Not a day goes by here without new arguments why interest rates won’t rise.
They go like this: The weather’s been good since last winter ended. People are enjoying it. They play and prosper in the sun. If the snows come it will be bad. We are not ready. We will suffer. Therefore the government will not allow it to be so.
Other variations, too. Like pointing to Japan where rates have stayed low for two decades. Or claiming central banks will print money, buy all the bonds, and keep rates low. Or the simple argument (above) that because Canadians have pigged out on cheap mortgages, saved nothing, bought McMansions on credit and would be completely screwed if mortgage rates went up, that the feds wouldn’t possible do such an evil thing.
Of course they will. And if they don’t, the bond market will. And I’m tired of telling you why.
Suffice to say this: Anyone not preparing now, is a fool. The kids camped out in front of Mattamy Homes in Milton, as the guys inside typed up new price lists (they added $10,000 on the weekend), are greater fools. Those who think the Bank of Canada can stem what the Government of Canada is doing ($55,900,000,000 in new debt this year) are the greatest fools.
Like I said, this topic is boring me. Look outside. Damn, today the rain was almost sleet.
Hi Mr. Turner. I read your blog daily, read your books etc. Here’s my story, we decided about 1.5 years ago not to be “Fools” and stayed in our current home. (We reside in a small rural town Northwest of Kitchener-Waterloo)  In the meantime our mortgage expired and we elected to take out a HELOC (TD Canada Trust). We owe about $65000 on a home that is valued at $200K, this has worked well for the past 1.5 years however my concern is that TD has annouced a rate increase (As per your blog and I confimed this with TD) for the HELOC effective later this year, how many more rate increases are coming? This is now, what’s next etc?
Any suggestions on how to insulate ourselves from future rate increases? Lock it into a mortgage again for the 5 year term etc? Appreciate any advice! – Dave
This is a small taste of what’s to come, Davo. That 1% hike in the bank’s LOC arrives because it;s now originating that money in the bond market. So, despite the fact the Bank of Canada rate did not move, your loan rate increased by 44%. Coming will be similar increases in fixed and variable mortgage costs.
Hardest hit will be new buyers with 35-year amortizations and VRMs, since each hike in overall mortgage costs will end up adding to the principle amounts (virtually no equity is paid monthly on long amortizations and the existing monthly will not cover added interest charges). This will have the effect of dampening the real estate market, which around K-W is already kinda soggy.
As for your loan, remember it is purely a demand borrowing. You have zero protection against further increases. So, why not lock in now to a fixed mortgage rate? But do it right.
Here’s a radical suggestion: Get a conventional five-year closed rate home loan at the current rate of 5.5% (relax – that will look cheap within three years). Then ask for a five-year amortization. The monthly will be $1,200, and you will have you mortgage totally and completely paid off in just 60 months. The total amount of interest (included in the monthly payout) will be just over $9,000. There are other ways of doing this, but with a mortgage obligation the bank supplies the will power.
Compare that with your HELOC at the new rate of 3.25%, where five years of interest-only payments would be $10,562, and then you’d still owe $65,000 – and be looking for a new mortgage at 8%.
Suck it up, Dave. Gird those loins. Head into the storm like a man.
We’re right behind you. Soon as we finish the drinks.
Related: Deflation threatens to eat Japan
