Tag Archives: Bank of Canada

Another Half Percent Rate Increase

10 minutes ago, the Bank of Canada announced another half percent rate increase – and they’re not done, yet.

At the start of the year, the Bank of Canada rate was 0.25% and the housing market was humming. That’s come to a crashing halt. The days of multi-offers are pretty much over and it’s taking a number of price drops to sell a home in most markets.

Keep in mind that “average” statistics for housing across Canada are totally useless. A small stable market isn’t impacted, while Toronto, Montreal and Vancouver will certainly see the brunt of the price drops and reduced sales. In between are a vast variety of different cities with a wide variety of factors and impact.

You also need to remember that the Trudeau stress-test is still in place. At the start of the year, someone with an $85,000 income could qualify for a $500,000 mortgage. Today, that would take an income of $113,000. And that’s assuming no other debt of any kind. Since nobody I know received a $28,000 annual raise, the person needs to find a much less expensive home or stay on the sidelines until rates drop (which won’t be until 2024) or prices come down – way down.

Since the housing sector is such a huge part of our economy, you can bet on a recession. But this recession won’t have the Bank of Canada dropping rates to resurrect the economy. They’re entirely focused on inflation. It’ll be a significant slow-down in the housing market, then a recession resulting in job losses without any help from the government or Bank of Canada until late 2023 or 2024.

Much like the imbalance in the car market for the past two years, it will likely turn out to be a great decision to put off buying a home for the next year or two…

Close To Your Mortgage Renewal? Make a Call To Save $10,000 Or More

There’s another (likely “only”) half a percent rate increase coming at the next Bank of Canada meeting in September. While inflation seems to have peaked, but that’s just an educated guess, our rate increases may not be over until the end of the year.

If you have a mortgage coming due for renewal like I do, it’s not a pleasant thought. However, if your mortgage comes up in the next six months, a number of lenders WILL let you renew if you’re within that six months! That’s what I did last week. My rate is going up 2.4 percent, but that’s better than three percent after the September increase, and any other jump after that. Check with your lender today if your mortgage is up in February next year or earlier! That call may end up saving you over ten thousand dollars!

What’s the rate increase going to cost you? That depends on the rate you currently have. However, a 3% increase on each $100,000 will be $3,000 a year. So someone with a $400,000 mortgage will see their payments go up close to $1,000 a month! What do you get for that? Nothing! It’s a huge increase in your monthly spending for just getting to stay in your home. Yes, it stinks and it’s depressing, but that’s what rising rates cause. Your early renewal will start the following month, so be ready to change your payment budget!

How long should you renew for? That’s up to you. I only ever answer questions as to what I would do – or in this case, what I did. My thinking was that rates will peak sometime next year at the latest. But then it’ll take a while for them to ease downward. Like gas prices, they spike up and take forever to come back down. Even when the Bank of Canada decreases rates, that doesn’t mean the chartered banks will immediately pass that prime rate decrease on. So it didn’t make sense to me to just do a two-year mortgage for that reason. But I sure wasn’t going to sign for five years at these rates as selling or refinancing triggers a big penalty (typically three months or the interest differential – whichever is larger.)

So I picked the kind-of middle option of a three-year term at 5.2%.

While my mortgage is pretty small, I sympathize with anyone who is close to the $400,000 mortgage example about to flush $36,000 of net income down the toilet over the next three years…

Close To Your Mortgage Renewal? Make a Call To Save $10,000 Or More

There’s another (likely “only”) half a percent rate increase coming at the next Bank of Canada meeting on September 7th. While inflation seems to have peaked, but that’s just an educated guess, our rate increases may not be over until the end of the year. (Their next meeting date to likely raise rates again will be Oct.ber 26th.)

If you have a mortgage due for renewal like I do, it’s not a pleasant thought. However, if your mortgage comes up in the next six months, a number of lenders WILL let you renew if you’re within that six months! That’s what I did last week. My rate is going up 2.4 percent, but that’s better than three percent after the September increase, and any other jump after that. Check with your lender today if your mortgage is up in February next year or earlier! That call may end up saving you over ten thousand dollars!

What’s the rate increase going to cost you? That depends on the rate you currently have. However, a 3% increase on each $100,000 will be $3,000 a year. So someone with a $400,000 mortgage will see their payments go up close to $1,000 a month! What do you get for that? Nothing! It’s a huge increase in your monthly spending for just getting to stay in your home. Yes, it stinks and it’s depressing, but that’s what rising rates cause.

How long should you renew for? That’s up to you. I only ever answer questions as to what I would do – or in this case, what I did. My thinking was that rates will peak sometime next year at the latest. But then it’ll take a while for them to ease downward. Like gas prices, they spike up and take forever to come back down. Even when the Bank of Canada decreases rates, that doesn’t mean the chartered banks will immediately pass that prime rate decrease on. So it didn’t make sense to me to just do a two-year mortgage for that reason. But I sure wasn’t going to sign for five years at these rates as selling or refinancing triggers a big penalty (typically three months or the interest differential – whichever is larger.)

So I picked the kind-of middle option of a three-year term at 5.2%.

While my mortgage is pretty small, I sympathize with anyone who is close to the $400,000 mortgage example about to flush $36,000 of net income down the toilet over the next three years…

Housing Correction Forecasts

We keep asking and wondering if there’s a housing correction coming in Canada – or at least in the hot-market cities. Well, good luck finding a definitive answer. A heads up first: This is exactly like investing. Ignore the forecasts and news stories and just carry on with your life. If you’re not selling in the next while – who really cares? It should be entertainment news more than useful news to 90% of home owners!

The Globe and Mail recently published the forecast and predictions of a whole bunch of experts and companies that ought to be the experts. The short answer? It might go down a ton…or it might go up. You pick who you want to believe. If you’re a pessimist, there’s a forecast you’ll love. If you’re an optimist, there’s a forecast to fit your mindset…

Deutsche Bank: 60% drop coming…their analyst used prices compared to incomes and prices compared to rents.

Fitch Ratings: 26% drop…their emphasis was on factors that drive demand for homes.

Bank of Canada: 20% drop..factoring in the 10-year bond rate as measuring stick for mortgage rates and our per-capita after-tax income.

International Monetary Fund: 11% drop…they’re new at Canadian estimating and include population growth, income and employment growth as major factors.

TD Bank: 11% drop…TD economists consider median family income, interest rates and employment levels as their key factors.

CMHC: 3% drop…They use four different models and the most complex calculations that would take half an hour to explain. They believe the housing market is anywhere from 16% overvalued to 13% undervalued, making it an average estate of a 3% drop.

Or you could pick one of the other models if you prefer to hear that prices will go up 13%.

Housing economist Will Dunning: 9% increase in values…As with CMHC, it’s complex to explain the modeling used. However, it’s the connection between rates and return on investment. Dunning believes we haven’t fully taken advantage of low rates, causing him to forecast a 9% increase this year and 25% over the next few years.

Pick the forecast you like, and good luck to you. But the question is what difference does it make? If you’re an investor, it might. But you and I need to live somewhere. We probably like our home, we’ve paid a ton of payments into it, may have kids in the school system and really aren’t going to move.

These forecasts help investors and lenders to tighten up, loosen up mortgage lending or other factors. But if you and I start to act on one of these forecasts, we’d be in big trouble.

 

Besides, are these forecasts for basically Calgary, Toronto and Vancouver? Would they apply to a condo in Penticton? Would they apply to an average but expensive home in Rutland or the outskirts of Edmonton? Is your home average and you’ll  be impacted? Is yours one of the top 10 most expensive in town?

 

Who knows who’ll get impacted or what economic earthquake or growth is coming…they’re guestimates and I choose not to let that impact my life, my home or my thinking, spending and actions.

 

Maybe we should revisit these forecasts next year. But, by then, there’ll be a lot of new ones to wonder about.

Is There A Point In Paying Down Your Mortgage?

I recently received an email from a lady asking if there is still a point in paying down her mortgage when house prices don’t seem to be increasing.

It’s a very good question. However, she’s confusing the mortgage with the value of her house. They really aren’t connected. The mortgage is the DEBT owed – the value (up or down) is what it can be sold for. The difference is what comes out in cash equity when it’s sold. In a perfect world, the mortgage is tiny – the value is high. So what’s cashed out on sale is huge equity. Or if the mortgage balance is still high and the value hasn’t gone up much – the difference between the two is a much smaller amount of equity.

The value is what you can sell the house for. The mortgage balance determines the cheque you’ll actually get if you sell.

The difference between owing and value is your equity. If you pay down the mortgage – the equity increases. That takes work and money. If you just pay the regular mortgage, equity builds slower. On the “value” side of the house – that is a second increase, but one you can’t control much, as it’s the market and what a buyer is prepared to pay.

All of us, hopefully, will pay off the mortgage. It’s just a question of whether it’s double or triple the original amount when interest is added for 25 years, or whether it’s much quicker and thus, much less interest, by paying weekly payments (that takes about seven years off) or adding a lump sum whenever  you can.

She’s right in that it’s the last debt that should be paid as it’s the lowest interest rate. It shouldn’t even happen before paying off a car or credit card. But for someone that’s debt free, except the house, it then becomes a choice. Invest extra money, or pay off the house – or both.

For over six years now we’ve heard that there’s an imminent massive housing price correction. I guess all these ‘predictors’ will eventually be right if you just keep saying it every year. In 2014, prices increased an average of 6% while the Bank of Canada predicted a 30% correction. In 2010, the Economist warned of a 25% reduction but prices increased 6.8%.

Predicting the housing market is a game you’re bound to lose, just like trying to time the stock market. Pay down your mortgage and invest a little money each and every month. If you’re not retiring today, or not selling your house this week – watch all those investment shows for entertainment value, and not specific advice to your financial situation.

Lots Of Financial News In Just a Week!

Canadian banks are kind of ashamed they’re Canadian. Bank of Nova Scotia is now Scotiabank, Toronto Dominion is TD, Canadian Imperial Bank of Commerce has been CIBC for a long time, and the Bank of Montreal is BMO.

Last week, the Royal Bank went on a huge wave across the country to replace all their branch signs to read: RBC Royal Bank. The next wave will be to do away with the Royal Bank part altogether. Oh how I want to be in the sign business. In Canada it’s cool to be Canadian, but in the rest of the world, they don’t want to advertise that at all.

The RCMP in BC want to get the word out on a new phone/credit card scam. The crooks already have your stolen credit card number and give you a lot of information to put you at ease. All they’re after is the three digit security code and they can go crazy with online purchases. It’s the last and only thing they ask for, claiming they just need to “verify that you’re the cardholder.” Don’t ever talk to anyone about your credit card. Hang up the phone and dial only the number on the back of your card! Here’s the link from the RCMP:

Last week, CBC’s Marketplace did a short story on breakfast sandwiches. They’re loaded with fat, get you two-thirds of the daily sodium and a ton of calories. But here’s an alternative diet plan: Last week, New Hampshire just rolled out new scratch and win lottery tickets. They are now bacon flavoured. So grab your coffee and just sniff the lottery ticket. You’ll still lose, but you’ll win on the calories, fat, and sodium reduced breakfast!

Also last week, TD rolled out a ton more new ATM machines. These ones are optical readers. Just insert the cheque or cash you’re depositing. No more envelopes and you don’t even need to key in the amount of the cheque. Your receipt will print out a picture of the cheque you deposited. It was only last year we talked about taking a picture of a cheque with your smartphone and it’s deposited. Boy, how technology is advancing quickly.

The middle of last week, the Bank of Canada cut the bank rate by a quarter of a point. We’re a resource country and they’re seriously concerned with our economy with oil dropping by almost 50%. Within 24-hours, the banks cut most of their savings accounts interest rates by a quarter point. But they also announced that, no – they’re not cutting their lending or mortgage rates. So savers get ripped off and borrowers get hosed in order to make another few billion dollars. NOT nice and not right!

The Sad News About our Savings and Debt Loads

US household debt to disposable income is still at 122% as of April. In normal times of the economy and employment levels, anything past 100% isn’t sustainable over an extended period of time. That is, you cannot continuously spend more than you earn. It is a recipe for financial trouble in the long term, and obviously means we can’t save. In Canada, even through the recession, we Canadians kept spending. Our household debt is now 146% of disposable income. We may be more conservative than Americans, we may have lower total debt levels but we’re spending a lot more, over and above what we earn, than our American friends.

On that same issue, the Bank of Canada says that, by 2012, one in 10 households will be spending 40% or more of their household income just paying debt. What does that leave to live on? Already 32% of households have no savings. So it stands to reason that, the more we pay towards our debts, the less money we have to live on, or save.

The National Foundation of Credit Counseling just released a study that, last year, the average person had over $2,000 in unexpected expenses! I keep talking about how critical it is that all of us have a basic emergency fund with two weeks of pay set aside – that’s another reason why. We all know there WILL be an emergency. We just don’t know when, what, or how big it’ll be. What an emergency fund does is to turn a panic and crisis into a minor inconvenience, because we have the money! If not, here we go again…using credit, and thinking that’s a solution, and going further in debt once again. Find a way to have two weeks worth of your pay in an emergency account that you don’t touch for anything else.

According to a company called RealtyTrac, foreclosures in the US, in the first quarter of 2010, are UP 35% over the same time period of 2009. And the credit bureau, Trans Union, found that mortgage arrears are rising, and not falling. In Nevada, 16% of homeowners are in arrears, it’s 15% in Florida, and 11% in Arizona and California.

In Canada, according to a report by the Canadian Association of Accredited Mortgage Professionals, there are about 375,000 people with mortgages who are challenged by their current payments. I don’t know what their definition of challenged means, but it sounds like a problem. If rates increase by just one percent, they expect another half million people could be in trouble. That goes back to what we talked about in the security of a fixed rate, instead of a variable rate mortgage.