Mortgage Advice From Mark Carney

Bank of Canada chief, Mark Carney, told reporters today that Canada’s economy should start growing again this quarter.  (Video:  BNN)

That surprised a lot of people, including bond traders who pushed up 5-year yields by 12 basis points to 2.65%.

Carney called the anticipated recovery “a long road” and said it may take until 2011 for overall inflation to run back up to 2%.

In one interesting exchange, a reporter asked:  “If you were renewing your mortgage would you go fixed or variable?”

After a laugh or two, the governor provided some judicious and unexpected advice:

• “We have a conditional commitment” (to keep the overnight rate flat until the 2nd quarter.)
• “It’s not a guarantee”
• “The only advice that is appropriate for us to give for Canadians is that we are in extraordinary circumstances.”
• The economy is “on track [but] there is a long way to go.”
• “Over time…interest rates will normalize.”
• “The way to think about managing your personal affairs, I would submit, is, can [you] borrow at what would be a normal rate?”
• “At some point…If we’re on track, we will get to a point where rates are at more normal levels and every household is going to want to make sure that they are able to service their debts at those levels.”

Carney’s guidance is quite apt to this environment.  Thousands of people have recently been taking out variables or 1-year mortgages with rates around 2.75%.  In a few years, it’s not unreasonable to suggest those rates could be at 4.75%.

If 1-year rates do jump 2% in a few years, that, in turn, means you’d have to qualify* at an even higher rate on renewal--perhaps 5.50%.

Will people be able to do that?  Or should more people instead be getting 5-year fixed mortgages now?  That is the kind of question where professional personalized advice matters.

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*  Mortgages with variable rates or terms under three years require that you qualify at a higher rate (called the “qualifying rate.”). 

For example, if you go to RBC today and apply for a 2.85% 5-year variable, they’ll make you qualify at today’s 3-year posted rate of 4.55%.  That ensures you can handle the payments if rates go up.