been $2,000 to ship a 40ft container across the ocean, today it’s $10,000
Basically supply chains are still experiencing problems due to premature Covid shutdowns – who knew we would all want a new car while unable to drive it anywhere at all?
Extreme weather events are also a factor.
And social issues (IE the great resignation?) are creating labour shortages and thus compounding material shortages.
All of this conspiring to constrict supply.
And hey, limited supply = no deals on anything.
IE housing!
This year’s black Friday is basically going to be down to shopping ebay for TP deals offered by the now regretful 2020 TP hoarders.
Central banks all like to use the word ‘transitory’ and we heard it again at last weeks BOC meeting.
That meeting where they don’t move interest rates… that’s the one.
Because low rates are not driving prices higher, no – this time…. It’s different?!?
But what is the definition of the word transitory Tiff?
Basically, one person’s transitory may be another’s ‘decade’.
Go back to 2009 and you can find many a pundit arguing about rate hikes about to hit – 2010-2016 saw CDN magazines covers with ‘Prepare for interest rate shock!’ and all manner of impending doom type headlines.
Well ok – let’s talk about preparing.
Which is different than locking in.
When inflation is driven by a lack of materials and labour, the fed pushing interest rates up a point or two over the next year or so isn’t necessarily the answer.
And with all due respect most economists are wrong about most things because of ‘the unexpected event’.
What could possibly happen next?
Indeed – what could happen next?
Well, probably not an interest rate hike.
That’s an increasingly out of date tool, for past problems of a bygone economic era.
Pushing up Prime to slow inflation, or cool the real estate market…
Well this is like asking for a root canal from a tree surgeon.
Tree surgeon’s operate with chainsaw’s, so ya – no more problems with the tooth because well… no more patient.
Note; Why am I not talking about bond yields and the 5yr fixed rate movement?
Because that movement is ahem… transitory.
Also it is irrelevant for our purposes, remember my opening line – NO.
A 5yr fixed mortgage product made no sense in 1995 when we took our first mortgage, nor in 1970 when my parents took their first mortgage.
The 5yr fixed was a suckers bet for the past 50 yrs, and in my admittedly outspoken opinion remains a bad move today.
How can I say this?
I look stats.
I look that the real life examples of 1,695 past clients… which is a decent statistical sample size, and I look at my own life, and yours.
I look at actual prepayment penalty amounts.
Locking into a 5yr fixed… that can result in a 900% higher penalty than the variable rate product, IE $18,000 on a $400,000 mortgage rather than just $2,000… is a bad idea.
Bet the bank didn’t mention that penalty math when they called you with an ‘urgent opportunity’ (for them) to lock in.
Just listen to the language – you are locking in – locking yourself in. Since when did you want to be locked into anything ever – I mean hey, maybe you’re Chuck Rhoades and that’s your jam – cool.
No judgment.
But back to mortgages… I look at the dollar for dollar savings of being 1% plus below the fixed rate for a year or two, or three …
And the math is $13.00 per month different in payment per quarter point, per 100K of mortgage money.
So yes, if you are carrying the CDN average of say a 400K mortgage then a quarter point hike MIGHT result in a 54.00 per month payment increase.
Might.
But if you are worried about a 1pt hike, why inflict the actual interest rate hike on yourself now? Why not just inflict the payment increase on yourself?
And pay yourself first.
Every penny of the $50.00 goes to principal if you add $50.00 to your current payment.
Call your Broker, get them to assist you with the math and the change.
If you have a 400K balance, odds are that locking in today will jack your payment by $216.00 per month or thereabouts.
With a great chunk of that going right to the banks bottom line – never mind that 900% penalty increase you have set yourself up for as well.
So hey, why not pay yourself first and have 100% of that 216.00 going to principal, lowering your balance faster, thus lowering your risk faster, and if and when a rate hike does come your way, you’re already prepared.
But again… how long, before rates rise?
Well there is of course no way of knowing for sure.
It all depends on whose (crystal) balls your peering into.
And speaking of balls, here’s a click bait headline if there ever was one;
4 rate hikes per year for 2 years running’
Really?
The guy that predicted that got the top 95% of the news article, but if you were in the 1% of readers that actually read the entire article you saw another prediction from a gent whose job title and employer suggest an equally weighty set of (crystal) balls.
BMO Asset Management
Chief Investment Officer
Sadiq Adatia
Said “Well I do expect to see the Bank of Canada probably go earlier than the US Fed in terms of interest rates hikes but I don’t expect to see four next year by any means,”
“I do expect at least one, maybe two rate hikes next year but definitely not four.”
So who’s right, about what?
What I see’s that given the unique nature of our current inflationary experience – higher rates are unlikely to be seen as ‘the answer’… by the people in power.
And so I’m sticking to my guns, my mortgage financing is variable – because my life is variable.
And hey, if your life is variable, maybe your mortgage should be too?