*Updated* Ongoing Bank of Canada Benchmark Rate Announcements

[Geraldsh]

Originally Posted by GGG

How sensitive is he to payment changes.

If a 2% increase in interest rate will cause him financial stress then I would lock in for longer. Variable vs Fixed and 2 vs 5 is about risk tolerance and flexibility as opposed to trying to guess what is going to happen next.

So questions like

Is his income going to be higher 2 years from now? If no then the ability to handle rate hikes is lower
Is he planning on selling and not re-buying in Canada? If yes than shorter is better
Can he afford a 2% higher rate at time of renewal?
Can he afford the higher 2 year fixed today?
Are you willing to bail him out if he can afford payments at some point.

In general over the past history of mortgages variable is lower cost. The problem is that we live in a discrete moment in time so on average shorter and more variable should pay off however you have to live with the fluctuations.

Anyway the short answer is don’t try to big the cheapest outcome pick the option with a risk profile you can tolerate.

After 17 years my son’s condo is being bought out due to fires in the complex. He is not happy about the timing/situation and dislikes change of any sort. Still early in the process so I haven’t seen any actual numbers yet. He will probably go for a 5-year if it’s at all feasible.

[powderjunkie]

Originally Posted by bizaro86

I mean, that post wasn't dripping with outrage, it was pretty matter of fact. And the BoC forecast was wrong on the turn in interest rates last time, so counting on them to forecast correctly this time seems potentially unwise, especially given the potential importance of the decision.

Again, it depends on the person and their ability to handle higher payments.

Fair, I meant to qualify that I wasn't talking about OP as much as the common and very tired refrain we've seen so much of in recent months, where people completely ignore/forget the context of those 2020 announcements.

[The Fonz]

Unfortunately couldn't find an updated historical that went any further back - would have been nice to see a 30 or 40 year chart.

[Izzle]

Originally Posted by The Fonz

Unfortunately couldn't find an updated historical that went any further back - would have been nice to see a 30 or 40 year chart.

The trading economics website has one but it only goes till 1990

[Fuzz]

[tvp2003]

Originally Posted by The Fonz

Unfortunately couldn't find an updated historical that went any further back - would have been nice to see a 30 or 40 year chart.

Historical 5-year posted rate: https://www.ratehub.ca/5-year-fixed-...e-rate-history

If you scroll down they have the 5-year discounted rate since 2006, which will give you a more realistic picture for the past 15+ years.

[The Fonz]

Originally Posted by Fuzz

This looks to be missing the last 6 years.

A 5-yr fixed today would be up around 6%.

[Fuzz]

Originally Posted by The Fonz

This looks to be missing the last 6 years.

A 5-yr fixed today would be up around 6%.

Ya, your chart kinda picks up where this one ends off. I can fetch you some scotch tape if you want to merge them.

[Yoho]

https://twitter.com/user/status/1619022530047803394

[DoubleF]

Originally Posted by Geraldsh

My son is shopping for a mortgage and asked for a 5 year fixed rate. The bank advised him to limit the fixed term to 2 years - what would you advise?

This is not the best of advice to maximize savings... but a balanced approach for education vs aiming for the best rate for your son might be important as well.

Be very careful in separating the concepts overall cash flow vs income vs expenses. The entirety of a mortgage is not an expense. A portion is forced savings. You'd be surprised how many people seriously do not understand this concept and some of which I've met have more than a million in net worth.

How financially savvy is he? For a first mortgage or not too financially savvy, 2-3 year fixed to understand how it works but also to lock in steady "expenses" is a good thing to do while learning how things work. Have your son sit down with an advisor and listen to the whole schpiel they make about how to make a decision. Then have a discussion together and also do some research as well. Advisors are good, but sometimes they don't have the entire big picture. Their advice might be good and make sense short term, but not necessarily long term.

It might cost him extra money up front, but it's something IMO important to learn the break down of principal payment and interest without then having to figure out other stuff relating to variable. Otherwise, it'll almost always be, "Which should I choose?" without knowing the reason why it's one or the other and whether the answer could switch based on changes in market circumstances. Yes, I get that variable is sorta like that, but with more fluctuations in interest/principle split, it gets too complicated at younger individuals don't learn about it until it's too late.

I also tried teaching others about the concept of how much you're giving to the bank. It does help to realize that if you have a $300K mortgage at like $5%, that's $15K to the bank in "convenience fees" PER YEAR. If you expect to pay down a mortgage in 10 or 20 years, if you do that calculation (simple, ignoring compound), suddenly you realize why people used to celebrate mortgage free. It's cash flow unlocking AND yearly savings.

This vs 2% savings on $50k is $1K per year or $250 per 3 months, paying down the mortgage at 3% right now isn't the greatest of ideas. Too much opportunity cost given up based on current rates and current potential cash flow needs for the next 2-3 years. I'm better off putting it into bank stocks and/or short term GICs and then taking some 0% financing offers on some house repairs and upgrades and earning a little bit on those rather than paying any debt I have immediately as I used to do.

I know some people who love sitting on cash because they're ultra risk averse. Like, 60-90K of cash as the rainy day fund sort of thing. After explaining it this way and explaining stocks such as growing at X% less taxes vs saving percentages on mortgages, LOC and credit cards vs spreads on earning/growth vs immediate savings and risk tolerance, things have improved substantially in her financial literacy. For GICs though, I would advise making sure the duration that are purchased are appropriate (ie: 30, 60, 90, 1 year etc.) for what your needs are. My wife thought I was BSing her when I said we were accumulating net worth faster than both our parents and would likely surpass them by age 40. This not including the fact I bought a whole life insurance plan in my 20s and it'll be paid off soon and will just accumulate a cash balance/net value for me for the rest of my life.

But when I explained how we got into investing earlier than they did by decades (vs parents sat on cash and only started investing in their 40s and 50s) and how housing prices are now benefiting us more than them, or the fact our parents don't know how to leverage assets as much, it made sense to her.

I'm not joking when I say some people are seriously weird in their financial literacy logic, and I'd be lying if I didn't say I have also grown substantially in my personal understanding in the last few years as well.

Like people who literally know the logic inside and out, but refuse to do the calculations. Once they do the calculations, they realize they've been really screwing things up with rule of thumbs that they've been using.

Personally, I used to hate borrowing money. Now I realize that there's some free cash here and there for borrowing. Also, doing the real calculation of interest on certain loans vs the mental anguish on a number that I never calculate that turns out to be like saving $500 a year but losing a flexibility that I'd easily pay double that for for an extra 6-8 months to pay it off/not have to delay vacations, take advantage of deals etc. But I also realized it makes sense to look at time lines for 1, 3, 5 and 10 years.

It's a new and important lesson IMO that I'm personally learning how to balance militant saving/pay down behaviours vs paying interest on purpose. I'm glad I can be learning and discussing these topics in real time with the spouse. I'm still bummed that I won't be mortgage free by 40, but after doing the calculations, I'm more comfortable deferring that by around 3-5 years and then basking in the savings and the fact I'll basically have no more major costs from that point on.

Basically from age 40-60, we'll be doing damn well with expected ability to save making a huge spike, but the next few years before I hit 40, we need to be a little bit lean for cash flow purposes. At 60 onwards, we might hit large housing expenses again, but at that point we wonder if we'll be moving from this house, or if we bite the bullet and defer mortgage free another year or two with upgrades that would allow us to kick the can down the road for revisiting another 10-20 years etc.

[FlamesAddiction]

Interest rates wouldn't be so bad if home prices and wages kept pace over the years. Even though 6% isn't grossly high historically, it is certainly worse when you consider mortgages are at least 4-5 times larger now than they were when interest rates were as high or higher, and that more monthly income goes to paying mortgages. For people lucky enough to have a mortgage of course, assuming you can still pay.

[blankall]

Originally Posted by FlamesAddiction

Interest rates wouldn't be so bad if home prices and wages kept pace over the years. Even though 6% isn't grossly high historically, it is certainly worse when you consider mortgages are at least 4-5 times larger now than they were when interest rates were as high or higher, and that more monthly income goes to paying mortgages. For people lucky enough to have a mortgage of course, assuming you can still pay.

Another thing to keep in mind was that during those record high interest rate times, they also had ridiculously high rates on guaranteed investments. With a 10+% return, if you have a 25% downpayment, you can wait 4ish years, and you'll have a 50% downpayment, plus whatever else you can save in that time....not the case anymore. Now it's struggle to get a downpayment...then if you don't act now, in 4 years, that downpayment has likely decreased relative to price.

[Slava]

Originally Posted by blankall

Another thing to keep in mind was that during those record high interest rate times, they also had ridiculously high rates on guaranteed investments. With a 10+% return, if you have a 25% downpayment, you can wait 4ish years, and you'll have a 50% downpayment, plus whatever else you can save in that time....not the case anymore. Now it's struggle to get a downpayment...then if you don't act now, in 4 years, that downpayment has likely decreased relative to price.

Well those rates are all relative though. So if you have a double digit GIC, and you think you're way ahead of the game, but inflation is 12%, you're basically guaranteed to lose money. Similar to this past year where you could get 5% from GIC's...but inflation was running at 8%.

And btw, you're not doubling money in 4 years at 10%. You need more like 18% at that point and inflation is probably at 21%?

If there's one bright side to what we've seen in the past twelve months though, it's that you can actually get a good bond yield or fixed rate. I used to et asked things like "hey, I've saved for a house and I want to buy in the next year, but in the meantime I want to invest this and make some money!" Unfortunately, for prudent risk management, you can't really invest those funds because you need them soon. But a "high interest" vehicle was like 0.9%! Now at least you can get say 4-5% and wait it out.

[blankall]

Originally Posted by Slava

Well those rates are all relative though. So if you have a double digit GIC, and you think you're way ahead of the game, but inflation is 12%, you're basically guaranteed to lose money. Similar to this past year where you could get 5% from GIC's...but inflation was running at 8%.

And btw, you're not doubling money in 4 years at 10%. You need more like 18% at that point and inflation is probably at 21%?

If there's one bright side to what we've seen in the past twelve months though, it's that you can actually get a good bond yield or fixed rate. I used to et asked things like "hey, I've saved for a house and I want to buy in the next year, but in the meantime I want to invest this and make some money!" Unfortunately, for prudent risk management, you can't really invest those funds because you need them soon. But a "high interest" vehicle was like 0.9%! Now at least you can get say 4-5% and wait it out.

Sorry. To get to the 50%, yeah you either need way higher rates or way more saved.

However, despite high inflation, housing prices were relatively flat during the high interest rate times:



Sure some up and down...but nothing like today. It was just easier to get ahead of the market, even with the ultra high interest rates.

[opendoor]

Originally Posted by Slava

Well those rates are all relative though. So if you have a double digit GIC, and you think you're way ahead of the game, but inflation is 12%, you're basically guaranteed to lose money. Similar to this past year where you could get 5% from GIC's...but inflation was running at 8%.

That certainly wasn't true in the 1980s. You could get 9-10% GICs from 1983-1991 when inflation was only 3-4%.

And even for most of the '90s and early '00s you could get 5-7% GICs when inflation was under 2%.

It was only really after 2008 that real returns on GICs went negative.

[Slava]

Originally Posted by opendoor

That certainly wasn't true in the 1980s. You could get 9-10% GICs from 1983-1991 when inflation was only 3-4%.

And even for most of the '90s and early '00s you could get 5-7% GICs when inflation was under 2%.

It was only really after 2008 that real returns on GICs went negative.

Yeah it depends on bond rates of course, and inflation and GICs aren’t completely related. It also depends on the location of the GIC (registered vs non-registered) because that interest could be taxable, making it less of an overall return. Lots to consider.

[Azure]

Powered by the buoyant construction, skilled trades and manufacturing sectors, Statistics Canada reports the Windsor-Sarnia region saw a $6 per hour surge in its average wage for all occupations in 2022.

The region, which also includes Chatham-Kent, saw the overall average wage rise from $19.65 per hour at the end of quarter three of 2021 to $25.65 a year later. That rise pushed the local area past the national and provincial averages of $24.20 and $24.65 respectively.

https://windsorstar.com/news/local-n...-in-area-wages

Sucks to be these workers. BoC gonna hear about wage and sector growth? Can't have that. Another rate increase on the way!

[Yoho]

Will be interesting to see if this effects the “pause” on interest rates hikes.

https://twitter.com/user/status/1624038922513747970

https://twitter.com/user/status/1624087278925627395

[Slava]

Originally Posted by Yoho

Will be interesting to see if this effects the “pause” on interest rates hikes.

https://twitter.com/user/status/1624038922513747970

This is interesting to me on a few fronts. First, there is some pretty strong evidence that the rate increases are not entirely reducing inflation, but adding to it. This doesn't apply in all sectors, and there is a net benefit, to be clear. But one are where it might be working against the central bank is housing because the rate increases obviously increase the financing, which pushes rents up at the same time. This is adding about 0.5% to the inflation rate, which is obviously not helpful.

The second part I find interesting is that with unemployment rates holding well, and companies clearly reluctant to lay off workers that they've had a difficult time in finding in the first place, it suggests the soft-landing is still in play. Typically a recession would see job losses and a rise in unemployment, which we really aren't seeing at all. GDP has also remained positive and strong. Basically despite all kinds of heuristics and such, the economy has tolerated the rate hikes and remains resilient for the most part. Interesting times.

[Harry Lime]

That site demanded so many cookies that I didn't get to read it all.

It always makes me look sideways at an article that uses unemployment rate instead of jobless rate, or doesn't relay the loss/gain of part time vs. full time, or doesn't also relay the increase in new employment aged people to a population in the desired timeframe.

In short, I think that this news will have zero effect on any planned hikes.