Vine Group Executive Market Commentary
The Bank of Canada (BOC) increased their overnight rate again on December 7, 2022, by 0.50%, taking the overnight rate to 4.25%. This increase will bring the Prime rate for most lenders to 6.45% and brings the cumulative tally of increases to 4.00% for 2022 (the year started at 0.25%), taking it to the highest level it has been in 15 years.
The increase was a bit of a surprise as the market and most analysts had expected a 0.25% increase. Still, the tone of the announcement was softened, potentially hinting at a pause in additional rate increases as we go into 2023.
The Bank of Canada noted the following in its announcement:
- CPI inflation remained at 6.9% for October, but many of the goods and services Canadians purchase regularly showed significant price increases.
- Core inflation remains at around 5%.
- Three-month rates in core inflation have come down, “an early indicator that price pressures may be losing momentum.”
- GDP growth in the third quarter was stronger than expected, and the economy continued to operate “in excess demand.”
- The labour market remains “tight,” with unemployment near historic lows.
- Housing market activity continues to decline.
- The Bank’s outlook is that growth will “stall through the end of this year and the first half of 2023.”
- Inflation around the world remains high and broadly based.
- Global economic growth is slowing.
- In the United States, the economy is weakening, but consumption continues to be solid, and the labour market remains “overheated.”
What this means for consumers
The overnight rate increase will impact loans linked to Prime, which, for the most part, will increase to 6.45% (up from 5.95%). Typically variable rate mortgages and HELOC (home equity line of credit), 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 Rate, which will affect many borrowers with this rate increase who haven’t seen any changes to payments on their variable-rate mortgages. Trigger Rate will impact borrowers with a variable-rate mortgage with a lender where monthly payments don’t increase when Prime increases (compared to an adjustable-rate mortgage where your payments will move with Prime increases). BOC reported last month that over 50% of Canadians with variable-rate mortgages were already at their trigger rate, so this new rate hike will only increase this figure.
To make matters even worse, we’ve seen several clients with amortizations well over 30 years (some over 60 year amortizations!).
Looking ahead – is this the peak?
There is ongoing debate as to whether this will be the final rate hike and whether we’ll see rates flatline for 2023 until inflation comes down and rates begin their descent into more neutral territory. Here is some of what the bank economists are saying:
Avery Shenfeld, chief economist with CIBC (rates remain same 2023 with possible easing down 2024)
James Orlando, director and senior economist with TD (potential increase Jan 2023 by 0.25% because remaining neutral for 2023)
Taylor Schleich and Warren Lovely, senior economists with National Bank Financial (likely to see rates remain same for 2023)
Derek Holt, head of Capital Markets Economics at Scotiabank (rates likely to stay put for 2023)
Douglas Porter, chief economist with BMO Capital Markets (another potential increase of 0.25% for 2023 before pausing)
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 due to these rate increases, and they 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. It’s 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 in early 2022). With the right financing plan, they can 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 easier (you’re less likely to sell in a short time frame or suddenly must 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 historically over the long term. A 5-year variable/adjustable-rate 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. Variable-rate terms that are “insured” or have less than a 20% down payment are some of the lowest rates in the country.
- Convert to fixed. If you have a variable/adjustable rate with a short time to maturity (let’s say, 1-2 years), consider asking 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 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 $500K HELOC, compared to a mortgage, you are paying $410/month less. All of this is going towards interest and not the principal, but it allows you to improve cash flow in times of uncertainty and then convert to a regular mortgage when rates are more attractive.
Expert opinions remain divided, but the consensus is that either no additional action or potentially another 0.25% increase for early 2023 will be made by the BOC. The market will digest quite a lot of data until the next meeting, with two CPI reports and a Business Outlook Survey to help interpret whether additional action by the BOC is needed to achieve its primary goal of bringing inflation to their neutral range between 2-3%.
The next Bank of Canada meeting will occur on January 25, 2023.
Regardless of the BOC’s rate decision, if you are actively looking to purchase a property, this is a historic time to buy – 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