Vine Group executive market commentary
Bank of Canada (BOC) increased their overnight rate by 0.50% on October 27th, taking it to 3.75% and increasing Prime for most lenders to 5.95%. This is the sixth consecutive increase in 2022. The overnight rate has increased by 3.50% in the last seven months and was slightly under the expected 0.75% increase that most analysts anticipated.
The overnight rate is trending at its highest since 2008:
The Bank of Canada noted the following:
- Inflation worldwide remains high due to the global recovery from the pandemic, global supply disruptions, and higher commodity prices, especially for energy, primarily due to Russia’s attack on Ukraine.
- The strength of the U.S. dollar is adding to inflationary pressures
- The Canadian economy is still running in excess demand, with the demand for goods and services still outpacing the economy’s ability to supply them, putting upward pressure on inflation
- Businesses continue to report widespread labour shortages
- Effects of recent rate increases have had an impact, particularly on the housing market, and spending by households and businesses has dropped as well.
- Bank projects that GDP will go from 3.25% to under 1% in 2023 and then 2% in 2024
- CPI inflation has declined from 8.1% to 6.9% for September, primarily due to falling gasoline prices.
- Concern for the bank is that over 75% of CPI components have increased by more than 5% in 2022.
- Bank expects that CPI inflation should move down to 3% by the end of 2023 and return to its 2% target by 2024
- Bank feels that rates may need to rise further but will assess ongoing data to determine if additional rate increases are required. The primary data points that will impact future rate increases are demand changes, supply chain improvements and inflation expectations.
- The next scheduled meeting is December 7th, 2022
What this means for consumers
The overnight rate increase will impact loans linked to Prime, which, for the most part, will increase to 5.95% (up from 5.45%). Typically, variable rate mortgages and HELOCs (home equity line of credits), line of credits will all be impacted by an increase in Prime.
If you have a fixed mortgage rate, you won’t see an impact or change to your regular payments.
Be mindful of the Trigger Payment, which will affect many borrowers with this rate increase who haven’t seen any changes to payments to their variable rate mortgages. This is for borrowers with a variable rate mortgage with a lender where monthly payments don’t increase when Prime goes up (compared to an adjustable-rate mortgage where your payments will move with Prime increases). Check with your lender and broker to determine if you have a trigger rate.
Looking ahead – is this the peak?
Many analysts now feel that we may be nearing the end of the Bank of Canada’s rate hike campaign. With the BOC only increasing rates by 0.50% instead of the expected 0.75%, they are sending a subtle hint to the market that they may be easing off the rate hike button. Public communication from the central bank is always very carefully worded, and the language used, if interpreted correctly, can provide clues on where the BOC’s strategy for the future is headed. With zero growth expected for the final quarter of 2022 and 1st quarter of 2023, the bank anticipates a slowdown which will help balance demand and supply. This is expected to happen much sooner than the BOC predicted in its last July meeting, so future rate hikes may no longer be needed.
The bank is careful not to use the word “recession” (in its monetary policy report only comes up once) but sees a slowdown in the economy as a favourable outcome to bring down inflation and get the economy back to more sustainable growth.
The wild card here is inflation and depending on the upcoming data and whether we see real decreases in CPI will determine how the BOC decides on future rate changes.
It’s very possible that we will either see no additional rate increases until the end of 2023, when most analysts anticipate rates to start a decline with inflation under control, or we will see additional rate increases before the end of 2022.
With the most recent meeting seems more likely that we’re at the end of the rate hike cycle, but we still recommend that clients budget for an additional 0.50-1.00% worth of increases to remain prudent.
Is this the best time to be buying real estate?
Rate-sensitive markets like real estate have fallen over 20% depending on the individual market because of these rate increases and could see additional reductions if rates continue to increase. This is an excellent opportunity for investors and new home buyers to take advantage of much lower real estate prices despite the current higher mortgage rates. Worth noting that despite higher rates with lower purchase values, the monthly payments in many cases are very similar.
Depending on the real estate market, when the purchase price is adjusted to current levels and updated rates for respective periods are used, the actual monthly payment can be very similar or even lower than earlier 2022. For home buyers, this means that they can purchase a home at reduced levels (in some cases 30% less than early 2022) and, with the right financing plan, can then put themselves in a situation where they can ride out current elevated mortgage rates while taking advantage of building equity when markets return to growth likely towards 2024 onward.
What we’ve been suggesting to clients
- Consider a short-term fixed-rate between 1-2 year terms. These are very digestible periods where planning becomes much more manageable (you’re less likely to sell in a short time frame or suddenly break your mortgage or make significant changes). These short terms will also coincide with where most economists see rates coming back down so you can be in the best position to renegotiate your terms moving forward.
- Consider a 5-year variable/adjustable rate. If you want to get the lowest possible rate these days BUT are okay with rate fluctuations, this is still the most attractive option over the long term. On average, over a 5-year term will likely do much better than locking into a 5-year fixed rate which on average is sitting in the mid 5% range these days.
- Convert to fixed. If you have a variable/adjustable rate with a short time to maturity of, let’s say, 1-2 years, perhaps ask about converting to a short-term fixed rate to hedge against future increases. Many lenders allow this option without a penalty or a new application to be completed.
- Consider a HELOC. HELOCs are often used to fund renovations, investments, and emergencies, but they can also carry your traditional mortgage balance. Instead of borrowing with a mortgage on a fixed or variable term, a HELOC allows you to have a fully open, interest-only option. This means that although your payments are adjustable (linked to Prime), you will only have to make minimum monthly interest payments which could allow you to increase cash flow significantly. E.g. – On a $500,000 HELOC, compared to a mortgage, you are paying $450/month less. All of this is going towards interest and not principal, but it allows you to improve cash flow at times of uncertainty and then convert to a regular mortgage when rates are more attractive.
The next BOC meeting is December 7th, 2022 and will likely give us some good insight into what the next few months going into 2023 will look like. Regardless of the BOC’s rate decision, if you are actively looking at purchasing a property, this is a historic time to be buying while values are still relatively low compared to early 2022 and before rates ultimately decrease over the next 12+ months and give way to higher real estate values.
A financial review is key to ensuring you can navigate the current climate. If we haven’t already, let’s chat and see how we can help.
We’re all in this together and will come out stronger together.
VINE GROUP – MORTGAGE ALLIANCE
ON LIC. 10530 SK LIC. 316209