Mortgage 101 – Homeowners Are Feeling The Pinch | June 19, 2023

In our latest edition of Mortgage 101, Clinton Wilkins and Todd Veinotte are discussing the latest increase in interest rates, how it’s creating cracks in credit profiles, misconceptions about rate increases and how to navigate the runaway train of inflation.

LISTEN to the conversation on Spotify and Apple

Todd Veinotte 00:05
All right. Welcome to Mortgage 101 your guide to homeownership with Clinton Wilkins and myself, Todd Veinotte, we are so pleased that you’ve decided to tune in and listen. And we have lots and lots to talk about today. Clinton Wilkins, when you say that mortgage rates? this is top of mind, obviously, right?

Clinton Wilkins 00:24
Oh, it’s top of mind. It’s top of, you know, it’s so wild since we even were here last time. Yep. So much has changed. So much has changed.

Canadians are starting to see cracks in their credit profile.

Todd Veinotte 00:33
Yeah, nobody would have been too – well, we didn’t, we were told that the Bank of Canada basically said they weren’t going to do another interest rate hike. That was what the message was.

Clinton Wilkins 00:42
Or that was the messaging. And then some economists obviously leading up to this last announcement, there was one kind of school of thought that there was not gonna be any changes, they’re gonna hold the course. Then there were another school of thought that, you know what, there’s room for another 25 basis points for the increase and Ding, ding, ding this week. Yeah. 25 more basis points were added on the key overnight rate, which brought the bank prime rate to 6.95. So people are feeling it. I can tell you that Equifax and TransUnion has now put out some messaging that they’re starting to see cracks in the Canadian credit profile. Canadians are starting to miss their loan payments, not necessarily maybe mortgage payments. So let’s not like say the sky is falling. But you know, we’re starting to see some signs of distress.

Todd Veinotte 01:24
But it would start with low missing loan payments, other payments, right? Mortgage generally would be the last thing or the first thing people would pay.

Clinton Wilkins 01:32
Yeah, Canadians make their mortgage payments. Usually, by and large, they make their mortgage payments. So that’s usually the last thing that kind of goes, usually the first thing is, you know, maybe a credit card, or maybe they don’t worry about other things like some toys and stuff that they might have financed.

Todd Veinotte 01:47
Student loan, perhaps.

Clinton Wilkins 01:48
Student, student loans are probably the first thing people don’t pay. They’re the first thing that people call up and say, hey, I want to go on deferral. And let me tell you, the first thing that messes up people’s credit bureaus is the student loans. Student loans, and cell phones, literally the two worst things I ever see.

Bank prime rates have gone from zero to 6.95%

Todd Veinotte 02:04
So since this all started in, I can’t remember when these interest rates started to climb, but like a little bit over a year ago, a little over a year ago, we went from what to what, let’s just do a little history lesson on where we’ve come.

Clinton Wilkins 02:15
So the prime rate was basically almost at zero, the overnight rate was almost that was for quite a while. Yeah, it was. And then obviously, the bank prime rate is higher than the key overnight rate. And it’s continued to increase. And now it’s 6.95. So we’re at the highest place that we’ve been in 20, over 22 years. Since 2001, we are at the highest point. And some economists think that there’s room to move more, I think there might be riots at some point, zero, I think that’s, you know, homeowners are feeling the pinch, and I understand what the federal government is doing. And I understand what the Bank of Canada is doing. But with them increasing the key overnight rate, they are increasing inflation, Todd. So when they’re looking at their CPI, so you know, keep key performance indicator of basically the inflation or cost analysis, you know, they need to look at a different number than the CPI, they think they need to remove the housing inflation, and look at the other things that are impacting inflation. And, you know, I think there’s a little bit of miss weight here. Certainly, they were trying to slow the real estate market. You know, that’s really worked by increasing the rates, because it’s not just been the key overnight rate that’s increased. The fixed rates certainly have increased a lot as well. And there’s something coming here for homeowners. So if you own a home, I think you should, obviously, continue to listen to our show here.

Clinton Wilkins 03:39
But if you’re an existing homeowner, something is around the corner for you. The big bad rate wolf is going to get you and you know, it’s going to blow and it’s going to blow and it’s going to blow your house down in some cases. And there are some consumers that are living in this false sense of security with very low fixed rates. And, you know, we dog on people that are in a variable, you know, you know, their rates have gone up, some people are in a variable for a reason, because, you know, they think that maybe it’s going to go down, maybe they’re waiting for the rates to go down, then to convert it into a fixed or maybe they know they’re going to break their mortgage early in the variable will have the lowest penalty. But those people that are in a fixed rate, say, you know, what, I’m good, I’m going to, fixed rates will be lower when I’m trying to renew. Well, guess what? There are so many renewals coming up in the next two years, it would blow your actual mind. More than 50% of Canadians have their mortgage renew in the next two years.

Todd Veinotte 04:31
And what would they generally have for a rate at this point?

Clinton Wilkins 04:34
Some of these mortgages that are coming up for renewal are obviously sub 3%. And we’re going to start seeing mortgages coming up for renewal that are sub 2%. So in some cases, pretty much every mortgage now today, some are still in the fours, but majority of mortgages starting and I think by the time our show is on here on Saturday and Sunday, mortgage rates in Canada will start with a five and some will start in a six and going up to like almost 7%.

Todd Veinotte 04:57
So you’re going from a two, two and a half whatever percent to a five to a six. So what does that mean for, and obviously, this all depends on how much the mortgages and the amortization is. But can you kind of paint the picture as to what this might mean for the average person?

Misconception: Your mortgage payment is not doubling

Clinton Wilkins 05:14
Okay, so the first misconception is your mortgage payment is not doubling. So let’s just take a breath there for a minute. If your interest rates double

Todd Veinotte 05:21
Hang on a sec, why was that a misconception?

Clinton Wilkins 05:25
Because I think some people think if your interest rate doubles, your mortgage payment doubles. It doesn’t. Your interest borrowing costs will double. But you need to remember that your mortgage is made up of an interest and a principal payment. So your mortgage payment is not doubling. Yes, it will go up significantly, but your mortgage payment is not going to double. So I think that’s the first thing that we need to like not worry about, okay. But if you’re going from a rate at like 2%, to 6%, it is going to have a significant impact. Right? And you can just renew, but your amortization is gonna stay in line, and you’re going to feel a big payment shock when that happens. And I have clients that are basically, I don’t know, what we would call it like, what is it when you stick your head in the sand?

Todd Veinotte 06:07
Ostrich.

Don’t wait on rates to go down

Clinton Wilkins 06:07
They’re ostriching, that’s what they’re doing. They’re ostriching, and they’re just waiting and waiting and waiting until that renewal. I have so many clients that have renewals in the next four weeks, that were just frantically trying to get their refinances done, or their transfers done from one institution to another, because they waited and they waited and they waited. Get an approval at 120 days, guys. If I had an approval three months ago, they would have had a rate at a lower rate. Rates went up this week, rates are going up tonight, they went up yesterday, every day we’re basically seeing rate change.

Todd Veinotte 06:40
So once you get that approval that’s locked in for three months?

Clinton Wilkins 06:42
Four months, 120 days, and we start calling our clients six months out, you know what I mean? Then four months out than three months out, and we’re really getting on people, but people are scared. And they’re ostriching, we’ll call it, sticking their head in the sand and hoping that the rates are going down. And in many cases, for customers that I talked to even this week, they are paying a higher rate, because they waited. And I have clients that are dealing with the big five, and they’re like, oh I’m not gonna take that rate and the rate expires, oh, I’m not gonna take that rate, the rate expires. And then it gets to really like crunch time, you’re less than 30 days out. And you’re like, well, I guess I should have taken that that rate from three months ago. You really need to ask the questions and just don’t take what you’re given. And, you know, sometimes you can’t do better. And sometimes you can but at least ask and you know what, I have people that reach out, even they just send me a quick email, or they do a little form fill on our website. Even our listeners reach out to be like, hey, Clinton, I was offered this for my lender, do you think this is a good deal or not? And I’ll give them my two cents worth. Yes, I love to do business with people. But I love just giving the advice.

Todd Veinotte 07:47
Okay, so the fundamental reason for those who don’t know what the purposes all these interest rate changes is and why that’s necessary and, just a little tutorial, if you will, on why the Bank of Canada feels this is necessary to raise interest rates.

Inflation is a runaway train

Clinton Wilkins 08:00
I think the the one reason and I’ll just caveat this, the Bank of Canada has gotten this right 0% of the time. We’ve said this before, the governor of the Bank of Canada said that the rates were going to be low for the future foreseeable future, they are not no, they’re obviously much higher than they obviously have been. So we’ll just leave that there. The Bank of Canada left the rates low for too long, then inflation started going up. And inflation was like a runaway train, it left the station and they couldn’t slow it down. So then they start increasing the key overnight rate to encourage Canadians to stop spending their money. But guess what, they told us to stay home for two years, and we saved all our money, then we were able to go out and about. And we have all of this capital ready to go. So we start buying things, we start buying homes, we start buying material goods, we start traveling more, we start buying more fuel and food. And guess what? There’s a lack of supply, which then drives up the price. And then there’s some supply chain issues and inflation becomes a runaway train, increase a key overnight rate. People have less money in their pockets, they don’t really care, they have all this extra money, they can afford to pay a higher payment. So essentially what the Bank Of Canada has really tried to do is, deplete the savings of Canadians and force them to stop spending on consumer goods which is starting to work. Obviously, if Equifax and TransUnion say people are starting to miss their loan payments, people are starting to run low on cash. That means that we are at all time high in terms of consumer debts. During the pandemic, Canadians were very good. We pay down our bills, right? But now, the amount that we owe is significantly more than pre pandemic in terms of credit card debts and lines of credit and stuff like that. So the consumer debt has increased. What needs to happen is the Bank of Canada wants to bring inflation down to the 2% mark. And that’s going to take some hard work. And it’s not just hard work of higher rates, but we need to stop spending.

Todd Veinotte 09:58
Okay, what else you want to talk about?

Clinton Wilkins 09:59
We’re gonna talk talk about the real estate market we’re at the end of spring going into summer. What’s summer gonna look like here? And you know how is this spring different than last spring?

Todd Veinotte 10:06
Okay. Clinton Wilkins and myself Todd Veinotte, Mortgage 101 your guide to homeownership. We’ll be right back

Clinton Wilkins 10:21
If you’ve liked what you’ve heard, and you want to learn more, feel free to visit us online at Tim clinton.ca