Mortgage Rate Increases - What To Do?

MORTGAGE RATES are going up!!!!!

It is in the news, it's water cooler talk, there are concerned mortgage holders, and in my industry it is the talk of the town. What do we do about the rate increases? Should I go fixed or variable? Should I even buy or refinance? So many questions so let's dig in.

Mortgage rates are cyclical and we have been fortunate, from a family budget perspective, to have received record low rates for a prolonged period of time. That said, with mortgage rates going up, here is a very handy First Foundation chart you can follow along with.

Turn of the Century, Again. Mortgage Rates Going Up.

So a quick view will show you we haven't really absorbed these kinds of rates since the early 2000's and of course that stokes fears of our parents' stories. In the 80's my rates were at 18.5% and people had jingle key scenarios where they would walk into the bank and drop off their keys. Do I think we will get to those levels? NO. Do I think we could be heading into a recessionary type scenario, MAYBE. I know that is a cheap way of being non-committal to an economic storm but I wanted to preach some data and some advice as we boldly go where only a Trudeau Government can take us (As political as I will get in this post).

Bulls Have More Stamina Than Bears.

In the last 70 years of economic data, if we do sink into a Bear market territory, the duration of most of those Bear markets is 11 months. Bull markets typically last 3 times that but we should focus on what we are in. So it's patience I preach as if you have to buy or refinance or renew you might want to flip the switch on your rate mentality. Perhaps you consider a short term fixed rate before rushing into a long term rate commitment, time the market and be able to renegotiate your mortgage earlier if markets stabilize in the back half of the Bear market I mentioned. If you lock into a 4 or 5 year term and rates do move down, you will hemorrhage a large penalty to consider breaking to sign new terms. Why not mitigate that scenario by cycling some short term options.

Protect Your Upside Down Side?

OR, and this may be crazy, but consider a variable rate mortgage. Right now the payments will go up but they are considerably lower than current long term fixed rates. You will nail bite for a year or so but what history has shown is markets change quickly. Bear markets last a shorter time before stabilizing and likely you will see some rate drops a little later into your new scenario. Variables have the advantage of only a 3 month interest penalty at any time to break your terms, remember longer term fixed rates could cycle up large IRD (interest rate differential) penalties so you may be married to your mortgage partner long term. The variable option could allow you to break with minimal interest damage to negotiate fixed rates if you feel more comfortable in that rate scenario.

How to Mitigate Rising Interest Rate Risk

1. Talk to your mortgage broker. Like me!
2. Review your financial plan with a Certified Financial Planner (like Tyler!)
3. Cut discretionary spending on unnecessary items like travel, entertainment, restaurants, etc.
4. Find ways to save money on necessities, like home insurance, by getting new quotes.

History Repeats. Mortgage Rate Increases are Just Like Flannel Shirts.

Now I will boldly say that we shouldn't, and not likely, get back to 5 year fixed rates of 1.54% like those super low days provided. When met with a love to spend our money government (political again, ooops) it can cause massive borrowing flooding markets with cheap money, fast moving real estate, and eventually historic inflation which is supported by many hundreds of years of economic data and scenarios that have played out eerily similar. The lesson is that history repeats itself and I like Sydney J Harris' take on it," History repeats itself, but in such cunning disguise that we never detect the resemblance until the damage is done". Well eerily similar characters and names to our current situation, similar price pressures and rate increases, similar bad inflation with massive spending as the main driver. I digress as we seem to be doomed to repeat our history but history shows we will come out with corrections as well so it's the planning portion of your mortgage and not succumbing to pressure that will carry us through.

Rising interest rates can seem and are scary for many homeowners especially after a very long Bull run on rates where I suspect many homeowners grew accustomed to them. Historically, although not feeling ideal now because of mortgage rate increases, we are still in line with decent money cost overall. Some markets who have had greatly inflated prices over the last 3 years will feel a definite pinch over the next short while, they will bounce back over time and again it's is the patience part which is hard. I suspect big markets in Canada like our Toronto and Vancouver friends will erode much of the price gain, but if they drop 30% it means they will see prices from 2019 which still is much higher than the rest of Canada.

The sage words from my mom ring in my head often when I get frustrated, "Son you are going to have to grin and bear it for a while". Yes it's a grin and bear it like time, these times are made more comfortable by discussing with people who traverse these battle lines for years and years. With mortgage rates going up, if you have concerns, direct mortgage questions, just want to grab a coffee and chat that is what I am here for and would be happy to discuss with you

Eternally trying to be patient.

Jason (link in my bio) Dodd