- Interest Rates – What’s Going On?
- Working with Professionals: The TvH Group
- Question? Comment? Know someone who might need some help?
1. Interest Rates – What’s Going On?
I have been getting some questions recently about interest rates. Specifically which way they are headed. A common enough question for a mortgage broker as you might surmise and in fairness one I am asked to comment on frequently. So much so that beyond general terms I tend not to get into rates too much in my articles as the fact is they can be rather puzzling to discuss and depending on your particular situation and point of view what resonates with one might make no difference to another. So rather than try covering individual scenarios with blanket statements I tend to encourage people to call or email me their specific details. That said, I am going to take a bit of a turn from my usual policy regarding interest rate discussions because the times they are a changing and the rate environment has become to the casual observer perhaps somewhat muddled. As mentioned, people have been asking about the direction of interest rates and whether they’re going up or down. The reason I thought it was worth a discussion today is because the answer is “both” and that is sometimes a little confusing.
Depending on the type of rate and term (fixed, variable, longer term, shorter term, etc.) you may well have rates heading in diametrically opposed directions. So the answer isn’t so much which way rates are going but more which kind of rates are we talking about? Sorry, was that a cop out on an answer? 🙂
While it is fair to say that interest rates follow a general correlation, it is also fair to say that like many financial markets over the short term there are times of discrepancy. So while it is correct to say that since lending rates peaked back in the early 80s that Canada has “generally” seen declining rates over the last 30 years it does not mean that all shapes and sizes of interest rates have moved in lock step during that period.
So the question now becomes, besides an Economist working on their PHD, who cares?
Well, I thought you would never ask! It matters because different choices like a fixed rate or a variable rate, a 1 year term or a 10 year term can have a significant impact on your financing situation. In Canada, while sometimes 5 year fixed rates are the correct choice the reality is we far too often default to this term without due consideration. The 5 year fixed rate is a term that is far and away Canada’s most common financing selection and by a factor but the reason given for why people want a fixed is often lacking. People haven’t really thought about it, or that’s the term their friend told them to take. The fact is if you look at studies over any reasonable timeframe a 5 year fixed term is rarely the least expensive choice.
By way of example let’s take a look at what has been happening to various lending terms in Canada over the last 6 months with a focus on fixed vs. variable choices. In the spring of 2013 fixed rates, for a variety of reasons hit an all-time low with pricing below the prime rate of 3 per cent. Variable mortgages on the other hand, long a favourite of mine over the years, were clearly out of favour as they were trading at a premium to the prime rate of 3 per cent. In plain terms fixed rates were cheaper than variable rates and most economists were forecasting interest rates were going to rise in the coming years. In other words, not only were variables more expensive than fixed rates but the gap was likely to widen! Why wouldn’t you take a 5 year fixed rate? And needless to say I counseled many people to do exactly that.
However, fast forward 6 months:
The fixed income or bond market has been under pressure in recent months with historically low rates being pushed higher. Lenders, facing a compression of their margins due to both markets and regulatory changes brought in by the government of Canada have moved to increase rates on their fixed mortgages. The 5 year fixed rate, so recently the darling of the mortgage world at below 3 per cent has now perhaps put on a little weight and not shaved in a few days. Still attractive, but not as attractive, say Hugh Jackman to Ashton Kutcher. Both are ranked as the top 100 sexiest men of the year (at least according to Glamour Online) but Wolverine is clearly the guy. Ladies back me up on this. As it stands fixed rates on a 5 year term are in the middle 3 per cent range. Still pretty nice, but not quiet at the top of the list and fixed rates may well continue to rise.
Well, if fixed rates have gone up then what have variable rates done? If they were over 3 per cent back in the spring where are they now? To stick with the sexiest man alive theme they must be like Leonard Nimoy or something! And yes they have changed, but rather than worsening variable rates have actually seen a drop in pricing and are now firmly in the middle 2 per cent range. In fact, the spread between a 5 year fixed mortgage and a 5 year variable mortgage is now approximately 100 basis points or one full percentage point and widening in favour of the variable in 6 months! If you had a mortgage of $500,000 that is a $5,000 annual interest difference. No small potatoes when you consider what that will become over a few years. Variable rates have started to become a viable option once again as the supply of money funding variable rates has increased relative to the supply of money funding fixed mortgages through the bond market.
What’s that you say? It makes no sense you say?
Well, in the short term you might be right. I think my old university economics professor Doc Haver would be inclined to agree. But here’s the thing, it happens and it creates opportunity. With a little market knowledge and an informed opinion the potential exists to save a lot of money. The reality is markets are complex. Even mortgage markets, which seem pretty tried and true can still provide the potential to confuse and confound. The problem with mortgage market like most financial markets is the mistakes made as a result of said confusion are typically both expensive and time consuming to repair. So I will leave you with this:
If you are considering doing something with your financing, or a friend, or a relative etc. etc. and you are hearing things in the media that are giving you cause for concern take a few moments to touch base with me and allow me to provide you with an informed opinion based on your specific circumstances. As many of you know, I am only too happy to discuss this kind of thing. Don’t take what you hear in the news as gospel, don’t assume, don’t avoid taking action as a result of a lack of information or even too much information. Do touch base with me, do give me what you are thinking and trying to accomplish and do take action and I would suggest more often than not there will be solid opportunities to improve your situation.
I hope that makes sense but as always I am happy to chat!
2. Working with professionals:
One of my goals as a financial professional over and above my goals as your mortgage professional is to provide you with a support network that will help you manage your complete financial and real estate situation in the way we have managed your mortgage situation – by putting you in touch with ethical, principled and knowledgeable specialists from a variety of fields. If you have questions or needs in any of the following areas:
- TvH Mortgages run by yours truly, Jon Sowerby as Mortgage Broker and Broker of Record
- TvH Financial, dealing with Investments and Insurance is headed by Jim Lao , Financial Advisor
- TvH Legal, dealing with Real Estate and Estate law in addition to civil litigation is headed by Sonia Kociper, Lawyer
- TvH Accounting, dealing with personal and business tax matters headed by David Jamestee, Chartered Accountant
- TvH Real Capital, dealing with mortgage investing, a subsidiary of TvH Mortgages
We also know some excellent people in the following fields:
- Real Estate
- Property Insurance
Even if you don’t have a mortgage need at the present time but you need some help in one of the above areas please call or email me. I am privileged enough to work with some of the best in the business and I know they will take excellent care of you and yours.
If you have a need in a field you don’t see above? Let me know, I might still be able to help!
3. Question? Comment? Know someone who might need help?
Do you have a question or a comment? Do you know someone who is considering their financing options and would like some straight forward advice? Why not take a moment to send me your question? Email or phone me, whichever is more convenient. I’m always happy to help and why wonder and maybe miss an opportunity when a few minutes of your time could provide all the help you need. Take care and stay in touch!