We’ve all felt the urge to price shop. Maybe for you it’s clothes, maybe it’s patio furniture, or maybe it’s trying to find the cheapest plumber in town … regardless of when you bargain shop, almost everyone does it when it comes to mortgage rates.
How do I know? Well turn on the TV, listen to the radio, read a newspaper, surf the net, talk to your neighbor (I’m not kidding, go ahead don’t text him or her, actually talk to them). Any one of these sources will know something about what’s happening with mortgage rates. And I’m guessing so do you! So why are we so obsessed with them? It’s a good thing right?
Global News recently published an article on this very topic and asked 5 questions about interest rates in 2014. I’ll answer all of those questions from the perspective of a mortgage broker.
1) Why are we obsessed with low mortgage rates?
Simple, we are consumers, and borrowing is the drug that fuels our spending. Like any drug, the cheaper the better. Now you might find that an interesting statement coming from someone who is a mortgage broker, after all am I not someone who is helping push this cheap money and fuel the spending? Guilty on all counts! However, in my own defense, I would say that the debt I encourage my clients to take on, is “good debt” and ultimately in the long run for their financial well being. Bottom line, unless you’re planning on living at home for the rest of your life, at least you’ll have clean laundry, you more than likely want a place to call you own. And in the long run owning, rather than renting, is the way to go. More on that however in a future blog, for now let’s move on to what the Feds are doing about it.
2) Okay if excessive borrowing is a concern, why doesn’t the Bank of Canada raise its rate?
You’ve likely heard about the Bank of Canada governor’s talking about excessive consumer spending and overall debt over the past few years. I think of them as the boy who cried wolf, you know the story all the townspeople go running with pitchforks only to find out it was a false alarm. Ultimately though, the wolf really does come and eat the boy and townsfolk are busy napping. Well I look at our current state pretty much the same way, I know talking to many of my clients over the past few years when I mention any of this (rates rising, the economy and their excessive spending) their eyes glaze over, it’s only a triple-triple that brings them back to the living.
Well that’s the government/BOC’s life-long quandary, while they would like to raise rates and slow down consumer debt, they don’t want to stifle the economy and at this time all indicators are pointing to the fact that it’s already slowing and we are headed for deflation (cooling economy). If rates were to rise now, not only would consumer spending be impacted further, but businesses as well would be, as business owners would be reluctant to invest in their businesses if they thought sales were headed for a slowdown.
A rise now will only slow the housing market further, and a slowing housing sector will result in stunted job growth (housing sector is a big player in job creation). In turn this will lead to increased unemployment which will lead to less spending, I think you get the picture. It’s not an easy tightrope to be walking for either the Finance Minister or BOC Governor General, and that’s why most economists are pointing to rates not rising at all till the 3rd quarter of 2015 at the earliest!
3) So why are the banks cutting their mortgage rates?
As I mentioned above, we have a slowing housing market. But what’s the root cause of this? A lot of fingers are being pointed at all of the recent mortgage rule changes/tightening over the past 4 years or so, especially the last couple.
It would appear that the former BOC governor and the present finance minister along with the current BOC governor have got their wish, a slowing housing market. However in some quiet quarters in Ottawa it’s now being muttered that the slowing might be more than preferred. If it were me I would have done the rule changes a bit differently, but alas that’s a something to talk about another day.
So where does that leave lenders today?
Still wanting to generate sufficient mortgage business!
For the big banks this is even more important because mortgages are really a loss leader; they are a means to the “juicy” part of the business and that’s basically everything else. These days the real commodity is “people”, and not just any old folks, we are talking the ones with really good credit and net worth, or the people who have the potential of becoming these star clients for the banks. Unfortunately for their poor cousins, the mono-line lenders, these are lenders who only do mortgages, they have no ancillary services to sell, or promote to clients. As rates drop - so do their margins. The big banks however have another advantage: they have depositor funds, your money, which they can pay you a lower interest rate and relend for a higher one.
4) Will interest rates fall further this year?
....more talked about than Pink these days, okay maybe not!
Okay so if we are headed for deflation (less desirable than inflation), how do you stimulate the economy without having personal consumer debt run away? With respect to the housing market and mortgage debt we shouldn’t see this as a major concern; even with a ½ rate drop we are not going to have runaway sales. This might have been the case if the other changes the Fed’s implemented with respect to the mortgage rules had not taken place.
Those changes have had an impact and continue to do so with the additional OSFI changes that are both occurring & proposed in the background, I can’t see the housing market running away in the short term. All of these changes are still working themselves out. If there was a reversal on some it might cause some steam to build, but I can’t see the optics of this looking very good especially in light of the fact we have been told for quite some time that this is the tough love the housing market has needed. So really in the short term it leaves rates as something they can adjust, which is more than likely what we will see in the short term.
Anyways that’s my prediction, but I also bet on Denver to beat Seattle!
5) Okay so how do you get un-hooked?
...you may not want to know but you need to know!
The real elephant in the room is the lack of understanding society has towards “needs and wants” and “curbing our spending appetite”. I’m not excluding myself from the conversation, I have an iPhone, but it’s not a 5! This isn’t really something you can legislate for – you just need to educate!
Consumers (that’s all of us) need to become better versed in all aspects of debt and credit to have a sound & thorough understanding of not only how it all works but how it impacts all of us. This education should start right from elementary school and continue all the way through high school so it can create long and lasting effect on spending and savings habits. From “cradle to grave” we are constantly being marketed to buy, buy, and buy more and in order to blunt the impact there has to be a continuous message from the other side extolling the virtues of financial prudence. Sure it’s not as sexy (think supermodel), but definitely more sustainable (your grandma) - not only financially but all the way around.
How are kids going to learn this behaviour? Other than being educated about it, they will need to see it modeled, by guess who, that’s right, their parents. There’s an old saying “that an apple doesn’t fall far from the tree” and I can tell you from experience, from taking & processing thousands of credit applications and loans, that’s financial dysfunction runs in families and for those of you who are trying to “keep up with the Jones” don’t bother. They’re basically broke and living on credit. I know. I’ve seen enough of them.
I love cars, so I will leave you with this little thought, while you may want a Ferrari, I can assure you a Civic will get you from A to B just as well, maybe not in as much style I grant you, but at least you’ll have money left over for insurance & gas!
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