Date: July 13, 2023

Category: Newsletter

The Bank of Canada increased the overnight rate to 5%, a .25% increase. 

Bringing the prime rate to 7.20%

It’s been more than 24 hours, and by now, you’ve heard all the doom and gloom in the news. It may seem like we will never make it out of this moment; however, I assure you this is a moment in time, likely longer than anyone wants. 

Let’s keep it simple and digest the facts, good and bad. 

Just Facts:

  • It’s evident from yesterday’s actions that the Bank of Canada (BOC) will only stop once they have reached its elusive 2% inflation rate. 
  • From the BOC’s action, we can see they are trying to slow the housing market.
  • June inflation and job numbers point to a slowing economy on the surface; a deeper look shows us that there is more. 
    • Inflation dropped to 3.4%, and the removal of gas prices as an indicator brings us right back up above 4%
    • Unemployment did increase to 5.4%, but the addition of 60,000 new positions and the influx of new Canadians essentially negate that relative improvement in the eyes of the BOC. 
    • Canada’s population growth is 2.7%. This is the fastest pace among advanced economies, rivalling least developed nations such as Burkina Faso, Burundi and Sudan.
  • We are at a 22-year high of 5% for the overnight rate and lender prime rate up to 7.20%.
  • It is a seller’s market; if you want to sell your home – take a deep breath and know that this is a seller’s market; with so little inventory on the market, you are sitting in a good position.
  • Credit card delinquencies are rising – if this is you, please reach out. In moments like this in history, the one thing that will help you is good credit. Let’s make sure you keep it. If you are struggling, please connect before you miss payments. This includes mortgage payments.
  • Consumer and business insolvencies (bankruptcies) have increased – no surprise there. However, I urge you to reach out if you are in this spot because I speak from experience; your home’s equity can often bring you back above water when you have equity available.
  • Five-year bonds were hovering near 4% and passed 4% last month. This is important as it directly relates to the 5-year fixed mortgage; this is important for those considering locking in your variable or adjustable rate mortgage.
  • Locking in your mortgage may be a good option if you have reached your monthly max. However, I urge you to discuss your plans for the next 3-5 years with us, as not all fixed-rate mortgages have the same penalties. I say this because the five-year variable/adjustable penalty is three months’ interest; however, once you lock in – it’s three months’ interest or interest rate differential. Not all lenders calculate this the same.
  • Economists now state that they expect rates to be high until 2025-2026. 
  • If your mortgage is up for renewal in 2025, you can expect your monthly payments to increase by 20-25%. This is where we connect with you and look at options. There are ways to reduce the monthly payment.
  • We are still in an inverted interest rate environment, where taking on a fixed rate is cheaper than a variable rate. This is a huge change from where we’ve been over the last decade. 

What do we do now? 

As I’ve said before, we can only base our decisions on the information we are provided with, and currently, I don’t put much faith in what we are being told, so here is what I suggest. 

  • If you are in a fixed-rate mortgage that is not coming due until mid-2025, I encourage you to increase your payments to help you pay off the mortgage faster at a lower rate. There is much discussion around whether you should invest those additional funds into a GIC or other investments instead of putting it towards your mortgage, and here is my response to that. You put those funds where it is best for your situation; however, remember that you will not pay taxes on the interest saved, that’s just more money in your pocket, and if you invest it, you will pay taxes on the investment. I’m not against investing but I encourage you to explore the options.

Homes will continue to sell, people will move, mortgages will renew, and life will continue. 

This is one instance where our parents are correct, and we need to listen to your parents and tighten the belt a little, go back to your monthly spreadsheet (budget) and follow it. If you need one, let me know. I would be happy to share. Go back to the basics if you have no budget, or try a budget for the first time. Curb your unnecessary spending, and we will get through this moment. 

Final Thought:

  • Most of us will have a mortgage for most of our lives; it’s a reality! We also realize that throughout our lives, we will have good and bad years – we all have some scrapes and bruises along the way…so why do we not understand that this also happens within the confines of our mortgage life? There are times in our mortgage life span t where we ‘win,’ whether due to a low-interest rate or an increase in income, allowing for a large lump payment into the mortgage or inheritance. So I urge you to remember that this time will pass, and now is the time to focus on the things we can control, such as spending and saving.

I’m going to end with this one statement. Some economists are saying this may be the BOC’s final increase. However, I have little faith in this, and I would rather prepare and do everything I can to put myself in a good situation than hope for the best. 

Hope is needed, but preparation is essential. 

Click here to read the Full Bank of Canada Statement

The next scheduled date for announcing the overnight rate target is September 6, 2023.

Inflation numbers will be available on July 18, 2023.

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