25 Jul

Bank of Canada reduces policy rate by 25 basis points to 4½%

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Posted by: Dean Kimoto

The following is re-posted from the Bank of Canada website

The Bank of Canada today reduced its target for the overnight rate to 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank is continuing its policy of balance sheet normalization.

The global economy is expected to continue expanding at an annual rate of about 3% through 2026. While inflation is still above central bank targets in most advanced economies, it is forecast to ease gradually. In the United States, the anticipated economic slowdown is materializing, with consumption growth moderating. US inflation looks to have resumed its downward path. In the euro area, growth is picking up following a weak 2023. China’s economy is growing modestly, with weak domestic demand partially offset by strong exports. Global financial conditions have eased, with lower bond yields, buoyant equity prices, and robust corporate debt issuance. The Canadian dollar has been relatively stable and oil prices are around the levels assumed in April’s Monetary Policy Report (MPR).

In Canada, economic growth likely picked up to about 1½% through the first half of this year. However, with robust population growth of about 3%, the economy’s potential output is still growing faster than GDP, which means excess supply has increased. Household spending, including both consumer purchases and housing, has been weak. There are signs of slack in the labour market. The unemployment rate has risen to 6.4%, with employment continuing to grow more slowly than the labour force and job seekers taking longer to find work. Wage growth is showing some signs of moderating, but remains elevated.

GDP growth is forecast to increase in the second half of 2024 and through 2025. This reflects stronger exports and a recovery in household spending and business investment as borrowing costs ease. Residential investment is expected to grow robustly. With new government limits on admissions of non-permanent residents, population growth should slow in 2025.

Overall, the Bank forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.4% in 2026. The strengthening economy will gradually absorb excess supply through 2025 and into 2026.

CPI inflation moderated to 2.7% in June after increasing in May. Broad inflationary pressures are easing. The Bank’s preferred measures of core inflation have been below 3% for several months and the breadth of price increases across components of the CPI is now near its historical norm. Shelter price inflation remains high, driven by rent and mortgage interest costs, and is still the biggest contributor to total inflation. Inflation is also elevated in services that are closely affected by wages, such as restaurants and personal care.

The Bank’s preferred measures of core inflation are expected to slow to about 2½% in the second half of 2024 and ease gradually through 2025. The Bank expects CPI inflation to come down below core inflation in the second half of this year, largely because of base year effects on gasoline prices. As those effects wear off, CPI inflation may edge up again before settling around the 2% target next year.

With broad price pressures continuing to ease and inflation expected to move closer to 2%, Governing Council decided to reduce the policy interest rate by a further 25 basis points. Ongoing excess supply is lowering inflationary pressures. At the same time, price pressures in some important parts of the economy—notably shelter and some other services—are holding inflation up. Governing Council is carefully assessing these opposing forces on inflation. Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook. The Bank remains resolute in its commitment to restoring price stability for Canadians.

Information note

The next scheduled date for announcing the overnight rate target is September 4, 2024. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR on October 23, 2024.

23 Jul

Here’s why markets are betting on a Bank of Canada rate cut tomorrow

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Posted by: Dean Kimoto

Confidence is high that the Bank of Canada will deliver a second consecutive rate cut on Wednesday. Below, we look at some of the reasons why.

Investors and analysts have grown increasingly confident that the Bank of Canada will deliver a second consecutive rate cut on Wednesday to support the economy as inflation worries ease and signs of economic weakness grow.

As of Monday night, bond markets were pricing in 90% odds of a quarter-point rate cut, which would bring the Bank’s overnight target rate to 4.50%. This would be welcome news for those with variable rate mortgages and lines of credit, as they would see their interest costs reduced for the second time in as many months.

“Inflation is much better behaved today and the progress that’s already been made should render this a relatively easy decision,” National Bank Financial economists Taylor Schleich and Warren Lovely wrote in a recent note. “Empirical analysis of past interest rate cycles also lend support to the BoC starting off with back-to-back cuts.”

Here’s a rundown of some of the factors that should give the Bank of Canada confidence in moving ahead with its highly anticipated rate cut this week:

1. Easing inflation

Recent data from Statistics Canada shows that inflation has continued to moderate, with the headline Consumer Price Index (CPI) inflation in June easing to an annualized pace of 2.5%, down from 3.4% in May. This marks the lowest inflation rate in over two years, driven by declines in energy prices and slower growth in food prices.

In the view of CIBC’s Katherine Judge, the June CPI data “gave the Bank of Canada what it needed in order to cut interest rates.”

2. Softening labour market

The latest employment data also revealed a labour market that’s increasingly struggling. Canada’s unemployment rate continued to trend higher in June, rising to 6.4%. That translated to an additional 42,000 unemployed individuals in June, increasing the national total to 1.4 million.

Bruno Valko, VP of national sales for RMG, called the June employment numbers “awful.”

“We see this in our industry with clients and their battles to buy homes, renew at higher rates, and so on,” he wrote in a note to subscribers. “Hopefully, now, the economists see our true job market. It is not resilient. It is weak [and] the Bank of Canada will notice.”

However, regardless of the near-term monetary policy path, National Bank Financial expects the national unemployment rate to continue to rise to about 7% by later in the year.

3. High interest rates are taking a toll

The longer interest rates remain elevated, the higher the toll they’re expected to take. And the Bank of Canada is acutely aware of this. Recent economic indicators paint a picture of growing economic pain, creating a sense of urgency for further rate relief.

The Bank of Canada’s latest Business Outlook Survey indicates that sales outlooks remain pessimistic, especially for businesses linked to discretionary spending. Investment spending plans are also below average due to weak demand, high interest rates and cost concerns.

Similarly, consumer sentiment remains subdued, according to the BoC’s latest Survey of Consumer Expectations. Financial stress remains high among consumers, with many planning to cut spending and focus on paying down debt. Job security perceptions have worsened, particularly in the private sector, and consumers are generally pessimistic about future economic conditions, impacting their overall spending intentions.

Last week’s retail sales report for May confirmed Canadians continued to reduce discretionary spending with sales falling by 0.8% month-over-month.

“Another data release, another economic indicator justifying our call for the Bank of Canada to cut the policy rate by 25 basis points,” Desjardins economist Maëlle Boulais-Préseault wrote in response to the figures. “And if the headline for retail looks bad, on a per capita basis it looks even worse due to still-surging population growth.”

4. Reduced risk of U.S.-Canada policy divergence

Earlier this year, concerns arose about policy divergence between the Bank of Canada and the U.S. Federal Reserve due to falling inflation in Canada and persistent inflation in the U.S. This divergence suggested the BoC might cut rates while the Fed raised them, risking a weaker Canadian dollar and higher import costs​.

However, in June, lower-than-expected U.S. inflation increased the likelihood of multiple Fed rate cuts this year, a significant shift from previous expectations of prolonged high rates. As a result, concerns about policy divergence have subsided, giving the BoC more flexibility in its rate decisions without the associated risks of diverging too much from the Fed’s policies.

“We (still) don’t see BoC-Fed divergence concerns impacting that decision, especially now that the market has coalesced around a fall FOMC cut,” the National Bank economists noted. “The limits of policy rate divergence shouldn’t be put to the test this cycle.”

Lingering concerns for the Bank of Canada

While there are strong arguments for a second straight rate cut, the Bank of Canada may still have some reservations about cutting rates too aggressively.

Wage growth still high

Despite signs of a softening labour market, wage growth remains relatively high, with most traditional wage measures stuck around the 4% annualized mark, though down from a peak of around 4.5% and 6%. Elevated wage growth can contribute to inflationary pressures.

This persistent wage growth, driven by tight labour market conditions and high demand for workers, has been a challenge in the fight against inflation. However, many economists and the Bank of Canada itself have said they expect wage pressures to continue to ease.

“The fact that wages are moderating more slowly than inflation is not surprising: wages tend to lag adjustments in employment,” BoC Governor Tiff Macklem said in a speech last month. “Going forward, we will be looking for wage growth to moderate further.”

Core inflation remains somewhat sticky

1- and 6-month annualized change in average of CPI-median and -trim

Despite a favourable inflation report for June, the readings just one month earlier came in surprisingly hot. And while headline inflation did drop more than expected in June, core inflation still remained above 2% on a seasonally adjusted annual rate (SAAR) basis.

“Nonetheless, we don’t think the Governing Council will miss the forest for the trees,” the National Bank economists wrote. “Inflation is irrefutably better behaved than it was in the past.”

The latest big bank rate forecasts

The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from our previous table in parentheses.

Current Target Rate: Target Rate:
Year-end ’24		 Target Rate:
Year-end ’25		 5-Year Bond Yield:
Year-end ’24		 5-Year Bond Yield:
Year-end ‘25
BMO 4.75% 4.25% (+25bps) 4.00% (+100 bps) 3.30% (+5bps) 3.15% (+20bps)
CIBC 4.75% 4.00% 2.75% NA NA
NBC 4.75% 4.00% (-25bps) 3.00% 3.15% (-20bps) 3.00%
RBC 4.75% 4.00% 3.00% 3.00% 3.00%
Scotia 4.75% 4.00% (-25bps) 3.25% (+25bps) 3.45% (-5bps) 3.50%
TD 4.75% 4.25% 2.75% 3.25% (-25bps) 2.65% (-25bps)
This article was written for Canadian Mortgage Trends by:
STEVE HUEBL

Steve Huebl is a graduate of Ryerson University’s School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.

19 Jul

Are mortgage borrowers gravitating towards brokers at renewal time?

General

Posted by: Dean Kimoto

Homeowners appear to be increasingly looking around for the best option

With a glut of mortgages coming up for renewal in Canada, scores of homeowners are assessing their options – but how many are turning to mortgage brokers for advice, instead of simply renewing immediately with their bank?

Recent Mortgage Professionals Canada (MPC) research showed that last year, the broker share of the overall mortgage market jumped by five points compared with 2022, increasing to 34%. That year-end survey of nearly 2,000 Canadians also indicated that the percentage of homeowners who were likely to use the same lender upon renewal was creeping upwards.

At the end of 2021, 22% of homeowners said they were “unlikely” to renew with their existing lender, compared with 31% in the “very likely” category. By 2022, those in the “unlikely” camp had ticked upwards to 23% – and a quarter of Canadians by the end of last year revealed they would probably seek a different lender for their renewal.

Why are borrowers more likely to shop around?

Andrew Thake (pictured top), an Ottawa-based broker with Smart Debt Mortgages, told Canadian Mortgage Professional plenty of clients who normally wouldn’t have considered shopping around were now doing so upon seeing the renewal rates being offered by their bank.

Reasons for that may vary, according to Thake, from dissatisfaction with the offered rate to hearing positive things from friends or family about their experience with a broker. “It’s just awesome to see more people just giving the broker channel a chance,” he said.

Among the most prominent dilemmas faced by borrowers upon renewal in the current market is whether to opt for a two- or three-year fixed term – which, at present, are more expensive than longer terms – or choose the more conventional five-year fixed option.

In most cases, the choice is a question of borrower appetite. “When people are learning and seeing that [shorter terms are more expensive], it’s driving some people back to the five-year,” Thake said. “Others are sort of biting the bullet and taking that higher rate on the three-year in hopes that they’ll save some bucks down the road.

“So [there are] a lot of clients, a lot of questions, a lot of information we’re having to share about where rates are going to go, about different options, about the market.”

How are mortgage borrowers coping with renewals at higher rates?

Canada’s banking regulator, OSFI (the Office of the Superintendent of Financial Institutions) and the Bank of Canada have both flagged the potential risk posed by mortgage borrowers renewing at significantly higher rates than they initially took out during the rock-bottom-rate environment of the COVID-19 pandemic.

In May, OSFI noted 76% of mortgages outstanding were set to face renewal by the end of 2026 – a fact that could heap further woes on already-strained borrowers faced with the prospect of much steeper payments than their current arrangement.

Still, the mortgage industry has remained relatively sanguine about the coming renewal wave, with little indication to date of a spike in distress among current homeowners and existing borrowers.

Thake said plenty of clients had already done their homework on the likely impact of higher payments. “I’m not seeing [distress] here,” he said. “I think a lot of people coming up for renewal [have] already heard that rates are higher. Some of them have already done some online calculations and stuff.

“By the time they’ve come to me they’re just sort of mentally prepared to take that hit when they hear what the payment is – so it hasn’t been a big shock to many people.”

Some borrowers are availing of extended amortizations to help navigate a higher-rate environment, while the mortgage stress test (which required borrowers to prove they could handle steeper payments, even when rates were at record lows) has also proven an effective means of helping homeowners absorb the shock.

The five-year fixed rate, for instance, remains lower than the rate most borrowers were stress-tested at, 5.25%. “There were a lot of safeguards in place, and the rates that [many borrowers] are actually getting are below those safeguards,” Thake said.

“Plus, a lot of people over the last half of decade, if they had that five-year fixed rate, their incomes have gone up. So that helps as well.”

This article was written for CMP: by Fergal McAlinden

15 Jul

OSFI delays capital floor increase for banks amid competitive imbalance concerns

Latest News

Posted by: Dean Kimoto

 

Canada’s banking regulator is pushing back implementation of a rule change that could have significant implications for Canadian lenders, following consultation with domestic intuitions and global regulators.

Late last week, the Office of the Superintendent of Financial Institutions (OSFI) announced a one-year delay in implementing a higher global standard for lending risk as it waits for other countries to move forward with the change.

Some fear that the increase to the capital floor level for banks, in accordance with standards set out by the international Basel Committee on Banking Supervision, could result in lower lending volumes in Canada, along with higher fees and fewer options for consumers.

The capital floor level sets a minimum threshold for the amount of capital banks must hold relative to their risk-weighted assets, ensuring financial stability and reducing the risk of insolvency.

The delay comes after concerns were raised that Canada was moving forward with the change too quickly, putting its banks at a disadvantage while those same standards face resistance and delay south of the border.

Mortgage Professionals Canada (MPC) expressed concern that the change would have significant implications on the mortgage industry by limiting how domestic banks calculate loan risk.

“We commend OSFI’s prudent decision to delay the implementation of new capital floor levels for another year, preserving lenders’ flexibility in risk assessment,” said MPC’s President and CEO Lauren van den Berg. “MPC has strongly advocated for OSFI to proceed cautiously with significant changes affecting lenders and implement regulations that prioritize flexibility for the consumer rather than limit it with standardized models.”

Van den Berg says that while the standardization model could simplify things for regulators, it would impose limits on both lenders and consumers.

She explains that the global standard could make it harder for lenders to consider unique circumstances or alternative risk factors when making loan decisions. That, in turn, could make it harder for borrowers to qualify for loan products, increase borrowing costs, and limit their product options.

OSFI remains committed to reform

Though the changes have been pushed back by a year, the Group of Central Bank Governors and Heads of Supervision (GHOS) — which oversees the Basel Committee on Banking Supervision and which the Bank of Canada is a member — unanimously reaffirmed its commitment to implementing the reforms as soon as possible.

“The Basel III 2017 reforms will strengthen banks’ ability to withstand financial shocks and support economic growth while enabling them to compete and take reasonable risks,” said Peter Routledge, the Superintendent of Financial Institutions, in a press release. “Key to these reforms’ success is full, timely, and consistent adoption and implementation across BCBS jurisdictions so that competitive balance prevails throughout the international banking system.”

Routledge added that OSFI will implement the reforms with a focus on competitive balance in banking and the soundness of Canada’s capital regime.

The Basel III reforms include a set of measures developed in the wake of the 2008 financial crisis to protect the global economy from future crises, and were accepted by the international body’s members, including Canada, in 2017.

They are intended to ensure financial institutions adhere to a universal standard for balancing risk with adequate levels of capital and liquidity.

The capital floor imposes a universal approach to capital requirements, rather than allowing individual countries and institutions to set their own standards. With the delay, the 2025 capital floor will remain at the current 67.5% threshold, postponing the increase to 70%, originally scheduled for this year, until the 2026 fiscal year.

This article was written for Canadian Mortgage Trends by:

JARED LINDZON

Jared Lindzon is a freelance journalist and public speaker based in Toronto. He is a regular contributor to the Globe & Mail, Fast Company and TIME Magazine, and has been published in The New York Times, Rolling Stone, The Guardian, Fortune Magazine, and many more.

12 Jul

June Home Sales In Canada Show Early Signs Of A Pick-Up After BoC Easing

Latest News

Posted by: Dean Kimoto

Early Signs Of Renewed Life In June Housing Markets

The Canadian Real Estate Association (CREA) announced today that national home sales rose 3.7% between May and June following the Bank of Canada’s rate cut. While activity was still muted, it wasn’t nearly as weak as the media recently portrayed.

“It wasn’t a ‘blow the doors off’ month by any means, but Canada’s housing numbers did perk up a bit on a month-over-month basis in June following the first Bank of Canada rate cut,” said Shaun Cathcart, CREA’s Senior Economist. “Year-over-year comparisons don’t look great mainly because of how many buyers were still jumping into the market last spring, but that’s a story about last year. What’s happening right now is that sales were up from May to June, market conditions tightened for the first time this year, and prices nationally ticked higher for the first time in 11 months”.

New Listings

The number of newly listed properties rose 1.5% last month, led by the Greater Toronto Area and British Columbia’s Lower Mainland. As of the end of June 2024, there were about 180,000 properties listed for sale on all Canadian MLS® Systems, up 26% from a year earlier but still below historical averages of around 200,000 for this time of the year.

As the national increase in new listings was smaller than the sales gain in June, the national sales-to-new listings ratio tightened to 53.9% compared to 52.8% in May. The long-term average for the national sales-to-new listings ratio is 55%, with a sales-to-new listings ratio between 45% and 65%, generally consistent with balanced housing market conditions.

“The second half of 2024 is widely expected to see the beginnings of a slow and gradual return of buyers into the housing market,” said James Mabey, Chair of CREA. “Those buyers will face a considerably different shopping experience depending on where they are in Canada, from multiple offers in places like Calgary to the most inventory to choose from in over a decade in places like Toronto.

At the end of June 2024, there were 4.2 months of inventory nationwide, down from 4.3 months at the end of May. This was the first time that the number of months of inventory had fallen month over month in 2024. The long-term average is about five months of inventory.

Home Prices

The National Composite MLS® Home Price Index (HPI) increased by 0.1% from May to June. While a slight increase, it was noteworthy because it was the first month-over-month gain in 11 months. Regionally, prices are still generally sliding sideways across much of the country. The exceptions remain Calgary, Edmonton, and Saskatoon, and to a lesser extent Montreal and Quebec City, where prices have steadily increased since the beginning of last year.

That said, there have been more recent upward price movements in other markets, including across Ontario cottage country, Mississauga, Hamilton-Burlington, Kitchener-Waterloo, Cambridge, London-St. Thomas, and Halifax- Dartmouth.

The non-seasonally adjusted National Composite MLS® HPI stood 3.4% below June 2023. This mostly reflects how prices took off last April, May, June, and July – something that has not been repeated in 2024.

Bottom Line

Housing activity will gradually accelerate over the next year as interest rates continue to fall. Yesterday, bond yields fell considerably due to the marked improvement in the June US inflation data. Markets are now pricing in a 90% chance of a Federal Reserve rate cut in September, allaying fears that the Canadian dollar will decline precipitously if the Bank of Canada continues to go it alone in easing monetary conditions.

Next week’s CPI data will determine whether the Bank of Canada cuts rates at their July confab or waits until the September meeting. A further reduction in core inflation will open the doors to another rate cut on July 24, particularly given the continued rise in the Canadian unemployment rate. Rising monthly mortgage payments in the wake of record renewals will continue to slow discretionary consumer spending, providing further impetus for Bank of Canada rate cuts.

Please Note: The source of this article is from SherryCooper.com/category/articles/

8 Jul

Will rising unemployment hasten the Bank of Canada’s coming rate cuts?

Latest News

Posted by: Dean Kimoto

Canada’s labour market stumbled in June, with the unemployment rate rising more than expected to 6.4%.

Despite the disappointing report, economists largely think the Bank of Canada will continue to bide its time before delivering its next rate cut.

The economy saw a net loss of 1,400 jobs in June, according to figures released today by Statistics Canada. It consisted of a gain of 1,900 part-time positions but a loss of 3,400 full-time jobs. This fell well below economists’ expectations of a 25,000 position gain.

Who’s feeling the economic pain?

Job losses were concentrated in transportation and warehousing (-12,000; -1.1%) and public administration (-8,800; -0.7%), while significant gains were reported in accommodation and food services (+17,000; +1.5%).

“We are seeing job losses in areas like manufacturing, office work, and solid jobs, but massive increases in fast food, accommodation (hotels), etc.,” rate expert Ryan Sims observed. “We are trading in good paying positions for temporary, low-wage positions,” a trend he says has been going on for some time.

Canada’s national unemployment rate has risen 1.3 percentage points since April of last year, equating to 1.4 million unemployed individuals in June, an increase of 42,000 from May.

StatCan’s data also reveal that only 21.4% of those unemployed in May transitioned to employment, a lower rate than the pre-pandemic average of 26.7%. Additionally, the proportion of long-term unemployed (more than 27 weeks) rose by 4 percentage points to 17.6%.

“A lower proportion of unemployed people transitioning into employment may indicate that people are facing greater difficulties finding work in the current labour market,” StatCan observed.

The most affected groups include youth aged 15 to 24, with their unemployment rate rising 0.9 percentage points to 13.5%, and new immigrants, whose unemployment rate increased to 12.7%.

Economists from National Bank highlighted the imbalance between job creation and recent strong population growth.

“Job creation hasn’t kept pace with the population’s meteoric rise for some time now,” economists Matthieu Arseneau and Alexandra Ducharme wrote in a note. “A stagnation in employment as observed in June, while the population is up by 100K, is a recessionary deviation.”

Regionally, Quebec experienced a net loss of 18,000 positions (-0.4%), while New Brunswick and Newfoundland and Labrador saw employment gains of 3,000 (+0.8%) and 2,600 (+1.1%) positions, respectively.

The Bank of Canada’s rate cut: July or September?

While Canada’s may not be seeing sharp job losses under the weight of high interest rates and a weak economy, that doesn’t change the fact that the June employment numbers were “awful,” says Bruno Valko, VP of national sales for RMG.

“We see this in our industry with clients and their battles to buy homes, renew at higher rates, and so on,” he wrote in a note to subscribers. “Hopefully, now, the economists see our true job market. It is not resilient. It is weak [and] the Bank of Canada will notice.”

BMO Chief Economist Douglas Porter emphasized the data’s significance, stating, “This report drives home the point that the Canadian labour market can simply no longer be considered tight—in fact, it is quickly tipping in the other direction.”

Still, most economists believe the Bank of Canada will tread cautiously before delivering its next anticipated rate cut, which could come as early as its next meeting on July 24, or not until September 4.

“As a standalone result, the softening job market raises the odds of a Bank of Canada rate cut,” Porter wrote. “However, wages remain the very definition of sticky, which will give the Bank pause.”

Average hourly wages in June were $34.91, representing an annual growth rate of 5.4%, up from 5.1% in May.

Porter added that for the BoC to go ahead with a rate cut in July, the June inflation results, to be released on July 16, would need to be “exceptionally tame.” He suggested that while the weak job market sets the stage for further rate cuts later this year, variable-rate mortgage borrowers may not see rate relief this month.

Leslie Preston, an economist at TD, pointed out that key economic indicators due before the BoC’s July 24 rate decision will play a crucial role in determining whether the BoC makes a rate move in July or September.

“In either case, Canada’s economy is not falling off a cliff and we expect rate cuts will be gradual over the remainder of the year,” she wrote.

This article was written for Canadian Mortgage Trends by:
Steve Huebl
Steve Huebl is a graduate of Ryerson University’s School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.
5 Jul

Why young people keep getting caught in debt traps and how to break the cycle

General

Posted by: Dean Kimoto

By Nina Dragicevic

Between inflation, housing costs and interest rates, debt is ballooning for many younger Canadians.

Scott Terrio sees it all the time. The manager of consumer insolvency says the average credit card balance in Canada is less than $4,500, but the cases he saw last year averaged more than $12,000 for this young group.

Terrio helps clients cut deals with creditors and avoid bankruptcies, if possible, at Hoyes, Michalos Licensed Insolvency Trustees. Looking at his 2023 filings for clients aged 18 to 29 across Ontario, he said average credit card debt was up 34.5 per cent from 2022.

Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada Inc., notices the same trend. The national non-profit organization usually works with Canadians on education and debt restructuring but also sometimes refers clients to insolvency firms if their situation is dire.

“We looked at Q1 for 2023 versus Q1 for 2024,” Schwartz said of the firm’s clientele. “And specifically for those people that were under 40, in our client base, we’re seeing that the debt loads for those people has increased about 27 per cent. Like all of a sudden, when people aren’t making that much more, if anything more at all … not to mention the interest rates that have gone up over the last little while, then it becomes more and more of a challenge.”

This represents a large demographic for Consolidated Credit, he added. Over half of its clients are under the age of 40.

Terrio said his clients show up with the “typical Canadian financial life” — starting with a credit card at 18 and a student loan, then card companies keep increasing the limit and consumers run up their debt. Seeing the interest load, these people then get a line of credit with lower interest rates and transfer the balance there.

Now, Terrio said, they feel relieved — and they keep spending.

Once they flip their debt to a line of credit, he said consumers should cut up their credit card and live on cash flow as much as possible. But their debit card sits unused, while they keep tapping credit everywhere instead.

“They run their Visa back up because they didn’t cut up their card,” Terrio said. “So now the banks got you three times, and they got you for life.”

Terrio said it’s the same story over and over again, and is critical of ever-increasing limits offered to young people when financial literacy is typically at its lowest.

“I’m always the first person these people have spoken to who’s helped them in their financial adult life,” he said.

It’s impossible to ignore current market conditions, however.

As Schwartz pointed out, Canadians are feeling the squeeze between incomes that haven’t kept up with the cost of living, housing crises in markets across the country, and rising interest rates brought in to control inflation.

Managing spending and debt becomes a tightrope act, especially for younger people, Schwartz said.

“So with the advent of social media, and the ease with which someone can buy something online, we’re finding that consumers have adopted these behaviours whereby they’re trying to keep up with their friends and family,” he said.

He also warned against so-called lifestyle creep, when people start making a bit more money, and just start spending more.

“They may see a slight increase in their income, and they think, ‘Oh, I just kind of hit the lottery, and now I’m going to spend like crazy,’” Schwartz said. “And it’s tough to change those behaviours after it’s been ingrained for a long period of time.”

To prevent this from happening, track spending diligently — you can download apps for this purpose — and delay milestones such as moving out or getting a car if you can, Schwartz said. Build up an emergency fund in case you lose your income or suffer a financial setback, to avoid falling into serious debt.

“If you have the opportunity when you’re young, when you’re not spending as much on rent, you’re not spending as much on food, if you can cut back on how much you’re socializing — that’s a great place to start to build up that reserve fund,” Schwartz said.

Live within your monthly cash flow — using your debit card or cash — and develop a short-term austerity plan to make big strides on debt repayment, Terrio said.

Summer months are tough for austerity because you want to socialize, he pointed out, but January through March are a good time to adhere to a severe budget. Up to 40 per cent of your non-rent income should go to debt, Terrio said, noting short-term austerity is tolerable because it’s over quickly.

Ultimately, the aim is to reach the tipping point when at least half of your debt payment is going to the principal — and the portion going to interest starts to slide. Never use an instalment loan, he added.

“All these 36 to 48 per cent interest loans that are $10,000 — if you get one of those, you’re done,” Terrio said. “You’re never, ever getting out.”

Once you’re free of debt, stay that way. Keep your credit limit low and turn down offers to increase it, Terrio said. If you move debt to a line of credit, stop using your credit card.

“You decide how much debt you’re going to have, not the bank, right?” Terrio said.

“I know it’s tempting. If they give you a credit card for $20,000, don’t take it, just take $5,000. Because if you get into $5,000 debt, we can fix that. You can fix it. If you get into $20,000, I have to fix it, right? You’re in my office.”

This report by The Canadian Press was first published May 28, 2024.

Re-posted from Canadian Mortgage Trends.

2 Jul

The latest mortgage news: Variable-rate mortgages are making a comeback

General

Posted by: Dean Kimoto

Mortgage borrowers are increasingly opting for variable-rate mortgages, a trend that is expected to continue as the Bank of Canada continues to lower interest rates.

As of the first quarter, 12.9% of new mortgage borrowers opted for a variable-rate mortgage, according to figures from the Bank of Canada.

That’s up from a low of 4.2% reached in the third quarter of 2023, but down from a peak of nearly 57% of originations reached during the pandemic when most variable rates were available for less than fixed-rate products.

A variable-rate mortgage is one where the interest rate can change over time, typically in relation to the Bank of Canada’s overnight target rate.

More recent data show that while the popularity of variable-rate mortgages eased heading into the spring—and just ahead of the Bank of Canada’s quarter-point rate cut in June— their share of originations are up 50% from a year ago.

“But for context, they accounted for just 9% of total originations in April and were 90% lower than the same month in 2022,” noted Ben Rabidoux of Edge Realty Analytics.

Still, variable-rate mortgages are expected to regain a larger share of originations in the months ahead.

“I do expect that we’ll see a sharp increase in variable originations in the next few months once it becomes clear that the Bank of Canada really is on a serious rate-cutting cycle,” he wrote in his newsletter to subscribers.

Meanwhile, shorter fixed-rate mortgages are among the most popular choices for today’s borrowers, as they balance a shorter term and competitive rates. More than 50% of new mortgage borrowers selected a 3- or 4-year fixed term in April.

The Bank of Canada figures also showed that mortgage credit growth reached a 24-year low in the month of just 3.4%.

“We’d rather act too early and aggressively”: OSFI on managing risk

In a recent webcast, the head of Canada’s banking regulator emphasized the importance of proactive risk management when it comes to financial stability.

“We would rather face criticism for acting early and too aggressively than face criticism for acting too late,” said Peter Routledge, head of the Office of the Superintendent of Financial Institutions (OSFI). This proactive stance is crucial to maintaining stability in Canada’s financial system.

He noted that the financial system is highly interconnected, meaning that weaknesses in one area can quickly spread, and that it’s OSFI’s role is to mitigate those risks.

“Our job at OSFI is to make sure that everyone within our jurisdiction remains well prepared to withstand shocks that could occur,” he said. “I would say the shocks that we feared last year never materialized. I hope I can say the same thing next year.”

Routledge also touched on the high interest rates that have posed challenges to households and businesses, requiring vigilance with regulatory measures to maintain financial stability.

That includes OSFI’s announcement in March that federally regulated banks will have to limit the number of mortgages that exceed 4.5 times the borrower’s annual income, or in other words those with a loan-to-income (LTI) ratio of 450%.

OSFI has said previously that this new loan-to-income limit will help “prevent a buildup of highly leveraged borrowers.”

 

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What higher-than-expected inflation means for future Bank of Canada rate cuts

Canada’s headline inflation rate rose to 2.9% in May from 2.7% in April, surpassing economists’ expectations and adding some uncertainty to the timing of the Bank of Canada’s future rate cuts.

The Bank of Canada’s preferred measures of core inflation also edged higher, with CPI-median rising to 2.8% (from 2.6% in April) and CPI-trim increasing to 2.9% (from 2.8%).

Shelter costs remained the largest contributor to overall inflation, holding steady at an annual rate of 6.4%. Rent inflation accelerated to 8.9%, while mortgage interest costs slightly eased to 23.3%.

The results were “clearly a step in the wrong direction,” noted BMO Chief Economist Douglas Porter.

“With inflation back on a bumpy path, the outlook for BoC moves is similarly bumpy. For now, our official call remains that the next BoC rate cut will be in September, and this report does nothing to move that needle,” he wrote.

TD’s James Orlando emphasized that “one bad inflation print doesn’t make a trend,” and that inflation remained below 3%.

“But it does speak to the unevenness of the path back to 2%,” he said, agreeing that the central bank will likely wait until September before delivering its second rate cut.

This article was written for Canadian Mortgage Trends by:

Steve Huebl
Steve Huebl is a graduate of Ryerson University’s School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.