We wanted to come out to you all with GENERAL information right now BUT……… would you like us to go through your file INDIVIDUALLY?
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With Covid financial recovery underway, throw in a War, inflation running out of control and a severe supply and demand issue, we are certainly living the unknown right now.
Let’s consider those singular issues to start:
Covid Recovery – we do need to remember that we have lived in a very unusual time for the last 2 plus years and rates were never going to stay the same. Most certainly when we were planning individually, the spread between Variable and Fixed was considerable and is still considerable.
War – the unexpected most certainly did happen with Russia and Ukraine and is obviously having a major issue on certain goods as well as oil prices. Devastating as this is, it won’t be permanent and will end at some point, we just do not know when.
Supply & Demand – so we all know this is intense. Whilst we have supply issues, this is actually driven more by demand. Whilst there are households effected by the Covid downturn, the truth is as well that even more households have never been wealthier. We have spent so long of not being able to do anything that we have been spending. Demand is out of control and Supply cannot keep up with EXAGGERATED demand. At some point, we WILL slow down. The fact is, we NEED to slow down.
Inflation – currently running at a three-decade high due to all of the factors above. In normal times, the Bank of Canada would have stepped in earlier but couldn’t during these times and they are now watching carefully to see what their changes will trigger. Whilst the initial plan was to raise rates steadily, with the War and Fuel prices, they were forced to act far more AGGRESSIVELY – Painful as that feels, it is needed.
Inflation was considered throughout this time as “Transitory” – TEMPORARY. But with the additional issues this year, they are very cautious now that they do not want to see Inflation become “Entrenched” – HARD TO STOP / PERMANENT.
So aggressive action needs to be taken. This is not forever.
Please do remember that PRIME was 3.95% Pre-Covid. Even with the Bank of Canada’s recent moves, it is still at 3.70%. Yes it will increase but the spread between FIXED & VARIABLE is considerable and the expectation is that whilst rates will increase for now, they will also FALL again in due course. This is not expected to be long term.
If you were to switch to a FIXED RATE right now, you would be jumping considerably and LOCKING in for say 5 years – we will NOT be at this level for five years. So potentially, you would be locking into a rate that will mean much higher interest over the next 5 years and the penalty to move out of this would be huge. Buying into a HIGHER rate to ease your mind, is not considered to be the answer right now. As a reminder, at any point during your Term, you can switch to a Fixed Rate for AT LEAST the remaining term or longer. EG if you are 2 years into a 5 year term, you can switch to AT LEAST a 3 year term.
We appreciate that everybody is feeling the pressure with gas prices, grocery prices etc.
We know we all saved considerable money – interest rate wise – in the last 2 plus years, and I know many of you looked to make either accelerated payments or budget for investments etc. We took advantage of the lower times and historically, variable has ALWAYS won over any 5 year period, and this will too.
Property Values – Many of you have seen property values increase 20-30% in 2021 alone. And 15-20% in 2020. And we took advantage of this for many clients refinancing from credit card debt of 19.99% etc. Have confidence that your cashflow is easier.
If you didn’t take advantage of this – do you need to do that now?
Stress Testing – not that we are saying Variable Rates will hit this level, but pretty much all current mortgages were assessed at Bank of Canada benchmark rate of 5.25% or previously higher! We made sure that borrowing capability was 20% lower than in pre-stress testing times.
Penalties – Let’s also remember that penalties are very different so please do consider this factor if there are ANY potential changes in the next 5 years. A Variable Rate has the penalty of a straight 3 months interest. A Fixed Rate has a penalty that is the higher of 3 months interest or the IRD, the interest rate differential. This means comparing your rate or posted rate with the current rate or posted rate. When rates fall again (which they will) that means the cost of coming back out of that Fixed Rate could run into $10,000’s-$20,000’s.
How can you budget?
Consider your payments at a higher level. Prime is currently 3.70% as I mentioned, still 0.25% lower than pre-covid levels. Many of you have discounts off that from 0.50-1.00% typically. So you are around 2.70%-3.20%. Pretty much now similar to the Fixed Rates that had been on offer at the start so we are only just breaking even on RATE, still having saved overall by quite a margin.
For every $100,000 borrowed, that would increase your payment by $12 for any 0.25% increase.
Let’s say you have a Mortgage Balance of $500,000 – and rates moved 0.50% – your payment will increase by $120 per month. Consider putting this to one side.
Are you currently making accelerated payments and feeling the pinch? Let’s look to make standard MONTHLY payments for a while.
Let’s say you have a Mortgage Balance of $500,000 – moving from Bi Weekly Accelerated payments to Monthly Payments would SAVE you around $2,000 per annum right now in cashflow.