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.

Canadian Mortgage Data – Nov 14

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

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

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

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

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

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

Finally some good news for buyers.

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

Mortgage Mark Herman – top, best Calgary mortgage broker

 

 

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.

 

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

UGH! The BoC whacks borrowers again.

Mark Herman, Top Calgary Alberta  Mortgage Broker

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

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

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

Inflation facts and outlook

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

 

Canadian housing and economic performance

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

 

Global economic performance and outlook

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

 

Summary and Outlook

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

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

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

Stay tuned

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

 

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.

 

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.

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.