06/10/2022
A client just sent me this article and I wanted to just make a few comments about it for everyone with a mortgage out there. https://financialpost.com/news/economy/bank-of-canada-financial-system-review-mortgage-payments
The headline is misleading. Yes, if you got a mortgage at the bottom – I have clients who got a mortgage rate of 1.89% in the last 2 years – when the mortgage comes up for renewal there is a chance that the rate could double. Yet, those clients had 5 years of an incredibly low rate, so if there was other debt, they could work on getting that down. Mortgages are still one of the cheapest ways to borrow money.
There is one paragraph – “A larger share of households took out mortgages that were large relative to their income…The bank’s classification of a high loan-to-income ratio includes mortgages that had a loan-to-income ratio above 450 per cent at origination.”
What is missing from this is that most mortgages that have been done since 2016 had to pass a stress test, which means qualifying for the mortgage using a much higher rate than the current rate. This qualifying rate is set by the Canadian government so that if/when the payments go up, you would still be within your financial limits. This rate is currently set at 5.25% for a variable mortgage or 2% above the rate that is being offered for fixed-term mortgages so that if you have a traditional mortgage you can afford to keep making the payment based on your income.
So yes, it could hurt your bank account when renewal times comes. This article is predicting a 4.50% rate. The funny thing is that 4.50% is actually a decent rate! A few years ago, Benjamin Tal, Deputy Chief Economist at CIBC world markets stated, “We have a generation of Canadians who have never experienced high, or even rising, interest rates. For them, those extremely low-interest rates are a given.”
And it’s not just a generation – It is anyone who has gotten in the market in the last 10-12 years.
All of this seems to be coming from that dreaded word – inflation.
This article states we are at a 31-year high with inflation, but this is not the kind of inflation we have experienced in the past. We are in a post-pandemic world. Many economists are telling us that inflation is so high due to coming out of a global pandemic, major supply chain issues and the war in Ukraine. Benjamin Tal of CIBC World Markets (can you tell he is one of my favourites? I have been doing this a long time and he is usually right.) says supply chain issues and a “sick supply system” are causing prices to rise and are responsible for 60 to 70 per cent of inflation. “The demand shock is COVID, and the supply shortage is COVID. That will diminish.” Tal believes another COVID-19 variant is coming that will impact lives but won’t derail economies and will be economically manageable. “2022 is still a transition year from a pandemic to an endemic,” he says. Plus, the war in the Ukraine and a more flexible labour market – all of this is adding to the current inflation.
“Two years from now, inflation will be two per cent,” says Tal. “It’s not about inflation. It’s about the cost of bringing inflation back to two per cent in terms of high interest rates.”
“Just because the market is expecting it doesn’t mean that the market is right,” says Tal. “The market can be wrong and has been wrong in the past.” The Canadian housing market is slowing down rapidly, and Tal believes it will soon be balanced, which is a good thing, and that will be followed by a buyers’ market. “I need to see inflation starting to behave and the housing market slowing in order to make the point that there’s no need for interest rates to go beyond 2.5 per cent,” Tal says. “I can tell you that the difference between 2.5 and 3.5 per cent is the difference between no recession and a recession. It’s as simple as that.” (For the whole article - https://renx.ca/cibcs-benjamin-tal-on-inflation-and-interest-rates/)
Every recession in Canadian history has been brought on by the Bank of Canada raising rates too fast and I am really hoping they have learned from past mistakes but based on what is going on, I don’t think so.
This line really hits home for me - Just because the market is expecting it doesn’t mean that the market is right. I know that this situation is causing some of you stress but take a deep breath and stop reading the headlines – they just get you worked up!
We have been down the road of raising rates and markets softening before and we will again. Just ride it out and if you need to talk it out feel free to reach out to your mortgage broker.
TLDR
Buckle your seatbelt is going to be a bumpy ride on the way up but then it will settle take a deep breath!
Central bank highlights rising debt loads and falling home prices among risks
