Surprise surprise, banks are raising their rates. OK, we all knew it was going to happen, but now it’s suddenly front page news? The only excitement about it was who the first lenders to jump the gun would be.
So The Big Question:
Are The Rate Increases Worth Panicking About?
At this point, we are talking about a quarter percent increase, which is rather minimal. This shouldn’t be a make or break increase for 98% of the population. If you are a buyer, and this pushed you out of the market to buy a property, perhaps you shouldn’t be in the market for property? If this small a change in rates made it unaffordable, the increase likely saved you from losing even more money and getting caught in a downward financial spiral.
Should You Lock In Your Variable Rate?
If you have a variable rate mortgage do you need to rush to the bank and lock your variable rate mortgage in before the rates skyrocket? In my opinion, this is only the start of an increase in rates. I believe most of the banks will raise their rates once, see how the market deals with it. Then if they can squeeze some additional profit out, they will likely raise them again and say it’s due to market demands.
However, I don’t believe it will be large increases, nor will it last long. We will see the quarter point now and maybe another quarter again later in the month in anticipation of the next Bank of Canada rate announcement, but then they will likely stabilize or even drop a quarter again.
Increased rates will put pressure on the housing market, pressure that will slow down demand and sales. When lenders realize the market is slowing and they are losing profits, they will not raise their rates and this is when they may claw back a quarter again to stimulate borrowing (or really profits!).
Do You Need To Buy Now Before Rates Increase?
If you are planning on buying a property, do you need to do it now rather than wait any longer? Let me ask you this, did you find the property you want, or are you settling so you don’t miss out? If you are being driven by emotion, rather than affordability and common sense, DO NOT BUY.
There is still a fairly large window of opportunity to purchase and if your budget gets shot by even a half percent increase in rates, you are one of the fringe buyers who should step back, save a bit longer and jump in later. If however, you found the exact home you wanted, why wouldn’t you take advantage of the incredibly low rates that still exist?
Media is building up the hype about the rate increases because hype sells. Stop for a moment and look at how low the interest rates currently are. If they increase a full percentage point, they are still pretty darn reasonable.
Is This Just The Beginning of The Mortgage Rate Runup?
I mentioned this earlier; we all knew rates had to go up eventually. It’s a fine balance of how much and how fast and there will be mistakes made. My feelings are the Bank of Canada made a mistake last summer raising the rates twice. I believe we would have been in a much better economic situation if they held off both or at least one increase then.
By raising the rates, they stalled the economy and slowed the growth. I would like to believe they recognize that and won’t do it again this summer. Then again, government doesn’t always do the correct thing, they often follow what big business or the people want and go that route to keep people happy. Perhaps one increase this time and then they should allow time to go by and see how it has affected the balance, rather than two increases in a row, albeit small increases.
Long term picture though, rates will continue to increase. As the economy grows, the rates will be increased by the Bank of Canada to stabilize inflation and keep it under control. Fixed mortgage rates are not actually tied directly to the Bank of Canada rate, but instead to the bond market, so they do not have to increase or decrease with the central banks changes.
Bond markets however grow with the economy and move upwards as the economic situation improves. So inevitably the economy will pickup, the central bank will increase rates and the bond market will improve. It just won’t happen overnight, so please don’t panic.
Investors Perspective on The Market
If you are a seasoned Real Estate investor, this increase is great. It squeezes out a bit more of the competition that really shouldn’t be competing, it’s putting fear into the market when you should have a firm grasp of the reality behind the hype and any purchases you are making now should all be based on cash flow anyway.
With slightly less competitors in the market, you have more time for analysis and more opportunities arise. With fear in the market, it’s more stimuli for extra opportunities to start appearing. For some current owners it may put more pressure on them to move their properties before they get hit with increased rates. Tie that in with more lenders not renewing mortgages on rental property and it gets more interesting.
If you have all your ducks in a row, have found a lender who will work with you and are basing everything on strong cash flow, this current market may look like Nirvana! Prices are still reasonable, rates are still good and demand for rental property over the next two years will continue to increase. So what are you doing reading this? Go buy something, or tell me what you think is going to happen!!! Just take some kind of action!
