Happy New Year from the Mortgage Professionals!
We hope that this new year brings you new opportunities and above all, prosperity and health for you and your loved ones. As your trusted Mortgage Professional, we will continue to help you make informed decisions about your mortgage and keep you up-to-date on the market.
Topics covered in Today’s Blog:
- December 7th rate announcement Re-cap
- Today’s rate announcement: Jan 25th
- National debt levels are rising
- How you can consolidate your debt through refinancing
- Rising rates and their effects on housing affordability
- The cost of borrowing and the current qualifying rate
- Our market projections for 2023
Before getting into 2023, let’s talk about how we ended 2022
We ended the last rate announcement of 2022 with an increase of 25bps (0.25%)— Bringing the overnight target rate to its previous level of 4.25%. The mortgage rate environment over the past year has caused angst for many as the prime rate increased 400bps since March 2022. Inflation, trigger rates and rising mortgage payments have been on everyone’s mind as the bank continues to raise interest rates in hopes to combat persistent inflation. Here are some end-of-the-year stats to help us situate ourselves in the new year’s market:
- The Consumer Price Index (CPI) rose 6.8% year over year in December 2022. We ended the year with a CPI of 6.3%— Still 5% above the target rate (See graph below).
- Mortgage interest costs rose 18.0% yearly in December following a 14.5% increase in November.
- The dramatic monetary tightening in the past nine months has slowed headline inflation. The decline in December, however, was primarily due to seasonality and a significant drop in gasoline prices.
- Wages have risen by more than 5% for the seventh consecutive month in December. The GDP in Q4 of 2022 ran well above the Bank’s forecast of 0.5%.
- Employment rose by 104,000 last month, and the unemployment rate fell to 5.0%. The increase in employment in December was driven by full-time work, which rose for a third consecutive month— Surpassing the BoC’s expectations.
Overnight Target Rate Increases since March 2022
Today’s Rate Announcement Details
The Bank of Canada announced today that it’s raising its target for the overnight rate to 4.5%. This means that the Bank Rate will be 4.75% and the deposit rate will be 4.5%. Bringing the Prime Rate to 6.7% (from its previous 6.45%). The bank is also continuing to reduce the amount of money it pumps into the economy.
Global inflation is still high and widespread. However, many countries are seeing prices fall, mostly due to lower energy prices and better supply chains. The economies in the United States and Europe are slowing down, but not as much as the bank originally thought in October. China has recently lifted some of its restrictions due to COVID-19, which could lead to more economic growth and higher prices for goods. Russia’s ongoing conflict with Ukraine is causing uncertainty. Financial conditions are still tight, but have improved since October, and the Canadian dollar has remained stable compared to the US dollar. The bank predicts that the global economy will grow by about 3.5% in 2022, then slow down to 2% in 2023 and 2.5% in 2024. This is slightly better than the bank’s prediction in October.
In Canada, the economy is doing better than expected and there is still more demand than what is available. Jobs are hard to find and businesses are having trouble hiring workers. However, increasing interest rates are starting to slow down economic activity, especially in people’s spending and the housing market. As interest rates continue to rise, spending on things like entertainment and business investments is expected to slow down. Also, weaker demand from other countries will likely affect Canadian exports. This overall slowdown will help balance out the supply and demand.
Inflation is improving, but there’s still more tightening to come
The rate of inflation decreased from 8.1% in June to 6.3% in December. This is largely due to lower gas prices and more recently, stable prices for durable goods. However, Canadians are still facing difficulties due to high inflation in everyday expenses like food and housing. Expectations for inflation in the short term are still high. While the overall inflation rate is still around 5%, measurements taken over the past 3 months suggest that it may have peaked. Inflation is expected to decrease significantly this year. Lower energy prices, better global supply conditions, and the impact of higher interest rates on demand are all expected to bring the inflation rate down to around 3% in the middle of this year and back to the target rate of 2% by 2024.
Because there is still more demand than supply, the Governing Council decided to increase the policy interest rate by an additional 0.25%. The bank is also continuing to reduce the amount of money it pumps into the economy. If the economy continues to develop as expected, the Governing Council plans to keep the policy rate at its current level and evaluate the impact of the previous interest rate increases. They are prepared to increase the rate further if necessary to reach the target inflation rate of 2%. The Governing Council is dedicated to ensuring stable prices for Canadians.
Inflation Rates in Canada have been on the rise since 2019
Despite all this, we are beginning to see declining inflationary pressures on CPI. Inflation has decreased from its record-breaking high in June 2022 of 8.1%. However, the public’s perception of inflation matters. In fact, 60% of the respondents to the Bank of Canada’s latest business consumer index believe that by 2024 inflation will be near 5%. This amount would still be above the 2% target rate. The Bank of Canada wants to combat expectations that cause workers to demand higher wages and businesses to pass on their higher costs to the consumer. To prevent this, the Bank of Canada will most likely continue to raise rates throughout 2023.
Debt is on the rise.
Last week, the Office of the Superintendent for Financial Institutions (OSFI) announced that they were concerned about the risks associated with the large and rising number of highly indebted borrowers, particularly those with floating-rate mortgages, which constitute a record proportion of outstanding mortgage loans.
The Bank of Canada’s policy rate affects the interest payments on various types of debt. According to Equifax Canada, consumer debt reached $2.36 trillion in the third quarter, a 7.3% increase from the previous year. A recent survey shows that 71% of respondents are concerned about interest rates increasing faster than they can handle. This amount underwent a 4% increase from the previous survey. While not all variable mortgages will see an immediate increase in payments with higher rates, those with fixed payments have trigger rates to consider. Which is the point at which the lender may ask the holder to pay more or adjust their terms to pay off more of the principal loan. Before the recent hike, the Bank of Canada estimated that half of the mortgage holders with these types of loans had already reached their trigger rates.
We have already written a few blogs concerning Trigger Rates, so if you’re in need of a refresher check out any of our previous blogs:
- Everything you need to know about Trigger Rates.
- Thinking About Locking Into a Fixed Rate Mortgage?
- September 7th: Prime Rate Announcement & Your Trigger Rate
According to Rebecca Oakes, the head of advanced analytics at Equifax Canada, the increase in debt is a result of a combination of factors such as growth from immigration, pent-up spending, and the strain of higher living costs leading to increased borrowing. Additionally, Oakes stated that there has been a rise in credit card spending and new card issuances across all consumer segments, including those considered subprime.
Credit card spending reached an all-time high by Q3 2022, rising 17.3% from 2021. The average spending on credit cards was also up, reaching $2,447, a 21.8% increase from the third quarter of 2019.Equifax Canada
What is debt consolidation? How can refinancing my home help?
A debt consolidation mortgage is a type of loan that allows an individual to combine multiple outstanding debts into one single loan with a lower interest rate and potentially lower monthly payments. There are several reasons why someone might consider a debt consolidation mortgage:
- Lower interest rate: A debt consolidation mortgage typically has a lower interest rate than credit cards or personal loans, which can result in significant savings over time.
- Lower monthly payments: Combining multiple debts into one loan can lower the overall monthly payments, making it easier to manage and pay off debt.
- Simplify debt management: Having multiple debts with different due dates and interest rates can be overwhelming to manage. A debt consolidation mortgage simplifies the process by consolidating all debts into one loan with one due date and interest rate.
- Improve credit score: Through debt consolidation, an individual may be able to lower their credit utilization and make payments on time, which can improve their credit score over time.
- Tax benefit: The interest paid on a mortgage loan for a primary residence may be tax-deductible, whereas the interest paid on credit card debts is not.
In Canada, debt consolidation through refinancing your home typically involves taking out a new mortgage that is larger than the current mortgage balance. The additional funds can be used to pay off outstanding debts. Debts such as credit card balances, personal loans, car loans, and other high-interest debts. It’s important to note that refinancing your home comes with certain risks, as you will be taking on a larger mortgage, which will take longer to pay off and increases the total interest you will pay over the life of the loan.
Be sure to consider the long-term financial impacts of refinancing. Always make sure that you can afford the new mortgage payments before proceeding. Never hesitate to contact a mortgage professional to find a tailored solution to your situation. Make sure that your decision to consolidate aligns with your overall financial goals and is sustainable for you in the long run. Contact us today for a free debt consolidation consultation.
Those with high Loan-to-Value mortgages are most at risk
To date, mortgage delinquency rates at federally regulated financial institutions (FRFIs) are at a record low. Most FRFIs have been committed to working closely with borrowers who have reached their trigger points. TD, CIBC, and BMO have allowed some negative amortizations until their renewal. As a result, the proportion of mortgages having remaining amortizations has risen sharply.
Earlier last week, CEOs of the Big 5 banks weighed in on vulnerable mortgage clients. None were quite as forthcoming as Scotiabank’s new President and CEO, Scott Thomson. He announced that the bank has about 20,000 borrowers that it considers “vulnerable.” These are borrowers with a high loan-to-value (LTV) mortgage, a low credit score, lower deposits in their checking accounts and those with home valuations that are susceptible to market conditions.
What is Loan-to-Value (LTV)?
The LTV ratio measures the proportion of a property’s value that is financed by a mortgage. It is determined by comparing the size of the mortgage to the market value of the property when a new mortgage is obtained. A high LTV ratio indicates a smaller down payment in relation to the purchase price.
Are you a homeowner who fears they won’t be able to make their mortgage payments? There are several steps you can take:
- Contact your mortgage lender as soon as possible. Many lenders have programs in place to assist homeowners who are struggling to make their payments.
- Consider refinancing, which can lower your monthly mortgage payments by extending the loan term, reducing the interest rate, or both.
- Review your monthly budget and consider cutting back on expenses to free up money for your mortgage payments. Consider renting out a room or a basement to increase your income.
How increased interest rates are affecting housing affordability
The housing market is one of the most susceptible industries when it comes to increasing interest rates. Resulting from the seven consecutive rate hikes in 2022, the actual national average home price as of December 2022 was $626,318. Down 12% from the same month the year prior. Home sales plummeted in the country’s largest metro areas by 30%-to-50%. Greater Vancouver led the way, with sales falling 52% year-over-year. Both inflationary rate hikes and rising borrowing costs have posed challenges to home affordability. And as many know, the cost of borrowing is highly dependent on the qualifying rate.
What is the Mortgage Stress Test?
The Office of the Superintendent of Financial Institutions (OSFI) in Canada uses the mortgage stress test, also called the qualifying rate, to make sure borrowers can afford their mortgage payments if interest rates rise. The stress test makes borrowers qualify for a mortgage at a higher interest rate than the rate they are getting. Currently, the rate is the highest of the Bank of Canada’s five-year benchmark rate or the rate offered plus 2%. Borrowers must be able to afford payments on a mortgage at least 2% higher than the rate they are getting.
How does the Stress Test affect the housing market?
The mortgage stress test applies to all mortgages. It requires borrowers to qualify at a rate 2% higher than the rate they secure from their lender. The test is designed to determine if a borrower can handle potential interest rate increases in the future. It also serves to prevent borrowers from taking on excessive debt and maintain the stability of the housing market. When the stress test becomes too high, it can make it more difficult for potential homebuyers to qualify for a mortgage. This can lead to a decrease in demand for homes and potentially slow down the housing market. It can also make it harder for first-time homebuyers and those with lower incomes to enter the housing market.
Today’s Qualifying Rate
This situation is exactly what we have seen over the last 6 months. With the back-to-back interest rate hikes since March of last year, so too has the qualifying rate risen alongside the Prime rate. The current stress test is now in the 7-9% range depending on mortgage type. This has visibly reduced activity within the housing market. Borrowers are now qualifying for much less than they did just a year ago.
Each 25bps (0.25%) increase in the prime rate on a $100,000 mortgage balance equals +$14 per month in a mortgage payment. Meaning, since March 2022, mortgage payments have increased $238 per $100k borrowed.
Our market projections for 2023
Based on a Reuters’ opinion poll, the world’s largest multimedia news provider, 90% of economists (26 of 29), expected the rate to rise to 4.50% on January 25th. Poll medians indicate that the Bank of Canada will maintain its overnight rate at 4.50% through the end of the year. During the next six months, only two forecasts predicted that the terminal rate would reach 4.75%.
With rising amounts of consumer debt, it may be worthwhile to contact us to discuss your options for debt consolidation. Through refinancing, you can pay off your debt quicker. And at a potentially lower rate, saving you money in the short run.
Dominion Lending Centre’s very own in-house economist, Sherry Cooper concluded her 2023 projections with the following statement: “It won’t surprise me if the Bank of Canada resumes their tightening later this year. I do not expect any rate reductions in 2023.”
Bank of Canada’s Governor Tiff Macklem and his officials have slowed down the rate hikes and signalled that future decisions would depend on economic data. Indeed, the most recent GDP and today’s jobs report point to continued economic strength. The October and November gains in GDP suggest Canada’s growth is holding up better than expected. The economy is on track to expand at an annualized rate of 1.2% in the fourth quarter. This amount exceeds the central bank’s expectations.
Expect another year of increased rates
Decreasing home prices are causing markets to adjust and making housing more affordable. This helps the Bank of Canada control inflation. We anticipate that the slowdown will have enough of an impact on inflation for the Bank to lower interest rates by 2024. Which will further improve affordability once the housing market stabilizes. These developments should lead to a sustainable recovery.
If you want to learn more, check out Sherry Cooper’s youtube Channel where she breaks down all of the Bank of Canada’s announcements: Watch here.
Give your Mortgage Professional a Call Today
Understanding all the recent rate increases can be challenging. It may feel as if finding a solution to your current situation can be difficult. There are many individual factors that will affect your mortgage. If you would like to schedule a consultation, or simply want to give us a call, we are happy to help in any way we can. Even if it’s to provide a little peace of mind during these complicated times.
Contact Darcy Doyle at the Mortgage Professionals today by calling 604-889-7343 or send us an email at email@example.com
Click here to visit our Instagram, where we post the latest Tips & Tricks in the mortgage world.
Happy Lunar New Year! 2023 is the Year of the Rabbit.
For all those born in 2023, 2011, 1999, 1987, 1975, 1963, and 1951.
Chinese astrology describes the rabbit as gentle, sensitive, peaceful, a good listener, and a great mediator. The Year of the Rabbit is considered a lucky year that brings good fortune and prosperity. It is believed that it is a time for diplomacy, negotiation, and compromise. People born in the Year of the Rabbit are said to possess refinement, elegance, and good manners, with a keen sense of fashion and aesthetics. They are also believed to be kind-hearted, compassionate, and good-natured. The Year of the Rabbit is also considered a time of new beginnings and opportunities. Making it a perfect time to initiate new projects or make significant changes in life.