Time to Lock In?

Warren's Mortgage Monthly - September 2019

Good afternoon one and all!

Here we are once more, wondering how exactly we are on the other side of summer and bidding adieu to Labor Day weekend.  With the return of the Pumpkin Spice Latte and back to school routines in full swing, it seems everywhere we turn there is a noted change in the air.  This season for me is always one of renewed commitment to better routines and overall improvement which I am certain all harkens back to the days of stocking up on fresh lined paper, binders and white erasers =)  In the spirit of nostalgia, I decided to put away the camera and green screen and scribe this edition “old school” … class is in session, listen up please! =)

We have been experiencing an unusual market relative to mortgage interest rates this year in that insured fixed rates are on average lower than insured/insurable variable offers – this a rare event.   While not a signal in isolation to “lock-in”, it may be opportune for some variable rate holders who are currently sitting at near Prime to Prime -0.45% to investigate breaking their mortgage early in favour of a lower variable discount. Depending on the particular mortgage scenario, Prime -0.75% to Prime – 1.0% are available in the market place.  A mid-term transfer would trigger a 3 month interest penalty, however up to $3,000 of this can be captured into the new mortgage.  This means depending on the mortgage size, some if not all the penalty would be financed and nothing comes out of pocket.  Legal fees are not required in a transfer/insurable mortgage application so there is an added incentive to at least run the math. In other circumstances, it may also STILL be of benefit to transfer out early even with an out of pocket expense paid by the borrower (legals and any overage above the $3,000 penalty cap) so if this is something of interest I would be happy to run some scenarios for you to see if of benefit.  Math is Math and this decision is all about the numbers.  3 main questions to ask ourselves:

1) How much farther ahead are we at maturity if we do decide to make a move
2) Do we recoup enough of the penalty with the lower effective rate
3) How much more time do we buy ourselves at the lower rate with the new term
   relative to  the current renewal?

Given the current mood at Bank of Canada and what appears to be on the horizon for the foreseeable future, Prime rate is on the precipice of a rate reduction. BoC Governor Stephen Poloz has up until now enjoyed seeing the economy through rose colored glasses. The highly data dependant decision maker was able to coast through Q1 and Q2 given good job growth, GDP and export numbers however that time is nearing its end. For those of us who have stayed the course with our variable rates, reprieve is coming =)  Some factoids:

The Canadian economy is not doing as well as the economists would have us believe which will eventually necessitate a reduction in the Banks Prime rate.
Roughly 30% of the global investment grade market world-wide is already ator below 0% which is incredible! Canada is not an island, we will eventually need to follow suit.
Trade wars continue to wreak havoc on the stock market and overall stability of financial markets which will require stimulus to keep us afloat.
The “R” word (recession) continues to creep into economic vocabulary as the global market slows.
International (and more recently U.S.) factory output figures have seen contraction as output shrinks signaling a shift downward in demand.
Brexit continues it’s ugly extrication from the EU as British Prime Minister Boris Johnson first signals prorogation of parliament and now, an election in Great Britain in an attempt to make good on his promised delivery October 31^st.

While it is my opinion that tomorrow’s BoC announcement will be no change to prime, which is in step with Mr. Poloz’s reactivenotproactivestance, the writing is on the wall for at least one cut before the year is up.

Despite news on the economic front not being as rosy as we would like, there continues to be room and reason for optimism. Notwithstanding Government interference in the housing market with the implementation of “stress test” rules, real estate prices seem to have normalized with the number of unit sales up 24% year over year and values posting moderate y/o/y growth of 4%. Inventory is still low relative to demand which will keep home prices solid, especially in the GTA where over the next decade 100,000 newcomers are expected to settle in.

There is no time like the present to begin looking into leveraging the equity built up in your home to purchase investment properties as a wealth creation strategy. If “buying up” is proving cumbersome given the large Million dollar plus price tag, many of my clients have taken to home renovation loans to make their current situation work better for them. With the rate outlook being low and steady for the foreseeable future, why not take advantage of reasonable borrowing costs to make life better!

Until next update I wish you all well and look forward to hearing from you.

Fondly,