Economic Insights from Dr. Sherry Cooper – August 2023

Economic News Jag Dhamrait 1 Aug

The Bank of Canada remains staunch in its battle against inflation, utilizing its primary weapon—the overnight policy rate—which has escalated from 25 basis points to 500 bps since March 2022.

This historically low overnight rate was a direct consequence of the COVID-19 pandemic and implementing measures to cushion the economic impact of the lockdowns. These initiatives included reducing the policy rate from 1.75% to 0.25%, postponing mortgage payments, providing financial support to businesses for workforce maintenance, and compensating individuals for home quarantine. These measures, amongst others, reignited the economy upon the widespread availability of the vaccine.

The Canadian economy bounced back robustly once commercial activities resumed. Employment rates rocketed, and unemployment plummeted to all-time lows. However, the recovery faced a setback when Russia invaded Ukraine in February 2021, which caused supply constraints, and substantially increased energy and food. Despite the soaring inflation, central banks were initially hesitant to take action.

In hindsight, we now know the necessity for initiating interest rate hikes by mid-2021. Instead, this action was postponed until March 2022.Furthermore, the Bank of Canada and other significant central banks inundated the financial system with surplus liquidity by purchasing government bonds. This quantitative easing tactic made capital not only more affordable but also readily available, sparking an unprecedented boom in the housing market.

Many exploited the record-low rates of 2020 and 2021 by opting for variable-rate loans due to their lower costs. At its zenith, variable-rate mortgages (VRMs) accounted for 57% of all loan originations. These loans are due for renewal in 2025 and 2026. However, most of these loans have reached their trigger points and are negatively amortizing, barring substantial lump-sum payments by borrowers.

For those who chose adjustable-rate loans, monthly payments increased with every Bank of Canada rate hike. Delinquency rates, for the time being, remain impressively low within the prime space, though they are beginning to rise among alternative lenders.

After reaching a zenith of 8.1% in June 2022, inflation has slowed to 2.8% in June of this year. Regardless, the Bank of Canada continued its trend of interest rate hikes following a brief hiatus in its last two meetings, with speculation of another hike in September. The Bank has provided a buffer period for itself by projecting a return to the 2% target inflation rate by mid-2025—a considerably more extended period than initially anticipated.

The recent rate hikes and moderated expectations appear prudent considering the Bank’s preference for mitigating inflation over preventing a recession. It is improbable that the Bank of Canada will reduce interest rates this year.

Although the policy rate is projected to decrease in the first half of 2024, it is not expected to return to the pre-COVID level of 1.75%. Negative real interest rates (the actual market rate minus the 2% inflation rate) are unlikely to occur, barring a global economic meltdown.

Economic Insights from Dr. Sherry Cooper – July 2023

Economic News Jag Dhamrait 4 Jul

 

The biggest surprise recently has been the unexpected interest rate hike by the Bank of Canada. While the April inflation headline did tick up, and Q1 GDP data came in at a stronger-than-expected 3.2%, the April labour force data showed some easing in the jobs market.

The ratio of unemployment-to-job vacancies is now rising. Rather than signalling a rate hike before the announcement on June 7, the Bank chose to pre-empt any additional economic indicators.

Ironically, the May jobs data, released later that week, showed a rise in the unemployment rate to 5.2%, the first increase since before rate hikes began in March of last year. The Bank of Canada was particularly disturbed by the resurgence in home sales and prices in April. They argued that interest rates needed to be higher if the most interest-sensitive of all spending was rising.

That move by the central bank spooked the housing market, causing many to question their decisions to purchase. Expectations of any declines in the overnight policy rate this year vanished, and markets now expect at least one more hike this year.

Consumer spending does remain robust, as evidenced by the solid retail sales data for April. Moreover, many households have turned to credit cards to finance their spending—bolstered by inflation—and delinquency rates have risen.

Wage inflation remains strong, core inflation ticked up in April, and food inflation, though down from double-digit levels, is still far higher than a 2% inflation target would warrant.

The bank watchdog, OSFI, warned that the rising level of remaining amortizations of variable rate mortgages is a warning sign of continued risk for households that went into VRMs in droves when interest rates plunged in the first two years of the pandemic. New originations over that period were at rock-bottom rates, and variable mortgage rates were far below fixed. The situation has reversed today, and 3-to-4-year fixed mortgages dominate new mortgage originations.

Many VRM borrowers have hit their trigger points, where their monthly payments are no longer covering their interest costs—hence the negative amortizations of these loans at some Big Six Banks. OSFI is warning banks to address this immediately as renewals will mean at least a 30% rise in monthly payments if mortgage terms revert to 25- or even 30 years. OSFI has also increased the mandatory level of Tier One common equity relative to risk-weighted assets by 50 basis points. Currently, all the large Canadian banks fulfill this requirement.

Another significant milestone last month dramatically impacted the Canadian housing market. International migration to Canada spiked in 2022, taking population growth to 2.7%, the highest in the developed world and the strongest since the top of the Baby Boom in 1957. As of mid-June, Statistics Canada announced that the population is 40 million. The housing shortage is mounting, and housing starts are falling. Despite higher interest rates, demand for housing for rent or purchase has never been more robust.

While the federal government announced last year that they want to double housing construction to improve affordability over the next decade, Trudeau’s goal appears unachievable. This will continue to put upward pressure on rents and home prices over the longer term.

Economic Insights from Dr. Sherry Cooper – June 2023

Economic News Jag Dhamrait 1 Jun

Image of Dr. Sherry Cooper from Dominion Lending Centres
 

Once again, the Canadian economy is running hotter than expected by the Bank of Canada. The economy continues to exhibit excess demand conditions. In particular, labour markets are very tight, the unemployment rate is near a record low, and wages are rising by more than 5%.

Consumer spending is still strong, and the housing market has bounced considerably. Home sales were up 11% in April, prices are rising again in many regions, especially the GTA and GVA, and new listings are so slim that it is now a sellers’ market. This should bring some potential sellers off the sidelines in May and June. However, demand is likely to remain well more than supply, given the influx of many immigrants and the constraints on the construction of new housing.

The April inflation data was stronger than expected at 4.4%, indicating that the mid-year forecast of 3% might well be overly optimistic. Some are already calling for a rate hike by the central bank this month or in July. While that might be premature, the Bank will consider at least one more increase in the overnight policy rate if the May data is robust.

This is at a time when homeowners are already feeling the pinch of the rapid rise in interest rates over the past year. Homeowners who bought in 2020 and 2022 and financed with variable-rate mortgages are already under pressure. And those with fixed-rate mortgages will refinance at substantially higher interest rates.

Already, many households have monthly payments that do not cover the interest on their loans, let alone the principal. Many lenders are allowing extended amortization. CMHC announced they would not extend the amortization of newly insured mortgages beyond 25 years.

One thing is sure. Do not expect monetary policy easing any time this year.

Economic Insights from Dr. Sherry Cooper – May 2023

Economic News Jag Dhamrait 1 May

Image of Dr. Sherry Cooper
 

It has been just over a year since the Bank of Canada started hiking interest rates. While the economy has remained surprisingly resilient, the housing market has weakened sharply.

The Bank has remained on the sidelines for the past two Governing Council announcement dates, and home sales have edged upward in very tight markets.

There is a rapidly growing housing shortage. As population growth remains strong and immigration targets rise, new home construction cannot keep up with demand. Demand for rental properties is surging, and rents have risen sharply for new tenants.

Another factor that could slow the economy this year is the rise in monthly housing payments. For those with adjustable-rate mortgages, monthly payments have already risen sharply. Most of those with variable-rate loans with a fixed monthly cost has hit their trigger point, and the amount no longer covers any of the principle. Most banks have allowed negative amortization but will require borrowers to return to original 20-year amortizations upon renewal. This could be quite a shock to consumers over the next few years.

The Office for the Superintendent of Financial Institutions is very concerned about the risk associated with these loans. We will be hearing soon from OSFI regarding more restrictions on mortgage lending.

The great news is that inflation is falling quickly, down to only 4.3% in March. The central bank expects inflation to fall to about 3% by the end of this year. So, barring unforeseen inflation pressures, the Bank could pause for the rest of this year. Rate cuts, however, are unlikely until 2024.

The Canadian economy will likely slow as the year progresses. The most likely scenario is a mild recession later this year. As we move into 2024, interest rates will slowly decrease to about 2.5% for the overnight policy rate. The economy will rebound, and the Bank of Canada expects to hit its 2% target on inflation. That might be hard to achieve, given rapidly rising wages and continued inflation expectations.

Choosing Your Ideal Payment Frequency

Mortgage Tips Jag Dhamrait 26 Apr

Your payment schedule is the frequency that you make mortgage payments and ranges from monthly to bi-monthly, bi-weekly, accelerated bi-weekly or even weekly payments.

Below is a quick overview of what each of these payment frequencies mean:
Monthly Payments: A monthly payment is simply a single large payment, paid once per month; this is the default that sets your amortization. A 25-year mortgage, paid monthly, will take 25 years to pay off but includes the added burden of one larger payment coming from one employment pay period. With this payment frequency, you make 12 payments per year.

Example: $750k mortgage, 3-year fixed rate, 5.34%, 30-year amortization you would have a monthly payment of $4,156.19. No term savings; no amortization savings.

Bi-Weekly Payments: A bi-weekly mortgage payment is a total of 26 payments per year, calculated by multiplying your monthly mortgage payment by 12 months and divided by the 26 pay periods.

Example: $750k mortgage, 3-year fixed rate, 5.34%, 30-year amortization you would have a bi-weekly payment of $1,915.98 with term savings of $177 and total amortization savings of $1,769.

Accelerated Bi-Weekly Payments: An accelerated bi-weekly mortgage payment is also 26 payments per year, but the payment amount is higher than a regular bi-weekly payment frequency. Opting for an accelerated bi-weekly payment will not only pay your mortgage off quicker, but it’s guaranteed to save you a significant amount of money over the term of your mortgage. This frequency also allows the mortgage payment to be split up into smaller payments vs a single, larger payment per month. This is especially ideal for households who get paid every two weeks as the reduction in cash flow is more on track with incoming income.

Example: $750k mortgage, 3-year fixed rate, 5.34%, 30-year amortization you would have accelerated bi-weekly payments of $2,078.10 with term savings of $1,217 and total amortization savings of $145,184. Plus, you would save 4 years, 12 months of payments by reducing scheduled amortization.

Weekly Payments: Similar to monthly payments, your weekly mortgage payment frequency is calculated by multiplying your monthly mortgage payment by 12 months and dividing by 52 weeks in a year. In this case, you would make 52 payments a year on your mortgage.

Example: $750k mortgage, 3-year fixed rate, 5.34%, 30-year amortization you would have weekly payments of $957.50 with term savings of $253 and total amortization savings of $2,526. You can move to accelerated weekly payments to save even more!

Prepayment Privileges: In addition to fine-tuning your payment schedule, most mortgage products include prepayment privileges that enable you to pay up to 20% of the principal (the true value of your mortgage minus the interest payments) per calendar year. This can help reduce your amortization period (the length of your mortgage).

By exercising your prepayment privileges, you can take time off your mortgage. For instance:

  • Extra $50 bi-weekly is $32,883 total savings and an additional 1 year, 2 months time saved
  • Extra $100 bi-weekly is $62,100 in total savings and an additional 2 years, 3 months time saved on your mortgage
  • Extra $200 bi-weekly is $111,850 in total savings and an additional 4 years, 1 month of time saved on your mortgage.

Understanding the different payment frequencies can be key in managing your monthly cash flow. If you’re struggling to meet a large payment, breaking it up can be effective; while the same can be true of the opposite. Individuals struggling to make a weekly or bi-weekly payment, may benefit from one monthly sum where they have time to collect the funds.

Consider getting in touch with me today at: 647-883-7790 to determine what payment frequency is best for you OR you can download my app and calculate them for yourself!

Economic Insights from Dr. Sherry Cooper – April 2023

Mortgage Tips Jag Dhamrait 4 Apr

In March, the global economy was focused on systemic risk in the banking sector.

Following three bank failures in the U.S., markets were roiled again by the forced sale of Credit Suisse to UBS.
Interest rates have plummeted as demand for the haven of government bonds has increased sharply. Consequently, five-year fixed mortgage rates have fallen roughly 30 basis points as the Fed pondered its next move.

Inevitably, failed banks and fears of additional losses have led many financial institutions to tighten their provision of credit. Although interest rates have fallen worldwide, more cautious lending will slow economic activity, particularly in the U.S. and Europe, ground zero for bank failures.

For that reason, many expected the Fed to pause to assess the situation further. The Fed raised its overnight policy rate 25 bps to a range of 4.75% to 5.0%, now above the overnight rate in Canada.

Just over two weeks ago, Fed Chair Jerome Powell testified to Congress that inflation pressures warranted higher-than-expected interest rates. With the bank failures, the Fed suggests that the target level might be only one or two moves away. However, even with that, the U.S. central bank reasserted that interest rates determined by the Fed will not be reduced until next year.

Market-determined yields have fallen sharply, especially at the short end of the yield curve—increasing the inversion in the yield curve. An inverted yield curve portends a more aggressive economic slowdown, reflected in the fall in oil and gas prices.

Canada’s yield curve moved almost as much as in the U.S. Good news on the inflation front affirmed the Bank of Canada’s decision to pause. Consumer price inflation fell last month from 5.9% to 5.2%. The Bank will likely pause again at its next meeting in April.

Canadian bank stocks fell quite a bit, mirroring global trends. Our banks are in no danger of failing. Like the 2008 Financial Crisis, Canadian banks have proven to be very soundly regulated.

Lower mortgage rates are great news for the coming Spring season. While it won’t measure up to the 2021 boom, a rebound in sales and new listings will be great for the industry.

Economic Insights from Dr. Sherry Cooper – February 2023

Economic News Jag Dhamrait 10 Feb

Image of Dr. Sheryl Cooper

Even bond traders and economists are stumped about what the next few years will bring. The repercussions of a global economy that stopped suddenly, shed millions of jobs and initially contracted 30% only to rebound in a flash on the back of free-money government programs are still being felt.

 

Predicting where the economy goes from here risks taking comfort in spurious accuracy. We’ve never experienced a similar set of circumstances. With hindsight, we now see that policymakers have made severe errors—taking interest rates to unprecedented lows and flooding the system with massive fiscal stimulus has precipitated global inflation; home prices in Canada surged 50% in the three years following the pandemic; variable-rate mortgages were much cheaper than fixed-rate loans as the central bank cut overnight rates to 25 basis points.

 

The volume of mortgage originations surged, with a record proportion, in VRMs. Now many borrowers have hit their trigger points. The banks allow the amortization of rising interest payments owed, easing the near-term pressure on borrowers. Those with adjustable-rate loans have seen their monthly payments rise seven consecutive times, with likely another rate hike next week. This, in addition to inflation, has reduced household purchasing power. Many are hoping that interest rates fall to pre-COVID levels soon.

 

Initially, the central banks argued that inflation was transitory. Many are betting that the old forces that worked to keep inflation under control for years would reassert themselves. The federal banking regulator is now proposing additional restrictions on mortgage lending to highly indebted households.

 

We hope for the best but must prepare for a slow return to 2% inflation. Home prices have fallen but are still up more than 35% from pre-pandemic levels. Labour markets are still robust, but a slowdown is inevitable. This will be a transition year with little likelihood of interest rate cuts. The Bank of Canada will pause soon to see if the lagged effects of higher rates further reduce inflation. Few believe the 2% target will be hit this year or next. The benchmark policy rate, now at 4.25% will not return to its pre-COVID level of 1.75%.

What to Know About Title Insurance

Mortgage Tips Jag Dhamrait 15 Jan

Image of a woman reading about title insurance

There are many insurance products when it comes to your home, but not all are created equal. One such insurance policy that potential homeowners may encounter is known as “title insurance”.

This particular insurance is designed to protect residential or commercial property owners and their lenders against losses relating to the property’s title or ownership. In fact, it is so important to lenders that every single lender in Canada requires you to purchase title insurance on their behalf. It is not a requirement to have coverage for yourself, but that doesn’t mean you should dismiss it outright.

While title insurance can protect you from existing liens on the property’s title, the most common benefit is protection against title fraud.

Title fraud typically involves someone using stolen personal information, or forged documents to transfer your home’s title to him or herself – without your knowledge. The fraudster then gets a mortgage on your home and disappears with the money. As the old adage goes: “It’s better to be safe than sorry” and the same goes for insurance.

Similar to default insurance, title insurance is charged as a one-time fee or a premium with the cost based on the value of your property. This insurance typically runs around $300 for the lender and $150 for the individual. It can be purchased through your lawyer or title insurance company, such as First Canadian Title (FCT).

If you are wanting to know more about title insurance, or confirm that you (and your home) are properly protected, don’t hesitate to reach out to me today for a mortgage review!

Post-Holiday Debt Consolidation

Mortgage Tips Jag Dhamrait 10 Jan

Couple sitting in kitchen looking at billsThe holidays are a season of giving and often times, households can often find themselves carrying some extra debt as we enter the New Year.

If you happen to be someone currently struggling with some post-holiday debt, that’s okay! Whether you’ve accumulated multiple points of debt from credit cards or are dealing with other loans (such as car loans, personal loans, etc.), you are likely looking for a way to simplify your payments – and reduce them.

Rolling them into your mortgage could be the perfect solution. In fact, consolidating other forms of debt into your mortgage has multiple benefits, including:

  • Helping you pay off your loans over a longer period of time
  • Allowing for reduced interest rates when compared to a credit card
  • Being easier to track with one single payment per month
  • Reduce your total monthly outlay of debt repayments

If you’re still not sure if this is the right solution for you, here is an example… if you have $30,000 of credit card debt, you are probably paying approximately $600 per month and $500 per month of that is likely going directly to interest. If you let me help you to roll that debt into your home equity and monthly mortgage, your payment for this $30,000 portion would drop down around $175 per month, with interest charges closer to $140 per month. That is huge savings!

While debt consolidation through refinancing will increase your mortgage, the benefits can be well worth it when it comes to interest savings, time and stress. Keep in mind, you’ll need a minimum of 20 percent equity in your home to qualify for this adjustment.

If you are looking for a way to simplify (or get out of) debt, reach out to me today! I would be happy to take a look at your current mortgage and walk you through the debt consolidation process, or help you come up with an alternative option that may help suit your needs.

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