Nov 26 Analysis of Rate Increases by Dr. Sherry Cooper – Dominion Staff Economist

Our Staff Economist, Dr. Sherry Cooper, has this to say about the Details of the latest Rate Increase.

The Bank of Canada Slowed the Pace of Monetary Tightening

 

The Governing Council of the Bank of Canada raised its target for the overnight policy rate by 50 basis points today to 3.75% and signalled that the policy rate would rise further. The Bank is also continuing its policy of quantitative tightening (QT), reducing its holdings of Government of Canada bonds, which puts additional upward pressure on longer-term interest rates.

Most market analysts had expected a 75 bps hike in response to the disappointing inflation data for September. Headline inflation has slowed from 8.1% to 6.9% over the past three months, primarily due to the fall in gasoline prices. However, the Bank said that “price pressures remain broadly based, with two-thirds of CPI components increasing more than 5% over the past year. The Bank’s preferred measures of core inflation are not yet showing meaningful evidence that underlying price pressures are easing. Near-term inflation expectations remain high, increasing the risk that elevated inflation becomes entrenched.”

In his press conference, Governor Tiff Macklem said that the Bank chose to reduce today’s rate hike from 75 bps last month (and 100 bps in July) to today’s 50 bps because “there is evidence that the economy is slowing.” When asked if this is a pivot from very big rate increases, Macklem said that further rate increases are coming, but how large they will be is data-dependent. Global factors will also influence future Bank of Canada actions.

“The Bank expects CPI inflation to ease as higher interest rates help rebalance demand and supply, price pressures from global supply disruptions fade, and the past effects of higher commodity prices dissipate. CPI inflation is projected to move down to about 3% by the end of 2023 and then return to the 2% target by the end of 2024.”

The press release concluded with the following statement: “Given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the Governing Council expects that the policy interest rate will need to rise further. Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding. Quantitative tightening is complementing increases in the policy rate. We are resolute in our commitment to restore price stability for Canadians and will continue to take action as required to achieve the 2% inflation target.”

Reading the tea leaves here, the fact that the Bank of Canada referred to ‘increases’ in interest rates in the plural suggests it will not be just one more hike and done.

 

 

Monetary Policy Report (MPR)

The Bank of Canada released its latest global and Canadian economies forecast in their October MPR. They have reduced their outlook across the board. Concerning the Canadian outlook, GDP growth in 2022 has been revised down by about ¼ of a percentage point to around 3¼%. It has been reduced by close to 1 percentage point in 2023 and almost ½ of a percentage point in 2024, to about 1% and 2%, respectively. These revisions leave the level of real GDP about 1½% lower by the end of 2024.

Consumer price index (CPI) inflation in 2022 and 2023 is anticipated to be lower than previously projected. The outlook for CPI inflation has been revised down by ¼ of a percentage point to just under 7% in 2022 and by ½ of a percentage point to about 4% in 2023. The outlook for inflation in 2024 is largely unchanged. The downward revisions are mainly due to lower gasoline prices and weaker demand. Easing global cost pressures, including lower-than-expected shipping costs, also contribute to reducing inflation in 2023. The weaker Canadian dollar partially offsets these cost pressures.

The Bank is expecting lower household spending growth. Consumer spending is expected to contract modestly in Q4 of this year and through the first half of next year. Higher interest rates weigh on household spending, with housing and big-ticket items most affected (Chart below). Decreasing house prices, financial wealth and consumer confidence also restrain household spending. Borrowing costs have risen sharply. The costs for those taking on a new mortgage are up markedly. Households renewing an existing mortgage are facing a larger increase than has been experienced during any tightening cycle over the past 30 years. For example, a homeowner who signed a five-year fixed-rate mortgage in October 2017 would now be faced with a mortgage rate of 1½ to 2 percentage points higher at renewal.

 

 

Housing activity is the most interest-sensitive component of household spending. It provides the economy’s most important transmission mechanism of monetary tightening (or easing). The rise in mortgage rates contributed to a sharp pullback in resales beginning in March. Resales have declined and are now below pre-pandemic levels (Chart below). Renovation activity has also weakened. The contraction in residential investment that began in the year’s second quarter is projected to continue through the first half of 2023, although to a lesser degree. House prices rose by just over 50% between February 2020 and February 2022 and have declined by just under 10%. They are projected by the Bank of Canada to continue to decline, particularly in those markets that saw larger increases during the pandemic.

Higher borrowing costs are affecting spending on big-ticket items. Spending on automobiles, furniture and appliances is the most sensitive to interest rates and is already showing signs of slowing. As higher interest rates work their way through the economy, disposable income growth and the demand for services will also slow. Past experience suggests that the demand for travel, hotels, restaurant meals and communications services will be impacted the most. Household spending strengthens beginning in the second half of 2023 and extends through 2024. Population growth and rising disposable incomes support demand as the impact of the tightening in financial conditions wanes. For example, new residential construction is boosted by strong immigration in markets that are already particularly tight.

Governor Macklem and his officials raised the prospect of a technical recession. “A couple of quarters with growth slightly below zero is just as likely as a couple of quarters with small positive growth” in the first half of next year, the bank said in the MPR.

 

 

Bottom Line

The Bank of Canada’s surprising decision today to hike interest rates by 50 bps, 25 bps less than expected, reflected the Bank’s significant downgrade to the economic outlook. Weaker growth is expected to dampen inflation pressures sufficiently to warrant today’s smaller move.

A 50 bps rate hike is still an aggressive move, and the implications are considerable for the housing market. The prime rate will now quickly rise to 5.95%, increasing the variable mortgage interest rate another 50 bps, which will likely take the qualifying rate to roughly 7.5%.

Fixed mortgage rates, tied to the 5-year government of Canada bond yield, will be less affected. The 5-year bond yield declined sharply today–down nearly 25 bps to 3.42%–with the smaller-than-expected rate hike.

Barring substantial further weakening in the economy or a big move in inflation, I expect the Bank of Canada to raise rates again in December by 25 bps and then again once or twice in 2023. The terminal overnight target rate will likely be 4.5%, and the Bank will hold firm for the rest of the year. Of course, this is data-dependent, and the level of uncertainty is elevated. 

Canadian Prime Rate is now 5.95% – Mortgage Rate Analysis to End of 2022

Bank of Canada increased benchmark interest rate to 3.75%

Today, the Bank of Canada increased its overnight benchmark interest rate 50 basis point to 3.75% from 3.25% in September. This is the sixth time this year that the Bank has tightened money supply to quell inflation, so far with limited results.

Some economists had assumed the increase this time around would be higher, but the BoC decided differently based on its expert economic analysis. We summarize the Bank’s observations below, including its all-important outlook:

Inflation at home and abroad

  • Inflation around the world remains high and broadly based reflecting the strength of the global recovery from the pandemic, a series of global supply disruptions, and elevated commodity prices
  • Energy prices particularly have inflated due to Russia’s attack on Ukraine
  • The strength of the US dollar is adding to inflationary pressures in many countries
  • In Canada, two-thirds of Consumer Price Index (CPI) components increased more than 5% over the past year
  • Near-term inflation expectations remain high, increasing the risk that elevated inflation becomes entrenched

Economic performance at home and abroad

  • Tighter monetary policies aimed at controlling inflation are weighing on economic activity around the world
  • In Canada, the economy continues to operate in excess demand and labour markets remain tight while Canadian demand for goods and services is “still running ahead of the economy’s ability to supply them,” putting upward pressure on domestic inflation
  • Canadian businesses continue to report widespread labour shortages and, with the full reopening of the economy, strong demand has led to a sharp rise in the price of services
  • Domestic economic growth is “expected to stall” through the end of this year and the first half of next year as the effects of higher interest rates spread through the economy
  • The Bank projects GDP growth will slow from 3.25% this year to just under 1% next year and 2% in 2024
  • In the United States, labour markets remain “very tight” even as restrictive financial conditions are slowing economic activity
  • The Bank projects no growth in the US economy “through most of next year”
  • In the euro area, the economy is forecast to contract in the quarters ahead, largely due to acute energy shortages
  • China’s economy appears to have picked up after the recent round of pandemic lockdowns, “although ongoing challenges related to its property market will continue to weigh on growth”
  • The Bank projects global economic growth will slow from 3% in 2022 to about 1.5% in 2023, and then pick back up to roughly 2.5% in 2024 – a slower pace than was projected in the Bank’s July Monetary Policy Report

Canadian housing market

  • The effects of recent policy rate increases by the Bank are becoming evident in interest-sensitive areas of the economy including housing
  • Housing activity has “retreated sharply,” and spending by households and businesses is softening

Outlook

The Bank noted that its “preferred measures of core inflation” are not yet showing “meaningful evidence that underlying price pressures are easing.” It did however offer the observation that CPI inflation is projected to move down to about 3% by the end of 2023, and then return to its 2% target by the end of 2024. This presumably would be achieved as “higher interest rates help re-balance demand and supply, price pressures from global supply chain disruptions fade and the past effects of higher commodity prices dissipate.”

As a consequence of elevated inflation and current inflation expectations, as well as ongoing demand pressures in the economy, the Bank’s Governing Council said to expect that “the policy interest rate will need to rise further.”

The level of such future rate increases will be influenced by the Bank’s assessments of “how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding.”

In case there was any doubt, the Bank also reiterated its “resolute commitment” to restore price stability for Canadians and said it will continue to take action as required to achieve its 2% inflation target.

NEXT RATE INCREASE

December 7, 2022 is the BoC’s next scheduled policy interest rate announcement. We will follow the Bank’s commentary and outlook closely and provide an executive summary here the same day.

 

Trigger Point for Canadian Variable Rate Mortgages Explained, with Example

You have likely heard – or will soon be hearing – a lot of talk about “trigger rates” and “trigger points”. More importantly, you are probably hearing “trigger point” together along with more changes in the Bank of Canada rate and you need expert guidance.

Let’s start with a few definitions:

  • Variable Rate Mortgage (VRM) – prime changes, rate changes. When interest rates change, typically, your mortgage payment will stay the same.
  • Adjustable Rate Mortgage (ARM) – prime changes, rate changes. Unlike variable rate, your mortgage payment will change when interest rates change.
  • Trigger Rate – When interest rates increase to the point that regular principal and interest payments no longer cover the interest charged, interest is deferred, and the principal balance (total cost) can increase until it hits the trigger point.
  • Trigger Point – When the outstanding principal amount (including any deferred interest) exceeds the original principal amount. The lender will notify the customer and inform them of how much the principal amount exceeds the excess amount (Trigger Point). The client then typically has 30 days to make a lumpsum payment; increase the amount of the principal and interest payment; or convert to a fixed rate term.

NOW, WHICH MORTGAGES WILL BE AFFECTED FIRST?
Quick answer, VRMs from March 2020 to March 2022.

During the month of March 2020, the prime rate dropped three times in quick succession from 3.95% to 2.45%, and variable-rate mortgages arranged while prime was 2.45% have the lowest payments. The lower the interest rate was, the lower the trigger rate, and the faster your client may hit this negative amortization.

WHAT TO DO
When this happens, customers are contacted by the lender and generally have three ways they can proceed:

  • Make a lump-sum payment against the loan amount
  • Convert with a new loan at a fixed-rate term
  • Increase their monthly payment amount to pay off their outstanding principal balance within their remaining original amortization period

Below is a customer scenario so you can see how this could play out.

WHY ARE DEBT SERVICING RATIOS IMPORTANT WHEN APPLYING FOR A MORTGAGE?

HOW ARE DEBT SERVICING RATIOS CALCULATED?

There are two ratios you need to worry about—gross debt servicing (GDS) and total debt servicing (TDS)

Gross debt servicing (GDS)

This is the maximum amount you can afford for shelter costs each month. It’s your monthly housing costs divided by your monthly income.

Total debt servicing (TDS)

This is the maximum amount you can afford for debt payments each month. It’s your monthly debt and housing costs divided by your monthly income.

If too much of your income is already going to housing costs and debt payments, according to your lender, you may not be able to afford to take on more debt.

WHAT DOES DEBT SERVICE RATIO MEAN AND WHY IS IT IMPORTANT?

Lenders use ratios to assess risk and understand if you will be able to make your payments on a mortgage. Generally, lenders like to see a GDS ratio around 32% and a TDS ratio that is no greater than 40%. If the ratios are higher, that does not mean you won’t qualify for a mortgage, but you may end up paying a higher interest rate.

In general, the better your debt servicing ratios and credit score, the lower your interest rate will be. This is because lenders view you as more reliable and it shows that you manage your money well and make your payments on time. Even if you need to refinance now, at a slightly higher rate, you can look at getting into a lower rate in a couple of years, when you mortgage term is up for renewal.

Your debt servicing ratio also lets you know how well you’re managing your budget. If your TDS ratio is over 44%, you are spending too much of your income on debt already and you may be unable to borrow without a co-signer. A co-signer’s credit history and income is factored in with yours. This gives the lender some reassurance that the payments will be made because the co-signer is as responsible for the mortgage as you are.

CALCULATING YOUR PERSONAL DEBT SERVICING RATIOS

Start by adding up your monthly debt payments. Include those fixed costs that you must pay every month:

Housing costs Debt costs 
●     Rent or mortgage payments
●     Property taxes
●     Heat
●     50% of condo fees

●     Loan payments, such as car, student, or personal loans
●     Credit cards (3% of the outstanding balance)
●     Outstanding bill payments not on a credit card (dental, medical, repairs)
●     Interest charges for line of credit payments
●     Spousal or child support payments

Next add up your monthly income:

  • Pay cheque (before taxes)
  • Retirement or pension payments
  • Benefits payments
  • Spousal or child support
  • Rental income
  • Any other monthly income

Formulas:

Gross debt servicing ratio

Total debt servicing ratio

Housing Cost

————————     x 100

Total income

Housing Costs + Debt Costs

————————————-     x 100

Total income

Examples:

Your income (before taxes) is $6,500 per month. You have a monthly mortgage payment of $1,400, property taxes of $ $300, and $ $100 for heat. Your GDS ratio is calculated as $1,800/$6,500 x 100 = 27.69%

Your income (before taxes) is $6,500 per month. You spend $300 for your car payment. You have $2,500 in credit card debt, and 3% of the outstanding balance is $75 for a total of $375 per month. Your TDS ratio is calculated as $2,175÷ $6,500 x 100 = 33.46%.

To learn more about specific mortgage approval ratios, check out this handy article.

Note: If you have a two-income household, include the debt payments and income for both of you. This is important because you have more income between you, and you share the cost for some of the debt.

TIPS FOR LOWERING YOUR DEBT SERVICING RATIOS

There are two basic ways to improve your debt servicing ratios—increase your income or reduce your debt.

Increasing your income is not always possible, although it could include a raise at work, finding a new job with better pay, or taking a second job. If you do find yourself with a little extra cash—maybe you received a year-end bonus—consider using it to pay down your debt.

Paying down your debt and not adding to it is the best way to improve your debt servicing ratio. Here are a few ideas to get you started:

  • Avoid making new purchases, especially if you need to use your credit card to make the purchase.
  • Create a budget and see where you can cut expenses. Apply those savings to your debt.
  • Call your credit card company and try renegotiating a lower interest rate. With a lower rate, more of your payment will be applied to what you owe
  • If you have money sitting in an account that is not earning much interest, consider applying it toward your debt, which tends to have a higher interest rate.
  • Explore options to refinance equity from your home to pay off debt (work with your mortgage broker to form a plan).

DEBT SERVICING RATIOS AND YOUR CREDIT SCORE

Your debt servicing ratios do not directly affect your credit score but carrying a large amount of debt can negatively affect both. And lenders will look at both when assessing your mortgage application. The good news is that reducing your debt improves your credit score as well as your debt servicing ratios. Work with your mortgage broker to create a plan on how you will reduce your debt and improve your ratios. This informative credit video may be useful, straight from a seasoned underwriter.

Your debt servicing ratios give lenders information about your ability to repay the money you borrowed while your credit score provides information about the way you manage credit. Do you make payments on time? Do you have a history of borrowing and repaying money?

Now that you know how a lender is going to assess your mortgage application, you can take the necessary steps to lower your debt servicing ratios and get that mortgage approved!

Mortgage Mark Herman, Top Calgary Alberta mortgage broker

Canadian Economic Data Points Affecting Mortgages

Below are the Bank of Canada’s updated comments on the state of the economy, the Bank and singled out the unprovoked invasion of Ukraine by Russia as a “major new source of uncertainty” that will add to inflation “around the world,” and have negative impacts on confidence that could weigh on global growth.

These are the other highlights.

Canadian economy and the housing market

  • Economic growth in Canada was very strong in the fourth quarter of 2021 at 6.7%, which is stronger than the Bank’s previous projection and confirms its view that economic slack has been absorbed
  • Both exports and imports have picked up, consistent with solid global demand
  • In January 2022, the recovery in Canada’s labour market suffered a setback due to the Omicron variant, with temporary layoffs in service sectors and elevated employee absenteeism, however, the rebound from Omicron now appears to be “well in train”
  • Household spending is proving resilient and should strengthen further with the lifting of public health restrictions
  • Housing market activity is “more elevated,” adding further pressure to house prices
  • First-quarter 2022 growth is “now looking more solid” than previously projected

Canadian inflation and the impact of the invasion of Ukraine

  • CPI inflation is currently at 5.1%, as the BoC expected in January, and remains well above the Bank’s target range
  • Price increases have become “more pervasive,” and measures of core inflation have all risen
  • Poor harvests and higher transportation costs have pushed up food prices
  • The invasion of Ukraine is putting further upward pressure on prices for both energy and food-related commodities
  • Inflation is now expected to be higher in the near term than projected in January
  • Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards
  • The Bank will use its monetary policy tools to return inflation to the 2% target and “keep inflation expectations well-anchored”

Global economy

  • Global economic data has come in broadly in line with projections in the Bank’s January Monetary Policy Report
  • Economies are emerging from the impact of the Omicron variant of COVID-19 more quickly than expected, although the virus continues to circulate and the possibility of new variants remains a concern
  • Demand is robust, particularly in the United States
  • Global supply bottlenecks remain challenging, “although there are indications that some constraints have eased”

Looking ahead

As the economy continues to expand and inflation pressures remain elevated, the Bank’s Governing Council made a clear point of telling Canadians to expect interest rates to rise further.

More on Food Security – Interesting data points on the War in Ukraine

Prices for food commodities like grains and vegetable oils reached their highest levels ever last month largely because of Russia’s war in Ukraine and the “massive supply disruptions” it is causing, threatening millions of people in Africa, the Middle East elsewhere with hunger and malnourishment, the United Nations said Friday.

The UN Food and Agriculture Organization said its Food Price Index, which tracks monthly changes in international prices for a basket of commodities, averaged 159.3 points last month, up 12.6% from February. As it is, the February index was the highest level since its inception in 1990.

FAO said the war in Ukraine was largely responsible for the 17.1% rise in the price of grains, including wheat and others like oats, barley and corn. Together, Russia and Ukraine account for around 30% and 20% of global wheat and corn exports, respectively.

While predictable given February’s steep rise, “this is really remarkable,” said Josef Schmidhuber, deputy director of FAO’s markets and trade division. “Clearly, these very high prices for food require urgent action.”

The biggest price increases were for vegetable oils: that price index rose 23.2%, driven by higher quotations for sunflower seed oil that is used for cooking. Ukraine is the world’s leading exporter of sunflower oil, and Russia is No. 2.

List of Data Needed for Lo/No Condition Offers

Documents needed for Low/ No Condition Offers are below.

For Employees:

Employment Data

  • Employment letter ** – order from payroll or HR
  • 2 x recent pay slips

Tax Data

  • Last 2 years of your NOAs – Notice of Assessments – you get them back after you pay your federal income taxes
  • Last 2 years T4’s – to verify continued employment in your industry

Confirmation of down payment

90 days of detailed account history is needed – by way of:

  • 3 months of on-line bank statements (print-out to PDF and email is perfect) showing funds on deposit AND / OR
  • For RRSP/ TFSA funds: 3 x monthly account statements OR at least 2 statements, 3 months apart OR a year-end summary and recent statement.
  • If your name is not on the statements please print the “welcome page” that should show your name AND last few digits of the account numbers so they can be cross referenced.

** Employment letterA letter of employment is needed that includes the following:

  • Addressed to: Whom It May Concern:
  • Position,
  • Length of time with employer,
  • Status: either Fulltime or Part-time; “with XX hours per month guaranteed,”
  • Salary: Annual base salary, hourly pay,
  • Any applicable bonuses,
  • Contact information for the author of the employment letter – many lenders will call to verify information,
  • Letter to be on company letterhead,
  • Letter to be signed by writer.

For SELF-EMPLOYED

Tax Data

  • Last 2 years of your NOAs – Notice of Assessments – you get them back after you pay your PERSONAL income taxes
  • Last 2 years T4’s – if you T4 yourself, if you don’t T4 yourself you will not have these.

Your accountant may have these and can usually forward them to us in PDF if you ask them too:

  • Last 2 years of T1 Generals – a copy of the actual PERSONAL tax return that was sent to RevCan
  • Specifically with the “schedule of business of activities”

If you are incorporated, also add:

  • Articles of Incorporation
  • Last 2 years of financials – balance sheet, cash flow, income statment, with Notes to Readers.

Confirmation of down payment – by way of:

  • 3 months of on-line bank statements (print-out to PDF and email is perfect) showing funds on deposit AND / OR
  • For RRSP/ TFSA funds, at least 2 statements, 3 months apart showing funds on deposit in your name on the print outs.
  • If your name is not on the statements please print the “welcome page” that should show your name AND last few digits of the account numbers so they can be cross referenced.
  • All the funds in both your personal and business bank accounts count as your own funds – for mortgage math – so you don’t have to move money between accounts when we are qualifying you. We can discuss this in more detail.

 

 

What Are the Risks Of Unconditional Offers When Buying A Home?

The process of buying a home and completing a real estate transaction typically centers on the offer. After finding the home you want to buy, you’ll need to submit an offer, which the seller will review before signing off on it. 

But in addition to the typical clauses that are included in an offer, buyers have the option to insert “conditions” to the offer. Without these conditions, the offer will be deemed “unconditional,” and in this case, the contract will be legally binding for both parties. 

There are some inherent risks with unconditional offers that buyers should be aware of. Let’s review what unconditional offers are, and how they may leave you vulnerable in some cases. 


SUMMARY:

  • We recommend “no condition offers” if you have the cash to buy as “Plan B.”
  • We do recommend the Financing Conditions to be at least:
    • “subject to lender approval of appraisal value and lender approval of property standards” and
    • if less than 20% down, subject to CMHC/default insurer acceptance.

Why?

      • Any of these could stop a mortgage at a specific lender: preserved wood foundations, near a busy commercial location, too near flood zone or flood fringe for the lender, aluminum wiring, Poly B plumbing, condo docs not accepted -if condo.

Common House Offer Conditions

There are dozens of examples of conditions that buyers can insert into their offers, but many are not often used. That said, there are certain conditions that are very commonly added to offers, including the following:

Financing Condition

Most home purchases require some form of financing to help buyers come up with the money to buy a home. But getting a mortgage requires an application and approval process. Before buyers seal the deal on a contract, they should ensure that they are able to secure a mortgage to finance the purchase. 

Financing conditions are among the more common ones inserted into offers and give buyers and their mortgage lenders some time to work through the mortgage process. If they cannot get approved for financing, the buyer will be able to back out of the deal. 

Home Inspection Condition

A home inspection is another common condition, which provides the buyer with a certain amount of time to have the subject property inspected by a professional home inspector. If there are any major issues that are discovered, the buyer can address them with the seller. Otherwise, the buyer can back out of the deal if they find the home inspection report unsatisfactory.

Condo Doc Review of Condo Corp. Financial Statements

In the case of a condo purchase, a review of the condo corporation’s Status Certificate is very important. The Status Certificate will detail the financial and legal health of the condo corporation. 

The buyer’s lawyer will review the Status Certificate and look for any potential red flags. And if there are any, the buyer will have the opportunity to kill the deal before the condition expires if they so choose.

Sale Of Another Property

In some cases, buyers may want to make the purchase of a home conditional upon the sale of their own current home. This is more commonly seen in buyer’s markets where there is a lot of supply and not as much demand. In this case, it may take buyers a little longer to sell their homes. 

Buyers who insert these conditions in their offers want to make sure that they are able to find a buyer of their own and not get stuck with two homes and two mortgages. 

That said, many sellers don’t like to see these types of conditions, as it can put them at risk of the deal falling through. The time spent waiting for this condition to be filled could have been spent entertaining other potential offers that many have otherwise come through.

What Is An Unconditional Offer?

An unconditional offer is one that does not come with any conditions. There are no additional checks to be made aside from the clauses that already come with a purchase of sale agreement. Once the contract is signed off by both parties — and before the expiry date — the deal is firm and neither the buyer nor the seller can back out. 

Benefits Of An Unconditional Offer

While it’s generally advised that buyers insert conditions such as a home inspection, financing, or Status Certificate review, in some cases it may be a good idea to make a “clean” offer, or one that is void of conditions. For instance, in the case of a bidding war where there are multiple buyers bidding for the same house at the same time, all buyers will want to go in with their best foot forward. 

This might mean putting in an unconditional offer. These offers are more attractive to sellers because there is no waiting game that needs to take place to fulfill conditions. In some cases, sellers may even favour an unconditional offer with a slightly lower offer price than an offer with a higher offer price that has a couple of conditions that would need to be dealt with.

Risks Of Unconditional Offers

As you might imagine, there are some risks that come with unconditional offers. You’ll be left unprotected if you sign off on the contract with no opportunity to ensure all your bases are covered. 

Here are a few of the risks associated with a condition-free offer:

Your Bank May Not Approve Financing

If you are unable to secure financing, you’ll be stuck with a massive financial obligation to pay for a home you do not have the money for. If you do not insert a financing condition, you won’t have the chance to make certain that you can get approved for a mortgage needed to finance the purchase. 

You’ll Have to Cover Any Shortfalls in Down Payment

In the case of a bidding war, you may offer a price that’s higher than the market value of the subject property. When the property is appraised, the mortgage lender will discover that the home is not worth as much as you agreed to pay for it. As such, the lender may not approve the initial loan amount you requested. 

In this case, you’ll need to bump up your down payment amount in order to make up for the difference. If your offer was not subject to a financing condition and you are not able to cover the shortfall in the extra down payment, you could risk losing your deposit and even be sued for damages. 

You Could Get Stuck With A Faulty Home

If you neglect to give yourself some time to scope out the property with a professional by your side, you could inadvertently buy a “money pit” that will require a ton of money to repair. 

During your initial visit to the home before you put in an offer, you may not have noticed any issues. A home inspection will give you a few hours with a home inspector to check out if there are any major problems with the home before you commit to buying it. If any are discovered, you’ll have the chance to either renegotiate a lower price with the seller, ask the seller to make the repairs, request a credit so you can make the repairs yourself, or back out of the deal altogether. But without a home inspection condition, you’ll be stuck with the house regardless. 

You Could Get Stuck With A Condo That’s In Disarray

Some condo corporations may have legal issues and be in the midst of lawsuits, have reserve funds that are not enough to cover the cost of major repairs that can arise in the near future, or be poorly run. You don’t want to get stuck with a condo corporation that is mismanaged, but this is exactly what can happen if you don’t insert a Status Certificate review condition.

Mortgage Rates Up Due to Inflation

Prices are Rising Everywhere– This Transitory Could Last A Long Time
Today’s release of the September Consumer Price Index (CPI) for Canada showed year-over-year (y/y) inflation rising from 4.1% in August to 4.4%, its highest level since February 2003. Excluding gasoline, the CPI rose 3.5% y/y last month.

The monthly CPI rose 0.2% in September, at the same pace as in the prior month. Month-over-month CPI growth has been positive for nine consecutive months.

Today’s inflation is a global phenomenon–prices are rising everywhere, primarily due to the interplay between global supply disruptions and extreme weather conditions. Inflation in the US is the highest in the G7 (see chart below). The economy there rebounded earlier than elsewhere in the wake of easier Covid restrictions and more significant markups.

Central banks generally agree that the surge in inflation above the 2% target levels is transitory, but all now recognize that transitory can last a long time. Bank of Canada Governor Tiff Macklem acknowledged that supply chain disruptions are “dragging on” and said last week high inflation readings could “take a little longer to come back down.”

Prices rose y/y in every major category in September, with transportation prices (+9.1%) contributing the most to the all-items increase. Higher shelter (+4.8%) and food prices (+3.9%) also contributed to the growth in the all-items CPI for September.

Prices at the gas pump rose 32.8% compared with September last year. The contributors to the year-over-year gain include lower price levels in 2020 and reduced crude output by major oil-producing countries compared with pre-pandemic levels.

Gasoline prices fell 0.1% month over month in September, as uncertainty about global oil demand continued following the spread of the COVID-19 Delta variant (see charts below).

Bottom Line

Today’s CPI release was the last significant economic indicator before the Bank of Canada meeting next Wednesday, October 27. While no one expects the Bank of Canada to hike overnight rates next week, market-driven interest rates are up sharply (see charts below). Fixed mortgage rates are edging higher with the rise in 5-year Government of Canada bond yields. The right-hand chart below shows the yield curve today compared to one year ago. The curve is hinged at the steady 25 basis point overnight rate set by the BoC, but the chart shows that the yield curve has steepened sharply with the rise in market-determined longer-term interest rates.

Moreover, several market pundits on Bay Street call for the Bank of Canada to hike the overnight rate sooner than the Bank’s guidance suggests–the second half of next year. Traders are now betting that the Bank will begin to hike rates early next year. The overnight swaps market is currently pricing in three hikes in Canada by the end of 2022, which would bring the policy rate to 1.0%. Remember, they can be wrong. Given the global nature of the inflation pressures, it’s hard to imagine what tighter monetary policy in Canada could do to reduce these price pressures. The only thing it would accomplish is to slow economic activity in Canada vis-a-vis the rest of the world, particularly if the US Federal Reserve sticks to its plan to wait until 2023 to start hiking rates.

It is expected that the Bank will taper its bond-buying program once again to $1 billion, from the current pace of $2 billion.

The Bank will release its economic forecast next week in the Monetary Policy Report. It will need to raise Q3 inflation to 4.1% from its prior forecast of 3.9%.

How to Get a Home Loan When You Own a Home-Based Business

AND NOW A GUEST ARTICLE BUY Derek Goodman …

How to Get a Home Loan When You Own a Home-Based Business

When your home-based business starts to grow, this is a good thing. But what if it’s growing so much that you need to purchase a larger home? This can get tricky because applying for a home loan when you own your own business is sometimes a little harder than when you are employed by a company. But don’t let this dissuade you! It is perfectly possible for a small business owner to apply for — and get approved for — a home loan. Here are some of the ways you can improve your chances.

Keep your records organized.

Staying organized is important for keeping your business running smoothly, in general, but it’s especially crucial when you’re preparing to apply for any kind of loan. All of your tax returns, payroll records, and sales records should be saved for at least three years, but holding onto them longer is advisable so that you yourself can track business progress. Other records, such as employment taxes and bad debt reduction claims, should be kept even longer. You should keep both digital and paper copies of your financial records. Having good accounting software will help you stay organized and accurate. If you are working with an accountant, ask them to help you maintain your records.

Don’t take so many write-offs.

This may sound counter-intuitive, but if you intend to apply for a home mortgage sometime in the near future, start reducing your tax deductions. Yes, typically you want those deductions for equipment, travel, and other expenses. But in this case, they could hurt your chances. Talk to your accountant about your plans to get a loan and upsize your residence. They can help you figure out how many deductions to take, so your income doesn’t look too low.

Try to get rid of some debt.

Raise your eligibility for a loan by getting rid of debt. There are several ways you can do this. See whether your loans can be consolidated into a single sum with lower interest. Pay off your higher-interest loans first, if possible. Or, try using the snowball method of debt reduction, which involves paying off debts based on the size of the balance, starting with the lowest. You may even be able to get your creditors to work with you by lowering interest rates. Reducing debt may also free you up to make a larger down payment, which is another way you can increase your purchasing power.

Find a less expensive home.

If you can find a residence that meets your needs for a lower cost, you can take out a smaller loan. Study the market to see where property prices are lower. If it’s possible for you to run your business outside city limits, rural properties are often less expensive. Or, look for homes that are being sold as-is. A house that is sold as-is means exactly what it sounds like: There will be no room for negotiations with the seller regarding needed repairs. This doesn’t necessarily mean the home will be in disrepair. Some homeowners sell as-is just to facilitate a quick transaction, which could also work in your favor. Nevertheless, consult a lawyer and have the home inspected before moving forward.

Applying for a loan as a self-employed business owner is certainly more work due to the extra documentation required. If you’ve been writing off expenses, your debt-to-income ratio may look lower than it would otherwise. But you should still be able to get a loan and upsize to house your business if you plan well and maintain good records. If you’re considering a mortgage for a home purchase in Calgary, contact Mark Herman for a customized mortgage that meets your unique needs. Call 403-681-4376.

Image via Pixabay

Best,

Derek Goodman

Post-Covid Home Demand to Continue – Data

What is everyone doing with the money they saved during Covid?

  • Eating out, travel, debt reduction and BUYING HOMES!
  • Mortgage rates are low and home prices are close to 2005 levels!

Mortgage Mark Herman, Top Calgary Alberta Mortgage Broker

Latest Bank of Canada Survey:

As COVID-19 continues to be pushed down in Canada, consumer spending is expected to go up.  The latest survey by the Bank of Canada suggests that will lead to an even greater demand for homes.

The Bank of Canada’s Survey of Consumer Expectations… indicates:

  • 40% of respondents managed to save more money than usual during the pandemic.
  • They expect to spend about 35% of those savings over the next 2 years on activities that have been restricted during the pandemic, such as dining out.
  • Respondents plan to put 10% of their savings toward debt repayment and
  • 10% toward a down payment on a home.

14% plan to buy a home soon, much of that was driven by renters, with 20% saying they want to get into the market.

80% of the respondents who have “worked from home” expect to continue with that and there is a consistent with the shift in demand for larger properties, away from city centres.