Be the Better Borrower - How the BoC Interest Rate Announcement May Impact You.
Well, what a day Wednesday July 13th was, most of the financial industry (including the best economists in the country) was caught off guard by the Bank of Canadas move of raising its policy interest rate by 100-basis points. Most were confidently predicting a 75-basis point hike (like the move the US Federal Reserve made in June), but the Bank of Canada shocked most of us with a full 1% hike, the largest single hike in over 20 years. And why pull out the big guns? To fight inflation of course as most of us are now well aware, but instead of fighting what was originally considered transitory inflation, the concern now is that if inflation becomes entrenched (meaning we all believe it is here to stay for a while), it can put upward pressure on wages and we then run the risk of a wage/price spiral. Not good, and theoretically quite likely a worse outcome than a recession. And speaking of a recession, there are many now predicting that a recession is inevitable and along with it coming a decline in interest rates as attempts at that point will need to be made to jump start the economy. Good news in some ways I suppose in that forecasting declining rates somewhat tempers the current headlines of impending doom, but truly crystal ball stuff and apparently mine has a crack in it!
So, what does this mean for you as a borrower? Well, if you are currently in a fixed rate mortgage product, it doesnt have any immediate impact on you. Your monthly payment remains the same however, depending upon your situation and when your current term is up for renewal, you could be facing the prospect of higher interest rates at that point and for some, that could mean some pretty good sticker shock. If on the other hand you are in a variable rate mortgage, in most cases, your monthly mortgage payment will be (or in my opinion should be) going up. The reason I say should be is because some lenders have a variable rate mortgage product with a fixed payment meaning your payment will remain the same for the term of your mortgage with the monthly split going to principal and interest, and ultimately your amortization, changing in the background. With this type of variable rate product (again in my opinion) it is beneficial and prudent to consider voluntarily increasing your monthly payment to realistically reflect the market conditions and retain your current amortization. And lastly, like a variable rate mortgage, if you have a home equity line of credit (HELOC), your monthly payment will also be going up.
So, what does going up mean for those with a variable rate mortgage and anyone with a HELOC? At this stage its good to understand the basic math. For every 25-basis point increase in the Bank of Canada policy rate, borrowers can expect their payment to increase by about $13/month for every $100,000 borrowed. Given that last week the BoC raised its policy rate by 100-basis points, this then represents four times that amount which is about $52/month more. Accordingly, that $100,000 balance on a HELOC will now cost about $52/month more than it did a month ago, and a $500,000 variable rate mortgage will cost about $260/month more. And its important to point out here that those same monthly payments go down in times of declining interest rates and is why, based upon historical trends, there are many who believe a variable rate mortgage strategy will save you money over time. What can be said is that while this may be true, it is not true 100% of the time and so the choice between a fixed rate or variable rate mortgage is a personal decision based upon comfort levels.
The final word? If youre not 100% certain of your mortgage details (and any other debt for that matter), dont stick your head in the sand. Do a review to ensure youre doing all you can to minimize your costs in terms of servicing your debt. This may mean making some changes, or perhaps even doing nothing at all, but at least know your situation and ensure youre on course. And for those who perhaps have drifted a little off course maybe that HELOC was a little too convenient and the balance is higher than you want, or your credit card balance is a little high due to some pandemic spending check in with me to see if a plan to utilize some your home equity makes sense to consolidate any expensive (and stress inducing!) debt you may have.
Be the Better Borrower - Reverse Mortgages. Let's be Clear!
Reverse Mortgage. There, I said it. Almost feels like theres an elephant in the room now, doesnt it?
In my opinion, no other mortgage product seems to garner more negative feedback, or has a greater negative stigma, than that of a Reverse Mortgage. Bring it up with friends or family and its often met with oh, those are bad or cant you lose your home with one of those? Just Googling the term Reverse Mortgage can yield a list of peoples previous negative searches indicating the general dislike or misunderstanding of what I believe to be a very good product in the right situation. In fact, just now I typed Reverse Mortgage into my Google search bar and Reverse Mortgage Horror Stories comes up in the list of options Im given to complete my search!
Its too bad really, but perhaps understandable as there likely were a few horror stories that the media chose to sensationalize in the early days of reverse mortgages which made it easy to conclude that these types of mortgages perhaps were indeed and forever bad. However, fast forward to today and we now have a product that has evolved, especially in Canada, with protective features and safeguards that many of us conservative and polite Canadians might expect!
While its clear of course that reverse mortgages are not for everyone, what cant be overlooked is that there is a very real and growing segment of the population today that is retired (or about to retire), that is on a fixed income, and that perhaps has not managed to save enough for retirement or have some sort of pension plan in place. And these good folks, while perhaps not the best of prepared for retirement, like many boomers they are potentially healthier and more active than previous generations, they would prefer to age in their current home, and they could benefit from tax free access to the equity in that home.
Reverse mortgages are on the rise in Canada and in my opinion, this is a clear indication of the need for the product as well as its market relevance. In the UK, the product is called an Equity Release Mortgage (a term I personally prefer to that of Reverse Mortgage) and there they have a penetration rate of 5:1 compared to Canada (on per capita basis), which is a further indication of the strong relevance of this product in another arguably sophisticated market.
If you, or someone that you know, would like to explore the options with respect to a Reverse Mortgage, Id be happy to help. And full disclaimer, I dont treat this product lightly and as something to necessarily rush into. I believe in exploring all options and likely even engaging a financial adviser to ensure it is the best plan/option for my clients.