4 March 1994

Look out, long term mortgage rates are on the rise.

We have been expecting those rates to climb. They do every year after RRSP season. The influx of huge amounts of RRSP dollars is generated by Canadians who try to defer taxes. The only way of attracting investments in these RRSP pools is to advertise higher and higher rates return on investment. This money must be lent out in order to bring a return on investment to the RRSP. In other words, all the money that has been taken in by various RRSP providers must be lent out to other Canadians so the RRSP can make a profit. We all know that the profit earned within the RRSP is not taxable until you take it out of the RRSP. Canadians feel that this is a good investment.

Traditionally, a large percentage of these funds get invested in long term certificates with the lending institution that administers your RRSP. These certificates in turn are used to finance mortgages for Consumers. The rates go up at the end of February, because the administrators of these funds have offered higher and higher returns to attract the Consumers' investment dollar.

Once these funds have been depleted (lent out on mortgages), the rates normally go down. The reason they decline is tied in with the source of new money. Now that RRSP season is over, investment rates normally go down. The cycle starts all over again. This year may be different.

The big investment push this year was mutual funds. Very few RRSP dollars found their way to mortgage pools. As a result, mortgage rates may continue to escalate because of a shortage in the supply. Mortgage lenders may have to go back out to the Consumer to attract more money specifically targeted for mortgage pools. We all know that the only way of attracting money in investments is to offer higher and higher yields. The higher the return on investment, the higher the rate on mortgages.

The short term rates have not moved which may give you a false sense of security. If you have budgets to worry about, if cash flow is a concern, I would seriously consider locking in now to protect against long term mortgage rate hikes. Next week we will look at how to lock in to best suit your needs.