Winning Variable Rate Strategy: end-2023
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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.
Canadian economy running too hot, BoC increases Prime by .25%
Hot Economic growth leads the Bank of Canada to increase its benchmark interest rate
Today, the Bank of Canada increased its overnight interest rate to 4.75% (+0.25% from April) because of higher-than-expected growth in Canada’s economy in the first quarter and the view that monetary policy was not yet restrictive enough to bring inflation down to target.
Leading up to today’s announcement, many economists feared that the BoC would have no choice but to raise rates in the face of persistent inflation and recent GDP growth. Their fears were founded.
To understand the Bank’s thinking on this important topic, we highlight its latest observations below:
Inflation facts and outlook
- In Canada, Consumer Price Index (CPI) inflation “ticked up in April” to 4.4%, the first increase in 10 months, with prices for a broad range of goods and services coming in higher than expected
- Goods price inflation increased, despite lower energy costs
- Services price inflation remained elevated, reflecting strong demand and a tight labour market
- The Bank continues to expect CPI inflation to ease to around 3% in the summer, as lower energy prices “feed through” and last year’s large price gains “fall out” of the yearly data
- However, with three-month measures of core inflation running in the 3.50%-4% range for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2% target
Canadian housing and economic performance
- Canada’s economy was stronger than expected, with GDP growth of 3.1% in Q1 2023
- Consumption growth was “surprisingly strong and broad-based,” even after accounting for the boost from population gains
- Demand for services continued to rebound
- Spending on “interest-sensitive goods” increased and, more recently, “housing market activity has picked up”
- The labour market remains tight: higher immigration and participation rates are expanding the supply of workers but new workers have been quickly hired, reflecting continued strong demand for labour
- Overall, excess demand in the economy looks to be “more persistent” than anticipated
Global economic performance and outlook
- Globally, consumer price inflation is coming down, largely reflecting lower energy prices compared to a year ago, but underlying inflation remains stubbornly high
- While economic growth around the world is softening in the face of higher interest rates, major central banks are signalling that interest rates may have to rise further to restore price stability
- In the United States, the economy is slowing, although consumer spending remains surprisingly resilient and the labour market is still tight
- Economic growth has essentially stalled in Europe but upward pressure on core prices is persisting
- Growth in China is expected to slow after surging in the first quarter
- Financial conditions have tightened back to those seen before the bank failures in the United States and Switzerland
Summary and Outlook
The BoC said that based on the “accumulation of evidence,” its Governing Council decided to increase its policy interest rate, “reflecting our view that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target.”
The Bank says quantitative tightening is complementing the restrictive stance of monetary policy and normalizing the Bank’s balance sheet.
Going forward, the Bank said it will continue to assess the dynamics of core inflation and the outlook for CPI inflation with particular focus on “ evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving” its inflation target.
Once again, the Bank repeated its mantra that it “remains resolute in its commitment to restoring price stability for Canadians.”
Next up
With today’s announcement now behind us, a new round of speculation will begin in advance of the Bank’s next policy announcement on July 12th.
Odds of New Rates
Market odds now have a July 12 hike at a 61% probability, with potentially another increase by December.
Just 1 more Prime Rate increase would take the benchmark prime rate from 6.95% at the end of today to a nosebleed 7.20% (last seen in February 2001).
There may well be another Prime Rate increase on July. We have strategies to beat these rates so please call and we can sort out a situation that works for you.
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:
- General explanation: http://markherman.ca/payout-penalties-how-the-big-5-banks-get-you/
- Details of all the lenders and their specific math: http://markherman.ca/fixed-rate-mortgage-penalties-larger-than-ever/
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
Bank of Canada increases its benchmark interest rate to 4.50%
Today, the Bank of Canada increased its overnight benchmark interest rate 25 basis point to 4.50% from 4.25% in December. This is the eighth time since March 2022 that the Bank has tightened money supply to address inflation.
While the headline increase will certainly make news, it is the Bank’s accompanying commentary on its future moves that will capture the most attention. We summarize the Bank’s observations below, including its forward-looking comments on the potential for future rate increases.
Canadian inflation
- Inflation has declined from 8.1% in June to 6.3% in December, reflecting lower gasoline prices and, more recently, moderating prices for durable goods
- Despite this progress, Canadians are still “feeling the hardship” of high inflation in their essential household expenses, with persistent price increases for food and shelter
- Short-term inflation expectations remain elevated and while year-over-year measures of core inflation are still around 5%, 3-month measures have come down, suggesting that core inflation has “peaked”
Canadian economic and housing market performance
- The Bank estimates Canada’s economy grew by 3.6% in 2022, slightly stronger than was projected in the Bank’s Monetary Policy Report in October, however it projects that growth is expected to “stall through the middle of 2023,” picking up later in the year
- Canadian GDP growth of about 1% is forecast for 2023 and rising to about 2% in 2024, little changed from the Bank’s October outlook
- The economy remains in “excess demand” and the labour market remains “tight” with unemployment near historic lows and businesses reporting ongoing difficulty finding workers
- However, there is “growing evidence” that restrictive monetary policy is slowing activity especially household spending
- Consumption growth has moderated from the first half of 2022 and “housing market activity has declined substantially”
- As the effects of interest rate increases continue to work through the economy, spending on consumer services and business investment is expected to slow
- Weaker foreign demand will likely weigh on Canadian exports
- This overall slowdown in activity will allow supply to “catch up” with demand
Global economic performance and outlook
- The Bank estimates the global economy grew by about 3.5% in 2022, and will slow to about 2% in 2023 and 2.50% in 2024 — a projection that is slightly higher than the Bank’s forecast in October
- 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
- Global inflation remains high and broad-based although inflation is coming down in many countries, largely reflecting lower energy prices as well as improvements in global supply chains
- In the United States and Europe, economies are slowing but proving more resilient than was expected at the time of the Bank’s October Monetary Policy Report
- China’s abrupt lifting of pandemic restrictions has prompted an upward revision to the Bank’s growth forecast for China and “poses an upside risk to commodity prices”
- Russia’s war on Ukraine remains a significant source of uncertainty
- Financial conditions remain restrictive but have eased since October, and the Canadian dollar has been relatively stable against the US dollar
Outlook
Taking all of these factors into account, the Bank decided today’s policy rate increase was necessary and justified.
However, the Bank also offered this important piece of news: “If economic developments evolve broadly in line with (its) outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases.”
That sounds positive, but as is customary, the Bank also noted that it is prepared to increase the policy rate further if needed to return inflation to its 2% target. It also added the usual language that it “remains resolute in its commitment to restoring price stability for Canadians.”
Although the Bank did not say it, the bottom line is Canadians will have to wait and see what comes next.
Next touch point
March 8, 2023 is the Bank’s next scheduled policy interest rate announcement and we will be on hand to provide an executive summary the same day.
New Mortgage Rules 2023: Expanding the “Stress Test” to Everything?
This is from the Desk of Dr. Cooper, our Economist, and this data is 1 of the reason we are at Dominion Lending – to get this data.
Below is the details of the government expanding the STRESS TEST, or other mechanisms, to make it harder to buy a home.
OSFI Is Concerned About Federally Insured Lender Exposure to Mortgage Risk.
Late last week, the Office of the Superintendent for Financial Institutions (OSFI) announced it was concerned about the risks associated with the large and rising number of highly indebted borrowers, especially those with floating-rate mortgages, which stands at a record proportion of outstanding mortgage loans.
With the economy in danger of entering a recession and the Bank of Canada warning of potentially more rate hikes to counter persistent inflation, the housing market may face continued pressure in the coming months.
A record number of buyers used floating-rate debt for purchases during Canada’s pandemic-era real estate boom. Those borrowers may come under increasing strain if mortgage costs remain high. Job losses from an economic slowdown also would make it harder for people to keep up with loan payments and stay in their homes.
Superintendent of Financial Institutions Peter Routledge said a review of the country’s mortgage-underwriting rules that starts later this week would look beyond its current main measure — a stress test requiring borrowers to qualify for higher interest rates than what their banks are offering.
“The question in our minds is, is it sufficient?” Routledge said of the current stress test. “So we will look at a broader range of debt-serviceability tools, including debt-to-income constraints, debt-service constraints, as well as the current interest-rate stress test tool.”
The proposed rules—subject to public consultation—include loan-to-income and debt-to-income restrictions, new interest rate affordability stress tests and debt-service coverage restrictions.
Highly Indebted Borrowers
OSFI is particularly concerned about the rise in mortgage originations to households with a loan-to-income ratio of 450% or more, which the Bank of Canada has long asserted is the sector most at risk of delinquency and default. This risk has repeatedly been highlighted in the Bank’s financial risk analysis–the Governing Council’s Financial System Review. The latest report says, “Those with high debt are more vulnerable to a decline in income and will face more financial strain when they renew their mortgages at higher rates.”
This vulnerability relates to households’ ability to continue servicing their debt if incomes decline or interest rates rise without significantly reducing their consumption. The Bank staff estimate that the most highly indebted households have generally seen the smallest increases in liquid assets. At the same time, alongside higher house prices, many households have taken out sizable mortgages to purchase a house, adding to the already large share of highly indebted households.
The chart below shows that the average share of high loan-to-income borrowers before the pandemic was 23.8%. The average since the pandemic onset has risen to 33.7%.
Proposals for Comment
To date, mortgage delinquency rates at federally regulated financial institutions (FRFIs) are at a record low. The large FRFIs have worked closely with borrowers who have reached their trigger points. TD, CIBC, and BMO have allowed some negative amortizations until renewal. As a result, the proportion of their mortgages having remaining amortizations has risen sharply (see second chart below). Questions remain regarding how they will deal with this at renewal time. Will the new mortgage be amortized at 25 years at renewal, raising the monthly payments dramatically and increasing the risk of delinquency or default, especially among highly indebted households?
Earlier last week, CEOs of the Big 5 banks weighed in on vulnerable mortgage clients. None were quite as forthcoming as Scotiabank’s new President and CEO, Scott Thomson, who said the bank has about 20,000 borrowers that it considers “vulnerable.” These are borrowers with a high loan-to-value (LTV) mortgage, a low credit score, lower deposits in their checking accounts and those with home valuations that are susceptible to market conditions.
“So, as you think about the tail risk, we have about 20,000 vulnerable customers, which would be 2.5% [of the total portfolio],” he said Monday during the RBC Capital Markets Canadian Bank CEO Conference.
However, he added this represents a “manageable-type situation for us on mortgages.” Scotiabank’s floating-rate mortgages are not fixed payment. They adjust monthly payments every time the central bank changes the overnight rate.
According to Steve Huebl at Canadian Mortgage Trends, RBC President and CEO Dave McKay said that his bank is “keeping a watchful eye on its mortgage clients, turning to AI and various types of modelling to forecast clients’ cash flow.”
“We look at incomes, we look at the stress of inflation on expenses in a household, and we monitor cash flow to interest payments, as you would in any corporation,” McKay said during the conference. “We do that [for] every single consumer in our portfolio because over 80% of our clients have their core checking and core cash management with us.”
Looking at the bank’s variable-rate mortgage portfolio, which totals between $100 and $120 billion, McKay said the bank has been able to segment that group of clients, keeping tabs on when they reach their trigger rates and when they’ll be coming up for rate resets in the next several years.
Through modelling, the bank can then predict which clients with upcoming renewals “will or will not have a cash flow challenge” should the economy enter a moderate or severe recession, he said. “We have a pretty clear view of that.”
For clients who have difficulties making their payments, mortgage lenders have several options to try and assist borrowers before the situation progresses to the point of them needing to sell their homes.
“You have skip-a-payment deferrals, you have maturity extensions, whatever it happens to be, you have a lot of ways to work with that client,” McKay said.
In terms of clients with cash flow challenges in addition to a collateral problem, where the property sale wouldn’t cover their mortgage and could result in default, McKay said it’s a much smaller group but one the bank is actively monitoring.
“That bucket, I can tell you, is in the low single-digit percentages of our portfolio,” he said. “And that’s the bucket we’re managing”.
Bottom Line
To the extent these measures are implemented, further pressure on mortgage growth is likely. Mortgage brokers can access lenders not impacted by OSFI B-20 rule changes. More than ever, brokers could add value to borrowers turned away from the banks. In these uncertain times, existing and new clients need advice from a trained and caring professional.
Work Visa’s / Non-Canadians Can’t Buy Homes: 2023 New Rules
Prohibition on the Purchase of Residential Property by Non-Canadians Act.
Summary of New Rules, 2023:
Anyone with a work visa will have to have lived here for 3 of the past 4 years and have filed taxes during those years. Here are the RULES!
- Holds a valid work permit as defined in section 2 of the Immigration and Refugee Protection Regulations, or is otherwise authorized to work in Canada in accordance with section 186 of the Regulations;
- Has worked in Canada for a minimum continuous period of 3 years within the past 4 years, where the work meets the definition set out in s. 73(2) of the Regulations; and
- Has filed a Canadian income tax return for a minimum of 3 of the past 4 taxation years preceding the year in which the purchase is made.
Please also find below the Globe and Mail article that ran last week on December 1st.. I copied and pasted the whole article:
Ambiguity about Canada’s ban on foreign home buyers creating hiring headaches for businesses
Canada’s impending ban on foreigners purchasing residential real estate is complicating how businesses hire, promote and transfer immigrant workers because of an information vacuum about the final rules.
The Prohibition on the Purchase of Residential Property by Non-Canadians Act, passed by Parliament earlier this year, will restrict foreigners from buying homes in Canada starting next month. That ban will remain in place for two years – supposedly to curb investor speculation in the housing market.
Although the legislation will come into force on Jan. 1, 2023, the federal government still hasn’t released the final regulations outlining how the prohibition will work. Those details are essential because they will specify which non-Canadians, both individuals and corporations, will be exempt from the ban.
Our legislators, however, seem unaware that 2023 is less than 30 days away. But you can be damn sure the businesses and foreign workers who have to comply with the law are acutely aware of the problem.
“The regulations will be made available soon,” Claudie Chabot, a spokeswoman for the Canada Mortgage and Housing Corporation, wrote in an e-mail. (The national housing agency led the government’s consultation on the law.)
The sooner the better. Businesses and workers are being kept on hold.
The government’s consultation paper proposed that exemptions would only be given to temporary residents who hold a valid work permit and who’ve worked in Canada for a “minimum continuous period of three years within the past four years.” Additionally, those individuals would have to prove they filed Canadian income tax returns for at least three of the four years preceding their property purchase.
That potentially sets a high bar for skilled workers. Is Ottawa really planning to prohibit executives and other talent, who plan to move to Canada with their families, from buying a home until they’ve worked here for three years?
We don’t know because the government still hasn’t finalized the rules. It’s ridiculous.
“If I’m sitting in London, England, and I’m saying, ‘Well, gee, do I want to go to Canada? Do I really want to go through all of this aggravation?’ ” said Stephen Cryne, president and CEO of the Canadian Employee Relocation Council.
Known as CERC, the non-profit organization advocates for increased labour force mobility on behalf of companies in sectors including financial services, technology, natural resources and telecommunications.
As Mr. Cryne points out, top executives who work for companies such as banks, energy companies and manufacturers have plenty of choices about where they and their families choose to live in the world.
“I was speaking with one of our members,” he recounted. “They’re looking at bringing in several executives and their families from South Africa, and [because of the uncertainty around the new rules], they’re second-guessing saying, ‘We’re not sure.’ ”
That’s hardly a vote of confidence in Canada.
CERC is asking the federal government for a blanket exemption for any foreign national with a valid work permit who is living and residing in Canada. It’s a reasonable ask.
“Given Canada’s critical skills shortages, these requirements will place Canada in an uncompetitive position when compared to other countries where such restrictions on the purchase of residential property by foreign nationals may not exist,” CERC told the government in a submission.
The proposed rules are also creating headaches for U.S. relocation management companies that handle employee moves on behalf of Canadian corporations. Some of these American companies will purchase and resell an executive’s home to speed up a move. But as non-Canadians, they could be banned from conducting such property transactions for two years – further complicating the process of relocating employees.
Not only are businesses’ hiring and relocation plans getting gummed up, the regulatory uncertainty about the forthcoming ban also risks chasing away foreign direct investment. Our immigration backlog is already a frustration for foreign companies that want to hire more employees and expand their operations in Canada.
Worst of all, it’s not clear that a ban targeting foreign home buyers will actually prevent speculation in the real-estate market.
After all, non-residents only owned 3.1 per cent of residential property in British Columbia in 2020, according to Statistics Canada. In Ontario, that figure is only 2.2 per cent.
So why is the Liberal government pointing a finger at foreign buyers for pricing Canadians out of the housing market?
This is the problem with populist policies. They might make for good politics, but they often have undesirable consequences for businesses and consumers.
The government needs to clear up the confusion about its foreign-home-buyer ban – and fast.
If Ottawa’s goal is to admit nearly 1.5 million new immigrants to Canada by the end of 2025 to solve labour shortages, it shouldn’t be giving skilled workers reasons to think twice about moving here
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…
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.
