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Bank of Canada – “Consumers are a little bit upside down” | December 7, 2022

Clinton chats with CityNews host, Sam Laprade in Ottawa about the Bank of Canada announcement. The Bank of Canada increased the key overnight rate by 50 basis points. Clinton and Sam talk about what this means for consumers in variable rate and for those in a fixed rate who are coming up for renewal.  They discuss if the Bank of Canada has more increases in store for Canadians, and the goal of getting inflation down to pre-pandemic levels. The two also talk about how Canadians are feeling a little upside down with the economic situation.

Bank of Canada – “Consumers are a little bit upside down” | December 7, 2022

Don’t feel like watching the video? Check out the transcript below.


“We all had this date marked on our calendars”

Sam Laprade: [00:00:00.09] We were waiting for today. We all had here, especially on CityNews, we all had this date marked on our calendars: December the seventh. We knew that interest rate hike would be happening today.

We didn’t know by how much. Well, we found out by how much. And we wanted to spend some time today with Clinton Wilkins from CENTUM Home Lenders. Hi, Clinton.

Clinton Wilkins: [00:00:18.69] Hi, Sam. How are you?

Sam Laprade: [00:00:20.13] Good. Clinton hosts a show on CityNews here, of course, with Todd Veinotte and the opportunity, of course, to share about mortgages and everything people are talking about right now.

And it’s such an important show, Mortgage 101. Today, you and I have this date marked on our calendars for sure, Clinton.

Clinton Wilkins: [00:00:38.60] We certainly did.

Key overnight rate by 50 basis points

Sam Laprade: [00:00:39.39] And tell us what you’ve learned from the Bank of Canada.

Clinton Wilkins: [00:00:42.09] The Bank of Canada actually just came out with their announcement, Sam, here just about 50 minutes ago. They announced that they’re going to increase the key overnight rate by 50 basis points.

And what that means to consumers is the bank prime now for most lenders will be 6.45. And for most lenders, they’ll it’ll take effect today.

Sam Laprade: [00:01:01.56] And tell us what that means for someone driving in their car right now. Maybe they’re heading to an appointment and they’re thinking about their own mortgage.

What does this increase mean for my variable rate

Clinton Wilkins: [00:01:08.91] Well, if you’re in a variable rate mortgage product and you have an adjustable payment, that means that your payments going to go up and that may go up as soon as your next payment. Some lenders impact the prime rate the first of the following month. So certainly in the coming weeks you will see an increase.

If you have a type of variable mortgage that the payment is static. I think that is even maybe more of a concern. Sam, many consumers are getting to what we call the trigger rate. So what that means is the amount that they’re paying on their mortgage payment isn’t enough to cover the interest. And their amortisation now is been getting longer and longer with every increase.

And I think in those scenarios you either need to start increasing your mortgage payment or the bank will start increasing your mortgage payment for you. Some lenders, obviously, with these types of mortgages are giving consumers some options where they’re able to do a lump sum payment to bring the amortisation back in line with where they need to be.

But I certainly think that if you’re in the type of variable more mortgage and the payment doesn’t change, you really should start looking at it and it’s something you should probably start looking at as soon as today.

A challenging time for Canadians?

Sam Laprade: [00:02:13.53] And some Canadians are saying to their radio right now, “But Clinton, if I had, you know, a lump sum of money, I would have done that already.” I mean, it’s a lot of pressure on Canadians. Do you think there will be a really challenging time for Canadians in terms of choosing what to do next in terms of their housing?

Clinton Wilkins: [00:02:34.89] Well, I think December is a challenging time anyway, Sam. You know, there’re certainly a lot of pressures from friends and family and really what’s going on economically outside of what’s happening with mortgage rates.

You know, we see the challenges at the grocery store, when you come to the till and you see what the food order is. We see the challenges at the pumps. And, you know, the mortgage rates certainly have exacerbated some of that for people. I think the one thing that we need to remember is it’s impacting everyone.

And it’s not just consumers who this is impacting, Sam. It’s impacting businesses and, you know, availability of credit and cost of credit. So the ripple effects will be widespread. And that’s the intention that the Bank of Canada has. So really what they want to do, they’re trying to get inflation in line.

Trying to get inflation in line

We know the inflation was at peak here in Canada sometime around June and July. And the numbers even at the end of October were still they were too high. But we are starting to see signs of that. Inflation is starting to soften.

It’s really interesting right now with this last Bank of Canada increase, the variable rate mortgage product is more expensive now than where a fixed rate mortgage product is. And that is very unusual.

And I think some consumers are really going to look in the mirror and decide, you know, how many more increases can I handle? You know, obviously the housing costs have become higher and higher.

“Consumers are a little bit upside down”

Clinton Wilkins: [00:04:04.02] And I think in some markets, even the value of the real estate has gone down. So I think some consumers are a little bit upside down. And I think there’s going to be certainly a lot of conversations about what rate and rate product and amortisation is going to work best for you.

So I think some consumers are going to look at doing some transactions in 2023 to better their financial position. And, you know, I always encourage consumers that, you know, if you’re starting to feel the pinch, it’s better to do a transaction now than wait until it’s too late. And I think sometimes people try to hold on and hold on and sometimes you dig yourself a hole.

So, you know, I think the thing is that all signs are really pointing that we may be in a recession towards the end of next year. And, you know, although that may soften the interest rates, Sam, and, you know, inflation will come down. I think the other impacts from a recession are going to be widespread as well.

So when we’re talking about lack of employment or people losing their employment, I think that certainly would will become a reality, which will I think obviously be an impact as well.

Are more increases on the horizon?

Sam Laprade: [00:05:13.19] We know the Bank of Canada had signaled that they were going to do a rate hike today when the Bank of Canada does an announcement in the future, are they also signaling that they’ll raise interest rates again? Do we know that already, Clinton?

Clinton Wilkins: [00:05:28.73] Some economists think that we’re almost at the ceiling with this 50 basis point increase. Some economists thought that, you know, maybe 75 basis points prior to today will be where the ceiling is before we’re really in a recession type situation.

You know, if the 75 basis point, you know, kind of theory rings true, we may see another small increase going into the new year. The Bank of Canada meets again in January. We’re certainly going to be watching it. And when the Bank of Canada gets to the ceiling, you know, I think in some ways that will be good for Canadians. They can start making some decisions and planning around how can they stay the course based on what’s going on with the rates.

Getting inflation down to pre-pandemic levels

But I think it also signals that they may wait that ceiling out for as long as they can to bring that inflation in line. The governor of the Bank of Canada stated that they really want to bring the inflation to a number that is around 2%, which is lower than where inflation was pre-pandemic. So we’re going to feel some pain in 2023.

And, you know, consumers, if you’re in a variable rate mortgage product or if you don’t even own a home, you’re going to feel some pain due to the ripple effects of the Bank of Canada increasing the overnight rate.

Clinton Wilkins: [00:06:44.39] And I think the one thing that I really want to bring to the forefront, I think 2023 is really going to be one of those years that we need to focus more on needs versus wants. And I think the holiday season is a tough time to do that, Sam. You know, we want to give a great holiday to our friends and our family, but I think we really need to look at the spending.

Consumers in fixed rates coming up for renewal

I think cash is going to be king, and I think having access to credit is going to be important, too, because we’re already in the storm. And how can we weather that and how can you best protect yourself through this upcoming year? I think we’d be remiss to say that we certainly have a lot of concerns for people who are in a fixed rate product that are coming up for renewal.

Many people that are coming up for renewal now are in a situation that the rates are significantly higher than where that fixed rate product is. So, you know, it’s not just variable rate clients that are being impacted, Sam. I think basically anybody who owns a home, anybody you know, can be impacted by what’s going on currently with inflation.

Sam Laprade: [00:07:47.69] Always learn something from you, Clinton. It’s not the news we were hoping for. I was hoping that the economists that were saying it was just going to be a quarter of a percent, we’re going to be right.

Clinton Wilkins: [00:07:56.48] Some were saying even no increase. I think the good news coming out of this, Sam, is we may be close to the ceiling. So I think that’s one little piece of solace. And, you know, we really just need to buckle down here in 2023.

Sam Laprade: [00:08:13.13] Thank you so much, Clinton. Appreciate your time today.

If you have any questions, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.