Did the Bank of Canada just blink? This week, we saw another interest rate increase of 50 basis points, which to many analysts was lower than anticipated; but could this really be a good news story or are we on the verge of further rate hikes and a recession to kick off 2023? This week, Dustan Woodhouse joins the 12-timer club on the Vancouver Real Estate Podcast with a wide-ranging conversation centered around rate hikes, financing strategies, and what Bank of Canada policy will mean for the market at large. Fixed or variable? What should you do if you hit your mortgage trigger point? And will now be the best time to buy in the next 5 years? All this and more on this banger of an episode!
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Episode Summary
Who is Dustan Woodhouse?
Three and a half years ago, I was asked to move into a corporate role after working as the face of mortgage transactions for many years. At Mortgage Architects, we’ve grown from $6 billion in funded volume and 1300 agents in 2018 to $17 billion funded and 2000 agents this year. Being on the corporate side is a different role but I’m still very immersed in mortgages.
I’ve always said to go variable over fixed and I stand by that. I’ve been saying it since 1996. But it is a tough year for variable rate mortgage holders.
Did the recent 0.5% interest rate increase by The Bank of Canada surprise you?
It did and I am officially out of the prediction business. It almost feels like the Bank of Canada is taking their foot off the gas a bit too soon. But it’s not over yet.
The Bank of Canada isn’t saying the fight against inflation is over by any means. In their statement, they say they expect the interest rate will need to rise further and that they are committed to taking action to reach a 2% inflation target. The last report was 6.9% inflation.
Given their strong stance, 0.5% is surprising. Most of us expected 0.75%. But 0.5 is still going to cause a lot of things to happen.
Is a variable rate mortgage still the right choice?
Even when you make the right call, you can still end up with a bad outcome. Variable rate mortgages are the right call 99% of the time. This year might be the 1%. But what you have to ask yourself is what the next 19 years look like.
If you’ve been in a variable rate mortgage for a while, you might still be ahead. But if you just started, it could be tough as you approach your trigger point.
Fixed rate folks are like a broken clock – they’re still right twice a day. Arguably, they’ve been wrong for the last 25 years. So yes, they eventually had to be right. But that’s setting aside the issue of prepayment penalties.
A bank’s mandate is to serve and protect shareholders and the most profitable option for them is a five year fixed mortgage. But six out of ten Canadians will break their mortgage at an average of 33 months, which triggers a prepayment penalty. So the bank is actually making closer to 6.5-7% on a 5% five year fixed mortgage. Whereas with a variable rate mortgage, the penalty is only ever three months’ interest.
The conversion rate from adjustable to fixed mortgages over the last six months was only 5-6%. So not very many people are switching from adjustable rates and locking in fixed rates.
When you get a call from your friendly banker asking you to lock in, they’re not looking out for you. They’re looking out for their shareholders. So it’s a good thing that 94% of people in adjustable mortgages are not locking in. Life is variable, so maybe your mortgage should be too.
What is the impact of the 0.5% increase on variable mortgages and trigger points?
If you’re in a variable rate mortgage, you may have hit your trigger point today after the Bank of Canada’s latest interest rate hike. What does that mean? It depends which lender you’re in.
Adjustable rate mortgage clients have their payments change with each increase in prime. So their payments have gone up about 60% since March. Your $2000 payment is now $3200. That’s a lot of pain. But at least it has been steadily increasing over the last few months.
Variable rate mortgage clients with static payments may have that same 60% increase all in one whack – it depends on the lender.
Some lenders will say that once you hit your trigger point, that’s it; you need to reamortize your mortgage now at today’s new rate. Another option could be making additional payments to cover the full interest and continue with your current mortgage payments as interest-only. Having interest-only payments is painful but it can help some families get through the next year or two.
Another option is to reamortize to your original term without reapplying. So if you were at year 18 of a 30 year mortgage, you’d go back to a 30 year term. Of course, no one wants to add 12 years to their mortgage, but it could help you make your payments over the next few years and come out the other side.
I’m not advocating for interest-only mortgages or 30-40 year mortgage terms, but they are important options. What you can’t do is run and hide or bury your head in the sand.
If interest rates start coming back down, will lenders reduce monthly payments for variable rate mortgage clients?
Generally when rates tick up, payments tick up. But when rates flow down, payments don’t change. You would just have more of your payment going to the principal rather than the interest. Could you ask your lender to reduce your payment? Most likely. The one who asks is the one who gets.
On the importance of mortgage brokers:
Mortgage brokers are there for strategic conversations. They are your best advocate with your lender. If you need advice, your broker can give that to you. They are the experts who can let you know what the options are. Having an independent expert on your side is key.
I helped fund 1695 mortgages. But I probably talked to almost 7000 people, most of which I advised and sent them back to their original lender.
Will the latest interest rate hike cause a shift in buyer sentiment? What is the real estate market like right now?
Being a realtor is a tough gig. I’m no realtor apologist but it is a really tough game. I’d love to see us land in a balanced market. We went from multiple offer madness to crickets – both had a lot of pain and suffering for realtors and clients alike.
The Bank of Canada’s statement says they expect the interest rate to have to rise further. They’re not saying the pain is over. Their biggest challenge has been trying to cool a market that is at full employment. If the media starts to push the sentiment that the pain is over, I’m worried about what the outcome will be. I don’t think the Bank of Canada is moving 0 points in December.
Are major interest rate hikes over?
We can be cautiously optimistic that major rate hikes are over. I’m a recent homebuyer with a variable rate mortgage, but I have to acknowledge that I’m very privileged and have a cushion to carry me through the storm. But my story is not everyone’s story.
A lot of people took variable mortgages at very low rates and are watching those rates rise. There will be pain. To those people, I encourage you to call your broker and ask what your options are. Do the math and brainstorm some solutions.
What advice would you give fixed rate mortgage holders who are up for renewal in the next 6-24 months?
You can’t give macro advice on mortgages – you need to speak with someone who can look at your specific financial picture. Talk to a broker who has seen lots of mortgage situations play out. It needs to be a bigger conversation than just fixed vs variable.
What happens if prime goes up another 2-3%? Can you future-proof against that? Hope for the best but plan for the worst. Engaging an expert to help with that planning is crucial.
If you’re coming out of a 3.79% fixed mortgage rate, you’ve got bad timing. That was the high of the last five years and now you’re facing the next five year high. But at least it’s only a 1.5% step up, not a 4% step up. Your payment won’t be changing that radically.
I’ve always said not everyone should go into a variable rate mortgage but everyone should consider one, know the differences and make an informed decision.
Are 4.5-5% interest rates the norm? Or will they come down in a meaningful way in the next few years?
Technically, rates are at a 15 year high right now. But are they here to stay? I’m skeptical. I think there’s room before we hit the ceiling on interest rates.
Could interest rates float back down? Absolutely. Maybe not in the next 6-9 months but arguably in the next 12-18 months. It’s a given that rates will come down from whatever high they hit but no one knows what that high will be.
The weaponizing or politicizing of the Bank of Canada is very interesting. It’s new for Canada. To say they printed too much money and kept rates low for too long is a gross oversimplification. But we need simplicity to survive.
If it was purely a matter of too much money and too low rates, then you’d think that taking money out of circulation and raising rates would reverse the problem. But that wasn’t the mistake. Over half of the inflation number is supply chain related. Interest rates have no impact on that.
What does it cost to carry a property these days?
Not only is it more expensive to carry a property with today’s higher interest rates, but the stress test is at an all time record high. We’re stress testing people at 8% after being at 5.25% for years. So that limits people’s ability to purchase.
You need to have more income to qualify to buy the same thing. So a lot of buyers have been taken out of the pool. People looking at properties around $1-3 million take considerable mortgages and those are becoming harder to qualify for.
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