Is It Time For A Fixed Rate Mortgage?

Is it Time to Lock In?

Inflation may be taking us on a wild ride.

If you operated your household finances like a country here is what you would do right now:

1) Borrow as much money as you can at as low a fixed, long term interest rate as possible;

2) Invest in ways to increase your productivity and income well into the future.

This strategy increases your debt, but assuming you can invest in ways that earn income in excess of the interest you pay, your net worth will grow and at the end of the term of the debt, it will be easily refinance-able.

The best Five Year Fixed rate mortgages are typically reserved for borrowers with lower down payments who are purchasing rather than those with higher down payments or with greater equity positions looking to refinance.  Today the best 5 year fixed rate mortgage on the market is 1.39%.  The best variable rate on the market is 1.35% which is 1.10% below prime.

What we think we know:

The economy will likely experience a double dip recession. The long, hard winter of 2021, with renewed lock-downs, is exposing the gaps in the response of all governments to the COVID-19 crisis.  There will be real and lasting damage to the economy as a result.  

Low interest rates are here for the foreseeable future.  The Bank of Canada has used low rates like a surgeon uses powerful painkillers.  Premature cessation of either could be worse for the patient than the disease was.  

We are starting to recommend fixed rates in the 5-7 year tenor (we see little value in 10-year rates).  Our view is that all of the government’s actions at the moment are highly inflationary, and as the world normalizes that demand will recover faster than supply in the 18-36 month time frame.  5 and 7 year fixed rates appear to us not to reflect this eventuality.

Tomorrow the Bank of Canada will meet to offer guidance as to how the economy is doing and some economists predict we could see a, “Micro-cut”, this would mean a reduction in the overnight rate of 0.10% to 0.15%.  We don’t think that the central bank will resort to such a largely symbolic gesture - but it’s possible, if only to talk the Canadian dollar down from its currently lofty position.

Economists believe that although Canada will soon return to its previously robust economic ways we might have a little more rough water ahead. As the vaccine rollout slows and the second wave of COVID seems to be worse than the first, many warn that we are not out of the woods yet.  The government’s plans with respect to vaccination, as well as their fiscal and monetary plans, involve significant execution risk and will have unintended consequences.  These consequences are more likely than not to be inflationary.

Bay Street, heeding the possibility of meaningful inflation, touts the merits of gold or the stocks of the companies that mine it.  Alternatively, they advise an investment in Bitcoin.  We take no position on the merits of either.  We simply say that for the average Canadian with a variable-rate mortgage, converting it to a fixed rate is easier, cheaper, and less risky than evaluating an investment in precious metals or crypto-currency.  Bay Street stays silent on this for the obvious reason: the fees aren’t as high.

Remember that just before the onset of the COVID-19 pandemic, our economy was in robust shape.  This strength helped Canada to manage through a period of uncertainty and economic contraction unmatched in living memory.  Consumer spending has rebounded, at the same time that the savings rate has increased!

While there will be winners and losers as a result of the pandemic, we are generally positive on the prospects for the economy going forward.  A release of pent-up demand and significant infrastructure spend, combined with continued low borrowing rates, will mean a period of above-average economic growth.

To borrow from Alan Greenberg, the long-time Chairman of Bear, Stearns in the 1980s and 1990s - these difficult times will not last forever.  Further, in our experience, when the bad times end, they end suddenly and often violently.  And regrettably, nobody rings a bell the day before that happens.  Stay strong.  We’ll be out of the current crisis soon.

 

If you're looking for a stable investment to get you through these economic hardships, take a look at the Cannect Mortgage Fund.

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