Comment by chollida1 | Hacker News Reader

Comment by chollida1 | Hacker News Reader

For the American's that don't know. In Canada our banks won't give you a 25 or 30 rate.

We typically renew our rates every 5 years, while still amortizing our mortgages over 25-30 years. So rate adjustments tend to hurt more than they do in the US.

Our overnight rate is now 3.25% so we're a bit ahead of our neighbor to the south.

And our equivalent to the dot plot suggests no more rate raises this year, though we do have a chance for one more in December, but unless our inflation rate jumps again, we're probably done until the US catches up to us.

I guess I should note that the new 3.25% rate is 25bps above what the BOC considers to be the neutral rate.

Our two year rate( the one I tend to think is the most important) is currently trading around 3.62% which is up, while the 10 year hasn't really budged, indicating that the markets think we may be close to the end of rate hikes.

Our inflation rate "falling" to 7.6% in July from 8.4% in June also suggests that rate hikes are starting to work.

We're in a weird not often seen situation where we are seemingly heading into a recession with full employment and high inflation and already high interest rates(by recent memory) while also having high debt levels for both individuals and businesses.

The BOC( and US FED) have been pretty clear which side they'll come done as they have constantly said inflation is job #1, so people with debt will be feeling pain for along time to come

>> We're in a weird not often seen situation where we are seemingly heading into a recession with full employment and high inflation and already high interest rates(by recent memory) while also having high debt levels for both individuals and businesses.

Hi from the UK too :-)

High energy prices and fuel costs here are just annihilating people's spending ability, yet Bank of England has been upping interest rates similarly aggressively, to, you know, reduce people's spending ability. Fun times. And the people with serious disposable money to spend are seeing better savings rates and so... have more money to spend!

I think there's simply a "this is the tool we've always used to combat inflation so here we go" attitude among central banks. IIRC Japan took a more nuanced view and bet on inflation being transient and with a distinct (COVID plus Russia/Ukraine) cause different to normal inflation causes, and they seem to be doing pretty well?

https://tradingeconomics.com/japan/inflation-cpi

And because Japan is not raising interest rates as highly, its bonds aren't in demand so its exchange rate is falling. This makes imports more expensive which will increase inflation.

So people will take this as evidence that Japan did the wrong thing and other central banks did the right thing, when really it's the rate raises at other banks causing Japanese inflation.

The main difference is that the Bank of Japan, unlike the rest of the world right now, wants more inflation.

> And our equivalent to the dot plot suggests no more rate raises this year

They say this in the linked press release, though: "Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further."

I guess we'll see what happens by the end of October. I wouldn't be surprised if they keep hiking.

edit: a missing space.

As a variable rate holder, I am not the most pleased.

I personally never understood how could anyone take a variable rate mortgage. I would never have a good night's sleep. But that's just me.

It was cheaper than fixed for the last 15 years

Marginally, from a historic perspective.

It should almost always be cheaper - you're trading risk of rate changes for lower prices on average. The person you are responding to is almost certainly aware of this.

Most jurisdictions let you repay in full without penalty so assuming you can refinance down the road or simply sell the place during the lock period, you come out ahead.

It doesn’t change nightly either. It’s in fixed windows every X months (e.g. every six months) and the maximum delta per hike or drop is usually fixed as well.

Going with a variable rate mortgage would have been better at least 75% of the time, as possibly as much as 90%:

* https://www.ratespy.com/the-most-misconstrued-study-in-mortg...

* http://astarmortgage.com/pdf/moshe.pdf

We just happening to be in a rising rate environment currently.

There are two types of variable mortgages:

> With a fixed payment, when prime rate rises you simply pay more interest and less principal, and vice versa when prime falls. But your actual payment stays the same (unless rates soar so much that you’re not even covering the minimum interest due, which is rare).

> That’s opposed to an adjustable rate mortgage (ARM) where both your payment and interest cost vary as prime rate fluctuates.

* https://www.ratespy.com/offers-fixed-payment-variable-mortga...

> With a VRM, a rise in the interest rate leaves the regular mortgage payment unchanged but the interest charged rises and the amount of the payment allocated to pay down the principal balance drops and this means it will take longer to pay-off the mortgage. A lower rate has the opposite effect accelerating your pace of mortgage repayment.

> With an ARM, a rise in the interest rate results in a rise in the regular mortgage payment to cover the higher interest cost to ensure that the dollar amount allocated to pay down the mortgage principal remains intact. On the flip side, a drop in rates will drop your regular payment without accelerating the pace with which you repay the debt.

* https://www.mortgagesandbox.com/news/types-of-variable-rate-...

That kind of analysis really only works well for people who make a lot of housing purchases, and have cash reserves to cover rising rates.

For most people, who get one mortgage on their primary home (which they live in), the potential downside if you’re in that 25% is ‘lose your house’, so it’s not unwise to go with a fixed rate that you know you will be able to pay for the life of the loan.

It's often the opposite, at least in Canada. In Canada, fixed rate is only fixed for 5 years. A variable rate mortgage goes up and down gradually. A fixed rate mortgage sees massive changes in rate every 5 years.

Most banks have 10 year fixed, too.

But going long term fixed means you're in a forecasting competition with the bank. It's no gimme.

Yes but it's way easier to make one decision every five years than worry every. single. year how the latest news will affect my mortgage.

> That kind of analysis really only works well for people who make a lot of housing purchases, and have cash reserves to cover rising rates.

The VRM has no rising costs: your monthly payments are the same. It's just the amount of principle paid off each month changes:

* if rates rise (like now), less principle is paid off

* if rates drip (the 10 years before this particular moment), more principal is paid off

But what gets taken out of your chequing account would be the same.

VRMs also have a trigger rate where payments increase, you can't accrue principal. Not sure how the banks will handle this yet, it's not in their interest to crush marginal mortgage holders.

Considering a bunch of Canadians are hitting trigger rates (interest > current per month payment) and seeing either 50% increases in monthly payments or request to make lump sum payment of tens of thousands, I’d say that’s not true.

I don't quite understand what you mean by "The VRM has no rising costs: your monthly payments are the same."

This is definitely not the case. My mortgage payments have gone up by hundreds of dollars per payment.

I felt the same way until I learned that in much of the world, super long (eg 30 year) fixed rate (no penalty for early payment) mortgages just aren't available

This is apparently a weird mostly unique to the USA thing, probably driven by complex subsidies. And that's why owning a home in the USA is such a good deal-- because it's the only way to get a 30 year fixed early-repayable mortgage, which, especially at the rates that were available for the last 15 years or so, is such an insanely good deal it's pretty much free money.

If you really think about it, why would any rational bank take this bet? If rates go up, you have an unfairly low rate and they can't do anything about it. If rates go down, they still lose because you can just repay early through a refinance. And 30 years is a long time to guarantee a rate.

The only reason a bank would offer such a crazy bargain is subsidies.

>> This is apparently a weird mostly unique to the USA thing, probably driven by complex subsidies

Before the 1930's, 5 year fixed-rate interest-only loans with a 50% down payment were typical in the US. At the end of 5 years the borrower would either have to pay off the remainder of the mortgage or negotiate a new loan at a new rate.

Of course this caused a crisis during the Great Depression.

During the 1930's, the Home Owners’ Loan Corporation (HOLC), the Federal Housing Administration (FHA), and the Federal National Mortgage Association (FNMA) were created to regulate and insure mortgages. Instead of 5 years, 15 years was common at first, then 20, then 30. Instead of being interest only, loans were amortized to pay off principal, instead of a 50% down payment, 20% or even 10% was common.

During the 1970's the interest rate mismatch (short term interest rates which banks used for financing rose, while their 30 year interest rates on loans were fixed) led Congress to allow FNMA and other entities to buy mortgages from lenders to get those loans off their books - that was the creation of the secondary mortgage market.

Loans were still all fixed rate though, variable rate wasn't allowed in the US until 1982 (the Garn-St. Germain Depository Institutions Act).

By the 2000's, you had variable rate mortgages, interest only loans were back, and banks could originate and then sell them into the secondary market, so they could make money on the origination (or if not that, the servicing) of the loan, while getting rid of the default risk (that was left to the US taxpayer under the guise of the supposedly private "government sponsored entities", the GSE).

Of course this caused a crisis during the Great Recession.

(Assuming you're an American). In Canada, "fixed rate" generally means fixed for 5 years only. So while there is a difference between fixed and variable, it's not a huge difference in terms of peace of mind; all mortgages are essentially variable rate in some sense.

A lot of Canadians opt to try their luck with variable, especially since it's usually cheaper on average, and usually cheaper up front.

Hello from beautiful British Columbia. Variable rate mortgage is a gamble. I am not gambling.

Much of this was realtors and mortgage brokers pushing buyers into variable for various reasons. One, to get more buying power and for brokers the chance to make more commissions with sorter term variable rate mortgages (more future renewals).

For the last several decades, over the long term they've been the better option.

We took a variable mortgage last round (December 2020) because we were considering moving with a couple years.

Supposedly the penalties of getting out of a fixed rate were costly, whereas they are less so (none?) with the variable flavour.

Yet, we are still here and now our payments have gone up nearly 25% :(

To give some perspective, I relied somewhat heavily on my broker. According to them, over time, variable rate mortgage holders end up paying less. I'll be very interested to see how this fares as time goes on, so far we're paying a lot more per month.

One factor for the decision was that as a first time home buyer, our ability to get favourable long-term rates was basically non-existent. I would expect that to change when it comes time for a renewal.

> They say this in the linked press release, though: "Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further."

Well I was just talking about this year so its entirely possible(and I'd say probable) they hike next year

> I guess we'll see what happens by the end of October.

Probably not, the BOC doesn't meet again till December so I'm not sure what we'd see at the end of October.

> Probably not, the BOC doesn't meet again till December so I'm not sure what we'd see at the end of October.

From the linked press release: "The next scheduled date for announcing the overnight rate target is October 26, 2022."

Oh, shoot, you are indeed correct and I am wrong on this :(

I misread the dot plot. Thanks for correcting me, so we could indeed see a hike in October, though the current plot suggests a max of 25bps for the end of the year.

October 26 and December 7:

* https://www.bankofcanada.ca/core-functions/monetary-policy/k...

There seems to be a fair bit of "demand destruction" here in the USA. Hard for me to tell if its from our 2.25%ish overnight interest rates, or if it is due to inflation.

Either way, the September 20th meeting is currently expected to be +.75% by the bond futures market. So I think we're gonna catch up to you sooner, rather than later.

"Demand destruction" is one way to look at it.

The other is that artificially low interest rates synthesized demand, and this is a normalization.

I mean, whatever it is, there's fewer people buying things. (or many people buying fewer things). So I don't see much point arguing the semantics / precise words used to describe the phenomenon.

That's not strictly true. See https://www.rbcroyalbank.com/mortgages/mortgage-rates.html#p...

While 25-year fixed is uncompetitive (9.75% !!!!!! vs 5.9% on a 3-year fixed), the banks definitely sell them.

Does anybody buy them?

I have to imagine the greasy bank advisor who manages to sell one gets a free trip to Cancun.

> while still amortizing our mortgages over 25-30 years

I thought the government eliminated the 30 year amortization?

No, any of the banks will give you a 30 year amortization.

it was the longer duration mortgages they killed. There was a small windows where they allowed durations longer than 30 years but they killed those recently.

Probably a very wise decision given the real estate market in Canada.

> No, any of the banks will give you a 30 year amortization.

A federally regulated bank may offer a 30 year ammortization if you put i ≥20% equity. Non-federally regulated institutions (e.g., provincially regulated credit unions) may offer more options too.

Only if you need CHMC insurance max is 25 years. Otherwise if you put down 20% you can have 30 years since you do not need CHMC.

Those inflation numbers can change once more data a looked at.

> For the American's that don't know. In Canada our banks won't give you a 25 or 30 rate.

Section 10 of the Canada's federal Interest Act states (emphasis added):

> 10 (1) Whenever any principal money or interest secured by mortgage on real property or hypothec on immovables is not, under the terms of the mortgage or hypothec, payable until a time more than five years after the date of the mortgage or hypothec, then, if at any time after the expiration of the five years, any person liable to pay, or entitled to pay in order to redeem the mortgage, or to extinguish the hypothec, tenders or pays, to the person entitled to receive the money, the amount due for principal money and interest to the time of payment, as calculated under sections 6 to 9, together with three months further interest in lieu of notice, no further interest shall be chargeable, payable or recoverable at any time after the payment on the principal money or interest due under the mortgage or hypothec.

* https://laws-lois.justice.gc.ca/eng/acts/i-15/page-1.html

So since penalties on cancelling >5 year term mortgages are restricted, which means banks have no (major) recourse if you cancel a >5 year mortgage, so the banks have little incentive to offer >5 year mortgages. (Amortization periods are >5 years of course.)

The US has no such restriction, and so if you cancel a 30 year mortgage there, banks can theoretically go after you for the entire amount of lost profits.

Note that, while there have been some spikes, interest rates have been on a generally centuries-long trend of going lower:

* https://www.visualcapitalist.com/700-year-decline-of-interes...

* https://www.bankofengland.co.uk/working-paper/2020/eight-cen...

Renewing often has, in general, gotten you a lower rate. It's why, historically speaking in Canada, going with a variable rate mortgage would have been better at least 75% of the time, as possibly as much as 90%:

* https://www.ratespy.com/the-most-misconstrued-study-in-mortg...

* http://astarmortgage.com/pdf/moshe.pdf

We just happening to be in a rising rate environment currently.

This may be a reason, and not the only one, or unrelated to the situation entirely.

> Section 10 of the Interest Act (Canada) allows a borrower who is a natural person to prepay a mortgage loan or hypothec having a term of 5 years or more at any time after the first 5 years, in exchange for 3 months’ interest payments (in addition to the principal and interest owing). This right of prepayment protects individuals from being locked into a long-term mortgage at a high interest rate with either no ability to prepay or with prepayment subject to a large penalty. However, the same rule restricts individuals from negotiating their own prepayment terms which may preclude them from securing more favorable long-term financing.

* https://obj.ca/article/five-interest-rate-provisions-be-awar...

* https://www.mondaq.com/canada/real-estate-and-construction/1...*

> The US has no such restriction, and so if you cancel a 30 year mortgage there, banks can theoretically go after you for the entire amount of lost profits.

That would be a good explanation for why loans are structured like that in Canada, except for this last sentence - this virtually never happens. I have never seen, let alone taken out, a 30 yr mortgage with a prepayment penalty.

Like, I honestly don’t know if any banks are issuing them.

—editing to add:

Did a little research, and yes - there are some loans with prepayment penalties, but in no cases do they seem to “go after you for the entire amount of lost profits”. It’s generally a fixed %age of the loan value, and the penalty expires fairly early in the loan (2-3 years seems to be common, some go to 5).

> I have never seen, let alone taken out, a 30 yr mortgage with a prepayment penalty.

Hence the the use of the word theoretically.

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