The Fear and Reality of Rates Rising

....I read too much....

When will the sky start falling? It's a question put forth nearly every 3 days by some financial expert about the current state of real estate in today's day and age. I read articles constantly about the real estate bubble bursting and unfortunately, none of them are about how to be prepared.
The consensus among those pessimists is 'soon, any day now, like really, it's going to happen, this can't last forever, the real estate bubble will burst.'

But man, doesn't it feel like they have been saying this forever?

I admit I am fairly new to the mortgage broker business. I've never seen a public lender rate at above 6% (which was my 1st house mortage). I can't fathom my parents' mortgage, where they had loans of 11-18% interest. So what's happening?

I'm not financial expert, but here's one thing; Money is not infinite. There has to be balance. This is kept in check by 'inflation'. You may remember discussing this in high school economics or socials class. At one time, governments thought the easiest answer to nobody having money was just to make more. I remember my teacher using Post-Germany WW1 as an example of inflation.

And then I found the Internet using this as an example.

But that was centuries ago! Well, not really. More like only 1 century ago. So this idea of inflation or cause and effect, taken as a moment of time in all known history is relatively new.


Let's get back to real estate. Money is finite. We commoners don't necessarily make more, we just move it around. What we take in, we put out. Loans and loan interest is based on bringing in more than we are putting out. That's savings. But unless you are literally stuffing your money in a coffee can and burying it in the backyard, 4 spaces to the North West from that Maple tree, you aren't really saving anything, just a theory.

That money you have in your bank account? That's just a number. An IOU so to speak. That physical money is converted into numbers and is being used by your bank to attempt to get more money. Note that it's not 'making' more money, it's just trying to 'get' more of the money that is already out there. They do this by buying and selling shares in other country's money and... well... it just gets ridiculous. An entertaining book to read, quasi-fiction is Bonfire of the Vanities. Tom Wolfe gets into a better description of money trading in one of the chapters than this keeping it simple blog could. At least, I think it was Bonfire of the Vanities. If it wasn't, let me know in the comments.

It has it all; Willis with hair, a skinny Tom Hanks, Melanie Griffith...

Anyways, there is a finite amount of money. The interest you owe on your credit cards/house, car loan is not based on the expectation of there being more money in the system but more that you will get more of that money that is currently out there.

So, let's pretend you have a house, you did your due diligence and came out with a mortgage payment that still leaves you $1000 for all your other extras, like a car loan, food, heating, gas, current credit card payments, vacations etc. You've done quite well, even built up a little RRSP contribution for your later years. Now it's time to sign up for another 5 years (fixed interest rate because you haven't consulted a mortgage broker) and instead of 3.5% interest rate as you've become accustomed to, the rates have increased to 5.5%. That's not much, right? That's like 2009 interest rates.

But what happens? Well, you can either extend your mortgage and continue to pay the same amount, only to find instead of the 20 years you've been told it would be paid off is now back up to 25 years, because the cost of re-borrowing the remainder of your mortgage has gone up and you can't afford to pay a higher mortgage rate....or...
you can pay the higher rate.... or....
you can sell your place and find something cheaper.

Those are really your only three choices.

So, the question is to those in power, when will they raise interest rates? And why? One good shock to the system will scare everyone and all those Chicken Littles out there will start screaming "I told you so!".

Yes, people who are already on the precipice of their total debt service ratio will find it harder to qualify for that house they really want. More houses will go into foreclosure as owners find that they just can't find anymore money out there. Builders, finding less buyers, will stop building, meaning more tradespeople will be out of work. Less work = less flow of money in the system.

People will start looking for a scapegoat. Will it be VISA or MasterCard for their 19% interest rates that you can't ever seem to pay down? No, there's no real face to VISA. There may be a voice to VISA (Morgan Freeman) but no face, for that exact reason. Will it be the banks? No. Again, there's no 'spokesperson' to the Banks, like the A&W guy.

'I ordered a Papa Burger, not this TEEN BURGERRRRRRRRR'

But there is the government. Plenty of face recognition there. If people start losing their houses, start becoming unemployed all they know is that the government/Harper is the reason and with an election coming in 2015 you can express how pissed you are at the rise in interest rates at the polls.

That's why if I am a betting man, I'm thinking that there won't be any real raise of rates until maybe after the next election.

So does that make this a good time to buy? It all depends on what you are buying. The biggest question is

'CAN YOU AFFORD TO PAY AN EXTRA $500 MONTH IN INTEREST RATES?'.

If yes, no worries. Happy Trails, move along now. If not, now is the time to plan ahead. You have over a year at the least, in my optimistic opinion.

And if you are currently shopping, tell your broker that you want a variable rate that will allow you to lock in if you see those rates rising. The savings in the penalties alone are worth it.