The Slowing of the US Economy and Canadian Mortgage Rates.
Our big neighbour to the south is having tough economic times, which are predicted to worsen as time goes by. In this article we’ll try to analyze the upcoming US recession, its impact on Canadian Mortgage Rates and what is the best thing to do as a borrower.
Importnant: How to Measure US Slowdown to Your Advantage.
As an informed borrower it is best to base your decisions on best avalaible information. Before we get into mortgage rates, it is very importnant to know how to measure US economy, since it’s going to be a primary factor in your decision making.
Gold is measured by many as the safest investment in the world. Gold has been around for centuries and it’s value always stays current no matter the stocks and economy.
Dollar value is affected by many factors, gold is constant.
Imagine a light poll and a feather. In that case light poll is gold and feather is the dollar. If it rains - light poll will stand there unaffected while our feather will go down to the ground. If the wind blows - the light poll will stand, while the feather will fly to explore the world.
This is the primary feature of gold – no matter the economics it stays constant. It’s value never changes. What changes is the value of dollar. When economists say “gold went up” what they’re really saying is “dollar went down”, because one dollar can buy less gold, since gold value never changes.
So gold is your good friend to measure performance of the no so mighty US dollar and US economy. When the gold price goes up – US dollar and economy goes down. When the gold price goes down – dollar is experiencing growth and economy is getting better.
Right now we’re seeing a constant slow down in the economy.
Graph represents 5 year history of gold prices:
As you can see, in 5 years (2003, invasion of Iraq) gold price went from $350 to $900+, which means that dollar experienced tremendous inflation.
This pattern continues to this day as dollar keeps falling into its lowest.
One thing that banks do in order to substitute for the decline is they cut interest rates. The formula is this. When the value of dollar goes down, central banks make less money, since they’re actually getting less as opposed to what they lended.
In order to recover they would logically rise interest rates, however rising the rates would be even harder for the economy. In turn, central banks are forced to experience losses and actually cut the rates, in order to stimulate economy and encourage more credit. Credit is a closed loop. In order to pay off existing credit, more credit must be borrowed. If this is descouraged by economic harship, banks are forced to cut rates and experience losses.
This is what we saw with recent interest cuts from the Federal Reserve(US central bank) and Bank of Canada.
They lowered interest rates, while Federal Reserve cut the rates to record in 20 years. What this means to you – US economy is having deep trouble and central banks are forced to cut rates, in order to stimulate more borrowing. This is a temporary patch however. Cutting the rates helped dollar for about a month, as it continues the downward slope even further.
“If we made the wrong diagnosis, we should change the treatment…” – Ron Paul
In order to really stimulate US economy, it must cut spending, as Iraq and other wars are costing US unrepayable debt. The interest rate cuts will not help in the long run, but they’re a must, since banks must encourage credit borrowing.
What Does US Decline Mean to You as a Borrower?
This where you can gain. As the US slumps into ressesion, Canada will be the first one to feel it. Whether you like it or not, Canada is completely dependant on US, both economically and strategically. As the saying goes:
“When US sneezes – everyone gets a cold.”
As the US goes down even further, Canada will be affected as well. What this means is that banks will be cutting interest rates. There will be no other choice but to follow that pattern. credit business is a closed loop – new credit must be constantly created at bigger proportions, otherwise the economy slumps.
For you as a borrower this is a great chance of getting an adjustable rate mortgage.
Do not say: “I know the deal” – I don’t like it.
Look at the outlook from bigger perspective. As the US economy enters into recession, Canada will inevitably feel the impact. In order to prevent it at home or at least slow it down, banks will be forced to cut rates, cut rates and cut some more.
This where adjustable mortgage will play a good deal for you. The rates go down - you pay less.
So getting an adjustable(variable) rate mortgage will save you on payments. But don’t just get a variable rate mortgage, get a variable that can be switched to fixed rate later on.
Number of lenders offer this mortgage. It stays adjustable for a period of time then switches to a fixed rate. As a borrower, you benefit from a nice price break on interest rates cuts as the economy slump. When it hits rock bottom before going up – you lock in to the lowest rates with a fixed rate mortgage.
You win both ways.
Again, getting an ARM is somewhat considered risky, however looking at current markets this is the smartest thing to do. Get Adjustable with an option to switch into fixed rate. Price may be bit more expensive or you might pay royalty for the priviledge - it will pay off in the long run.
Where To Follow US Economy
You can follow US economy by simply looking at gold prices. If the price is going up – economy is going down and vice versa.
Here is a great site that is updated hourly(price per ounce):
Gold Price
Also follow the news closely. A disclaimer can be said however, it is to not wise to base decisions on one newspaper, as most mainstream publications like Toronto Star, The Sun and others, are quite bias and are very censored in terms what writeters can say. Also, channels like City-TV, CBC and others are also very restricted.
The best bet is to follow smaller publications. Google offers a news aggregator service called Google News.
It gathers news from big as well as smaller publications, more analytical in terms of their reporting.
Google News
We wish you luck.
If you need any assistance, give us a ring. We’ll be happy to help you with any questions you might have.
514 – 397 – 68 32
