You can stop waiting to see how the politics of Donald Trump will hit home here in Canada.
Mr. Trump’s plan is to stimulate the slow-growing U.S. economy by spending big on infrastructure, and that has financial markets worrying about inflation. As a result, investors are dumping bonds and causing certain interest rates to rise. Mortgage rates could be affected at any time.
“This Trump win is a game-changer for the rate market, everyone in the industry knows it and consumers are going to start hearing more about it,” veteran mortgage broker Robert McLister said.
If you’re buying a house or you already own one, it’s time to strategize. We don’t know how much rates will rise or for how long. Mr. Trump has yet to fully announce his economic policies, much less get them implemented. But what’s already clear is that the housing outlook is more uncertain today than it has been since the financial crisis in 2008-09.
Let’s start with home buyers. The combination of the threat of higher rates and new federal government rules designed to cool housing raise the question of whether we are seeing the peak of the market right now. Keep an eye on rates – the more upward momentum there is, the more risk there is that house prices will come down.
Pausing your home search makes sense while we see what happens to prices. And yet, you should still hustle to lock in a five-year fixed rate mortgage as soon as possible. Preapproved mortgages will hold a rate for as long as 120 days, which is long enough to carry you almost all the way through to the busy spring season for residential real estate.
You may not be able to lock in the lowest rates for 120 days. Mr. McLister said the best deals are reserved for mortgages that close in 30 to 45 days – so-called “quick-close mortgages.” Rates locked in for 60 to 90 days generally cost 0.15 of a percentage point more. Some lenders will hold their rates to 120 days without extra cost.
The urgency of locking in a rate applies equally to people coming up to a mortgage renewal. Banks typically send a reminder notice about a renewal in the last 30 days or so of your term, but you can lock in a rate on a renewal as many as 120 days in advance.
If you’re not sure when your mortgage comes up for renewal, find out now and mark the date on your calendar for this year or beyond. Higher rates equal higher payments, so start thinking about how your household budget will adapt. Rates may not rise much now, but they will eventually.
The more uncertainty there is in financial markets, the more appealing it is to lock in for five years rather than going with a modestly cheaper variable-rate mortgage. But let’s be clear about variable-rate mortgages – they’re less vulnerable to what’s happening with interest rates right now than fixed-rate mortgages are.
A variable-rate mortgage is priced off the prime rate at your lender, which is in turn influenced by the Bank of Canada’s overnight rate rather than rates in the bond market. The overnight rate is staying put for the time being because the Canadian economy is weak. It might rise next year if our economy picks up, but that’s unknowable right now.
Variable-rate mortgages do have their issues, though. Toronto-Dominion Bank raised its “mortgage prime” – a special prime rate used to price variable-rate mortgages – by 0.15 of a point early this month to offset higher business costs associated with the new federal mortgage rules. More changes like this cannot be ruled out.
People who already have variable-rate mortgages have to be wondering if now is the time to use a feature that lets them lock into a fixed-rate mortgage. “If it’s a case where you can afford a 10- to 15-per-cent increase in your payment and you have reasonably sound finances, I wouldn’t rush to lock in,” Mr. McLister said. His reasoning is that it’s too soon to know whether we’re heading into a long period of rising rates or just seeing a temporary blip.
Don’t dismiss the emotional benefits of locking in. Wiping your mortgage off your personal list of things to worry about is worth something.