Canadian Residential Mortgage Market: Inflation & Interest Rates: the Lead Characters for 2023
Summary:
- The Bank of Canada (BOC) increased interest rates 7 times in 2022. Exactly as expected 16 months ago.
- Inflation is at least 5.7%; and it needs to get down to 3%
- The BoC would rather over-tighten than under-tighten
- Normally it takes 18 to 24 months for interest rate increases to work their way into the economy and we are only about 10 months into this tightening cycle
These 4 painful data points mean Prime will increase from 6.45% to 6.70% on Jan 25th.
We now expect there to be at least 1 or 2 more o.25% increases to Prime before it is expected to hold for the rest of 2023, and then begin to decrease in 2024.
Mortgage Mark Herman, Top Calgary Alberta Mortgage Broker
DATA
A lot of the recent talk in financial and real estate circles has been centering on the possibility of a pause in the Bank of Canada’s aggressive interest rate increases. Some speculate that could happen at the next rate setting, later this month, on January 25th.
The Bank raised rates 7 times last year in an effort to rein-in galloping inflation. It does seem to be working, but there are some stubborn sticking points.
Headline inflation, known as the Consumer Price Index (CPI), has dropped. It was 8.1% in July and drifted down to 6.8% in November. However, the drop from October to November was a mere one-tenth of one percentage point and the Bank’s target rate remains significantly below that, at 2.0%.
As well, the BoC’s preferred inflation measure, Core Inflation (which strips out volatile components like food and fuel), actually increased. A simple averaging of the three components that the Bank uses to measure Core Inflation came in at nearly 5.7% in November, up from 5.3% in October.
Other factors that figure into the Bank’s plans include Gross Domestic Product and unemployment. Canada’s GDP continues to grow, albeit modestly, despite rising interest rates. It increased by 0.1%, month-over-month in November. Unemployment dipped 0.1% to 5.0% in December. Both of these tend to fuel higher wages which are a key driver of inflation.
The Bank of Canada, itself, remains firmly dedicated to battling back inflation. Governor Tiff Macklem has said he would rather over-tighten than under-tighten and run the risk of having high inflation linger and become entrenched.
The U.S. central bank has made it clear it plans more rate hikes. Given the integration of the Canadian and American economies, the Bank of Canada does have to pay attention to what its American counterpart does.
The BoC will have new economic data by the time it makes its January 25th announcement. The December numbers will provide a fresh look at how well the inflation fight is going.
Normally it takes 18 to 24 months for interest rate increases to work their way into the economy and we are only about 10 months into this tightening cycle. It is reasonable to expect another 25 basis-point increase on the 25th. Given the Bank’s apparent success so far it also seems reasonable to expect a pause sometime after that.
Looking ahead to a year from now some forecasters say we might start to hear talk of interest rate cuts, which would be welcome news. Cuts would allow the BoC to move toward its, long stated, goal of normalizing rates back into the neutral range of 2.5% to 3.5%. The Bank of Canada, and central banks around the world, have been trying to do that for more than a decade – since the ’08 – ’09 financial collapse.
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.
WHAT’S REALLY BEHIND A CREDIT SCORE? Revealing the components of the calculations
Credit scores typically range between 300 and 850 points and provide an indication of a borrower’s capacity r to repay their loans. There are two main credit bureaus in Canada – Equifax and TransUnion – that collect, store, and share information about how you use credit.
5 main factors used to calculate credit scores:
Payment History
The most important factor in a credit score is whether a borrower has a good track record of repaying the money loaned to them. Payment history comprises up to 35% of a credit score. Remind clients that multiple late or missed payments, overdue accounts, bankruptcies and any written off debts will all lower their credit score. Paying back debt quickly can help repair their credit.
Credit Utilization
Credit utilization ratio looks at the percentage of debt used out of all credit limits available to the borrower. If your client has multiple credit cards, revolving lines of credit or other accounts that are maxed out consistently, it can lower their credit score. Help clients examine the type of accounts they hold and stress the importance of managing each of them responsibly.
Credit History
The longer someone has an account open, the better for their credit score. Credit history is a window into how much experience a borrower has managing debt and their ability to pay it off. Work with clients to review active and inactive accounts. Suggest leaving credit card accounts open, even if they don’t use them much, as the age of the account might help boost their score.
New Credit
New credit is another key input to a person’s credit score. Check with clients to see how recently and how often they’ve applied for new credit, as well as how many new accounts have actually been opened. When you apply for new credit, borrowers are subject to a “hard inquiry” so that the lender can check their credit information. If there have been many of these hard credit checks in a short period of time, it could impact their credit score negatively.
Types of Credit
Having more than one type of credit account (while managing them responsibly) can improve your credit score, such as credit cards, an auto loan, mortgages, and lines of credit. This makes up a smaller portion of a borrower’s score, but balancing different types of credit can be a way to raise your client’s score.
Mortgage Tips for Canadian Buyers
Buying a home should be exciting – not exhausting.
Mortgage Checklist
1. Determine your Budget
Determine what your monthly budget is for the following:
– Mortgage payment
– Property taxes and Condo fees (if applicable)
– Utilities, maintenance and repair
2. Pre- Qualification
You will be asked to provide information about yourself and whoever is going to be on the mortgage with you. All of the information that is relayed is strictly confidential. You will be provided with a Mortgage Disclosure and Consent document to review and sign. Next, your Mortgage Broker will pull your credit bureau and review your overall situation and start the document collection process so they can determine your maximum purchase price and min down payment. A rate hold can be obtained once documents have been reviewed.
3. Document Preparation
Income for Salary or Hourly Employees
– Most recent Pay Stub
– Letter of employment – must be on company letterhead and state your name, position, length of employment. Guaranteed min # of hours and rate of pay or annual salary. It also must have contact information for the lender to call to verify employment once an offer has been made.
– Last 2 years Notice of Assessments (NOAs), T1 Generals and T4 slips for any hourly overtime, commission or bonus income
Income for Self-Employed:
– Last two years Notice of Assessments and T1 generals + confirmation no CRA tax in arrears
– Last 2 years statement of business activities for Sole Proprietors
– Articles of incorporation and Last 2 years company financials for Corporations/Partnerships
Down Payment/Closing Costs
– Anti Money Laundering Laws require the lender to review your 90 day Bank or Investment account histories to verif funds in account for down payment. Any frequent or large deposits and transfers must be verified. Online statements are acceptable, but smartphone screenshots are not.
– Gift letter + gift funds deposited to account, proof of Line of Credit available or sale of existing home proceeds (if applicable)
– You are required to have 1% to 1.5% of the purchase price on top of your down payment for costs relating to the closing of your new home purchase such as home inspection, property tax adjustments, appraisal fees, title insurance, moving expenses, utility hook ups and home fire insurance.
4. Find a realtor and start looking at houses
If you do not already have one, we can highly recommended you to one of our realtor connections. You can the proceed to look for a home that is within your pre-determine price. When you have found a house that you want to purchase, make sure your realtor makes it conditional on obtaining satisfactory financing. It is best to specify 7 to 10 days. It is also recommended to include the condition of a satisfactory house inspection.
5. Mortgage Approval
Once you have a confirmed Offer to Purchase on a house, notify your Mortgage Broker right away so they can start to work on getting the mortgage approved. At this time you will need to give your Mortgage Broker the following documents:
– Updated paystub, job letter and down payment account histories if they are more than 30 days old
– Completed & signed Offer to Purchase
– MLS listing (fact sheet) of the property, if private sale – old MLS listing or appraisal to confirm details
– Lawyer Information (Including the firm and solicitor’s name, address, phone and fax)
– Copy of void cheque for mortgage payments
6. Commitment Signing
A mortgage commitment is provided to your Mortgage Broker by the lender after your deal is approved. Your Mortgage Broker will spend time to review your mortgage commitment with you and let you know about any other lender requirements that need to be fulfilled. You then need to submit those requirements in order to get a final mortgage approval.
7. House Appraisal and Inspection
If required, your Mortgage Broker will order and schedule an appraisal. The mortgage lender determines th requirement of this. This is also the time where you should arrange to have an inspection performed on the home by a certified house inspector. The main purpose of a home inspection is to determine if the home has any existing major defects or any major repairs coming up in the near future. A home inspector will determine structural and mechanical soundness, identify any problem areas, provide cost estimates for any work required and provide you with a report.
8. Condition Removal
Once the lender has confirmed they have all the required documents and the deal is approved you can contact your realtor and have the financing condition removed. At the same time, if the home inspector’s report came back satisfactory, that condition can be removed as well. Do not remove conditions until all amendments to your real estate contract have been reviewed and accepted by the lender as it could affect your financing.
9. Meet with Lawyer
Once all of the conditions for the mortgage are verified and approved, the lender will package your mortgage up and send it to your lawyer whereupon your lawyer will call you in for a meeting one to two weeks before your possession date to go over the legal matters of the mortgage. You will review and sign documents relating to the mortgage, the property you are buying, the ownership of the property and the conditions of the purchase. Your lawyer will also ask you to bring a certified cheque or bank draft to cover closing costs and any other outstanding costs. Avoid signing up for duplicate Mortgage Life/Disability insurance at lawyers.
10. Possession Day
Once the transfer of money has occurred between your lawyer and the seller’s lawyer, you will officially own your new home. Your realtor will arrange to meet with you at your new home and do a walk through to make sure everything is as it should be and also to give you the keys. Congratulations!
Creating happy homeowners by providing personal bespoke mortgages solutions with uncompromising service.
Mortgage Mark Herman
Mortgage Broker & Overall Happiness Creator
Mortgages Are Marvellous
Mark@MortgagesAreMarvellous.ca
Serving Clients In: Calgary, Okotoks, Airdrie, Strathmore, Cochrane, Lethbridge, Red Deer,= & Medicine Hat.
Also Serving: All areas of Alberta including: Edmonton, Sherwood Park, Fort Saskatchewan, Leduc, Nisku, Stony Plain, Spruce Grove, Beaumont and St. Albert. Wood Buffalo / Fort McMurray, Grande Prairie, Airdrie, Lloydminster AB, Okotoks, Cochrane, Camrose, Chestermere, Sylvan Lake, Brooks, Strathmore, High River, Wetaskiwin, Lacombe, Canmore, Morinville, Whitecourt, Hinton, Olds, Blackfalds, Taber, Coaldale, Edson, Banff, Grand Centre, Innisfail, Ponoka, Drayton Valley, Cold Lake, Devon, Drumheller, Rocky Mountain House, Slave Lake, Wainwright, Stettler, St. Paul, Vegreville, Didsbury, Bonnyville, Westlock, Barrhead.
How sudden job loss affects your mortgage pre-approval or approval
If you’ve been thinking about buying a house, you’ve probably considered how much you can afford in mortgage payments. Have you also thought about what would happen if you lost your source of income?
While the sudden loss of employment is always a possibility, the current uncertainty of our economy has made more people think about the stability of their income. Whether you’ve already made an offer on a home or you’ve just started looking, here is how job loss could affect your mortgage approval.
What role does employment play in mortgage approval?
In addition to ensuring you earn enough to afford a mortgage payment; mortgage lenders want to see that you have a history of consistent income and are likely to in the future. Consistent employment is the best way to demonstrate that.
To qualify for any mortgage, you’ll need proof of sufficient, reliable income. Your mortgage broker will walk you through the income documents your lender will need to verify you’re employed and earning enough income. So, if your employment situation is questionable, you may want to reconsider a home purchase until your employment is more secure.
Should you continue with your home purchase after you’ve lost your job?
What if you’ve already qualified for a mortgage, and your employment circumstances change? Simply put, you must tell your lender. Hiding that information might be considered fraud, and your lender will find out when they verify your information prior to closing. If we are aware of this change we may be able to work it out with the lender.
What if you don’t tell the lender or us – your broker – and hope the lender does not find out?
The lender will probably “pull your financing” if they find out on their own, and this can happen right up to the minute before possession, like 11:59 am on possession day.
At best, you may “close late” and there are fees for that, at worst, you could both:
· Lose your deposit that you gave and
· Be sued for “specific performance” of completing a legal and binding contract to buy the home. If the sellers need the funds to close on another house, they could “fire sale” the home for say $50,000 less and sue you for that to. And you will probably lose.
If you’ve already gone through the approval process, then you know that your lender is looking for steady income and employment.
Here are some possible scenarios where you may be able to continue with your purchase:
- If you secure another job right away and the job is in the same field as your previous employment at a direct competitor. You will still have to requalify, and it may end up being for less than the original loan, but you may be able to continue with your home purchase. Be aware, if your new employer has a probationary period (usually three months), you might not be approved.
- TIP: ask if you can have probation waived or be hired without probation.
- If you have a co-signer on your mortgage, and that person earns enough to qualify on their own, you may be able to move forward. Be sure your co-signer is aware of your employment situation.
- If you have other sources of income that do not come from employment, they may be considered. The key factors are the amount and consistency of the income. Income from retirement plans, rentals, investments, and even spousal or child support payments may be considered if we have not used that income to qualify you please tell us.
Can you use your unemployment income when applying for a mortgage?
Generally, Employment Insurance income can’t be used to qualify for a mortgage. The exceptions for most financial institutions are seasonal workers or people with cyclical employment in industries such as fishing or construction. In this situation, you’ll be asked to show at least a 2-year cycle of employment followed by Employment Insurance benefits.
Also if you are in an apprenticeship, then you are on EI when you are in your “school term” and that is totally fine.
What happens if you’re furloughed (temporary leave of absence)?
Not all job losses are permanent. As we’ve seen during the COVID-19 pandemic, many workers were put on temporary leave. If you’ve already been approved for a mortgage and are closing on a house, your lender might take a “wait-and-see” approach and delay the closing if you can demonstrate you’ve only been furloughed. In these cases, you’ll need a letter from your employer that has a return-to-work date on it. Keep in mind, if you don’t return to work before your closing date, your lender will likely cancel the approval and ask for a resubmission later.
If you haven’t started the application process, it would be wise to wait until you are back to work for at least 3-months to demonstrate consistent employment.
Your credit score and debt servicing ratios may change because of lost income, which means you may no longer meet your lender’s qualifications for a mortgage. While it may not be possible, try to avoid accumulating debt or missing any payments while unemployed.
Talk to your mortgage broker.
You don’t want to get locked into a mortgage you can’t afford. You also don’t want to lose a deposit on a home because you lost your financing. When trying to assess if it’s better to move forward or walk away, we should be your first call.
Data on July 1, 2022 Prime Increase to 3.7%
Today, the Bank of Canada showed once again that it is seriously concerned about inflation by raising its overnight benchmark rate to 1.50% – making Consumer Prime 3.70%
This latest 50 basis point increase follows a similar-sized move in April and is considered the fastest rate hike cycle in over two decades.
Everyone STAY COOL!
Says Mortgage Mark Herman, top Calgary Alberta Mortgage Broker.
With it, the Bank brings its policy rate closer to its pre-pandemic level.
In rationalizing its 3rd increase of 2022, the Bank cited several factors, most especially that “the risk of elevated inflation becoming entrenched has risen.” As a result, the BoC will use its monetary policy tools to return inflation to target and keep inflation expectations well anchored.
These are the highlights of today’s announcement.
Inflation at home and abroad
- Largely driven by higher prices for food and energy, the Bank noted that CPI inflation reached 6.8% for the month of April, well above its forecast and “will likely move even higher in the near term before beginning to ease”
- As “pervasive” input pressures feed through into consumer prices, inflation continues to broaden, with core measures of inflation ranging between 3.2% and 5.1%
- Almost 70% of CPI categories now show inflation above 3%
- The increase in global inflation is occurring as the global economy slows
- The Russian invasion of Ukraine, China’s COVID-related lockdowns, and ongoing supply disruptions are all weighing on activity and boosting inflation
- The war has increased uncertainty, is putting further upward pressure on prices for energy and agricultural commodities and “dampening the outlook, particularly in Europe”
- U.S. labour market strength continues, with wage pressures intensifying, while private domestic U.S. demand remains robust despite the American economy “contracting in the first quarter of 2022”
- Global financial conditions have tightened and markets have been volatile
Canadian economy and the housing market
- Economic growth is strong and the economy is clearly “operating in excess demand,” a change in the language the Bank used in April when it said our economy was “moving into excess demand”
- National accounts data for the first quarter of 2022 showed GDP growth of 3.1%, in line with the Bank’s April Monetary Policy Report projection
- Job vacancies are elevated, companies are reporting widespread labour shortages, and wage growth has been “picking up and broadening across sectors”
- Housing market activity is moderating from exceptionally high levels
- With consumer spending in Canada remaining robust and exports anticipated to strengthen, growth in the second quarter is expected to be “solid”
Looking ahead
With inflation persisting well above target and “expected to move higher in the near term,” the Bank used today’s announcement to again forewarn that “interest rates will need to rise further.”
The pace of future increases in its policy rate will be guided by the Bank’s ongoing assessment of the economy and inflation.
In case there was any doubt, the Bank’s message today was clear: it is prepared to act more forcefully if needed to meet its commitment to achieve its 2% inflation target.
July 13, 2022 is the date of the BoC’s next scheduled policy announcement.
Rates Increasing: How Much? & How Fast?
With interest rates now on the rise, 2 Questions: How much? & How fast?
Summary:
- Rates are up by 1.45% on the Variable already (Prime was 1.75% and is now 3.2%)
- There HAS BEEN a 1 x .25% increase and 1 x .5% increase so far = .75% so far
- Expected increases are 1 x .5% or .75%, and 1 x .25% still to come.
- so expect Prime to get to 3.95% from 3.20% today, April 25th.
- Insured variable rates are at Prime – 0.95% = 3.2 – .95% = 2.25% today
- and they are expected to increase to 3.95% – .95% = 3.00% and then hold and decrease in the Fall of 2022.
- these rates are lower than the current 5-year fixed rates of about 4% and are expected to come down in the Fall, 2022.
DETAILS:
Traditionally the Bank of Canada has used 0.25% as the standard increment for any interest rate move up, or down. Occasionally the Bank will move its trendsetting Policy Rate by .50%, as it did at its last setting on April 13.
The last time the central bank boosted the, so-called, overnight rate by ½% was 20 years ago. Now the Bank seems to be laying the ground work for an even bigger increase of .75% at its next setting in June. There has not been a three-quarter point increase since the late 1990s.
Inflation remains the key concern for the BoC. In March the inflation rate hit 6.7%, a 30-year high. The central bank wants to see inflation at around 2.0%. But it does not expect that to happen until sometime late next year.
Bank of Canada Governor will “not rule anything out” when it comes to interest rates and taming inflation. “We’re prepared to be as forceful as needed and I’m really going to let those words speak for themselves.”
While higher inflation was not unexpected as the economy recovered from the pandemic, it is lingering longer than anticipated. The Bank says this is largely due to:
- on-going waves of COVID-19, particularly in China, that have disrupted manufacturing and the supply chain;
- the Russian invasion of Ukraine; and
- spending fuelled by those rock-bottom interest rates that were designed to keep the economy moving during the pandemic.
The Bank is thought to be aiming for a Policy Rate of between 2% and 3%. That is considered a “neutral” rate that neither stimulates nor restrains the economy.
At the current pace, that could be reached by the fall of 2022.
Investment Mortgages WILL Be Harder to Get in 2023!
Its true! This thing called Basel 3 will make it harder to get an investment mortgage in 2023!
Lots of junk below, the short version is:
Canadian banks will need to apply more risk to investor mortgages and to lower that risk they may:
- Increase the down payment needed from 20% to a higher amount … maybe 25% or 30%
- Lend to fewer investors – which already make up 25% to 30% of the Canadian market.
- New Zealand already started 40% down payment for investment properties!
“Avoid the new rules by buying your investment property in 2022!
Mortgage Mark Herman, top Calgary, Alberta mortgage broker.”
DETAILS: Canadian Bank Regulator Confirms Investor Mortgage Reduction Coming Next Year
Canadian real estate investors are about to face higher hurdles to enter the market. The Office of the Superintendent of Financial Institutions (OSFI), Canada’s bank regulator, confirmed new rules being rolled out in Q2 2023. The rules are a part of international Basel III guidelines, designed to reduce risk in the system. One critical change for real estate will be raising the risk weight for investor mortgages. This will reduce their leverage, which OSFI cites as a key response to housing risk. It’s still early, but here’s what we could dig up.
The Basel Trilogy and Global Financial Risk Reduction
The Basel reforms are a global set of measures for prudential bank regulation. They were developed by the Basel Committee On Banking Supervision (BCBS). The BCBS is a 45-country group hosted by the Bank of International Settlements (BIS). The BIS is often called, “the central bank for central banks.” It’s also jokingly called the “final boss” by Bitcoin investors.
We know, it’s a lot of banking jargon and acronyms, but what they do is straightforward. Their job is creating non-partisan risk reduction standards for the global financial system. Since the world’s financial system is now interdependent, problems spill across borders. They stepped up their game after a housing bubble in the US caused a global financial crisis (GFC).
The Basel Accords are a trilogy of policy where the common goals were set. The original happened before many of you were born (1988), but Basel II and III occur after the 2007-2008 GFC. No, circle back. GFC doesn’t stand for Gesus F*cking Christ, we just explained it’s the Global Financial Crisis. We’re also worried about your spelling skills.
The Second Accord primarily addressed minimum capital adequacy requirements. In other words, how much financial institutions had on hand compared to what they lend. Basel III was held in 2010, and mostly just improves the recognition of risk.
A good chunk of BASEL III reforms have already been implemented. Increasing Common Equity Tier 1 (CET) to 4.5% of risk-weighted assets (RWAs) from 2% in BASEL II, is one example. It happened in 2015 and almost no one heard a sound. The measures have been gradually introduced to create as little noise as possible. Though real estate investors might make some noise with the next update.
Basel III Will Land In Q2 2023, and It Will Lower Investor Mortgage Leverage
Basel III will increase the capital requirements for investor mortgages. “as part of the domestic implementation of Basel 3 reform package” in banks’ fiscal Q2-2023, we are increasing the risk weights, and thus capital required, for investor mortgages compared to the risk weights for owner-occupied properties,” said OSFI this morning.
That only tells us a reduction in leverage by Q2 2023 is coming, but not how much. OSFI said they’ll get back to us with what that means for down payments soon. We’ll update as soon as they do, but in the meantime we can get an idea of what we’re in for, from Basel III guidelines.
New standardized credit risk assigns a 30% risk weight to residential real estate. Next year income producing properties with a loan-to-value between 60% and 80% will have a risk weight of 45%. A bank will assume 50% more risk weight for an investor mortgage than an owner occupied home. i.e. owner-occupied mortgages with 20% down have similar risk to investor mortgages with 30% down.
There’s no direct translation of how that’s mitigated. They could want 10 points more for a mortgage, or they can offset risk in various other ways. Raising the risk premium on interest or lending less would be two methods to deal with it. None of those are particularly great for investors, now between 25% and 30% of home sales in Canada. It will slow demand though, which is probably needed.
Raising the down payment is already occurring in other countries like New Zealand. Last year the country increased the minimum downpayment for investors to 40% of the value. Mortgage Professionals Canada (MPC) recently suggested a similar arrangement for Canada. Yup! The organization that represents mortgage brokers suggested it as just a cooling measure. Not even a Basel III mitigation.
The Federal Government has yet to address the issue, probably since most don’t know it’s coming. That means we don’t know if they’ll help reduce the leverage for political points or it’ll come from the banks. One thing’s for sure though — it’s coming next year.