It’s time to lock in your mortgage rate…ASAP!

Most of us dream of the day when we can burn our mortgage. Few of us are prepared for the day when the mortgage burns our dreams of home ownership.

For some, the added expense of renewing their mortgage at a higher rate of interest can come as a shock. The rates offered today are crazy low by historical standards. Young homeowners weren’t subjected to skyrocketing mortgage rates during the early 1980’s and God willing they never will.

I recall being asked – long ago when friends thought I was prescient just because I worked in the financial industry – whether or not one should lock in the mortgage rate for the long term since it seemed like they’d just keep going higher. After all, in 1982 the trajectory of interest rates and mortgage rates had been straight UP!

As you can imagine, my answer at the time was an emphatic “NO!”

Today the opposite is true. The cheapest posted mortgage rates are the ones with the shortest terms or are variable. Plug those rates into your calculator and the payment schedule seems like a dream come true. Unfortunately interest rates over short time horizons can be surprisingly volatile. It’s possible just one or a few years later you’re burdened with payments that are no longer manageable.

In March of 1987 the average mortgage rate was close to 10%, but by March of 1990 had climbed to 13.5%. The monthly payment for a $500,000 mortgage at 10% (crude calculations but I am lazy) might have been around $4800. But at 13.5% would be nearly $6000. If you or your partner were lucky enough to get a $15,000 raise over the course of the term (say 3-year in this example) then things would be okay, but otherwise your consumption (food, child’s education, gasoline) or savings plan would suffer. Worst case, you’d have to sell the house.

Strangely enough, housing prices can rise during the early stages of rising interest rates as people who were planning to buy a house begin to hurry up the process, hoping to get a more attractive mortgage rate (before they go any higher). Unfortunately, the panic to buy is short-lived and soon there is a veritable drought of buyers who can’t afford to hold mortgages at the higher rates. Suddenly, there’s a glut of houses for sale, and if you can’t manage the higher monthly payments you have to sell the house at a loss. OUCH!

The process of rising interest rates has already begun in earnest. Historically, mortgage yields are slightly above bond yields. Bond yields go up, mortgage rates go up too. Financial institutions have responded to rising bond yields (see graph) by raising their mortgage rates in recent months as I’m sure you’ve noticed. At present, mortgage rates haven’t risen as much though, because these institutions continue to compete with one another by offering incentives and there’s also a bit of a lag as head office communicates its changes in corporate strategy down to the marketing departments.

There is still a bit of time to buy your dream home and walk away with a low-rate mortgage, but not nearly as much time as you might think. You might be reading that governments are inclined to keep the ‘bank rate’ (or discount rate which is the rate of interest the central bank charges the commercial banks to borrow money) low, in order to help the economy along. This policy is long-in-the-tooth already, and central banks cannot continue lending money to the banking system at a ridiculously low rate, when the interest rates the central banks have to pay to raise money for government spending (bond rates) keep rising. The strain on the country’s finances will become too onerous, and unwanted inflation inevitable.

If you haven’t taken advantage of low mortgage rates yet, go ahead and lock up your rate at the lending institution for as long a term as possible. And if you’ve been holding off buying that new car, don’t wait. I’ve been in the financial industry long enough to know a good thing when I see it and I took advantage of one of those generous 0% financing offers – I figure I may not see another opportunity like it in my lifetime.

Mal Spooner

 

 

 

Visit me at LinkedIn.

 

Fiduciary duty – a long time overdue

As most Canadian readers will know, the concept of mandating that certain advisors have a legally binding fiduciary duty to their clients has been gaining strength recently. Long overdue in my opinion!

Ignoring fancy legal words, a fiduciary duty or responsibility is to put the interests of the client FIRST, before the interests of the advisor. While for professional advisors this should be self-evident (and has always been part of my personal standard of integrity), regulators seem to feel the need to add more regulatory teeth to this issue.

So far, the impetus in Canada has come from the CSA (no – not the Canadian Standards Organisation – The Canadian Securities Administrators) which is a policy group consisting of the top Securities Regulators in each Province and Territory – and yes this includes Québec. They provide policy direction to Provincial Regulators and try and make the rules consistent across the country. There is a parallel insurance industry group called the CCIR (the Canadian Council of Insurance Regulators) which functions in the same manner as the CSA for the life and general insurance industries. I am going to presume that the folks on the CCIR are paying close attention to the work of their colleagues on the CSA and we can expect further action on the insurance side of the Canadian money world soon. Good stuff! HOWEVER, there is a problem from my perspective – what about the rest of the financial community??

What about banks, trust companies, credit unions, caisse populaires? How about household financing companies, mortgage lenders and brokers and payday lenders? What about vehicle dealers and their financing arms? Have people considered the furniture and appliance dealers and their lending practices? Even issuers of credit cards should be subject to this duty – some could argue they are the biggest offenders of not putting the interest of the client or customer ahead of their own! What about MLM businesses that require an “investment” by new “distributors” before they can play the game? Who is considering this issue beyond just the “investment” industry?

How do we, as a society, deal with those unscrupulous folks such as Earl Jones who was never registered or licensed in the first place? It wouldn’t matter what rules were in place via IIROC, the MFDA or the equivalent bodies in Québec for the Mr. Jones’ of this world. How will this impact Ponzi-schemes and the perpetrators behind them?

My next blog will examine some of the costs that will have to be paid – by guess who?? The consuming public is the ONLY source of $$ to pay for regulation and they need to be fully informed of this aspect as well!