July Interest Rate Update
Over the last 5 days, since the Bank of Canada’s 100 basis point prime rate change, I’ve responded to many emails, phone calls and texts from clients that are becoming very nervous about their variable rate mortgages.
The graph outlines the BOC overnight lending increases since early 2022.
I’ve spent the last 5 days reading, researching, and making notes about the announcement and each client call and I wanted to share some thoughts for you to consider. (I always promise that if I’ve helped you obtain a mortgage, I’ll stick with you right through the period that you own the home)!
I’ve owned my own home since I was 23. (Well, the bank owned it (and still does), and I’ve been paying a mortgage). I love math, numbers and Real Estate, so I’ve been learning about Real Estate and mortgages for a very long time. Since owning my first home, my husband and I have purchased many rental properties, and now we’re paying 18 mortgages each month. Over the years, I’ve had variable rate mortgages, fixed-rate mortgages, and Home Equity Lines of Credit and I still hold a combination of all 3. We’ve owned Real Estate that doubled in value and Real Estate that sh%*t the bed. Honestly, I’m still selling mortgages my friends, clearly, I didn’t get it all right.
All this to say, that what is going on in the market affects me in a very personal way. I've "put my money where my mouth is."
I became a mortgage broker, just over 5 years ago, and have since helped clients with about 700 mortgage transactions. In the beginning, I helped a lot of clients obtain fixed-rate mortgages around the 2.79% -3.69% mark. Then, in March of 2020, when interest rates started to move towards rock bottom and the pandemic caused lockdowns, employment changes, and general chaos, everyone decided they wanted to break their mortgage and move.
Break the mortgage for a lower rate.
Break the mortgage and refinance because they were laid off and monthly cash flow was a problem.
Sell the home, because they couldn’t afford the payments without their airline jobs, restaurant jobs, physiotherapy or spa jobs, (you catch my drift).
Move home, to be closer to their family that could help with child care & homeschooling little ones.
Move to suburbia, sell their condo, and buy a house with more space and a yard.
No problem, I said, let’s just calculate your mortgage payout penalty.
Well, you can imagine how all those conversations went, when rates had moved from 3.5% to 1.5% most of my clients (even at monoline lenders with lower payout penalties), had payout penalties in excess of $25,000.
It was brutal.
I’ve never been yelled at so much in my life, it was a pandemic, people felt trapped from all angles, people were struggling with finances, mental health, and homeschooling their children; it was really, really awful. Massive mortgage payout penalties were the icing on the cake for many people.
This was 2020 & 2021 and it was something else.
As a result, I educate people more than ever about penalties and fixed-rate mortgages. A huge percentage of the deals that we do a Spire Mortgage Team are now variable and adjustable rate mortgages.
“Life is variable, and your mortgage should be too.”
Insert 2022.
Between February 2022 and July 13th, 2022, the Bank of Canada increased the overnight lending rate from 0.25% to 2.50%, and on the back of that, all of the lending institutions in Canada have increased their bank prime to 4.7%, (from 2.45%).
In early 2022, as a market, we understood that rates had nowhere to go but up. We expected that given the immense amount of Government support (IE CERB and the CEBA loans etc), and the inability of Canadians to spend money on experiences and services for 2 years, (due to lockdowns), we would see some transitional inflationary pressure. Yes, people will be excited to get out and spend money, travel will resume, international students will come back, we will flock to restaurants so that we don’t have to cook for ourselves…etc…etc.
I really believed that we’d have a flurry of excitement and activity and then we’d chill the F out, we’re scared of recessions in Canada – right? We're good savers - right? (maybe this is my Alberta bias coming out).
But, the language in the most recent announcement from the BOC has changed significantly. The period of transition is over, they are ready to SHUT. IT. DOWN. and they want to be very, very clear about that. After quite a few days of reflection, reading the speaking with clients, here is what I see & think today.
My Instagram feed is literally FULL of friends in Europe. Everyone is so damn excited to travel, it is unbelievable. I’m sure you all saw the news this weekend? Heathrow is capping arrivals because they can’t staff the airport and accommodate all of the passengers & luggage coming in and they’ve got a backlog of thousands of lost suitcases.
Anyone that isn’t in Europe, is in a boat, that they towed to the lake, behind their giant new truck, that they waited 4 months to receive off the assembly line.
When they’re not behind their boat, they’re filling their boat with gas at the gas station.
The few that weren’t in Europe, or on a boat last week, were at Stampede, buying $10 Budweisers & handing $20 bills to carnies hoping to try their luck at wack-a-mole.
I saw a job posting last month for a Restaurant Manager in Banff, AB. The salary range was $80-$100k. $80 to $100k people! WOW!
The ski hill that I frequent, Panorama Mountain Resort, has hired every 12-13 year-old child that they can find to clean rooms, chop & prepare food in the restaurants and scoop ice cream. They’ve organized buses from the Columbia Valley, and offered free ski passes and huge wages to attract workers. They’re still massively understaffed.
I’ve been trying to hire an underwriter at Spire, for a year. I literally can’t get anyone to show up for an interview. Oh yeah, it’s probably because they’ve also applied for one of the 1,000,000 job vacancies in Canada. (This is a real number friends, 1,000,000 job vacancies).
Don’t worry, Canada, immigration will help with all of the job vacancies, we’re breaking records with immigration right now, welcoming a record number of families & international students from abroad. (I am SUPER pro-immigration, as an aside). However, these new families need somewhere to live, they need furniture, appliances, etc. They have to PURCHASE all of these items.
Increased immigration only further increases our need for homes to be built, (reminder – we’ve EXTREMELY underbuilt single-family homes in the last decade in Canada), and will add continued pressure to our already strained supply chain for building materials.
So ALLLLL of this to say, what do I think about the announcement from the 13th of July?
I think we’re at war: BOC vs. Canadian Consumers.
The BOC knows that everyone that has a variable rate mortgage right now (or a mortgage coming up for renewal), was stress tested at 5.25%. So, they are aware that Canadian’s monthly cash flow can support mortgage payments at 5.25%. They aren’t worried about affordability and defaults until we get there. Right now, most variable rate mortgage holders have a rate between 3.70%-4.20%. They can keep cranking rates up until we, as Canadians, calm down and allow the supply chain to correct.
Canadian consumers are still in a post-pandemic eutopia, and they are excited to spend some of the $3 Billion dollars that accumulated over the two years of lockdowns. Viva Summer!
The language in the most recent announcement from the BOC has changed significantly. The concern about a “transitional period of inflation” is gone with the wind and the bank is now concerned about “entrenched” inflation.
Entrenched inflation means that Canadian consumers just start “accepting” new, higher prices. The government is very aware of historical trends, and they will fight, tooth and nail, to make sure that history doesn’t repeat itself in this case.
You have to remember that the 100 basis point increase that happened last week was on the back of the May inflation numbers. Many economists are still predicting that June inflation numbers were even higher, and given my, (incredibly reliable), “instasource,” I am going to bet that inflation numbers from July will also break records.
Sadly, I do think more rate hikes are coming, until the government's "instafeed" settles down quite a bit and we start seeing inflation numbers head the opposite direction.
Do I know HOW LONG we’ll be in the environment with these higher rates?
Nope.
Does anyone else know?
Nope.
Do I have a strong opinion about locking your mortgage into a fixed rate or renewing early because your fixed rate mortgage is coming up for renewal?
Unfortunately, also No.
Here is what I can tell you, you have 3 options right now.
You can let it ride.
You can lock into a fixed-rate mortgage. 5 year fixed rates range between about 4.79% and 5.34% right now depending on the parameters of your mortgage. You should call your lender, get a rate quote for a fixed rate and then call your mortgage broker to gauge if you’re being quoted a fair rate for today’s market.
You can move your “adjustable” rate mortgage to a variable rate mortgage with a static payment. Many Canadians, including many of my clients, have “ARM” products, meaning “Adjustable-Rate Mortgage” products. These payments change with each move to bank prime. It is possible to move these deals to a new lender, with a variable rate and a static payment.
What is a “VIRM” or Variable Interest Rate Mortgage?
A few lenders offer VIRM mortgages. These are variable rate mortgages with a static payment. As interest rates increase (or decrease) your monthly mortgage payment doesn’t change, but the amount of each monthly payment that goes to reducing principal changes.
In this environment, with increasing rates, the risk becomes that at renewal, you’ve not paid down your mortgage very much and your payments will need to jump substantially to get your amortization back on track.
The big advantage though, is that your monthly payments are reliable through this 5-year term. I do think that 5 years from now, we should be coming out the other side of the post-pandemic craze!
If you decide that you want to move your adjustable-rate mortgage to a new lender, either for a fixed rate mortgage or a VIRM product, here are the things you need to consider:
The payout penalty on your current mortgage will equate to 3 months' interest. In most cases, that penalty can just be capitalized (or added to), the new mortgage amount.
Most adjustable-rate mortgage holders have rates in the prime - 1.00% range. To move your rate to a variable rate, you are likely to obtain a rate between prime -0.40% - Prime - 0.60%. So you'd be giving up about 40-60 basis points for the security of the static payment.
The legal & appraisal fees will equate to about $2000 on the high end. We always try to do what we can to help with these fees but many lenders do not cover these fees currently.
If you want to move your mortgage you need to requalify at the new lender. Here are the types of documents we would need:
a. Income documents like Letters of Employment, Paystubs, Tax Returns, and Child Tax Benefit Statements
b. The current mortgage statements for any homes that you currently own
c. The current property tax statements for any homes that you currently own
d. If applicable, the condo fee confirmations for any homes that you currently own
If you’ve made it this far, thank you for reading. We’re here to help in any way we can at Spire Mortgage Team. The best thing that you can do is connect with your current broker, or us at Spire, and we’ll set a meeting to discuss your specific numbers. We can look at monthly cash flow, get you some firm rate quotes for Fixed, Adjustable (ARM) and Variable (VIRM) mortgages and put a plan in place that works best for you.
If you’d like to book a meeting, please email hello@spiremortgage.ca and we’ll set a time that works for you!
