Warren's Mortgage Monthly Vol. 63 - October 2018
Happy October everyone!
Just like the month of Spook, scary things are indeed at hand….markets are roiling and sending shivers up our spines as we watch them lose values of 5%+ in a single day, leaving all us ‘common folk’ shuddering. This, just at the same time that headlines are shrieking multiple rate hikes ahead!! Certainly scares the pants off of me and know you too as I have had several more than usual inquiries as to whether to lock or not and what my thoughts are around same.
Here are my thoughts and observations:
1 Inflation has moderated in Canada as per the most recent September data 2.1%
2 Unemployment is rising - 6% and softening of wage growth - hourly wages are trending down.
3 GDP is waning annualized growth is being pegged at 2% vs 3% that was last year
4 Housing YOY increases are slowing from once +10% per annum compounding increases to 2-3% (which is “normal” btw….) and seems to be in a frozen state as far as sales are concerned even though not a flake of snow has yet fallen.
5 Exports and manufacturing are not carrying the ship - trades surpluses are being reported despite declining exports, as imports are even weaker suggesting slowdown in demand overall.
6 The consumer is tired and retail sales are waning - summer was lacklustre
7 Our loonie is losing ground on a daily basis…
8 Oil remains low
9 Growth for 2019 is being pegged at 1.6% and for 2020 at 1.3% - ummm
Despite all the touch points pointing to NOT changing prime what are we expecting tomorrow? A change to prime +0.25%. Should it happen? No - will it? Likely yes, as a face saving measure to the “hold” that was September’s rate decision due to NAFTA having not yet been resolved. Now that it is, how can we say still no change - smooth sailing from here on in right? It is either this that is driving the decision or the cannabis fumes wafting over to the BoC headquarters from Parliament Hill causing rate decisions to be made while un-intentionally high - LOL! Certainly, it is not economic data.
But here too is what I know:
The bigger they come, the harder they fall - we have seen this trend before, consider the following historical data - a look down memory lane - 100 editions of scribing. Prime rates for lending purposes:
Sept 2001 - feeling lofty prime is at 5.25%- folk are locking in at 6% fearing further hikes.
February 2002 - 9/11 - prime is at 3.75% after falling repeatedly from Sept prior.
June 2003 - 9/11 has passed, no more horrifying events prime over time = 5.00%
April 2004 - Tsunami’s, Katrina’s, prime = 3.75%
Sept 2005 - prime = 4.25% no negative news of worthy, we are starting to feel mighty again…. property values are rising and rising…. Kumbayah!
Sep 2007 - prime = 6.25%!!!! fear and locking in abounding….
Feb 2008 - subprime crisis hits prime starts plummeting down!! People pay $18k+ penalty to get out of their locked in rates…..
April 2009 - prime is 2.25%
July 2010 - prime is 2.5%
October 2010 - prime = 3.00% the world is melting down
June 2015 - prime = 2.5% oil collapses and Fort McMurray is up in flames
Sep 2017 - prime = 2.75% oil has stabilized
Dec 2017 - prime = 3.00% Fort McMurray is stabilized
Oct 2018 - prime likely to go to 3.95% after 2 other prior increases in 2018 - we are surrounded by fake news and the USA’s surge is simply being fuelled by unsustainable juicing, tax cuts…the stronger the US dollar gets, the more precarious the financial world is becoming. Currencies are destabilizing, political unrest is at palpable level, mounting USA and China trade wars will wreak havoc.
Based on our historical trend another meltdown seems to be just around the corner…whether in late 2019 or early 2020, the writing is on the wall.
Further and perhaps most importantly and I include myself in this group…if we attributed as much attention to our real money as we do to whether interest rates for mortgages are going up or down we would not be sweating it nearly as much!
Consider the following:
1 Monthly car payments on average = $500/mth and this only because we took the loan over 7 yrs at 0%. An interesting stat here….on average, 92% of the time our cars are PARKED. That is one hefty parking bill! 0% interest is not a feat, it is a ploy - the interest has already been charged in the price of the vehicle. Hmmmm maybe the odd carpooling, public transit, more utilitarian choice of vehicle - rather than $6k/yr plus gas, insurance, maintenance and mechanics for an asset that is losing value by the minute…..
2 Bank Fees - rummaging through reams of paper for mortgage applications I regularly see bank fees, overdraft fees, annual credit card fees = ~$30+/mos…why no fee-less banking?
3 Food waste - OMG! buy groceries, go out to eat, throw away the groceries weekly = ~$100? and we think food is expensive!
4 Credit card and LOC interest on never ending balances in the $1000’s of dollars annually….
5 Inefficient utility usage -anyone who has teen+ kids knows what this is all about.
6 Every media channel on lock - Netflix, Superchannel……Apps etc….internet/cell providers
7. Smokers - Holy Moly! heard that a pack is $17 OMG! Glad I quit 2 years ago.
8. Wine and Beer Nice to haves not NEED.
While I fully understand that mortgages represent our biggest absolute dollar debt, they also represent our most affordable debt when considered stand alone. Indeed rate increases eat into our comfort level psychologically and economically and these days, incomes are stretched. But long before I worry about whether my mortgage is going to carry for $100 more/month over time for reasons I cannot control, I look to see where I can control “controllable spending” and the offset potential I find, well exceeds any impact the Bank of Canada increase is having.
To lock or not to lock - you can lock in today at roughly 3.89% across the board - this would represent on average 3 more prime increases based on average discounts below prime. Some of you may want to do both - lock and re-look at controllable spending :) - just remember, locking in to a fixed rate will have a higher rate than what you are currently paying if variable. Savings come if rates continue to rise over the long term, but if they retreat, you may have locked in higher interest payments for yourself. In all cases it is a personal decision. If you may be moving in the near term, staying variable reduces any potential penalty and in some cases considerably.
The point is, human nature is to always chase/focus on the lowest common denominator vs looking at the bigger picture….
• 0% interest vs 500 absolute dollars being considered over the longer term. The win is not the 0% - the win is the unburden of the $500/mos.
• A minimum $120 payment on a $12k revolving credit card bill vs the 23.99% rate of interest being charged on the $12,000 balance and ignoring the commensurate disclosure on the bill that states paying the minimum will mean taking 29 yrs to pay off the debt….OMG!! it will cost me $30,000 worth of interest to pay off a $12,000 debt.
• Taking advantage of the lowest possible rate while setting your payments higher to absolve 10’s of thousands of dollars of interest was the point vs simply pursuing the smallest number.
Money smarts is an action and a state of mind. Some of you have this on lock but most of us do not. Not always the funnest way to live, but the smartest way to from a financial standpoint. You can have your cake and eat it too. If you want a look at how this might look for you give me a call any time.
I personally continue to hunker down - it is a never-ending endeavour - I challenge myself to find opportunities to realize a financial win and take pleasure in doing so when I do.
I value each and every one of you and think of you always especially as I craft the mortgage monthlies.
Hope Halloween is a hoot - pare down the treats it will save you money and your waistline!