26 Jun

Gambling on interest rates… no more!

Real estate is kind of a national obsession in Canada (like everywhere else). Those, who have already bought the house, feel like they won a lottery, those who haven’t, still dreaming to win.
Both are checking prices and trends regularly.
Interest rates are as low as they can get, but prices went up a lot.
Checking from time to time what’s on sale around me, I can’t stop wondering how prices can be so high.
Anyway, I’m not writing about gambling on real estate today. 🙂

In 2016 I bought my own place and, comparing to today’s madness, I was quite good on timing.
First, I was the only buyer for the place and, it’s hard to imagine now, I was able to lower the price by around 10% and get new appliances from the seller as a bonus.
On top of that interest rates were quite low because of the 2014-2016 oil crisis.
I didn’t know much about mortgage interest rates, terms like variable or fixed meant nothing to me, so I’ve trusted my mortgage broker and she could find me a 2.25% 5-year variable rate.
In 2017 I have figured out what variable rate meant as my payments started to go up.
Bank of Canada has raised the rates pretty fast and in 2019 and my interest rate shot to 3.50%.
It was this time when a friend of mine got a 2.65% 5-year fixed rate while I was fretting over my 3.50% variable.
I have tried to renegotiate the rate with my lender, but I had some high breaking fees (not standard 3 months interest, thanks to my broker) so I left it as is, also rates stopped going up and everyone was expecting a recession (Inverted Yield Curve and all that stuff).
With coronavirus, BoC dropped rates to the current 0.25% and my mortgage interest rate dropped as well to a nice 2.00%.

Here is a chart from Ratehub, where basically variable rates follow the red line and fixed rates follow blue.
At some point in 2019, red line was above blue and my variable rate was higher than current fixed rates.

Source: Ratehub.ca

Spring/summer 2021 and here comes the time to renew my mortgage.
My lender offered me a 2.04% fixed or 1.50% variable rate, which was quite disappointing considering that a 1.25% variable rate was advertised on Ratehub and there were rumors about a mythical 0.99% variable rate from HSBC.
I’ve decided to look around and considering my situation (self-employed, always a problem) was able to get a 1.35% variable rate from another lender, plus they cover notary fees.
Inspired by a better rate I’ve contacted my current lender in the hope to start a small bidding war between 2 lenders, but they have simply ignored me.
I was not even considering fixed rates back then as my opinion was that with the amount of debt Canada has, there is no way BoC can raise interest rates and we will stay at 0.25% for quite some time.

Two weeks before renewal and a week before signing with the notary, my lender started calling me and sending emails.
Suddenly they were able to give me a bit lower rates, 1.45% variable and 1.99% fixed, and an extra $1000 cashback, if I stay with them.
Now, I wouldn’t consider this slightly better offer at all, if not all this paperwork required to switch lenders.
It took almost a month and tons of documents (self-employed, always a problem, right?) to get a 1.35% offer and now I was required to produce some other docs for the notary just a week before signing.
Thus I’ve decided to stay with my lender, so the choice was between 1.45% variable or 1.99% fixed, between the red line and blue line.

Source: The Matrix 😎

I was about to choose red, but then on June 16, Jerome Powell said they are projecting rate hikes soon enough and the Bank of Canada usually follows the Fed, so…
I chose blue… yep, no more gambling for at least the next 5 years! 😀
I still have some mixed feelings though.
From one side, what are the possibilities for rates to go up with all this extra debt we have now?
On another side, we have inflation rising and a big desire by Central Banks to raise rates.
The downside of going fixed: I will be losing 0.54% of my mortgage every year for 5 years if rates don’t change. My understanding is there are almost zero chances for the rates to go even lower.
Upside:
If rates will go up 0.5% in the next 1-2 years, my fixed rate mortgage will do ok.
If rates will go up at least 1% in the next 2 years (4 hikes of 0.25%) my fixed rate will be a winner.
If BoC will raise rates to the level of 2019 (6 hikes), my fixed rate mortgage will be a big success.
And of course, no more fretting over rising interest rates.

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