21 Jun

How the mortgage stress test is impacting qualification amounts


Posted by: Kyra Park

Variable rate mortgages getting all the love…

As of June 2022, we are currently seeing unnatural discrepancies in the size of mortgage loans borrowers will qualify for, and it’s all because of a rift in the space-time stress test continuum.

You see, most 5-year fixed mortgage rates are already over 5%, making their stress test a full 2% higher at 7% or more. Concurrently, the mortgage stress test rate for variable mortgages is still a comparatively low 5.25% or so.

In order to maximize the amount homebuyers can qualify for, many borrowers are choosing a variable-rate mortgage, even if their actual personal preference is for a fixed-rate mortgage.

Last week, in response to one of the big banks increasing its uninsured 5-year fixed rate to 5.23%, rate expert Rob McLister tweeted, “Borrowers must prove they can afford a stress tested payment @ 7.23%—almost 200 bps higher than stress test payments on variable rates. Completely senseless.”

It’s somewhat of a paradox that needs to be sorted out sooner rather than later. Because it’s not like all the variable-rate borrowers are feeling peachy and comfortable. There is far less conviction among the cognoscenti who often preach, “variable all the time; it has never been wrong, and it never will be wrong.”

Variable-rate borrowers are paying attention to the ever-increasing Bank of Canada overnight rate, which in turn is triggering increases to the prime rate. This means variability in the amount of interest those borrowers must pay each month, and, unless their payment is static, their variable-rate mortgage payment is increasing too.

At least the fixed-rate borrowers know their worse-case scenario. They commit to a specific payment for the term of their mortgage.

Options for today’s borrowers

Consumers looking for ways to maximize their mortgage are turning to mortgage brokers who have figured out the best approach to maximize their borrowing power. There are several ways to get ahead of the mortgage stress test:

1) Choose a variable rate mortgage, which currently entails a stress test rate of 5.25%. However, when the Bank of Canada meets on July 13, we can expect a hefty rise in the prime rate to follow. The variable mortgage stress test rate might be 6% by mid-July.)

2) Select a shorter fixed-term mortgage. Currently, 2- and 3-year fixed rates are below 5%, so there is a modest advantage relative to the 5-year fixed rate.

3) A private mortgage lender might be what the doctor ordered, provided your property and location fit their profile. If all other avenues fail, at least you can put financing in place (albeit at a higher cost than you may have planned for).

4) Finally, certain credit unions can be another option. They are provincially regulated, and in some cases offer mortgage products that qualify the borrower at the actual contract rate, or the contract rate plus 1%. And higher debt-service ratios might also be possible. Such institutions have enjoyed an increase in popularity in recent months.

Who is affected by the mortgage stress test rate?

If you’re buying a home, the mortgage rules have a direct impact on how much home you can afford. Most of the time, you have to prove you can still make your monthly mortgage payments if interest rates were to rise by 2% in the future.

And if you already have a mortgage, you’ll face a mortgage stress test if you refinance your home, take out a homeowner line of credit, or switch to a new lender (but not if you renew with the same lender).

How much mortgage can you afford with a household income of $120,000?

Suppose your household income is $120,000, you have good credit and you want to buy a condo in a major urban centre. Let’s say the property taxes are $2,400 and the condo maintenance/strata fees are $360 each month.

Conventional purchase with a down payment of 20% or more

Mortgage type Lender type Mortgage
Stress test rate Down payment Amz. Mortgage amount           possible
Variable Bank 3.35% 5.35% 20% or more 30 years $630,000
Fixed Bank 5.34% 7.34% 20% or more 30 years $515,000
Fixed Credit union 5.49% 5.49% 20% or more 30 years $720,000

The table demonstrates our point very well. An uninsured purchaser with at least 20% down might qualify for as little as $515,000 (fixed rate) or as much as $630,000 (variable rate). This is for identical borrowers and identical mortgage details. The only difference is the type of mortgage chosen with their bank or any A-lender.

And, with this specific credit union example, for a small rate premium, the borrower also enjoys expanded debt-service ratios. This results in a whopping $720,000 of mortgage potential. Again, same borrowers, same everything.

This all seems out of whack.

High-ratio purchase with a down payment of 10% or more

Now, let’s take this same borrower in all respects, except they have a down payment of less than 20%, and so the maximum amortization period is 25 years.

Mortgage type Lender type Mortgage
Stress test rate Down payment Amz. Mortgage amount           possible
Variable Bank/C.U. 2.70% 5.25% 10% 25 years $570,000
Fixed Bank 5.14% 7.14% 10% 25 years $480,000
Fixed Credit union 4.69% 6.69% 10% 25 years $500,000

There is still significant variability in the results. The 5-year fixed-rate mortgage from the bank will only get you $480,000, whereas the variable-rate choice will increase borrowing power by $90,000.

Looking at the two tables together tells us your borrowing power might be as low as $480,000 and as high as $720,000 depending on the type of mortgage you choose, the lender you work with, and of course the size of your down payment.

The takeaway

These days, you qualify for a larger mortgage with a variable-rate product or with a shorter fixed-rate term.

Additionally, you may qualify for a larger mortgage if your lender is a credit union or a private lender.

Some lenders will also offer expanded debt-service ratios (and thus greater borrowing power). This might be on an exception basis, or it might simply be how their offerings are structured, though not for high-ratio borrowers.

Clearly, mortgages in 2022 are much more complex than at any time in the past. It was not that long ago the question most asked was, “what’s your lowest rate?”

These days, there are other priorities.

More than ever, you need to be working with mortgage professionals with access to a wide array of lenders, and who possess a deep understanding of how to maximize your borrowing power. And of course, when it comes down to the short strokes, you still want the best possible rate for your circumstances.

Published by Ross Taylor

3 May

Reverse Mortgages and What to Know


Posted by: Kyra Park

For many Canadians who are looking to retire but currently facing high debt load and ongoing expenses, as well as reduced income, it can be a challenge. This is where the reverse mortgage can help!

This product is also a great option for anyone wanting to assist their elderly parents.

Instead of selling the home and moving them to a care home or assisted living, a reverse mortgage is a terrific way to access the equity in the home, month by month, to pay for in-home and ongoing care costs.

The goal of the reverse mortgage is to allow Canadians over 55 years to tap into the equity of their home, which assists in comfortable financial living. With a reverse mortgage, however, borrowers are not required to make regular payments. This allows them a considerable inflow of cash, without having to pay off what they owe! The only time payment will be required is when you sell or move out of your home.

Reverse mortgages are designed to allow you to access up to 55% of your home’s equity, thereby allowing you to convert your home equity into cash. This can be done as either a one-time lump sum payment, or you can choose to structure it to receive monthly payouts. Beyond being able to cash in on your home’s equity, a reverse mortgage has additional benefits including:

  • No monthly mortgage payments
  • No income or credit qualifications
  • Very low / little paperwork required
  • Title and ownership of property remain in homeowner’s name
  • Flexible options to break term early if needed
  • Penalty waived in the event of death or care home placement to preserve the estate

If you are struggling financially, or want to have a little extra equity on hand to pay off existing debts, gift money to family, expand your quality of life or simply increase your investment portfolio, contact me today! I would be happy to discuss the possibility of a reverse mortgage in further detail with you and ensure it is the best product to suit your needs.

Published by DLC Marketing Team

2 May

What Happens When Appraisal Values Come up Short?


Posted by: Kyra Park

For the first time in 2 years, the real estate market is cooling, which means occasionally houses may appraise for less than the agreed purchase price. Then what?

For the past two years, appraisal valuations have rarely fallen short. Instead, we routinely saw appraisals coming back at the purchase price—and often higher—due to the national pandemic-induced frenzy for real estate.

Since February of this year, the music has stopped playing in many markets across the nation, and the real estate marketplace is balancing out. Our Realtor colleagues report far more listings than before, meaning the supply problem we thought would never go away is suddenly less of a concern.

Raging inflation and rapidly rising interest rates have cooled off the market.

Now, there are situations where homes occasionally appraise for less than their agreed purchase price.

Does a low appraisal value kill a deal?

No, not necessarily. If the only thing off in the appraisal report is the price, the buyer just has to come up with additional funds to make up the shortfall and they’re good to go.

However, there’s also the possibility the appraisal raises other concerns, such as:

  • Identifying structural or mould issues.
  • There is a short economic life of the property.
  • The house is in below-average condition.

These and other such issues can kill your mortgage lender’s interest in your transaction, regardless of the valuation of the property.

What happens if your offer is firm, with no condition of financing?

You are obligated to complete your purchase at the agreed price. If the appraisal comes up light, but the property is otherwise acceptable, your lender is likely still prepared to offer you a mortgage. However, it may not be as big a mortgage as you hoped.

Suppose you agree to buy firm for $1,100,000. You are willing to put up 20%, or $220,000.

But, the property appraises at only $1,000,000.

Your lender will offer you a mortgage of $800,000, which is 80% of the appraised value.

You will have to come up with $300,000 to fulfill the purchase price of $1.1 million.

That’s an extra $80,000 you hopefully have at hand.

Will your pre-approval protect you if the appraisal is low?

Your pre-approval is not a guarantee you will receive the amount specified in your pre-approval certificate. Instead, it is an indication you may qualify for mortgage financing up to a certain amount, assuming everything else checks out.

The pre-approval is about you and your personal covenant. It has no property-specific information, which is always the unknown when looking to purchase.

In other words, your pre-approval has nothing to do with your appraisal coming in low.

What happens if your purchase is a high-ratio transaction?

Most of the time, a high-ratio mortgage (default-insured purchase) is approved without a formal appraisal. However, it can happen that the insurer (Canada Guaranty, Sagen or CMHC) requires an appraisal prior to issuing a commitment.

Your broker will not receive a copy of this appraisal, but they will be told if the valuation came in light or just right, and will share this verbal appraisal estimate with you.

If your offer to purchase included a financing clause, then a light appraisal will give you the option to either reduce your offer price, walk away from the purchase, or make up the difference from your own funds.

Can you debate the value with the appraiser?

No one really enjoys being second-guessed; it’s human nature. Appraisers do this for a living and they are licensed, trained professionals. They know what they are doing. More often than not, they will stick to their guns.

That said, if spoken to with respect and understanding, I have occasionally seen some movement in their opinion of value. I don’t think you should count on this, though.

As mortgage brokers, we can sometimes ask the appraiser not to send the report to the lender until we’ve had a chance to review it. This might lead to a discussion of the value, or may even result in asking a second appraisal company for their view on value.

Can you have a condition of appraisal clause?

Leaving one solitary condition like “subject to appraisal” might be the right way to go in this market. It tells the seller you are not worried about financing (getting a mortgage), which, coupled with your husky deposit and agreeable closing date, is a pretty respectable offer.

It also gives you an out, since withdrawing an offer following an appraisal should not cause you a problem, in my opinion.

The takeaway

It’s now time to exercise some caution when buying real estate. Things are changing quickly. Make sure you have a strategy in place so that if your appraisal comes in low, this would not devastate your personal finances or kill your accepted offer to purchase.

Don’t be shy about inserting a couple of conditions in your offer to purchase, just like we used to when the market was balanced and not skewed in favour of sellers. For the first time in years, you may have the time to make calculated decisions.

There is no predicting if this is just a speed bump till things settle down or if we are headed into a long-term correction. For some, this environment spells opportunity, and for others, it spells caution.

Published by Steve Huebl

20 Apr

Canadian Home Sales Begin to Slow in March.


Posted by: Kyra Park

Canadian March Home Sales Posted Their Biggest Decline Since June

Statistics released today by the Canadian Real Estate Association (CREA) show that rising interest rates were already dampening housing activity well before the Bank of Canada’s jumbo spike in the key policy rate in mid-April. National home sales fell back by 5.4% on a month-over-month basis in March. The decline puts activity back in line with where it had been since last fall (see chart below).


New Listings

The number of newly listed homes fell back by 5.5% on a month-over-month basis in March, following a jump in February. The monthly decline was led by Greater Vancouver, the Fraser Valley, Calgary and the GTA.

With sales and new listings falling in equal measure in March, the sales-to-new listings ratio stayed at 75.3% compared to 75.2% in February. The long-term average for the national sales-to-new listings ratio is 55.1%.

About two-thirds of local markets were seller’s markets based on the sales-to-new listings ratio is more than one standard deviation above its long-term mean in March 2022. The other third of local markets were in balanced market territory.

There were 1.8 months of inventory on a national basis at the end of March 2022 — up from a record-low of just 1.6 months in the previous three months. The long-term average for this measure is more than five months.


Home Prices

The Aggregate Composite MLS® HPI was up 1% on a month-over-month basis in March 2022 – a marked slowdown from the record 3.5% increase in February.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up by 27.1% on a year-over-year basis in March. The actual (not seasonally adjusted) national average home price was $796,000 in March 2022, up 11.2% from last year’s same month.


Bottom Line

The March housing report is ancient history, as sharp increases in market-driven interest rates have changed the fundamentals. This report also precedes the 50 basis point hike in the overnight policy rate by the Bank of Canada. Anecdotal evidence thus far in April suggests that new listings have risen, and multiple bidding has nearly disappeared.

The rise in current fixed mortgage rates means that homebuyers must qualify for uninsured mortgages at the offered mortgage rate plus 200 bps–above the 5.25% qualifying rate in place since June 2021. This, no doubt will squeeze some buyers out of higher-priced markets.

The federal budget introduced some initiatives to help first-time homebuyers and encourage housing construction–but these measures are hitting roadblocks. Labour shortages are plaguing the construction industry, and the feds do not control zoning and planning restrictions but at the local government level. The ban on foreign resident purchases will likely have only a small impact, so the fundamental issue of a housing shortage remains the biggest impediment to more affordable housing in Canada.


Published by Dr. Sherry Cooper & DLC Marketing Team

7 Feb

Get Used to the “Manhattanization” of our Urban Centres, OSFI Chief Says


Posted by: Kyra Park

High Prices and little spaces is what’s in store for Canada’s urban centres.

Younger Canadians wanting to live in Canada’s urban centres are going to have to get used to settling for smaller living spaces.

In other words, we’re witnessing the “Manhattanization” of our cities, according to Peter Routledge, head of the Office of the Superintendent of Financial Institutions (OSFI), which regulates the country’s federally regulated financial institutions.

“I think if Canadians want to live in big metropolitan areas, they’ll have to get used to the notion that they’re going to have to live in a smaller space,” he said during an interview on The Herle Burly podcast.

“Longer term, if the federal government can work with local and provincial governments in infrastructure investments to create zoning laws that will allow for densification, longer term we’ll be able to offer the Canadian dream of homeownership to more Canadians earlier in their lives,” he said.

“But you might live in 700 square feet instead of 2,100 square feet. But you’ll be able to walk out your street and your groceries are a block away, and your favourite two or three restaurants are four or five blocks away,” he added. “Culturally, I think we need to begin to accept…that’s the future of urban living in Canada.”

Routledge made the comments after being asked about the prospects of homeownership for younger Canadians who haven’t yet got their foot on the real estate ladder.

The hurdle for homeownership is becoming more challenging by the month. In January, the average selling price for a home in the Greater Toronto Area rose 28.6% year-over-year to $1,242,793, according to new data from the Toronto Regional Real Estate Board.

It’s an issue that Routledge sympathizes with, but admits there are no short-term solutions.

“Having prices correct down to the point where younger Canadians can jump into the housing market, that would be quite a shock for the system to absorb,” he said, adding that underlying factors, such as demand, aren’t going away anytime soon.

“I do think as rates go up, you’ll see some kind of normalization of prices and that may make it a little more accessible, but that’s not going to solve the problem,” he admitted. “The longer-term solution is to…bring up the construction of housing to a level that meets household formation.”

What’s behind rising prices?

There are a couple of key factors that have helped drive up prices, Routledge noted, one being the “thousands and thousands of really well-educated folks with financial resources” wanting to immigrate to Canada.

“Household formation in Canada is very, very high…probably the highest in the G7 on a population-adjusted basis. We’re not building dwellings, or housing units, fast enough for household formation,” he said.

The other component is an increase in purchases from the investor class. While investors typically make up between 15 and 17% of home sales in any given year, Routledge said that figure now stands at 22-23%, which he said is adding “significant” incremental demand into the system.

“There is a speculative fever that takes over private markets, and that’s what is playing out,” he said. Routledge added, however, that it appears we’re now at the latter stages of that phase. “My expectation is that, as rates go up, assuming they do, some of that fever is going to abate a little and you’ll see a slowdown in prices.”

House prices could fall in some markets by 10-20%

For some regions that have seen a “really rapid” rise in prices, Routledge said a decline of 10% to 20% is possible.

“But that will just be a return back to a little bit more sanity after a sudden build-up in prices,” he added.

Realistically, that would only take prices back six to 12 months in most markets.

After all, what’s a 10% pull-back in a market that’s seen a 20-30% increase in prices in the past year?

Published by Steve Huebl

26 Jan

No Rate Hike Until March–BoC Assures Inflation Will Return To 2% over 2023-24.


Posted by: Kyra Park

Bank Will Hike Rates At Next Meeting

While markets were 70% certain the Bank would hike their overnight target rate today, we remained of the view that the Governing Council would hold off until March or April because of the slowdown in first-quarter growth arising from the Omicron restrictions. The Bank announced today that economic slack in the economy had been absorbed more rapidly than expected in late October when they last met. “Employment is above pre-pandemic levels, businesses are having a hard time filling job openings, and wage increases are picking up. Unevenness across sectors remains, the Governing Council judges the economy is now operating close to its full capacity.”

Consequently, the Bank now believes that emergency measures arising from the pandemic are no longer necessary. They clearly state that a rising path for interest rates will be required to moderate domestic spending growth and bring inflation back to target. Being mindful that the increasing spread of Omicron will dampen spending in the first quarter, they decided to keep the policy rate unchanged today and to signal that rates will rise going forward. “The timing and pace of those increases will be guided by the Bank’s commitment to achieving the 2% inflation target.”

Notably, the Bank also suggested that another vital policy measure to reduce demand and thereby control inflation is “quantitative tightening” (Q.T.), reducing the central bank’s holdings of Canadian government bonds on its balance sheet. This selling of bonds also raises interest rates. “The Bank will keep the holdings of Government of Canada bonds on our balance sheet roughly constant at least until we begin to raise the policy interest rate. At that time, we will consider exiting the reinvestment phase and reducing the size of our balance sheet by allowing maturing Government of Canada bonds to roll off. As we have done in the past, before implementing changes to our balance sheet management, we will provide more information on our plans.”

The Bank of Canada is very concerned about maintaining its hard-won inflation-fighting credibility. Remember that while Canadian inflation is at a 30-year high–as it is in the rest of the world–at 4.8%, Canadian inflation pales compared to the 7.0% rate in the U.S. and 6.8% rate in the U.K. (see chart below). It is also below the pace of the Euro area. The Bank stated that “CPI inflation remains well above the target range and core measures of inflation have edged up since October. Persistent supply constraints are feeding through to a broader range of goods prices and, combined with higher food and energy prices, are expected to keep CPI inflation close to 5% in the first half of 2022. As supply shortages diminish, inflation is expected to decline reasonably quickly to about 3% by the end of this year and gradually ease towards the target over the projection period. Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target. The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation.”

Bottom Line

It surprises me that economists in Canada would expect the Bank to hike interest rates during a Covid lockdown without properly measured signalling beforehand. Bay St’s hysteria about inflation seems to have muddied thinking. The Bank will be taking out the big guns to get inflation under control. Overnight rate hikes begin at the next policy meeting on March 2 and then Quantitative Tightening shortly after that. The downsizing of the Bank’s balance could have even more dramatic effects on the shape of the yield curve, hiking longer-term interest rates.

In today’s policy statement and Monetary Policy Report, the Bank emphasized the strength of the housing market and the impact on inflation of the more than 20% rise in Canadian house prices last year. The MPR suggests that housing market activity strengthened again in recent months, led by a rebound in existing home sales.”Low borrowing rates and high disposable incomes continue to contribute to elevated levels of housing activity in the first quarter. At the same time, other factors that support demand, such as population growth, are also now picking up.”

Traders continue to bet that the Bank of Canada will hike interest rates by 25 basis points five or six times this year. This would take the overnight rate from 0.25% to 1.5% to 1.75%. It was 1.75% in February of 2020 before the pandemic easing began. Markets also expect two more rate hikes in 2023, taking the overnight rate to 2.25%.

Volatility in financial markets has surged this year. The FOMC, the US policy-making body, announces its decision at 2 PM ET today. No rate hike is expected yet, but the Fed will undoubtedly commit to serious rate hikes and balance sheet contraction in the coming months.

Published by Dr. Sherry Cooper & DLC Marketing Team

3 Nov

How a Mortgage Pre-Approval Can Protect You from Rising Rates


Posted by: Kyra Park


Over the past month, we have seen several fixed mortgage rate hikes from the banks and other lenders.

Whereas rates below 2% were readily available one month ago for most uninsured 5-year fixed mortgages, the average is now around 2.79% at most banks. We all suspected rates would rise eventually, but this is happening much sooner than expected.

Do Rising Interest Rates Affect Mortgage Pre-Approvals?

Rising interest rates make mortgage pre-approvals much more relevant and meaningful.

Not only does a mortgage pre-approval give you the lender’s estimate of your borrowing power, but it also offers you an interest rate hold for up to 120 days in many cases. In times of steady or declining rates, you barely pay attention to your pre-approval rate. But these days, this rate hold can be a total game-changer.

If you are pre-approved for a fixed-rate mortgage, you may find yourself in a very fortunate situation when rates increase, because as long as your mortgage funds while your pre-approval is valid, your mortgage lender should honour your pre-approval rate.

This past week, we have clients who completed their home purchase with pre-approved 5-year fixed rates of 1.89%; a rate that simply does not exist anymore for uninsured mortgages.

Is it Worth Getting a Mortgage Pre-Approval for a Variable-Rate Mortgage?

Yes, it absolutely is worthwhile. The rate for a variable-rate mortgage is expressed as a discount to the lender’s prime rate – and that discount is what could change during your pre-approval period.

Today, it is reasonably easy to get a variable-rate mortgage at 1.30%. With the Bank of Canada’s prime rate sitting at 2.45%, your variable rate is expressed as prime minus 1.15% (a discount from prime of 150 percentage points).

Your pre-approval will lock in that large discount regardless of changes to the prime rate itself.

But if you recall, in 2020 we saw a sudden and profound change to the discount for variable-rate mortgages in the early days of the pandemic. The discounts actually disappeared, and if you wanted a new variable-rate mortgage it would have been at the prime rate, or even higher.

Fortunately, this didn’t last too long. In time, order was restored to the markets, and so were the variable-rate discounts. But this experience proved it is also good to pre-approve a variable-rate mortgage.

Do Some Variable-Rate Mortgages Offer Fixed Payments?

If you are pre-approved for a variable-rate mortgage, in most cases your payment will be immediately affected by changes to the prime rate. But some lenders offer variable-rate mortgages where the payment remains constant throughout the term of the mortgage.

That can cushion the blow to your monthly cash flow, at least until your renewal date. In this scenario—where the payment remains the same—if rates rise, more money will go towards interest and less towards the principal. The opposite is true, of course, when rates fall.

This sort of variable-rate mortgage is quite compelling these days. Being able to lock in your mortgage payment at 1.30%, versus 2.79% for the fixed rate alternative, is appealing to home buyers and refinancing homeowners who are cash flow-conscious, above all else.

What are the Benefits of a Mortgage Pre-Approval?

  1. You have protection—or insurance—against higher rates during your pre-approval period (for many lenders, this can be up to 120 days). Let everyone else pay more than you, because your rate hold gave you every advantage with no disadvantages. If rates had fallen instead, you would still be a free agent and could benefit from those lower rates. So, with a pre-approval you can have your cake and eat it too.
  2. You know your borrowing power. This is so essential when buying a home, in particular. One of the worst things you can do is fall in love with a home that is not within your budget. But if you do find yourself in that situation, you must consider other means to solve the problem. For example, you can source a bigger down payment or ask a family member to co-sign your mortgage application. There are numerous occasions when having a co-signer for your mortgage is beneficial.
  3. In some cases, when you are pre-approved your credit has been checked and your application and documents have been reviewed. Note that this isn’t always the case, so be sure to ask your broker or lender. When you are house-shopping and find a property that you wish to make an offer on, you can ask your mortgage broker if the math works for that specific property. While this still isn’t a guarantee that you’ll be approved for the mortgage, the numbers can be run quickly in cases where you’ve submitted supporting documents and had a credit check as part of the pre-approval process.

The Takeaway

Many brokers and bankers do not go out of their way to offer mortgage pre-approvals. They feel it can be a waste of their time. After all, generally only a minority of pre-approved mortgages actually fund with the lender who pre-approved them, although that percentage increases in times of rising rates when many pre-approved rates are no longer available on the market. Additionally, a pre-approval often adds a slight premium to the rate.

But, in my view, this is short-sighted. A mortgage pre-approval is totally worth the effort. We owe our home-buying clients a mortgage pre-approval whenever possible. You can expect more people will jump on this bandwagon now that rates have started to climb higher.

Published by Steve Huebl

28 Oct

Hawkish Bank of Canada Decision.


Posted by: Kyra Park

Hawkish Bank of Canada Decision.

Bank of Canada Responds To Mounting Inflation: Ends QE and Hastens Timing of Rate Hike

The Bank of Canada surprised markets today with a more hawkish stance on inflation and the economy. The Bank released its widely anticipated October Monetary Policy Report (MPR) in which its key messages were:

  • The Canadian economy has accelerated robustly in the second half.
  • Labour markets have improved, especially in the hard-to-distance sectors. Despite continuing slack, many businesses can’t find appropriate workers quickly enough to meet demand.
  • Disruptions to global supply chains have worsened, limiting production and leading to both higher costs and higher prices.
  • The output gap is narrower than projected in July. The Bank now expects slack to be absorbed in Q2 or Q3 of next year, one quarter sooner than earlier projected.
  • Given persistent supply constraints and the increase in energy prices, the Bank expects inflation to stay above the control range for longer than previously anticipated before easing back to close to the 2 percent target by late 2022.
  • The Bank views the risks around this inflation outlook as roughly balanced.

In response to the Bank’s revised view, it announced that it is ending quantitative easing, shifting to the reinvestment phase, during which it will purchase Government of Canada bonds solely to replace maturing bonds. The Bank now owns about 45% of all outstanding GoC bonds.

The Bank today held its target for the overnight rate at the effective lower bound of 1/4 percent. While this was widely expected, the Bank adjusted its forward guidance. It moved up its guidance for the first hike in the overnight rate target by three months, from the second half of 2022 to the middle quarters–sometime between April and September.


Canadian bond traders had already bet a rate hike would occur in Q1 or Q2. Nevertheless, bond yields spiked at 10 AM today when the Bank released its policy decision (see chart below).


Bottom Line

Since the Bank last met in early September, the Government of Canada five-year bond yield has spiked from .80% by a whopping 60 basis points to a 1.40%. That is an incredible 75% rise. A year ago, the five-year bond yield was only .37%.

The Bank believes the surge in inflation is transitory, but that does not mean it will be brief. CPI inflation was 4.4% y/y in September and is expected to rise and average around 4.75% over the remainder of this year. Macklem now believes inflation will remain above the Bank’s 1%-to-3% target band until late next year.

There is also a good deal of uncertainty about the size of the slack in the economy. This is always hard to measure, especially now when unemployment remains elevated at 6.9%, while sectors such as restaurants and retail are fraught with labour shortages. Structural changes in the labour force are afoot. Many former restaurant employees have moved on or are reluctant to return to jobs where virus contagion risks and poor working conditions. There was also a surge in early retirements during the pandemic and a dearth of new immigrants.

Concerning housing, the MPR says the following: “Housing market activity is anticipated to remain elevated over 2022 and 2023 after having moderated from recent record-high levels. Increased immigration, solid income levels and favourable financing conditions will support ongoing strength. New construction will add to the supply of houses and should help soften house price growth”.

Published by Dr. Sherry Cooper

27 Oct

Bank of Canada Preview: Rate Hike Expectations Growing


Posted by: Kyra Park

Rate Hike Expectations still Growing.

With inflation well above the Bank of Canada’s target level and ongoing supply chain issues, expectations of earlier-than-expected interest rate hikes in 2022 are growing.

For much of the past year, the Bank of Canada had assured markets that interest rate hikes were off the table for at least the next year or longer. In January, the BoC had said, “We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved…In the Bank’s January projection, this does not happen until into 2023.”

Fast-forward to today, and rate hike expectations are growing by the week, with some seeing the first rate increases by mid-2022.

Scotiabank made headlines last week with its aggressive forecast for four quarter-point rate hikes in 2022, followed by four quarter-point hikes in 2023. That would mean a Bank of Canada target rate of 2.25% by the end of 2023—well above its current level of 0.25%, and higher than any other bank forecast.

No rate hikes are expected when the Bank meets this Wednesday, but all eyes will be on its statement and accompanying Monetary Policy Report for clues of a shifting outlook given the inflation and supply issues mentioned above.

Here’s a look at what some economists expect from the BoC at its Wednesday meeting:

On further winding down of Quantitative Easing (QE):

  • TD: “This winding down of emergency stimulus isn’t a shock for Canadians. The Bank of Canada has been leading the pack, cutting its government bond purchases over the last year and completely ending programs that were no longer needed (mortgage bond purchases, for example). We expect the Bank to make another reduction in its bond purchases in October and cease all net-new purchases at the beginning of 2022.” (Source)

On rate hike expectations:

  • BMO: “The interest rate landscape is shifting rapidly amid the sustained strength in a wide variety of inflation measures. Short-term bond yields have bolted higher as inflation has surged to the fastest pace in decades in many economies. Markets are now pricing in almost four rate hikes by the Bank of Canada by the end of 2022, compared with almost nothing just two short months ago.” (Source)
  • Desjardins: “Without the BoC even blinking, the 5‑year yield, one of the most influential rates in Canada’s financial ecosystem, is up nearly 47 basis points since early September. We expect it to rise by about 30 more basis points by the time the BoC finally hikes rates, meaning tightening is already underway. Which begs the question of why many appear to feel that the BoC should be in a rush.” (Source)

On inflation:

  • BMO: “Canadian inflation has broadened out from an initial rebound in beaten-down prices (gasoline) and reopening pressures (airfares, hotels), to supply-constrained items (autos, appliances), to homes, and now to food. We now expect headline inflation to average 3.3% both this year and next—in perspective, inflation has not averaged 3% for a single year since 1991, let alone two years in a row.” (Source)
  • RBC: “Central banks are acknowledging inflation will be more persistent than previously expected, but there’s little they can do to resolve supply chain bottlenecks and rising energy prices. Most continue to focus on supporting a complete economic recovery.”  (Source)
  • NBC: While other central banks (most notably, the BOE) have begun sounding the alarm on inflation, [Bank of Canada Governor] Tiff Macklem appears committed to the Bank’s transitory inflation narrative, reiterating this view in recent weeks. As such, we’re not looking for a significant change in tone, though we will likely get an acknowledgement of stronger-than-expected price hikes to date and potential upside risks ahead.” (Source)
  • Desjardins: “…our estimates show that the annual inflation rate reached a cyclical peak in September and could start to decline slowly in the coming months. Despite this encouraging prognosis, the risks of inflation continuing to rise in the coming months or remaining at its peak for longer are quite high.” (Source)

On GDP forecasts:

  • RBC: “We expect the central bank will revise its nearterm GDP projections lower in October. It was previously looking for 6% growth in 2021, whereas our latest call is 5.1%. Our forecast remains consistent with the banks guidance that economic slack will be absorbed in the second half of next year, though theres some risk that time-frame will be pushed back depending on how much of the recent growth shortfall is seen being made up in 2022.” (Source)
  • NBC: “With growth stumbling recently, markdown to the GDP outlook seems all but certain.” (Source)


Big 6 Bank Interest Rate Forecasts

Target Rate:
Year-end ’21
Target Rate:
Year-end ’22
Target Rate:
Year-end ’23
5-Year BoC Bond Yield:
Year-end ’21
5-Year BoC Bond Yield:
Year-end ’22
BMO 0.25% 0.50% NA 1.10% 1.35%
CIBC 0.25% 0.50% 1.25% NA NA
NBC 0.25% 1.00% 1.50% 1.30% 1.90%
RBC 0.25% 0.75% NA 1.10% 1.65%
Scotiabank 0.25% 1.25% 2.25% 1.40% 1.95%
TD Bank 0.25% 0.50% 1.50% 1.15% 1.75%

Article feature image: David Kawai/Bloomberg via Getty Images

Published by Steve Huebl
26 Oct

Canadian Inflation Rises Once Again.


Posted by: Kyra Park

Inflation Rises are no longer just talk, they are here.

Prices are Rising Everywhere–Transitory Can Last A Long Time

Today’s release of the September Consumer Price Index (CPI) for Canada showed year-over-year (y/y) inflation rising from 4.1% in August to 4.4%, its highest level since February 2003. Excluding gasoline, the CPI rose 3.5% y/y last month.

The monthly CPI rose 0.2% in September, at the same pace as in the prior month. Month-over-month CPI growth has been positive for nine consecutive months.

Today’s inflation is a global phenomenon–prices are rising everywhere, primarily due to the interplay between global supply disruptions and extreme weather conditions. Inflation in the US is the highest in the G7 (see chart below). The economy there rebounded earlier than elsewhere in the wake of easier Covid restrictions and more significant markups.

Central banks generally agree that the surge in inflation above the 2% target levels is transitory, but all now recognize that transitory can last a long time. Bank of Canada Governor Tiff Macklem acknowledged that supply chain disruptions are “dragging on” and said last week high inflation readings could “take a little longer to come back down”.

Prices rose y/y in every major category in September, with transportation prices (+9.1%) contributing the most to the all-items increase. Higher shelter (+4.8%) and food prices (+3.9%) also contributed to the growth in the all-items CPI for September.

Prices at the gas pump rose 32.8% compared with September last year. The contributors to the year-over-year gain include lower price levels in 2020 and reduced crude output by major oil-producing countries compared with pre-pandemic levels.

Gasoline prices fell 0.1% month over month in September, as uncertainty about global oil demand continued following the spread of the COVID-19 Delta variant (see charts below).

Bottom Line

Today’s CPI release was the last significant economic indicator before the Bank of Canada meeting next Wednesday, October 27. While no one expects the Bank of Canada to hike overnight rates next week, market-driven interest rates are up sharply (see charts below). Fixed mortgage rates are edging higher with the rise in 5-year Government of Canada bond yields. The right-hand chart below shows the yield curve today compared to one year ago. The curve is hinged at the steady 25 basis point overnight rate set by the BoC, but the chart shows that the yield curve has steepened sharply with the rise in market-determined longer-term interest rates.

Moreover, several market pundits on Bay Street call for the Bank of Canada to hike the overnight rate sooner than the Bank’s guidance suggests–the second half of next year. Traders are now betting that the Bank will begin to hike rates early next year. The overnight swaps market is currently pricing in three hikes in Canada by the end of 2022, which would bring the policy rate to 1.0%. Remember, they can be wrong. Given the global nature of the inflation pressures, it’s hard to imagine what tighter monetary policy in Canada could do to reduce these price pressures. The only thing it would accomplish is to slow economic activity in Canada vis-a-vis the rest of the world, particularly if the US Federal Reserve sticks to its plan to wait until 2023 to start hiking rates.

It is expected that the Bank will taper its bond-buying program once again to $1 billion, from the current pace of $2 billion.

The Bank will release its economic forecast next week in the Monetary Policy Report. It will need to raise Q3 inflation to 4.1% from its prior forecast of 3.9%.

Published by Dr. Sherry Cooper & DLC Marketing Team