Rate stress

Sigh. Oil was up 5% this morning. Big move.

Apparently Donald Trump has told Tat Guy to prepare plans for a major strike on Iran in the next three weeks. Plus a tanker was flamed in the Persian Gulf yesterday. And a new hurricane is bearing down on rigs in the Gulf of… whatever.

So up she goes. More fuel for inflation, which has been running hot in both the US and Canada. The central bankers want to see it at 2%, and we’re a full point above that. The US Fed recently increased its benchmark, sending the US$ up and the loonie down. So our guys have a few reasons to consider an increase later this month (the 28th) or in the final rate setting of 2027 (December 9th).

But it’s complicated. We’re also in a trade war. People are losing jobs, like at evil Stelco. Nobody wants to see mortgage rates go up when unemployment is rising and the housing market is already in cardiac arrest. Current odds for an increase this month have fallen back to about 33% but rise beyond that for the December date. Most economists see a rate tightening cycle in 2027, because this oil thing may last a lot longer than initially expected. Rising yields in the bond market support that concern.

All this makes Chris wonder what to do. He’s not alone.

Go long? Go short? Fixed or variable? Renew early or wait? How is anyone supposed to know what to do in a world like this?

?My wife and I are currently on a variable rate mortgage with Scotiabank at 4.10% and judging by the noise around the Bank of Canada rates are going to start going up,” he tells me.

The maturity date of the mortgage is August 15, 2027. I just had a conversation with someone at Scotiabank and they said we could renew our mortgage for 1 (4.64%), 2 (4.19%), 3 (4.34%) or 5 (4.54%) years.

Would it be best to lock in now on one of those rates? If so for how long would you suggest? Or are we best to hold on until our maturity date and then we have more options for renewal as we won’t be tied to Scotiabank and could potentially get a better rate. Thank you in advance.

Well, what’s likely to happen?

The bond market thinks inflation will be with us as long as Donald Trump is president (and beyond). He can’t stop spending. He can’t back down from the idiotic Iran war. He doesn’t care about deficits, debt or balanced budgets. He seems disinterested in the cost of living for average folk. He’s happy to raid the federal treasury to reward friends and family, build ballrooms and monuments and battleships. Mostly, his 19th Century tariff strategy has raised the cost of business globally, skewered supply chains and fostered protectionism which directly raises consumer prices.

So, Chris, rates will keep rising over the course of at least the next year. Probably more rapidly in the US, where the AI boom is papering over economic cracks and amping the GDP and stocks. In Canada the trade war hurts, so our guys will be more cautious. But CBs everywhere do not want inflation getting squirrelly.

An increase this month is probably not happening. December is a toss-up. Early in 2027, count on hikes starting.

Is it better to get out ahead of the rate increases? Sure. Makes sense. Conditions simply do not exist that would support lower rates, so you have nothing to lose by being proactive and locking down costs.

But, variable or fixed?

It looks like variable rates, currently around 3.5% will be 3.75% by the end of the year. Market-implied forward curves suggest the tightening cycle ahead will move VRMs to around 4.85%, or possibly 5%, within a year and a half. As we all know, variables move with the prime rate, and do so immediately.

Fixed rates are influenced more by the bond market than the central bank. These days a fiver sits close to the 4% mark, and is expected to peak around 4.7% by late next year. If oil goes nuts (like Trump) this could easily slide above 5%.

Nobody knows, Chris, how much, how far, how fast.

What we do know is that you pay 4.1% now and can lock into half a decade of tranquility for 4.5%. Nothingburger. By then the orange guy will be gone. The Iran war will be over. Oil should be back in the $60 range. Tariffs should be rolling back. Inflation should be easing.

It’s possible you might save some money going VRM over the next two or three years, but there will also be volatility and some stress as you watch every Bank of Canada decision and bank rate increase. Is it worth it? Unless the mortgage is well north of a million, nah. If you owe more than that, may Dog be with you.

Call TNL@TB. Lock ‘er up. There’s better stuff to worry about.

About the picture: “Hi Garth, Doug, Ryan, and the rest,” writes Rodney, in Vernon. “Thanks for the daily read. Always entertaining, and sometimes even correct….:) This is Carl, a Papillon. He’s 10 now, and enjoying the dog days of summer. He’s also letting us know that…”If you throw my ball in the pool again, then, well, I’ll just go get it.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.