Mortgage Strategies with Uncertain Interest Rates

The Bank of Canada (BoC) raised interest rates at the fastest pace in 20 years.

Mortgage payments could rise by 60%. Will mortgage rates fall? When? By how much?  

How can you plan real estate financing given such uncertainty?

WHERE ARE WE AND HOW DID WE GET HERE?
The BoC raised interest rates to fight the highest inflation we’ve seen in 40 years.  High inflation poses a dangerous threat to an economy and hits lower income families’ budgets the hardest.

We know that COVID-19 played a significant role in the growth of inflation by disrupting supply chains and exacerbating unfilled job vacancies. Jobs couldn’t be filled because of illnesses and the safety of governmental CERB payments. Everyone was surprised by how strong consumer demand was in 2020/21 (lots of folks working from home and ordering insatiable amounts of yeast for their newfound bread making passions). Low supply + high demand = increasing inflation.

The BoC only has one real blunt instrument with which to battle high inflation – they can raise and lower interest rates.

WHEN WILL INTEREST RATES FALL?
Interest rates eventually will fall – economic theory and history proves this. However, a more germane question I believe we should ask is What? not When?

That is: What should we plan to do while we wait for interest rates to fall?  

Let me explain:

Inflation has slowed down (currently at 3.4% Dec’23) and the BoC agrees with economists that we’re winning the battle. On January 24th another pause in interest rate hikes was announced (the last hike occurring in July’23).  So, if we’re winning the inflation batter, then interest rates should fall now too, no?  No.

The saying goes: Interest rates take the elevator up, but the stairs down. The BoC cannot risk cutting interest rates now only to see inflation increase again. This situation would confuse consumers trying to plan for their future as well as destroy the central bank’s credibility.  Some economists have suggested that inflation needs to slow to its 2% target and stay there for a few months before interest rates would be cut. 

To add anxiety to the discussion (side note, bread making can help with stress), consider this: if the BoC decided to lower interest rates fast and hard, it would be for alarming reasons.   The economy would be imploding and the stress on consumers would be at critical levels. 

The stock market is betting that cuts are coming in March’24 while other forecasts suggest June.  But many economists (particularly those who have lived through high rates in previous decades) predict a much longer time period – early 2025.

Bottom line: No-one really knows when interest rate cuts will come but we do know that they are coming.

FINANCIAL STRATEGIES FOR UNCERTAIN TIMES
There are still many tactics you can utilize as you plan for your mortgage renewal, home purchases or other lending related decisions.

• Start to budget now for high mortgage payments in anticipation of your future renewal:
  • If your current mortgage rate is 2%, a mortgage agent can forecast what your new payments will be at 5%.
  • Knowing this new budget, you can change your spending habits NOW, don’t wait for renewal.  Evaluate your discretionary living costs. You’d be surprised how much each of those Norwegian Super Bread Yeast packages can add up.

• Build your nest egg for a financial buffer in the event of unexpected surprises:
  • COVID-19 caught us off guard, high inflation caught us off guard.  What other surprises await us? You need to be disciplined and prepared.

• Strategize your mortgage options by talking to a mortgage agent:
  • Compare scenarios of variable vs fixed rates and paymentsEvaluate savings from breaking your mortgage to leverage a lower interest rateForecast different amortization periods to help cash flow
  • Talk to an agent at least 6 months before you need to make a financial decision

• Date the Rate, Marry the house:
  • A mortgage agent can explain why buying a house now (when interest rates are high but house prices are low) is more advantageous than waiting for rates to fall
  • A higher interest rate on a smaller mortgage loan is going to help you in the long run.

• Focus your energy on things in your life which are certain and you can control:
  • Your job and income generation
  • Your spending
  • Adopting a less risky investment approach
  • Nurturing things in life that bring you joy and peace (family, friends, hobbies)

How can we plan our financial future in uncertain times? 
Arm yourself with information and expert advice.  Be disciplined. Be conservative. Be cautious. And then take a deep breath, smile at the things that bring you joy and go make some bread.