One headline suggests interest rates are bound to rise soon, the next suggests they may drop to new lows, and a third suggests no changes anytime soon. This has been the case since rates dropped to 50-year record lows in 2009.
Many were adamant that rates could go no lower at that point, and yet they have with a few short-lived blips upward, in defiance of all who are calling for a return to normal – whatever normal is now.
Keep in mind that a key driver of interest rates is the economy in general. 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 (Vancouver and Toronto). Cooling of real estate is addressed not through interest rate hikes, but through policy changes. Most commentators forget that only a few short years ago there existed a 40-year amortization, 100% financing not just for owner-occupied but for investment properties and variable-rate mortgage qualification based on the three-year fixed discounted rate.
All of those things are gone or changed radically, and reality is that borrowers in 2008 – at nearly double the current interest rates – qualified for larger, and arguably riskier, mortgages than borrowers do today.
Interest rates will not be adjusted based on the detached home frenzy of Toronto and Vancouver. Lending guidelines have already been adjusted accordingly. Nor is it valid to argue that rates have been so low for so long. How long they remain low is a function of inflationary and deflationary forces in the general economy.
The sign on the streets? Watch for a bunch of our peers spending money like those proverbial sailors on shore leave that we mentioned last month. A brand-new truck in each of your neighbours’ driveways, each unloading brand new 80″ flat screen TVs – that is what will give the economy a strong boost and shift inflationary numbers into the ‘exceeding expectations’ category.
Until that time the steady stream of lacklustre economic news is likely to serve mortgage holders well. The big beneficiaries will be those in fixed rates approaching renewal dates over the next 12 to eight 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 locking into something early is the right move, but always consult with your mortgage broker first to determine if the move being suggested is right for the lender, or right for you.
Jean-Guy Turcotte is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.