Tag Archives: interest rates

Ready For The Recession?

Happy New Year! But likely not so happy in the financial world for the next six months or so as it’ll be unlikely that we’ll avoid a recession this year.

While rate increases happened pretty much all of 2022, the impact isn’t usually felt in a big way by consumers for at least six months. And that time is upon us. Actually, it was upon us in November or so, but there isn’t anyone who’s going to turn off their spending tap right before Christmas. There also aren’t many companies who want to be seen as Scrooge in doing big layoffs in December.

January, however, is very different and we’ll see an immediate decrease in consumer spending and a large increase in layoffs. Once person’s spending is another person’s (or companies) income. That creates a spiral effect boosted by inflation and high interest rates that’ll accelerate a slowdown rather quickly.

While 80% of Canadians holding a mortgage have a 5-year term, this year another one-fifth of those are up for renewal. Add that to the one-fifth who renewed at much higher rates last year and 40% of them are now facing the reality of $400 or more in mortgage interest. National Bank estimates that the median amount spent on mortgage costs is 67% of income. The normal ratio anyone uses is around 30% tops and this is an even worse situation than the early 19080s. That doesn’t leave a lot of money for non-essential spending for those who are laid off, had their hours cut back, are in the 40% who’ve had to renew their mortgage or the 20% who had a variable rate mortgage all along. That group of being hit with huge mortgage renewal rates will keep going until 2027. That’s the big advantage the U.S. has where everyone has a 15 or 30-year fixed mortgage…

Oh, and rental rates keep rising as landlords pass on their higher carrying costs, utilities, etc. so you can add most renters to the large group of people who are now barely able to cover their basic living expenses.

That’s assuming we’re not using credit cards to keep up our lifestyle. Since the end of summer, credit card pay rates (the percentage of balances paid each month) has been dropping significantly while auto loan arrears are growing.

So happy New Year is more likely to be an un-happy new year of 2023…

What Would You Do? Pay $40 Or Destroy Your Credit?

During a recent trip to downtown Edmonton, I purchased an all-day ticket from the lot’s dispenser, put it on my dashboard, grabbed my laptop, and left. Three hours later, after my seminar, I got back to my car only to find a violation ticket for $40 under my wipers. What the heck? I was choked! It turns out that the wind had blown the receipt off my dash when I opened the passenger door to get my laptop bag.

The majority of people would ignore the ticket, while some might phone the company and try to talk their way out of it. That may work, but I doubt it. The ticket wasn’t displayed so the fine was issued. Even if someone can talk their way out of it, unless they take the extra step of getting the ticket voided in writing, it will show up again.

Within a month, the collection letters will start to arrive. Then, a few months later, this will end up at a collection agency. After their hate letter, they’ll report it to the credit bureau. You now have a collection on your report. That will drop your credit score about 100 points if you had a decent score prior to this. In other words – it’s destroys your credit.

But the chain reaction gets worse: Your interest rates on your credit line and some new borrowing will now jump a lot! Sure, you can eventually pay the ticket. There’s even a small chance you can convince them to remove it. But it’s more likely it’ll just get changed from an outstanding collection to “paid in full”. And for the next three to six years this impacts your borrowing ability or rate.

Unlike most everyone else, I swallowed hard and paid the fine the same day. Expensive lesson learned – something I call a stupid fee. But a $40 lesson is a lot cheaper than thousands of dollars in higher rates, and years of credit problems.

A Vernon person emailed me the same kind of issue. He had collection letters he ignored and now the item is on his credit file. What can he do now? Pay it and learn a very expensive lesson for the next few years.

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…

And Another 3/4 Percent Rate Increase

As predicted, the Bank of Canada increased interest rates by another three quarter percent this morning.

Hopefully you were able to get an early mortgage renewal as we talked about two weeks ago. Or at least passed on the heads-up…

If you’re not anywhere near renewal – many of us are envious. Even more so if you don’t have a mortgage in the first place!

On a $400,000 mortgage, for example, today’s change will increase a mortgage payment by $250 a month (or $62.50 for every 100,000 of mortgage balance). Between the rate increases and the Trudeau stress-test there aren’t going to be many first-time buyers that will have any chance of qualifying for their first home.

How sad that the Federal Government seems to have a single-minded focus on stopping home sales when it’s such a massive part of our economic activity from legal fees to home improvement stores, builders to realtors. Let’s hope that, at some point, they realize more supply would make a massive difference…but that’s not likely…

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…

Sears, Amazon and Why We Can’t Do Our Own Investing

Ever wonder why retailers aren’t doing so well? Here’s a huge reason for it: Traditional retailers such as Sears, The Bay, Macy’s and the likes take 9 to 13 months to get a new clothing line from concept to production and into their stores to sell. Zella is a company with an extensive line of clothing. They can get an idea to production and into stores inside of two weeks! Two weeks versus a year. Wonder no longer why traditional retailers are fading quickly.

On the upside, Thursday Amazon announced they’d be selling Kenworth appliances online. Yes, Sears does have stuff people want – but now it’ll be online and in the U.S. only for the time being.

That announcement also shows why you and I really can’t do our own investing very well: When Amazon announced they’d be selling Kenworth, the stocks of other appliance retailers and manufacturers dropped by $12.5 billion collectively. From Best Buy to Whirlpool, Lowe’s, Home Depot, and the likes their stocks took a big hit. Now you and I may have figured out in a few days that, instead of Kenworth being gone, they’re now going to be a major player with Amazon behind them, but the Bay and Wall Street computers made the sell moves within a minute…

Speaking of investments, I’m going to make a bold prediction if you remember that I’m not an economist: The Bank of Canada can’t and won’t raise rates again until the U.S. does. The rate increase two weeks ago was based on thinking the U.S. would do one, too and they didn’t. The dollar is now way too high for our exporters and getting the dollar down is the main objective of the Bank of Canada. So they can’t do another increase, even if they wanted to, until the U.S. starts to raise them again.

Bad for savers, good for borrowers to get another reprieve…

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.

Five Steps to Mortgage Debt Freedom

Another hockey season starts today and I have two predictions: Vancouver and Edmonton won’t make the playoffs…although I’m more certain about the Oilers than the Canucks… and we’ll get another massive wave of 95,000 Scotiabank commercials…in the first week… I can’t help the Canucks and my Oilers, but I can help you with one of the main Scotia commercials.

Last year, one of the always-played commercials was a lady pulling into her driveway and a marching band came out and played.  She actually paid off her mortgage – and that’s something so few people do in a given year. The tag line was to come see Scotia to learn how to become mortgage free.

Well, you don’t actually need to do that. I’ll give you the scoop on what an appointment with them will get you in less than their 30-second commercial time.

-Shop around and get at least three quotes when your mortgage is up for renewal. They can vary by up to half a percent or more.

-If rate shopping gets you a lower rate, don’t lower the payment – shorten down the time you have left on the loan.

-Set it up for weekly payments if you can possibly afford it.

-Take advantage of your 10 or 20% prepayment privilege each year if you have a few thousand dollars.

-If you can swing it, go in and get your payment increased 10 or 20% right now. It’s not a lot, but it’ll add up to a lot.

That’s it – it really is that simple. If you do one or two of these five things you’ll be mortgage free much faster than 90% of people who are on the forever plan and a ton of people in their 50s or older who aren’t going to live long enough to pay off their home.

Getting your rate down by half a point on just a $200,000 balance will save you $1,000 a year. But, instead of dropping the payment and leaving your loan on the forever plan, just cut two or three years off the term. You’re used to paying a certain payment, so don’t think you’re saving or gaining anything if you take a lower payment.

Changing from monthly to weekly payments has the effect of paying 13 payments a year. That’ll cut the typical mortgage down by four to five years – and that’s a lot of time saving!

Lastly, almost all mortgages let you prepay up to 10 or 20% a year without penalty. If you have a bonus, a tax refund, or some money – dump it on there. It cuts the length of time by a lot. Leave the payments the same and any online calculator can show you the huge interest savings it’ll create. That’s assuming you don’t have any debt that’s at much higher rates. If so, those balances are way more of a priority.

But the best way to be mortgage debt free is still to sell your expensive home and purchase a cheaper one. Less price equals less mortgage. Unfortunately, that’s something very few people would consider…

The Downside of Low Interest Rates

Boy, did we Canadians go on a debt binge last year. Our total consumer debt, excluding mortgages, reached $1.4 trillion at the end of 2009. We are now officially the most overextended country of the big 20 developed nations. For all the pain we see from US families, we now owe more than Americans, on a per capita basis, and even more than the average Greek family! Right now, we are in debt $1.44 for every dollar of income. If there were to be a setback in the economy again, we’d be in big trouble.

Or, as we talked about a month or so ago, when rates keep climbing, we’re in the same trouble. Don’t forget, consumer debt, other than probably our fixed-rate car loans, most everything else from lines of credit to credit cards are on variable rates. That means, rates go up, you’re paying that increase the following month.

Yesterday, the Bank of Canada raised interest rates another quarter of a percent for the second time. On each $100,000 of debt that is not on a fixed rate, these two rate increases will cost you $500 a year and rising.

Behind the scenes, the federal government is taking steps to clamp down on our debt loads. A few months ago, the Federal Finance Minister announced changes to the down payments for mortgages, and the total that can be refinanced on a home.

The next wave of pressure, and nobody has talked about this, yet, is your credit cards. Starting in a few months, your minimum payment will be going up. The good news: you’ll have it paid off faster. The bad news: It’ll hit your budget to pay more as a minimum payment.

Starting with MBNA, the largest issuer of MasterCards in Canada, August will see a new and higher minimum payment. They will be the first, but not the only ones, to change the way the payment is calculated.

Why? Remember that I always say what happens in the US will come here? Well, their new credit card regulations require a box on your statement to show how long it would take to pay off the balance when making minimum payments. That will happen in Canada this fall, too. So when they increase your payment, the staggering time it’ll take to pay it in full won’t look quite so ugly when you see it in a few months.

The third reason, and it’s a big one, is that our debt load has started to increase the arrears and write offs that card issuers are having. So if they increase your payment, they get paid back faster, and have less risk. But we can also start to look for limits to be cut back for a ton of people in the next wave of clam downs. In the US, $1.5 trillion has been cut from credit limits and they’re not done yet.

I Didn’t Know – But You Need To!

I would bet that the two fastest changing industries are probably the medical field and the world of finance and credit. What was true one month gets changed, amended, legislated, or moved around, in one way or another.

Over the last couple of days I came across a number of things that are brand new, and that we all need to know:

-Scotiabank has changed their credit card agreement. That means others have, or will, follow soon. Starting in September, if you miss, or are late, on three payments in any 12 month period, your rate will go through the roof. The statement I saw jumps it by 7%.

-The two-tier interest rate charges started in the U.S. and is now here. Along with that, you will no longer receive credit limit increases automatically. You will now actually have to OK them. And that’s a good thing. Almost none of us NEED a bigger limit. The card issuers will send you the limit offer and you can accept or decline. Of course, you can still contact them to request one, if you need to.

-Scam phone calls are something that happens to millions of people. But you can no longer rely on call display for the accuracy of the number popping up. With internet calling, fraudsters can now spoof phone numbers being displayed to read almost anything they choose. You THINK you’re getting a call from your bank, because that’s what it reads on the call display, but it’s not. Always, always, get their name and department, hang up, and call the number on the back of your credit or debit card. It is the ONLY way you know you are actually reaching your bank.

Millions of us deal with Shaw, as do I. But I found out two days ago how nasty they get with one month past due. My company pays the bill, but there wasn’t a statement in April. May got paid, June got paid, July got paid, but it was always dragging by a month. My fault – no doubt. But they simply went in to disconnect my internet one morning.

All companies love you when you pay – and I’ve paid them close to $30,000 over the years, but don’t care when there’s a slight problem – no matter what the reason. Media relations chose not to respond to my inquiry, but their computers can only tell I’ve dealt with them since September 2008, instead of April 1995. Whether it’s Shaw, your bank, or your mortgage company – they’re ruthless on any past due amount, no matter what the reason, track record, etc. So, as the kids say: Don’t go there.