The worst (or best for the home buyers) is yet to come. In past I made myself clear that I do not like falling interest rate. I also do not like falling house prices. If house prices fall then the house I live in will lose its value.
Things are heating up:
As the busy season comes to an end – lenders are competing more for clients. Banks are using their sales team to offer backdoor rates (under 3% on a five years fixed) to lure businesses. Mono-lines and brokers are always looking for ways to counter that strategy and coming up with variety of innovative ideas. This is just the beginning of the war which may turn real nasty in future.
Bond yields have decided not to go up. That leaves the lenders with enough wiggle room. 10 years bond touching historical low and the mortgage rate is still at 3.99% shows that there are enough margins for lenders to play with.
What is the issue?
Banks are now offering lower rates than before, it shows that they are desperate for business. As a home buyer that may be good news for you but that competition may force institutions to go all out and thus inviting more regulations. There are rumors that more regulation on HELOC to come – cannot confirm at this point.
Then another problem is that mortgage is not consumer product. Mortgage is a service. It is now mistakenly seen as just another product which is produced in mass scale by Bank of Canada (read mint) and distributed by banks.
Not only mortgages but all the debts are packaged as consumer products and sold to consumers. Just as your line of credit deal served with Greek seasoning. Take auto loan as an example – car and financing goes hand in hand. The issue is larger than we can understand and resolve.
Encouraged by either low interest rates or higher house prices (for Re-Fis or HELOCs) people started to take on more than they can afford. In the end authorities had to start warning Canadians against that habit. Finally they got the message and then simply moved from credit cards to HELOCs. Mortgage refinances saw a boost in the business recently. That is why our debt to income ratio is still growing. Not to be fooled by the surveys which says rate of growth is slowing – the bottom line is – it is still growing.
The Causes:
Banks live on loans. They want to lend money to make money. If the borrowers are weak or over saturated with loans then how can a lender make money? Another place to lend is business lending. Unfortunately business lending is still weak in current economic situation.
There are GIC’s , bonds and dividends to pay – if there is no business then how would that happen? Therefore, lend happy. With a very generous central bank, there is no shortage in supply. If money is distributed at a very cheap rate, then why not take advantage of that?
If you look at the consumer confidence surveys then it is obvious that they are not confident to spend money. In order for them to come knocking on a lenders door, the obvious way is to offer something very attractive. Interest rate alone can ring that bell.
The Effects:
This is the worst part. Bleeding each other to death is one of the scariest effects of this cause.
When was the last time you saw a significant increase in your pay check? With inflation such low as the consumers are not interested to shell out that extra dime – pay raises are at their lowest level. Another fact is that to give you a pay raise your employer has to perform well too. That is not the case right now. When BOC says that the economy is not performing at its full potential then that is what it exactly meant.
How about your future? Your retirement funds are yielding big zeros or negative year after year. Low mortgage rate have fueled house prices and REIT’s saw a good time. Now that the government is trying to correct that skew by the means of regulations – they will obviously bring in shock in the market.
If and when the rates will eventually go up – those who borrowed to finance their impossible housing dream will come trembling down. Mortgage insurers will obviously be in serious trouble when that happens. Genworth MI Canada Inc (TSE:MIC) losing its value in the stock market for some time.
Small entities like mortgage agents will find harder and harder to operate due to extreme competitions. A drop of 20% in license renewal speaks volume about this fact. Ontario Teachers Pension Plan may have started to feel the heat too.
What can be done:
There are many things a mortgage borrower in Canada can do to protect themselves from future difficulties. Some of them are;
- Don’t over stretch yourself. Don’t just look at the rates the lenders offer you. If you think that you cannot pay a loan if the interest rates are over the qualifying rate (5.24% now) then if possible stay away from that house. The purpose of qualifying rate is noble but it got defeated by greed.
- Plan ahead and do not take any impulsive decision.
- Don’t borrow if not absolutely necessary.
- Save, save, save.
- Don’t invest in risky investments.
- Consult with a licensed professionals.
- Try not to get lured by free deals on financial products.
- Be wise and behave frugal.
- Last but not the least – pay off your mortgage as soon as you can.
Conclusion:
Bad times and good times are cycles of life. Finance is only a small part of our life. The biggest problems in life cannot be solved with money. If we are just a little bit cautious then finance will never pose a challenge in our life. Sometime we are not that lucky, unfortunate things happen in life. So, I would say with a little bit of luck we can survive this downturn – if there is any downturn in reality.
