Good morning, the Bank of Canada kept rates unchanged this morning with their scheduled rate announcement.  From the Bank’s release, the severe impact of Covid appears to have peaked & the gargantuan policy response has helped replace lost income & cushion the effect of the shutdowns. Right now the Bank’s forecast is for a sharp, partial rebound followed by a slower grind back to pre-crisis levels.  The grind part of that being the key element. 

Let’s remember that policy response was more life support than it was stimulus.  Debt, which was already at high levels pre-covid, is giving up future consumption for greater consumption today.  Unless that debt is used to create a new income stream that will help pay for that new debt, then it creates a drag on future cash flows.  If I take out a mortgage to buy a vacation property, then those payments are going to take away from what I can spend my money on & invest with otherwise.  If I use that financing to buy a rental property, I can acquire that asset without my monthly consumption being as impacted.   The economic gravity of what has happened in Canada & around the world the past few months is something that will weigh on us for a long time. 

What can you do?  If you’re able, use this as an opportunity.  Take advantage of low rates by creating another income stream, or by reducing your current debt load.  If neither of those are options & you are one of the millions turned upside down from has been the worst financial event in anyone’s memory, think about what you can do moving forward to help keep you brace for the unexpected.

I was thinking last night how, through most of my life, it has felt like we have been on a linear path of progress & of course, life is not linear.  Life is cycles of booms & busts, bright times followed by dark times.  Winston Churchill said never let a good crisis go to waste.  Find a way to emerge from this stronger than you were before.  If that means taking government help, education, a career change, using technology to improve productivity, re evaluating your monthly budgeting, investing, spending more time with loved ones, find a way to use this situation as a learning experience.  It is clear we have entered a darker time as humans.  Crisis’s happen & are happening more often than ever in our lifetime.  Find a way to better brace for the unexpected. 

I’m Ryan, glad to be clean shaven again & to have a reason to iron my dress shirts.  I hope you have a great day.

Here is a link to the Bank of Canada release.

I’ve been getting a lot of questions about how the coronavirus will impact mortgage rates so wanted to get this out there to cover what those looking to buy a home, or have mortgages coming up for renewal, or are thinking of maybe refinancing, should expect. A lot of people you know have mortgages & are going to benefit from watching this so please forward on to friends or family or whoever you think is going to want to know what’s going on.

I’ll try to keep this simple: LOWER RATES. Until the world has gotten this virus under control there will be no pressure on rates to go up. The Bank of Canada dropped rates by twice their usual 0.25% cuts last week, something they haven’t done since the great financial crisis, and that was just as this virus was entering Canada. Is that the last of them? No. Bond yields, which are what fixed rates are priced on, have been finding new bottoms, I expect us to see rates follow suit & continue to hit new all time lows.

Regardless of your personal thoughts on Covid19, what is very clear is how contagious this is. Forget death rate & how many ppl die compared to the seasonal flu. What this boils down to is the potential of exponential growth.

Consider this example: if the number of people in a stadium doubles every day, and it takes 50 days for the entire stadium to be filled, how many days does it take before half the stadium is filled? The answer is 49. On day 48 = 25% full. On day 47 = 12.5% full. On day 46 it’s 6.25% full. So in the span of 4 days we go from 6.25% full to 100% full. That gives you an idea of how quickly things can get out of hand & why authorities want to act early.

The path I think we can expect are schools shutting down, employers allowing people to work from home, conferences & sporting events being cancelled. The countries that have gotten a handle on this thing have done so by implementing draconian measures of more or less locking people inside their homes to prevent the spread & that is where I think things are likely to head. To frame all this from the perspective of the economy, it’s not good. Canada’s growth had already been slowing BEFORE corona had shown up. Look at commodity prices. Look at the price of oil right now. That decline started before the Saudi / Russia feud.

Think about the knock on effects of what happens when people aren’t going out for dinner, going to the mall, taking trips, booking flights. When companies aren’t making sales, they cut costs through layoffs. When people don’t have jobs, they don’t spend money. You can see how a deflationary shock like this can be self reflexive. All of this points to rates continuing to drop.

What does this mean to you? Looking purely from the mortgage perspective, this is obviously good. If you have a mortgage that is over 3%, get in touch because in the last week we have found a ton of opportunities for clients to save money refinancing their mortgage. I still think it’s a bit early, but we’re at least knowing these opportunities exist & waiting for the timing to be optimal before finalizing anything.

If your mortgage is coming up for renewal in the next 6 months, DO NOT take your lender’s early renewal offer. At least, not without checking in with me. I have yet to see one in the last few months that is attractive enough to make moving early worth it but I can at least promise to shoot you straight & can tell you quite quickly what you should do.

If you’re looking to buy a place, as always, be patient. There is going to be opportunity out there & on the mortgage front, you’re going to be looking at rates we have never seen in Canada’s history.

The final piece I want to add here is that there is already a ton of government debt in the system & we’re going to see a lot more. The way governments are going to eventually get out of this debt burden is by trying to create meaningful inflation. Any of us who have spoken to our parents about mortgage rates in the early 80s & 90s, have heard of rates in the high teens & even above 20%. We got there because the government was trying to reel in inflation. I’m not saying we’re going to go to 15%, but even rates going from the mid 2% to the mid 5% is going to create a shock to a lot of borrowers. There is a lot you can do in advance of that to prepare.

Once this worm has turned, it is going to be essential for you to have your mortgage not with a bank specialist, not with your account manager at the branch, neither of those avenues get compensated to service their existing book of business.  It is very rare for your banker to approach you with a refinance opportunity. 

That is really where us brokers are worth our weight in gold.  That’s how we make money is by finding these opportunities & saving you money.  You want to work with someone who has your best interests at heart, who knows what’s going on & knows when to do things so you can time it appropriately.

The last thing I’ll add, if you are concerned with the risk of inflation, not in the near term, but down the road, get in touch.  I have some awesome strategies for that, one in particular the “inflation hedge,” which I would love to share with any who are interested. 

Thanks for watching & have a great day!

Effective Jan 1 the newest mortgage rule was put into effect in Canada – the “stress test.” This video is going to give some background on mortgage stress tests, then explain the new rule.

Currently, if a borrower is buying with less than 20% down payment & is therefore getting an insured mortgage, they already have to qualify off of a stress test rate (being the 5 year posted rate, currently at 4.99%). For borrowers with 20%+ down, they can avoid this same stress test ONLY if they take a 5 year fixed mortgage (or longer), which means that if they want a variable or, say, a 2 year fixed, they would have to qualify off the 5 year posted rate not their actual interest rate.

The new requirement specifically impacts borrowers getting uninsured mortgages, which you can think of as borrowers with 20% down or more. Now, they will have to qualify for their financing based off a new stress test being their interest rate + 2%. So if they chose, say, a 5 year fixed mortgage with a rate of 3%, they would have to qualify based off a rate of 5%.

The irony of all this is that shorter terms generally mean lower rates, which therefore means that borrowers will qualify for larger mortgages taking shorter terms & shorter terms result in a borrower being more vulnerable to interest rate increases which doesn’t exactly benefit clients.

If you’ve bought a presale prior to these new rules being implemented & are curious how this will impact you, as long as you have a purchase contract dated prior to Jan 1, 2018, you’ll be grandfathered under the previous rules.

Additionally, you have a mortgage coming up for renewal & are not able to qualify to switch under the new rules, all is not lost. There are ways we can still qualify you off the previous rules.

If you’re looking to buy a place but can’t qualify for the price point you need under the new rules, give me a call. There are a still a few ways we can still get you into a purchase qualifying of your contract rate.

Ryan Zupan
604.250.6122
ryan@citywidemortgage.ca