By Paul Hudson
Published: Sept 11, 2013
In the words of Pierre Elliot Trudeau, “when Americans sneeze, Canada catches a cold”.
This is an appropriate metaphor describing what has happened to mortgage rates since June 2013 when rates started their ascension upward.
By August 22, The Royal Bank of Canada had increased its five-year fixed rate to 3.89 %.
Shortly thereafter the majority of other Canadian financial institutions followed suit, with mortgage brokerage deep-discounters Industrial Alliance even bumping its five-year fixed rate as high as 3.39%.
The rapid 1.1% increase since June occurred partially due to bond yields increasing in the United States. As part of their economic stimulus program, the U.S. has been buying around $85 billion worth of bonds every month in an attempt to keep interest rates low.
In late June the U.S. Fed Chairman, Ben Bernanke, announced he ‘could’ start to ease their stimulation of the economy later this year.
That small announcement has had a huge impact on the global stock markets and bond yields. Although nothing has been officially announced as of late August 2013, his continued flirtation with the idea since this announcement has bond speculator determining “when” rather than “if “this will happen.
So, what does this mean for mortgage rates in Canada? And more importantly, as a homebuyer or refinancer in Sea to Sky Country why should you pay attention to this noise south of the border?
Bond rates in Canada have increased in conjunction with rate increases in the U.S. and Canadian fixed mortgage funds are primarily sourced in the bond market.
More specifically, the money your local bank or mortgage brokerage (lender) obtains for you is borrowed or purchased by the lender for a lower rate than what you get it for. In Canada in recent times the difference or “spread” is about 1.4%.
Therefore when bond rates change, mortgage rates typically change to maintain this spread.
Over the course of the summer, I saw many of my clients take advantage or five year fixed interest rates as low at 2.79 % for their purchases and renewals.
Had they waited until now, their payments would be $230 more per month based on a $400,000 mortgage. This equates to an additional $20,847 in interest over five years (based on semiannual compounding and a 25 year amortization).
Clearly mortgage costs continue to increase but in comparison to historic rates, costs are still relatively low.
Of more serious concern than cost is the threat of buyers missing the opportunity to purchase the type of property they had planned for as rates continue to increase to more sustainable levels.
Furthermore, with the rental market in Squamish swaying back in favour of the landlord since early 2013, it may make more sense to purchase a home rather than face potential rental increases or evictions due to sale.
Also to be considered is the possibility of real estate investors entering back into the market when rental properties become more lucrative to own once again, limiting what kind of real estate is actually available to purchase.
From the perspective of an existing mortgage holder renewing in this environment, two options exist. The first is to early renew with your existing financial institution once you are within 120 days of your renewal date.
Although this definitely protects you from rate increases up to four months prior to renewal, it also protects your existing financial institution from losing your business.
What most financial institution will not do is guarantee a rate for 120 days in advance of renewal unless you renew with them “on the spot”.
The risk you run is missing a potential rate decrease during the 120 days leading up to renewal. Although rates in general are on the rise, quite often rates will retract by 10 or 20 basis points a week or two after a big increase.
Therefore considering a secondary option of a rate guarantee that protects you from rate increases and rate decreases four months prior to renewal is the prudent thing to do. This option is often available through the services of an independent mortgage broker.
Given the amount of money that can be kept in pocket, the best advice is to get your financial flu-shot in advance of your personal mortgage season.
If you are renewing, know when your term is due and start your renewal conversation with a mortgage advisor up to six month in advance of that date. Determining your renewal date can be easily done by visiting your online banking website.
On the other hand if you plan to purchase a home soon, ensure your mortgage advisor is not simply providing you a few quick figures via email.
Instead, ensure the time has been taken to determine your exact financial needs by obtaining the best rate guarantee and terms (in writing) for your personal situation well in advance of your anticipated purchase day.
(Paul Hudson lives in Squamish and has been a mortgage industry expert for the last 15 years.)
