Quarterly Commentary – July 2023

Mortgage Rates… what to do?

Given the interest rate increases over the past 18 months, mortgage questions are now a very regular discussion.  We have not seen mortgage rates like these since the late-90’s/early-2000’s, and it is causing many to wonder where to go from here.  The biggest question is whether to go with a locked-in rate or go with a variable-rate mortgage?

Over the years, I have found that the right answer does not depend on proper predictions of interest rate movements, it depends on the stomach of the borrower.  Generally, I break borrowers into 2 groups… those who want to be “as efficient as possible” with their mortgage, and those that want payment stability.  Yes, many folks are a combination of both, but generally one opinion is stronger.  Regardless of where you feel you stand, I have a few thoughts for you.

The first is for those already in low fixed-rate mortgages, good for you!  And, if your renewal is not for a 2 to 3 years, lucky you!  But for those with renewals in the next few months, my recommendation is to voluntarily increase your mortgage payment now… or at least bit-by-bit until the renewal.  This way you get used to the higher payment before the renewal date, and the renewal will not feel so ugly.  As well, until the renewal, you will make some material payments against your mortgage principle.

My second thought is for those in a variable rate mortgage.  I appreciate it’s not much fun right now, but this could be a benefit for the future, especially when interest rates retreat again… whenever that may be.  Specifically, by now you are plugging through with a higher payment than you had before, and assuming you are making it through each month, when interest rates drop again ask your lender to keep your mortgage payment where it is.  Thus, with each interest rate decrease you will be putting more and more of your payment against the principle.  So while the current period may hurt, the benefit will be that you are used to it and you can use that in the future to speed things up.

My last thought is for those looking to purchase homes right now or have mortgages renewing soon.  Safe to say you are staring at “less than desirable” mortgage options!  This week the Bank of Canada stated they do not see inflation dropping to their desired 2% until mid-2025.  This means there is a good chance interest rates will not drop for a couple years.  How far rates drop, and when, remains to be seen, but given all of the current information, I think its hard to pick a 5 year fixed-rate mortgage.  Instead, consider a 3 year fixed-rate, or maybe even a variable-rate mortgage.  The variable rate gives you the benefit of immediately seeing the benefit of any rate reductions, but if rates go up further, you will have a “the pleasure” of experiencing that too!

Having said all of this, the key thing to consider is one’s stomach, how does this all feel?  If payment stability is key for peace of mind, then a locked-in mortgage is best.  If getting the earliest possible reduction is key, then the variable rate is best.

Of course, all of the above comes with many caveats; family income stability/increases, other expense obligations, and/or simply retaining a cash-flow buffer.  All the planning in the world cannot offset cash-flow.  The bottom line, be sure to spend the proper time planning it out, and ensure your stomach agrees!

Overall, I hope these thoughts and comments are helpful.  Should you wish to discuss this further to formulate your personal plan, please feel free to reach out.

In the meantime, I hope you are enjoying your summer and have your sunglasses handy!

All the best,

Bryson

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