BC Sunshine Coast real estate by Menno at Royal lePage Real estate on the BC Sunshine Coast

The world is a risky place, it’s always been like that and it might never get “better”. Any investment has always been the subject of risk; any action you take can get you into some kind of trouble. What on earth are we to do?

Worrying about the future - people have probably always done that. Does it help? Of course not. Although it may sharpen your mind on thinking about future events.

Being an eternal pessimist. everything might be a problem. Thinking more rationally and realistically, there are indeed investments that are riskier than others. While the stock market is hobbling and financial markets are just so-so; when international economies are unstable and the commodity markets are doom and gloom, why would investing in real estate on the Sunshine Coast be your preferred long-term secure strategy?

Indeed, financial markets are whirling again. Many countries are experiencing financial trouble – but not Canada. What’s that going to do for the stability of our interest rates? Investors are once again looking to Canada as one of the biggest receivers of foreign cash. Our financial safe haven, however, creates rising demand, pushing yields on bonds close to record lows.

When the stock markets are struggling, investors look for safe deposit opportunities. Around the world, a glut of money is looking for safety. The US 10-year yield sits at a record low, Germany has seen a 2-year yield at 0% and Canadian yields on 5-year money are close to a record low as well. Since bank funding costs have tumbled as well, this typically translates into low, low mortgage rates.

Objectively speaking, it's hard to image that you can go wrong if you're borrowing money at about 3%; hardly more than the general rate of inflation.

FOR THE LOVE OF LOW MORTGAGE RATES?

Who says we don’t like low mortgage rates? We can buy more for less, we can spend our money on non-interest expenses, we have more financial freedom – we think. This is exactly what irks the Canadian financial authorities. The low interest rates drive increased consumer borrowing and that’s the last thing Canada needs right now. As they say, all this borrowing must be paid back at one point – possible with interest rates that may not be as low at that point.

In a world where triple-A credit is almost becoming a rare thing, Canada is taking on a new importance. The tremendous flight to quality in the Canadian market is an interesting phenomenon but opinions are split if this is really to our benefit in the long run.

Since it now costs a whole lot less for a bank to borrow money than it has historically, we might expect that banks will want to compete even more on their mortgage rates. This would mean that we may see some down-trending in that department.

On some mortgage terms at various financial institutions, these days, you can even dip below the 3% interest rate mark. How's that for virtually "free" money?

UNDER THREE PERCENT, AGAIN

Five-year bonds issued by banks to fund their home loans are enjoying such high demand that their funding costs are lower today than they were in the rate war period earlier this year, when we briefly spotted 5-year mortgage money being offered on 2.94% specials.

We’ve heard the repeated warnings from Bank of Canada Governor Mark Carney about the country’s excessive household debt levels. The mortgage wars drew criticism from Finance Minister Jim Flaherty; he even made his concerns known directly to the banks.

Low interest rates, especially after the financial crisis, have created an incentive for consumers to take on more debt. Another notable side effect of cheap money is the run-up in housing prices across Canada, especially in Vancouver and Toronto. Economists worry that an eventual rise in interest rates or unemployment could precipitate a serious housing correction with potentially disastrous consequences for consumers as well as the broader economy.

The Federal Government would like us to slow down a bit on the borrowing - this is because they know, as we do, that all money will eventually have to be paid back.

COOLING OUR HOT REAL ESTATE MARKETS

The federal government has taken a series of steps to try to cool the market, most recently by putting CMHC, the biggest provider of mortgage default insurance, directly under the control of the Office of the Superintendent of Financial Institutions. Earlier this spring OSFI announced proposals for tough new mortgage rules which are now gradually coming into force. This has put the brakes on credit growth. The most obvious way of doing that is by making the repayment period (amortization) shorter.

Analysts say that OSFI’s efforts have already begun to have the desired effect, with a slight deceleration in consumer loan growth in the first four months of the year. With bank funding costs now slumping again, some worry that it’s only a matter of time before phase two of the mortgage wars gets underway. That would imply lower rates and MORE borrowing, as opposed to less.

With yields where they are, banks can again afford to cut mortgage rates. For now, pressures from the federal government will probably lead them to hold off on more rate cuts — but anything’s possible.

Not just to impress your banker with plain knowledge, you will also gain confidence and greater ease of decision making when you know more about mortgage financing.

MORE reading on mortgage-related topics can be found in the following blog articles:

Illegal mortgage practices: http://www.mennorealty.ca/Blog.php/off-the-rails

Mortgage terminology explained: http://www.mennorealty.ca/Blog.php/big-bank-terms

A mortgage pre-approval or rate hold? http://www.menno.ca/?p=19593

The 80% rule in mortgages: http://www.mennorealty.ca/Blog.php/80-or-81percent

Mortgages of various kinds to pay for that purchase: http://www.menno.ca/?p=19812

Why don`t we try to predict market developments? http://www.menno.ca/?p=19620

Investment, refinance and renewal: http://www.mennorealty.ca/Blog.php/renewal-1