Mirroring the U.S. effort to fight the economic disaster expected from the coronavirus, the Bank of Canada lowered interest rates by 1/2% as well – to “get out ahead” of the storm. Governor Stephen Powell said “the downside risks to the economy today are more than sufficient to outweigh our continuing concern about financial vulnerabilities.” In other words, the debt-laden consumer is to take a back seat to virus consequences.
The benefit is lower mortgage rates. Hard to fathom since it wasn’t long ago the government made efforts to reign in the housing markets but it is what it is. The cost is affordability. It’s almost impossible for young families to pay outrageous rents today, never mind fork out the price to buy a new home. Lower rates will only fuel rising house prices some more.
Five years ago (2015) the average mortgage rate was 4.67%. It actually rose to above 5.00% afterward. So let’s say that lots of people are carrying a mortgage of roughly 5%.
According to Stats Canada, 60% of Canadians own their homes, and 40% of homeowners own them outright (2016 data). So lots of Canadians are carrying mortgages. The luckiest ones bought their homes 5 years ago and are renewing at today’s lower (and probably headed even lower still) rate of around 2.5% They will be saving quite a bit of money – see table below.
Over the next 5 years, these homeowners (5% down to 2.5%) will pocket savings of $50,000. Others only slightly less fortunate, who remain stuck with fixed mortgages may want to bite the bullet and get a new mortgage. For example, say you still owe $500,000, are paying 5% at a major bank and bought the house 2 years ago today, your penalty (before legal and other fees) will be in the neighborhood of $10,600. BUT, over the next five years at 2.5% you’ll save about $40,000 so net of the penalty you’re still far ahead.
There are three real options:
- Live with the pain of your current mortgage, especially if the savings don’t cover the costs of getting out of it.
- Renegotiate your mortgage or move to another lender, to take advantage of this anomaly central banks have orchestrated.
- Sell your home when prices go crazy (as they will) in short order, and rent until interest rates begin to rise again – taking down house values.
- If you’re intent on buying a property today, get a cheap mortgage while the getting is good.
The scary part of all this is that we’re eventually headed towards what I expect will be an inflationary recession; another financial crisis of epic proportions coordinated by central banks around the world, Oh well!