Mr. Client:
Hey Kyle I don’t understand what going on with lending rates. Could you get a mortgage for 2% right now?
Sorry I have no idea about this stuff
Kyle Wilson:
Ok so let’s say you want to go buy a box O Henry’s at Costco to RESELL at your convenience store 7/11. Costco sells it to you for 10$. However you only have 5$. So you asks the Bank of Canada for another 5$.
LAST WEEK, Bank of Canada would have said.. “no problem.. I am going to give you that 5$, but I want 1.75% interest in return on that dollar, because I need a better return than what I am getting in my bank account to make sense of profiting from this loan.”
TODAY…. You say: I still want to sell those O-henry’s. But you are too scared to buy it for re-sale for several reasons:
1. What if the world is collapsing?
2. Should I save my money instead of spending it?
3. What is someone touched it who has Covid-19!!!!
But the Bank of Canada is now also concerned, because their investments are no longer generating a positive return, but a negative! So they decide the only way to make sure things keep rolling is to use their liquid cash, …and encourage OTHERS to use their liquid. Rather than store it in their bank because of negative returns. Bank of Canada says: “look.. don’t worry. In fact, I am going to lend you the 5$.. at ZERO percent.”
Bank of Canada reasons this is way better to lend this money at 0% because they will lose money if they leave it in the bank.
Bank of Canada the wholesaler. You are the reseller. The Bank. You are the bank. They are dropping rates to encourage SPENDING. In all markets. Because if we don’t spend, the bank collapses.
And the bank of canada does this by reducing the return on everybody. If rates go to negative lending rates…. People will start to see not just investments like GIC… TFSA.. RRRSP etc. produce …negative returns… they will see their CHECKING ACCOUNTS have negative interest rates.. even though they are so low.. its still a negative.
It encourages spending.
So, will you see mortgage rates drop to 2%? potentially. But it comes down to the RESELLER and if they see enough action. The banks are RESELLERS (TD.. Scotia… RBC.. ETC) If markets are strong enough.. they will lend at 2.5… if markets are weak.. they will lend at 1.5… it will depend on the person walking in to the store to buy the O Henry… are they going to buy it for 2$ a piece? Or .75$ a piece? Reselling Bank had to buy that O Henry at a certain amount so they could resell it and make a profit.. at what point can they resell it to make enough to profit, while the Bank of Canada encourages the spending by dropping rates.
Mr. Client:
That makes a-lot of sense.
So could I re apply for my mortgage at a lower rate?
Kyle Wilson:
yes. but if your in a fixed rate. locked in…. you can’t forget the equation to break the current mortgage.. and the lower the rate. the higher the penalty. it depends what bank you used and how significant that penalty is. This is why I always encourage using lenders who use CONTRACT RATE IRD CALCULATIONS so the penalty is way lower.
Mr. Client:
I’m fixed, never-mind then. Haha thanks so much kyle wouldn’t buying a house in the next few months be totally worth it if you could get a super low interest? Doesn’t that mean housing prices go up when interest is low
Kyle Wilson:
YES. Especially in the Okanagan because we are least impacted by all of this. Supply is so LOW. Demand is high
