As we have all been waiting for the latest announcement by the Bank of Canada – which took place this morning. They went in aggressively deciding to rise the BOC (Bank of Canada) overnight lending rate by an additional 100bps or 1%. This rate is utilized by the banks to determine the rate to which they will lend funds, and directly impacts variable rate mortgages, home equity loans and unsecured debts.
The lenders – have yet to announce but will most likely increase their prime rates to 4.70% for all the major institutions’ asides from TD whose prime is 3.85% currently and should be adjusted to 4.85%.
What does this mean for your mortgage & lending products?
· If you have a Home Equity Line of Credit this will increase your cost of borrowing by:
o $50,000.00 (Balance)- $41.67 more per month
o $100,000.00 (Balance) – $83.33 more per month
o $200,000.00 (Balance) – $166.67 more per month
· If you have an adjustable variable rate mortgage – with MCAP, First National, Scotiabank, Merix, RFA, Manulife & many others – just send me a note if you are unsure your payments will adjust next month as the payments are based on the prime rate in effect on the 1st of the month or upon adjustment of the prime so should not impact your July payments but may impact your August payments:
o $100,000.00 Mortgage – $53.00 more per month
o $250,000.00 Mortgage – $131.00 more per month
o $500,000.00 Mortgage – $262.00 more per month
o $750,000.00 Mortgage – $391.00 more per month
o $1,000,000.00 Mortgage – $521.16 more per month
*These are estimates in the differential and may differ based on your balance, amortization & payment structure*
· If you have a variable rate mortgage – with fixed payments – it will be worth us scheduling a time to connect to look at adjusting your payments – to ensure you are ahead of your initial amortization schedule and continue to pay down principal as the interest rate environment rises.
Lenders that have fixed variables: TD, Coast Capital, Prospera, Valley First, CIBC, BMO and RBC – there are more, and it will be dependent on your mortgage – but I recommend us connecting to see how we can adjust your payment to be prepared.
These mortgages have set payments until a trigger rate is reached – which is determined specific to your loan, amortization & time passed, at which point your payments would adjust to ensure you continue to pay down the mortgage & ensure your amortization is shortening and not growing over time.
For those clients who are pre-qualified for a mortgage – it would be worth us also scheduling a time to connect or sending me an email, I aim to update you all next week – but our qualifications on the variable front will adjust – as we are now going to be qualifying at your net rate +2% which was lower than the Bank of Canada but has now risen above – so your qualifications are going to be drawn down slightly on the basis of the rising prime.
I have attached a copy of an interesting read for my investor clients & a copy of the monetary policy report for your review. I have also summarized the key takeaways below for your consideration:
Investors should start preparing for interest rates to come back down | Financial Post Monetary Policy Report – July 2022 (bankofcanada.ca)
Cultivate + Evolve Summary of the Latest MPR Report:
The Objective of the Bank of Canada is to promote economic and financial well being – to which they believe the best way is maintaining low and stable inflation.
The goal with the increases is to return to the target rate of between 1-3% within the next 1.5-2 years. The overnight lending rate impacts demand for Canadian goods and services through influence on monetary policy resulting in adjustments to demand, assets, products, and exchange rates.
Inflation has risen around the globe – predominantly due to high cost of food and energy; in addition to global supply chain issues persisting. These items – when combined with a strong continued consumer demand nationally and internationally has driven up inflation.
The BOC will rise rates to tame borrowing, spending, and slow down demand and help to anchor inflation. The CPI average has closed at 8% for mid 2022. The economy is overheated, and labour market is the tightest it has been. Labour shortages are increasing wages and the demand for products is high which is therefore causing businesses to pass on rising costs to consumers.
The BOC anticipates that inflation will decline as the impact of higher energy prices dissipate, supply challenges recede and monetary policy in Canada and abroad reduce domestic and foreign demand.
The biggest risks currently are:
Inflation continuing to rise and becoming entrenched – which would result in more aggressive rate hikes & a larger hit to the economy at large.
Severe Global Slowdown.
Significant decline in the housing market
I have attached a few key comments below from the Monetary Policy Report & Charts to Support worth considering:
Growth has been robust over the past year as the Canadian economy recovered from the worst effects of the pandemic. Strong housing markets, high commodity prices and the easing of public health restrictions have boosted economic activity. However, economic growth is now showing signs of slowing. The effects of higher prices and interest rates have begun to weigh on household spending. A sharp slowdown in the housing market is underway. Overall, economic growth is forecast to be strong in 2022 at about 3½% and to moderate to about 1¾% in 2023 and 2½% in 2024 (Table 2). Growth slows largely due to the impact of high inflation and tighter financial conditions on consumption and housing activity. A weaker outlook for global growth also weighs on exports and business investment. The Canadian growth outlook is revised down in 2022 and 2023 relative to the April Report.
The Bank has tightened monetary policy in response to the strength of inflationary pressures, beginning to increase its policy rate in March and initiating quantitative tightening on April 25.2 Higher policy rates, market expectations of further rate increases, and quantitative tightening in Canada and elsewhere have contributed to rapid increases in borrowing costs for businesses and households (Chart 8). Households seeking to renew or take on a new mortgage now face five year fixed mortgage rates at their highest level since 2010. According to the Canadian Survey of Consumer Expectations for the second quarter of 2022, consumers expect that accessing credit 12 months from now will be more difficult.
Housing market activity is weakening substantially from its unsustainable pace during the pandemic (Chart 10). Resales are falling across most regions and prices are declining in some markets as borrowing rates rise and household confidence declines. Some areas outside downtown cores, which had previously seen large price increases, are now experiencing a decline in prices.3 Exports and business investment continue to grow strongly, with the latter expected to reach pre-pandemic levels in the third quarter. Recent strength in US industrial production and an easing of travel restrictions should provide support for exports over the near term. As well, elevated energy prices are boosting exports and investment in the energy sector as firms seek to make full use of existing production capacity. Near-term business investment is also supported by a ramping up of work at LNG Canada’s Kitimat site and continued work modernizing electric vehicle manufacturing.
If you have questions, would like to discuss further, or have any questions in relation to the most recent change – I am here to help, please follow the link below to schedule a meeting or send me an email with a few potential times and we can set a call to connect.
Schedule – Cultivate + Evolve (cultivateevolvefinancial.com)
Yours truly,
Catherine Ellis.
