Weekend Reading: Mortgage Rate Limbo Edition

Mortgage Rate Limbo

I mentioned we are building a new house, which we hope will be finished by spring 2023.

It was a stressful time to sign a purchase agreement with a builder. We wanted to arrange our financing so that the new house purchase was not contingent on us selling our existing home (been there, done that, rented for 90 days in-between, and it sucked).

Meanwhile, with inflation soaring (including building materials and labour), there was risk for the builder if they priced their quote too low.

The builder wanted a quick decision to lock in the quoted price, but we had to refinance our existing home to expand our home equity line of credit and then apply for a new builder (draw) mortgage. Oh, by the way, we had a three-week trip to Italy booked during all of this.

I’ll spare you the details, but it involved a late night Zoom call with our lawyer from an Airbnb in Florence, followed by a frantic trek to find a pen(!), a printer, and a Mail Boxes Etc* to get the documents couriered back to Lethbridge in a hurry. Good times!

*Etc” doesn’t include printing, apparently.

We got everything set up the way we wanted and the house build is moving along nicely. Now the stressful part is dealing with rising interest rates and the potential for our existing home to fall in value before we sell it.

With a draw mortgage, we put down an initial deposit and then have a progressive schedule of deposits as the house nears completion. We plan to use our own funds (TFSAs) for the first 1.5 deposits and then dip into our existing home equity line of credit for the next 1.5 deposits, before tapping into the new builder mortgage for the remaining draws.

Unfortunately, the interest rate on our line of credit is now at 4.70% and should at least rise another 0.50% before the end of the year. Our draw mortgage is also variable at 3.80%, so that will rise in lock-step with any rate hikes.

We’re only charged interest-only payments until the house is completed and the full amount drawn. Then we can renew into a new fixed or variable rate mortgage without penalty.

So, we find ourselves in mortgage rate limbo for the time being. The planner in me wants to know exactly what our costs are going to be so I can determine our spending plan for 2023 and beyond.

My hope is that inflation gets under control, the rate hiking cycle ends this fall, and that housing prices steady and potentially find new life in the spring when we’re ready to sell our existing home. 

I’ll then continue my strategy of renewing our mortgage into the best of either a five-year variable with a deep discount off of prime, or a 1-2 year fixed rate if a big variable rate discount isn’t available.

By the way, my go-to mortgage resource (Rob McLister) at MortgageLogic.news says the value zone for mortgages right now is still the 1-year fixed rate while we wait for this rate hiking cycle to sort itself out. Makes perfect sense to me.

In the meantime, I’m planning with the assumption that we’ll sell our house for 10% less than appraisal. I’m assuming the interest rate on our new mortgage will be 4.94%. And, I’m assuming a ~50% downpayment on the new house after we sell our existing home.

That leaves us with some wiggle room for landscaping, realtor fees, moving costs, and any other extras we can think of. If all goes according to our conservative plan, we’ll still have some money left over to tuck back into our TFSAs to start filling up those accounts again.

This Week’s Recap:

Many thanks to The Globe & Mail’s Erica Alini for highlighting my post on how I invest my money in a recent Carrick on Money newsletter (Erica is filling in for Rob Carrick while he’s on holidays).

That article was also mentioned in this Financial Post piece on what advisors are doing with their own portfolios.

And, it was great to be back on the Build Wealth Canada podcast with Kornel Szrejber as we discussed workplace pensions. We talked about how to invest if you have a defined benefit pension, and how to take advantage of a defined contribution pension plan, among other things.

Here on the blog, I wrote about whether you should consider moving your portfolio when it’s down.

I also explored whether you should postpone retirement amid high inflation and depressed stock and bond prices.

Finally, I explained what the retirement risk zone is and how it might prevent retirees from wisely delaying their pension and government benefits.

Weekend Reading:

Speaking of government benefits, OAS payments have risen permanently for the first time since 1973. Here’s why retirees should defer them.

On the housing front, Rob McLister offers some clues as to when Canadian home prices may bottom (subs).

Here’s a trifecta from the excellent Morgan Housel:

The latest episode of the Rational Reminder podcast explored the expected returns from using a factor-tilted portfolio. Factor-tilts would include small cap and value stocks:

Compelling stuff, but I maintain my argument that most investors should avoid complicated portfolios and stick with total market index funds.

A Wealth of Common Sense’s Ben Carlson tries to make sense of this year’s wild stock market ride.

Of Dollars and Data blogger Nick Maggiulli looks at the pros and cons of a Die With Zero approach to spending.

The Department of Finance has now released details on the new First Home Savings Account to launch “at some point” in 2023.

Finally, a great piece by Tim Kiladze on how Canopy Growth, the star of Canada’s cannabis dreams, fell from grace (subs).

Have a great weekend, everyone!

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4 Comments

  1. Frito on August 13, 2022 at 1:42 pm

    Any concerns about the recent layoffs at Wealthsimple?

    • Robb Engen on August 13, 2022 at 1:56 pm

      Hi Frito, concerns about what, exactly? About whether my wife’s and my RRSP are safe there? Nope.

      They still have the backing from Power Corp and hopefully this downturn for them will allow them to re-focus on their core business and not be distracted by adding new crypto coins.

  2. Frito on August 13, 2022 at 3:42 pm

    I guess I still have ghosts of the dot com bubble floating around. I was about your age at the time and actually worked for a site that went belly up. Different setup, I know, but all the apps/websites/online entities seem to start off with great hype and expectations of unending success but then the layoffs start. Sometimes it takes years (HootSuite) sometimes more short term (Shopify) but it seems to be the first hint of stormy times ahead.

  3. Gary on August 14, 2022 at 6:08 am

    Building a home is for you young whipper snappers for sure! That is a lot of unknowns to deal with Robb. Good luck, I hope everything turns out as planned.

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