Up, Up, and Exhaustion
If you're feeling exhausted from an incredibly emotional & rough couple of years, a summer of trying really hard to relax despite that nagging feeling of anxiety in the background, and a hectic week of back-to-school and back-to-reality, you're not alone. Although it was expected and really was no surprise, this morning's announcement by the Bank of Canada that they were increasing their key interest rate by 0.75% felt like a "let's-crawl-back-into-bed" kind of moment. I've been sitting here at my desk trying to muster up the energy to write a blog post to address the rate hike and, let me tell you, it's not easy. First off, let me say that I am sending out big hugs to all of you, as you try to muster up the energy to move along too. I feel the weight that you are all carrying, and I know that it is getting heavy.
This morning's 0.75% rate increase by the Bank of Canada was not a small one, but hopefully it will be the last "jumbo-sized" increase for a while. In their statement, the Central Bank cited the "effects of COVID-19 outbreaks, ongoing supply disruptions, and the war in Ukraine" as contributing to the ongoing high inflation numbers. At this point, the Bank of Canada has a very delicate task of running after an economy that has gotten away from them, balancing and bringing down inflation, while not completely tumbling the entire economy and causing a deep recession.
In short, the Bank of Canada is not done in their quest to bring down inflation. It appears that they are trying to shock the system by scaring or forcing people into limiting their spending, therefore bringing down excess demand and, ultimately, inflation. This is especially important with the holiday season approaching.
The good news is that it does appear to be slightly working, as the latest numbers show a glimmer of relief. As summer ends and people get back to "normal", I think and hope that we will see people become more cautious with their finances and will start to tighten the reins. Gas prices have already decreased, and many supply chain/port issues appear to be getting resolved, slowly but surely. Since data is delayed, hopefully the numbers from August and the months to come will be favourable, and we will see the gradual reduction to inflation that the Central Bank is looking for.
However, it is important to take note of the last paragraph of the Bank of Canada's statement today, not to scare you but to provide insight into what may come for the future. They wrote: "Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further. Quantitative tightening is complementing increases in the policy rate. As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target. The Governing Council remains resolute in its commitment to price stability and will continue to take action as required to achieve the 2% inflation target."
In her communication today, Dominion Lending Centre's Chief Economist, Dr. Sherry Cooper, stated her beliefs that the Bank of Canada will continue their tightening until they are highly confident that they have done enough, and will not be quick to reduce their key interest rate so that they do not make the same mistakes that were made in the 80s. She predicted that the Bank of Canada will keep their key interest rate high until later in 2023 or 2024.
For people with balances on lines of credit, adjustable rate mortgages, or any other borrowing that is tied to Prime Rate, I know that this is not easy. After all, the Bank of Canada assured us in 2020 that they were going to keep rates unusually low for a very long time, and reemphasized throughout 2021 that rate hikes were off the table for at least the next year or longer. It is hard to see the light at the end of the tunnel, but hopefully you can find hope for the future when looking at key interest rate trends over the last 80 years.
You might find this article to be helpful, exploring the last 30 years and the average 13 month hiking cycle:
If you are wondering what this rate increase means to your payments for your adjustable rate mortgage or non-static payment variable rate mortgage, here are the numbers:
$35-45 increase per month per every $100,000 in mortgage balance (based on a 25 year amortization, depending on your actual adjustable/variable mortgage rate after your discount).
$180-$220 increase per month per every $500,000 in mortgage balance (based on a 25 year amortization, depending on your actual adjustable/variable mortgage rate after your discount).
For those of you with variable rate mortgages with static payments, you may want to look at increasing your payments similarly. Many of you may be getting close to hitting your trigger rates, so it is important to have all the facts so that you can make sound financial decisions based on your individual situations. Here is some additional information about trigger rates and trigger points:
I know that many of you were able to take advantage of the ultra-low mortgage interest rates over the last few years by making extra prepayments to rapidly pay down your mortgage balance, or by putting your payment savings aside to pad your rainy-day accounts. If you were able and lucky enough to do this, try to remember that your proactive steps have set you up to go easy on yourself in these months of higher interest rates. If you need to take a break from your accelerated payments to soften the cash flow blow, know that this is not giving up but giving yourself a break.
If you need some additional ideas of how you might be able to alleviate some cash flow, here are some other options:
Still Stressed? Remember, for those of you who obtained your mortgages within the last 4-6 years, you already had to pass the Stress Test to get your mortgage. In 2016, for insured mortgages with less than 20% down, and beginning in 2018 for all mortgages, the Canadian Government implemented the mandatory "Stress Test" to ensure that you would be able to withstand these possible interest rate increases. What this means is that even though interest rates at the time that you got your mortgage were lower, you had to qualify for your mortgage based on a hypothetical interest rate of between 4.79% to 5.25%, or in some cases even higher (your contract rate plus 2%). Put it simply, the stress test meant that your monthly housing costs, including your mortgage principal and interest payments (based on the stress test rate), condo/strata fees, heating costs, and potential rental vacancies, could not exceed more than 40% of your gross annual income. In theory, this should leave 60% of your gross annual income to service other living expenses, although we certainly know that taxes account for a significant part of the average household income and that the cost of living has gone up significantly. Hopefully knowing that, at this point, you're still using around or below 40% of your gross income to pay for your housing costs will help you feel less...stressed. (I know...easier said than done)
If you're unsure about how to carry on, and are grappling with whether to lock in to a fixed rate or to stay in your adjustable rate/variable rate, please reach out to me or to your Mortgage Broker to discuss. Remember, one of the best features of your current adjustable/variable rate mortgage is that you can break your mortgage with a relatively low penalty (just three months of interest). If you are confident that you would like to lock into a fixed rate at this time, there may be better options outside of your current lender. These better options may be through better rates, better mortgage flexibility, and/or better prepayment penalties if you ever need to break or pay out your current mortgage. I will reiterate that not all fixed rate mortgages are built the same, and it is extremely important that you review the terms of your mortgage before you lock into a fixed rate.
We cannot predict the future, but hopefully if we hang in there, have patience, manage our spending, budget properly, make lifestyle changes, and find new income-producing avenues, we can come out of this unscathed and stronger than ever.
Now is the time to slow your spending, slow the economy, slow the demand, and buckle down.
Me, I'm going to be spending time at home with my family this Fall, catching up on movies, and making lots of homemade soups. Delicious, healthy, budget-friendly, and most importantly for this time, comforting.
Questions? Please do not hesitate to reach out. I'm here for you, always.
First-Time Home Buyers
First-Time Home Buyers' Guide
Buying a Home - in 7 Easy Steps
Your Down Payment
Mortgage Default Insurance
Free Annual Mortgage Review
Using your Equity
What is Home Equity?
Equity Lending (Private Financing)