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October 26, 2017 | The Cull

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Matthew has a question. “First, the obligatory grovel,” he says, ensuring that he gets a response. “Love your blog, been reading it for a few years now. (blah blah lol).” Hmm. A soupcon of disrespect is detected, but let’s carry on.

“My mortgage is eligible for early renewal with RBC. The [email protected] is offering 5 year fixed @ 3.39% or 5 year variable @ 2.72. I’m currently on a 3.14 fixed. This will be my first renewal on a 25 year mortgage.

“Is it better to go fixed or variable at this time in the current economy? I’ve gone fixed in the past as I thought rates were already as low as they’d go, but of course would have been much better off in hindsight. Now with rates trending up, I’m not sure if the lower rate is only temporary? Roast away Garth.”

The first thing to realize is that none of this matters. For Matt to lock in a rate for the next five years at a mere 0.25% than he has been paying is the cheapest insurance he’ll ever buy. But all he need do to effectively slash his long-term interest costs is to switch from a monthly-pay to a weekly-pay mortgage. Over the course of 12 months he’ll make the equivalent of one extra payment (no big deal) and it will end up shortening his amortization by years, saving more than a variable-rate loan ever would. He just needs to ensure he gets the right kind of weekly mortgage, since some of them are bank rip-offs.

So where are Canadian rates going? Market odds tell us there’s a four-in-ten chance of another increase this year, likely at 10 am on Wednesday, December 6th. Some people are quite convinced the Bank of Canada will pull the trigger, exactly one week in advance of the Fed doing the same thing on December 13th. As for the first quarter of 2018, the consensus is for central bank increases in both countries. After all, things are okay. The US economy is chugging along, corporate profits are robust, inflation is back, global GDP is on the rise, American taxes are coming down and Trump hasn’t nuked anybody yet.

Despite Sears, Morneau, fifty-buck oil, Vancouver condo prices and the war on small biz, the Canadian economy continues to grow with no signs of recession on the horizon. The two most hawkish central banks on the planet lately have been the Fed and the Bank of Canada. Both want rates normalized. It’s an ill-informed fantasy to believe your next mortgage renewal will be for the same, or less. Ain’t gonna happen.

So going variable now is probably a bad idea. Why gamble for the sake of a few basis points? Life has enough uncertainty.

Meanwhile, a few words are required about scuzzy mortgage brokers who well know what the coming B20 stress test will do to real estate values, but continue to lure borrowers, in a massive conflict of interest. Check out this advice from an Invis Mortgage rep in the Lower Mainland. First clients are given a false flag on the Bank of Canada’s widely-expected decision not to raise rates this week, then goaded into buying now – just before prices fall. Sheesh.

Bank of Canada holds benchmark rate
The Bank of Canada announced today that it is holding the overnight rate steady after raising it twice this past summer. …The Bank has deemed that “the current stance of monetary policy is appropriate.” Good news for homeowners with variable-rate mortgages and lines of credit.

IMPORTANT – New Mortgage Rules Effective January 1, 2018. Purchase before year end if you have 20% downpayment, otherwise you may have to buy 20% less home! If you need to pay off large amounts of credit card debt, are thinking of a large renovation, or want to buy an investment property, you should also act before year end. These new mortgage rules will reduce your purchasing power and affect your ability to access your home equity. Get in touch ASAP to understand the changes and review your options!

Okay, Invis, so why will people “have to buy 20% less home” after New Year’s? Right, because borrowers will qualify for 20% smaller mortgages, to ensure they can actually afford them (the benchmark will be the greater of 4.89% or 2% above the rate the bank offers you). If every single borrower in the land must now pass the same income test, and available credit overall will contract as a result (which is the goal), then for the same house to sell to the same universe of buyers, it must become 20% cheaper. Duh. So either the market freezes up with sellers refusing to discount even if they cannot find a buyer, or valuations drop. And it will not be the former. At least for long.

Realtors are rounding up sheep, too.

“I’m contacting all of my current buyers to make sure they understand,” Hamilton-area agent Joe McMahon told CBC this week. “Most of the public don’t realize how much this is going to affect them.”

To recap: house prices in Canada were nutso because mortgage rates dropped to the point where people could afford to carry vastly more debt. Add in speculation, a misunderstanding of risk, group think and a thick sauce of house lust, and we ended up in this unfortunate spot. Thanks to the bank regulator, mortgages in 2017 will travel from 2% to 5% – an unprecedented doubling in a single year. Price reductions in 2018? Pure logic.

But what’s that got to do with it? Or ethics?

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October 26th, 2017

Posted In: The Greater Fool

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