The Mortgage Report – May 28
- Now in the 3s: For the first time ever, a Canadian reverse mortgage provider has a 5-year fixed term under 4%. Equitable Bank announced the offer Thursday, which applies to its 5-year “Lump-sum” reverse mortgage. Equitable trimmed all of its other reverse mortgage rates by 15 bps as well. That’s a big win for cash-strapped seniors needing to cash out home equity. It also puts more pressure on the lead dog, HomeEquity Bank, founder of the CHIP reverse mortgage. Equitable’s 5-year Lump-sum product is now a whopping 150 bps below a 5-year CHIP, albeit HomeEquity offers bigger loan amounts under normal circumstances. A regular CHIP or Equitable Bank reverse mortgage also has another advantage. It lets you borrow over time so interest is calculate on a smaller balance. Equitable’s 3.99% Lump-sum product makes you borrow all at once. But, with such a head start on the rate, it’s worth giving up borrowing flexibility for interest savings, if you truly need all of the funds upfront.
- Bank of Canada Predictions: Here’s what the tea leaf readers are expecting at next Wednesday’s BoC rate meeting. (Rates.ca story)
- Should You Convert? We hear from many a floating rate borrower wanting to know if it’s time to lock in (convert) to a fixed rate. Most of the time, what they’re really asking is, are rates going up in the near future? We won’t answer that question on the grounds that we’re not psychic, but here’s what we can say. People usually lock in a variable mortgage because they:
- Find a low fixed rate that seems too good to turn down
- We’ll see more such conversions once 5-year fixed rates are commonly below 2%, for example.
- Fear higher rates will leave them with too little cash flow each month
- Note: This is mainly a problem with adjustable-rate mortgages where the payment moves with prime rate. By comparison, variable mortgages offer fixed payments, which generally mitigates this issue.
- No longer want the stress of worrying about rising rates.
- Find a low fixed rate that seems too good to turn down
All of these can be valid reasons to lock in, depending on the circumstances. But if you’re going to convert, make sure it’s worth it. First, determine what conversion rate your lender will offer. Any 5-year fixed over 2.64% is lousy if you’re well qualified and converting today. Then determine the difference (spread) between that rate and your current variable rate. The bigger the spread, the less likely you’ll win by locking in. If you have to pay 100 bps more (2.65% on a 5-year fixed) to lock in, for example, that’s not so attractive if your variable rate is prime – 0.80% (1.65%).
- Last Resort: Desjardins says negative interest rates are now viewed by the BoC as “a desperate measure.” In other words, don’t bank on life below zero unless the wheels really come off the economy. And, no, Canada’s unemployment rate — which is going higher than at any time since the Great Depression — isn’t bad enough to warrant negative rates, economists say. Well, let’s just hope that the recovery is robust because, unless rates rise 250+ bps post-recession, the BoC might be left with insufficient rate cutting room to address future crises. In any event, we might have to wait until the next recession to see negative rates—but they’ll make their debut eventually.
- RE/MAX v. CMHC: CMHC’s 18% price drop prediction “is panic-inducing and irresponsible,” says a RE/MAX executive. Makes you wonder what he’d say if CMHC predicted an 18% increase in home prices. CMHC’s CEO Evan Siddall fired back, saying: “Please question the motivation of anyone who wants you to believe prices will go up (yes, up) with our economy in slow motion, oil being given away, millions of Canadians on income support and a greater percentage of mortgages not being paid than we’ve seen since the Great Depression.” (Thinkpol story)
- Mortgage Investment Corps: “For those investors locked up in one of these funds, the future of your money is now out of your hands…” (Wealth Professional story)
- COVID Entrenches Online Banking: Mobile banking registrations soared 200% in April. “…Only 40% of respondents said they expect to return to branches post-COVID, indicating the shift to online is likely to stick.” (CNBC story)
Why would anyone want to convert a variable rate now? Do people really think rates will rise substantially? If so maybe they should read today’s GDP report.
@Are People Nuts?
I don’t think it’s that people are worried that BoC rate will go up anytime soon. It’s the combination that BoC Zero Interest Rate is only a possibility, Negative Interest Rate a last resort, and the variable/fixed spread being extremely narrow right now. Basically, variable doesn’t have much more room to go down right now for existing variable rateholders (I would be surprised if discounts from Prime get better on new variable mortgages, but that’s not what we’re talking about here.
If you’re at 2.00% variable now with only so much likelihood of a rate cut lower, and could lock in at 2.24% 5YF (*hypothetical scenario) rate hikes don’t have to come very soon at all for it to still be a reasonable rate-insurance decision.
Rates have no foreseeable reason to increase this year so the conversation around locking in can be muted for now.
MoneyGuy, It’s a matter of how far in advance the bond market prices in a recovery. It’s hard to bet either way at this point.
It’s not about where you think rates are going go this year, it’s about where you think rates will be at the end of your current variable rate mortgage term. For example, I’m currently @ 1.85% and I’ve got a bit less than two years to my variable term. If I see an offer for a five years fixed rate mortgage @ 1.99% (unlikely on non insured) I’d probably jump on it even with the penalty. In my opinion, the odds of rates being lower than now in two years are much lower than rates being higher, so it would make a fixed rated mortgage with low differential to what I’m paying now very attractive. In reality, I doubt fixed rates on non insured mortgages will come down enough to make switching worth it with the penalty, but we’ll see.
In the here and “now,” there is no uninsured 1.99% five year fixed option. If you lock in a variable you would be lucky to get 2.59% today.
In two years time variable rates should be back to prime – 1% so you could probably renew at 2.45% or less even if rates rise 1%. In the interim you are enjoying rates under 2% for two years.
Like I said, I think people like you would be better off waiting “for now.”