Mortgage Trend: Is variable rates going up very soon? should I lock-in fixed rate now before they increase? OMG OMG!

today rate

We noticed a lot of people are travelling to Japan this year as it feels like half of our Facebook posts are photos from Japan. We also took advantage of the low airfare and took Zoe in past Spring. Those who know us know we always look for best deals in everything, and travelling is no exception.

We are sure most of you travelling to Japan will be using some sort of mobile wifi device. The first time we went, we didn’t know any better, we reserved a device online and picked up at the airport at over $10CAN/day (below left). But this year we found a place at Vancouver is renting out wifi devices for as low as $4CAN/day!!! (below right) They have a store in downtown Vancouver you can go pick up before you trip and no need to wait in line at the Japan airport and waste your vacation time while they try to explain to you in Japanese. The device battery strength is amazing. This device lasts the whole day unless you are always surfing the net like us in which case it still last until 10pm. If you or your friend travelling to Japan be sure to check it out. Don’t worry they speak English 604-683-3510.

wifi japanwifi saya


Back to our main topic.  Those who heard about the recent news that Bank of Canada is hinting they might increase interest rate soon than previous expected. We already hear people panicking asking us are rates going to go up now? should we convert from variable to fixed now? Or should we lock in fixed rate right now before it’s too late?

We are here to break it down for you with insight that you will probably  won’t see from any mainstream media.

The Scare Tactic:

Before you all go into panic mode that you mortgage rate will go up tomorrow, just think about all the media feeds that you have read/heard in the past, or any mortgage/home buying “experts” suggesting today’s interest rate will not last forever, it will eventually go up, etc. It’s important to take a look at what actually happened to the Bank of Canada rate in the past 18 months:

overnight rate

As we have been mentioning to homeowners last few years, we recognized the Bank of Canada intent is to try to cool down the real estate market. However according to Colin’s and Angel’s Think Tank, it suggested that Bank of Canada, realistically speaking, is not in a position to actually increase the Bank rate as the economy is still recovering, partly of the oil shock. So what they did is to use the scare tactic. They can only keep warning homeowners not to take on excessive debt as rates will eventually rise.  To most of the population it succeed. But to a person with CFA and Econ Major, sorry Mr Poloz we called your bluff. Just look at the chart above. Prime rate did not change for the past 18 months.

Direction of variable rate:

We generally agreed the economy is trending more and more in the right direction in the last few months, and that rate increase should, finally, be in the horizon. However what we want our clients to noted is that this will just push forward slightly the expected 1st rate increase, from mid 2018 to perhaps early 2018. We would be quite surprised if there is a rate increase before 2018. So variable rate holders can breath easier for now, there is still time to decide your next move. For those with variables ending in the next year, that is great news.

Throughout history, Bank of Canada overnight rate typically goes lock-step with mortgage prime rates. We need to noted the last decrease in mortgage prime rate did not decrease in lock-step with the overnight rate. For example the last drop of 0.25% in overnight rate resulted in only 0.15% drop in mortgage prime rate. So there is a good chance when the 1st overnight rate increase, which will be 0.25%, only result in 0.15% increase in mortgage prime rate. So your impact could be lessen by half.

Direction of fixed rate:

Before we start on this topic, we just want to clarify one thing, that fixed mortgage rate has no directly relationship with Bank of Canada overnight rate or prime rate. The fixed mortgage rate is determined solely by the yield in the Canadian bond market + a spread as per the individual Banks. Looking at the 2 graphs below you will see the yields for 2 & 5 years bond as of Jun 14.

2 year bond5 year bond

And the yield is determined by investors (local and global combined). If investors view Canada as a safe place to park their money and have solid economic prospect, this will drive down the yield thus resulted in a lower fixed mortgage rate. (Assuming the individual Banks will keep the margin the same). Fixed rates has been fluctuating within a close range in the past couple years, maybe within 0.25% boundaries. According to Colin’s and Angel’s Think Tank, in the next few months we expect fixed rates to continue to fluctuate within a very close range. We might see a slight increase in the next couple weeks but we do not think it will go any further, then that. As such, if you are in a variable rate now there is no rush to lock in fixed rate for now.

Feel free to each us if you have any questions about your current mortgage situation or if you are planning to get a new mortgage or close to a mortgage renewal. By not talking to us, we guarantee that you are leaving money on the table with the lender!



Disclaimer: The info and predictions above are only personal opinions of the writers. Actual results may varies. We are not responsible for any financial loss as a result.


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