The Bank of Canada Slowed the Pace of Monetary Tightening

General Gabriel Da Silva 27 Oct

 

The Governing Council of the Bank of Canada raised its target for the overnight policy rate by 50 basis points today to 3.75% and signalled that the policy rate would rise further. The Bank is also continuing its policy of quantitative tightening (QT), reducing its holdings of Government of Canada bonds, which puts additional upward pressure on longer-term interest rates.

Most market analysts had expected a 75 bps hike in response to the disappointing inflation data for September. Headline inflation has slowed from 8.1% to 6.9% over the past three months, primarily due to the fall in gasoline prices. However, the Bank said that “price pressures remain broadly based, with two-thirds of CPI components increasing more than 5% over the past year. The Bank’s preferred measures of core inflation are not yet showing meaningful evidence that underlying price pressures are easing. Near-term inflation expectations remain high, increasing the risk that elevated inflation becomes entrenched.”

In his press conference, Governor Tiff Macklem said that the Bank chose to reduce today’s rate hike from 75 bps last month (and 100 bps in July) to today’s 50 bps because “there is evidence that the economy is slowing.” When asked if this is a pivot from very big rate increases, Macklem said that further rate increases are coming, but how large they will be is data-dependent. Global factors will also influence future Bank of Canada actions.

“The Bank expects CPI inflation to ease as higher interest rates help rebalance demand and supply, price pressures from global supply disruptions fade, and the past effects of higher commodity prices dissipate. CPI inflation is projected to move down to about 3% by the end of 2023 and then return to the 2% target by the end of 2024.”

The press release concluded with the following statement: “Given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the Governing Council expects that the policy interest rate will need to rise further. Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding. Quantitative tightening is complementing increases in the policy rate. We are resolute in our commitment to restore price stability for Canadians and will continue to take action as required to achieve the 2% inflation target.”

Reading the tea leaves here, the fact that the Bank of Canada referred to ‘increases’ in interest rates in the plural suggests it will not be just one more hike and done.

 

 

Monetary Policy Report (MPR)

The Bank of Canada released its latest global and Canadian economies forecast in their October MPR. They have reduced their outlook across the board. Concerning the Canadian outlook, GDP growth in 2022 has been revised down by about ¼ of a percentage point to around 3¼%. It has been reduced by close to 1 percentage point in 2023 and almost ½ of a percentage point in 2024, to about 1% and 2%, respectively. These revisions leave the level of real GDP about 1½% lower by the end of 2024.

Consumer price index (CPI) inflation in 2022 and 2023 is anticipated to be lower than previously projected. The outlook for CPI inflation has been revised down by ¼ of a percentage point to just under 7% in 2022 and by ½ of a percentage point to about 4% in 2023. The outlook for inflation in 2024 is largely unchanged. The downward revisions are mainly due to lower gasoline prices and weaker demand. Easing global cost pressures, including lower-than-expected shipping costs, also contribute to reducing inflation in 2023. The weaker Canadian dollar partially offsets these cost pressures.

The Bank is expecting lower household spending growth. Consumer spending is expected to contract modestly in Q4 of this year and through the first half of next year. Higher interest rates weigh on household spending, with housing and big-ticket items most affected (Chart below). Decreasing house prices, financial wealth and consumer confidence also restrain household spending. Borrowing costs have risen sharply. The costs for those taking on a new mortgage are up markedly. Households renewing an existing mortgage are facing a larger increase than has been experienced during any tightening cycle over the past 30 years. For example, a homeowner who signed a five-year fixed-rate mortgage in October 2017 would now be faced with a mortgage rate of 1½ to 2 percentage points higher at renewal.

 

 

Housing activity is the most interest-sensitive component of household spending. It provides the economy’s most important transmission mechanism of monetary tightening (or easing). The rise in mortgage rates contributed to a sharp pullback in resales beginning in March. Resales have declined and are now below pre-pandemic levels (Chart below). Renovation activity has also weakened. The contraction in residential investment that began in the year’s second quarter is projected to continue through the first half of 2023, although to a lesser degree. House prices rose by just over 50% between February 2020 and February 2022 and have declined by just under 10%. They are projected by the Bank of Canada to continue to decline, particularly in those markets that saw larger increases during the pandemic.

Higher borrowing costs are affecting spending on big-ticket items. Spending on automobiles, furniture and appliances is the most sensitive to interest rates and is already showing signs of slowing. As higher interest rates work their way through the economy, disposable income growth and the demand for services will also slow. Past experience suggests that the demand for travel, hotels, restaurant meals and communications services will be impacted the most. Household spending strengthens beginning in the second half of 2023 and extends through 2024. Population growth and rising disposable incomes support demand as the impact of the tightening in financial conditions wanes. For example, new residential construction is boosted by strong immigration in markets that are already particularly tight.

Governor Macklem and his officials raised the prospect of a technical recession. “A couple of quarters with growth slightly below zero is just as likely as a couple of quarters with small positive growth” in the first half of next year, the bank said in the MPR.

 

 

Bottom Line

The Bank of Canada’s surprising decision today to hike interest rates by 50 bps, 25 bps less than expected, reflected the Bank’s significant downgrade to the economic outlook. Weaker growth is expected to dampen inflation pressures sufficiently to warrant today’s smaller move.

A 50 bps rate hike is still an aggressive move, and the implications are considerable for the housing market. The prime rate will now quickly rise to 5.95%, increasing the variable mortgage interest rate another 50 bps, which will likely take the qualifying rate to roughly 7.5%.

Fixed mortgage rates, tied to the 5-year government of Canada bond yield, will be less affected. The 5-year bond yield declined sharply today–down nearly 25 bps to 3.42%–with the smaller-than-expected rate hike.

Barring substantial further weakening in the economy or a big move in inflation, I expect the Bank of Canada to raise rates again in December by 25 bps and then again once or twice in 2023. The terminal overnight target rate will likely be 4.5%, and the Bank will hold firm for the rest of the year. Of course, this is data-dependent, and the level of uncertainty is elevated.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Fixed mortgage rates are expected to take another step up next week

Latest News Gabriel Da Silva 23 Oct

Fixed mortgage rates are expected to take another step up next week, pushing some 5-year fixed mortgages into 6% territory.

Five-year fixed mortgage rates typically follow the Government of Canada 5-year bond yield, which surged more than 40 basis points over the course of the week—briefly reaching a 14-year high on Friday—before retracing some of the gains.

 

 

Why are bond yields rising?

According to Ryan Sims, a mortgage broker with TMG The Mortgage Group and a former investment banker, markets are reacting to the recent inflation data that came out of Canada and the U.S.

“Both readings were above a level that central banks are comfortable with,” Sims told CMT. That has raised expectations for future interest rate hikes, at least in Canada.

Canada’s Consumer Price Index ticked down to 6.9% in September, which was higher than expected, while core inflation continued to climb. Meanwhile, inflation continued to accelerate south of the border, with overall prices rising 8.2% in September and core inflation, which strips out more volatile items, up 6.6%—the fastest pace in four decades.

However, the sharp pullback in bond yields from their initial highs on Friday came following speculation the U.S. Federal Reserve is set to slow the pace of rate hikes following its November meeting.

“Usually when we see an intra-day move like we have today (without news, central bank speeches, or an “event”), it would signal to me that the top, at least for now, is in,” Sims said.

“This kind of intra-day volatility on any asset class is something that is usually marked by a lower high, and a lower low,” he added. “I’m not saying we see an immediate drop, but a slow march towards lower yields.”

What does it mean for mortgage rates?

Despite the midday pullback in yields, fixed mortgage rates are still expected to march higher by next week.

“Rates will increase next week just based on the large move-up in the last few days,” Sims said. “Uninsured [fixed rates] will start with a 6-handle, and even insured rates could be in the high 5’s without much work. You may get a lender who is trying to buy business that keeps rates in the mid 5’s.”

A number of lenders have already been raising some of their fixed-rated products since last week, including most of the Big 6 banks.

According to data from MortgageLogic.news, the average nationally available deep-discount rate for a 5-year fixed mortgage is now 5.57% (+15 bps since early last week), while insured rates are averaging 5.28% (+15 bps).

“Everyone should also remember that what comes up, can just as easily come down,” Sims added. “Short-term bond yields have started to roll over state-side, and that is signalling that the bond market thinks that maybe the central banks have gone too far and too fast.”

 

Bank of Canada Will Not Be Happy With This Inflation Report

Latest News Gabriel Da Silva 19 Oct

 

Canada’s headline inflation rate ticked down slightly last month to 6.9%, but measures of core inflation remain stubbornly high, and food prices hit a 41-year high. Lower gasoline prices were primarily responsible for the decline in inflation in the past three months. Bond markets sold off on the immediate release of the data this morning, taking the 2-year yield on Government of Canada bonds to over 4%. This is the last major data release before the Bank of Canada’s policy rate announcement next Wednesday, October 26, which puts the potential for a 75-bps hike back in play. At the very least, the Bank will take the overnight rate up 50 bps to 3.75%, but I wouldn’t rule out another 75-bps move. Judging from experience, we may see a nod in that direction by Governor Macklem before the Governing Council meets.

Excluding food and energy, prices rose 5.4% year-over-year (y/y) in September, following a gain of 5.3% in August. Prices for durable goods, such as furniture and passenger vehicles, grew faster in September compared with August. In September, the Mortgage Interest Cost Index continued to put upward pressure on the all-items CPI Canadians renewed or initiated mortgages at higher interest rates.

Monthly, the CPI rose 0.1% in September. On a seasonally adjusted monthly basis, the CPI was up 0.4%.
Average hourly wages rose 5.2% on a year-over-year basis in September, meaning that, on average, prices rose faster than wages. The gap in September was larger compared with August.

In September, prices for food purchased from stores (+11.4%) grew faster year-over-year since August 1981 (+11.9%). Prices for food purchased from stores have increased faster than the all-items CPI for ten consecutive months since December 2021.

Contributing to price increases for food and beverages were unfavourable weather, higher prices for essential inputs such as fertilizer and natural gas, and geopolitical instability stemming from Russia’s invasion of Ukraine.

Food price growth remained broad-based in September. On a year-over-year basis, Canadians paid more for meat (+7.6%), dairy products (+9.7%), bakery products (+14.8%), and fresh vegetables (+11.8%), among other food items.

 

 

 

Bottom Line

Price pressures might have peaked, but today’s data release will not be welcome news for the Bank of Canada. There is no evidence that core inflation is moderating despite the housing and consumer spending slowdown. The average of the Bank’s favourite measure of core inflation remains stuck at 5.3%. Combined with the Governor’s recent harsh rhetoric, the high probability that the Fed will hike rates 75 bps at the next Federal Open Market Committee Meeting and the weak Canadian dollar, there is no doubt the Bank will increase their overnight policy target to at least 3.75%, and could well go the full 75 bps to 4.0% next week. I would bet that they will not quit there, with further hikes to come in December and next year by central banks worldwide.

The Government of Canada yield curve is now steeply inverted, reflecting the widely held expectation that the economy is slowing. The prime rate will increase sharply next week, increasing variable mortgage rates again. Fixed mortgage rates will rise as well, but not by as much, continuing a pattern we’ve seen since March when the Bank of Canada began the current tightening cycle. We are unlikely to see a pivot to lower rates in the next year as inflation pressures remain very sticky.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Rising Interest Rates!

Latest News Gabriel Da Silva 7 Oct

 

Forty-Three Years Ago, I Was Fed Chair Paul Volcker’s Special Assistant

Inflation appears to be book-ending my career. I started my work as an economist in the Research Division of the Federal Reserve Board in Washington, D.C., in the late 1970s. Inflation had been trending higher for years. Neither Arthur Burns nor G. William Miller, the Fed chairmen preceding Volcker, had the fortitude to raise interest rates sufficiently and keep them there long enough to reduce inflation to a low sustainable pace. Paul Volcker pulled it off–for which he was personally vilified at the time. But since then, Paul Volcker has become a legend, esteemed as the central banker whose brute-force campaign subdued inflation for decades.
You can see in the chart below that in late 1979, the Volcker Fed hiked the overnight policy rate to levels well above the inflation rate and kept real interest rates (nominal rate minus inflation rate) positive for an extended period. 

The current Fed Chair, Jay Powell, has expressed deep admiration for Paul Volcker, calling him “the greatest economic public servant of the era.” Last month, Powell alluded to his predecessor’s record of persistence, saying that policymakers “will keep at it until the job is done” — invoking Volcker’s memoir, “Keeping at It.”

The Bank of Canada was no slouch on the inflation front as well. As the chart shows, the Bank hiked interest rates in lockstep with the Fed in the Volcker years and even more in the early 1990s when Ottawa was fighting Canadian budgetary red ink to the ground.

This time around, Tiff Macklem has been ahead of the Fed in hiking interest rates and, in a speech on Thursday, said that the economy is still “clearly” in excess demand, with businesses facing an extremely tight labour market, wage gains broadening and underlying inflation pressures showing no signs of letting up. Macklem said that the sources of inflation, which started with goods prices, are broadening to the service sector. “. Labour markets remain very tight. Job vacancies have eased a little in recent months but remain exceptionally high. Our business surveys report widespread labour shortages. And wage growth has risen and continues to broaden.”

“With demand running ahead of supply, competition is posing less of a restraint on price increases, and businesses are passing through higher input costs more quickly. As a result, higher energy and material costs are showing up in the prices of a growing list of goods and services. So even if there is some relief at the gas pumps, price pressures remain high and continue to broaden. In August, the prices of more than three-quarters of the goods and services that make up the CPI were rising faster than 3%.”

Macklem continued, “As we look for a more fundamental turning point in inflation, measures of core inflation are becoming increasingly relevant…after taking out volatile components in the CPI that don’t reflect generalized changes in prices, inflation is running about 5%. That’s too high. We can also see that our core measures have yet to decline meaningfully even though total CPI inflation has come down in the last couple of months. Going forward, we will be watching our measures of core inflation closely for clear evidence of a turning point in underlying inflation.” In conclusion, the governor said, “there is more to be done….We know we are still a long way from the 2% target. We know it will take some time to get there. We also know there could be setbacks along the way, and we can’t afford to let high inflation become entrenched.” 

 

So given the clear statements by the Fed and the Bank of Canada, it makes no sense why Bay Street economists are betting that the overnight rate in Canada will peak at around 4% by yearend. They are still forecasting a decline in short-term interest rates next year due to a slowdown in economic activity. I don’t buy that.There are many views on how far the central banks will have to hike rates from here, but the critical issue is to reach a point where rates are meaningfully restrictive. A rule of thumb is that the overnight policy rate must rise to exceed the inflation rate. Fed Chairman Powell has said that he believes that real interest rates should be positive across the yield curve. Today, long and short US rates are still the lowest compared to inflation since the Burns era in the mid-1970s. (see chart below). Traders are betting that the US overnight rate will rise another 125 basis points (bps) by yearend and continue to rise next year to a median estimate of 4.6%.

Chair Powell has clarified that he is willing to tolerate much slower growth. As Bloomberg economists suggest, “Canada is seen having both faster growth and lower interest rates over the next three years — a peculiar mix of economic outcomes that assumes the country is more buffered from global headwinds — including a potential US recession — but won’t face the same pressure to match the Fed higher.”Short-term money markets are betting the Bank of Canada will stop its hiking cycle at about 4%, versus a Fed benchmark rate peaking at about 4.6% and remaining below US short-term rates for at least another three years.This is especially unreasonable given the fall in the Canadian dollar, which is now trading at US$0.728 compared to US$0.814 one year ago. This depreciation reflects the inordinate strength of the US dollar–the global safe-haven currency in a time of enormous uncertainty and volatility. The Canadian dollar has fared far better than other G-7 countries over this period. But the decline in our currency will raise the prices of the many US products and services we import, adding to inflation.Inverted Yield CurvesIn Canada and the US, 2-year yields have risen sharply to levels well above 5-year yields. As of October 6, the 2-year Government of Canada bond yield is at 4.0% compared to the 5-year yield at 3.49% and the 10-year yield at 3.31%. This implies the markets expect a slowdown in economic activity, but that does not mean that the overnight policy rate will fall in 2023 as Bay Street expects, especially if core inflation remains well above 2%. The Canadian prime rate is currently 5.45%, well above the 5-year yield of 3.49%. When the Bank of Canada Governing Council meets again on October 26, it will likely raise the policy rate by at least 50 bps to 3.75%, taking the prime rate up to 5.95% or higher—clearly improving the relative attractiveness of fixed-rate mortgage loans.

 

Bottom Line

For most of my readers, inflation is a brand-new experience, and so are rising interest rates. Inflation in Canada was at 2.2% when the pandemic began, and the 5-year bond yield was a mere 1.3%. Quickly the central bank cut the overnight rate from 1.75% to 0.25%, the prime rate fell from 3.95% to 2.45%, and the 5-year bond yield fell to a low of about 0.32%. Housing demand exploded and continued strong until it peaked in February 2022 when the Bank of Canada began to hike interest rates.Interest rates will not fall to pre-pandemic levels next year or even the year after. And we will likely never see interest rates at pandemic levels again, at least I hope not, because it would take another global economic shutdown. Hence, mortgage-borrower psychology will change. Many more homeowners will choose to lock in fixed interest rates, and by the time this is over, a new generation will realize that interest rates don’t just fall but sometimes rise to levels higher than expected and stay there longer than expected—a painful lesson to learn.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Staffing Shortages

Latest News Gabriel Da Silva 7 Oct

 

Tight Labour Market Fuels Higher Wages
Today’s Labour Force Survey showed that employment grew in September for the first time in four months. Job gains remained moderate despite the high number of vacancies, indicating how tight the job market remains. Wage rates rose 5.2% year-over-year (y/y), the fourth consecutive month for which wage gains exceeded 5%. The jobless rate ticked downward, retracing some of the rise posted in August.

Canada added just over 21,000 jobs last month, with both full-time and part-time work increasing. Gains in educational services, health care, and social assistance were offset by losses in manufacturing; information, culture and recreation; transportation and warehousing, and public administration.

Employment increased in four provinces, led by British Columbia, while fewer people were working in Ontario and Prince Edward Island.

Total hours worked were down 0.6% in September 2022. Despite declining by 1.1% since June, total hours worked were up 2.4% y/y.

In separate news, the US employment data for September was also released today, showing a moderate dip in job growth from the August data, although the gains remained strong. The jobless rate fell to 3.5% from 3.7% a month earlier. The persistent strength in hiring underscored the challenges facing the Federal Reserve as it tries to curtail job growth enough to tame inflation.

Bottom Line

Today’s labour force data in Canada and the US do nothing to deter the central banks from their rate-hiking paths. This is the last employment report before their decision dates–October 26th for the Bank of Canada and November 2nd for the Fed–although we will see the release of inflation and housing data before they meet again. It is already baked into the cake that rate hikes will continue.

Both central banks recently cautioned against market expectations that the fight against inflation was nearly over. Today’s data reinforce what we have already been told.

 

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Inflation Cooled Again in August, But Higher Rates Still Coming

Latest News Gabriel Da Silva 21 Sep

 

Canada’s headline inflation rate cooled again in August, even a bit more than expected. The consumer price index rose 7.0% from a year ago, down from 7.6% in July and a forty-year high of 8.1% in June, mainly on the back of lower gasoline prices.

The CPI fell 0.3% in August, the most significant monthly decline since the early months of the COVID-19 pandemic. On a seasonally adjusted monthly basis, the CPI was up 0.1%, the smallest gain since December 2020. The monthly gas price decline in August compared with July mainly stemmed from higher global production by oil-producing countries. According to data from Natural Resources Canada, refining margins also fell from higher levels in July.
Transportation (+10.3%) and shelter (+6.6%) prices drove the deceleration in consumer prices in August. Moderating the slowing in prices were sustained higher prices for groceries, as prices for food purchased from stores (+10.8%) rose at the fastest pace since August 1981 (+11.9%).

Price growth for goods and services both slowed on a year-over-year basis in August. As non-durable goods (+10.8%) decelerated due to lower prices at the pump, services associated with travel and shelter services contributed the most to the slowdown in service prices (+5.5%). Prices for durable goods (+6.0%), such as passenger vehicles and appliances, also cooled in August.

In August, the average hourly wages rose 5.4% on a year-over-year basis, meaning that, on average, prices rose faster than wages. Although Canadians experienced a decline in purchasing power, the gap was smaller than in July.

Core inflation–which excludes food and energy prices–also decelerated but remains far too high for the Bank of Canada’s comfort. The central bank analyzes three measures of core inflation (see the chart below). The average of the central bank’s three key measures dropped to 5.23% from a revised 5.43% in July, a record high. The Bank aims to return these measures to their 2% target…

 

Bottom Line

Price pressures might have peaked, but today’s data release will not derail the central bank’s intention to raise rates further. Markets expect another rate hike in late October when the Governing Council of the Bank of Canada meets again. But further moves are likely to be smaller than the 75 bps-hikes of the past summer.

There is still more than a month of data before the October 25th decision date. The September employment report (released on October 7) and the September CPI (October 19) will be critical to the Bank’s decision. Right now, we expect a 50-bps hike next month.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

 

 

First Time Home Buyers Guide

Mortgage Tips Gabriel Da Silva 20 Sep

 

Let Us Be Your Guide Through The Mortgage Process.
When you work with us, we’ll pair you with an experienced agent to take you step-by-step through the mortgage process. You’ll receive personalized, one-on-one service designed to get you across the finish line.

 

Notable Terms.
Mortgage Term: The length of time that you’re locked into your rate and conditions.

Down Payment: Any down payment less than 20% requires mortgage default insurance. Over 20% is considered a conventional mortgage, which doesn’t require insurance.

Mortgage Type: An open mortgage allows the borrower the option to pay off all or any of the balance owing on the mortgage at any time, without a penalty but tends to come with a higher interest rate.

Mortgage Rate: You’ll choose either a fixed or variable rate mortgage. Variable rates are often lower but involve more risk, as your payments may fluctuate with the rate set by the Bank of Canada. Fixed rates mean you are locked in for a term and your monthly mortgage payment is set in advance.

Amortization: The number of years it takes to repay your entire mortgage loan amount, based on a fixed payment schedule. Most lenders offer 25-year amortizations.

Closing Costs: Don’t forget about closing costs. Lenders typically like to see that you have at least 1.5% of the purchase price to cover these costs.

Mortgage Stress-Test: Federal regulations have made qualifying for a mortgage a little tougher. Regardless of the low rates offered, you’ll need to qualify to ensure that if mortgage interest rates go up, you’ll still be able to afford your payments.

 

Looking for your First Mortgage? There are Programs and Rebates to Help.

THE HOME BUYERS’ PLAN (HBP)
If you’re a first-time homebuyer, the HBP allows you to withdraw up to $35,000 from your RRSPs tax-free to put toward buying your first home. The HBP allows you to pay back the withdrawn funds within a 15-year period.

THE FIRST-TIME HOME BUYER INCENTIVE
The First-Time Home Buyer Incentive helps people across Canada purchase their first home. The program offers 5% or 10% of the home’s purchase price to put toward a down payment. You pay back the same percentage of the value of your home when you sell it or within a 25-year window.

 

The Mortgage Financing Process.
The number one question for someone new to the mortgage process is “what does this process entail?”. The following is a simple outline to give you an idea of the process and help you understand what to expect as you embark on your home buying journey!

STEP 1 – BE PREPARED
Having the following information on hand before meeting with your mortgage professional will help them determine what you qualify for and help them determine the best mortgage product for you:

Contact information for your employer and your employment history
Proof of address and your address history
Government-issued photo ID with your current address
Proof of income for your mortgage application
Down payment proof (amount and source)
Savings and investments proof
Details of current debts and other financial obligations

STEP 2 – GET PRE-APPROVED
One of the best things any potential homeowner can do when starting the home buying process is to get pre-approved. Mortgage pre-approval requires submission and verification of your financial history and can help you determine your price range, understand the monthly mortgage payment associated with that price range and provide the mortgage rate for your first term.

It is important to note that pre-approval does not mean that a lender has fully reviewed your documentation and you may still need the approval of a mortgage insurer. However, it does have a lot of benefits that can give you a “leg-up” in your search!

BENEFITS OF PRE-APPROVAL
Getting pre-approved not only makes the search easier by helping to determine your price range and budget, but pre-approval also guarantees the interest rate for 90-120 days while you search for that perfect home. Plus, the rate will automatically be adjusted down with any market reductions. Another benefit to pre-approval is that, when it comes time to purchase, pre-approval lets the seller know that securing financing should not be an issue. This is extremely beneficial in competitive markets where lots of offers may be coming in.

Quick Tip: Being entirely candid with your home-buying team throughout the process will be vital! Hidden debt or buying a big-ticket item during your 90-120 day pre-approval can change the amount you are able to borrow. It is best to refrain from any major purchases (such as a new car) or life changes (such as changing jobs) until after closing and you have the keys to your new home!

STEP 3 – HIRE A REALTOR
In today’s competitive real estate market, it can be very difficult to acquire property WITHOUT the help of a realtor. One of the reasons realtors are integral to the home buying process is that they can provide access to properties that never even make it to the MLS website. Realtors also gain access to information about homes that may come onto the market before a listing is even signed.

Most importantly though, a realtor understands the ins-and-outs of the home buying process and can tell you how to be successful in your endeavors to purchase a home by guiding you through the process from the first viewing to having your bid accepted.

STEP 4 – SHOP THE MARKET & MAKE AN OFFER
Once you have found the property that meets your needs, you’ll put in an offer that’ll be accepted or countered. This may go back and forth until you reach an acceptable price with the vendor.

STEP 5 – OFFER IS ACCEPTED
Once your offer is accepted with the condition of financing, you will need to do a few things to finalize the sale:

Ask for a realtor intro between your mortgage professional and realtor.
An appraisal may be required, which will be determined and arranged by your mortgage professional.
Send in any remaining documents required for financing (income confirmation, down payment confirmation, etc).
Arrange a home inspection.
Receive the lender’s approval on property and final approval letter.
STEP 6 – REMOVE CONDITIONS
At this point, your financing is in place and you’re ready to proceed with the purchase of the property.

STEP 7 – LAWYER’S OFFICE
You’ll be asked to provide any money that’s to be used as your down payment, which is not already on deposit with your realtor. Typically, you’ll go in 1-2 days prior to the completion date.

 

DLC-FCF

 

Understanding Mortgage Trigger Points

Mortgage Tips Gabriel Da Silva 6 Sep

 

As we move into the Fall market, there are some important things you should be aware of.

While inflation has now likely peaked, we will still be dealing with the repercussions from these heightened levels for a while before things balance out. As inflation is corrected, we are also seeing home prices moving back to normal post-pandemic era.

However, we are still anticipating some final rate hikes from the Bank of Canada coming into the fall.

With that in mind, now is an important time to discuss what this means for your mortgage – specifically in regards to trigger points. Another increase in rates on the horizon will put many variable-rate borrowers near their mortgage trigger points – even for fixed payments.

While static payment variable-rate mortgages are not designed to fluctuate with prime, the reality is that a mortgage payment consistent of two components: your principle and your interest. With the existing rates and subsequent increases expected in the fall, the amount paid towards principle has decreased with an increase in the amount of interest on a static mortgage. For instance, if you are paying $2000 a month on your mortgage, only $200 might be going towards the principle with the rest covering interest. An additional increase to the interest rate, means that your interest portion will spike again and may actually exceed your total payment. When this occurs, it is called hitting your trigger rate.

You can calculate your own trigger rate with the following formula: (Payment amount X number of payments per year / balance owing) X 100) to get your trigger rate in percentage.

If you have reached your trigger rate, don’t panic. You are certainly not alone and there are options:

  1. Adjust Your Payment: Firstly, you may choose to adjust your payment amount to ensure that you still have some going towards your principal balance.
  2. Review Your Amortization Schedule: Consider switching your amortization schedule from 20-year to 25-year which would be ideal if you already have equity in your home. However, if you’re already at your maximum amortization for your lender (i.e. 30-year mortgage), you would need to increase your payment.
  3. Switch to a Fixed-Rate Mortgage: Many borrowers are now choosing to opt for a fixed-rate mortgage to avoid the issue of increased interest and trigger rates. Keep in mind, depending on your mortgage product, you may face penalties if you switch your mortgage mid-term. Be sure to discuss any mortgage changes with me before going ahead.
  4. Pay Off Your Mortgage: The final option that is always there is for you to pay off your mortgage entirely. Though don’t fret if this is not possible!

While I understand words like “inflation” and “trigger rates” can be scary, as a dedicated mortgage professional I am here for you. I would be happy to discuss any concerns you have or help explain in more detail how these changes may impact your mortgage and what your options are.

 

Gabriel Da Silva
Dominion Lending Centres – FC Funding
Commercial & Residential Mortgage Agent
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Finally, Some Good News on the Inflation Front

Latest News Gabriel Da Silva 10 Aug

It was widely expected that US consumer price inflation would decelerate in July, reflecting the decline in energy prices that peaked in early June. The US CPI was unchanged last month following its 1.3% spike in June. This reduced the year-over-year inflation rate to 8.5% from a four-decade high of 9.1%. Oil prices have fallen to roughly US$90.00 a barrel, returning it to the level posted before the Russian invasion of Ukraine. This has taken gasoline prices down sharply, a decline that continued thus far in August. Key commodity prices have fallen sharply, shown in the chart below, although the recent decline in the agriculture spot index has not shown up yet on grocery store shelves. US food costs jumped 1.1% in July, taking the yearly rate to 10.9%, its highest level since 1979.

The biggest surprise was the decline in core inflation, which excludes food and energy prices. The shelter index continued to rise but did post a smaller increase than the prior month, increasing 0.5 percent in July compared to 0.6 percent in June. The rent index rose 0.7 percent in July, and the owners’ equivalent rent index rose 0.6 percent.

Travel-related prices declined last month. The index for airline fares fell sharply in July, decreasing 7.8%. Hotel prices continued to drop, falling 2.7% on the heels of a similar decrease in June. Rental car prices fell as well from historical highs earlier this cycle.

Bottom Line

The expectation is that the softening in inflation will give the Fed some breathing room. Fed officials have said they want to see months of evidence that prices are cooling, especially in the core gauge. They’ll have another round of monthly CPI and jobs reports before their next policy meeting on Sept. 20-21.

Treasury yields slid across the curve on the news this morning while the S&P 500 was higher and the US dollar plunged. Traders now see a 50-basis-point increase next month as more likely than 75. Next Tuesday, August 16, the July CPI will be released in Canada. If the data show a dip in Canadian inflation, as I expect, that could open the door for a 50 bps rise (rather than 75 bps) in the Bank of Canada rate when they meet again on September 7. That is particularly important because, with one more policy rate hike, we are on the precipice of hitting trigger points for fixed payment variable rate mortgages booked since March 2020, when the prime rate was only 2.45%. The lower the rate hike, the fewer the number of mortgages falling into that category.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Another Jumbo Rate Hike, Signalling More To Come

Latest News Gabriel Da Silva 4 Jun

Bank of Canada Leaves Expectations For 2022 Rate Hikes Intact

The Governing Council of the Bank of Canada raised the overnight policy rate by a full 50 basis points once again today, marking the third rate hike this year. The two back-to-back half-point increases are without precedent, but so were the dramatic pandemic rate cuts in the spring of 2020. Indeed, with the surge in Canadian inflation to 6.8% in April, the Bank of Canada is still behind the curve. The chart below shows that inflation remains well above the Bank’s forecasts. Today’s press release suggests they now estimate that inflation rose again in May and could well accelerate further.

Today’s policy statement emphasized that “As pervasive input price pressures feed through into consumer prices, inflation continues to broaden, with core measures of inflation ranging between 3.2% and 5.1%. Almost 70% of CPI categories now show inflation above 3%. The risk of elevated inflation becoming entrenched has risen. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well anchored.”

“The increase in global inflation is occurring as the global economy slows. The Russian invasion of Ukraine, China’s COVID-related lockdowns, and ongoing supply disruptions are all weighing on activity and boosting inflation. The war has increased uncertainty and is putting further upward pressure on prices for energy and agricultural commodities. This is dampening the outlook, particularly in Europe. In the United States, private domestic demand remains robust, despite the economy contracting in the first quarter of 2022.”

The Bank said that “Canadian economic activity is strong and the economy is clearly operating in excess demand. National accounts data for the first quarter of 2022 showed GDP growth of 3.1 percent, in line with the Bank’s April Monetary Policy Report (MPR) projection. Job vacancies are elevated, companies are reporting widespread labour shortages, and wage growth has been picking up and broadening across sectors. Housing market activity is moderating from exceptionally high levels. With consumer spending in Canada remaining robust and exports anticipated to strengthen, growth in the second quarter is expected to be solid.”

Bottom Line

The Bank of Canada couldn’t be more forthright. The concluding paragraph of the policy statement is as follows: “With the economy in excess demand, and inflation persisting well above target and expected to move higher in the near term, the Governing Council continues to judge that interest rates will need to rise further. The policy interest rate remains the Bank’s primary monetary policy instrument, with quantitative tightening acting as a complementary tool. The pace of further increases in the policy rate will be guided by the Bank’s ongoing assessment of the economy and inflation, and the Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target.”

The Bank of Canada has told us we should expect at least another 50 bps rate hike when they meet again on July 13. It could even be 75 bps if inflation shows no sign of decelerating. The Bank estimates that the overnight rate’s neutral (noninflationary) level is 2%-to-3%. Traders currently expect the policy rate to end the year at roughly 3%.

This was a very hawkish policy statement. The central bank is defending its credibility and will undoubtedly continue to tighten monetary policy aggressively.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

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