Tag: récession

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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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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

Cottage Q&A: Should I buy a cottage during a recession?

Photo by YAKOBCHUK VIACHESLAV/Shutterstock

Predictions of a coming recession have been thrown around a lot lately. Most experts say  Canada will be hit in 2023. To many Canadians, though, the Bank of Canada’s aggressive interest rate hikes, record-high inflation, and the current cost of living crisis make the recession feel like it’s already here.

For potential buyers looking to wade into the cottage real estate market, talk of a recession could make you second guess your choice. What will this do to the market? Is it actually a good time to buy? Before you panic, take a read through our guide. We’ll break down everything you need to know about buying a cottage during a recession.

What is a recession?

Even economists have trouble pinning down exactly when a country slips into a recession. The rough definition is that a country has entered a recession when it experiences two consecutive quarters of negative GDP growth. GDP increases when a country has a strong, productive labour force. That’s why a recession is often marked by high levels of unemployment.

Currently, the economy is coming off a high from the COVID-19 pandemic. While certain industries did suffer, demand in many, such as the cottage real estate market, skyrocketed. Thanks to low-interest rates and high savings, people were looking to spend. That, however, resulted in a high inflation rate and increased interest rates. These two factors lead to another recession marker: low spend.

How would a recession impact cottage prices?

Where they stand now, cottage prices remain high, says Haliburton realtor Shirley Rule. “In August, in Haliburton, the prices were actually up from a year ago, quite a bit. Now, the number of properties for sale is down by 40 per cent, but the sale prices were up,” she says. “And September seems to be holding its own compared to last September.”

According to Royal LePage’s 2022 Recreational Property Report, the average price of a waterfront property in Canada is expected to increase by 13 per cent this year to $640,710. Rule adds that despite the drop in sales volume, she’s still seeing demand, with multiple offers being placed on well-priced cottages with appealing shorelines that don’t need too many renovations.

This is a good sign that the market isn’t collapsing. But it still needs to be taken into consideration that cottages are a discretionary purchase. If a recession hit, the financial strain would likely cause sales volume to drop further and leave properties sitting on the market for longer. If this happened, it’s possible prices would start dropping to ensure the properties continued to sell.

But Rule points out that, unlike homes, there are only so many waterfront properties available at a given time. The limited supply could prevent a significant price drop. “There’s always going to be people wanting them at some point,” she says.

What are the pros of buying a cottage during a recession?

The pandemic brought a sellers market to cottage country. Not being able to vacation abroad, people started buying cottages as a way to escape urban centres. This increase in demand limited the supply of cottages available, driving up prices. According to Royal LePage, in 2021, the average price of a waterfront property jumped by 21.5 per cent.

But as borders have reopened and the Bank of Canada continues to hike interest rates, affecting mortgages, cottage demand has slowed. Rule says the market is starting to balance out again between buyers and sellers. If a recession hit and demand slowed further, power could shift to the buyer.

With less competition and cottages sitting on the market for longer, it gives you more leverage as a buyer. You can negotiate on price and include conditions with the sale. During the pandemic, demand was so high that buyers risked losing the sale by adding conditions, such as a home inspection. “It’s starting to get back into that now where a lot of our sales are conditional,” Rule says.

Cottage Q&A: What does selling “as is” mean?

She also advises people to be smart with their timing. Look to buy in the fall, Rule says. People who don’t want to take care of a cottage over the winter are looking to offload the property, increasing supply. Plus, summer’s over, so not as many people are thinking about buying a cottage, limiting demand. If you’re set on buying a cottage during a recession, fall is a good time to snag a deal.

What are the cons of buying a cottage during a recession?

A recession does, unfortunately, come with cons. Despite having your heart set on buying a cottage, you could experience some form of financial instability, such as losing your job. This kind of instability makes money lenders, such as banks, nervous. They don’t want to risk you defaulting on payments.

That’s why Rule stresses that you need to be certain you’ll qualify for your mortgage before putting in an offer. “The banks will ask for an appraisal. If the appraisal comes in lower than what [you’re] paying for it, then there are going to be issues,” she says. If this happens, the bank is unlikely to loan you more than the appraised value.

Mortgages are also difficult to qualify for right now. Rule says that the high qualifying standards of the current mortgage stress test are a major factor in slowing down sales volume.

Typically, during a recession, the Bank of Canada will lower interest rates to help stimulate the economy, as it did at the beginning of the pandemic. But currently, we’re coming off of a 39-year high inflation rate and the bank’s policy interest rate is sitting at 3.25 per cent, the highest it’s been since 2008. This means you’ll qualify for a lower mortgage amount than you would have a year ago, and your monthly payments will be higher.

There’s a chance that if we enter a recession, the inflation rate may drop and the bank can once again lower interest rates, allowing buyers to get better deals. But as it stands, experts are predicting interest rates to continue going up in the short term.

Regardless of whether we do enter a recession, Rule predicts that the wheels of the cottage real estate market will continue to turn. “There are still buyers out there who are eager to get something,” she says. “But they’re also being very picky about what to get. They want to make sure they’re getting what they want. You can’t blame them.”

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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

What the new gas tax cut in Ontario means for your cottage commute

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With a trip to the cottage costing you $100 in gas (give or take, depending on your vehicle) heading north is becoming cost-prohibitive for cottagers and renters alike. To help combat the soaring gas prices, Ontario Premier Doug Ford cut the gas tax by 5.7 cents per litre on July 1. The tax cut will remain in effect until December 31, with the possibility of an extension if prices remain inflated.

“People and businesses are feeling the pinch of high gas prices and grocery bills,” says Peter Bethlenfalvy, Ontario’s Minister of Finance, in a statement. “Our government is cutting the gas and fuel tax rates to put money back in people’s pockets and help keep costs down.”

On July 1, when the Ontario government implemented the gas tax cut, prices dropped 11 cents overnight to an average of $193.9 cents per litre. This came as much-needed relief for drivers after gas prices hit a record high of $2.15 in early June.

The province’s dizzyingly high gas prices are the result of low supply and high demand. “We’ve got crude oil inventories down 13 per cent—according to the last U.S. government report—which is not good,” says Roger McKnight, chief petroleum analyst for En-Pro. “That’s why prices went up.”

The reopening of the economy after the COVID-19 pandemic and Russia’s invasion of Ukraine has put constraints on the global supply of gas and oil, driving up inflation rates.

Gas prices in Canada have also been hiked by the federal government’s carbon tax, which was bumped up to 11.05 cents per litre on April 1.

Despite concerns over Ontario’s record-setting gas prices, McKnight says they aren’t likely to last. As of July 7, gas prices in Ontario dropped another 12 cents per litre to $1.79. Again, a relief to drivers, but the underlying cause for the price drop is concerning. Economists are predicting a recession, McKnight says. “Unless there’s some glimmer of hope or some optimism on Wall Street that this recession will not happen, then prices will continue to fall in the short term.”

If a recession does hit, which is possible considering the Bank of Canada continues to raise interest rates, then demand for gas will drop as people lose jobs and attempt to save money.

A recession is a possible outcome that people need to be prepared for, McKnight says. But for the time being, if he were a consumer watching gas prices drop 12 cents per litre or more, “I’d hop in my car and get on with this driving season. I don’t know how long it will last…I can’t see prices spiking or reversing anytime in the immediate future. So, have some fun.”

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Travelers Profit From Recession

For travelers who have not lost money during the current economic crisis, recession is a godsend. Hotels across the world, who are affected by a decline in occupancy, are lowering their prices.

Hotels are lowering their prices for hotel rooms on average by 17%. According to the price index for hotels published today on Hotels.com, this decrease is the lowest they have seen in the last 5 years and comes as no surprise that it is due to the recession.

The study involved 78 000 hotels in over 13 000 destinations worldwide, and thus represents an accurate picture of the market.

"", said David Roche, president of Hotels.com.

To further demonstrate the impact of the recession, Roche said that Moscow and New York, two cities with the most expensive hotel rooms, have recorded a decrease in their rooms of 39% and 23%, respectively.

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Nouvelles quotidiennes

Big Hotels Sacrifice Their Stars

To ensure their survival and profitability, certain hotel chains, like the Starwood Hotels and Resorts Worldwide, owner of the prestigious St. Regis and W Hotels, are willing to let go some of their star classification.

These stars, often gained from pain and misery over the years, have now become an obstacle for them to survive duirng the current economic crisis.

Certain hotels must cut some services to visitors in order for them to offer more affordable prices, thus leading to a new classification. 

Stars are awarded according to the extras offered to clients at the hotel, including restaurants, bars, room service, porters, laundry, gyms, pools and massages, to name a few.