Interest rate increases this year?

[Slava]

Originally Posted by bizaro86

You improve your returns on reinvested interest and on reinvesting bonds that come due. Assuming you kept maturities reasonable (say by laddering 5 years) this would really help you.

Yes, your existing bonds will decline in value, but assuming decent credit quality they'll still pay you the contracted amount, so you haven't "lost" anything unless you need to sell them.

Edited to add: I wrote this: http://seekingalpha.com/article/2214...interest-rates on how to prepare for higher interest rates. It's not a rate forecast (it was in response to a reader question on how to prepare for higher interest rates). It's a bit US focused (ie, in Canada it would be lock in for 5 years not lock in for 30) but the general principles are the same. Canadian rates will rise eventually, but low oil prices probably put that back a bit

Yes, thats true and I get how individual bonds operate. Its true that a lot of the return is reinvestment income, but the fact is most people don't buy individual bonds. A lot of people (retail investors) are buying bond funds, and those bond funds don't operate that way. They are trading these bonds, and the other area that they have been juicing returns with is High Yield or better known as junk bonds. That is another issue, but they're about to get smacked with such a large percentage of that space being smaller energy firms.

The other point is that a lot of people who are retired and invested in bonds are forced to sell to some extent because they have minimums they withdraw both to live and due to legislated mandates. I just don't see a lot of individuals who buy single bond positions and hold them to maturity. It does happen, but not very often in what I've seen.

[BigNumbers]

Originally Posted by stampsx2

Because low oil prices give people more disposable income and the u.s. economy's picking up.

Low oil, as I mentioned, is a net negative for the Canadian economy. Our rates are not set at the same pace as the US, though they do trend together historically, as the US economy leads the Cdn economy in most cases... Except where Canada's main export's value is cut in half. If oil stays low, I agree the US economy will see a net-benefit form low oil prices, but the Canadian economy will not.

This will lead to a larger IRD between the US and CDN feds, and drive the CAD/USD lower, which will eventually help the CDN economy, but we will lag the US on rate changes by 1+ years, IMO.

[White Out 403]

Originally Posted by stampsx2

Because low oil prices give people more discretionary income and the u.s. economy's picking up.

Fyp

[Schraderbrau]

Originally Posted by Johnny199r

What I despise is people taking on these really big mortgages leaving them absolutely no wiggle room in case of an emergency, ie job loss, but more importantly, in the event interest rate eventually rise, which they eventually will and then the inevitable begging of govt intervention, when it was completely their own fault.

Just curious what would you consider to be a really big mortgage? I have lived in calgary for a while now and I have always wanted to know what people are getting themselves into with these high house prices. Is $300K or $500K considered high?

[FlamesAddiction]

Spokes people for Scotiabank and BMO both think that rates will not see a hike until 2016 at the earliest (Scotia even foresees a decrease):

http://business.financialpost.com/20..._lsa=399d-bec6

http://business.financialpost.com/20...hat-oecd-says/

The oil decline was well in effect then (these comments were from only a few weeks ago), so it is not like it should be a surprise now. Is 2015 really going to see a significant economic upturn? Probably not if the markets are any indication.

At any rate, the ones predicting a hike are still thinking it will be around 0.25% to 0.5% over the year, so it shouldn't be too shocking for most people and still historically very low. Certainly not the steep hikes like in the 1980s. It still may be worth locking in though..

http://business.financialpost.com/20...interest-rate/

http://globalnews.ca/news/1716835/is...nterest-rates/

[GP_Matt]

Originally Posted by Schraderbrau

Just curious what would you consider to be a really big mortgage? I have lived in calgary for a while now and I have always wanted to know what people are getting themselves into with these high house prices. Is $300K or $500K considered high?

High mortgages is a relative thing.

You have to factor in income and stability. Someone with a high income that is unstable should not have as large a mortgage as someone who has a smaller but very stable income.

[kevman]

FWIW a 2.1% variable mortgage after a .5% rate increase is still only 2.6%. If rates go up 1% it's still only 3.1%. If you bank the difference while it's at 2.1% to help offset the time it's at 3.1% you're probably still ahead of that 2.9% fixed mortgage after 5 years. That's if rates even go up.

As for rates, totally uneducated opinion here, but why do the NEED to go up? Look at Japan. Their overnight rate broke 1% 20 years ago and has never rebounded for any substantial time. Society, not just consumers, is addicted to cheap credit. Everything from personal vehicles and houses to large public infrastructure and industrial mega projects currently rely on the availability of cheap credit. A slipping dollar rate is a concern but at 85 cents we're historically still in a pretty good place.

As more projects get cancelled and people begin to lose their jobs the government isn't going to jump in to make it harder to get credit to further slow things down.

Again, just one man's opinion. On a mortgage I'd personally always go variable. I don't pretend to be good at predicting anything so I'd rather go with the option that historically always comes out ahead in the long run. Risk/Reward.

[Red]

kevman, you are right, they can stay this low forever. But higher rates are preferred as they are an indication of healthy economy and prosperity (to a point) Generally governments use rates to control inflation.

Japan has been in the toilet for all those years btw.

Plus think of the pension plans that depend on higher rates for returns. Retirees get too little returns to be self sufficient. Then the government has to pay for more social services. Of course that causes taxes to go up.

And a million other reasons that I am overlooking.

[Schraderbrau]

Originally Posted by GP_Matt

High mortgages is a relative thing.

You have to factor in income and stability. Someone with a high income that is unstable should not have as large a mortgage as someone who has a smaller but very stable income.

From what I can find online (the internet is never wrong). You should be able to afford a mortgage roughly 2 to 2.5X your Gross yearly income. So in Calgary are we seeing people push that number to 3X or even 4X their yearly income? I know when I was just looking at a mortgage I was approved from something like 5X my yearly income which I thought was insane but they would have given me the money if I wanted it....

[FlamesAddiction]

Originally Posted by kevman

FWIW a 2.1% variable mortgage after a .5% rate increase is still only 2.6%. If rates go up 1% it's still only 3.1%. If you bank the difference while it's at 2.1% to help offset the time it's at 3.1% you're probably still ahead of that 2.9% fixed mortgage after 5 years. That's if rates even go up.

As for rates, totally uneducated opinion here, but why do the NEED to go up? Look at Japan. Their overnight rate broke 1% 20 years ago and has never rebounded for any substantial time. Society, not just consumers, is addicted to cheap credit. Everything from personal vehicles and houses to large public infrastructure and industrial mega projects currently rely on the availability of cheap credit. A slipping dollar rate is a concern but at 85 cents we're historically still in a pretty good place.

As more projects get cancelled and people begin to lose their jobs the government isn't going to jump in to make it harder to get credit to further slow things down.

Again, just one man's opinion. On a mortgage I'd personally always go variable. I don't pretend to be good at predicting anything so I'd rather go with the option that historically always comes out ahead in the long run. Risk/Reward.

I recall that our mortgage broker said something along the lines that historically since the 1970s, variable mortgages have been more cost effect in Canada than locking in on a 5 year fixed rate about 80% or 90% per cent of the time.

Obviously it is still an important decision that could cause someone a lot of grief, but if you can weather the high interest years, it suggests that you do better overall with a variable mortgage.

[MillerTime GFG]

Originally Posted by Schraderbrau

From what I can find online (the internet is never wrong). You should be able to afford a mortgage roughly 2 to 2.5X your Gross yearly income. So in Calgary are we seeing people push that number to 3X or even 4X their yearly income? I know when I was just looking at a mortgage I was approved from something like 5X my yearly income which I thought was insane but they would have given me the money if I wanted it....

I posted this a while back in another thread, but I did an average of gross monthly annual income vs. mortgage amount for all my clients last year, and it came in at 2.9x. Keep in mind that includes refinances and switches/transfers, where people are 5/10/15 years into their mortgage, therefore bringing that number down. I haven't done the calculations on just the purchases I did, but they'd probably be north of 3.5x.

Originally Posted by FlamesAddiction

I recall that our mortgage broker said something along the lines that historically since the 1970s, variable mortgages have been more cost effect in Canada than locking in on a 5 year fixed rate about 80% or 90% per cent of the time.

Obviously it is still an important decision that could cause someone a lot of grief, but if you can weather the high interest years, it suggests that you do better overall with a variable mortgage.

I believe it's 82%, and that's a stat I always tell my clients, as I still believe there is great value in a variable rate mortgage. kevman pretty much hit the nail on the head in regards to VRM's being potentially able to handle one/two/even three interest rate hikes, with how low they are right now.

Of course there are ways to prep yourself for an interest rate hike in a VRM, such as setting your payment higher to reflect what it would be if prime were to go to 4% for example.

[Bill Bumface]

When I got my first mortgage I thought everyone that didn't go variable was so stupid.

Then I got older and scared of everything, so I went fixed.

Now I worry about what happens in 5 year increments instead, and spend lots of extra interest doing it.

[albertGQ]

Originally Posted by OutOfTheCube

I'll PM you

Why only a pm? Is the lender you deal with a secret?

[MillerTime GFG]

Originally Posted by albertGQ

Why only a pm? Is the lender you deal with a secret?

I'll bet you know a lender with that kind of rate!

[bizaro86]

Originally Posted by Slava

Yes, thats true and I get how individual bonds operate. Its true that a lot of the return is reinvestment income, but the fact is most people don't buy individual bonds. A lot of people (retail investors) are buying bond funds, and those bond funds don't operate that way. They are trading these bonds, and the other area that they have been juicing returns with is High Yield or better known as junk bonds. That is another issue, but they're about to get smacked with such a large percentage of that space being smaller energy firms.

The other point is that a lot of people who are retired and invested in bonds are forced to sell to some extent because they have minimums they withdraw both to live and due to legislated mandates. I just don't see a lot of individuals who buy single bond positions and hold them to maturity. It does happen, but not very often in what I've seen.

For sure in a bond fund it's a different story. I guess I always assume that anyone who could possibly afford individual bonds would be using them for their fixed income allocation for the advantages I mentioned. Also, because it's pretty difficult to pay the fees on a fund from high quality bonds in the current interest rate environment.

I actually think many retail investors would do just as well with laddered GICs as they do with bond funds, and would probably sleep better at night as they wouldn't have the swings. Plus, laddering gives you money to withdraw for (retirement) spending needs and RRIF minimums.

Just my opinions, and obviously you would be more in touch with what the average person actually chooses to do.

[stampsx2]

CIBC chief economist Avery Shenfeld said if oil prices begin to recover in the second half of the year, he expects the Bank of Canada to raise its key interest rate by one quarter of a point.
However, if oil remains low and Canada's economy is at risk of growing at a rate below two per cent, Avery doesn't anticipate any interest rate increases from the central bank until 2016.


Read more: http://www.ctvnews.ca/business/ontar...#ixzz3O5yzWoUo

[The Yen Man]

Welp, good thing my mortgage is up for renewal in June. I'm just waiting to February to lock it in at a lower rate before the expected increase. Not that a quarter percent is really that big, but I guess it's still about $800 or so a year to go towards my principle for me, so that's nothing to sneeze at.

[Kavvy]

Negative deflation in Europe..

Although, I am unsure if this is really new news. I thought I read 6 months ago some banks in Europe had a 'negative interest rate'. Not really sure how that would work.

http://www.bloomberg.com/news/2015-0...al-mounts.html

[Dan02]

I'm thinking you meant to say negative inflation...

[oilyfan]

http://mobile.bloomberg.com/news/201...utes-show.html

Doesn't look like the US is in any hurry, the Fed says maybe April for a rate hike.