The Myplace Playbook // 078
Hey Everyone,
The dog days ended Monday. August 11, right on schedule. Summer's not done, but the countdown part is, and the fall market is next up.
Before it gets here, I need to tell you about a conversation I keep having, because I'm having it four or five times a week now and I'm about to have it with you.
Many Canadians have been flipping to variable.
Fixed rates climbed back to last year's levels this summer while variable stayed put, and the industry numbers show buyers and renewers now reaching for variable and short terms more than anything else. There's a real gap between the two rates, and people are picking the cheaper one.
I understand the math. Variable is less, today.
Let me explain why I'm standing on the other side of this.
Start with what the variable discount actually is. It's not free money. It's the price of a bet. You get the lower rate today in exchange for owning a piece of every Bank of Canada announcement from here on. The bet pays off if the Bank cuts, or holds forever.
Now look at what the Bank of Canada has been doing. Six holds in a row. Inflation running above 3% with the war keeping oil up. An economy that stalled for a year and is growing again. The Bank itself calling the current rate appropriate. And over the summer the big-bank forecasts changed shape. Nobody is pencilling in cuts anymore. The conversation has moved to when the hikes start.
So the bet that variable needs to win, rates falling, isn't on anyone's board right now. The realistic outcomes are the Bank holds, or the Bank goes up. One of those outcomes leaves variable fine. The other one takes your discount and keeps going.
That's not a balanced coin. When I look at September 2, three weeks out, I don't know what happens. Nobody does, and don't trust anyone who says otherwise. But I know which side has all the room. There is a lot of space above 2.25% and, in this inflation picture, almost none below it.
The part that has mean leaning this way.
Back in June I told you fixed rates follow the bond market. And the bond market moves early.
If the Bank starts signalling hikes, or just sounds hawkish enough on September 2, fixed rates don't wait for the actual hike. They move first. The people who say "I'll switch to fixed if things turn" are describing a plan where they lock in after the good fixed rates are gone. That door closes before the announcement, not after.
Which is why the move isn't "wait and see." It's the opposite.
Lock the fixed rate now. It costs you nothing to be wrong.
A rate hold is free and runs 120 days. Take one this week on a fixed rate and you're covered through Christmas no matter which way this goes.
If I'm wrong, and rates drift down or the Bank stays friendly, you take the better rate when you close or renew. The hold doesn't trap you. You lose nothing.
If I'm right, and September or October turns hawkish, you're holding a summer rate while everyone who followed the crowd shops in a worse market.
I give a lot of advice that depends on your situation. This one barely does. A free option that pays off in one direction and costs nothing in the other is the closest thing to a gift this business hands out.
There’s a catch though.
The exit penalty on a fixed mortgage is heavier than on a variable. Break a variable and it's typically three months' interest. Break a fixed at the wrong time and the penalty formula can get genuinely ugly.
That's not a reason to avoid fixed. It's a reason to pick the right fixed. If there's a real chance you move or restructure in the next couple of years, we look at a two or three year term instead of five, and we're choosy about the lender, because penalty formulas vary more between lenders than rates do. This is exactly the part of the job where a broker earns their keep, and it's the conversation your bank branch skips.
My ask this week is a specific one.
If you're renewing or buying anytime between now and next spring, hit reply this week. Tell me your date. We'll get a hold in place before September 2 so the announcement happens to other people.
Many have gone variable because it's cheaper today. Today is the shortest timeframe there is.
-Andrew
Find out what’s possible!
You can build a quick mortgage scenario online in under a minute–or just hit reply and I’ll run it for you.
