Mortgage 101 – Interest Rates Updates

Yet another Bank of Canada interest rate update means that Clinton Wilkins and Todd Veinotte are at the Mortgage 101 table to discuss what this means for Nova Scotians. They also get into the challenges of managing mortgage debt in a rising interest rate environment, and highlight the risks of negative amortization and the importance of proactively refinancing mortgages to avoid significant payment increases.

Todd Veinotte
You’re listening to Mortgage 101, your guide to homeownership with Clinton Wilkins and myself, Todd Veinotte. On today’s episode, inflation is on everyone’s mind. So today we’re talking about exciting news from the Bank of Canada!

Clinton Wilkins
Advice for navigating the ever changing rate environment and selecting the right rate product for you. You know, summers on the decline, you know, we’re in the second week of August now. I think summer went by too quickly.

Todd Veinotte
It absolutely did. Also on the decline, of course, thankfully, finally, interest rates!

Clinton Wilkins
The Bank of Canada! What good news coming in July with the second rate cut. Certainly, a lot of consumers want the rates to be lower. I think the Bank of Canada is really focused on it not being inflationary. And we want inflation to keep on going down, we want our consumer goods to be less, and we want the rates to continue to decline. And that’s what we’re really, really cognizant of. At the end of July, they reported that the GDP, increased a little bit, it was an increase over the previous month, where it was a decline. So I’m going to be watching very closely. The Bank of Canada meets again, that first Wednesday of September. So we have a little bit of a break here before the Bank of Canada is announcing again. I’m on the fence, I think we might see a hold now after two cuts but, I guess we’ll have to see what happens here the next couple of weeks.

Todd Veinotte
What does it mean in dollars and cents, when you have an interest rate cut?

Clinton Wilkins
You know what? It really depends on how much they borrow and really what their amortization is. Every mortgage payment is made up of an interest and a principal portion. Now, the rates going down by .25 doesn’t make a huge difference for those people that are in a variable or have a home equity line of credit. It’s like a 3% reduction in their, borrowing costs. But I think every little bit makes a difference. And I think it’s motivating for consumers. And we certainly have a lot more consumers that are choosing to go into a variable rate mortgage, because rates are starting to decline. Now economist, Scotia Bank, for example, they’re predicting maybe another 125 basis points of reduction between now and the end of next year. But there’s other lenders, and their chief economists are predicting 175 basis points of a close rate by the end of next year. So by December next year, they’re predicting that we’re going to see, the rates be, up to maybe 175 basis points less than where they are now. Which really means that we’re going to see, prime rate in that 4% type range. Which I think is going to be really great for a lot of consumers.

Todd Veinotte
But that’s a far cry from what it was at its historical lowest right? What was the lowest mortgage you wrote?

Clinton Wilkins
Ever, ever, ever, ever? Well it would be variable. And at one time prime was 2.25%. And we had, some consumers at like prime minus 100, so it’d be like, 1.25%. I mean, and I think maybe there were even lower, I’m just gonna think in my head, I think there were some that were like sub 1%. Believe it or not, it’s gonna be a while before we see rates at that level.

Todd Veinotte
If ever again, potentially?

Clinton Wilkins
I’m not gonna say ever but I do think it’s gonna be a while.

Todd Veinotte
So what would have to happen? What would the scenario be for rates to get to that?

Clinton Wilkins
I think that inflation would need to be very low or negative. The reason that they would lower rates at that level is to create inflation.

Todd Veinotte
To stimulate the economy; get people borrowing and spending.

Clinton Wilkins
Correct, exactly. So it’s gonna be a while. And, some consumers that are choosing to do these variable, they’re like, Well, “I don’t know what’s going to happen in the US. I don’t know what’s going to happen with inflation.” Typically, when we see the rates starting to cut, they’ll continue to cut until they plateau. Yeah, so it’s gonna be a long, long time. And it might even be five years before we start seeing rates increase again.

Todd Veinotte
There was a lot of talk, and I’m sure you heard a lot about this and witnessed it. There was this concern about what they call “COVID mortgages” in which people were getting these low numbers, and they were coming up for renewal on the five year mark anytime, if not some already. And the calendar is pretty obvious. It was in 2020, It’s going to be 2025. So is there a concern about people hitting this economic cliff, when they have to renew this mortgage?

Clinton Wilkins
The ones that I’m concerned about are the ones that are in a static variable payment. Let’s just be honest, here, it’s really lenders that are in the big five that have a static variable.

Todd Veinotte
What does that man, static variable?

Clinton Wilkins
I’m saying TD, Bank of Montreal, CIBC, World Bank just for an example. Okay? The way that their variable works, when the prime rate changes, the payment doesn’t change – It impacts the amortization. So some of those lenders, not all, but some will allow a negative amortization. So in essence, you owe more every month than your previous month. So your mortgage payment isn’t even covering just the interest. So no principal is being paid. Some of those lenders will allow like $1 being paid, or a penny being paid, to allow just a smallest amount of principal, that’s still like an amortization for infinity. Some will have a reset rate where eventually your payment will reset. But those consumers need to be so so concerned when their mortgage comes up for renewal. They either need to do a lump sum payment, to kind of bring the amortization back in line, or they’re gonna see their payment just skyrocket. So we’re seeing those consumers proactively, either at renewal or before renewal, choosing to refinance their mortgages, and then re amortize. So maybe we amortize over 30 years, we amortize over 25 years. And yes, they’re seeing their payments go up. But they’re not letting it get to the point where the bank is dictating, hey, this is your new payment. And your amortization now needs to go from infinity to 20 years.

Todd Veinotte
It was a static, is that what you call it?

Clinton Wilkins
Yea, so that’s a traditional variable. The ones from the bank would be the traditional way. The rate changes, no payment change. Most borrowers these days, where we’re doing the mortgages, have an adjustable rate. Where prime goes up, payment goes up, prime goes down, payment goes down.

Todd Veinotte
So why would people get into a static variable? They would be banking on interest rates not going up?

Clinton Wilkins
They would be banking on interest rates are going up, and they’re okay to say, we may have some changes in like five year periods.

Todd Veinotte
Should some of these lump sum payments be big? I would think they’d be pretty big eh?

Clinton Wilkins
Depends how big the mortgage is.

Todd Veinotte
Like we’re talking potentially 10’s of thousands of dollars. Big money! So if you can’t do that, then that money’s still that’s on the books?

Clinton Wilkins
Then you have to start making bigger payments.

Todd Veinotte
And then you have to, to your point re mortgage or refinance the mortgage?

Clinton Wilkins
When we are talking about a cliff, these are the ones that I’m most concerned about. Yes. I’m also concerned about those people that are on a fixed rate that we’re in the very Uber low sub 2%. I’m concerned about these folks too.

Todd Veinotte
But, they’ve already been realizing the increases?

Clinton Wilkins
I don’t think so. I think the ones in the static variable. And I think the ones with the Uber low fixed rates, I think are still going out and buying new vehicles, eating out. I see these people around town trust Me, I’m out and about. I see them buying their new cars. I see them on Facebook, and IG.

Todd Veinotte
Nothing drives you more nuts when you’re riding alone. And people are buying cars that drives you crazy right?

Clinton Wilkins
You know what, we deal with people at the car industry all the time, and I’m sure I’m like their nemesis or something. But honestly, auto debt is just the worst. It is honestly, the worst, and people buy much nicer vehicles, then they can really afford.

Todd Veinotte
And negative equity dumped into it as well right?

Clinton Wilkins
It’s so unregulated, where mortgage lending, we talk about all these nuances. It’s so complicated. We have to dot every I cross every T. But the reason that it’s so challenging is the government, the mortgage origination business, the banks are all trying to protect the consumers from themselves. Canadians have an unsatiable taste for debt. Canadians are so so indebted that, one little impact, just like when these rates went up, we’re only talking 18 months of the rates, being high. We have a very short term memory here.

Todd Veinotte
You’ve often said and there’s empirical data to back this up that Canadians traditionally pay their mortgage first.

Clinton Wilkins
They do. And still to this day, even though we’re seeing maybe these renewal cliffs happening, and all this stuff. The arrears are still very, very low. They’re picking up a little bit. But, overall, Canadians did a very good job at paying down their debt, and getting their finances under control in 2020. We didn’t have any place to spend our money. It’s going to be these later years. We’re going to start seeing more losses. We’re gonna see more losses from businesses, so we’re gonna see businesses going under, and we’re gonna see more consumers, in some areas, specifically GTA, Vancouver. We’re gonna see more consumers selling their home because they can’t afford this home at renewal. Here in Halifax, maybe not so bad. I think we’re more conservative overall. We’re gonna see some people. But guess what, we need the inventory here a lot more. And there’s more demand in this market than there is supply.

Todd Veinotte
It’s interesting. I saw a story about housing starts in Ontario. That was startling. And I wanted to talk to you about that. But let’s save that for the last segment of the show because…

Clinton Wilkins
We’ll definitely talk about the real estate market. We have a wonderful guest. We have Danielle McLean coming on from DCL Law. She’s joined us on our show before, during financial literacy month, on the phone. This time she’s in studio. She’s a real estate lawyer here, she practices in Halifax in Dartmouth, and we’re going to talk to her all about how real estate law really works. And also what are the impacts in terms of a deed, mortgage, and we’re gonna have a lot of really great questions for her.