Vine Group executive market commentary
Bank of Canada increased their overnight rate by 0.75% on September 7, 2022, taking it to 3.25% and increasing Prime for most lenders to 5.45%. The overnight rate has increased by 3% in the last six months, a dramatic shift from the record low rates we experienced throughout the COVID-19 pandemic taking us back to 2008 levels.
BANK OF CANADA HISTORICAL BENCHMARK RATE
The Bank of Canada noted that COVID-19 pandemic effects are still being felt; ongoing supply disruptions and the war in Ukraine have all impacted economic growth and continue to contribute to elevated pricing and inflation.
Inflation data for July was at 7.6%, which was a decrease from 8.1% in June but primarily due to declines in gasoline prices. Although a decrease in CPI data is a positive sign, we are looking for a decline in core inflation measures before we see rates peaking and ultimately beginning their descent. Core inflation primarily represents the costs of goods and services and excludes more volatile items like food and energy. The bank noted that core measures continued to move up, ranging from 5%-5.50% in July, but we’ll need to wait until September 20th for the August CPI data to get a better sense of direction. If CPI continues to increase, we can see further rate increases to help offset it.
What this means for consumers
The overnight rate increase will impact loans linked to Prime, which will most likely increase to 5.45% (up from 4.70%). Typically variable rate mortgages, HELOCs (home equity line of credits), and 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.
Many economists and financial market forecasters believe the central bank is nearing the end of its tightening cycle or “terminal rate.” The terminal rate is the peak where a central bank will take its benchmark interest rate. For most, this range is 3.50-4.00% (currently 3.25%), which means we can see additional increases of 0.25%-0.75% before rates level off. We would suggest any variable rate or HELOC (home equity line of credit) holders consider possibly another 0.75% of additional increases as part of their budgeting.
GLASS HALF-FULL OPPORTUNITY
Rate-sensitive markets like real estate have fallen over 20% depending on the individual market due to these rate increases. 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. 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 the current elevated mortgage rates while taking advantage of building equity when markets return to growth likely towards 2024 onward.
What we have 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 have to 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 ok with rate fluctuations, this is still the most attractive option historically 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 for emergencies, but they can also be used to 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. Eg. – On a $500,000 HELOC, compared to a mortgage, you are paying $550/month less. All of this is going towards interest and not the principal, but it allows you to improve cash flow at a time of uncertainty and then convert to a regular mortgage when rates are more attractive.
These are unprecedented times, but it is important to note that we’ve only been in this environment for about seven months. We’re certainly closer to seeing the stabilization of rates than we were earlier this year, and the next few weeks of data will be an important indicator of what is likely to come.
As always, 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 ALLIANCEvinegroup.ca
ON LIC. 10530 SK LIC. 316209