Tag: mortgage rates

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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

Everything you need to know to apply for a cottage mortgage

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So you’re planning to buy a cottage. You’ve probably spent months perusing listings, figuring out what type of property you want, and meeting with realtors. The next step in purchasing your dream cottage is getting pre-approved for a mortgage. This can feel like a daunting process, especially if you’re already paying off a mortgage on your house. To help smooth the way, we’ve assembled all the tips you need to secure a cottage mortgage.

What does a broker look for in a cottage mortgage application?

It’s all about the debt-to-income ratio, says Andrew Thake, a mortgage broker based out of Ottawa. To gain a broker’s confidence, you want to show them that you have a good credit score—typically 680 or higher. To get a good credit score, you need to be paying off your debts on time, including credit cards and other mortgages.

“Even if they had $100,000 on credit cards, that’s fine, as long as they’re paying them on time,” Thake says. “As long as there’s enough income to cover the debt, someone could really have as many debts as they want.”

Savings are a great cushion when taking out a second mortgage, but it won’t do much to sway a broker into approving your application. “Whether you have $10,000 in the bank or $10 million in the bank, that’s nice, but it’s not a heavy application decision-making factor,” Thake says. A broker wants to see that you have the income necessary to cover the mortgage payments and any other outstanding debts.

What type of cottage is it?

Once a broker has pre-approved your mortgage application, they’re going to want to talk about the type of cottage you’re looking for and which lenders would work best for your situation. Traditional lenders, such as banks, like a multi-season place, Thake says. “A three-season or four-season cottage, it’s no different than if someone came and said, ‘I want to buy a condo downtown.’”

These are cottages that could be used as a primary residence with a secure foundation; access from a municipally-maintained road; a permanent heat source, such as a furnace or boiler; and potable running water—this includes a well or water from the lake run through a filtration system. These types of properties typically only require a five to 10 per cent down payment.

On the other hand, a summer-only cottage drastically changes your lending options. Cottages on islands or isolated, rural locations are less appealing to lenders because if you default on your payment, it’s harder for them to resell the property. This includes cottages that don’t have electricity or running water, and aren’t easily accessible by road.

In these circumstances, it’s unlikely a bank will lend you the money, so you may have to turn to a private lender, Thake says. This means a larger down payment (closer to 20 per cent) and higher interest rates (six to nine per cent).

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What’s the cottage being used for?

Um…relaxing? This may seem like an odd question, but not everyone buys a cottage to lounge lakeside and take in the surrounding nature. Some buyers may be planning to rent the cottage out, or renovate the property and flip it. These both affect the type of mortgage you’ll need.

If you plan to rent out the cottage, you’ll need to secure a rental property mortgage. This, again, may require a private lender, as opposed to a bank, and typically means a down payment of at least 20 per cent. The interest rate on the mortgage will also be higher. Generally, expect between one to three per cent more interest points on a rental property mortgage than on a standard mortgage.

If you’re renovating the cottage, you should be able to secure a standard mortgage unless the cottage is uninhabitable. In this situation, you’ll need to apply for a construction mortgage or a private mortgage from a private lender, Thake says. This again means a down payment closer to 20 per cent as well as a higher interest rate than a standard mortgage. If you renovate the cottage to the point where it is habitable, you may be able to refinance your mortgage and apply for better terms through a standard mortgage with the bank.

Can you predict the mortgage’s rates and down payment?

Not ready to put in an offer until you know the terms of the mortgage? A broker can help with that. If you’ve settled on the type of property you’re interested in, Thake suggests sending your broker sample listings of desirable cottages.

They don’t have to be cottages you want to submit an offer on. They don’t even have to be cottages in the area you want to buy in, Thake says. But having samples will help your broker secure your mortgage faster when you’re ready to buy.

“It’s a lot easier to have that live property example where we can send it out to a dozen lenders and get some sample terms, like rates and down payment amounts,” Thake says. “That way, when the client does find the place they want, it’s kind of like a clone to what they’ve sent us as the sample.”

How do you finance the mortgage?

When buying a cottage, the down payment for the mortgage doesn’t have to come out of your savings. If you already have a mortgage on your house, you can borrow equity from that mortgage to help pay the down payment. Here’s how Thake explains it:

Say you bought a house for $500,000 and you’ve already paid off $250,000 of that mortgage. That $250,000 that you’ve paid is considered equity that you can borrow from if needed. If you’re buying a $500,000 cottage, you could refinance the mortgage on your house and borrow $100,000 of that $250,000 you’ve paid (you can borrow up to a max of 80 per cent of the property’s value). You can then use that $100,000 for your cottage down payment. Borrowing that $100,000 bumps your house mortgage back up to $350,000, but it brings your cottage mortgage down to $400,000 without depleting your savings.

This may sound complex, but there aren’t a lot of secrets to cottage mortgages, according to Thake. “We really just want to make sure there’s enough debt to cover this new mortgage,” he says, “and if they are looking to borrow the down payment from their existing home, that there’s enough income to carry that as well.”

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Categories
Cottage Life

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

Photo by Shutterstock/Elena Berd

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.