The ongoing impact of shifting interest rates

Start the renewal talk with your broker six months from the mortgage renewal date

By Jean-Guy Turcotte

Red Deer Express

One month of headlines suggest interest rates are dropping to new lows, another says no changes anytime soon, and recently many headlines seem to be suggesting an increase soon.

This stream of mixed messages contradicting one another has been steady since rates dropped to 50-year record lows in 2009.

Many were adamant in 2009, and each year since, that rates could go no lower, and yet they have.

Sure there have been a few short-lived blips upward along the way, in defiance of all who are calling for a return to normal – whatever normal may now be.

The key driver of the interest rate movement is the economy in general. Not a thin slice of it such as real estate. What drives interest rates down? Economic bad news.

What will drive rates up? Economic good news.

Economic good news seems in short supply since 2008.

Interest rates are a very large economic lever, far too large to be used simply to cool the arguably overheated real estate markets of two particular cities.

Cooling of real estate is not addressed via interest rate hikes; markets are cooled and have been cooled as of late through lending policy changes.

Many commentators forget that only a few short years ago there existed 40-year amortizations with 100% financing not just for owner-occupied but for investment properties, and variable-rate mortgage qualifications that were much easier than today.

The reality is that borrowers in 2007 – at nearly double the current interest rates – qualified for larger, and arguably riskier, mortgages than borrowers today do.

And always do the math. Yes, math is no fun, but here is a shortcut:

A 0.25% rate increase equals a $13 per month increase in payments per $100,000 of a mortgage balance.

And keep in mind that the majority of Canadians are in fixed-rate mortgages, and the majority of them have renewal dates a year or two away.

And for those mortgage holders an increase from today’s rates of 0.25% – 0.50% would in fact only be equal to their current rate.

A 0.25% increase in the Bank of Canada rate would impact less than 10% of households across Canada, perhaps less than 5% of households. And that impact would be on average $39 per month.

Could you handle a $39 increase in your mortgage payment?

Odds are you have actually already increased the minimum payment on your own as so many Canadians do. In that case you are already ahead of any increase.

Is the economy truly strong enough for an increase?

Are the small percentage of variable rate mortgage holders in Canada not already making higher payments ready for a 0.25% increase – overwhelmingly yes, they absolutely are.

The big beneficiaries of these uncertain times of trepidation around even a slight interest rate increase will be those on fixed rates approaching renewal dates over the next 12 months, and those enjoying the ride in their variable rate mortgages.

Be sure to start the renewal conversation with your broker six months out from the mortgage renewal date.

Your current lender may suggest that rates are about to move and suggest locking into something early as the right move, but always consult with your independent mortgage broker first to determine if the move being suggested is right for you – or simply just right for the lender.

What is right for you matters to us.

Jean-Guy Turcotte is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.