Tag: interest rates

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Cottage Life

Is now the time to renegotiate your cottage mortgage?

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Have you heard about “Frugal February”? This social media trend encourages people to tackle all aspects of their finances throughout the month, no matter how small or big. For some, those goals are very big indeed, including renegotiating their mortgage.

Taking a long look at your mortgage is something that Ottawa mortgage broker Jacquie Bushell highly recommends, even if you don’t change anything. Having a robust discussion about your various options will leave you better informed and more confident about your finances (and no more feeling anxious when your nosy neighbour or pushy uncle says “Ya know what you should do with the cottage…”).

In the present economic climate, Bushell says, for the most part: “I’m in the camp of staying put… Rates are a little higher than what most people expect and nowhere near the sub-3 per cent mark. If there is no need to touch your mortgage, then don’t, and avoid a potentially higher rate than you currently have.”

Expenses are something that Ottawa and Toronto real estate lawyer Sabrina Ding wants clients to know about, noting that renegotiation often comes with costs. “Find out the penalty for ending your previous mortgage,” she says. “For example, if ‘Susan’ has a mortgage for $500,000 with a term of five years, and she decides to end her mortgage after only one year, then her interest penalty may be as high as $20,000 to $30,000. In contrast, if Susan can get a new mortgage with the same bank, then the bank will likely waive all interest penalties.”

However, Bushell notes that there are circumstances which make mortgage renegotiation a smart move these days, even when you take penalties into account: “If you are in an adjustable or variable rate mortgage and having troubles managing the increases, whether that’s financially or emotionally, you may want to consider converting to a fixed rate.” Ding echoes this sentiment, saying “A fixed rate means you get stability.”

Finally, Bushell points out that there might be special circumstances which warrant renegotiating your existing mortgage, including if you need to take out equity for debt repayment, renovations, or to build an emergency fund.“If you’re carrying large balances on your credit cards and/or lines of credit, you may want to exercise this option,” she says.

Before you make your final decision, make sure you understand the title requirements. Ding points out that the bank may require other family members to go on your cottage’s title for increased security if you have insufficient income. While it’s tempting to accept mom or dad’s nominal help, know that it comes with consequences. “If dad already has a property under his name, then going on the title to this second property means that he must pay expensive capital gains tax when this second property is sold,” says Ding.

In short, mortgage renegotiation is a good move for some cottage owners but unnecessary for others. However, everyone should know the rules, understand their options, and talk through their choices with a trusted professional.

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Mortgage stress test remains unchanged (for now) despite high interest rates

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High interest rates over the last 12 months have reduced purchasing power and made borrowing more expensive for Canadians. But the outlook isn’t all doom and gloom for cottage owners and cottage buyers to-be.

Last year, the Bank of Canada raised its key interest rate seven times to 4.25 per cent, its highest level since 2008, in effort to cool consumer spending and lower inflation. Canada’s five major banks moved to increase their prime lending rates 50 basis points, which increases borrowing costs for anyone with a variable rate loan.

In December, the Office of the Superintendent of Financial Institutions (OSFI) announced it would keep the minimum qualifying rate—a mechanism to test whether borrowers will still be able to afford their mortgage if interest rates rise—for uninsured mortgages unchanged at 5.25 per cent.

“In an environment characterized by sustained high inflation, rising mortgage interest rates, and potential risks to borrower income, it is prudent that lenders continue to test borrowers for adverse conditions,” said Tolga Yalkin, the OSFI assistant superintendent for Policy, Innovation, and Stakeholder Affairs, at a media briefing last month.

While the federal banking regulator’s stress test still hovers around 5 per cent, cottage buyers must show they can pay interest payments at 7 per cent—which reduces the size of a mortgage buyers can qualify for, says Ottawa-based mortgage broker Andrew Thake.

Experts say that the high interest rates have worked as intended to slow the demand for big ticket items such as housing and vehicles. Home sales in Canada declined by 3.3 per cent from October to November in 2022, according to CREA.

However, high interest rates have made paying off home and cottage mortgages a strain for those who have them and made it even more difficult for those who want to secure one.

For those looking to buy

Buyers looking for cottages who don’t qualify for a mortgage that is large enough to purchase the type of property they’re interested in may be able to qualify in a year and a half when the stress test rates go down. Those applying for a mortgage today will qualify for less than they would have, had they applied a few years ago.

“You’d either have to put more down, or you just have to settle for a smaller place,” says Thake.

Thake suggested that people looking to buy while interest rates are high could also look at a fixed-rate mortgage for a shorter period of time—think two or three years—and if rates settle down after that, they could look at renewing.

Sometimes, when rates go up, cottage buyers can find savings elsewhere. “Even though interest rates are a bit higher, the price of the cottage is probably substantially lower than what you paid a year or two ago in some markets.”

This month, the OSFI is reviewing Guideline B-20, which includes the minimum qualifying rate (MQR) and other mortgage lending measures. The office launched a public consultation on January 12, which will take place until April 14, 2023.

Among the measures the OSFI is considering are restrictions on how much banks can lend to people whose mortgage exceeds a certain percentage of their gross income. This is something banks already do, but the changes may include tightening up the restrictions, says Thake.

Other changes may also include new debt servicing coverage restrictions, which would limit how much borrowers’ mortgage payments comprise a percentage of their income. Currently, most banks limit a borrowers’ housing obligations to 39 per cent of their gross income, but some major banks push that to 49 per cent.

Additionally, the OSFI is considering implementing a new minimum interest rate that is applied in debt servicing calculations.

“They want to reduce risk in the industry. The OSFI is worried about exposure to heightened risk from a lot of debt, plus a potential recession and high interest rates,” Thake said. “They want to reduce the probability of borrower default.”

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Rising interest rates spurs renewed interest in vendor take-back mortgages

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Canadian cottage prices are still at record-highs despite the economy inching towards a recession. That’s why cash-strapped buyers are increasingly turning to an alternative financing options to purchase a cottage, including vendor take-back (VTB) mortgages.

With a VTB mortgage, the property seller is the lender. “No bank or mortgage broker is necessary with a VTB,” says Andrew Thake, a mortgage broker in Ottawa. “It’s essentially a private loan agreement between a seller and buyer.”

A VTB is often utilized as a second mortgage that supplements an initial mortgage from a traditional lender such as a bank. “The VTB can bridge the gap when a bank is unwilling to finance the entire purchase price of a property, and the buyer doesn’t have enough of a down payment to cover the rest,” says Thake.

Because conventional mortgage interest rates are on the rise, Thake adds it’s actually sellers who typically instigate a VTB to help close a sale when they’re having trouble finding a buyer. For example, buyers might struggle to qualify for mortgages on unique cottage properties that don’t meet major lender requirements. “You see this especially with remote properties without much direct access, or cottages that lack potable water,” says Thake. In those cases, or in other scenarios where their cottage simply isn’t attracting buyers, sellers can entice offers in this tough economy by proposing a VTB with generous terms.

If the terms are right for both parties, a VTB is a win-win: the buyer is able to afford their cottage, while the seller successfully closes a property that would otherwise have no takers— with the bonus of earning added profit from the VTB interest.

For sellers who prefer a clean break once the sale closes, Thake cautions that a VTB can potentially lead to an unwanted ongoing relationship with the buyer. “They will be more inclined to ask questions like, ‘how do you winterize this?’ or ‘where did you put the lock to the shed?’ if their financial commitment to you extends beyond closing,” he says.

Thake also advises transparency with all other parties when a VTB is in place: a bank may adjust its financing if it discovers an undisclosed agreement between the seller and buyer. “If everyone knows the numbers, there aren’t any unwelcome surprises.”

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Cottage Life

Bank of Canada raises interest rates for sixth consecutive time. Here’s what it means for cottage mortgages

Photo via Bank of Canada/YouTube

The Bank of Canada is once again raising interest rates. On Wednesday, the bank bumped its policy interest rate up 50 basis points to 3.75 per cent. This is the sixth consecutive hike since March, and the highest the rate has been since 2008. Canada’s major banks, including TD, RBC, and CIBC, are expected to follow suit, raising their prime lending rates by the same amount.

The increase will make it more expensive for Canadians to borrow money and pay off loans, including lines of credit, student loans, credit card payments, and mortgages.

Why are interest rates going up?

Inflation remains well above the bank’s target goal of two per cent. By raising interest rates, the bank is attempting to discourage Canadians from overspending, in turn lowering the inflation rate.

In June, inflation hit a 39-year high of 8.1 per cent. Since then, the rate has eased to 6.9 per cent, largely due to a fall in gas prices. But the bank’s governor, Tiff Macklem, says this isn’t enough.

“We have yet to see a generalized decline in price pressures,” he said, during a press conference. “The economy is still in excess demand. It’s overheated. Households and businesses want to buy more goods and services than the economy can produce, and this is driving prices up.”

Countries around the world are seeing similar inflation rates as they emerge from the COVID-19 pandemic. The global supply chain continues to be disrupted by COVID lockdowns in China and energy shortages caused by Russia’s attack on Ukraine. As a result, supply is diminished, which causes prices to rice.

“As economies slow and supply disruptions ease, global inflation is expected to come down,” the bank said in a statement.

How long will the rate hikes last?

The bank predicts that inflation will return to its target of two per cent by the end of 2024. But to make that happen, Macklem said that interest rates will need to increase further. “How much further will depend on how monetary policy is working to slow demand, how supply chains are resolving, and how inflation and inflation expectations are responding to this tightening cycle,” he said.

Macklem pointed out that the higher interest rates are already working. Demand has slowed in interest rate-sensitive parts of the economy, including housing and other big-ticket items, such as vehicles. He added that if current trends continue, future interest rate hikes may be smaller.

“We are getting closer, but we’re not there yet,” Macklem said.

What does this mean for mortgages?

Higher interest rates will put an added strain on mortgage holders, especially those paying off both a home and cottage mortgage.

“If you purchased [a fixed-rate mortgage] during the first part of COVID, or even just before COVID, you would have seen record-low interest rates,” said Robin Dillane, a mortgage broker with Haliburton Mortgage Services. “That’s fine until the mortgage comes due. Then it’s going to be really hard.”

Current fixed-rate mortgage holders could see their interest rates jump by two to three per cent when it’s time to renew, adding several hundred dollars to their monthly payments.

“During COVID, we were down to about 1.9 per cent on some fixed rates. Now you’re seeing percentages in the fives. And if they continue to raise, you’d probably see closer to the sixes,” Dillane said. “It’s going to make it hard for the average person.”

As for variable-rate mortgages holders, their monthly payments are already on the rise. Variable-rate payments fluctuate based on the bank’s interest rates. As rates continue to go up, there’s concern that variable-rate mortgage holders will pass their trigger rates. This is when interest rates have gone up so much that an individual’s monthly payments are only covering the interest and aren’t paying down any of the principal loan.

In August, RBC revealed that 80,000 of its customers were about to pass their trigger rates, adding an extra $200 to customers’ monthly payments.“Everybody’s is different, and you should be checking in your contracts for those trigger rates,” Dillane said.

Higher interest rates will also make it more difficult for people to pass the stress test to secure a mortgage. The stress test determines whether an individual will be able to pay their mortgage if interest rates increase. To qualify, they must show that they can pay the benchmark rate of 5.25 per cent or their lender’s rate plus two per cent, whichever’s higher. Since interest rates are up, it’s likely the lender’s rate will be higher. If the individual can’t afford mortgage payments at this rate, the bank won’t loan the money.

Dillane pointed out that there is a way around this. If the individual opts for a variable-rate mortgage, some banks will offer the loan at below their prime lending rate, making it easier to qualify. The only problem is that a variable-rate mortgage is much riskier as you can’t predict the monthly payments.

How do you prepare for interest rate hikes?

Fixed-rate mortgage holders worried about rising interest rates should calculate how much their monthly payments will go up at the time of renewal, based on current interest rates, Dillane said, then increase their monthly payments to that amount.

“The extra money that you’re putting on your mortgage, because you’re contracted at a low rate, goes directly off the principal, so when that mortgage is renewed, you actually have a lower principal amount,” she said. “If the rates are higher, you’re kind of buffering to still be able to afford that mortgage.”

By choosing to increase payments, it not only helps pay down the principal faster, but also gives the mortgage holder a sense of control over their budget, rather than having the increase forced on them, Dillane said.

While variable-rate mortgage holders can’t operate on the same predictability, they can adjust their payments. Work in round numbers, Dillane suggested. For instance, if the monthly payment is $1,125, round it up to $1,200. “You just built in an extra $75,” she said, “and you won’t even notice it over the course of the mortgage.”

Paying more up front may sound daunting, but according to Dillane: “It’ll reduce the amount of stress that you’re going to have when you have no option but to increase your payments.”

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Cottage Life

RBC predicts recession could hit early next year. Here’s who will be most affected

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The Royal Bank of Canada (RBC) has bumped up its recession prediction. Previously, the bank suggested that the Canadian economy might experience a moderate contraction in 2023. But in a report published on October 12, experts are now saying that Canadians should expect the recession to hit in the first quarter of the new year.

The exact date remains vague as experts have difficulty nailing down when a country enters a recession. Most define it as two consecutive quarters of declining gross domestic product. A more obvious sign is a surge in unemployment.

But what does a recession mean for cottage owners? According to Claire Fan, an RBC economist and one of the authors of the report, it could make owning a cottage more expensive.

Canada’s inflation rate remains aggressively high, sitting at seven per cent. This means that demand is still outpacing supply. The Bank of Canada is working to lower inflation to two per cent by raising interest rates. On September 7, the bank raised its policy interest rate to 3.25 per cent.

This makes it more expensive for Canadians to borrow money, including cottage mortgages. Whether a cottager’s mortgage payments will be impacted during the recession depends on the type of mortgage they’ve taken out, Fan says.

“A fixed-rate mortgage would see a much smaller impact from rising interest rates than a variable mortgage,” she says. This is because a fixed-rate mortgage is locked in for a certain number of years at a set interest rate, keeping monthly payments consistent. Whereas the monthly payments for a variable mortgage fluctuate with the Bank of Canada’s interest rates. However, a cottager with a fixed-rate mortgage could see a significant jump in their payments if their contract comes up for renewal when interest rates are still high.

Presently, there are no signs of interest rates going down. RBC says it expects the Bank of Canada to raise its policy interest rate to four per cent before the end of the year as it continues to fight inflation.

The rising interest rates are having a cooling effect on Canada’s real estate market, including cottages. After the cottage real estate boom of 2020 and 2021, high mortgage rates are starting to slow sales.

According to RBC, property resale across Canada has dropped by 36 per cent since February. Despite the drop, cottage prices remain similar to their 2021 levels. But RBC says it expects the nationwide benchmark property price to drop 14 per cent by next spring. This could make it a good time to buy a cottage, if you can qualify for a mortgage.

Besides higher mortgage rates and a slower real estate market, a recession could also make day-to-day purchases more expensive for cottagers. Fan says the high inflation rate is putting price pressure on everyday goods, such as food and gas. If it costs $100 in gas to drive to the cottage, owners may reconsider the trip.

Plus, RBC says that between interest and inflation rates, the average household’s purchasing power is expected to decline by $3,000 in 2023. Purchasing power is the amount of goods and services a household can buy based on their income. “If a household buys the same things again next year, how much more would it cost? And if their debt levels stay fixed at where they are today, how much more could they be expected to pay for those liabilities?” Fan says. To calculate this decline in purchasing power, RBC looks at the inflation forecast and the average household’s gross disposable income.

Another recession issue cottage owners need to be aware of is job loss. RBC predicts that the jobless rate will reach seven per cent by the end of 2023. If a cottage owner lost their job, it could make it difficult to afford mortgage payments. However, thanks to an excess of job openings caused by the pandemic, RBC expects job loss to be moderate in 2023 compared to past recessions.

All this to say, the recession won’t be distributed equally, leaving some cottagers unaffected. “This will weigh most heavily on Canadians at the lower end of the wealth spectrum, particularly those whose disposable income has faded alongside pandemic support,” RBC says.

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Cottage Life

Here’s what the Bank of Canada’s latest interest rate hike means for borrowers

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It might be time to reassess that budget—the Bank of Canada has once again hiked interest rates.

Last Wednesday, the country’s central bank raised its policy interest rate by 75 basis points to 3.25 per cent, the highest it’s been since 2008. Canada’s biggest banks, including TD and RBC, followed suit, raising their prime lending rates by the same amount.

By raising interest rates, the Bank of Canada is impacting the amount of money Canadians are able to borrow in the form of mortgages and lines of credit, as well as increasing the amount of interest customers have to pay on loans.

This is the fifth rate hike in approximately six months. The Bank of Canada continues to increase interest rates in an attempt to tackle runaway inflation. Earlier this summer, the inflation rate hit a 39-year high of 8.1 per cent. Thanks to a drop in gasoline prices, inflation has since eased to 7.6 per cent. But the bank says this isn’t a reason to relax.

“That has helped bring the pressure down on inflation,” said Carolyn Rogers, the Bank of Canada’s senior deputy governor, during a press conference. “Apart from that, though inflation has broadened and increased. Certainly the raises have helped, but commodities in general remain volatile, so there’s still a chance that we get pressure back up in the other direction.”

The war in Ukraine and COVID lockdowns in China continue to impact the supply chain, preventing manufacturers and suppliers from meeting demand. Rogers explained that demand in Canada remains strong, but to reach the bank’s goal of two per cent inflation, it needs to continue curbing demand through interest rate hikes until it balances with supply.

“We have seen some early signs that monetary policy is working. Interest-rate sensitive parts of the economy—the housing market being an obvious example—have seen some pull back,” Rogers said.

The one scenario that the bank is concerned about is if Canadians start to make long-term decisions based on the idea that a high rate of inflation is here to stay. “That’s the entrenchment that we talk about that would be damaging to the economy,” Rogers said. “If that starts to occur, it makes inflation much harder to get down. It means monetary policy has to do more and rates have to go higher to get inflation down.”

How long will the rate hikes last?

When asked whether interest rates are expected to keep increasing, Rogers was cagey with her response. “We’ll take the next decision when it comes,” she said. The bank is expected to reassess its rates on October 26.

In a report published around the end of August, CIBC theorized that the 3.25 per cent rate should remain throughout 2023 with no additional hikes. However, CIBC recanted this theory in a later report, saying: “We’ll be lifting our target for the end of this tightening cycle, with another 25-50 [basis points] on tap for October. Even in October, the Bank is likely to want to leave the door open for a further move until it gets more definitive evidence of a deceleration in growth and inflationary pressures. We see that as likely to be in evidence over the next two quarters.”

Rogers mirrored this statement during a speech last Thursday, saying it will take time to get inflation down and there could be bumps along the way.

What does this mean for mortgages?

Many mortgage holders across Canada are feeling the effects of increased interest rates. A mortgage is one of the most common types of debt held by Canadians. According to the Canadian Financial Capability Survey, in 2019, 40 per cent of Canadians had a mortgage, with the median amount of those mortgages being $200,000.

For those with a fixed-rate mortgage, the interest hike won’t affect them until they have to renew. CIBC estimates that approximately one-fifth of mortgage holders have to renew their fixed-rate contract in a given year.

As for mortgage holders with a variable rate, 70 per cent have fixed payments, meaning the payments don’t change, only the amortization period does. The other 30 per cent are feeling the immediate impacts of the rate hikes.

There is concern with the fixed-payment, variable-rate mortgages that the latest interest hike has caused many of them to reach their “trigger rate”. This means the interest rate has gone up so much that an individual’s monthly payments are only covering the interest and are not paying down any of the principal loan. If interest rates pass this trigger, monthly payments will go up. Those most affected will be individuals who took out loans in early 2020 when interest rates were at 0.25 per cent.

During a conference call discussing its third quarter earnings, RBC revealed that 80,000 of its customers are about to surpass their trigger rates, causing an average increase of about $200 per month. An individual’s monthly payment increase will depend on the size of the loan, the amortization period, and what the rate was when the customer borrowed the money.

Canadians may also have more difficulty qualifying for mortgages. Anyone making a down payment of less than 20 per cent on a property must pass Canada’s mortgage stress test. The test shows lenders that a borrower can make mortgage payments at either the rate offered by their lender or the Bank of Canada’s five-year fixed rate, whichever’s greater. As interest rates go up, so does the five-year fixed rate. It now sits at 4.33 per cent.

How do you prepare for interest rate hikes?

For those concerned about paying off their mortgage amidst interest rate hikes, the Canadian government suggests paying down as much of your debt as possible before an interest-rate increase. “If you have less debt, you may be able to pay it off more quickly. This will help you avoid financial stress caused by bigger loan payments,” the government said.

Other suggestions include cutting expenses so you have more money to pay down your debts, paying the debts with the highest interest rates first so that you’re spending less money on interest, consolidating debts with high interest rates into a lower interest-rate loan, and making sure you have an emergency fund to deal with unplanned costs.

As Rogers said during her press conference, the most important factor is to not let the idea of high inflation sway your long-term spending decisions, as this can negatively impact the Canadian economy

“The thing that the governing council is most focused on is getting inflation back to target,” she said.

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Cottage Life

RBC forecasts historic real estate market correction, including cottages

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The Royal Bank of Canada is forecasting a “historic correction” to Canada’s real estate market after two frenzied years of buying, and cottage country will feel the impact.

In its latest housing report, RBC assistant chief economist Robert Hogue says that the bank expects home sales to fall 23 per cent this year and 15 per cent next year, eventually culminating in a 42 per cent drop from the start of 2021. That’s a larger decline than any of the past four national downturns (-33 per cent in 1981–1982, -33 per cent in 1989–1990, -38 per cent in 2008–2009, and -20 per cent in 2016–2018). Along with the drop in sales, the national benchmark price will fall 12 per cent by the second quarter of 2023.

The drop in sales and prices is a result of rising inflation caused by COVID-19 and Russia’s invasion of Ukraine. In May, Canada’s inflation rate reached 7.7 per cent, the largest yearly increase in almost four decades.

To combat rising inflation, the Bank of Canada is raising interest rates, making it more expensive to take out loans, such as mortgages. In July, the Bank of Canada raised its interest rate an entire percentage point to 2.5 per cent. In the RBC report, Hogue says he expects the interest rate to continue rising, reaching 3.25 per cent by October.

Ontario and B.C.’s real estate markets are expected to be hit the hardest, specifically high-priced areas sensitive to interest rates, such as Toronto, Vancouver, and Victoria. Over the next year, RBC predicts that property sales in Ontario and B.C. will fall 38 per cent and 45 per cent respectively, with prices dropping 14 per cent.

The average property price in Ontario has already fallen 7.6 per cent this year, and 4.9 per cent in B.C.

Within these markets, some of the first properties impacted will be cottages. “With consumer spend, what we expect is the consumers to stop purchasing things that are discretionary and keep buying the necessities. That same logic applies to the housing market. If [people] don’t need a cottage, this is probably not really the best time to go out and look for one,” says Claire Fan, an RBC economist.

Out of Canada’s cottage country areas, it’s the markets around Toronto and Vancouver that will experience the greatest changes, Fan says.

“Those markets saw the most uprising in both prices and retail volumes over the course of the pandemic because people were looking for more space,” she says. “But a lot of these markets that saw the biggest price appreciation over the course of the pandemic are the ones that are getting hit the hardest at the moment because larger prices come with pricier mortgages, and those are the most interest-rate sensitive.”

Areas farther away from high-priced urban centres should remain more stable. And Canada’s other provinces won’t be hit as hard as Ontario and B.C. “We project prices to slip less than 3 per cent in Alberta and Saskatchewan, and between 5 per cent and 8 per cent in the majority of other provinces by the first half of 2023,” Hogue says in the report.

While none of this is great news for home or cottage buyers, RBC does expect the real estate market correction to end sometime in the first half of 2023. “We’d argue the unfolding downturn should be seen as a welcome cool-down following a two year-long frenzy that put a huge financial burden on many new homeowners and made ownership dreams harder to achieve,” Hogue says.

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Cottage Life

Cottage mortgages jump as Bank of Canada raises interest rate to 2.5 per cent

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Cottage owners paying off a mortgage got some bad news on Wednesday after the Bank of Canada raised its policy interest rate a full percentage to 2.5 per cent, the largest one-time increase since 1998.

“An increase of this magnitude at one meeting is very unusual. It reflects very unusual economic circumstances,” said Tiff Macklem, Governor of the Bank of Canada, during a press conference.

The Bank of Canada introduced the hike in response to the country’s runaway inflation rate. In May, Canada’s inflation rate rose to 7.7 per cent, the largest yearly increase since January 1983. As a result, the price of groceries, gas, and other necessities has risen in the last several months.

Inflation is caused when demand is greater than supply. According to Macklem, the factors driving inflation in Canada, as well as the rest of the world, include Russia’s invasion of Ukraine, the dizzying price of oil, pent up demand caused by the pandemic, and continued supply chain disruptions. By raising interest rates, the Bank of Canada hopes to dissuade people from borrowing money and making purchases, cooling the market and allowing supply to catch up with demand.

The downside of increasing interest rates is that it makes borrowing money more expensive, including student loans, lines of credit, and mortgages. The real estate market is already seeing the effects as sales volume begins to slow. “People qualify for smaller mortgage loans, and they perceive a higher cost. It’s just less appetizing to pay more interest,” said Tom Davidoff, an economics and real estate professor at the University of British Columbia. “It’s just money out of your pocket.”

Cottage prices in Canada are expected to reach an average high of $640,710 in 2022, according to Royal LePage, and have yet to see a significant dip. But Davidoff said that the slowing sales volume is an indication that a price drop will follow.

Individuals who purchased a cottage during the pandemic with a variable rate mortgage will be feeling the effects of the rate increase, while those who took out a fixed rate mortgage should be protected against the increase for the next few years.

Another concern with rising interest rates is that both Canada and the U.S. are headed for a recession. The stock market indicates pessimism on part of the investors, explained Davidoff, “The ratio of price to earnings on stocks has really plummeted.”

On the other hand, Davidoff added that our job market and housing demand have remained strong. “So, there’s a long way to go before a recession.”

For the time being, Canadians should expect further increases in the Bank of Canada’s interest rate. “We are increasing our policy interest rate quickly to prevent high inflation from becoming entrenched. If it does, it will be more painful for the economy—and for Canadians—to get inflation back down,” Macklem said.

The bank’s goal is to get inflation back to its 2 per cent target by 2024. The bank is scheduled to make its next interest rate announcement on September 7.

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Cottage Life

Cottage mortgage payments could increase by 45 per cent in the next three years

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Rising interest rates could cause cottage owners who took out a variable-rate mortgage in 2020-2021 to experience a 45 per cent jump in payments by 2025-2026, said the Bank of Canada in its Financial System Review. The bank did specify that this number is hypothetical and is based on further increases to Canada’s mortgage rate.

Considering the bank increased interest rates by 50-basis-points in both April and June, however, the chances of further increases are likely. The bank intends to reassess interest rates in July.

By increasing interest rates, the bank is attempting to cool market demand and combat the elevated inflation level, which reached a 31-year high of 6.8 per cent in May. While intended to lower the cost of living, the increased interest rates are causing a spike in mortgage payments.

“It’s like red flashing lights in our face. [Mortgage rates] have been climbing so aggressively, fixed and variable,” says Andrew Thake, a mortgage broker based in Ottawa. “Fixed rates were in the one to two per cent range a few months back, and now they’re almost at five per cent with the major banks.”

A five-year, fixed-rate mortgage tends to be the most popular mortgage package, Thake says. This means that the property owner is locked in at a certain rate for five years. Therefore, a property owner who took a mortgage out before the interest rates started to increase is currently unaffected. But once those five years are up and the property owner has to renew their mortgage, they’re likely to see a major jump in payments.

Similar to the 45 per cent increase in high loan-to-income variable-rate mortgages, the Bank of Canada hypothesized that a high loan-to-income fixed-rate mortgage taken out in 2020-2021 would also increase by 2025-2026, jumping 26 per cent. Mortgages obtained in 2020-2021 are expected to see the largest increase because they were taken out when rates were at record lows.

At the moment, Thake says the fixed-rate mortgages are rising much faster than variable-rate mortgages, which fluctuate and are based off the Bank of Canada’s overnight lending rate. This means that a variable-rate mortgage is giving people more purchasing power.

“If a household made $150,000, they had no debt, their current home was paid off with 20 per cent down, and they’re using a variable interest rate, they would qualify for a $940,000 loan,” Thake says. “But if that very same client used a fixed rate, they would qualify for about $820,000. That’s a massive difference.”

For Canadians who did take out large mortgages during the pandemic, the Bank of Canada says that these highly indebted households are a vulnerability to the financial system, especially if household incomes don’t increase along with interest rates.

But Thake says it’s unlikely we’ll see a major spike in defaulted mortgages in the near future. This is because anyone who took out a mortgage had to pass the mortgage stress test. This test shows lenders that you’ll still be able to make your monthly payments even if interest rates rise.

To pass the stress test, you have to show your lender that you can meet the Bank of Canada’s minimum qualifying rate, which was increased from 4.79 per cent to 5.25 per cent in June 2021, and is based on the mode average of fixed rates posted over the last five years by Canada’s big banks, or you must meet the mortgage rate offered by your lender plus two per cent, whichever’s higher.

The issue, Thake says, is that since fixed-rate mortgages have climbed so aggressively, they now sit around five per cent, which when you add the lender’s two per cent makes them closer to seven per cent. This means that potential buyers won’t be able to qualify for as large a mortgage as they could in previous years.

Additionally, since mortgage rates are rising so quickly, potential buyers might be pre-approved for a mortgage one week, but then no longer qualify for that mortgage a week later after the rate’s been raised. To make sure you’re on top of increasing rates, Thake suggests working with a mortgage broker.

“When’s the last time your bank called you and updated you on rates?” he says. “A broker manages a client like a financial planner does. We have a pool of 500 clients, and they get day-to-day devotion. We only really earn our living if we service that client and everything goes through smoothly.”

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Cottage Life

Interest rates just went up—here’s what it means for cottage country

Photo by Shutterstock/AevanStock

On April 13, the Bank of Canada raised its policy interest rate by half a percentage point to one per cent—the biggest increase since May 2000. The move comes after Canada’s inflation rate hit a 31-year high of 6.7 per cent.

“Much of the inflation we’re experiencing today is coming from international factors. The war in Ukraine has pushed commodity prices higher. It’s further disrupted global supply chains, and that’s the principal reason why our inflation forecast is revised up,” said Bank of Canada governor Tiff Macklem during a press conference.

Canada’s inflation target usually sits between one to three per cent. Six per cent puts us well over, causing the price of goods and services to go up. This is because inflation is caused by an inbalance between supply and demand. Throughout the pandemic, demand for certain commodities, such as oil, dropped, so there was less incentive to drill for new oil reserves, says Angelo Melino, an economics professor at the University of Toronto. “But when the world economy warmed up, we were caught with less [oil] supply than we’ve normally had.”

The same goes for other products. During the pandemic, everyone bought items they could use from home, such as Peloton bikes and free weights. But now people are returning to gyms, bars, restaurants, theatres, etc., resulting in service inflation, Melino says. The sudden shifts in demand cause supply chain constraints, which are now being exacerbated by the war in the Ukraine.

By raising interest rates, the Bank of Canada said it expects to reach its inflation target of two per cent by 2024. Higher interest rates discourage people from borrowing money, which reduces spending, slowing down the economy, and putting the brakes on inflation. The only issue is if the Bank of Canada raises interest rates by too much, Melino says, it can stop the economy from growing and create a recession. He expects the Bank of Canada’s policy interest rate to rise from one to two per cent over the next year.

This has a major impact on mortgage rates. When the pandemic first hit Canada in March 2020, the Bank of Canada slashed its policy interest rate to 0.25 per cent in an attempt to bolster the economy. Low mortgage rates combined with the ability to work remotely and the desire to escape urban areas made cottages hot commodities during the pandemic. This demand has driven up cottage prices. In fact, Royal LePage reported that the national aggregate price of a recreational property in 2021 jumped 27 per cent.

But rising mortgage rates are expected to cool the real estate market. “It doesn’t directly affect the housing market in the sense of prices, but it does affect the buying,” says Lisa Hannam, the executive editor of MoneySense. “We are currently in a seller’s market, so it does seem a little bleak if you’re trying to get into it.”

The tapering off of cottage prices won’t happen overnight. It’s expected to be a drawn-out process, which could lead to some disconnect between buyers and sellers. “We have sellers who are holding on to the 2020 and 2021 prices,” Hannam says, “and then you have the buyers who are thinking about 2023, 2024 prices. So, you’re probably going to negotiate a lot more than you expected.”

If you are planning to buy a cottage, Hannam says that you shouldn’t solely fixate on mortgage rates. “Always think about your long term goals, and don’t make emotional purchases. Look at the hard facts of buying real estate. There are things in addition to the mortgage and the down payment. You have to look at property taxes, maintenance, electricity, phone bills, cottage association fees, and cottages tend to be older than a primary residence, so there may be renovations,” she says.

“The mortgage rate changes will come into play, but don’t get sidetracked from the overall cost of a cottage.”