This was the headline, just another in a long list of what is essentially fast-food for the brain.
Short Version
- Stop watching/reading the news – it’s primary purpose is to generate fear.
- Stay variable – especially if you’re at Prime-1.00% or better
- What follows is long, easily an 8 minute read, and who has 8 minutes these days?
Long Version
Will your payment rise 45%?
Let me ask you the same question worded differently;
Will your mortgage interest rate triple?
If yes, then yes.
That’s the math.
If rates triple, then payments increase 45%.
a.k.a. ‘If this then that’ a basic formula for News headlines.
Let’s go deeper, using 2% as a starting rate, because that’s who the BOC is worried out – you 2%’ers
If rates double, to 4%, the payment rises ~25%
If rates triple, to 6%, the payment rises ~45%
What if rates go to 18%?
Well then your payment goes up 9,000%
Kidding, ‘just’ 337%
337% sounds not so bad after I said 9,000% doesn’t it?
That’s a technique called ‘anchoring’, where one number is set that is way out there, and in turn it makes the real number seem more palatable. It’s something the BOC is also doing… sneaky eh?
Enough about headlines and marketing, let’s talk about something real.
Let’s talk about two things headlines and the news stories almost never cover.
Real math.
Real money.
So here’s a few very real questions no headline is asking;
Are you making 1.5% more than you did a year ago?
Are you making 6% more than you did in 2019?
Will you average a 1.5% raise per year over the term of your mortgage?
Because 1.5% = 25% = 2X
Yes, a 1.5% raise, covers a 25% mortgage payment increase 5years later, triggered by the interest rate doubling.
Next question;
Will you average a 3% increase in gross household income over the 5yrs to renewal time?
Because 3% = 45% = 3X
Yes, a 3% raise, covers a 45% mortgage payment increase 5years later, triggered by the interest rate tripling.
Now, am I saying a $980.00 increase to the monthly payment on a $500,000 mortgage isn’t a big deal?
No.
What I am giving you is real math, along with a real action plan.
If you’re worried that your 2% rate today (from 2021) is going to become 6% tomorrow (2026), then you need to average 3% more gross household income per year, every year, to cover that off.
Key Point; at renewal that 500K mortgage is knocked down to ~425,000 – that’s a $75,000 reduction in debt, aka a $75,000 increase in equity.
A $75,000 increase in your net worth, never mind the increase in your property value – which 4 years from now will also be a real thing.
Equity is power, more on this coming up.
If you, like me, are in a variable rate mortgage – today’s headline drama isn’t impacting you.
Because your payment is static for the term.
In fact only ~1 in 10 mortgages in Canada have a true adjustable rate, these are the ones with payments moving each time the Bank Of Canada sneezes.
Next sneeze due July 13, count on it being another big one.
But all of us qualified at 5.25%, even when our contract rate was say 1.25%, still 5.25% stress tested.
And after the last three hikes many of us are at just 2.5%, less than half the qualifying rate used for approval.
This suggests to a thinking person that… we will be OK.
Do we like paying more?
Of course not.
But… can those who qualified for adjustable rate mortgages over the past 6 months, or 4 years, afford to pay more?
Yes.
Yes they can.
There’s a lot to not like about what’s happening right now, the new words alone are a bit much…
Stagflation
Inflation
Shrinkflation
All words that never really mattered before, now suddenly important for us to know.
Stagflation sounds like an exaggerated story about a bachelor party…
Man there was a tiger, then I was locked in the trunk of a car, next thing I knew I was in Thailand with a face tattoo…
Sounds on point for the wild ride our economy is taking us on.
And what about shrinkflation?
This sounds like something middle age men need to speak to their doctor about.
As for inflation – this one we get.
Things cost more.
No kidding!
Canada tends to follow the US, and what was the news out of the US last Friday?
Inflation at 8.9%
Gas up 49%
Grocery up 11.9%
Electricity up 12%
Rent up 5.2%
Will Canada’s number follow?
Probably, we are followers…
But, what do we know about Canada today, as in ‘this news just in’?
That we’ve hit another all-time high for employment.
Good news right?
Who knows anymore…
135,400 new full time jobs
95,800 fewer part time jobs… hopefully the part-timers became full time.
A net gain of 39,000 people employed full time over 30 days.
Wow.
And hey, inflation’s not just limited to the cost of goods, wage inflation – the cost of people, is also running at 3.9%, up from 3.2% in April.
Hey wait, there’s that 3% we needed earlier.
3% = 45% = 3X
The (general) wage math is on track to cover a tripling of interest rates.
Interesting.
See… it’s all roses, rainbows, and puppy dogs.
OK not exactly, but keep in mind.
- You’re paying your mortgage down at an all-time record rate!
- At renewal your 20yr amortization can be extended back out to 25, or very likely 30yrs if need be – which offsets any big interest hikes in an equally big way.
IE triple the rate, or re-extend to 30yrs – and it’s becomes just a 22% increase in the payment.
And if things got really bad, would we see the gov’t bring back a 35yr option?
Yes, we should see that now in fact, it’s overdue.
And lastly for all the talk of ‘highly indebted households’… it’s not homeowning households.
Since Jan 1, 2018 it’s a different buyer, due to the stress test.
Today’s homebuyer has zero consumer debt. Zero. They have amazing credit, great income, a solid down payment, and are on a record setting pace to pay down their mortgage balance thanks to rock bottom rates among other things.
As for those coming up for renewal today, they’re barely seeing a 1% rate increase, because back in 2017 fixed rates were at 3.79% (I told you not to lock in, I told you to stay variable)
I knew then what I know now.
Rule # 1 in mortgage world; Life is variable and your mortgage should be too.
Also, it’s all going to be OK – no really it is…
I’ve been saying this for more than two decades, decades of fear and loathing about ‘where it’s all going’
Smile, breathe, relax, turn off the news, put your phone down, go for a walk.
In the end everything will be OK, and if it is not yet OK, that’s just because it is not yet the end.
Hang in there.
Stay positive.
Stay awesome.
Stay variable.
DW