Acceptable Sources of Down Payment for a home Canada, 2024

This seems to be the topic of this week  … what can I use for down payment on my home?

All banks DO ACCEPT these approved methods to gather down payment for a home.

Acceptable Sources of Down Payment:

  • Investments
  • Legal Settlements
  • RRSP
  • Borrowed funds from secured facilities
  • RESP
  • Income tax refunds
  • Sale of a property
  • Cash Buyout from separation or divorce
  • Refinance of a property
  • Employer relocation allowance
  • Land – sale of – including from divorce
  • Business cash flow
  • Inheritance
  • Business proceeds from sale
  • Grant “Insured Only
  • Winnings
  • Personal savings “Tax-Free Savings Account (TFSA) or Tax-Free First Home Savings Account (FHSA)”
  • Gifted funds “Only from an immediate family member (siblings, child, parents, grandparent), the spouse and the ex-spouse”
  • Gifted equity “Only from an immediate family member (siblings, child, parents, grandparent), the spouse and the ex-spouse”
  • Funds wired from abroad except from sanctioned countries
  • First Time Home Buyer Incentives (FTHBI) program

Ineligible Sources of Down Payment

  • Unsecured loans, lines of credit and credit cards
  • Lease to own / Rent to own – because this happens to be the #1 area of fraud in ALL if Canada for ALL reasons.
  • Sweat equity
  • Cash back
  • Purchase incentive
  • Locked-in RRSP
  • Cryptocurrency – even Dogecoin – sorry Elon. 🙁
  • Vendor concession- or Vendor Take Back = VTB  (treated as a decrease in the purchase price)

The new Tax-Free First Home Savings Account (FHSA) and the

FTHBI – First Time Home Buyer Incentive were the government matches your down payment up to 5% ARE both great ideas!

Mortgage Mark Herman, top Calgary Alberta Mortgage Broker since 2004!

Underlying Economic data on BoC holding Prime rate the same, December 5, 2023

Bank of Canada holds its policy interest rate steady, updates its outlook

Against the backdrop of a decelerating economy and growing calls for less restrictive monetary policy, the Bank of Canada made its final scheduled interest rate decision of the year today.

That decision – to keep its overnight policy interest rate at 5.00% – was broadly expected. What was not entirely expected (or welcome) was the Bank’s statement that it is “still concerned” about risks to the outlook for inflation and “remains prepared to raise” its policy rate “further” if needed.

The Bank’s observations are captured in the summary below.

Since August, we have been saying the VARIABLE RATE mortgage is the way to go, and this proves we were right on the money.

Mortgage Mark Herman, top Calgary Alberta and Victoria BC mortgage broker

 

Inflation facts and housing market commentary

  • A slowdown in the Canadian economy is reducing inflationary pressures in a “broadening range” of goods and services prices
  • Combined with a drop in gasoline prices, this contributed to easing of CPI inflation to 3.1% in October
  • However, “shelter price inflation” picked up, reflecting faster growth in rent and other housing costs along with the continued contribution from elevated mortgage interest costs
  • In recent months, the Bank’s preferred measures of core inflation have been around 3.5-4%, with the October data coming in towards the lower end of this range
  • Wages are still rising by 4-5%

Canadian economic performance

  • Economic growth “stalled through the middle quarters of 2023 with real GDP contracting at a rate of 1.1% in the third quarter, following growth of 1.4% in the second quarter
  • Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year
  • Exports and inventory adjustment “subtracted” from GDP growth in the third quarter, while government spending and new home construction provided a boost
  • The labour market continues to ease: job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly
  • Overall, these data and indicators for the fourth quarter suggest the economy is “no longer in excess demand”

Global economic performance and outlook 

  • The global economy continues to slow and inflation has eased further
  • In the United States, growth has been stronger than expected, led by robust consumer spending, but is “likely to weaken in the months ahead” as past policy rate increases work their way through the economy
  • Growth in the euro area has weakened and, combined with lower energy prices, has reduced inflationary pressures
  • Oil prices are about $10-per-barrel lower than was assumed in the Bank’s October Monetary Policy Report
  • Financial conditions have also eased, with long-term interest rates “unwinding” some of the sharp increases seen earlier in the autumn. The US dollar has weakened against most currencies, including Canada’s

Summary and Outlook

Despite (or in the Bank’s view because of) further signs that monetary policy is moderating spending and relieving price pressures, it decided to hold its policy rate at 5% and to continue to normalize its balance sheet.

The Bank also noted that it remains “concerned” about risks to the outlook for inflation and remains prepared to raise its policy rate further if needed. The Bank’s Governing Council also indicated it wants to see further and sustained easing in core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and “corporate pricing behaviour.”

Once again, the Bank repeated its mantra that it “remains resolute in its commitment to restoring price stability for Canadians.” As a result, we will have to wait until next year for any sign of rate relief.

What’s next?

The Bank’s next interest rate announcement lands on January 24, 2024.

In the meantime, please feel free to call me and discuss financing options that will empower you in this economic cycle, and the ones ahead.

Canadian Mortgage Data – Nov 14

There has been a little relief for mortgage shoppers in recent days.

  • Fixed-rates have come down slightly, led by declining yields for government bonds.
  • Variable-rate mortgages appear to be maintaining their discounts and most market watchers believe the Bank of Canada has reached the top of this rate-hiking cycle.

The Bank, however, continues to warn that Canadians should be preparing for interest rates to remain higher for longer.  Senior Deputy Governor Carolyn Rogers made that point again during a recent speech in Vancouver, saying it is important to adjust proactively to that possibility.  Rogers cited a number of global considerations for higher rates including: China and other developing nations joining the worldwide economy; a decline in attractive investment opportunities for businesses; and an overall, international, adjustment to higher rates.

It is also useful to remember that central banks around the world have been working to normalize interest rates that have been at historic lows since the 2008 financial crisis.

Rogers offered some reassurance that Canadians are adjusting to higher rates.  Household credit growth has dropped to its slowest pace since the early ’90s.  Delinquency rates on credit cards and other consumer loans are only slightly above pre-pandemic levels.  Mortgage delinquencies are below pre-pandemic levels, and that is despite about 40% of all mortgage holders having already renewed at higher rates, with bigger payments.

As to when interest rates might actually start falling?  The BoC’s Q3 survey of “Market Participants” suggests they are adjusting to the higher-for-longer scenario. Based on the median response they are expecting a quarter point drop in April, 2024.  That is a month later than expectations expressed in the Bank’s Q2 survey.

Finally some good news for buyers.

Buy soon before everyone that did not buy sees this data and tries to by tool

Mortgage Mark Herman – top, best Calgary mortgage broker

 

 

Data on those negative amortization mortgages

Queston 1: What about all these (negative amortizing) mortgages that will now take 71 years to pay off?

Answer:

Yes, they are called VRMs – Variable rate Mortgages – and we don’t really offer/sell /even talk about them for that exact reason – what if the rates rates jump? And they did.

We do offer ARMs – Adjustable Rate Mortgage – and we do recommend as of August 2023 because:

  • Rates have topped and are slowly on the way down right now so the rate will go down
  • The current rate starts lower than the 1, 2, 3, and 4 year fixed right now; and ARM rates should be below the 5-year fixed by Fall of 2024.

 

Question 2: What is the difference between VRM and ARM?

  • With an ARM – adjustable rate mortgage – the amount of your payment will go up and down based on the changes of the prime lending rate
  • The VRM – Variable rate mortgage – your mortgage payment amount always remains the same. It does not go up and down with changes in the prime lending rate. And when rates jump to 4x what they were when your loan started, then you are not even paying interest any more, and end up at 70 years left to pay it off.
As the article below states, VRMs are mostly from BMO, CIBC, Royal Bank and TD.

ARMs – Adjustable rate mortgages – are what we offer, they can’t have a negative amortiztion and we don’t have any customers that were affected with negative loans. 

Mortgage Mark Herman, best top Calgary mortgage broker

 


Concern over rise in negative amortization mortgages

On October 30th, the Bank also highlighted concern over negatively amortizing mortgages. Negative amortization occurs when a borrower’s monthly mortgage payment is less than the interest due on the loan and the outstanding mortgage balance grows over time rather than declining. This phenomenon is mostly associated with variable rate mortgages.

Those who bought or refinanced homes during the pandemic, when interest rates were at their lowest, heavily opted for variable rate mortgages (VRMs). In Canada, most VRMs come with fixed payments, where the interest portion is determined by the prevailing prime lending rate, while the rest is used to repay the principal. As a result, the Bank of Canada’s series of rate hikes – from 0.25% to 5% – has propelled growth in negative amortization mortgages with terms exceeding 30 years. 

As of July 31, negative amortization mortgages were 24% of total mortgage portfolios (insured and uninsured) for BMO, CIBC, Royal and TD. This is equivalent to $277 billion in mortgages  – up from virtually nil a year ago. National and Scotia mainly offer adjustable-rate mortgages – as rates change the mortgage payment changes to keep the amortization period fixed – so both banks have negligible exposure to negative amortization within their mortgage portfolios. 

Variable Rate Exposure (as of July 31, 2023)

Source: Fitch Ratings

Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OFSI), has announced regulatory changes to address risks related to mortgages in negative amortization. Effective early next year, banks will be required to maintain a higher amount of capital, reflecting the elevated risk associated with mortgages in negative amortization when the loan-to-value ratio (LTV) surpasses 65% (i.e. when the outstanding mortgage balance is 65% or more of the value of the underlying property). The proposed changes are designed to incentivize banks to reduce the volume of mortgages that could potentially go into negative amortization.

To assess how borrowers are reacting to the increase in rates, the prepayment report for floating rate 5-year mortgage-backed securities (MBS) pools, published by CMHC, serves as a valuable tool. Although it doesn’t pinpoint individual issuers, the report offers a comprehensive look at trends within the banks’ variable-rate mortgage (VRM) portfolio.

Report data indicates that borrowers with VRMs have been effectively managing impacts of rising rates by making partial principal payments or transitioning to fixed-rate mortgages. Enforcement activity, which is undertaken when a borrower is unable to make mortgage payments, has been minimal, which suggests that despite the rise in rates, defaults have remained low.

Also, the majority of non-amortizing mortgages, where payments are covering interest only, were recorded between November 2022 and February 2023. This is a positive sign that banks have taken measures to limit the growth of these mortgages.

One caution is around borrowers whose mortgage rates have exceeded the trigger point – that is, the rate at which the regular payment is no longer enough to cover the full amount of interest accrued since the last payment. These borrowers might encounter payment shock when their loans mature and are re-underwritten based on the original amortization but at higher rates and with larger principal amounts.

Those who were first-time homebuyers with high loan-to-value ratios, purchasing at or close to peak prices in 2020 or 2021, could face significant challenges during renewal, particularly if their equity position has been significantly eroded. Similar to Fitch, we anticipate that delinquency rates will not rise in 2024, remaining within the expected range of 0.2-0.25%.

 

Winning Variable Rate Strategy: end-2023

Variable Rate Strategy,
Now starting lower than 1, 2, 3 & 4 Year Fixed Rates.

Detailed price predictions below …

Top graph above – black line shows anticipated Prime Rate reductions until 2027!

  • Take advantage of this now and save with the variable rate at Prime – o.9%, Big-6 banks are at P – o.3%%

2nd graph shows 5-year fixed has not been this high since 2008 – that’s a 15 year high. Don’t lock in to it for 5 more years!

Summary

  • Variable rates are lower than the 1, 2, 3, and 4-year fixed options today
  • Variable should beat the 5-year fixed rate before the end of 2024.
  • The black line in the chart above shows is the most accurate of 3 models showing future reductions to Prime.
  • Fixed rates are staying higher longer due to a hot US economy and bonds doing crazy things.

Take action now and get a REAL Pre-Approval with 4-month-rate-hold at today’s best ratesTo start a PRE-APPROVAL, click here

Short Version:

  • Post-Covid inflation has caused 5-year fixed rates to go from 4% (before Covid), down below 2% (during Covid), and hopefully topping out at about 5.9% today – their highest since 2008.
  • Variable Rates are recommended again now that the economic recovery “cards are on the table” and we can do solid projections with expected rate reduction dates and amounts.

Strategy
Take the Variable Rate now; it starts LOWER than the 1, 2, 3 & 4 year fixed rates today.
Prime is expected to start to come down in July, and after only 2 reductions, your rate should be BELOW the current 5-year.

(Taking the current 5- year is locking in the highest 5-year rates since 2008.)

Then … continue to stay in the Variable and reap the benefits of the lower rates, or lock-in, at what the rates are for the day you lock in at. Both get you lower rates than either the 3 or 5 year fixed today.

Math
It will only take 2 reductions to Prime – expected to start in July 2024) to get the rate below the 5-year fixed rate today.

  • Variable at 6.3% today (for less than 20% down payment)
  • Assume Prime does not increase and the 1st Prime Rate reduction arrives July 24th, 2024, and then 1 reduction, by o.25%, every 3-months thereafter.
  • IF Prime does go up 1 time in 2023 (economists are betting there is a 50/50 chance it will go up 1-time or not at all) then this math IS still valid and it just takes 1 more rate reduction to be the same.)

Expected Forecast of Variable Rate Decreases and When the Variable will Beat Current Fixed Rates …

Date Prime Rate Expected 5-Year Variable Rate after Reductions Comment
November 2023 7.20 7.20% – o.9% = 6.30% Variable rate TODAY
Lower than 1, 2, 3 and 4 year fixed.
July 24, 2024
(1st rate-cut expected)
6.95 6.95% – o.9% = 6.05%  
Oct 23, 2024
(2nd cut expected)
6.70 6.70 – o.9% = 5.80%  Variable rate is now lower than today’s 5-year fixed rate of about ~5.84%
Jan 24th, 2025 6.45 6.45 – o.9% = 5.55% Variable rate well below all current fixed rates on the 3rd reduction to Prime
April 10, 2025 5.55 5.55% – o.9% = 5.30%  
July 24, 2025 5.30 5.30 – o.9% = 5.05%  S A V I N G S !!

Mechanics & Details

  • 6.49% = 3-year fixed rates for INSURED, or less than 20% down payment purchases, today.
  • 5.84% = 5-year fixed rates for INSURED mortgages, today.
  • Variable (< 20% down) is at Prime – o.9%, Prime is 7.2%; 7.2% – o.9% = 6.3%
  • Prime usually changes o.25% at a time.
  • There is a 50% chance of 1x .25% rate increase to Prime by the end of 2023.
  • 1st Prime rate reduction is expected in July, 2024.
  • That means Prime reductions are expected to start in/ around July 2024 at o.25% each.
  • THE KEY: Prime -o.9% is broker rates, Big-6 banks are at P-o.3% or P-o.4%; this leverages the massive ½ % – yes o.5% variable rate difference – between Broker rates and Big-6 rates.
  • CONVENTIONAL or 20% or more down – Variable rate is P – o.6%: still better than Big-6 at Prime – o.3%

Detailed Canadian Economic Data is here

No matter what the Bank of Canada does or doesn’t do, we will:

  • Continue to answer the phone in the 1st ring from 9-9
  • Support Lo/No Condition offers with Pre-underwritten, Pre-approvals that actually work.
  • Start a 120 day rate hold for you, from the exact day the next rate increases happen – we do time the bottom of the market for you.
  • To start a PRE-APPROVAL, click here

We welcome the opportunity to prove it in the weeks ahead.

A Bit More About Me
I offer 9-9 x 365 availability and access for you and your clients.
Rate is the easy part; the completed approval is the hard part  and I never take a day off until a file is complete.
My goal is your clients being approved as smoothly and quickly as possible.
I don’t own golf clubs or a boat; my only hobbies are processing mortgages and answering you and your clients’ calls on the first ring.
I am always on to support your sales efforts!”

See our 366+, 5-star, reviews here: https://markherman.ca/customer-reviews

Mark Herman, AMP, B. Comm., CAM, MBA-Finance | Licensed in Alberta since 2004
Direct: 403-681-4376

Winner: #1 Franchise for Funded $ Mortgage Volume at Mortgage Alliance Canada; 2013, 2014, 2015, 2016, 2017 and 2018!

Accredited Mortgage Professional | Dominion Lending Center | Mortgages are Marvelous

“Borrowers who use a mortgage broker pay less …,” Bank of Canada.

When Will Canadian Mortgage Rates Begin to Fall?

Last week, the Bank of Canada held its policy rate at 5%. The decision was expected given slowing in the economy and modest improvement to core inflation measures.

The Bank is likely at the end of its tightening cycle. How soon it eases rates – and how low will rates go in the near to medium term – is the question #1

ANSWER: The general view from market economists is that we could see some easing of the overnight rate by mid-2024.

Question #2: How low. how far will Prime come down?

ANSWER: Prime is expected to come down a total of 2%.

DETAILS of Prime Cuts

  • Prime is 7.2% now / November 2nd, 2023,
  • Prime is expected to get down to to 5.2% or a bit lower, like 4.75% – 5.25% range by the end 2025; which looks like this:
    • June/ July 2024, 1st Prime cuts = 6 months
    • Prime reduction by o.25% every quarter = 1% less / year for the next 2 years = 24 months
  • so these together = 30 months.

With Prime coming down, now is the time for you to take advantage of the Variable Rate reductions.

Variable Rates via brokers are at Prime – o.9%, while the Big-6 banks rates are Prime – o.15%.

YES, broker rates are 6x better than at the Big-6 lenders, o.9 – o.15 = o.75% better. It’s true!

Mortgage Mark Herman; Best Top Calgary Mortgage Broker for first time home buyers.

When might rates begin to fall?

The Bank’s latest Monetary Policy Report (MPR) also provides signals that we can monitor to gauge when rates could start declining.

When interest rates rise, one of the main ways monetary policy affects the economy is through reduced consumer spending on durable goods, like appliances, furniture and cars. Prices for durable goods, except for cars, have dropped from 5.4% to -0.4%, while prices for semi-durable goods, like food and clothing, have decreased from 4.3% to 2.1%. We’re still experiencing delays in delivering cars. As a result, manufacturers are concentrating on selling more expensive vehicles with higher margins and are offering fewer discounts from list prices.

Inflation in service prices, excluding shelter, has slowed from 5.1% to 1.5%. If bond rates begin to drop, we will see a gradual decline in mortgage costs. The challenge will be rental costs, which are soaring due to the very limited availability of rentals and the continuous influx of newcomers. Increasing housing supply is key to reducing rental prices. However, that is a problem that will take years to resolve given the significant shortage of housing.

Currently, the Bank is concerned about inflation expectations, corporate pricing behaviour, and wage growth. As noted in its Monetary Policy Report, “As excess demand eases, inflation is expected to slow. At the same time, inflation expectations should also fall, businesses’ pricing behaviour should normalize, and wage growth should moderate. So far, progress has occurred but somewhat more slowly than anticipated.”

The Bank will be careful to ensure that inflation expectations inconsistent with its 2% target are not embedded in corporate pricing and wage expectations. A slowing economy should help to lower those expectations.

The general view from market economists is that we could see some easing of the overnight rate by mid-2024.

NERD STUFF: Maintaining a restrictive rate policy

The Bank can maintain a restrictive policy even without increasing rates any further, simply by keeping rates at their current level. With the overnight rate at 5% and an inflation rate of 3.8%, the real policy rate is 1.2%. This rate is restrictive, since it is higher than the neutral real rate of interest, which the Bank estimates to be between 0 and 1%.

The neutral real rate of interest is the level of interest that neither stimulates nor restrains economic growth. In other words, it is the rate at which the economy is in balance, with stable prices and full employment. Therefore, when the real rate of interest is restrictive, we would expect GDP to slow.

In its recent Monetary Policy Report (MPR), the Bank is forecasting economic growth to average less than 1% over the next few quarters, while potential output growth is expected to average 2%, mainly due to population growth and increased labor productivity. This should lead to a negative output gap (low demand and a surplus of products) and lower inflation.

Persistent inflation leads the Bank of Canada to increase benchmark interest rate

UGH! The BoC whacks borrowers again.

Mark Herman, Top Calgary Alberta  Mortgage Broker

Yesterday, the Bank of Canada increased its overnight interest rate to 5.00% (+0.25% from June) because of the “accumulation of evidence” that excess demand and elevated core inflation are both proving more persistent and after taking into account its “revised outlook for economic activity and inflation.”

This decision was not unexpected by analysts but is disconcerting – as is the Bank’s pledge to continue its policy of quantitative tightening.

To understand today’s decision and the Bank’s current thinking on inflation, interest rates and the economy, we highlight its latest observations below:

Inflation facts and outlook

  • In Canada, Consumer Price Index (CPI) inflation eased to 3.4% in May, a “substantial and welcome drop from its peak of 8.1% last summer”
  • While CPI inflation has come down largely as expected so far this year, the downward momentum has come more from lower energy prices, and less from an easing of “underlying inflation”
  • With the large price increases of last year removed from the annual data, there will be less near-term “downward momentum” in CPI inflation
  • Moreover, with three-month rates of core inflation running around 3.5% to 4% since last September, “underlying price pressures appear to be more persistent than anticipated”, an outcome that is reinforced by the Bank’s business surveys, which found businesses are “still increasing their prices more frequently than normal”
  • Global inflation is easing, with lower energy prices and a decline in goods price inflation; however, robust demand and tight labour markets are causing persistent inflationary pressures in services

 

Canadian housing and economic performance

  • Canada’s economy has been stronger than expected, with more momentum in demand
  • Consumption growth was “surprisingly strong” at 5.8% in the first quarter
  • While the Bank expects consumer spending to slow in response to the cumulative increase in interest rates, recent retail trade and other data suggest more persistent excess demand in the economy
  • The housing market has seen some pickup
  • New construction and real estate listings are lagging demand, which is adding pressure to prices
  • In the labour market, there are signs of more availability of workers, but conditions remain tight, and wage growth has been around 4-5%
  • Strong population growth from immigration is adding both demand and supply to the economy: newcomers are helping to ease the shortage of workers while also boosting consumer spending and adding to demand for housing

 

Global economic performance and outlook

  • Economic growth has been stronger than expected, especially in the United States, where consumer and business spending has been “surprisingly” resilient
  • After a surge in early 2023, China’s economic growth is softening, with slowing exports and ongoing weakness in its property sector
  • Growth in the euro area is effectively stalled: while the service sector continues to grow, manufacturing is contracting
  • Global financial conditions have tightened, with bond yields up in North America and Europe as major central banks signal further interest rate increases may be needed to combat inflation
  • The Bank’s July Monetary Policy Report projects the global economy will grow by “around 2.8% this year and 2.4% in 2024, followed by 2.7% growth in 2025”

 

Summary and Outlook

As higher interest rates continue to work their way through the economy, the BoC expects economic growth to slow, averaging around 1% through the second half of 2023 and the first half of next year. This implies real GDP growth of 1.8% in 2023 and 1.2% in 2024. The Canadian economy will then move into “modest excess supply” early next year before growth picks up to 2.4% in 2025.

In its July Monetary Policy Report, the Bank noted that CPI inflation is forecast to “hover” around 3% for the next year before gradually declining to 2% in the middle of 2025. This is a slower return to target than was forecast in its January and April projections.  As a result, the Bank’s Governing Council remains concerned that progress towards its 2% inflation target “could stall, jeopardizing the return to price stability.”

In terms of what Canadians can expect in the near term, the Bank had this to say: “Quantitative tightening is complementing the restrictive stance of monetary policy and normalizing the Bank’s balance sheet. Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation. In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the 2% inflation target. The Bank remains resolute in its commitment to restoring price stability for Canadians.”

Stay tuned

September 6th, 2023 is the Bank’s next scheduled policy rate announcement. Will there be 1x more increase?

 

Using Return-To-Work Income while on Maternity Leave to buy a home IS possible in Canada.

Using Return-To-Work Income while on Maternity Leave to buy a home IS possible in Canada.

Are you on maternity leave and trying to buy a home, but the bank will not use your income? This is a common reason home buyers find us on the internet or their realtors send them to us.

We CAN use your FULL RETURN TO WORK SALARY as qualifying income, if you have a “return to work date” that is less than 12 months away from your home purchase possession date.

 

Big-6 banks do not do this and we have no idea why. It frustrates everyone, and broker lenders have no issue with it.

Mortgage Mark Herman, Top-Best Calgary mortgage broker near me.

 

And while we are it – our lenders also use CCB – Canadian Child tax Benefit – for all children aged UNDER 16, when the mortgage starts.

Big-6 banks don’t use this … not sure why that is.

 

What else about Broker Lenders?

Broker lenders are all secure, and many are publicly traded, and all are audited by the same staff the investigate all of the Big-6 banks.

Broker lenders also have payout penalties that are 500% to 800% LESS than the way Big-6 banks do it. Here are the links for that specific data on my blog:

Broker lenders ALWAYS renew you are best rates, while Big-6 banks know that 86% of mortgages that renew will take the 1st offer so they “bump the rate” on you. Then you have to call in/ go in to chisel them down.

  • At broker lenders, they expect you to call us to check the rates and we would jump at the chance to move you to a different lender and get paid again … so you get best rates with broker banks.

There is lots more to … call to find out.

Mortgage Mark Herman, licensed in Alberta since 2004.

403-681-4376

 

inflation and Canadain mortgages

Details of Canadian Economic & Housing Market Performance, as at Dec 7, 2022

Bank of Canada increased Consumer Prime to 6.45% – exactly as expected for the last 5 months. January 25th is the next BoC interest rate announcement & I hope it is a 0.25% increase and then holds there for all of 2023. We will see…

Mortgage Mark Herman, Best Calgary mortgage broker with a Master’s degree in Finance.

Today, the Bank of Canada increased its overnight benchmark interest rate 50 basis point to 4.25% from 3.75% in October. This is the 7th time this year that the Bank has addressed inflation and means the policy rate is now as high as it has been in 15 years.

We summarize the Bank’s observations below, including its forward-looking comments on the need/likelihood of future rate increases below:

Canadian inflation

  • CPI inflation remained at 6.9% in October, with many of the goods and services Canadians regularly buy showing large price increases
  • Measures of core inflation “remain around 5%”
  • Three-month rates of change in core inflation have come down, “an early indicator that price pressures may be losing momentum”

Canadian Economic and housing market performance

  • GDP growth in the third quarter was stronger than expected, and the economy continued to operate “in excess demand”
  • The labor market remains “tight” with unemployment near historic lows
  • While commodity exports have been strong, there is growing evidence that tighter monetary policy is restraining domestic demand: consumption moderated in the third quarter
  • Housing market activity continues to decline
  • Data since the October Monetary Policy Report supports the Bank’s outlook that growth will essentially stall” through the end of this year and the first half of 2023

Global inflation and economic performance

  • Inflation around the world remains high and broadly based
  • Global economic growth is slowing, although it is proving more resilient than was expected at the time of the Bank’s October Monetary Policy Report
  • In the United States, the economy is weakening but consumption continues to be solid and the labor market remains “overheated”
  • The gradual easing of global supply bottlenecks continues, although further progress could be disrupted by geopolitical events

Outlook

Although the Bank’s commentary noted that price pressures that are driving high inflation may be losing momentum, it went on to say that inflation is “still too high” and that short-term “inflation expectations remain elevated.” In the Bank’s view, the longer that Canadian consumers and businesses expect inflation to be above the Bank’s 2% target, “the greater the risk that elevated inflation becomes entrenched.”

Given these economic signals, the Bank’s Governing Council stated that it “will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target.”

It concluded its statement with a familiar refrain: “We are resolute in our commitment to achieving the 2% inflation target and restoring price stability for Canadians.”

Analysts and commentators will seek to interpret those outlook comments for signs that the Bank has reached or believes it is close to reaching the terminal point in its current rate-hike cycle. For now, that remains a question of debate and speculation that will turn on future economic signals.

Next Touchpoint

January 25th is the next BoC interest rate announcement.  I hope it is a 0.25% increase and then holds there for all of 2023. We will see…

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.