“Who sees less? A blind man or the person who asks a blind man what he sees?”
Mortgage shoppers crave certainty, so they continually question brokers or bankers about where interest rates are headed. If this is something you’re prone to doing, first ask yourself if your broker or banker can predict the next global catastrophe, war, financial crisis, or sovereign insolvency. If not, you may want to rethink your question.
Unforeseeable events impact mortgage rates at unforeseeable times.
The events of this past week are the latest reminder of how fluid rate expectations can be….
A month ago, some economists were contemplating a BoC rate hike as soon as May.
Now, you see:
- the benchmark 5-year yield plummeting Wednesday to 2.43%
- deeply discounted 5-year fixed rates falling back to 3.79%
- market rate-hike expectations being pushed out to September/October (based on Overnight Index Swap [OIS] yields).
The prediction business is as predictable as it never was.
That’s not to say rate projections are completely worthless. Following the bottom of an economic cycle, rate increases are more probable and it’s useful to consider the magnitude of “reputable” rate hike forecasts. (You can define reputable. Some people use the Big 6 banks’ projections.)
From those forecasts, your mortgage professional can calculate how the expected rate increases might impact your future mortgage costs (and budget). Then they can analyze alternative rate scenarios, apply historical research, and factor in your risk profile & financial picture to recommend a mathematically sound term.
Just try to remember: When you hear a mortgage rate forecast that sounds plausible, distinguish if it’s a short or long-term forecast. Reputable near-term rate calls are more accurate. Moreover, each has different relevance. For example:
- Reading that rates may rise next week should have little impact on your long-term mortgage strategy—unless you need a rate lock soon.
- Specific rate prognostications like “prime rate will hit 6% by 2016” should go in one ear and out the other, given the enormous margins of error in long-term economics. (Although, that’s not to say you shouldn’t plan for higher rates.)
To put everything in the present context, consider that the Big 6 currently expect prime rate to climb 200+ basis points in the next 24 months. They project 5-year bond yields rising over 125 bps.
Even if these ball gazers happen to be right, it doesn’t mean rates will escalate in a straight line. Long-term rate trends are always speckled with short-term counter-trends (some believe we’re in one now).
What becomes important is keeping short-term market emotion from steering long-term mortgage strategy.
Side Note: Rate forecasting is a tough gig…
- Economists get rate direction correct half the time
- Only two out of 50 WSJ economists got yields right in a 2010 study
Rob McLister, CMT
I’d qualify your comment on long-term forecasts- although it’s true that long term forecasts are inherently less reliable than short term forecasts, projecting the impact of significant rate moves on borrowing capacity based on reasonable projections of long term rates is pretty important. For someone at a TDS of 20% with good income security and prospects for wage growth, only extremely unlikely rate shocks will cause a borrower financial stress. But for the significant minority of borrowers who have a TDS above 25% and modest wage growth expectations, the very real risk that rates are at least 200bp higher in 5 years should be at least considered when making borrowing decisions.
I have to agree. The closer someone is to the edge of unstable finances, the fewer shocks they should be looking at. Yes, there is a cost for rate certainty, whether for investing or borrowing, but to not take financial shocks into account could be considered somewhat akin to gambling your home and financial security. The more financially secure you are, the more you can afford to gamble.
Most Financially secure people have taken risks and gambled to get where they are, Variable is the way to go :)
Thanks for the note. Considering higher rates is mandatory. No argument there.
What I was getting at was that the focus shouldn’t be on a specific number and timeframe (like 6% prime in 2016). Borrower analysis needs to be done on a range of future rates. What if prime hits 7% instead of 6%? Or 5%?
It’s almost like insurance underwriting in that you have to account for worst-case “outliers,” but then make probabilistic adjustments based on the borrower’s profile to determine how much risk they can take (in order to potentially save interest).
I would agree with you, but also add that:
Most financially ruined people also have taken risks and gambled to get where they are !
Lol so true
Don’t forget folks – that 25 TDSR and the 35 TDSR are based on the Qualifying rate which now sits over 2% higher that available 3 & 4 year rates thus insulating most home buyers from the rise in interest rates – they have already shown they can withstand the shock
Yes, long term predictions are an irrelevancy in many instances in my opinion.
I pay far more heed of the short to mid term forecasts which tend to be far more accurate.
Out of curiosity, do banks (PC financial in particular) ever “match” mortgage rates? I have a pre-approval for 3.89%, but that was offered to me as a “retainer” when the 5yr mortgage rates were 4.22% a few weeks ago. Now that many brokers, etc are offering 3.79/3.69%, is it possible to go back to PC and ask if they could? Or is this unheard of?
Thanks for your help, all!
Banks sometimes match if you’re a good customer. It depends on your credit, mortgage size and the representative you get.
In my experience PC has much less discretion with their rates than a mortgage specialist at a large bank. I also think it’s stupid that PC doesn’t let you out of its basic mortgage for three years.