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Why you should get a rate hold now

Posted by Jeff Campbell on Sunday, December 11th, 2011 at 3:03pm.

Why you should get a rate hold now.

Very pleased to be a guest blogger for Jeff Campbell’s Real Estate Team and also pleased to work with one of the best realtors in Calgary. There are about 5,000 realtors in town and about 500 make their full-time living at it; Jeff’s team are some of the better ones for sure. The big advantages of using a top mortgage broker are listed near the end of this entry but reasons to use us should be pretty obvious by the time we get that far. Good brokers earn our salt because we watch the markets, the lenders, the rules, and the mortgage rates all day for a living. Or the good ones do anyway.

So … What is going on with these super low mortgage rates?

Right now interest rates are at their 111-year lows at about 3.4% for a 5-year fixed, closed, mortgage. The banks consider anything under 4.0% to be free money. Consider the banks have to borrow the funds, include the cost to administer the funds and also make a profit. At 4% there is not much room left for profits – they say.

Now consider the recent US debt ceiling issue (they have not really done anything about facing their debt problems yet) and pile the EU issues on top with the PiiGS – Portugal, Italy, Ireland, Greece and Spain – and the stock market freaked out and did a general sell-off. That is the 49-word summary of the world economy right now.

When the sell-off happened, all those (literally) trillions of dollars have to go somewhere and they go into American Treasury Bonds – the standard for where banks put their short term cash. Those bonds then pay almost no “incentive” or interest to the buyers as banks really have no choice and are going to buy the treasury bonds anyway. This means the interest the bonds now have to pay to get banks to buy them is way less – around 0.25%. The circle is complete when the banks that fund your mortgage borrow money from a bond (the Canadian Mortgage Bond, or CMB) that charges them almost no interest – they then pay the bond almost no interest, and in turn, charge you less to you too. That is how rates are now below the theoretical minimum of “the 4% barrier” and down to these never-seen-before, short term, 3.4% rates.

If you did not follow that paragraph above don’t worry about the background data. Just remember this; as soon as there is even a sniff of economic recovery, as in, the EU or the USA gets it’s mess sorted out, money will rocket back into the stock market and then these treasury bonds (and the CMB) will have to pay more interest to get banks to buy them. That interest cost then gets passed along back to you, the mortgage consumer, and rates go back to above that 4% hurdle. (The long term, 20-year, average for the 5 year fixed mortgage is about 6.5%.)

The news is that the stock market rally might be here very soon because we watch the stock markets very closely too. Then rates go up, everyone gets more confident, people start buying things that they were putting off – like homes, prices start to go up, people from all over Canada move back to Alberta – the CBC National on Nov. 15th just had a 25 minute focus on Alberta and Saskatchewan jobs and worker shortages – and the cycle accelerates with rates and prices increasing.  

These are exciting times,

Mark Herman, AMP, B. Comm., CAM, MBA-Finance

1 of the Top-10 brokers of 1,700 at Mortgage Alliance

Direct: 403-681-4376

Accredited Mortgage Professional | Mortgage Alliance – Mortgages are Marvelous

Toll Free Secure E-Fax: 1-866-823-1279

Mortgages are Marvelous

Toll Free Secure E-Fax: 1-866-823-1279

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