The Other Side of the Balance Sheet

Robert Zanfir, CFP, CIM

For most people, when they touch on the topic of balance sheets with their Advisors, the focus is usually on their assets, and more specifically their financial holdings. What is usually left undiscussed is debt. Even in the context of a rate discussion, there tends to be a focus on assets, and the allocation thereof to fixed income or what central bank policy will do the high P/E portion of the portfolio. It’s entirely reasonable to think in these terms, however, it’s an incomplete discussion.

?We are now over two years into the fight undertaken by central bankers to cool inflation. The rise in rates, and the pace at which they’ve happened, has been historically unprecedented. After some initial tumult in 2022, as markets digested rapid rise in rates, we’ve seen things level off as consumers have been relatively resilient; so much so in the U.S. that inflationary pressures have not abated as much as anticipated and those rate cuts which had been forecasted have not materialized so far in 2024 (and may not until the leaves change colour).

The story in Canada has not been as peachy, and while we saw stickier inflation up here, it has come under control. In both February and March CPI has been below 3%, with accompanying GDP figures also much softer than we saw right at the beginning of the year (0.2% Feb vs. 0.5% Jan). Notwithstanding the spending outlined in the recent budget, the Canadian economy losing steam makes a summer rate cut significantly more likely. That’s where the so-called rubber meets the road insofar as Canadian mortgage holders are concerned.

The main question now is, not so much what is going on with my portfolio, but what do I do with my mortgage? Especially if rate cuts are on the way. It’s an important question, made more so in an era where the cost of homes has skyrocketed, and it has become common to see mortgage amounts exceeding $1M, especially in large markets like Toronto and Vancouver.

For context, here is an illustration of a $1M mortgage with a rate difference 0.50%:

Just because your mortgage is up for renewal doesn't mean you actually have to renew it

In my conversations with clients and non-clients alike, I get some variation of “oh my timing is terrible, as my mortgage is coming due, and rates are still high”. The implication being that you must take whatever is on the table with your lender depending on the term and type of mortgage for which you are looking. In some instances, this has driven people (back) to variable rate mortgages even though they may have been burned as rates went up. It’s not a bad strategy, but given where those terms/rates are currently you would need Tiff Macklem, and his cohorts at the Bank of Canada, to go on an aggressive cutting spree during the early portion of your term. Certainly, it’s possible, but ask yourself what the economic circumstances would need to be for something that drastic to materialize.

The answer may be to kick the proverbial (mortgage) can down the road. In fact, it’s not just mortgages, but the logic can be extended to investment/corporate loans as well. However, this delay tactic isn’t something raised as an option for a myriad of reasons, but primarily because it makes things more difficult (for the lender) and carries some level of risk (for the borrower). That may not be the case here, depending on who you ask.

Don’t be afraid to raise the issue of interest rates and your mortgage with the people managing your RRSPs

The people who have their eye(s) on fixed income markets, and don’t necessarily have a vested interest in what happens to your mortgage, might be best positioned to offer some advice. Obviously, I am referring to us as Advisors and though most of us are loathe to talk about mortgage/credit, we can offer some insight on interest rates and maybe some solutions as well. And here is one some people with upcoming maturities should consider:

At renewal, transfer your mortgage into an open product, which is to say there is no penalty for paying it out. Simultaneously, get a rate guarantee for a mortgage term/rate which would’ve been acceptable otherwise. These rate guarantees can range from 30-130 days. Then wait to see what the BoC and the Canadian bond market does, such that if rates go down you can negotiate a better one for the term you originally wanted, and if they go up you rely on that aforementioned rate guarantee to lock in, at what in this case would be the better rate.

There is more to it obviously, but it’s worth the conversation…...

Regards,

BBIM Team

Disclaimer: This third party publication is not prepared or approved by BMO Nesbitt Burns Inc.("BMO NBI") and therefore does not meet Canadian research disclosure requirements applicable to BMO NBI. The opinions, estimates and projections contained in the publication are those of the author as of the date indicated and are subject to change without notice. BMO NBI makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors or omissions which may be contained therein and accepts no liability whatsoever for any loss arising from any use of or reliance on the report or its contents. The provision of this publication is not to be construed as an offer to sell or a solicitation for or an offer to buy any securities. BMO NBI or its affiliates may buy from or sell to customers the securities of issuers mentioned in this publication on a principal basis. BMO NBI, its affiliates and/or their respective officers, directors or employees may from time to time acquire, hold or sell securities of issuers mentioned in the publication, related securities, or options, futures or other derivative instruments based thereon. BMO NBI may act as financial advisor and/or underwriter for certain of the issuers mentioned therein and may receive remuneration for same. BMO NBI is a wholly owned subsidiary of Bank of Montreal. Bank of Montreal or its affiliates may have lending arrangements with, or provide other remunerated services to, the issuers mentioned herein. The reader should assume that BMO NBI or its affiliates may have a conflict of interest and should not rely solely on this publication in evaluating whether or not to buy or sell securities of issuers discussed herein.