Using Business Income / Corporate Income to Qualify for a Mortgage in Canada, 2024

Are you self- employed and thinking about, or hopping to use your own business income or corporate income to help you qualify for a mortgage?

It is possible, but not very common, as it usually does not help as much as we hope it would.

Mortgage Mark Herman, best Calgary Alberta mortgage broker for self-employed buyers

 

For RESIDENTIAL Purposes:

Very few lenders (like 3 out of 40+) will consider using business income that is not on personal taxes.

  • When they will allow the business income added in, they only use between 40-60% of the net business income after dividends paid.
  • They wouldn’t allow the operating company to actually be on mortgage/title;
    • it would be in personal name or
    • Hold Co name (with full personal guarantee, for the full mortgage amount – with full recourse. Meaning they can/ do/ will sue you into bankruptcy if they need to foreclose.)

Docs Needed

They do need to review more data than usual if trying to use business financials. I addition to the regular documents needed (2 years of T1 Generals, and NOAs and T4’s if there is T4 income), add in these docs:

For the Business:

  • 2 years of professional accountant prepared financial statements
    • including a signed ‘Notice to Reader’ and
  • Need a compilation of all billing engagements for the fiscal periods

 

Catch – there are always a few:

If the property in question has a large shop – it is usually not allowed in determining the value so a higher mortgage amount is usually required.

They also have a hard time if there is any income to be derived from the property.

 

Acreage Details

Max land is limited to 4, 8, or 10 acres – depending on lender

  • Only the home, de/attached garage and 4 acres are used for valuation by lender.
  • NO value is attributed to: out-buildings, sheds, riding rings, stables, storage, nor fences
    • Many of which could be valued at 200k+, like fences and buildings.

Using Disability Income to Qualify for a Canadian Mortgage: 2024

CAN I USE DISABILITY INCOME TO QUALIFY FOR A CANADIAN MORTGAGE?

YES, YOU CAN use DISABILITY INCOME to get a pre-approval leading to a full mortgage approval if you are on disability or have disability income.

  • Below are a few clarifications on the typical disability incomes that the banks can use.
  • Not all banks accept all types of disability income so we use a few different lenders to ensure we have all your bases covered.

NEXT STEP

Call or send me an email with your contact data so we can have a chat on the phone about how to use these for your purchase.

  • I answer from 9-9 x 363, am in the office from 10 – 6:30 most days, best time to call is between 11 am – 3 pm.
  • No need to pre-book, just call!
  • (How different is that?)

 

Long-term & Short-term Disability Pension/Insurance

If the borrower has a non-taxable income, the Bank, CMHC and Sagen allow the income to be grossed-up.

  • Less than $30,000, this income may be increased by 25%
  • At least $30,000, this income may be increased by 35%

 

Long-term disability: 100% of long-term disability income can be used.

Provide one of the following:

  • Letter from the organization or from QPP confirming long-term or permanent disability. If the letter is outdated (over 120 days), current bank statements confirming the deposits are being made to the borrower’s account are also needed
  • T4A(P) confirming disability income.

 

Short-term disability: 100% of the employment income can be used for short-term disability.

Provide the following:

    • A letter from the employer confirming the borrower’s return date, position and salary with a verbal confirmation from the employer to ensure the date on the letter is correct. If the return date cannot be confirmed, the disability income can be used for qualifications.

 

Pension & Retirement Income/Life Annuity

Retirement pensions are fixed incomes, CPP (Canada Pension Plan), OAS (Old Age Security), GIS (Guaranteed Income Supplement), provincial pension plans and private/corporate pensions and must be Canadian pension and evident on Canadian tax return.

IF you are Splitting Retirement Income: In the case where the pension income is shared for tax purposes, the transferring spouse/common-law partner must be on file and only the amount that has not been transferred/split is admissible.

Provide the most recent two documents of the following depending on the source of the declared retirement income:

  • Most recent NOA supported by T1 General
  • RL-2 Slip
  • T4A, T4A(P)
  • Letter from the initiating party confirming the yearly pension amount
  • Letter from the organization confirming income and permanency of income
  • Copy of current bank statement showing the automatic deposit
  • Copy of current monthly cheque stub

For CPP, OAS, QPP and GIS, only one relevant document for each source is required from the list above.

 

RRIF

Income from a RRIF is admissible if there is proof that the portfolio generates a sustainable income amount for the length of the term.

This is a tough one to nail down as the portfolio has to be sustainable and not “drained” over the term of the loan, as in, there will still be a substantial balance in 5 years, if the mortgage is a 5-year term.

 

Provide the following:

  • The most recent NOA supported by T1 General
  • Recent RRIF statement to show that the borrower has sufficient assets to support the indicated income for the length of the term

 

First Nations

This is a non-taxable income. The income can be grossed-up as follows:

  • Less than $30,000, this income may be increased by 25%
  • At least $30,000, this income may be increased by 35%

 

Provide the following:

  • Copy of the status card needed

 

“We use disability income all the time in our practice and have access to the banks and lenders that allow its use some pensions and other disability income better than other options.

Mortgage Mark Herman, top Calgary Alberta and BC mortgage broker, for 21 years.

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.

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.

Canadian Economic Forecast – Nov- Mortgage related use

Bank of Canada holds its interest rate steady, publishes updated economic forecasts

On October 25th, the Bank of Canada announced that it would maintain its Canadian Prime Rate stays at 7.3% –  stating that there is “growing evidence” that past interest rate increases are dampening economic activity and relieving price pressures.

This decision provides some comfort to borrowers who have seen their mortgage costs rise steadily since March of 2022. As for real relief – in the form of rate cuts – the Bank demurred, noting that its preferred measures of core inflation show “little downward momentum.” Consequently, the Bank said it is holding this policy rate and continuing its current policy of quantitative tightening.

We capture the Bank’s observations and its latest economic forecasts in the summary below.

Inflation facts and outlook

  • In Canada, inflation measured by the Consumer Price Index (“CPI”) has been volatile in recent months: 2.8% in June, 4.0% in August, and 3.8% in September
  • Higher interest rates are moderating inflation in many goods that people buy on credit, and this is spreading to services
  • Food inflation is easing from very high rates; however, in addition to elevated mortgage interest costs, inflation in rent and other housing costs remains high
  • Near-term inflation expectations and corporate pricing behavior are normalizing only gradually, and wages are still growing around 4% to 5%
  • The Bank’s preferred measures of core inflation show little downward momentum

Canadian housing and economic performance

  • There is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures
  • Consumption has been subdued, with softer demand for housing, durable goods and many services
  • Weaker demand and higher borrowing costs are weighing on business investment
  • A surge in Canada’s population is easing labour market pressures in some sectors while adding to housing demand and consumption
  • In the labour market, recent job gains have been below labour force growth and job vacancies have continued to ease; however, the labour market remains “on the tight side” and wage pressures persist
  • Overall, a range of indicators suggest that supply and demand in the economy are now “approaching balance”

Global economic performance and outlook

  • The global economy is slowing and growth is forecast to moderate further as past increases in policy interest rates and the recent surge in global bond yields weigh on demand
  • The Bank projects global GDP growth of 2.9% this year, 2.3% in 2024 and 2.6% in 2025. While this outlook is little changed from the Bank’s July Monetary Policy Report, the composition has shifted, with the US economy proving stronger and economic activity in China weaker than expected
  • Growth in the Euro area has “slowed further”
  • Inflation has been easing in most economies, as supply bottlenecks resolve and weaker demand relieves price pressures but underlying inflation is persisting, meaning central banks must “continue to be vigilant”
  • Oil prices are higher than the BoC assumed in July, and the war in Israel and Gaza is a new source of geopolitical uncertainty

Summary and Outlook

The BoC noted that after averaging 1% over the past year, economic growth is expected to remain “weak” for the next year before increasing in late 2024 and through 2025. Near-term weakness in growth reflects both the broadening impact of past increases in interest rates and slower foreign demand. The subsequent economic “pickup” will be driven by household spending as well as stronger exports and business investment in response to improving fore

ign demand. Spending by governments contributes materially to growth over the forecast horizon. Overall, the Bank expects the Canadian economy to grow by 1.2% this year, 0.9% in 2024 and 2.5% in 2025.

In the Bank’s October projection, CPI inflation is expected to average about 3.5% through the middle of next year before gradually easing to 2% in 2025. Inflation is expected to return to the Bank’s target about the same time as policymakers forecast in their July 2023 projection, “but the near-term path is higher because of energy prices and ongoing persistence in core inflation.”

As for what to expect going forward, the Bank had this to say about interest rates: “With clearer signs that monetary policy is moderating spending and relieving price pressures, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. However, Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed.”

The message is therefore clear: the Bank wants to see downward momentum in core inflation before it changes tack, and continues to be focused on the “balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour.”

Once again, the Bank ended its communique with a familiar phrase: it remains “resolute in its commitment to restoring price stability for Canadians.”

What’s next?

The Bank’s final (scheduled) interest rate announcement of 2023 takes place December 6th and we will follow immediately after with our next executive summary.

 

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

 

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.

 

Canadian Residential Mortgage Market: Inflation & Interest Rates: the Lead Characters for 2023

Summary:

  1. The Bank of Canada (BOC) increased interest rates 7 times in 2022. Exactly as expected 16 months ago.
  2. Inflation is at least 5.7%; and it needs to get down to 3%
  3. The BoC would rather over-tighten than under-tighten
  4. 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.

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…

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.