Today’s deflationary environment will ultimately be replaced by inflation. You’ll have no trouble recognizing this when oil hits $150, a litre of gas is a buck and a half, food prices are going nuts and mortgage rates are rising monthly.

But this will not make us Argentina. Instead of hyper-inflation which wildly inflates wages, salaries, prices and asset values at the same time, this is the kind that just sees prices go up, while your income doesn’t. There are many sound economic reasons for my saying this. I’ll explain over a few scotches some time.

This inflation will also not escalate house values. Not by enough to compensate for your lost net worth, anyway.  The main reasons will be stagnant family incomes, the debilitating effect of energy prices and rising mortgage costs.

At least you can do something about one of those. And now, on to Pickering…

Hi Garth,
Really enjoy reading the blog everyday. I know you are a big advocate of variable rate mortgages.  I was wondering when you think the right time/rate is to lock-in, if ever?

Our situation is this:
-We sold and bought a house in the fall of last year.
-We chose a home that was more suited to our needs that resulted in a mortgage of $270K (20% down on $350k).  This represented a mortgage of about a third of what the bank ‘approved’ us for (seriously, why in the heck would we, or anyone else, need an $800K+ house?).
-While we did do a 35 year amortization, we also went with bi-weekly payments to accelerate the am, and we also throw everything extra we can afford toward the principal (bank allows us up to 15% per year without penalty).  So, effectively, we’re making payments as though it is a much shorter amortization.
-We secured a 5 year variable at an opportune time; our rate is prime less a half.

While prime may remain reasonably stable over the next year, we are already starting to see/expect banks to raise their mortgage rates.
While we love our current low rate, which makes our payments toward principal much better, when is it the right to time to pull the trigger and lock it in, if ever?
If there a right time, how long a term is wise to lock in for – 5 years? 10 years?
5.25% on a Scotia Fixed for 10 year mortgage is much higher than our rate right now, but we don’t want to be paying 10% come renewal time in fall 2013 either.
Thanks — Jeff in Pickering

This is a question I am asked more than any other these days. Stay variable, or lock up?

Regulars will know my propensity for variable rate mortgages, simply because they save a ton in cash flow and since loan rates have not been scary for the last decade and a half. Those people who jump on a 5- or 10-year term irrationally and pay 2% extra for half a decade or more are idiots. They would have been far better off to go VRM and dump the extra money against the principal in the form of prepayments.

But these days, long-term rates are moving higher with the bond market. And while I think rates will fall again this autumn when the blood rivulets down the gutters of Wall and Bay, there’s no doubt the cost of money over the next number of years will be relentlessly increasing.

I mean, how could it be otherwise? That Obama guy will (like that Harper guy) be monetizing his deficit and bloated debt, goosing the money supply in order to pay for the mother of all stimulus packages, health care reform and various wars. At the same time, America will be imposing a carbon tax to ostensibly rescue the environment but really to save US manufacturing jobs (sorry China) and, of course, we have peak oil coming.

Given that, a great investment strategy is this: duck.

Part of ducking is stabilizing your loan costs, and that means locking in a mortgage. So, yeah, Jeff, suck it up and call the loans officer.

And while you’re rewriting the loan, deep six that ridiculous 35-year amortization. What were you thinking? That interminable term means you pay off virtually no principal each month, since it’s meant just for dumbass first-time buyers who don’t know any better. But not you. You are here reading this blog. You are elite.

Go to the branch. Do it: five year term, bargained down to a point below posted, 25-year am, rapid paydown and prepayment options, portable, weekly pay, hold the insurance.

Strut in. Shades. Attitude. Carpe diem, dude.