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:
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 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.
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 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.
Mid-March Commentary: Rates and Prices Trending Up Due to Inflation! and War!!
On March 2nd, 2022, the Bank of Canada made its most anticipated decision on interest rates since the pandemic began. After weeks of speculation and anticipation of an increase, central bankers finally pulled the trigger and moved their overnight rate higher.
For the 1st time since the pandemic began to hurt the economy in March 2020, the Bank raised its overnight benchmark rate by .25% and the knock-on effect is that borrowing costs for Canadians will rise modestly although by historical norms, remain low.
In its updated comments on the state of the economy, the Bank and singled out the unprovoked invasion of Ukraine by Russia as a “major new source of uncertainty” that will add to inflation “around the world,” and have negative impacts on confidence that could weigh on global growth.
Below are the other highlights…
Canadian economy and the housing market
- Economic growth in Canada was very strong in the fourth quarter of 2021 at 6.7%, which is stronger than the Bank’s previous projection and confirms its view that economic slack has been absorbed
- Both exports and imports have picked up, consistent with solid global demand
- In January 2022, the recovery in Canada’s labour market suffered a setback due to the Omicron variant, with temporary layoffs in service sectors and elevated employee absenteeism, however, the rebound from Omicron now appears to be “well in train”
- Household spending is proving resilient and should strengthen further with the lifting of public health restrictions
- Housing market activity is “more elevated,” adding further pressure to house prices
- First-quarter 2022 growth is “now looking more solid” than previously projected
Canadian inflation and the impact of the invasion of Ukraine
- CPI inflation is currently at 5.1%, as the BoC expected in January, and remains well above the Bank’s target range
- Price increases have become “more pervasive,” and measures of core inflation have all risen
- Poor harvests and higher transportation costs have pushed up food prices
- The invasion of Ukraine is putting further upward pressure on prices for both energy and food-related commodities
- Inflation is now expected to be higher in the near term than projected in January
- Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards
- The Bank will use its monetary policy tools to return inflation to the 2% target and “keep inflation expectations well-anchored”
- Global economic data has come in broadly in line with projections in the Bank’s January Monetary Policy Report
- Economies are emerging from the impact of the Omicron variant of COVID-19 more quickly than expected, although the virus continues to circulate, and the possibility of new variants remains a concern
- Demand is robust, particularly in the United States
- Global supply bottlenecks remain challenging, “although there are indications that some constraints have eased”
As the economy continues to expand and inflation pressures remain elevated, the Bank made a clear point of telling Canadians “To expect interest rates to rise further.”
The resulting quantitative tightening (which central bankers framed as “QT” rather than the previous term “QE” for quantitative easing) would complement increases in the Bank’s policy-setting interest rate. The timing and pace of further increases in the policy rate, and the start of QT, will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving a 2% inflation target.
BoC’s next scheduled policy announcement is April 13, 2022. We will update you following that announcement as always.
Rising rates: fixed or variable?
The Bank of Canada pulled the trigger on an interest rate increase, the first since October 2018 and the Bank has made it clear more increases are coming.
The upward move and the Bank’s messaging have rekindled the perennial mortgage debate: fixed or variable. The answer remains the perennial: it depends.
It depends on the borrower’s end goals, finances and their desire for stability. That last point, stability, is what leads most Canadian home buyers to opt for a 5-year, fixed-rate mortgage. But in purely financial terms – and saving money – variable-rate mortgages tend to be cheaper, and they do not have to be volatile.
In a rising rate environment, many borrowers worry about the cost of their debt going up. But right now, variable-rates are notably lower than fixed-rates and it will take several Bank of Canada increases to close the gap. In the meantime, that amounts to savings for the borrower.
Those savings – often hundreds of dollars a month – could be applied against principal. As rates rise the amount can be adjusted, thereby keeping total monthly payments the same and evening-out any volatility.
It should be remembered that fixed-rates are rising as well. They are tied to Government of Canada 5-year bond yields. Those yields have been increasing, and at least some of that is tied to increases in U.S. government bond yields. Canadian bonds tend to move in sync with American bonds, but those changes do not necessarily reflect the Canadian economy. In other words, the changes are not completely within our control.
A Few More Words on Russia Invading Ukraine
Markets were thrown into a tizzy. They plunged. But the frenzy was short lived. By the end of the day markets were back in the black.
Canada’s economic exposure to Russia and Ukraine is relatively small. Canada imported $1.2 billion from Russia in 2020; Russia imported roughly the same from Canada – less than a week’s worth of commercial traffic across the Ambassador Bridge.
The key factor in the conflict, for Canada, will likely be the price of oil, which has climbed past $100 a barrel. Rising oil prices and higher fuel costs have been a principal driver of inflation here, and inflation is the main concern of the Bank of Canada. It is currently running at 5.1%, a 30 year high, and the central bank is under growing pressure to bring it under control.
Oil is also an important part of Canada’s resource economy. Higher prices will likely lead to more production. Any embargo of Russian oil will create demand for Canadian product. That, in turn, would put more load onto Canada’s economic recovery, which is strong but hampered by pandemic labour shortages and supply-chain problems which, again, are adding to inflation pressures.
None the less, war creates uncertainty, and uncertainty triggers caution among central bankers. A recent Reuters poll of 25 economists suggests the Bank of Canada will go ahead with a quarter-point rate hike this week.
Best answer I have seen yet is below … it still makes the 5-year fixed the better option right now (for most people)Mortgage Mark Herman, Top Calgary Mortgage Broker
The latest significant news was good, but modest. Canada’s unemployment rate dipped to 7.5% with the creation of 94,000 jobs in July. Most of those are full-time and in the private sector.
Employment levels are linked to inflation, which is a key factor watched by the Bank of Canada in setting interest rate policy which, in turn, can affect mortgage rates.
As the labour market tightens up, employers tend to offer higher wages to attract workers. That increases the cost of producing goods and services, driving inflation. As well, as more people get work and earn more money demand for goods and services increases. If that demand outpaces supply, inflation can also result.
Canada finds itself in this position now. Inflation is running high chiefly because of supply constraints caused by the pandemic. At the same time, more and more people are heading back to work.
That has some analysts forecasting the Bank of Canada will be raising rates to calm inflation. The Bank, however, has been saying otherwise.
It is also useful to watch what is happening in the United States. The two economies are tightly linked and actions in the U.S. can offer useful clues about what will happen here.
In its latest assessment of the American economy the U.S. Federal Reserve continued to down play inflation – which is running high there as well – as “transitory”. The Fed continues to look to the second half of 2023 as the most likely time for any possible rate hikes. While the Bank of Canada has said it expects rates could start rising as much as a year sooner than that, it would be unusual for the BoC to move before the Fed.
What is everyone doing with the money they saved during Covid?
- Eating out, travel, debt reduction and BUYING HOMES!
- Mortgage rates are low and home prices are close to 2005 levels!
Mortgage Mark Herman, Top Calgary Alberta Mortgage Broker
Latest Bank of Canada Survey:
As COVID-19 continues to be pushed down in Canada, consumer spending is expected to go up. The latest survey by the Bank of Canada suggests that will lead to an even greater demand for homes.
The Bank of Canada’s Survey of Consumer Expectations… indicates:
- 40% of respondents managed to save more money than usual during the pandemic.
- They expect to spend about 35% of those savings over the next 2 years on activities that have been restricted during the pandemic, such as dining out.
- Respondents plan to put 10% of their savings toward debt repayment and
- 10% toward a down payment on a home.
14% plan to buy a home soon, much of that was driven by renters, with 20% saying they want to get into the market.
80% of the respondents who have “worked from home” expect to continue with that and there is a consistent with the shift in demand for larger properties, away from city centres.
- 5 Year fixed are going up and never getting back down to where they are now.
- Variables are also great – right now they are Prime – 1% or 2.45% – 1% = 1.45%, and as below, should stay there until 2023! Almost 20 more months!
Both of these are awesome options right now.Mortgage Mark Herman, Top Calgary Alberta mortgage broker for 1st time home buyers
Bond traders believe inflation is going to be rising over the coming months and have been demanding increased bond yields. That has led to increasing interest rates for bonds and, consequently, increasing rates for the fixed-rate mortgages that are funded by those bonds.
The traders say the COVID-19 vaccine rollout and plans for vast infrastructure spending – particularly in the U.S. – are boosting expectations of a broad recovery and an increase in inflation. Better than expected GDP growth in Canada and shrinking unemployment in the U.S. would tend to support those expectations.
This, however, puts the traders at odds with the central banks in both Canada and the United States.
The Bank of Canada and the U.S. Federal Reserve also expect inflation will climb as the pandemic fades and the economy reopens. There is a pent-up demand for goods and services, after all. The central banks see that as transitory, though, and appear to be looking past it. The U.S. Fed has gone so far as to alter its inflation target from 2% to an average of 2%, over time, thereby rolling any post-pandemic spikes into the bigger, longer-term calculations.
The Bank of Canada and the Fed have committed to keeping interest rates low, probably through 2023. Both say inflation will have to be sustained before interest rate moves are made to contain it. The integrated nature of the Canadian and American economies means it is unlikely the BoC will move on interest rates before the U.S. Fed.
Moving to Calgary and Buying a Homes As Soon As Possible
This is a common question, and as usual, the way the banks / lenders want things done is exactly the opposite of what works in real life, for real people, like you.
You Want: To buy a home in Calgary, move the family in, get settled and then start the new job – RIGHT! That makes the most sense.
The Lenders want:
- You to have 1 full-cycle payslip BEFORE then will fund your mortgage and
- You to be completed the 90 day probation if you have a probationary clause in your new employment
PAYSLIP: The first full-cycle pay-slip – meaning 2 full weeks of pay – critically needs to match your employment letter / job offer at 40.00 hours; or whatever it is that you are guaranteed for pay. If it does not match, then your income is not guaranteed, and the lenders want to see guaranteed pay.
39.97 hours is not 40.00 hours; it means the 40 hours is not guaranteed and the lenders often decline to fund your mortgage.
PROBATION: In Alberta, you can be let go for no reason in the first 90 days of employment – even if you are NOT on probation. It does not matter if there is/not a reason, it is the law.
Obviously, if you just moved here, bought a home and are let go, the odds of you moving back are high. And the bank is left in the risky position of losing money on the home or making an early CMHC claim. Which is why they want to see either: NO probation, or a shortened & completed probation period, or a completed probation period.
- Workaround 1: We recommend and often see new employees specifically asking for no or short probation periods. You are taking the risk moving here, the employer is often willing to waive the probation – which can be the key to speeding a home purchase.
- Workaround 2: Depending on how your math works out, you may be able to carry 2 mortgages at 1 time. There are 2nd Home Programs that can work for situations like this, but again, the math is different for everyone.
How to make the move as smooth as possible
The smoothest way to buy a home when relocating is to start the job first. Ask for the employer to waive or shorten the probation period. Then rent, stay with friends, or anything that works for the first 2 or 3 weeks. Then when you have a full-cycle pay slip you can buy a home that works for you and take possession as soon as possible is a much smoother transaction. Otherwise you are “trying to push a rope up a hill” and the bank’s don’t like that at all.
We see issues with people buying too soon all the time. Forcing the system often backfires on new home owners. The resulting brain damage is not worth trying to do the transaction backwards in the eyes of the banks.
Mark Herman; top Calgary Alberta Mortgage Broker, with best rates
Below is a great summary of why this rate cut is not a big deal mortgage wise.
All the banks kept their rates the same but for TD that lowered their Prime rate by 0.10% only. No other banks have followed yet and are not expected to. As you can see the banks will keep that rate cut to boost their profits … because they love money; specifically, your money, not you.
Variables went down only by 0.1% … and fixed rates all stayed the same … at their 115 year all-time lows. Looks like mortgage interest rates are as low as they can go.
Mark Herman, top Calgary Alberta mortgage broker for home purchases and mortgage renewals.
Why the Bank of Canada’s interest rate cut won’t help us.
After seven years of interest rate cuts, this economic lever is a spent force. The law of diminishing returns means each new cut has less and less impact.
The Bank of Canada decision Wednesday to cut its key lending rate for the second time this year to 0.50 per cent …
The impetus behind the cut wasn’t really about getting you to borrow more or ease your borrowing burden. It was about widening the gap between our interest rates and those in the U.S. to push our dollar down.
“Canada’s economy is undergoing a significant and complex adjustment,” the bank said in its rate decision, noting there was a modest recession in the first half of the year as the economy contracted.
Our dollar started the day down a third of a cent to 78 cents, a level not seen in 10 years. That’s going to make snowbirds unhappy, but the central bank is more interested in fuelling exports to our larger trading partner.
Can the Bank of Canada really save the day? Rates are already so low, we’re at the point of diminishing returns. Each new cut is greater in percentage terms than the last, but the real impact is smaller and smaller.
Here are four reasons this cut isn’t likely to make much difference:
1. Not much relief
If interest rates are at 15 per cent – not far off what I was paying for my first mortgage – and fall to 10 per cent, that’s a 33 per cent decline and puts a huge amount of money in your pocket.
If the rate is 0.75 per cent and falls to 0.50, it’s the same 33 per cent drop, but the saving is negligible. By the time it filters down through the banking system to your line of credit, the difference may add up to a Big Mac meal.
Wednesday’s move by the central bank means the banks will likely lower consumer borrowing costs a little. The betting is that they’ll give us 10 basis points and they’ll keep the other 15. TD Bank was first off the mark, doing just that.
So, suppose you’re a good bank customer. Your $100,000 secured line of credit is at prime, plus half a point, or 3.35 per cent (2.85 plus .50). You’re making an interest-only payment each month which comes to $279 a month.
The bank passes on 10 basis points. Your new combined rate is 3.25 per cent, or $271 a month. Spend that $8 wisely.
2. Indifferent businesses
Businesses who need money to invest are already borrowing. This rate cut won’t make a difference to their plans…
3. Indifferent consumers
… many consumers see the low rates as normal. He’s right, in that anybody 45 or younger has only lived in an environment of falling interest rates. So 10 basis points off is just more of the same and unlikely to generate much interest….
4. Drooping dollar
Economist have noted that the January rate cut did send the dollar lower, but did little to accelerate growth, even as the loonie fell from 87 cents to about 82 cents and now 78 cents..
We watch all kinds of indicators for when mortgage rates may change.
This is the main one, the CMB – Canadian Mortgage Bond. As you can see it is on the way up and mortgage rates and the graph are directly related.
Rate Watch Program
When rates go up the banks call us and give us at least 2 hours – and sometimes 2 days – notice. This lets us send in all the files that we are working on for 120 day – or 4 month – rate holds. All the files that have enough data in them – at least an application and the disclosures and a payslip – get rate holds at today’s rates.
The banks do not do this for you! Another reason to use a broker that works the system to your advantage at no cost to you!
Mark Herman, top Calgary Alberta mortgage broker for new home purchases and mortgage renewals.
The graph below shows the expected Alberta GDP growth rate for the end of 2015 and 2016. The numbers are still positive – just not as high as they were before.
If the Calgary to Edmonton corridor was a country it would have the 2nd highest growth rate in the world after China.
Now these numbers are back to earth, things will continue as normal as oil slowly works it’s way back to about $70 a barrel.
Mark Herman, Top Calgary, Alberta mortgage broker
Click on the chart to see it larger.