In this episode of Mortgage 101 with Clinton Wilkins and Todd Veinotte, as heard on…
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 Canada is with rates. if borrowers should covert into a fixed rate or stay in a variable rate, and discuss the question in the back of everyone’s mind: Is a rescission on the horizon?
Mortgage 101 with Clinton Wilkins & Todd Veinotte: Is a recession on the horizon?
Don’t feel like watching the video? Check out the transcript below.
Drunk on cheap money?
Clinton Wilkins: [00:00:00:08] Todd was really amped up for us to talk about the Bank of Canada, We were on last week, obviously, when the bank had met. And you had some people who are really raired up.
Todd Veinotte: [00:00:10:23] Raired up?
Clinton Wilkins: [00:00:11:09] Yeah, raired up.
Todd Veinotte: [00:00:12:08] I don’t think that’s a word.
Clinton Wilkins: [00:00:13:10] Maybe not. That might be a local term. I don’t know. You have some people who are very excited about the Bank of Canada.
Todd Veinotte: [00:00:19:19] Yes, and I find it funny because, to me, it’s amazing that somebody would do anything to buy a house at 2 per cent. Let’s just throw that number out there or 2.2, or 2.6, or whatever they were. But suddenly 2.8 is like, “WOAH, I have to be cautious now.” It seems strange, does it not?
Clinton Wilkins: [00:00:39:26] It does seem strange. And I think like some borrowers, you know, obviously if they were in a variable rate product, some Canadians are still drunk on cheap money.
Todd Veinotte: [00:00:48:15] I’m in a variable rate product.
Clinton Wilkins: [00:00:49:23] And are you drunk on cheap money?
Todd Veinotte: [00:00:52:05] No. We went up a little bit.
Clinton Wilkins: [00:00:53:24] But guess what? It’s still pretty low!
Todd Veinotte: [00:00:55:27] Still pretty low.
We are still below pre-pandemic rates
Clinton Wilkins: [00:00:56:18] We’re still at pre-pandemic prime rate. The prime rate before the pandemic struck, Todd, was 3.95.
Todd Veinotte: [00:01:03:23] Yeah.
Clinton Wilkins: [00:01:04:03] We have a very short memories.
Todd Veinotte: [00:01:07:03] That’s true. And who’s to blame? The you mentioned you kind of vilified the media?
Clinton Wilkins: [00:01:11:19] You know, I vilify the media. We’re on the media.
Todd Veinotte: [00:01:14:24] You realize we’re on the media?
Clinton Wilkins: [00:01:15:27] We are the media. I don’t know. I can vilify myself sometimes. I think we’re all. We’re all at fault here a little bit. You know, I think that, variable rates have always been lower than fixed. It still is lower than fixed right now, Todd.
I think that we got used to it being very, very cheap to borrow money. And guess what? Now it’s a little bit more expensive, but the economists are saying that we’re going to see more increases and borrowers are like, “Well, what do I do? The fixed rates are very high right now. Should I convert into a fixed?” And guess what we tell them? You need to weather the storm.
There will be increases, but not runaway rates
There’s going to be more increases over the next 12 to 18 months. And some economists think that the prime rate is going to get to somewhere around 5 per cent. They think that’s kind of the median mark. And right now when we qualify a borrower on a variable rate mortgage, we use a rate of 5.25 to qualify them. So we know they can afford it.
Todd Veinotte: [00:02:16:10] Yeah, it’s called the stress test, right?
Clinton Wilkins: [00:02:18:13] It’s a stress test and that’s what we use. And today it’s actually easier to qualify for a variable rate mortgage than it is a fixed rate mortgage.
Todd Veinotte: [00:02:29:14] And why is that?
Clinton Wilkins: [00:02:30:21] Because you qualify at 5.25 or your contract rate plus 2 per cent, whichever is higher. And right now, most fixed rates are between 4.25 and 5 per cent.
Todd Veinotte: [00:02:44:18] Yeah.
Clinton Wilkins: [00:02:45:18] If you have 5 per cent fixed rate contract right now, you are qualifying at 7 per cent. But your same, you know cohort of borrowers that are taking a variable rate mortgage are going to be qualifying at 5.25 per cent.
Variable rates are still lower than fixed
Todd Veinotte: [00:03:00:18] So the variable rate right now is what?
Clinton Wilkins: [00:03:03:08] You know, a good variable, if you’re buying a home and you’re getting a high ratio purchase, is somewhere between 2.7 and 3.2 per cent, depending on what lender you’re going to use. Obviously, on a refinance or a rental purchase, you know, you might pay a little bit of a higher rate.
Todd Veinotte: [00:03:18:00] Yes.
Clinton Wilkins: [00:03:18:24] On a fixed rate, we’re looking at usually like mid to high fours.
Todd Veinotte: [00:03:22:21] Wow.
Clinton Wilkins: [00:03:24:15] And you know, the variable aren’t necessarily half of where the fixed rates are, but pretty darn close.
Todd Veinotte: [00:03:28:24] So the variable, would you anticipate going up to the 4 to 5 per cent in the next couple of years?
Clinton Wilkins: [00:03:34:24] I do. I think probably by a year’s time, 18 months time, you know, the variable rate might be around that 4, 4.5, 5 per cent. But the one thing that we sometimes forget about, we have all the savings today and obviously lower short term interest rates have a value. There’s a future value of money.
Borrowers need to weather the storm
And the other thing that we need to remember is many economists think that we’re going to be going into a recession. And what happens during a recession? The government wants Canadians to start spending again. So they’re going to lower the key overnight rate, which is going to lower the prime rate, which is going to mean money, is going to be on sale again and things are going to be coming on sale here very, very soon. But there’s going to be a storm. We’ve been saying there’s going to be a storm for a while, Todd.
Todd Veinotte: [00:04:20:04] So what’s a storm? Identify a storm.
Clinton Wilkins: [00:04:21:23] I think a storm is going to be more increases. Are we going to see more 50 basis point increases? We might if inflation doesn’t start coming under control. But the Bank of Canada is going to do a slow burn probably for the next 12 to 18 months, depending on obviously, I’ll caveat it, what happens with inflation, but the rates are not a runaway train. And the rates are also not going to the moon.
I have younger borrowers and, you know, we’ve done a mortgage for them, you know, one, two, three, four years ago and they’re not up for renewal. They’re kind of like in the middle of their term or whatever.
And they’re calling me and they’re saying “My parents really, really think that I need to convert into a fixed rate at whatever rate I could possibly get.” I said, “Okay, borrower: You’re at prime -110 basis points. So right now your rate is, let me see, 2.6 per cent. If you convert into a fixed, you’re going to be somewhere around 4.25, 4.5 per cent. It’s going to almost double your cost of borrowing. Are you sure you want to do this? Are you sure?”
And they’re like, “Yeah, I’m not sure. I don’t want to do this, actually. I want to weather the storm. I know it’s going to go up, but I’m pretty sure it’s going to go down.” I said, “You know what? I’m with you. I am with you. You took a variable because that’s what you wanted. You didn’t take a variable because it was cheaper. You took a variable because you knew what the risks were. You took you knew the risk that it’s going to go up. You know, the risk that it is going to go down. And that’s why it’s a variable rate.”
Do not convert into a fixed if you’re not willing to pay more money
And historically, borrowers do better in a variable. And there’s a lot of pros to the variable, Todd. Obviously, one of the big pros is if you break the mortgage early, it’s only three months interest. Now, if you’re losing sleep at night and you’re in a variable rate mortgage, you can convert into a fixed with no penalty with your lender, but you’re subject to whatever the rates of the day are. So that’s obviously something to remember. Once you convert it to a fixed, then all the terms and conditions of that fixed rate are going to apply. And if you break that fixed rate early, be prepared to pay.
Todd Veinotte: [00:06:19:07] So there’s no underwriting that’s required?
Clinton Wilkins: [00:06:21:02] You can just convert.
Todd Veinotte: [00:06:22:00] You just convert. There’s nothing. It’s your choice. There’s no ‘potentially’ you can’t do that.
Clinton Wilkins: [00:06:26:29] If you want to break that fixed rate early, be prepared to write a big, fat check.
Todd Veinotte: [00:06:32:23] How much?
Clinton Wilkins: [00:06:34:05] Might be three months interest or it might be an interest rate differential, which is ever higher. Banks are like the casinos. Listen to what I say: The banks are like the casinos. And what happens with casinos? They never lose.
Todd Veinotte: [00:06:48:08] Yeah.
Clinton Wilkins: [00:06:49:14] And bankers and lenders are just salivating. They are rubbing their little hands together saying “Borrower, you should definitely convert!” And I’ve heard there’s bank branches that are like calling everybody who’s in a variable rate. My clients call me and tell me that and they laugh and they’re like, “You’re never going to guess what they try to get me to do.” And I say, “Oh, let me guess. They probably want you to lock into a fixed rate.”
Todd Veinotte: [00:07:11:04] So it’s more money for them?
Clinton Wilkins: [00:07:12:19] It’s guaranteed return.
Todd Veinotte: [00:07:14:02] Yeah.
It’s not the 80s and rates are not going up into the teens
Clinton Wilkins: [00:07:14:14] And it’s guaranteed return at a much, much higher rate? And right now there is some fear mongering going on. The rates are not going to the moon because guess what? The federal government is in bed with Canadians and home ownership. They are insuring a lot of this risk already. Through the Canadian Mortgage Housing Corporation, Sagen, and Canada Guarantee.
It’s all government backed in essence, and they are in bed with Canadians, you know, through obviously the risk tolerance. They’re protecting the banks. We’re not going to be in a situation, you know, that happened in like the seventies and eighties, when the rates were in the teens. That’s not happening.
Todd Veinotte: [00:07:57:16] Why do you think people keep invoking or talking about that, citing those as an example?
Clinton Wilkins: [00:08:02:12] I think it’s still recent enough that we remember.
Todd Veinotte: [00:08:06:19] Yeah, because your parents or my parents or.
Clinton Wilkins: [00:08:09:00] I’m sure. My but my parents had a property in Vancouver and they had a rate in the teens and it was low teens and you know, it was very early eighties and they sold their house and someone actually assumed their mortgage because it was such a good deal I think the rate was like 10 per cent, let’s say. And at that point the rates had gone to like 20 per cent and somebody assumed their mortgage because it was so valuable, because it was such a much lower rate.
“Is a recession on the horizon?”
We’re not going to see rates like that. Will we see rates at 5 per cent? Yeah, we will. That’s the median mark, Todd. And things will start balancing out. But the interesting thing to think about is: Is a recession on the horizon?
Todd Veinotte: [00:08:50:13] Yeah. Okay. All right. We got lots more to talk about. A couple more segments. It’s Mortgage 101: Your Guide to Homeownership. We’ll be back.
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.