Scott Dillingham: 00:21

Welcome to the wisdom lifestyle money show. I'm your host, Scott Dillingham. Today, I'm recording this one at home, it's a bit different than the normal format, but I was out on my on my motorcycle and I was going around and I I thought of this and it's something that happens all the time with clients nowadays. And pretty much what they wanna know is what are the interest rates doing? Where are they going?

Scott Dillingham: 00:46

And should we lock into a shorter term? So then when that term is done, maybe the rates are lower, or should we go with a 5 year fixed and move forward? I wanted to just have a discussion with you on this, because I think it's important, and I think a lot of, investors are missing out on this key piece. What's happening is obviously, the rates have been going up. It's it's now June of 2023, almost July, and the government of Canada or Bank of Canada, sorry, raised the rates roughly 3 weeks ago.

Scott Dillingham: 01:18

People are suspecting that they're gonna raise the the rates again this year too. It's hard to say. Right? These are economists guessing, and it's a guess. Right?

Scott Dillingham: 01:29

It's an educated guess, but it's still a guess. So it could be wrong. So we don't really know if the rates are going to go up or not. But what have a lot of investors are trying to do is they're trying to beat the system. They're trying to think, okay.

Scott Dillingham: 01:43

Look. We suspect the rates might go up in the short term, but in the long term, they'll go down. And it's true, like, Canada on paper is in a recession. Right? If you look at the gross domestic product of Canada and the definition of a recession, we are in 1.

Scott Dillingham: 02:01

Fiscally and financially, we haven't felt it per se. We we have felt the cost of goods being quite high, but there's still, like, good employment numbers, good jobs. Obviously, this is not covering all cities. I realize some cities and towns struggle with these things. I'm referring to a very broad approach where I'm speaking of the Canadian economy as a whole.

Scott Dillingham: 02:28

Every recession, the rates lower. Okay. That's what we expect, and they do that to boost the economy. Now the lenders that I'm speaking to are saying, look, Scott. If the Bank of Canada does lower the rates, it's not gonna be like what it did in COVID, or in the o seven and o eight recession, where they just slashed rates like crazy.

Scott Dillingham: 02:48

It's gonna be calculated, and it's gonna be slow. And they also don't believe the rates are gonna drop that much. They're suspecting that they just drop a little bit where I know a lot of investors are hoping they they get slashed. They just drop 2% overnight, and I I guess at the end of the day, nobody really knows what's happening. But I do see a challenge is that clients are wanting to lock in to 2 or 3 year fix because their thought is, look, if I get a 5 year fixed, I'm accepting a rate for 5 years.

Scott Dillingham: 03:27

But if the rates come down, I'm gonna miss that decrease in rates. So overall, I'll be paying more, and I think this is incredibly flawed thinking, and when I explain this, there's I would say maybe half the investors get it and and half don't. So my word of caution to you is don't follow the flock. Use your emotions. Think about it, and think what makes the most sense for my scenario right now?

Scott Dillingham: 04:00

And I'll explain it and then you can decide what to do. So what the investors are anticipating is the rates are lower. So they're getting or wanting to get a 2 or a 3 year fixed with the goal that when that 2 or 3 years is done, that the rates are lower, and then they can walk into something different. So overall, they'll save money. But it's incredibly flawed because they're not literally writing down the interest that they're that they're paying.

Scott Dillingham: 04:30

So if you get a 2 or a 3 year fix, now these are basic averages. I recommend speaking to us or another mortgage broker to get the exact numbers for you and your scenario. But if you think about it, the 5 year fixed rate now is roughly one to 1 and a half percent cheaper than the 2 in the 3 year terms. Now that's an average rates. You might find some that are just slightly lower than that, but you will also find some that are higher than that.

Scott Dillingham: 05:02

So I'm saying, on average, you're 1 to 1 and a half percent higher of a rate if you go with a 2 year or a 3 year. Now in all honesty, the banks do that on purpose because they want you to lock in for longer because it's better for them. They have a customer for longer. Right? So they discount the 5 year more.

Scott Dillingham: 05:21

Right? But the argument becomes this, we know that the lenders and the economists are saying if the rates go down, it's only gonna be a little bit. It's not gonna be a lot. So they're not gonna slash multiple percentages like what they did in the past. So with that thought in mind, right, you're willing if you go with a 2 or 3 year right now, that means you're willing to accept the rate that's roughly one to 1 and a half percent higher than the 5 year, and you're gonna have that higher rate for 2 to 3 years.

Scott Dillingham: 05:57

Paying 1 and a half percent higher than what you thought you might have, if if you got the 5 year fixed. And they're doing this with the gamble that the remaining 2 or 3 years left, depending on the initial term that they picked compared to just going with a 5, that those rates are gonna be lower. But what they failed to realize is those rates have to be drastically lower to make up that savings, or else you're paying the money. Because if the rates drop 1 and a half percent, it's gonna be a wash for you. Do you know what I'm saying?

Scott Dillingham: 06:31

Because you're overpaying 1 to 1 and a half percent for the 1st couple years, and then the next couple years you might save 1 to 1 and a half percent, if that's what it drops. So it has to drop a substantial amount for those savings to kick into play. And they're saying they're not gonna do that. They're not gonna drop it big time. So you have all these people that I believe are making the wrong decision because it's more of a gamble, and not to say they're making a wrong decision.

Scott Dillingham: 06:59

I don't wanna say that anybody's wrong in this because nobody really knows. Nobody's can predict the future. But what I'm saying is the thinking is flawed because they're not literally adding up how much extra and interest they're paying over those 1st 2 to 3 year terms, and they're factoring in massive drops, which just aren't gonna happen. So overall, the investors are gonna end up paying more money out of pocket. I believe, in my opinion, because they're saying the rates aren't gonna drop that drastic.

Scott Dillingham: 07:30

Why gamble? Do you know what I mean? Like, why gamble with your money? So my advice and my suggestion is get what feels right now. If you like the idea of that lower interest now, which would give you a lower payment and higher cash flow, potentially.

Scott Dillingham: 07:47

Right? Some markets there isn't cash flow because of the price, but in many markets there still is. So depending where you're tuning in from. But sit back and really think, is that really what's important to me today? Forget the future, nobody knows what the future holds.

Scott Dillingham: 08:04

We've not really been through a rate environment like this, and then COVID and then recession, it's different. So nobody really knows. I also know the bank of Canada's overall goal is to raise interest rates. They want them higher than what they are now. Now they can't just do it overnight.

Scott Dillingham: 08:22

I know they really increased the rate last year, but a lot of that was to eliminate the discounting that they provided for COVID. And a lot of the rates now are actually pretty close to pre COVID rates. And I think a lot of homeowners ignore that fact. So they were naturally and gradually going up, and then COVID came and everyone's, yeah, everything's so cheap. So just know that it's not like they're really higher than they were before.

Scott Dillingham: 08:52

It's pretty much the same, but we've we felt it because they raised it so quickly. It wasn't a gradual process. So my advice again is pick what's best for you today. Now let's say, you disagree with my statement, and you think it is still better to get a 2 or a 3 year term. I'm gonna say that's wrong because you don't know the market.

Scott Dillingham: 09:17

What if they do lower the rates in a year? And again, I know I'm using the word wrong. I I don't mean or to to call somebody wrong or insult anybody. But what I think is better, a better thought instead of I'm gonna go with a 3 year term, because it's gonna be better then, what if the rates are the lowest in 1 year? You know what I mean?

Scott Dillingham: 09:37

And you've still locked in for 3. If this is your game plan, you're missing out because you're still locked in. If you are somebody that really thinks they're gonna lower and you wanna capitalize on that, and again, nobody knows. So it very well could happen, then I would say get the variable rates because the variable rate that will adjust as the rates adjust. If you start to see that it goes down, then you benefit right away, even if the lowest rates are 1 year from now.

Scott Dillingham: 10:10

And so that's the challenge with picking a 2 or 3 year fix is you're trying to not only trying to save interest overall in the grand scheme of things, but you're also trying to time the market, and time when the Bank of Canada is going to lower the rates, and it can't be timed. They base that on a lot of different variables. I think if that is your strategy, and after hearing this, you still think it's best to choose a shorter term, then again, I would choose a variable. If you don't know this, the variable you can convert to a fixed at any point in time. So say the rates are the best in 1 year, or you feel like they're the best and you're hearing the news, it's not gonna change any lower, this is where we're at, you can convert that and lock it in if you wanna lock it in, or if you wanna stick with the variable and ride that out, you have that option.

Scott Dillingham: 11:02

But I just see a lot of investors not making those educated decisions. And they're gonna end up or could end up paying much more. I firmly believe they will end up paying more just from what I'm hearing as a mortgage person, as an insider. But again, the lenders telling me this, they don't know also. Nobody knows what's in the deck of cards.

Scott Dillingham: 11:28

Again, I think if you're somebody who really needs that money, just get a longer locked in fix like a 5 year fixed. Even if it does cost you a little bit more later, it's gonna save you a lot now for the next couple years anyways because it's much lower. I think that's best, but if you wanna write it out then I would say go with the variable. Because then you can you don't have to worry about timing the market. You're still in the game where you can benefit if they go down, but now you're not timing it.

Scott Dillingham: 12:00

When it goes down, it'll go down and you'll be able to capitalize on that automatically because you don't even have to do anything. The rates come down, it it goes down for you too. So that is what I would suggest to help you out. Plus, as an investor, the lower your rates, the lower the stress test. And the lower your stress test, the more you're gonna qualify for.

Scott Dillingham: 12:24

So if you're trying to build your portfolio and you're trying to grow, getting that smallest payment is gonna be the thing that's very ideal for you to for your growth, you know, plans. So that is what I I suggest. I I welcome your feedback. Let me know what you think about this, if you have any different opinions. Right?

Scott Dillingham: 12:43

It's really unique situation that we're going through. I just my fear is that people are expecting this, And if it doesn't happen, then we're gonna have tons of investors overpaying that have much higher mortgage rates than they should have. And then on top of that, they're gonna qualify for less down the road as they build their portfolio. It's in in my opinion, it's it is better to go with the, the fixed. But anyways, thank you for tuning in to today's show.

Scott Dillingham: 13:15

I'd love your feedback. And if you really like the show, please share it. Give us a review. I would really appreciate it. Thank you.