Many of you are already aware, fixed rates have increased slightly over the last week and a half. I’ve received a few phone calls and emails from people who have seen news headlines dance across their screen calling for the financial world to collapse and the end of surging prices in Vancouver as we know it. Fear mongering at its best.
**If you want to skip forward to what this means for you, my client, head down to paragraph 7. If you’re interested in what has led us to these increases and some vented frustration on the matter, continue reading.**
Let’s take a step back a few weeks and review what has gone on in the world of real estate financing. October 17th was a rude awakening for all of us when the feds ushered in a set of new mortgage regulations that are among the strongest that we have ever seen. Yes, they have effectively cut the legs out from first time buyers with their new mortgage stress test guidelines, the effects of which remain to be seen. But what most people are ignoring is the fact that these new policies are also making it more expensive and difficult for many of Canada’s largest lenders to secure funds for the purpose of real estate lending.
We have three options in Canada for “AAA” mortgage business: Banks, credit unions, and non-bank lenders. The majority of you reading this email likely have a mortgage with a non-bank lender in our country. Over 400,000 Canadians, last year alone, received mortgages from our non-bank lenders. These guys are big, big players and offer superior products in many cases and keep the market competitive.
In the simplest of terms, these non-bank lenders and many of the credit unions too, are now having to find alternative sources to secure the funds they lend, which only makes things more complicated and more expensive for the consumer in the form of higher interest rates.
But here’s where things get even more frustrating. If you’re reading this thinking that the big 6 banks don’t have to secure their funds the same way and they will just undercut the rest of the market and steal all the business… you could not be more wrong. The big 6 have raised their rates quicker than the non-banks have, for two reasons. First, the big 6 actually secure a large portion of their funds the same way non-banks have for the past decade, which means their costs will increase as well on many of their products. However, for those products and mortgages that aren’t secured the same way, they’re simply increasing their margins and making greater profits off of you.
It is public knowledge that the big 6 banks in our country have been crying about their diminished spreads with the amount of increased competition in the lending space. There was nothing wrong with the system we had in place. In fact, it was the envy of the financial world since the 2008 financial crisis. These changes simply heavily favour their spreads and will only line their pockets even further.
This brings us to today where we have seen the prices on fixed rate mortgages jump by approximately 0.25%. This equates to approximately $13/month for every $100,000 in mortgage on a 25 year amortization. Hardly anything to be calling for a collapse of the Vancouver real estate market.
So, what does this mean for you, my clients?
If you are in a variable rate mortgage, in my opinion, now is not the time to be locking in. We have seen a slight increase in fixed rates due to policy changes, not market changes. The Prime rate (which is what your variable rate is based on) has not moved, and likely will not move any time soon. Prime is typically increased when the country’s inflation rate is surging. This is far from the case in our country, and given the extreme unknowns for our neighbours to the south, I think we will continue to see low inflation for a long time to come.
To put things in perspective, if you have a variable rate of Prime – .75 to Prime – .40, your current interest rate is between 1.95% and 2.30%. If you were to lock in to a fixed rate today, you would be increasing your rate to roughly 2.69%. Prime would have to increase fairly significantly before you are losing money on this dilemma.
If you are in a fixed rate, no need to panic either. For most of you it doesn’t make sense to pay a penalty to renew early at this point. If you think you might be a special circumstance, reach out and email me at [email protected].
For ALL of my clients, this is an excellent opportunity to take advantage of the Inflation Hedge Strategy that we spoke about when setting up your mortgage. Take advantage of today’s low rates, and increase your payment slightly to “keep up with inflation and avoid payment shock”. As I eluded to above, it’s an increase of approximately $13 for every $100,000 of mortgage. This little increase will have an enormous effect on your amortization and balance owing at maturity. It is still a great time to take advantage of these rates and pay off as much debt as you possibly can!
About these changes… Should we be angry? Yes, we should be angry with the government for making these changes without any industry or public consultation. You can’t just turn a dial and marginally slow down a market that is mainly driven by a lack of supply issue. I anticipate that these changes will only slow the economy and hurt our first time buyers. I digress…
One thing remains for sure, is that now more than ever you will need a good Broker on your side!
Remember, I am here for you. I work for YOU. And always will work for YOU. If you have any questions specific to your circumstance, never hesitate to reach out.
And don’t forget, I love helping your friends and family as well. If they are not getting the attention they should be, I’d appreciate the introduction!