The Bank of Canada has left rates unchanged at this morning’s interest rate announcement. This wasn’t much of a surprise as inflation has continued to decelerate, , unemployment ticking up & real GDP contracting, all in spite of the positive input of strong population growth. The government of Canada bond yields, which fixed rates are priced on, have been coming down for the last 3-4 weeks.
Why does this matter? Central bankers often use statements to guide markets (remember the, “rates will stay low for a very long time” comment in summer 2020 attempting successfully to get everyone to borrow & spend to juice the economy during covid?).
After basically 2 years of emphasizing the importance of getting inflation to 2% & all the rate hikes to get there, why the shift? Why, at this point, start opening the door for rates coming down? Does the Bank of Canada see a future where it is going to be a very long time before inflation hits 2% with an economy that needs help before then? Is it a positive thing that rates could be coming down if inflation is high?
The short answer is no. If rates are coming down while inflation is above target that suggests a pretty dire economic picture.
The reality is we’re in a higher cost of living regime. When you borrow, you’re pulling demand from the future & the government of Canada total debt surged by 84% in the past 5 years. 54% of that debt is coming due to renew in the next 3 years. You’re either paying for that through growth, higher taxes, or cutting government spending.
Now, don’t go buck wild on that comment. Tiff also said loosening monetary policy is still a ways off, but markets reacted on that nonetheless & are still pricing in cuts as soon as April.
To counter all that, it should be noted real GDP for Q2 was revised up from a 0.3% drop to 1.4% growth. The upcoming months were also ones where inflation was coming down at this time last year so it wouldn’t be a surprise to see higher surprises with inflation reports, but for the time being rates are settling down into the Christmas season.
That wraps 2023 for rate announcements. Have a very happy holiday season & see you in 2024.
https://ZupanMortgage.com/wp-content/uploads/2020/05/Citywide-logo.png00adminhttps://ZupanMortgage.com/wp-content/uploads/2020/05/Citywide-logo.pngadmin2023-12-06 08:06:292023-12-06 08:16:16Bank of Canada Dec 2023 – NO CHANGE
The Bank of Canada raised rates 0.25% at this mornings rate announcement. This is the second consecutive increase after the 5 month pause to start the year. With inflation continuing to ease, the downward path has come more from lower than expected energy prices & less from underlying inflation, with core inflation (when you take out fuel & food) remaining persistent in the 3.5-4% range.
It was this point last year where inflation began to decelerate which will make the 2nd half of this year interesting as we will be facing easing comps from 2022. The Bank expects inflation to settle to 3% for the next year before gradually declining to 2% in the middle of 2025.
GDP growth is essentially unchanged however expectations for growth has gone up slightly, due to surging population growth. Canada’s population grew by 1.2 MILLION in the past year as of Q2. I know this comes up a lot but it’s a staggering number.
Unemployment has risen to the highest level since February 2022. Business outlook has fallen to the weakest since the depth of the pandemic, but the Bank sees consumer price gains held up by high government spending & strong demand.
The question today is, with inflation continuing to come down, with unemployment rising, with GDP negative on a per Canadian basis, why have we now seen 2 hikes since the pause? Mortgage interest costs are adding nearly a single percentage point to CPI.
The Bank of Canada cannot control immigration. They can’t build homes & know that rates at these levels hurt housing supply as developers pull projects & sellers hold off in order to hang onto their lower mortgage rates.
The Bank of Canada raising rates today is a commitment to crushing the economy & demand. Considering the heavy handed approach we saw when the pandemic hit, urgently dropping rates to basically zero, then the extraordinary move of keeping rates unchanged as inflation marched well beyond their 2% target as their intention was to “let it run hot,” & now the extreme level of rate hikes & unusual move to go back to raising after pausing, can you really envision a scenario where this ends well?
We know where this is going, everyone knows how much their spending has changed over the last year & a half. The painful uncertainty is when we will get there & where will rates be when we get there. Leading into this meeting, CIBC economist Andrew Grantham said in a recent report they think today’s hike will prove the peak & with rates starting to cut around the middle of 2024.
So, what should you do? If you’re in a fixed rate mortgage, raise your payments. Start preparing for higher rates at renewal & paying down more principal to lessen that potential blow waiting down the road. If you’re in a variable rate, you can lock in to a rate that’s going to be about the same as what you’re in now, if not moderately better, but doing that takes on a significantly higher penalty risk if you break your mortgage early, takes away the ability to benefit when rates do eventually drop & only really pays off if we continue to get more hikes & rates don’t come down.
If you’re in a fixed payment variable, know that locking in will raise your monthly payments as your amortization will have to get back on track. If cash flow is the concern, you’re best off raising payments by enough so that you’re continuing to pay off some principal then reevaluating when the rate cycle turns. At renewal, assuming you have the minimum 20% equity & qualify, you can always refinance up to 30 years to lessen payment shock if rates are still elevated but if you are able to stomach higher payments you will thank yourself down the road by raising by as much as you can handle now.
Make no mistake, you can’t have the level of debt we have as a country, raise rates by this level, and squeak out a soft landing & avoid recession. Rate hike cycles end in recession.
If you would like to discuss any of this please get in touch with me today.
https://ZupanMortgage.com/wp-content/uploads/2020/05/Citywide-logo.png00adminhttps://ZupanMortgage.com/wp-content/uploads/2020/05/Citywide-logo.pngadmin2023-07-12 09:43:492023-07-12 09:43:56Bank of Canada raises 0.25% – July 2023
Good morning, The Bank of Canada raised rates 0.25% at this mornings rate announcement. This move was a bit of a surprises as, while a potential hike was being floated, markets weren’t favouring an increase at this meeting. This continues to be a difficult central bank to predict as if you recall, following the last hike in January they indicated their intention was to pause & wait to see how the impact of rates played out & data unfolded. Something changed over the last month so let’s take a look at what happened & what prompted this big reversal.
First off, inflation. Instead of headline inflation dropping from the March 4.3% to the expected 4.1% in April, it went up slightly to 4.4%. A 0.1% increase obviously isn’t much of a difference but it’s all about expectations & the rate of change, but it’s worth noting that was the first increase in 10 months.
The irony of that print is the increase was largely driven by higher shelter costs — namely rents & mortgage interest expenses – both results of high mortgage rates. Rates are high because of inflation. Inflation is high because of high rates. It’s interesting to note that the Bank didn’t really change it’s outlook for CPI. Same as the last meeting, the expectation was for us to fall to 3% this summer. Was inflation the reason they raised this morning? Seems a little thin. So what else happened?
On the GDP front, Canada grew by 3.1% annualized in Q1 but basically all of that growth happened in January with 0.5% growth. February came in at 0.1% & March 0%. Consumption & demand for services are the points of strength but like we’ve talked about before, when you’re bringing in record numbers of new Canadians each year that is going to support those areas. If you look at GDP on a per capita basis which is a closer reflection of the reality Canadians are facing, we’re in a recession now.
On the housing front prices have been going up but not because this is a healthy & balanced growing economy. House prices have been increasing because we’re still dealing with extraordinary low levels of inventory. Limit the supply of something & prices go up. Demand needs to fall in turn to extraordinary low levels. How will we get there with all the new bodies coming in needing places to live?
In the Bank’s financial system review it noted approx 1/3 of mortgages have seen increases in their payments compared to Feb 2022. Considering only 30% of Canadians have some form of housing loan, we can assume only 10% of Canadians have seen a mortgage payment increase & explains a little bit why this massive move up in rates hasn’t had the impact (yet) many would have predicted at the start.
Make no mistake, the Bank of Canada wants the economy to break. The move today was worrisome as this could very well open up the door to more increases over the summer. On the one hand, more increases would bring us closer to the eventual points of rates going down, but on the other hand the question is how long will it take to get there & what is going to happen in the meantime.
If you’re in a variable rate mortgage, and not necessarily wanting to lock in to your remaining term with your lender but wanting to secure a shorter term fixed for the next 4 months to see what the coming Bank of Canada meetings brings, get in touch with me today as we can still get 2 year rates in the low 5% range but would need to lock that in ASAP before taken off the table.
If you would like to discuss any of this please get in touch with me today.
https://ZupanMortgage.com/wp-content/uploads/2020/05/Citywide-logo.png00adminhttps://ZupanMortgage.com/wp-content/uploads/2020/05/Citywide-logo.pngadmin2023-06-07 09:36:052023-06-07 09:36:12Bank of Canada Rate Announcement – June 2023 – 0.25% INCREASE
The Bank of Canada left rates unchanged with this morning’s rate announcement, as was expected. They signalled they intend to pause & see how the economy responds to the jumbo hikes from last year so nothing has really tipped the scales in either direction for them to make a move.
That said, it’s been an eventful month. Much of the upward rate pressure has been the extremely hawkish talk from the US Fed – the higher they go, the more pressure there is for Canada to raise to support our currency.
Just over a month ago bond yields started to drop significantly as the stability of the US banking sector came into question. The 16th largest bank in the US – Silicon Valley Bank – failed as their bond holdings were basically underwater & worth significantly less than what they paid for them. The mechanics behind that is when rates go up, bond values go down so all the rate hikes lead to a run on deposits, money getting pulled out as there were concerns about the bank having enough assets to pay them out & voila, the bank was shut down.
They weren’t the only one mind you & there was concern for the regional banking sector overall. The talk was that further rate increases would make this issue worse & could lead to a full blown crisis but that has since died down. The Fed raised 0.25% at their last meeting (0.5% was being floated around) & changed their guidance from being committed to “ongoing” rate hikes to “some additional hikes.. maybe.” Basically, they may raise. They may not, but overall they are easing off the brakes a bit. All in all it was a step in the right direction if you’re looking for rates to come down here.
In Canada, employment data continues to be strong & surprised to the upside, although, again, that is one of the most lagging indicators & the last shoe to drop when the economy enters recession.
Inflation continues to ease & the Bank expects CPI to fall quickly to around 3% by mid this year & decline to 2% by the end of next year.
One of the major challenges in getting inflation down & keeping it down is our recently announced federal budget. More spending & more debt will not help ease inflation any time soon. Cutting $500 cheques to help cover soaring prices of groceries does nothing to help bring down prices. Announcing a new tax free savings account for new home buyers goes directly in opposition to what the Bank of Canada is trying achieve, although I will say, if you qualify for that program, use it & I have some highlights of the program on my website you can check out. It is a really good program but make no mistake that is stimulus to a housing market the Bank of Canada wants to cool. All signs of our budget & immigration commitment point to higher inflation for longer.
In the near term, barring a crisis, there doesn’t seem to be any indication that rates will go up or down. Bond yields continue to bounce around & at this point it’s not looking like the Bank will start dropping until 2024 but it does look like we’re going to see fixed rates continue to settle lower here.
That’s it for today. If you have a mortgage coming up for renewal this year or are looking to buy & want to run your strategy by me, please get in touch as I’d love to hear from you. Thanks & have a great day.
https://ZupanMortgage.com/wp-content/uploads/2020/05/Citywide-logo.png00adminhttps://ZupanMortgage.com/wp-content/uploads/2020/05/Citywide-logo.pngadmin2023-04-12 09:00:502023-04-12 09:00:57Bank of Canada Rate Announcement – April 2023 – NO CHANGE
https://ZupanMortgage.com/wp-content/uploads/2020/05/Citywide-logo.png00adminhttps://ZupanMortgage.com/wp-content/uploads/2020/05/Citywide-logo.pngadmin2023-03-31 11:49:252023-03-31 11:58:50The New First Home Savings Account (FHSA)
For the first time in 12 months the Bank of Canada has NOT raised rates. They signalled a pause after the Jan meeting & held true today but it’s continued to be a really flippy floppy few months. Leading into Christmas bond yields were dropping & fixed rates were coming down. That reversed hard into the new year then returned to dropping below pre-Christmas levels. Enter Feb & another about face with upward pressure on rates & that’s where we still sit today. Over that time the market went from pricing in no more hikes with rates to start dropping late 2023 to then pricing in a potential hike before the fall with the Bank of Canada not dropping until 2024.
Part of the reason for the spike was job gains. Canada added 150k jobs in Jan which was 10 times the estimate, however that was driven by temporary, non permanent resident, non citizen workers to fill the large gap of job vacancies. The interpretation there is that is likely a 1 time boom & not something to read in to deeply on. It’s also important to note that when the economy slows, those temporary workers tend to go back to their home countries so not the best foundation for a robust growing economy. So Tiff has signalled a pause. What is the risk that could cause them to raise again? Inflation & the US FED.
On the inflation front, the good news there it came in softer than expected at 5.9% vs 6.1% expected & down from 6.3% in Dec. Food prices are still high at 10.4% year over year but who really eats food anyways..
The US Fed has recently upped their hawkishness & suggested a potential 50bps hike this month which could lead to a higher terminal rate then previously expected, put pressure on the loonie & pressure the Bank of Canada to take further action. Takeaways from today are that things are taking longer to play out. Still a lot of volatility with rates & the outlook continues to bounce around. At this point it’s looking like for the Bank of Canada to cut this year we would need a significant economic downturn but as of now it’s looking like no rate cuts until next year.
If you have a mortgage coming up for renewal this year get in touch with me today. It never hurts to get some rate holds in & have some irons in the fire as we see how the upcoming months play out. That’s it for me. Thanks for watching & have a great day!
https://ZupanMortgage.com/wp-content/uploads/2020/05/Citywide-logo.png00adminhttps://ZupanMortgage.com/wp-content/uploads/2020/05/Citywide-logo.pngadmin2023-03-08 08:46:422023-03-08 08:46:47Bank of Canada Update March – No Change
The wording to key on in this morning’s release was that if economic developments evolve in line with expectations they expect to “hold the policy rate at it’s current level.” That doesn’t mean this WILL BE the last hike. It means it COULD be the last hike. Taking that in & piling into risk assets is a great way to make sure this is NOT the last hike.
THE mistake just about everyone made last year, myself included, was underestimating central bank action. Rates were kept so low for so long that no one really believed we would see the about face & aggressive rate hikes that we ended up seeing. The reason being that it was obvious that would cause a world of economic pain & it most certainly is. The mistake was not recognizing that became the intention. That became the justification TO raise, not the reason NOT to.
Remember, the only tool the Bank of Canada has to bring down inflation is crushing the economy. They can’t create more goods. They can’t change government spending. They can, however, make borrowing so expensive that it results in people selling assets & cutting spending to kill demand. They want & need a recession. They want job losses. It just take time for the impact of raising to be felt throughout the economy & we are now into that point.
While 1 & 2 year fixed rates are still very high, 3, 4 & 5 year fixed rates have come down significantly in the last month. 5 year fixed rates are now in the mid 4% range & the trend, right now, is for rates heading in the right direction.
I’ve been getting a lot of questions on whether clients should be paying down their mortgages right now. If you’re in a variable rate, yes you 100% should as you get a guaranteed return & save on interest as soon as you make that extra payment.
If you’re in a fixed rate, though, & your rate is well under 4%, instead of paying down your mortgage, dump that cash into GICs. You can still get GIC rates of 5% or higher from places like EQ BANK so if that is higher than your mortgage rate, you can profit by continuing to borrow at your lower mortgage rate & earning a guaranteed return over 5%. Just make sure you aren’t locking in that investment beyond your mortgage term so that you have the option of paying down your mortgage prior to renewal if mortgage rates are still elevated at that time. If you have 8 months until mortgage renewal, don’t go into a 12 month GIC.
There are a lot of mortgage renewals coming in Canada this year & the vast majority of the industry does not understand some of the tricks on how to get better pricing on mortgage renewals. Please, if you have friends or family who have mortgages coming up for renewal, put them in touch with me. I won’t waste anyone’s time. I very often will help clients even if it means not working with me, but in a lot of cases we’re saving significant amounts by knowing how to structure the renewal properly. Give that gift to the people in your life this applies to & please put us in touch.
Variable rates & LOC rates increase by 0.25%
Bank of Canada signals this could be the last hike (barring surprises)
Fixed rates have started to come down
HAVE EXTRA CASH? Do this:
if in a Variable Rate Mortgage, consider paying down your mortgage.
https://ZupanMortgage.com/wp-content/uploads/2020/05/Citywide-logo.png00adminhttps://ZupanMortgage.com/wp-content/uploads/2020/05/Citywide-logo.pngadmin2023-01-25 08:22:472023-01-25 08:22:53Bank of Canada Raises 0.25% – January 2023
More pain this morning as the Bank of Canada surprises markets for the 2nd meeting in a row & raises 0.5% vs the market’s expectation of 0.25%. Last meeting consensus was expecting more & we got less. This week, the opposite. As of this morning market expectations are still for another 0.25% but as we’ve seen throughout this year, this can all change for better or worse. The Bank ended their release ambiguously stating they will be considering whether the policy interest rate needs to rise further. This is a change from their typical, “more action is needed,” line but as we saw today & throughout this year, be cautious with optimism with these guys, although it does appear we are very near the end here.
Inflation continues to come down but CPI inflation is still at 6.9% with core inflation around 5%. Canada’s 10s/2s yield curve, which gives an indication of future economic activity, is the most inverted since the early 1990s. In a health economy the curve slopes upwards, which points to economic growth into the future. When short term yields are higher than long term, the curve slopes downwards, which corresponds to periods of economic recession. The growth outlook is not good. Winter is coming.
A lot has been made over the last month of Central Bank action. The head of Australia’s central bank actually came out with an apology to people who took out mortgages last year under the guidance of rates being low until 2024. In Canada, for the first time ever our central bank ran a loss. Keep in mind that loss falls on the backs of tax payers & is looking to be something to the tune of a $10b loss – instead of collecting something around $3b annually from the Bank of Canada, we’ll be forking out approximately $7b overt the next 3 years. First time ever. Ever is a long time..
They also admitted they should have raised rates sooner but defended paying out $18.4m in bonuses to staff last year so more signs of how broken our world has become.
Prior to this morning, around 13% of all mortgages in Canada had passed their trigger rate, meaning their payments were not covering all the interest owed for that month. After today that number will be higher. If you’re in that boat, raise your payments, even if you have already. You want to delay the trigger situation as much as you can. Around 75% of mortgages in Canada this year were in variable rates, which, in a lot of situations had to do with broken policy pushing clients to going variable in order to have the lower stress test rate & qualify for their purchase. Also, in fairness, given the history of this central bank it was hard envision the hawkishness we ended up seeing.
Looking at my own business, what I got wrong was, we knew inflation was going to be an issue & that’s something I was talking about since 2020. We knew there was a ton of debt in the country & raising rates would be problematic, which it is & will continue to be, but what I underestimated was the level of damage that could occur between when they started raising & finished. I completely underestimated the level of pain & damage they would be willing to reign down & that is something I take very seriously. Myself & really everyone completely missed the boat on that. The conflict in Ukraine certainly didn’t help & looking back that seemed to be the point where the switch really flipped & that was used as the excuse to really move to significant increases, but whether that happened or not, inflation still would have been high & that’s not THE reason for this year.
Even though variable had been the better bet close to 90% of the time in Canada’s history, the take away for me is to really outline what could happen in that 1 time in 10 where it isn’t.
This is the last meeting for 2022. One that will surely be remembered for a long time. Next year the story will be when will rates start to drop but I would suspect mid to late 2023 before any relief comes on that front.
That’s it for me. Thanks for watching & please get in touch if you’d like to discuss.
https://ZupanMortgage.com/wp-content/uploads/2020/05/Citywide-logo.png00adminhttps://ZupanMortgage.com/wp-content/uploads/2020/05/Citywide-logo.pngadmin2022-12-07 09:36:062022-12-07 09:36:13Bank of Canada rate increase – 0.5% Dec 2022
The Bank of Canada raised another whopping 0.75% at this morning’s rate announcement, making a total of 3% in the last 6 months & leaving the door open for more rate increases. This has been a massive move in a short period of time & based on their announcement we may not be out of the woods yet.
GDP is weaker than projected with the last 2 month’s readings being 0% & -0.1%. Growth has clearly turned. Housing continues to pull back across the country however inflation is still high at 7.6%. The target is 2%. We’re a clearly a ways off from that so the question is, are we going to see the Bank of Canada continue to march up rates until inflation starts with a 2? They could have raised rates by 3% this morning & next month’s reading still wouldn’t be close to 2%. Is the plan to talk aggressively to decrease how much further action they’re going to take?
In that piece Tiff highlighted that inflation appears to have peaked but that it also remains far too high & will likely remain too high for some time. He continued that they need to tame inflation back to 2% by raising borrowing costs in the “short term.” They don’t want to choke off demand, but slow it’s growth for what they call a “soft landing.”
How much confidence do you have in the same people who are largely responsible for the high inflation we’re experiencing today, who were clueless as it ramped up, refrained from doing anything while inflation was accelerating all last year, to be able to artfully land this ship without triggering a recession? Inflation hasn’t been at 2% in over 1.5 years & they did nothing for the bulk of that.
I thought I’d go back over the recent history of Central Bank messaging & highlight some of the statements to give an idea of the type of accuracy we can expect here:
When Covid hit, Tiff Macklem said (a number of times) that they didn’t plan on raising rates until well into 2023, to be assured that we will have low borrowing costs “for a long time” & suggested to anyone “considering making a major purchase (… or) investment, you can be confident rates will remain low for a long time”.
It’s not 2023. Rates are not low.
In the 2nd half of last year, while inflation was ramping up, their statements highlighted that inflation was going to be temporary & that even though it was above their 2% target, that was “as expected.”
As recently as December of 2021, while inflation continued to ramp up, they stated that inflation would be back to 2% by late 2022.
One month later at their January 2022 meeting that changed to inflation will decline “reasonable quickly to about 3% by the end of this year.”
Two months following that statement inflation was all of a sudden not a temporary phenomena & actually a problem & so began the rate hikes.
Those comments haven’t aged well & all but the 1st aren’t even a year old!
So what to do with your variable rate mortgages? CIBC came out last week stating they think this will be the final rate increase we see but if you take Tiff at his word, we have more rate hikes to come. The Bank of Canada has highlighted recently that they are “front loading” the rate hikes & in the post called attention to the hikes being short term but what are you to believe?
If you’re in a variable, you can always lock in but the question is if it’s worth locking into a fixed rate of 4.5% – 5% to avoid having your variable cross that threshold for, say, 6 months? For 12? Are you OK giving up the option of benefitting when rates do eventually drop?
Variable rates have only really been going up for 6 months & only recently have crossed the threshold of being more expensive per month than if you had gone with a fixed rate for most variable rate mortgages.
Would you have felt the same pain or anxiety you feel now if you had taken a fixed rate right from the get go & had been paying considerably more being in a fixed for the past many years while the variable has been lower?
Feeling safer comes with a premium. Feelings should never drive financial decisions.
I’m going to highlight some action points below if you are a in a variable but please do reach out to me today if you would like to discuss any of this.
Lock into a fixed rate around 5% depending on the term with no cost to do so:
-piece of mind
-not being able to benefit from potentially lower rates in the future (when rates drop fixed rate penalties get expensive)
-taking on significantly higher penalty risk
If you’re in a fluctuating payment variable rate, switch into a fixed payment variable rate & extend the amortization back up to the max
-with fixed payments your cash flow will not be impacted by the rate changes as your payments are fixed (but the amount that goes towards principal/interest will fluctuate as rates change)
-when rates do eventually drop you will pay your mortgage off quicker as more of your payment will then go towards principal vs interest
-will incur a small 3 months interest penalty
-will not be able to benefit with lowering payments from dropping rates
Move into a 1 year fixed rate term
-payment/rate security to ride out the current rate volatility
-not locking into a long term at a time where rates are just below the peak & hopefully renewing that mortgage in a year’s time where rates should be lower than today.
-will incur a 3 months interest penalty
-cannot benefit from lower cash flow with lower payments until renewal
https://ZupanMortgage.com/wp-content/uploads/2020/05/Citywide-logo.png00adminhttps://ZupanMortgage.com/wp-content/uploads/2020/05/Citywide-logo.pngadmin2022-09-07 10:21:332022-09-07 10:21:41Bank of Canada 0.75% increase – Sept 2022
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