Weekend Reading: Upside Down Mortgage Rates Edition

Weekend Reading: Upside Down Mortgage Rates Edition

In a normal interest rate environment, fixed rate mortgage tend to be more expensive than variable rate mortgages. Borrowers pay a premium for predictability – knowing exactly what their interest rate and mortgage payment will be for a five-year period.

For that reason, a common strategy for saving money on your mortgage has been to go with a variable rate mortgage. A widely quoted study by Moshe Milevsky showed that borrowers would have saved money nine times out of 10 by selecting a variable rate over a fixed rate mortgage.

Variable rates are tied to the Bank of Canada’s key interest rate, while fixed rates – broadly speaking – are closely linked to the bond market. What’s happening now is extremely rare. Five-year fixed rate mortgages have fallen below their variable rate counterparts. The going rate for a five-year fixed is around 2.69% while the best 5-year variable rate is 2.84%.

The reason for this upside down mortgage rate environment is because of something known as the inverted yield curve. In normal times, bonds with a longer maturity pay higher interest rates than bonds with a shorter duration. Yields may fall when investors believe the economy is due for a slowdown or recession. An inverted yield curve is when long-term yields fall below short-term rates. It does not happen often, but the event is believed to predict an impending recession.

My typical mortgage renewal strategy is to take the best of a five-year variable rate or a short-term fixed rate – as these tend to offer better discounts than five-year fixed rate mortgages. However, today the five-year fixed rate mortgage is being offered at a discount to the variable rate, AND at the same or lower rate than a 2-year fixed rate mortgage.

To me, that means the risk premium for a five-year fixed rate mortgage has temporarily vanished – making it a no-brainer for homeowners to lock in for five years. The one caveat I should mention is before locking in make sure you’re in a stable place with your work/life/finances because the penalties for breaking a five-year fixed rate mortgage can be steep.

This Week’s Recap:

I managed just one post this week – continuing my look at the best time to take CPP. This article explained why it’s not ideal to take CPP at age 65.

Previously, I shared three reasons to take CPP and age 70, and three reasons to take CPP at age 60.

Several of you have asked for a follow up on Old Age Security and if it’s worth delaying taking your OAS benefits, so watch for that article coming soon.

Promo of the Week:

Interest rates on savings accounts have been ticking down at most big banks and credit unions. Once a market leader, Tangerine recently dropped its interest rate to 1.15%. If you want to earn a higher rate on your savings then you need to look outside the big banks and consider an online bank.

EQ Bank has offered one of the best interest rates in the country since it launched in 2016. Its EQ Bank Savings Plus Account, which has also has some chequing account functionality, pays a healthy 2.30%* interest. That’s double Tangerine’s savings account and nearly triple what some of the big banks currently offer (short term promos aside).

What I like about EQ Bank is that it doesn’t mess around with short term promotions and teasers. It pays an everyday high interest rate – currently 2.30%* – on every dollar (up to a maximum of $200,000).

If you’re the type of person who likes to hold a large amount of cash, whether it’s an emergency fund or a short-to-medium term savings goal – do yourself a favour and start earning higher interest on that savings. Sign up for an EQ Bank Savings Plus Account here.
*Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.

Weekend Reading:

Sticking with the CPP theme, MoneySense’s Alexandra Macqueen answers a reader question: Could retiring at 61 significantly reduce your CPP benefit?

Jamie Golombek explains why running afoul of the CRA on RRSP withdrawals can be a costly mistake.

My Own Advisor Mark Seed walks readers through a retirement calculator he learned about from Fred Vettese’s Retirement Income for Life.

Michael James shares a useful analysis on Canadian listed ETFs versus U.S. listed ETFs. The point is, as your portfolio grows there are a number of cost advantages to using U.S. ETFs, namely lower MER and reduced or eliminated foreign withholding taxes.

I liked this article on how to protect your retirement portfolio from drawdown erosion, especially the idea of dividing your portfolio up into ‘buckets’ of short, medium, and long term monies. However, I didn’t like that it mentioned one of the most overused phrases in financial planning – ‘protection on the downside‘.

Investor advocate John DeGoey explains the life changing magic of low cost investing:

“This little bit of self-evident logic seems to be lost on many advisors, who continue to recommend unnecessarily high-cost investment products to their clients.”

De Goey also shares an excerpt from his new book on The Evidence-Based Investor blog, “You’re entitled to your own opinion, but not your own facts.”

In this interview with Dan Ariely, the behavioural economist shares his thoughts on the future of financial advice, including his positive experience using an advisor:

“I knew I wasn’t in tremendous danger to spend [recklessly]. But here was a guy that cared about me holistically. He wanted to know about the money I had outside of his bucket and would discuss quality of life and what kinds of things gave me happiness and so on. It was great.”

Here’s A Wealth of Common Sense’s Ben Carlson on the old investing line, “If you would have just invested $10,000 into the Amazon IPO…”

And Ben’s podcasting sidekick Michael Batnick on the opposite of conventional wisdom.

An alarming visual graphic of the countries most at risk of a housing bubble paints a stark picture for Canada, which ranked high in all four key housing market indicators.

Finally, a hilarious take on preparing for daily life with a newly retired spouse. Maybe it hits close to home for some readers. In any case, a good reminder to have a plan for how you’ll spend your time in retirement.

Have a great weekend, everyone!

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  1. Grant on July 27, 2019 at 3:15 pm

    Wrt to the bucket approach, because you do not rebalance from the cash bucket to equities during bear markets, the strategy actually increases your chance of running out of money.


  2. Jake Nepholine on July 28, 2019 at 6:07 pm

    We have a money problem but a good problem. I have just paid off my mortgage after 17 years and our house is worth $900,000 here in Toronto. We have now $5,000 a month that I no longer need to pay our debts. It looks like we will just sock it away in a high interest savings account of 3.00% with Meridian C.U. until we have a good chunk for my emergency, reserve fund which is only $5,000 right now.

    We would like to grow that to 2 years of living expenses, $75,000 and then we will start investing. We personally think mortgage rates are so low because house prices are too high and they don’t want to upset the apple cart.

  3. Gary Sanchez on July 30, 2019 at 2:09 pm

    It looks like to me it was better when we had higher interest rates of 8% to 10% mortgage rates in the mid 90’s to early 2000’s.

    It kept house prices cheaper and speculation down. Now, we have very low interest rates, 2.5% to 3.25% and out of sight housing prices $1 million+ in Toronto, Vancouver. Why did people believe that much lower mortgage rates would help our society in the longer term?

  4. Winnie Scholtz on July 30, 2019 at 6:01 pm

    I am a 70 year old widow for 25 years now. My husband passed away in his 40’s and the only financial planning we did was get a $500,000 life insurance policy through his workplace and group RRSP’s.

    Back then $500,000 looked enough to replace at least 80% of his income because you could get a 8%, 9% in a GIC. Today, it is really bad, 2.5% maybe 3% if you really shop around, more like replacing 40% of his income. Everything is so expensive and taxes are increasing alot from property taxes, utilities, insurance, gas, food, garbage fees etc. I retired in 2014 at 65 and get OAS, C.P.P. and am mortgage free but I don’t know how people sleep at night with hundreds of thousands in debt even with low mortgage rates.

  5. Rina Schafer on July 31, 2019 at 2:13 pm

    I live in a small town and I am widowed too. I have no mortgage and no debts, I don’t even use a credit card. I have only a modest paid off house, $100,000 in my RRSP and turned that into a life annuity a few months ago at $512.57 a month.

    I bring in $2,200 a month with pensions, my annuity included and have left over $800 a month which goes into my savings account at the local credit union. It is $3,500 currently. Mortgages and debt are so foreign to me as I have not had any since 1980.

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