Today, January 25, 2023, the Bank of Canada (BoC) held a meeting to discuss interest rates. The decision was to raise rates by 0.25% again, but this may be the last raise we see for a while. We are continuing our historic momentum, as this is the first time that there have been eight increases in a row. This time, however, I think the BoC made a mistake. Inflation has come down a lot and is now at 6.3% instead of 8.1%, at its peak, but monthly inflation from November to December was negative by 0.6%. It is therefore normal to think that inflation will be below 2% (their target) this year. We also have a relatively rare anomaly, currently, variable rates are considerably higher than fixed rates. The good news is that the BoC has decided to wait for the next hike to see what will happen with inflation. So in theory this increase should be the last. The BoC, on the other hand, does not seem to be ready to cut rates soon, and it’s talking about cutting interest rates potentially towards the end of the year, but more likely next year. Moreover, they will be much more cautious this time around with their drop than during the pandemic. The next meeting will be held on March 8th, 2023.
Another good news, this morning I received rate sheets from the banks showing variable rate increases and fixed rate decreases. Fixed rates are based on the mortgage market, which itself tracks Canadian government bond interest rates, and they are not directly dictated by the Bank of Canada. Fixed rates are dictated by the transactions of investors like the big banks, insurance companies, pension funds, and a few other major players. These major players invest their money at an interest rate that they consider to be higher than inflation for the duration of the bond. From this, we can conclude that they believe that inflation should be under control soon.
What does this mean for real estate? This rise in rates should not have a significant impact on real estate prices, at least not near major city centres. There will surely be a drop (of less than 1%) in the coming months, but everything should come back to life in March for the start of the most transaction heavy period for real estate. The downturn will be short-lived unless the BoC decides to raise rates again at the next meeting. The prices will not drop by much as there are always trades that need to take place. People need to move for work, need extra room for a new baby, couples forming, divorces, people aging, and over 465,000 new immigrants are expected to arrive this year. All of these reasons create demand for real estate. From a qualification standpoint, buyers have greater purchasing power today than they have since November 2022. This is due to fixed rates falling. I see more and more customers with rates below 5%.
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. On the other hand, if you have a renewal coming up within the next 12 months, I recommend contacting me so that we can start the renewal process as soon as possible. If you are unsure about when you need to renew, please contact me. For those of you that have a variable rate mortgage with a payment that remains constant (your mortgage is most likely with TD), the majority of you have exceeded your trigger rate. A full explanation of what a trigger rate is and what to do can be found in my blog post here:
If you have a variable rate with a bank other than TD. A 0.25% increase will add about $15 per month for every $100,000 of mortgage to your payment. So, if your mortgage is $500,000, your payment will change by about $75 per month. For all of my variable rate clients, the rate you currently have is possibly higher than a similar fixed rate mortgage. So for those who are starting to lose sleep over all these increases, now might be a good time to discuss converting from a variable rate to a fixed rate. Switching from one to the other is not necessarily a good idea
for everyone. It is important to think about many factors before converting, such as your penalty risk, your term length, the bank you are at, etc. You are probably able to afford the higher payment, but it may be difficult. Best to contact me for more details. Most banks have not yet changed their prime rate; 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 would like 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 schedule an appointment to discuss your options: use this link:
If you have 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 0.25% higher because your cashback is protected by a rate hold. However, your purchasing power may have changed. I will contact you with your case details 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 coming 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 allows us to maintain rates and protect you against possible but unlikely rate increases.
If you have any questions, please do not hesitate to contact me at 604-828-9864 or by email email@example.com.