The mistake

Noel’s done. The blizzard is over. Reality beckons. For example, the next interest rate hike in Canada will hit in less than 30 days.

So on January 25th, will it be up, down or sideways?

Up, natch. The only question is by how much. It will be a quarter, for sure. And quite possibly a half. So the chartered bank prime will be 6.5% or 6.95%. It’s a safe bet by the time of the second 2023 bump (March 8th), that number will exceed 7%.

Then a pause? Likely. But no declines in 2023.

Mortgage rates? Depends. Fixed-rate loans will maybe stabilize in the low 5% range, reflecting an easing in the yields on five-year Canada bonds (already happening). Short-term rates will stay elevated, and so will VRMs. Anybody who cheaped-out with a variable-rate borrowing in 2021 is paying the price now. Like Anton. And Alex.

“Love your blog and infinite respect for it being free,” writes Anton. “I sense a trigger letter is inbound and assuming the green bank will offer me one of these three options, which one instinctively would make more sense?”

1. Fixed rate switch
2. Prepayment
3. Adjust variable payment to increase principle amount.

Without far more information about his finances, family, job, assets, age, pension and goals, there’s no simple answer. But this much is clear: the VRM pain will increase, it will last a year or two, and during that time real estate values are likely to flatline, moderate or crash. In short, why pump more equity into a declining asset if that means robbing the money from financial assets which are likely to have an excellent 2023?

The sanest approach seems to be to lock into a fixed-term rate. Five-year money is currently available at just over 5% from one of the banks (the green one). Given the fact inflation is still close to 7% and guaranteed investment certificates are yielding 5%, this seems like a relative bargain. And it’s cheaper than the current rate on a VRM.

Now, to Alex. He seems a little unhinged by his debt.

“I stumbled upon your blog during the pandemic and have been reading it ever since,” he says. “While I’ve learned so much from you over the last two years, I, like many others you write about, recently chose to purchase a house and not lock in our rate.”

So Alex & squeeze bought Peak House as 2022 dawned. Mortgage just under $700,000, variable, five-year at the teaser rate of 1.25%. Payment $2,300. Plus they took a HELOC at the same time for another $160,000, costing $700 a month (locked in cheap for a year). Other assets include three hundred grand in registered and non-registered accounts, including a hundred in bank savings.

“I believe our monthly payments will now be in the $5,000 – $6,000 range instead of the current $3,000,” he says. “What should we do (can we do?) about our mortgage situation? The rates are likely increasing a couple more times next year, so do we have any alternatives or are we forced to stay the course and suffer from my mistake?

“The rates won’t be dropping any time soon, so should we be expecting to pay $5,000+ for the foreseeable future? (OMG, please say no…) Should we use our savings, maybe to pay off the HELOC before the rate jumps to 7%? Should we liquidate any of our non-registered investments (~$100,000) to pay off any of this debt?……PLEASE HELP!!”

So Alex is carrying just under $900,000 in debt, with monthly mortgage payments than now don’t even cover the accumulating interest. His HELOC rate was fixed for one year, but will rocket up this Spring. Monthly overhead will double and even then precious little debt will be retired.

Suggestions: First, pay off the HELOC when it comes up for renewal. Otherwise it will cost at least 7% – in after-tax dollars – so no guarantee invested bucks are going to do substantially better. Then lock in the mortgage. At just over 5%, payments will rise from $2,300 to $4,000, but principal repayment will resume and every month there’s a useful reminder of how easy it is to borrow and how hard to repay.

As with Anton, resist the emotional temptation to dump invested assets and throw them against the mortgage. Real estate has a myriad of issues right now, and it’s entirely possible we’re siting on the precipice of an historic decline. This blog has told you why. Vastly higher interest rates. A possible recession. A plethora of new taxes from three levels of (moronic) governments. The stress test. Foreign buyer ban. A mania to increase building houses. It all adds up, with the potential of pulling prices much lower.

In other words, why dump growth assets into something losing capital value? When you can still borrow money at less than the CPI or annual wage growth, why not do so? Take a balanced approach, ensuring too much of your net work is not in one asset, and maintaining your registered and non-reg accounts.

Mostly, get a grip. The first mortgage Dorothy and I took cost 12%. When I was newly elected to Parliament years later we bought a place in Ottawa – at 14%. Yes, real estate cost less. But mortgage rates were running ten points higher than inflation. Today, in contrast, the cost of money’s a flaming bargain. Stop begging for help. Man up.

About the picture: “Thank you, Mr. Turner, for all the many years of sound advice,” writes Dmitry. ” I don’t know if your analytics show it, but you’re quite popular among the Canadian expat crowd in Seoul, as we’re always keeping one eye on the economic situation back home and love to talk about the crazy real estate markets both here and there.  At least in Korea we can point to the obvious population density of fifty million people in an area just 1.5 times the size of New Brunswick, with half of them all wanting to live in the capital city, lots of status obsession over certain neighborhoods, wonky government policies, and a wholly unique rental system based on massive short-term leases / loans between the landlord and renter (look up the jeonse system, it’s an eye opener) as some of the factors affecting prices here, along with interest rates and all the rest… yet, living far from Canada, with all its vast land and limitless resources, we need someone like you to make sense of the why’s and how’s of the maple market, and to point out the flaws and opportunities therein.  So, thanks for the consistently insightful (and free!) posts from you and your team.  Since I don’t have a pooch of my own, here’s a photo of a fella that pulled up alongside me a few months back. I was impressed by how confidently he was holding his position despite the precarious circumstances.  Maybe he can serve as an illustration that we just need a little bit of faith in those steering us on our journey… or, at the very least, that we keep a straight face as we stay balanced on the road ahead.”