Is the news about mortgage rates news to you?

BMO announced a super low mortgage rate of 2.99% for a 5 year fixed term and it has been making news today. Flaherty is worried about “a race to the bottom” where competition between banks results in even lower rates which in turn could increase the amount of buyers seeking homes in an already expensive housing market. Mr. Flaherty is worried about consumers rushing into a mortgage just because rates are low and getting in over their heads. A year ago mortgage rates dropped which spurred the latest changes to CHMC lending rules.  Michael Babad at the G&M thinks all this worry is foolish and because of a cooling housing market BMO is just trying to attract a larger share of fewer buyers ie being competitive, which is good for consumers.  As Garry Marr at the FP puts it “When did it become the job of the minister of finance to boost bank profits and stick it to the consumer?”

Are you thinking about buying this spring? or how about refinancing at a lower rate, and maybe taking some cash to do some renovations or pay down more expensive debt?  These are questions that come to mind when cheap borrowing becomes an enticing option. Rob Carrick at the G&M suggests using caution if you are a first time home buyer. He is predicting market declines over the next year so the house you buy this spring could potentially be worth less than you paid for it, so waiting to see if prices drop in the fall would clearly offset buying with a lower rate today. What about just getting a better rate for the home you already mortgage? It sounds like a good idea. I think the only danger is the temptation to finance just a little bit more, or even a lot more because this is likely the cheapest borrowing option available, but what will happen when 2.99% goes up to 4.99%?

Personal Debt and Interest Rates

In a G&M article from last week you can read this speculation – “the time may be coming when high personal debt levels are a greater threat to the economy than higher interest rates.”

Citing a report that from Statistics Canada that the household debt-to-income ratio has reached 163.4 per cent (the highest ratio of debt to income ever recorded in Canada), the author is suggesting that increasing levels of personal debt may be a factor in the Bank of Canada eventually raising interest rates. The problem, as I understand it, is that high levels of debt threaten to become unpayable and when a large sector of the economy can’t pay its debts, some sort of collapses is inevitable- such as bankruptcies or home foreclosures, which in turn cause the economy to decline, not expand. Bank of Canada Governor Mark Carney has recently pledged to maintain the Bank’s key low interest rate, but there is speculation that this might soon change.  Today the BoC announced it was maintaining interest rates but cites continuing “imbalances in the household sector” as a possible reason for an increase.

How would increased interest rates affect your personal finances? What percentage of your income goes to debt and how much would that go up if interest increases? I did a little internet searching and general consensus is that a 30% debt-to-income ratio and below is excellent and over 40% means finical trouble.  Desjardins has some good online debt-to-income ratio information.

It is certain that rates will rise sooner or later­-possibly the end of next year,  so now is the time to get finances on track.  Some books from our collection on personal finance: