What’s in Store for the Fall

by Jay Calafiore

As our summer holidays wind down, the fall real estate and financial markets tend to go into higher gear. Autumn appears to be a season where we all start paying closer attention to our financial goals.Real estate values in the GTA keep on rising… moderately, but rising nonetheless despite recent economic woes in the U.S. and Europe. Our housing market has been sustained by recent lower unemployment, steady immigration, and mortgage rates that are expected to stay low for the foreseeable future. Remember that even if rates begin to gradually rise next year, they are still considered low… ask your parents! It appears that a combination of all these factors has created a more “balanced” market where supply and demand seems to be more in sync.

Recently, the bond market had generated some “crazy” low five-year fixed rates, as low as 3.25%, which is an all-time historic low. Yet this does not mean we should all stampede to go with a fixed term. Variable mortgage rates are not based on the bond market, but are based on what the Bank of Canada (BOC) feels should be done to keep the economy in balance.

The BOC meets eight times a year to address inflation, productivity, and the general health of the economy. In a normal market they usually adjust the Prime rate (which variable mortgages are based on) a couple times a year to either stimulate, or cool off the economy. I think we can all agree that there’s no hot economy in sight that needs to be cooled down, and Canadian economic growth is moderate, therefore interest rate reductions are not required. Expect this overnight rate to be flat for a few years to come making a variable mortgage a very attractive choice.

Despite the interest rate, variable mortgages tend to be safer than fixed mortgages because you can change to another mortgage term for free anytime. Conversely, fixed rates lock you down with huge discharge penalties to get out of them early. You likely know someone right now who is upset about the discharge penalty on their fixed mortgage. You also know someone who is absolutely thrilled that they stuck with a variable mortgage and did not waver even though at times interest rates were rising… am I right, or am I right?

The information age has made variable mortgages even more popular than ever. Now anyone can browse online to quickly determine which mortgage may best suit them, where in the past we oddly enough only relied on our Banker’s advice… how much sense does that make? The internet has made us all more financially literate, which may not be the best thing for a mortgagee (the lender). I believe where our parents’ generation was coached to take a basic five-year fixed mortgage, our children’s generation will instinctively choose variable mortgages.

Now that so many borrowers are opting for five-year variable mortgages, the mortgagees (lenders) needed to change their pricing and tactics. To be profitable, all mortgagees have cut back on the discounts they were giving on variable mortgages. Prime less .9% no longer makes financial sense for them, where prime less .5% makes them the profit they need to keep shareholders happy. Generally speaking, mortgagees tend to promote a closed fixed term, which is more profitable for them. A fixed mortgage may be good for you and a variable mortgage may be good for you, but don’t let someone else make that decision for you. Do your research and understand where your money is going and why? Having the lowest interest rate does not translate into paying less interest. Usually there’s more savings in the mortgage terms, privileges and strategy.

My responsibility is to provide all the resources you need to build a solid “Mortgage Plan” and a better financial future.

All the Best – Jay

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