Unfortunately, this is one of the worst renewal periods in the past ten years, and my concern is that you position yourself correctly with the best mortgage.
First off, we need to reflect on what is happening currently with rates, historical rates, the cause of higher rates, and future predictions.
Current Rates
Posted mortgage rates currently are above a ten-year average. The ten-year average for a posted five-year mortgage rate has been around 4%, while the current posted five-year rate is 5.58%
Why are rates so high right now?
Issue One (Lots of Cash)
During the pandemic, governments worldwide provided enormous capital infusions to businesses and individuals via various programs. The combination of individuals hoarding money during the lockdown period and the injection of additional capital created a savings bubble that had never been seen before. Governments also were buying up bonds, which in turn lowered the borrowing cost of borrowing.
Issue Two (Lots of Shopping)
Once the pandemic shutdowns started to lift and many countries began to return to a somewhat normality, consumers went on a purchasing spree. Along with their everyday needs and wants, many consumers had more capital to access than usual.
As the consumers went to town shopping, the demand for goods was outstripping the supply. Usually, this could have been absorbed somewhat, but there were worldwide supply chain issues delivering goods. The supply chain issues continue today and have gone on longer than expected due in part to China’s zero Covid policy.
Issue Three ( War)
The unprovoked and unjustifiable invasion by Russia of Ukraine added more issues with commodities. Not only were essential agriculture commodities disrupted, but the added sanctions against Russia’s oil and gas sector have caused prices to climb.
Issue Four ( Inflation)
The combinations of supply chains, an abundance of capital in consumers’ hands, and war in Ukraine have pushed inflation to levels we have not seen in 40 years.
There is also a lot of price gauging going on. For example, shipping companies charging $6,000 to move goods pre-pandemic are now charging upwards of $20,000. Hotels have shut down some of their rooms and upped daily rates to never seen before. The list goes on.
Central banks have only a few tools to combat inflation, one slowing the economy by raising the cost of borrowing.
I think the use of raising the cost of borrowing is not treating the symptom. I believe inflation’s causation is in the hands of parties outside Western countries. ( China supply chain and the war in Ukraine)
Positioning A Current Mortgage Renewal or Refinance
So now that we have reviewed the past and the present, how do we deal with the future? My concern is that there may be panic about locking into a fixed five-year mortgage at this time. But there are some other options to give some relatively good flexibility.
Why the need for flexibility?
If we know that five-year mortgage rates have averaged around 4% for the past ten years and we lock into a fixed five-year mortgage today at 5% or more, we are now committed to that mortgage. If you try to exit a five-year fixed mortgage at 5% or more and current rates are lower, the penalty will be substantial.
That penalty could affect your ability to readjust your payments, interest costs, or even sell your home mid-term of the mortgage.
We have some suggestions, but all are based on your individual needs.
If you would like a consultation to review some options, please go to https://calendly.com/canadamortgageprofessional/15-min to pick a date and time that works for you.
I look forward to chatting with you.
Michael
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