Scott Dillingham: 00:21

Welcome to the Wisdom Lifestyle Money Show. I'm your host Scott Dillingham. Today I'm diving into a hot topic. We're literally asked this every single day. And the question is, where are interest rates going?

Scott Dillingham: 00:34

It's 2022. COVID's here. The rates have been adjusted because of COVID. Housing market's on fire. There's not enough supply.

Scott Dillingham: 00:43

There's too much demand. Where are the rates going? Before we dive into my prediction and where I do see rates going, I want to explain the rates and how they adjust over time because there's a couple different mechanisms depending on the rate, and that can have an impact whether it's the rates are going up or even the rates are going down. So there's a couple of metrics here. In Canada, we have a variable rate mortgage.

Scott Dillingham: 01:10

Usually it's either for a 3 year term or a 5 year term. And then on the fixed mortgages, you've got multiple terms. There's a 1 year, 2 year, 3 year, 4 year, 5 year, 7 and a 10 year fixed mortgage. Now on the variable rate mortgages, the, they're tied to the prime rate in Canada. So the bank of Canada sets the prime rate.

Scott Dillingham: 01:33

Currently, it's at 2.45. Okay? Now when they're making this prime rate, they're going over all the market data, all the stats, and they're determining how the economy is doing. So the variable rate, very high level, it's tied to the economy. Now there's a lot of things that the variable rate is tied to that a lot of people don't realize or understand.

Scott Dillingham: 01:59

Some examples, mortgages can be tied to the variable rate, lines of credit can be, attached to it, certain car loans can be, Credit cards can also be tied to variable. There's even some business loans and things like that are, are tied to variable. There's investing accounts. Right? There's some investing accounts where you can leverage and borrow money that you don't actually have and invest, And those are tied to variable.

Scott Dillingham: 02:26

So there's so many products that are out there tied to variable, which is then tied to the economy. So when COVID came, they lowered the rates big time. There's a huge drop in the rates. And that was to help boost the economy. They knew COVID was gonna slow down the economy.

Scott Dillingham: 02:43

They wanted to boost the economy, so they lowered the rates and made all these different borrowing options cheaper for everybody. So they would continue to go out and buy and do those things that keep the economy going, support jobs, everything. But the rate is also tied to inflation, right? If inflation is going up or going down, it can also have an impact on the rate. Now the challenge with keeping the rates so low with inflation so high is that, the banks could end up losing money.

Scott Dillingham: 03:18

If they're lending it out cheaper than what they're borrowing it at, that's a problem. So high level, that's how it works. With the variable rate, they're very cautious when they review it. Now they weren't so cautious when they lowered it because they lowered it by multiple decreases. Usually when they raise or lower the variable rates, it's by decimal 2 5 of a percent at a time.

Scott Dillingham: 03:41

So it's never usually drastic, but when COVID came, it was drastic. They dropped it big time. And we're at that turning point where it's becoming behind us and, there's other, economies, in the world to different countries that are completely returning to normal, without any restrictions and their economies are booming again. So I know as Canadians that's we want to have a more normal life regardless of whether you agree with the mandates or not. I think everybody does want life to to be normal and back to how it was pre COVID.

Scott Dillingham: 04:16

That's what everybody here could agree on for sure. With that being said though, as we open the economy up, everybody's gotten used to these lower rates. So the Bank of Canada in February, so that's when I'm recording this, they sat down and they discussed on if they were gonna raise rates. Economists are predicting they're gonna raise the variable rates. I've heard half a percent.

Scott Dillingham: 04:36

I've heard 1. I've heard 1 and a half. My opinion would be, I don't think they're gonna raise it more than 1. I do think it'll be less than that. That's my own opinion.

Scott Dillingham: 04:47

I believe that will be the case because when they raise the variable rates, what they do is they raise it a little bit and they wait and see. And they determine if the economy can handle that cause they look at all the stats and everything coming in. People still buying cars. Are they going to the grocery store? Are they buying things at Best Buy?

Scott Dillingham: 05:05

Right? Or like they check all of these things and they look at because they, have different categories of goods. Right? So there's the essential goods that you need to survive, and there's the discretionary spending goods, which are not necessarily things you need, but more of the things that you want. They're watching really closely that want category and making sure that people are still buying, things that they don't need to boost the economy.

Scott Dillingham: 05:30

So again, when they raise the variable, it's in stages. So somebody getting a variable rate or even somebody concerned, about the variable rates and they wanna go with fixed, just know that overnight, it's not gonna jump 1 to 1 and a half percent. That might be for their target. I know that's some predictions, but I really don't believe that they're gonna to jump it like that. If you look at the history of interest rates, in one of my previous episodes, I discussed it.

Scott Dillingham: 05:56

You can Google interest rates for the past 25 years, and you'll see this chart. But you can see when they raise the rates or sorry, when they drop the rates, they do so quickly just like they did with COVID. But you can see when they're raising the variable rate, it looks like stairs when you look at the graph. And that's exactly what it is because they're raising it and then they're pausing. So that time delay makes it look like a stair, and they raise again, they pause, and they wait.

Scott Dillingham: 06:21

So you can see that. So again, when they raise just to get that fear or minimize that fear, it's just step by step. Now if they raise it, let's say they raise it half a percent and they start to see the spending that Canadians are doing drops, or maybe they're not getting their vehicles or whatever it is, they're going to look at all the data and they're gonna pause longer. So instead of raising it, they're gonna wait because they wanna get that spending back up to the point of before they raised that rate. And once they see it or once they're happy with that figure and they feel the economy can handle another increase, they're going to raise the rates again.

Scott Dillingham: 07:01

Now in the February meeting, they said that they weren't raising it for February, but they were incredibly seriously considering raising the variable rate in March or April. Well, that hasn't happened. Whether they will or not, nobody really does know. It appears that they're going to, but, right, we have, Omicron's here. If more variants come and they're worse, maybe they won't raise it, right, just to keep the economy going.

Scott Dillingham: 07:25

So you really don't know it. So it's heavily tied to COVID. So as a customer, what you'll see though, right, because if they raise it in April, I actually don't think you're gonna see it or feel it right away. Because in the spring, that's when the lenders tend to come out with their best promotions. In rates, they are seasonally adjusted.

Scott Dillingham: 07:49

So in the spring and summer, they're the lowest point of the year. They go up in the fall. They're they're still good, but in the middle of winter, I find that's when they're their highest. Weekly, I'm getting notices that the rates are going up. But I think soon we're gonna start seeing that they're going down because then the promotions are coming out.

Scott Dillingham: 08:08

So I think even if they raised it once or twice during the summer, spring and summer, I feel like Canadians won't really see it because the lenders are gonna offer their discounts at that time. So we just have to take a quick pause. When we come back, I'm gonna dive into the fixed rates and how they're affected and how they adjust. And then we can dive into when I think, the rates will really be high, and what we can do about it. Okay.

Scott Dillingham: 08:35

Welcome back. Before the break, I was just speaking about the, the variable rates in case you missed it and how they tend to go up and down. But the, Bank of Canada usually raises it incrementally by 0.25 percent at a time. So it's not crazy overnight. So now I wanna dive into the fixed rates, how they're determined and potentially where they're going as well.

Scott Dillingham: 08:59

The variable rate is very much tied to the economy. The fixed rates are very much tied to the bond rates. And it's gonna sound like probably a foreign language if you're listening to this the first time. But it's tied to government bonds. Worldwide, whenever there is a major, catastrophe, fear in the world, even potentially war.

Scott Dillingham: 09:21

From past history, I'm speaking, I can't predict the future, but from past history, investors have flocked to Canadian bonds. It's like a safe haven. And even if they don't have a, a great return, if you're buying a bond and your yield is 1%, you're going to make 1%, which is not much. There's so many other investments where you can make way more than that. But if you're in an economy that's contracting, there's job loss, unemployment, things like COVID people and investors worldwide, whether that's a company or an individual, they're more their mindset shifts a bit.

Scott Dillingham: 09:57

So instead of, growth of your asset, which you do want it to grow, it shifts to become a asset preservation. So now they don't want to lose their money. So they go into a protection mode and they buy, government Canadian bonds. And, so the fixed rates go up and down based on the demand of these government bonds, as well as the supply of the government bonds. So the government has some control over the fixed rates, but also global and just investors who would invest in the government bonds also have some control over over the rate.

Scott Dillingham: 10:33

Now they don't get to set the rate, say here's the rate, but the higher the demand for the government bonds, the higher the fixed rates become. So that is why when you're doing a mortgage pre approval, it's super important because it actually locks in your rates. So if you do your pre approval today, the lenders reserve bonds and they get get those bonds and they lend out based on that bond value. And when you do that preapproval, you're locked in. So that's why you'll hear people saying, do your preapprove your rate will lock in.

Scott Dillingham: 11:04

That's the the technicalities behind it. Now in their, in the bank of Canada's February announcement, they also stated that they are going to sell some of the government bonds. Some of the government owns them and they always are selling and buying. So it's a cycle. But the government is going to sell bonds.

Scott Dillingham: 11:24

And that also raises the interest rate when the government's selling them. Now, sometimes it could lower the interest rate, but right now with everything that's going on, the economists are predicting because I'm not an economist, but I'm just sharing with you what I've read, what I learned, what I see in the industry. But the economists are saying that will increase the fixed rate mortgages. So you've got the Bank of Canada who wants to raise the variable rates to get closer to match up with inflation. You've got the government selling bonds to which will also raise the fixed rates, which again, to get more aligned with inflation.

Scott Dillingham: 12:01

And so with both of those things happening at the same time, the fixed and the variable rates are going to be going up. Now they don't always go up together. It always depends on the market of what's going on. So I've seen sometimes where variable rates were higher and fixed rates were lower. So it it does shift.

Scott Dillingham: 12:19

They're they're independent to some point of each other. But the goal is for the government to raise the rates. And I remember pre COVID doing like a 5 year fixed, we were offering clients and this is through the broker channel. It was like high threes, is what you could get as a 5 year fixed. And I remember at that time, people were upset because the rates were going up and then COVID came and they lowered it and everybody loves it.

Scott Dillingham: 12:43

And so they're going out and buying and shopping. And I've had tons of clients that weren't even up for their mortgage was not up for renewal and they want to refinance because they know their rates are so much cheaper now and they're artificially cheap because of COVID and they're taking advantage of that. And, also, you're getting so many buyers that are getting out now, and they wanna buy now before the rates go up so they can save on their interest. And that all makes logical sense. But what's happening with the rates is as the rates are going up, whether it's from the Bank of Canada raising the prime rate or the government bonds being sold.

Scott Dillingham: 13:18

They're not, like, from what the economists are saying, the fixed rates are going up based on them selling. And then you have the discounts in spring. I don't think we're really gonna see it. I think the discounts will offset the increase. And over spring and summer, I think the market will be pretty busy.

Scott Dillingham: 13:34

I think it'll be really busy, still maintain, but come fall when the lenders start to back off those discounts. That's when I feel that Canadians are really going to feel the impact of the rates rising. Oh, even though as a consumer, I want to pay the lowest amount of interest. But from my point of view and seeing the whole thing, I do think it will actually be good for the economy. If the rates do go up, it's super technical and advanced, but they do need to.

Scott Dillingham: 14:00

I don't want them to. I the the cheap lending. I'm an investor and but to keep everything in line and everything working and going, things do follow what inflation does. I see the need and why they would want to raise the rates up. Now the piece of advice that I could give to anybody who's listening to this right now is get your preapprovals in.

Scott Dillingham: 14:20

Right? Work with your bank, your mortgage broker, work with us, whoever you feel comfortable with, but get your pre approval and lock it in. Now there's a couple of cool things that happen. So if you lock in your rates, but say the discounts, improve greater than what the rates go up, that means the rate might actually be lower in the spring or summer. So a lot of the lenders that we work with, they'll honor the new lower rate, even if you were locked in at a higher rate.

Scott Dillingham: 14:48

So it's still a great time to lock in. But on the flip side, if the rates do go up, then you're locked in and you're protected and you're good to go. Now, usually the rate lock in will be for 90 to 120 days, depending on your lender. You also cannot lock in a variable rates. The variable rate preapprovals when you do them, you get to lock in your discount that you're being given, but you don't get to lock in the rate because the banks do not have control over the primary.

Scott Dillingham: 15:20

The government of Canada does with the discount being locked in. And how that works, I'll just make an example here. Say your rate that you're being given, the prime rate currently is 2.45, but the lender is giving you a 1% discount on that. That 1% will be locked in. So your rate will actually be 1.45.

Scott Dillingham: 15:41

But if the government raises that prime rate from 2.45 by the 0.25 that they usually do, that would mean that the prime rate would then be 2.7. So your 1% discount gets locked in, so then your rate would be the 1.7. So keep that in mind on the variable rate. Only your discount can be locked in. We can't control the the government rate.

Scott Dillingham: 16:04

But the banks do reserve the bonds, which is why you're able to, lock in the fixed rate, whether it goes up or down. So completely different things. But I do suggest you speak to an expert in the field. You get your preapprovals in, even if it's the end of August. Right?

Scott Dillingham: 16:18

I'd still get your preapprovals in because the rates will be ending. Right? The the specials and discounts usually end. I find August, some of them will go away. More of the lenders take away the discounts September and then October, November.

Scott Dillingham: 16:31

That's when they they really start to creep up. But still, I would encourage you if you're looking to buy in this market, get your preapproval. It'll help you to know your, purchase price, but it will lock you in on the rates. Because right now, this is unprecedented. We're not used to COVID and how it affects lending.

Scott Dillingham: 16:48

It's not something that's been around. So we we've never seen this. But I do also believe on the flip side that if COVID stays and it gets worse, I do think the rates will stay low for a while until it dissipates. But with what, you know, doctors are saying and I'm hearing Omicron's more mild and, things seem to be looking better. Doctor.

Scott Dillingham: 17:09

Tam was saying, we'd like to see Canadians live a more return to normal type of life. So there's all these things that are are looking like we will return more to a normal scenario. And if that does happen, then you can absolutely anticipate the interest rates going up. If you like to chat about this further, feel free to give our office a call as well. It's 519-960-0370.

Scott Dillingham: 17:34

Thanks so much for tuning in today.