13 Sep

Upcoming Mortgage Changes

General

Posted by: Angela Calla

In addition to recent rate hikes, we have even more regulation changes coming that will make it more difficult to qualify for mortgages and access your equity from this point on.

To protect yourself in the best way possible:

1. If you have a mortgage renewal in the next year, please contact us directly to begin reviewing your options now

2. If you have debt outside of your mortgage, now is the time for us to help you restructure your mortgage and pay it off by using your equity

3. If you are considering home renovations, please contact us to access your equity to cover the costs of the improvements

4. If you want to access your equity for any investments, please contact us at callateam@dominionlending.ca or 604-802-3983 before the rules change in order to best position yourself.

Here is the link to the full article about the upcoming changes: https://www2.mambonetcom.com/cgi-bin/public/redir.pl?cid=477&rid=799002&id=2461

If you or anyone you care about have questions on how to secure the best mortgage strategy, we are here to help.
Angela Calla, AMP

7 Sep

Bank of Canada Raises Rates

General

Posted by: Angela Calla

The Bank of Canada is raising its target for the overnight rate to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent. It is most likely prime will follow with the full .25 percent increase within hours if not a day.

Should you lock in your mortgage? I would suspect this will be the last increase that is expected due to global economic factors, and political changes. This now has reversed the 2 decreases in 2015. I personally am staying the variable rate mortgage course (which is not a decision for everybody pending your personal circumstances). The average borrower with a 300k mortgage will see a monthly increase of $50 per month.

The full press release can be viewed here: https://www2.mambonetcom.com/cgi-bin/public/redir.pl?cid=477&rid=794442&id=2456

Article of note: https://www2.mambonetcom.com/cgi-bin/public/redir.pl?cid=477&rid=794442&id=2457

The next scheduled date for announcing the overnight rate target is October 25, 2017. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR at the same time.

If you have questions on your mortgage kindly email us, or call 604-802-3983.

Angela Calla has been a licensed mortgage broker for 14 years. She has been with Dominion Lending Centres since its inception in January 2006. Residing in Port Moody, British Columbia, Angela is a regular expert guest on several news stations, television shows, radio programs and local and national publications. She was the AMP of the year in 2009, and has consistently been one of DLC and the industry’s top performers since 2006. She can be reached at callateam@dominionlending.ca or 604-802-3983

11 Aug

Tougher Mortgage Rules Ahead- Get in Front of Them TODAY

General

Posted by: Angela Calla

Tougher Mortgage Rules Ahead

Are you planning to move, renovate, invest or consolidate debt?

Tougher mortgage rules are on the horizon that may prevent you from being approved for a mortgage!

As your local independent mortgage professional, my team is here to help!

Plan ahead, explore your financing options today and look at the ‘what if’ so that you don’t miss an opportunity.

With rates increasing and rules tightening many families are looking ahead and accessing equity now.

Read the Article Here: ‘Playing with fire’: Housing experts warn OSFI against new stress tests

To learn more contact us directly at 604-802-3983 or email callateam@dominionlending.ca

Angela Calla has been a licensed mortgage broker for 13 years – since she was 22 years old. She has been with Dominion Lending Centres since its inception in January 2006. Residing in Port Moody, British Columbia, Angela is a regular expert guest on several news stations, television shows, radio programs and local and national publications. She was the AMP of the year in 2009, and has consistently been one of DLC and the industry’s top performers since 2006.

1 Aug

Is My Mortgage Portable?

General

Posted by: Angela Calla

Is My Mortgage Portable?

The question: ‘Is my mortgage portable?’

The answer most often given: ‘Yes.’

This answer is increasingly wrong.

In reality, you may qualify to move 80% or less of the current balance.

The proper question: ‘Do I need to re-qualify for my current mortgage to move to a new home?’

The proper answer: ‘Yes, your mortgage is portable, but only if you re-qualify under today’s new and more stringent guidelines.’

Who is the very best person to answer the portability question? Your mortgage broker.

They will answer this question accurately. And it can only be answered accurately with a complete and updated application, along with all supporting documents to confirm the maximum mortgage amount under current guidelines.

Calling the 1-800 number on your mortgage statement, or asking the teller while depositing cheques is far less likely to get you an accurate answer. Instead that tends to be the origin of the one word answer.

Call your mortgage broker as soon as you start thinking about moving.

Too many clients learn this lesson the hard way. They sell their existing property before speaking with their Mortgage Broker, and in some cases they also enter binding purchase agreements under the mistaken assumption they can just ‘port their mortgage.’

What is the problem?

Key Point – The Federal Government has created a dynamic in which there are two different qualifying rate used for approvals. One is for the initial purchase or refinance, and the other is for when it comes time to move to a new home.

So the qualifying rate used yesterday to get you into a five-year fixed rate mortgage on your current home is not the one being used to qualify you to move that same mortgage to a new home down the street, even just one day later.

Key Point – One day into your new five-year fixed mortgage you are now subject to a ‘stress test’. In a nutshell, the stress test effectively reduces your maximum mortgage amount by 20%. Meaning that you can only port 80% of the current balance to another property… just one day later.

So, what’s the fix?

The best fix – The government could add a simple sentence to their lending guidelines along the lines of ‘If a borrower qualified for their mortgage at the five-year contract rate at inception, then the borrower shall be allowed to re-qualify at the original contract rate when moving their mortgage to a new home.’

Currently this fix does not exist.

The current fix – You pay a penalty to break the current five-year fixed mortgage you have and then apply for a new five-year fixed mortgage. Which is as ridiculous as it sounds.

The penalty amount? Approximately 4.5% of balance, i.e., $14,000 on a $300,000 mortgage balance. Yes, you read that correctly.

This is entirely unreasonable. It is not a fix at all. If you bought with 5% down, and then a few months later were transferred to another province and had no choice but to move, this represents your entire down payment vanishing due to a simple oversight by the federal regulators.

Dominion Lending Centres Inc. August 2017 Newsletter.

Angela Calla has been a licensed mortgage broker for 13 years – since she was 22 years old. She has been with Dominion Lending Centres since its inception in January 2006. Residing in Port Moody, British Columbia, Angela is a regular expert guest on several news stations, television shows, radio programs and local and national publications. She was the AMP of the year in 2009, and has consistently been one of DLC and the industry’s top performers since 2006. She can be reached at callateam@dominionlending.ca or 604-802-3983.

1 Aug

Ten Things to Know About Prime & Your Mortgage

General

Posted by: Angela Calla

Ten Things to Know About Prime & Your Mortgage

1.Fixed-rate mortgage holders are not affected by Bank of Canada rate changes during their current term. Only those in either adjustable-rate or variable-rate mortgages
need read on.

2.On July 12 lenders increased variable-rate borrowing costs by 0.25% to match the Bank of Canada increase of the same amount on the same day.

3.There are three more scheduled Bank of Canada meetings this year, and there remains doubt about any further increases this year. Few expect anything more than a 0.25%
further increase.

4.This was the first increase to Prime in nearly seven years, and it follows two 0.25% reductions in 2015.

5.A 0.25% rate increase equals a payment increase of $13 per month per $100,000 of outstanding mortgage balance for those in an adjustable-rate mortgage. That means a
$300,000 mortgage balance will see payments rise by $39 per month.

6.Not all payments increase. Several lenders differentiate from an adjustable-rate product by offering what is called a ‘variable-rate’ mortgage and their clients will
not have any payment change at all. Instead, the life of the mortgage is extended slightly. A letter in the mail from your lender should be arriving to confirm which
camp you are in.

7.There is no penalty or fee to convert to a fixed rate. Whether in an adjustable-rate mortgage or a variable-rate mortgage, you have the option of locking into a
fixed-rate at any time without cost. The length of the term offered varies according to policy and remaining time to maturity, with some lenders allowing conversion
to a three-year fixed from day one, but most ensuring they have you under contract for the full original term.

8.Locking in can be very costly. The prepayment penalties differ significantly between variable- and fixed-rate products. Be careful about locking in. Aside from
immediately increasing your payment even further, you stand to increase your potential prepayment penalty by up to 900%. Few think they will trigger a penalty, yet
more than half of borrowers actually do.

9.No surprises. Mortgage lenders failed to give us the full 0.25% decreases in 2015, instead only reducing rates by 0.15% both times. Counting on our short memories
and lack of uproar, lenders chose to increase by the full 0.25% on July 12, rather than doing what would have been fair and only increasing 0.15%.

10.Future increases will depend largely on consistent economic good news. This is what drives interest-rate increases.

Stay tuned for next month’s newsletter as we weigh the likelihood of another 0.25% increase at the September Bank of Canada meeting.

Dominion Lending Centres Inc. August 2017 Newsletter.

The best mortgage plan is one that is developed by assessing your goals and life stage. The Angela Calla Mortgage Team will help you personally call us at 604-802-3983 or email callateam@dominionlending.ca. To contact Angela Calla directly call 604-802-3983 or visit www.angelacalla.ca

31 Jul

CHIP News: Top 3 Misconceptions About Reverse Mortgages In Canada

General

Posted by: Angela Calla

CHIP News: Top 3 Misconceptions About Reverse Mortgages In Canada

I recently read an article by Jamie Hopkins in Forbes magazine, entitled “Americans Don’t Even Know What Their Most Important Retirement Asset Is”.

The article highlighted 3 common misconceptions about reverse mortgages and unsurprisingly, they are prevalent in Canada as well as in the U.S.

Top 3 Misconceptions About Reverse Mortgages:

1. The Bank Owns Your Home.

2. Your Estate Can Owe More Than Your Home

3. The Best Time to take a Reverse Mortgage is at the End of Your Retirement

Let’s examine each misconception in more detail.

1. The Bank Owns Your Home.

Over 50% of Canadian homeowners over the age of 65, believe the bank owns your home once you’ve taken a reverse mortgage. Not true! We simply register our position on the title of the home, exactly the same as any other mortgage instrument, with the main difference in the flexibility of not having to make P&I payments on the reverse mortgage.

2. Your Estate Can Owe More Than Your Home

A reverse mortgage, unlike most traditional mortgages in Canada, is a non-recourse debt. Non-recourse means if a borrower defaults on the loan, the issuer can seize the home asset, but cannot seek any further compensation from the borrower – even if the collateral asset does not fully cover the full value of the loan. Therefore, when the last homeowner dies (and the reverse mortgage is due), the estate will never be responsible for paying back more than the fair market value of the home. The estate is fully protected – this is not the case for almost any other mortgage loan (specifically secured lines of credit) in Canada, which is full recourse debt. So read the fine print the next time you offer to co-sign for a loan for mom!!

3. The Best Time to take a Reverse Mortgage is at the End of Your Retirement

This is a common mistake that reflects the “old-school” financial planning mentality.
For the majority of Canadians (without a nice government pension), the old school financial planning mentality is about cash-flow, and is as follows:

a) Begin drawing down non-taxable assets to supplement your retirement income.

b) Once your non-taxable assets are depleted, begin drawing down more of your registered assets (RSP/RIF) to supplement retirement income.

c) Once your registered assets are depleted, sell your home, downsize and re-invest to generate enough cash-flow to last you until you die.

The problem with the “old-school” financial planning model is two-fold:

1. 91% of Canadian seniors have no plans to sell their home (CBC News “Canadian Boomers Want To Stay In Their Homes As They Age).

2. You are missing out on a huge tax-saving opportunity by not taking out a reverse mortgage in the beginning of your retirement.

“Research has consistently shown that strategic uses of reverse mortgages can be used to improve a retiree’s financial situation, and that reverse mortgages generally provide more strategic benefits when used early in retirement as opposed to being used as a last resort.” – Jamie Hopkins, Forbes

In Canada, a reverse mortgage can be set-up to provide homeowners with a monthly draw out of the approved amount. For example: client is approved for $240,000 and decides to take $1000/month. This is deposited into the clients’ bank account over the next 20-years. Interest accumulates only on the amount drawn (i.e.: not on the full $ amount at the onset).

This strategy allows clients to draw down less income from their registered assets to support their retirement lifestyle. In turn, this can create some excellent tax savings, since home equity is non-taxable. Imagine lowering your nominal tax bracket by 5 – 10% each and every year over a 20 year period?! The tax savings can be huge. You are also able to preserve your investable assets, which historically, can generate a higher rate of return when invested over a greater period of time.

In summary, Canada and the U.S. both have aging populations and both have misconceptions about reverse mortgages. Learning about these misconceptions will allow you to offer your clients the best advice on how to balance retirement lifestyle and cash-flow, with the desire for retirees to age gracefully within their own homes.

John Fries, CIM
Business Development Manager
HomEquity Bank
Recognized by CMP as a Top 30 BDM in Canada in 2016

Questions on the best mortgage for you? Contact The Angela Calla Mortgage Team to help you personally 604-802-3983 callateam@dominionlending.ca

31 Jul

Borrowers who obsess about rates are getting it wrong

General

Posted by: Angela Calla

Trivia question: What is the interest rate you’re paying on your various debts?

Interest rates seem vitally important in a week in which the Bank of Canada raised its benchmark lending rate for the first time in seven years, but they’re not what you should be focusing on as you prepare for the possibility of borrowing costs ahead.

“People get all excited about rates,” said Stephanie Holmes-Winton, CEO of a firm called the Money Finder, which trains financial planners and advisers to better help clients manage their household cash flow. “But rates don’t have a lot of impact until you add amortization and principal.”

Amortization refers to the period of time over which you’ll gradually repay what you owe, and principal is the amount you borrowed. Both, obviously, get at least a bit of attention when you set up a mortgage, line of credit or loan. But it’s the interest rate that we obsessively research, negotiate, then brag about.

“We’ve been taught to chase the shiny thing,” Ms. Holmes-Winton says of our fixation with rates. “It’s so easy to say 3 per cent is less than four. What we’re not looking at is the question: How much does my debt cost me?”

Want to protect yourself against the risk of higher rates? Pay down your principal and shorten your amortization. The more effective you are at reducing your total household debt load, the less vulnerable you are if borrowing costs gradually move higher in the months and years ahead.

Even in today’s low-rate world, the cost of debt is substantial. Someone who buys a $500,000 house with a 10-per-cent down payment would pay $165,374 in interest if we assume today’s discounted five-year fixed mortgage rate of 2.6 per cent lasts throughout a 25-year amortization. If the economy sustains current growth levels or improves, expect both rates and interest costs to be higher. With a constant 3.6-per-cent mortgage rate, total interest costs over 25 years rise to $236,707.

Let’s say you have the average $70,000 balance carried by people with home equity lines of credit (HELOCs). Over a year, your minimum monthly payments (interest only) would add up to about $2,415 at current rates. Your principal remains at $70,000 if you just pay the interest on the average HELOC balance, and interest costs pile up endlessly. Higher rates aren’t your problem if you’re in this position; the bigger issue is the need to grind down your principal and get your debt paid off. Reducing your balance even to $50,000 cuts your annual interest bill to $1,725.

According to a recent study from the Financial Consumer Agency of Canada, some lenders find that a large majority of HELOCs are not fully repaid until the borrower sells his or her home. This kind of financial procrastination is possible only when interest rates are as low as they have been.

With a mortgage, the simplest way to reduce principal and amortization is to make payments on an accelerated biweekly basis rather than monthly. You’re essentially making a 13th monthly payment each year if you do this. The benefit for people just starting a mortgage is an automatic reduction in amortization by roughly two years – 23 instead of the usual 25 – and a lower overall interest cost.

Paying down the mortgage principal is another tactic – one that we’re pretty good at already. Data presented late last year by Mortgage Professionals Canada (they represent mortgage brokers) shows that 35 per cent of homeowners with mortgages used one or more of these measures in the past year to get their mortgage paid off faster: Increasing their payment, making a lump-sum payment or increasing the frequency of their payments. In cities where people are forced to take on big mortgages to buy a house, it would be great to see half or two-thirds of home buyers take at least one of these steps.

According to Ms. Holmes-Winton, the sad part of our rate obsession is that we often underestimate what we’re really paying. She’s found that people’s average rate across all their borrowings – loans, mortgages, credit cards and more – is 8 per cent. Problem is, people seem to mistake much lower mortgage rates for their overall cost of borrowing. “People are paying way more average interest than they realize.”

Read the article from the Globe & Mail here

Angela Calla has been a licensed mortgage broker for 13 years – since she was 22 years old. She has been with Dominion Lending Centres since its inception in January 2006. Residing in Port Moody, British Columbia, Angela is a regular expert guest on several news stations, television shows, radio programs and local and national publications. She was the AMP of the year in 2009, and has consistently been one of DLC and the industry’s top performers since 2006. She can be reached at callateam@dominionlending.ca and 604-802-3983.

26 Jul

New record: $2,090 a month is average cost of one-bedroom rental in Vancouver

General

Posted by: Angela Calla

New record: $2,090 a month is average cost of one-bedroom rental in Vancouver

For more than a year, Vancouver has taken top spot for the most expensive city to rent in Canada and now the city of glass has broken another record.

In July, the average price of rent for a one-bedroom apartment in Vancouver hit $2,090 a month; which is the first time this type of property has cracked the $2,000 mark since Padmapper started tracking rental data. Padmapper collects rental data from 25 of Canada’s biggest cities based on population.

In June the average price for renting a one-bedroom was $1,950. That’s a 2.5 per cent jump in cost from June to July and year-over-year price of a one-bedroom in Vancouver has increased by 15.5 per cent.

Similarly, rent for a two-bedroom grew by 2.5 per cent in July to $3,230 a month.

While Vancouver stays poised at the top of the list, Toronto comes in second consistently with rents increasing only slightly (0.9 per cent) to $1,800 a month for a one-bedroom and $2,430 for a two-bedroom.

Affordability for both renters and homeowners continues to be a hot topic in Metro Vancouver.

In March, tenants on Vancouver’s west side fought against a 35 per cent rent increase. The landlord of the building, located in the 1000-block of West 13th Avenue wants to raise the rent above this year’s legally-capped limit of 3.7 per cent under a clause of the Residential Tenancy Regulation.

The province currently caps annual rent increases at 3.7 per cent, but landlords can apply for exceptions if the rent they are currently charging is significantly lower than what is being charged for similar suites nearby.

The City of Vancouver conducted a survey of 10,000 residents, which resoundingly said affordability is their top priority and the city’s new housing strategy should prioritize housing based on what local residents can afford.

The survey also found that many residents believe investment pressure is a primary contributor to rising prices and that the majority of renters are concerned about their future in Vancouver — with affordability being a main reason why they might choose to leave. City staff will be reporting to council on July 25 with the results of the public consultation, housing targets in the next 10 years and actions to achieve those targets.

Victoria also remained in the top five even though rent fell by 5.1 per cent for one-bedroom units ($1,120/month) and slightly increased by 0.7 per cent for two-bedroom apartments ($1,410/month).

Click Here to Read the Article

Angela Calla has been a licensed mortgage broker for 13 years – since she was 22 years old. She has been with Dominion Lending Centres since its inception in January 2006. Residing in Port Moody, British Columbia, Angela is a regular expert guest on several news stations, television shows, radio programs and local and national publications. She was the AMP of the year in 2009, and has consistently been one of DLC and the industry’s top performers since 2006. She can be reached at callateam@dominionlending.ca and 604-802-3983.

14 Jul

Canadian Mortgage Rates Are Rising – Should Variable-Rate Borrowers Lock In?

General

Posted by: Angela Calla

Last week Bank of Canada (BoC) Governor Poloz eliminated any doubt about the BoC’s near-term plans. During an interview on CNBC he said that the two 0.25% overnight-rate cuts that the Bank made in 2015 in response to the oil-price shock have “done their job” and he expressed confidence that our economy’s “surprisingly” strong first-quarter growth rebound would continue.

The market’s reaction was swift.

The futures market raised the odds of a BoC rate rise at its July meeting to better than 50% and the Loonie soared against the Greenback, reaching a nine-month high. Government of Canada (GoC) bond yields surged higher and mortgage lenders wasted no time, quickly raising their fixed rates, which are priced on GoC bond yields, in response.

This marks a rare moment for many of our variable-rate borrowers because the BoC hasn’t raised its overnight rate in more than seven years, which means there are many among this group who have never experienced a rate rise (this is the part where the older generations shake their heads).
Suddenly these borrowers have just been told by the BoC that their rates are going to go up and at the same time, they are nervously eyeing fixed mortgage rates, otherwise known as their conversion parachutes, moving higher.

In today’s post, I’ll explain why the BoC is planning to raise its overnight rate soon, offer my take on the impacts that this will have on our economy, and most urgently, offer my two cents on whether variable-rate borrowers should now convert to a fixed-rate mortgage.
The Canadian economy has performed much better of late. Our GDP rose by 3.7% on an annualized basis in the first quarter of this year (which led the G7 economies), our job growth has consistently exceeded consensus forecasts, and even our beleaguered export-manufacturing sector is showing signs of life.

That last point is key for the BoC because it has long said that any healthy economic recovery scenarios must be export led and underpinned by a strong and stable rise in business investment in our manufacturing sector. The health of this sector is vital because manufacturing jobs have a multiplier effect that stimulates job creation across our broader economy.

This newfound economic strength adds another worry to the Bank’s list because if our current economic momentum marks the beginning of a sustainable recovery, it must now try to stay in front of inflationary pressures. BoC Deputy Governor Carolyn Wilkens recently alluded to this when she said that “If you saw a stop light ahead, you would begin letting up on the gas to slow down smoothly … You don’t want to have to slam on the brakes at the last second. Monetary policy must also anticipate the road ahead.” 

The BoC has lots of other reasons for wanting to begin raising its overnight rate. Our extended period of ultra-low interest rates has created potentially destabilizing risks that include:

-Rising household debt levels.

-The potential for asset bubbles.

-The deterioration of overall credit quality as investors reach for higher yields.

-Increasing long-term liability shortfalls from pension funds and insurance companies because they can’t earn the returns they need to cover their long-term
obligations.

-Limited future monetary-policy flexibility when the overnight rate is so close to 0% (it stands at 0.50% today).  

If the BoC wants to make the case for raising rates in the here and now, the two emergency rate cuts that it made in response to the oil-price shock in 2015 are a good place to start. The Bank believes that our economy has now largely adjusted to lower oil prices, so if that economic emergency has been dealt with, why not remove the emergency rate cuts that accompanied it?

If the answer seems simple, it’s not.

When the BoC pulls its interest-rate lever it creates impacts that are far-reaching across our economy, and that cuts both ways. Here are some examples of the negative impacts that will accompany the BoC’s coming rate rise:

The Loonie will rise – The rising Loonie impacts our economy in many of the same ways as monetary-policy tightening. For example, it raises the costs of our exports, and the Loonie’s exchange-rate value has already been a headwind for our exporters. While it has fallen against the Greenback over the past several years, other currencies, like the Mexican Peso, have weakened more, making our exports relatively more expensive than the competition. The BoC has repeatedly expressed concern over these “competitiveness challenges” and it knows that higher rates will exacerbate them. That has to make raising now a tough call. We have been waiting a long time for our export sector to show signs of life and a BoC rate hike will increase the strength of the currency headwind that is acting against it.

Our government deficits will increase – Rate rises will increase the cost of government debt, and since our federal government and most of our provincial governments are already running deficits, higher borrowing costs will increase those shortfalls. As the cost of servicing our overall government debt load rises over time, there will be less money available for more productive long-term investments in things like infrastructure, education and research.

The risk of deflation will increase – The BoC’s primary mandate is to use its monetary policy to maintain price stability, and in layman’s terms, that basically means that they need to help keep inflation under control. Our current inflation levels are as low as they have been in almost a decade, at about 1.3%, and if rate rises slow our hard-won economic momentum, what little inflation we have could disappear. If that happens and we experience outright deflation instead, the BoC will regret having pumped its brakes, especially since its monetary-policy tools are far less well suited to reigning in deflationary forces.

The BoC might argue that now is the time to raise rates because the U.S. Federal Reserve has already raised its policy rate three times and is planning to raise it again in the near future (and the Bank of England and the European Central bank are suddenly sounding more hawkish as well).

For my part, I think the Fed is over-tightening based on current U.S. economic momentum and that its actions may well lead to a U.S. recession sometime within the next twelve months (for reasons that are beyond the scope of this post). While that view might be controversial, consider that past Fed tightening cycles have triggered a

U.S. recession about 80% of the time (according to research done by economist David Rosenberg).
If the U.S. economy enters a recession, the Fed will likely cut its policy rate back, and if that happens, the BoC would be expected to follow. But even if I’m wrong and the U.S. avoids recession, I don’t believe that history will mark this as the definitive moment when variable-rate borrowers should have locked in.

Here are five reasons why I hold this view:

Central bankers influence, but do not control interest rates – Interest rates have been pushed steadily lower by a variety of long-term factors such as aging demographics, slowing economic growth rates and long periods of low inflation in most developed countries. These factors will continue to exert downward pressure on our interest rates for many years to come. That doesn’t mean that rates won’t go up a little in response to monetary-policy changes, but it does make it very unlikely that we’re headed for a repeat of 1980s rates in the 18%+ range (as some borrowers fear).

Rates don’t need to rise by much to slow our economy – The BoC has repeatedly said that with our current debt levels, our economy will require less monetary-policy tightening to ease inflationary pressures and it has been consistently lowering its neutral-rate forecast to reflect this (as a reminder, the neutral rate is the rate “that is neither stimulative nor contractionary when an economy is operating at full capacity”). That means that if the BoC does raise rates it will be able to do more with less.

The cost of labour isn’t feeding inflationary pressures – The cost of labour is a pervasive driver of overall inflation, and while our economy’s employment momentum has been impressive, our average wages are barely rising. It’s true that labour costs are a lagging indicator, meaning that they tend to rise after overall inflation trends higher, but by any historical measure they should have increased by much more at this point in our economic recovery. And the fact that they haven’t suggests that other longer-term factors are at play, such as increased levels of automation. Flat labour costs will go a long way toward keeping inflation down.

Rates aren’t likely to go up in a straight line – It wasn’t too long ago that market watchers were speculating about the possibility of a BoC rate cut. If the BoC raises, the odds of a future rate cut will also increase, so don’t expect the BoC overnight rate to follow a straight upward line just because we see one or two rate hikes. The higher the overnight rate goes, the more flexibility the BoC has to lower it back again if needed (and which I think will happen if the U.S. economy lands in recession).

The bond market’s initial reaction may well prove to have been an over-reaction – Investors tend to shoot first and ask questions later, and the market’s reaction to the BoC’s hawkish guidance assumes that at least two overnight-rate increases are imminent. While that’s certainly possible, I think there is still a good chance that the second increase could either be delayed or may not even happen, and if that proves the case, bond yields will move back down as rumour and speculation turn to fact.

Our history says that variable-rate borrowers who convert tend to pay more over time than if they had stayed the course. While past is not necessarily prologue, in his famous fifty-year study that compared fixed and variable mortgage rates, Dr. Moshe Milevsky found that variable-rate borrowers who convert mid-term typically paid more than variable-rate borrowers who stuck it out. In other words, converting your variable rate today will give you peace of mind, but history says that you will probably be locking in additional cost over the long run.

Five-year GoC bond yields surged higher by twenty-eight basis points last week, closing at 1.40% on Friday. Five-year fixed-rate mortgages are still available at rates as low as 2.34% for high-ratio buyers (but not for much longer), and at rates as low as 2.59% for low-ratio buyers, depending on the size of their down payment and the purchase price of the property. Meanwhile, borrowers who are looking to refinance should be able to find five-year fixed rates in the 2.79% to 2.89% range.

Five-year variable-rate mortgages are largely unchanged so far and are still available at rates as low as prime minus 0.80% (1.90% today) for high-ratio buyers, and at rates as low as prime minus 0.50% (2.20% today) for low-ratio buyers, again depending on the size of their down payment and the purchase price of the property. Borrowers who are looking to refinance should be able to find five-year variable rates around the prime minus 0.40% to 0.45% range, which works out to between 2.20% and 2.25% using today’s prime rate of 2.70%.

The Bottom Line: If you’re a fixed-rate borrower, the worst of the rate hikes is likely behind you for the time being because lenders have already adjusted their pricing in response to rapidly rising GoC bond yields. If you’re a variable-rate borrower, my view is that staying the course instead of converting, at least for now, will still prove the better option. While your variable rate may be headed higher soon, for the reasons outlined above, I don’t think the rise will be dramatic, as many now suddenly fear.

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The best mortgage plan is one that is developed by assessing your goals and life stage. The Angela Calla Mortgage Team will help you personally call us at 604-802-3983 or email callateam@dominionlending.ca. To contact Angela Calla directly call 604-802-3983 or visit www.angelacalla.ca

12 Jul

Bank of Canada increases overnight rate target to 3/4 per cent

General

Posted by: Angela Calla

The Bank of Canada is raising its target for the overnight rate to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent. Recent data have bolstered the Bank’s confidence in its outlook for above-potential growth and the absorption of excess capacity in the economy. The Bank acknowledges recent softness in inflation but judges this to be temporary. Recognizing the lag between monetary policy actions and future inflation, Governing Council considers it appropriate to raise its overnight rate target at this time.

The global economy continues to strengthen and growth is broadening across countries and regions. The US economy was tepid in the first quarter of 2017 but is now growing at a solid pace, underpinned by a robust labour market and stronger investment. Above-potential growth is becoming more widespread in the euro area. However, elevated geopolitical uncertainty still clouds the global outlook, particularly for trade and investment. Meanwhile, world oil prices have softened as markets work toward a new supply/demand balance.

Canada’s economy has been robust, fuelled by household spending. As a result, a significant amount of economic slack has been absorbed. The very strong growth of the first quarter is expected to moderate over the balance of the year, but remain above potential. Growth is broadening across industries and regions and therefore becoming more sustainable. As the adjustment to lower oil prices is largely complete, both the goods and services sectors are expanding. Household spending will likely remain solid in the months ahead, supported by rising employment and wages, but its pace is expected to slow over the projection horizon.  At the same time, exports should make an increasing contribution to GDP growth. Business investment should also add to growth, a view supported by the most recent Business Outlook Survey. 

The Bank estimates real GDP growth will moderate further over the projection horizon, from 2.8 per cent in 2017 to 2.0 per cent in 2018 and 1.6 per cent in 2019. The output gap is now projected to close around the end of 2017, earlier than the Bank anticipated in its April Monetary Policy Report (MPR).

CPI inflation has eased in recent months and the Bank’s three measures of core inflation all remain below 2 per cent. The factors behind soft inflation appear to be mostly temporary, including heightened food price competition, electricity rebates in Ontario, and changes in automobile pricing. As the effects of these relative price movements fade and excess capacity is absorbed, the Bank expects inflation to return to close to 2 per cent by the middle of 2018. The Bank will continue to analyze short-term inflation fluctuations to determine the extent to which it remains appropriate to look through them.  

Governing Council judges that the current outlook warrants today’s withdrawal of some of the monetary policy stimulus in the economy. Future adjustments to the target for the overnight rate will be guided by incoming data as they inform the Bank’s inflation outlook, keeping in mind continued uncertainty and financial system vulnerabilities.

Information note

The next scheduled date for announcing the overnight rate target is September 6, 2017. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on October 25, 2017.  

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