Nutella pizza, anyone?
In the Castagna family, we’ve been having pizza parties in the backyard for years.
My parents have had a wood burning pizza oven at their house for over a decade.
Long before it became fashionable to have a pizza oven at home.
Pizza ovens have come a long way over the years. And way more convenient.
My brother just picked up a small, propane PC brand pizza oven at Zehrs. And he absolutely loves it!
Me, I do everything the hard way… and went the complete opposite direction.
I built an old school brick, wood burning oven in my backyard.
It’s taken me some time to figure out my new pizza oven, but this past weekend was huge milestone.
We perfected the Nutella Pizza!
For years, this has been an ongoing joke in our family. We could never get the Nutella Pizza right.
To do it right, the dough needs to expand into almost a ball like shape, so that you can cut it horizontally into two halves.
Much harder to do, than it sounds! At least for us, anyways.
This past weekend, I think we figured it out.
Unfortunately for my dad (that’s him in the picture), it happened while using my pizza oven.
So now the ongoing joke is that my pizza oven is better than his. 😊
Okay, on to more important items…
In the spirit of yesterday’s Bank of Canada announcement, let’s chat about interest rates.
Yesterday, the Bank of Canada announced a rate cut of 25 bps.
This reduction should be adopted by the all the Big 5 commercial banks by end of the week. This will bring Bank Prime rate to 6.70%.
This will provide some relief to variable rate mortgage borrowers and lines of credit.
This likely won’t have much near-term impact on fixed rates.
And the vast majority of mortgage borrowers, opt for fixed rate products.
As discussed in a past newsletter, fixed rates are determined by the bond market.
And prior to the Bank of Canada’s announcement, the bond market was pricing in a 92% chance of a rate cut.
So basically, fixed rates already reflected the rate cut, before the rate cut was announced.
On that basis, aside from perhaps a positive shift in consumer sentiment, I don’t see yesterday’s rate cut having any meaningful impact on real estate and mortgages.
Will rate cuts continue?
YES.
Per capita GDP is not great, unemployment is up, and inflation seems to be trending downwards.
If I’m a betting man… these three trends will continue.
So yes, there likely will be further rate cuts.
Maybe even another two 25bps cuts before the end of this year.
So, with that in mind, is now the time for borrowers to go variable?
NO!
Variable rate mortgages right now cost more than fixed rate mortgages.
The concept behind variable versus fixed, is that with a variable, the borrower is taking on the interest rate risk. In contrast, with a fixed, in theory, the bank is taking on the interest rate risk.
So, if you’re choosing a variable rate mortgage and taking on interest rate risk, then it should be priced cheaper than a fixed rate mortgage.
If it’s not, then it is simply mis-priced.
And right now, variable rate mortgages are significantly mis-priced.
A 3-year fixed is under 5%, while a 5-year variable is around 6%.
To me, it makes no sense to choose the variable.
If you’re the one taking on the risk, then you should be getting a discount to do so.
And right now, you’re not getting a discount. You’re paying a premium!
Instead, I say you opt for a 1-, 2- or 3-year fixed term.
But everyone; s situation is different, so best to reach out and discuss what’s best for YOU.
In conclusion, yesterday’s rate cut is very much welcomed in the mortgage and real estate circles, and I don’t want to downplay its significance, but in reality, there’s still a long way to go before rate cuts have any meaningful impact on these industries.
Until next time,
Vince
P.S. To put yesterday’s rate cut in into perspective, during the most recent rate HIKE cycle, the Bank of Canada increased rates by 4.75%. That equates to nineteen, 25 bps rate moves.
P.P.S. Happy to share my Nutella pizza secret with you. Feel free to reach out.
