Mortgage 101 – what to do if you have an old or young fixed rate | October 2022 Part 3

In this episode of Mortgage 101 with Clinton Wilkins and Todd Veinotte, as heard on CityNews 95.7 and CityNews 101.1, the guys talk about borrowers’ situations and what they should do if they have an old fixed rate and are coming up for renewal, and what they should do if they have a young fixed rate that they recently signed. They also review what some Canadian experts are saying about inflation and rate changes.

Mortgage 101 with Clinton Wilkins & Todd Veinotte: What to do if you have an old or young fixed rate

Don’t feel like watching the video? Check out the transcript below.

Transcript:

Inflation is on everyone’s mind every single day

Todd Veinotte: [00:00:00:05] So again, welcome back to Mortgage 101: Your Guide to Homeownership with Clinton Wilkins and myself, Todd Veinotte. We’re happy to be on the air in our fine city of Halifax and Ottawa, of course, on CityNews. And we’ve talked about some interesting things so far.

But on everybody’s mind is inflation. I, of course, host a talk show Monday to Friday and inflation comes up every single day. And I have to mention that some recent polling done by Narrative Research indicates that 90%, at least 90% of people who responded to the poll, are very concerned about inflation right now. You must see that in your business?

Clinton Wilkins: [00:00:35:03] It’s a number one concern when people talk to me. Existing clients, obviously people are concerned about what’s going on with rates and all these things, but they’re so, so in their minds about what’s going on with inflation.

And you know, something funny that came up from the conference. I was on a panel, on the national stage, with mortgage brokers: one from Vancouver, one from Toronto, and one from here, obviously me, and the mortgage broker from Vancouver said something really, really interesting. He has a lot of his clients on Instagram, as you might, and he follows them back. And, you know, he’s going through his news feed and he can tell which customers are in an adjustable rate mortgage.

Todd Veinotte: [00:01:21:10] Yeah.

Clinton Wilkins: [00:01:21:19] And which customers are in a mortgage with a fixed payment, because he says these customers that are in a mortgage with a fixed payment are still going to eat all the time. They’re going out and leasing their new BMWs, like all this stuff.

And the clients that are in these adjustable rate mortgages are cooking at home and getting back to basics and buying a used car and all these things. And he’s like, I can see a very distinct difference between my two customer sets. And, you know, we touched on it a little bit.

Worried about borrowers on expiring fixed rates

I’m concerned about the people that are in a fixed payment, whether that’s a variable rate mortgage with a fixed payment because you might hit the trigger rate. I know we’ve talked about trigger rates before.

I’m also concerned about customers that are in a very low fixed rate that are going to be renewing because that’s instant payment shock when something changes, when you have an adjustable rate mortgage, as you know, when the Bank of Canada increases the key overnight rate, increases prime and then it increases your payment. But for the people that their mortgages don’t act like that, it’s almost a false sense of security.

Todd Veinotte: [00:02:24:24] Yep.

Clinton Wilkins: [00:02:26:25] And what happens when something suddenly changes? It’s like the music stops, right? And that’s what I’m really concerned about. You know, we said the cost of diesel. You said it was $2 something.

Todd Veinotte: [00:02:38:02] $2.50 Litre.

Clinton Wilkins: [00:02:39:02] $2.50 a litre here in Halifax, Nova Scotia. You know, the real news this week is around inflation being down. It was down now at 6.9%.

Tiff MacLean was actually here doing his first public address since he’s become the governor of the Bank of Canada here in Halifax. He was meeting. There was a luncheon that we went to.

Todd Veinotte: [00:03:03:04] Chamber of Commerce.

Canada is trying to lower inflation “at all costs”

Clinton Wilkins: [00:03:03:19] At the Chamber of Commerce. I was there. And he said at all costs, he’s going to bring inflation down to a 2% target. To give you a little bit of perspective, and for those of you that don’t follow the inflation trends, inflation was about 3% before the pandemic.

When the pandemic struck, inflation actually went to negative numbers. People were not spending. Obviously, the situation has changed. Then suddenly inflation became a runaway train. And Ken is very, very concerned.

The government, obviously the Bank of Canada is very concerned about what’s going on with inflation, and they will do whatever they can to bring that down. One of their only levers that they have, or levers, levers / levers.

Todd Veinotte: [00:03:47:14] Tomato, tomato.

Clinton Wilkins: [00:03:48:21] Is to increase the key overnight rate. To make borrowing more expensive for banks and businesses and for consumers. Really, they’re trying to send a message to stop spending. Get back to basics. Refocus on wants, or why did I say? Don’t focus on wants. Focus on your actual needs.

Todd Veinotte: [00:04:09:05] Yeah.

Clinton Wilkins: [00:04:10:04] So I think that’s very interesting. In Vancouver, I’ll still touch on it again, the chief economist for the for CIBC, Benjamin Tal, spoke that he thinks that we’re almost at the ceiling, pre-recession.

Todd Veinotte: [00:04:26:08] Right.

We will probably see more rate increases into 2023

Clinton Wilkins: [00:04:26:20] So he thinks that maybe the Bank of Canada will increase to a maximum of 100 to 125 basis points more between now and next year, before we’re in a recession type situation. And the new normal may not be as low as it was, Todd. He thinks once we’re in a recession type situation, we’re going to get down to that 4% range.

Todd Veinotte: [00:04:46:20] And a recession is pretty much inevitable at this point? We’re kind of, it’s been foreshadowed by many economists.

Clinton Wilkins: [00:04:51:18] I think, just based on what’s going on, that they already think that the recession is in the future. And that’s really what the bank kind of wants, in a way. They want a recession, so inflation goes down and then they will lower the key overnight rate to increase spending again.

It’s you know, it’s increase the rate slow spending. Decrease the rate, increase spending. So it’s about turning the hose on or off. The problem is, it was like that garden hose that got away from you and it’s spraying everywhere, right? The train has already left the station.

They just don’t want inflation to get to a place that they cannot slow it because if it gets to that point it could be certainly very negative for many people, many businesses, the government, etc. So that’s certainly interesting. You know, do I believe every address that a Bank of Canada governor gives? No, I don’t, because Tiff Macklin himself said,

Todd Veinotte: [00:05:55:10] Doesn’t crystal ball.

Clinton Wilkins: [00:05:56:02] Doesn’t have a crystal ball. And he’s using the best data that he has and his team’s from across this country. But he did say during the pandemic rates are going to be low for the foreseeable future. The one thing that they didn’t take into account was no one was spending, then suddenly all kinds of capital entered the market.

How does this economic climate impact mortgage brokers?

Todd Veinotte: [00:06:17:02] So the bottom line is, how do you think this eventually impacts your business?

Clinton Wilkins: [00:06:23:07] I think that, you know, consumers that were doing a transaction for the sake of doing a transaction might think twice about it.

Todd Veinotte: [00:06:30:20] Right. Yeah.

Clinton Wilkins: [00:06:31:15] I think that we’re going to be doing more transactions for people that need to do a transaction. And there may be some consumers, existing home owners, that need to do transactions, maybe more now than they ever have had. Imagine if you’re a consumer that has a low fixed rate and you’re coming up for renewal.

You may need to increase your amortization to deal with the mortgage payment, but maybe it’s just not the mortgage payment that you’re having a problem with, maybe of a diesel vehicle, or maybe your cost of groceries has really gone up. I mean, it has for everyone.

Todd Veinotte: [00:07:02:29] So if you need to increase the amortization that means a remortgage?

Clinton Wilkins: [00:07:06:26] That is a refinance.

Todd Veinotte: [00:07:08:14] Refinance. Yeah.

Clinton Wilkins: [00:07:08:25] So it would be it would be the same if you’re pulling equity out or if you don’t pull equity out if your need to extend that amortization that’s a refinance. And that could be a renewal or maybe it’s in the middle of the term.

We’re having conversations with borrowers every day

You know, we’re certainly having those conversations with consumers a lot. And you would think it was the consumers that were in a variable rate that had an adjustable payment that really we wanted to do this right. A lot of those customers have pretty good rates. You know what?

They’re at prime -50 or prime -100 or more. And they’re like, “I think I’m going to ride this out because my rate today is better than what I could get on a new mortgage.” I think the consumers that are coming up for renewal, those are the ones that are really kind of thinking about doing a transaction.

And, you know, the one thing that we do that we really, really pride ourselves on is annual reviews. We love reaching out to our customers and just touching base and seeing what’s going on with them.

Obviously a lot of things change in people’s lives, but you know, we’re certainly calling a lot of our clients that are in a variable and just checking in and seeing how they’re doing because everybody’s situation is different, you know, and some people are doing good. They’re like, yeah, it sucks, but I know what’s going to come down, Other consumers are really feeling that pinch.

Don’t wait for things to get bad: Be proactive about your situation

Todd Veinotte: [00:08:14:05] So obviously people should be aware that they may get into a need to renew or to renew the mortgage and to amortize out and so they should have your financial house in order right then? That’s, that’s very important.

Clinton Wilkins: [00:08:29:00] For you to requalify. if we do a refinance, you requalify again. So it’s looking at the income assets and credit. So I think, you know, if you start getting into some financial hardship, do a transaction before things get bad.

Todd Veinotte: [00:08:43:24] Right.

Clinton Wilkins: [00:08:44:08] You know, if you’re concerned that you might not be able to make your bill payments and stuff like that down the road, do a transaction before you get to that point. Trust me, it’ll be easier and it’ll be easier for us and it will also be easier for you. And I’m not saying that if people are already in hardship, cannot get a mortgage. That’s not what I’m trying to say, Todd. But maybe that’ll be at a more costly type situation.

Maybe that’ll be with a higher risk lender and a higher interest rate. So if you need to do some forward thinking, there’s nothing dishonourable from breaking your mortgage early, you might pay a penalty. And in most cases you will. But maybe that penalty will put you in a better financial position and get you maybe an amortization that you can handle for the next period of your life.

If your fixed rate is young, wait it out

Todd Veinotte: [00:09:28:06] So I would think that for people that that had a fixed when fixed were low and they did a five year fixed within the last year, they’re in the best possible position.

Clinton Wilkins: [00:09:36:13] They should ride it out.

Todd Veinotte: [00:09:37:09] Yeah they should ride it out because probably rates, we don’t know for sure, but those are the most enviable positions right now.

Clinton Wilkins: [00:09:44:29] I would say that people that are in a low fixed rate and had a low fixed rate prior to 2022.

Todd Veinotte: [00:09:51:22] Right.

Clinton Wilkins: [00:09:52:03] Should ride it for as long as they can. That being said, not everyone can do that, Todd. People have to sell their homes. People need to refinance for whatever reason.

So if you’re sitting on the fence, should you do a transaction? Should you not? I would ride out a low fixed rate for as long as I can. But again, I will reiterate and I’m going to just say this again, you know, if you’re getting to a point where you think you need to do a transaction, sometimes it is better to break the mortgage early.

Todd Veinotte: [00:10:22:19] Yeah, and of course, you’re still a, you’re still variable. You’re still believe in the variable mortgage rate.

Clinton Wilkins: [00:10:27:21] Historically, borrowers do better in a variable, Todd. You know, today, if we’re looking at apples to apples, yes, variable is better. If you took a fixed a year ago, that’s not comparing apples to apples.

And will that fixed rate from a year ago be cheaper and lower than what the variable is today? I’m not 100% certain because we don’t know what’s going to happen over the next 12 to 18 months. And especially if we’re in a recession type situation, I think rates will come more in line with where we were 2019.

Todd Veinotte: [00:10:59:24] Yeah.

If you have any questions, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.

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