- Hey, it's Nolan Matthias from Mortgage360,
and today we were talking to the Bank of Canada
rate announcement and why that announcement
is indicating that a five-year fixed mortgage
may not be the best option anymore.
But before we get into it,
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Okay, so let's get into it.
Let's talk about why five-year fixed rates
are no longer the strategy that we're suggesting
and how we know that a variable is a safe bet
for the next couple of years, and how we know
that a variable is a safe bet for the next couple of years
is because of Tim, Tiff, Tim?
It's not Tim; it's Tiff, T-I-F-F, Macklem,
the new Bank of Canada governor,
and his interest rate guidance that he provided
on Wednesday, July the 15th, and in that guidance,
he obviously didn't lower interest rates.
We're at 0.25 percent for the overnight key lending rate
so that rate can't go much lower
without going into negative interest rate territory,
but what he did suggest was that, and these are his words,
that interest rates were going to be very low
for a long time.
Now, he didn't define specifically what long time means,
but what we can defer from some of the other comments
and some of the predictions
that the Bank of Canada is making
is that a long time is at least two years.
And the reason why we know that is because
what they are suggesting is that they expect GDP
to be down by about eight percent.
It's like 7.8 percent or something like that.
I'm gonna use round numbers, but be down
by about eight percent for 2020
and then in 2021, 2022, they expect it to rebound
by about five-and-a-half to six percent
and then about three-and-a-half
to four percent respectively.
And what that means is that we have at least
a two year window where interest rates
are going to remain low, and by the way,
those predictions are based on them not having
a major shutdown for a second wave of coronavirus in Canada.
So here's what they're expecting.
They're expecting at least two years of low interest rates,
and you know, I think anytime you see interest rates
get this low, you can go back in history,
go back to the 1940s, 1950s,
you always expect interest rates to stay low
for a very long period of time.
You can do the same thing, go and look at Asia in the 1990s,
when they got to very, very low rates,
and they've still been climbing out of the,
that low rate territory for the last 30 years.
So we know that when interest rates get low,
they stay low for a long time,
but the Bank of Canada's guidance is basically telling us
that we have a two-year window
where you're probably not going to see
variable rates increase.
So when we have that type of window
and variable rates are low,
what that means is that we can take advantage
of things like the low variable rates, the lower costs
of a variable rate mortgage, and also their low penalties.
And low penalties mean significant flexibility,
so that if variable rate discounts go from like
prime minus point five to prime minus one,
well, we can take advantage of the fact
that we have a low penalty.
We can refinance, and we can get
into lower variable rate mortgages.
So there's gonna be significant opportunities
to save as long as we have some flexibility going forward.
Now here's the other big reason why we think people
should be taking variable as of right now
instead of a fixed, and that's because
if the Bank of Canada is predicting
that interest rates will start to go up
in two to three years, well,
you probably don't wanna be caught
with a five-year mortgage right now.
Because if you're caught with a five-year mortgage
and interest rates at five years
have gone up significantly,
you're going to have to renew
at five years into a higher interest rate.
But if we can take advantage of having a variable rate
for the next two to three years
when we know that rates are going to be low
and we know that they're going to basically stay the same,
then what we can do is when interest rates
do start to go up, we can assess the market
and then decide if we wanna lock into a five-year fixed.
And what that'll do is that'll give us
instead of a five-year window at low rates,
it'll give us a seven to eight to nine year window
at low rates, because we're taking advantage
of the variable for the short term
and then locking into the fixed
as interest rates start to increase.
So it's just a better strategy.
It gives us more time at low
or at lower interest rates
if we're paying attention to the market.
And you know, at our company, at Mortgage360,
we do that for the client.
We make sure that, if we're putting 'em into a variable,
and we start to see rates go up in year two
or year three that we're calling them and saying,
"Okay, here's the strategy going forward,"
but at the end of the day,
there's a huge opportunity to save
a pretty significant amount of money
and extend the window of low interest rates
by being smart and using variable rates right now.
So, that's why we think that the five-year fixed strategy
for most people is no longer the best strategy.
We've got some opportunity here with variables,
and if you really want to save money over the long term,
we think variable rates is the way to go.
We'll be able to knock several years
off of somebody's mortgage,
if not five to 10 years off somebody's mortgage,
just by being smart in our choices
and also by being smart in choosing mortgages
that are highly flexible
and when it comes to flexibility,
variable rates are the way to go,
and they're also the way to go
when it comes to getting low priced mortgages.
So, that's why we think variables are the play,
and if you have questions on it,
feel free to leave 'em in the comments below.
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