On October 26th, the Bank of Canada (BoC) held a meeting to discuss interest rates. The decision was to increase rates by 0.5%. We are continuing our historic year since it is the first time that five increases of 0.5% or more in a row. The is the fastest raise of interest rate ever in Canada. There is no time that rates have risen that fast that high. The BoC continues to consider that the Canadian economy to be in ‘’Excess Demand’’. However, the economy as shown sign of slowing down in the last job report where 21K jobs were lost in September. The flash GDP number of August was flat at 0% growth. Inflation is at 6.9% (September number). The inflation is decelerating from the peak of 8.1% of June. The bank's inflation target is below 2%. So, what they are trying to do is remove the excess demand from the economy and make the demand more in line with the supply side of the economy. With this rate hike the BoC as now an overnight rate at 3.75%. This rate is now pass the neutral range of 2-3% and are now actively suppressing economic activity. The reality is that nobody really knows what the real rate should be to avoid crushing the economy while removing the excess demand. The BoC is hoping to get it right and to take the inflationary pressure off without creating a deep recession. The goal is to not create a cure worse than the disease. A lot of factors can influence what the right interest rate should be, which include the level of debt of the households, economic growth and economic confidence (which is consumer sentiments) as well as international economic condition. The hikes that they did takes between 3-6 months to show full effect, but can be faster when the average consumer chose a cautious approach of wait and see before opening their wallet. They are trying to push more people to reduce spending by fear of higher rate and inflation than their budget can really do. The idea that they have is clearly to reduce demand in the short term to help companies still grappling with production issue to catch up. Many countries are doing the same hoping for the same results. This should reduce global demand and help with worldwide inflation. Governments should also pitch in and reduce their spending, which would reduce demand rapidly and also help with the worker shortage. The BoC still expect to have to continue raising the interest rate to curb inflation. There is a real possibility to see another hike this year. They will stop when they can see that the inflation remains under 2% for some time. Hopefully, the next set of economic data will show better the effect of what was done and will allow them to take better decision.
What does that mean for real estate? Depending on where you live, the amplitude of change may vary. Real estate prices will likely go down, as we started seeing in the last market update of September and October. Prices are still above those of October 2021 but lower than the prices from April-May of this year. However, the closest you are from Vancouver and Victoria, the least effect you should see. This means that you may lose some equity on your property from the peak, but still have gained since your purchase. If you purchased earlier this year you may have lost some equity. I do not expect this to be for the long term. Because there is a lack of supply and plenty of well-qualified buyer to purchase everything for sale, the softening in price should not be deep and not be for a long period of time. So, if you are scared for your home equity, don’t be. If you stay in your home for a few years, you will have paid down your mortgage and the market will come back. The largest cohort in the Canadian demographic are the millennials, and they are turning 30 at a very high rate. This group is the prime buyer of real estate. There is also over 430,000 immigrants expected this year and the next and they will require housing. The BoC may very well be pushing the rate down sooner (after March of next year) rather than later, if the market slows too much, or they realized that they created a deep economic slow down. If the BoC also just stop raising rates for a few months, people that want/need to buy, will just go back at it, returning the market to the regular BC market. This means that if you are looking to purchase a property, you may have a small window in which it will be possible to buy a property with a lot less competition and a more agreeable price. It is not time to hide, it is time to act.
When can we expect the next hike? The BoC has clearly indicated that they want to fight inflation at all costs. We have already had 3.5% rate hikes this year. The BoC does not want to send us into recession by rushing increases, but they are not ruling out the possibility of another increase in December. Economic data of the fall will give them the outlook necessary to take their decision. Looking at rate hikes in the past, of 0.5-1% is really rare and has often been followed by a drop a few months later. We just had five rate increase in a very short period of time. I will continue to monitor economic data and keep you informed. Another indication that the rate hikes might be towards the end is that the variable rate are now on par or very close to their fixed counterpart. The next BoC meeting will take place on December 7th 2022.
What is the impact on your mortgage and what to do for the future?
If you have a fixed rate mortgage, you don't have to do anything until renewal because your rate won't change. If you have a renewal coming up within the next 12 months, I would start the process as soon as possible by contacting me. If you are unsure when you have to renew, please contact me. If you have a variable rate mortgage but with a payment that remains constant (your mortgage is most likely with TD), some of you may have passed your trigger rate. A full explanation of what is a trigger rate is the next paragraphs.
For those that have a variable rate with TD or other banks and that your payment haven’t changed yet. And if you got your mortgage between March 2020 and May 2022 you may have pass your trigger rate. What is the trigger rate? The trigger rate is the rate at which your payment will now not be sufficient to cover your mortgage interest. This means that you will no longer be reimbursing your mortgage and maybe even adding onto it. To know your trigger rate you can: 1st find the document that you signed with your lawyer/notary, the trigger rate is indicated there. If you do not find those documents, you can call TD at 1-800-937-5020. You can also calculate it from my app on the DLC mortgage app. If you do not have it go to https://www.dlcapp.ca/app/simon-bilodeau . If this doesn’t work for you, here is a formula that you can use to approximate it:
Your current Payment amount X number of payments per year / balance owing X 100.
Here is an example for a person that pays 2000 $/month on a monthly payment and still owe $500,000 : (2000 $/month x 12 payment per year / 500,000 $ X 100 = 4.8. This means that the trigger rate, for this mortgage, would be 4.8%. If you use your original mortgage balance, This will be even better. Now, if you have found or calculated your trigger rate, and you have exceeded it. Do not panic, stay calm here is what you can do. The first thing to know is that the bank is not coming for your house or anything at this point. There is another trigger that needs to happen before changes are forced upon you. For the bank to request a change, you also have to pass the trigger point. The trigger point is where you have no longer enough equity in your property to cover the excess interest that you are not paying with your payments. If you had 20% down payment when you opened your mortgage, your mortgage can go back to that. If you had less than 20% your mortgage can go back to 105% of the property value. For almost, all of my customers, this should not be an issue. So, doing nothing for now is an acceptable course of action. However, this is far from a good idea. What will happen is that if you do nothing and that the rates remains high for a while, you will be adding to your mortgage instead of reducing it. So, at renewal, your payment will jump greatly. We can find a few fixes at that point, but this is far from an optimal solution. Here are 3 solutions that are better. Option 1) Increase your payment so that it covers interest and some principal (if this fits your budget). I can assist you with the payment that you need, to achieve that. Option 2) Keep your payment the same, but pay a lump sums to maintain your amortization on schedule. Again, I can assist you for the amount that you should use. Option 3) convert to a fixed rate mortgage. This will increase your payment if the equivalent fix rate is still higher and fix them to ensure that your amortization schedule will be maintained. To discuss your options contact me or take an appointment at : https://calendly.com/refinancebc/30-min-mortgage-updates .
If you have a variable rate with another bank than TD. A 0.5% increase will add about $30 per month per $100,000 of mortgage to your payment. So if your mortgage is $500,000, your payment will change by about $150 per month. For all my variable rate clients, the rate you currently have may be really close or even higher than a similar fixed rate mortgage. So, for those that are starting of loosing sleep with all these increases, it might be a good time to discuss converting you from variable to a fix rate. Converting from one to another is not necessarily a good idea for everyone. It is important to think of many factors before converting, such as your penalty risk, the length of your term, the bank that you are in, etc. You were qualified at a rate of 5.25% meaning that you have the capacity to sustain the higher rate and payment. However, I do understand that this is not easy. Most banks have not changed their prime rate yet; however, I expect this to happen within the next few hours/days. Your rate will only change when the banks change their prime rates. The payment will reflect the change next month if you pay monthly. If you pay weekly or bi-weekly, there should be no change for a few payments. If you want to know your new payment amount, please email me with your current mortgage balance and payment frequency. With this information, I can calculate your new payment. To make an appointment to discuss your options: use this link: https://calendly.com/refinancebc/30-min-mortgage-updates .
If you have a pre-approval with me on a variable rate. Your pre-approval is based on Prime minus a certain discount. As the prime rate will change for your bank, your rate will be 0.5% higher because your discount is protected by a rate hold. However, your purchasing power may have changed. I will be contacting you with details on your file later this week. If we have a rate hold for a fixed rate, this does not apply to you unless your rate hold is about to expire. I will contact you in this case.
If you are in the process of getting your mortgage approved. I will contact you in the next few days to explain what will happen.
If you still don't have a mortgage and are thinking of buying this year, I suggest you contact me as soon as possible to start your pre-approval. This will allow us to maintain rates and protect you against future rate increases.
If you have any questions, please do not hesitate to contact me at 604-828-9864 or by email at simon@refinancebc.ca.
Simon Bilodeau
DLC-Mortgage Negotiators
604-828-9864
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