Many Canadians are in a crisis because of rising interest rates. How is inflation affected by our increasing rate market? In this edition of Mortgage 101, Clinton Wilkins and Todd Veinotte discuss the complex impact of high rates on inflation, how payments are affected and challenges in rural areas. Plus, why should fixed-rate borrowers up for renewal be worried?

Are rate hikes helping or hurting inflation?

Todd Veinotte 00:04
A number of times I’ve talked about interest rates with a regular guest on my talk show. His name is Ian Lee, he’s a business professor at Carleton University. And he’s been an ardent, ardent supporter of interest rate hikes as being the key tool in dealing with inflation. He said that he’s witnessed it a few times, an older gentleman, including in the 80s, when inflation was in double digits, plus right. So interestingly enough, I thought I’d mix it up. And I had Jim Stanford who’s an economist on the show, a former economist with Unifor. And now he works for another organization. He’s in British Columbia. And he had a completely different perspective on the interest rate hikes, and suggested that it’s not appropriate. That these interest rate hikes are hurting a lot of Canadians in a big time way. And it’s not dealing with some of the core issues that are out there, like global supply chains, worker shortage, there’s all types of variables, and just going in and going at it with a sledgehammer with this policy from the Bank of Canada, he feels is problematic. Obviously, it creates, if higher interest rates are in play, which they are. People are less opt to build homes, you’re probably seeing a lot of that for sure. Right. Housing starts are down, and it’s creating a lot of issues. What are your thoughts?

Clinton Wilkins 01:26
I 100% agree. I think the Bank of Canada has gotten every decision that they make wrong, you know, across the board. They’re too late to the party sometimes. And you know, then, once the inflation train has already left the station, it’s very hard to slow that back down. The one thing that I’ve really heard and it’s, you know, spoken to me from what economists have said, is the increases that have happened, it takes 4, 6, 8, 10, 12 months for the results of an increase to really trickle down. So we are seeing inflation slow. It’s not where they want it to be. But overall, it slowed. You know, we may be already in a recession. But the challenge is, the one thing that’s really driving inflation is the housing costs. And that’s being driven by these rates. So it’s really very tough, and it’s a very hard balance to find. But I don’t think the Bank of Canada has gotten it right. And I don’t think that they’ve let the increase of the rates marinate long enough with Canadians to really see the results of inflation slowing. So that’s kind of my opinion.

Todd Veinotte 02:32
And you said that when interest rates were, what was the lowest interest rate that you issued over at the low point?

Clinton Wilkins 02:40
Like in the 1% range.

Todd Veinotte 02:41
In the 1%? range. So these a five year fixed. These are coming up many of these mortgages, and they’re going to be dealing with what six and a half?

Clinton Wilkins 02:48
Yeah, 6% in that range.

Todd Veinotte 02:50
Right.

How are payments affected by rate hikes?

Clinton Wilkins 02:52
Most of the rates today are like high fives into low sevens. That’s really the range that we’re looking at right now.

Todd Veinotte 02:56
Okay, so what does that mean for somebody’s payment?

Clinton Wilkins 03:00
That’s significant. Because just think if your interest carrying cost goes up 6X, your mortgage payment not going up 6X. But it’s going up significantly, because a portion of every payment that you make is made up of an interest and a principal component. And if that interest component is way up, yes, your payment is going to be higher. And this is a crisis for many, many Canadians. I am the most concerned about borrowers that are in a fixed rate coming up for renewal. I’m not worried about people in a variable, they have it under control

Todd Veinotte 03:32
Like me, I’m paying the variable now.

Fixed rate borrowers should be concerned

Clinton Wilkins 03:35
I’m in a variable as well. We are comfortable. We have been very educated. We’ve had a slow burn. Yes, it hurts. But we’ve dealt with it right? I am most concerned about fixed rate borrowers that are coming up for renewal. That’s what really keeps me up at night. Because I think in some ways, they’re living in this false sense of reality. They don’t even know what’s coming in some cases, because you know, they’ve set it and forget it to be like, oh I’ve always gone fixed, I’m going to be okay. The problem is like your term does not last forever.

Todd Veinotte 04:06
Now that said they paid for five years down in their principal, have they not?

Clinton Wilkins 04:12
Yeah they have. So they owe less. So that means that their amortization is not, you know, any longer. So I think when these people come up for renewal, many of them will likely refinance and extend their amortizations just to deal with that rate parity. And I think even if they extended, you know, back to 25, or even 30 years, their payment and likely will still be higher than if they, you know, than it would have been.

Todd Veinotte 04:36
Right. But there may be some people in a situation where their income isn’t what it was, they might have lost a job or people might not qualify to do that.

Clinton Wilkins 04:45
If there’s something that’s changed with the credit or the income they might not qualify.

Todd Veinotte 04:48
Which I mean, let’s face it, there would be a cohort of people out there that would be in that situation.

Clinton Wilkins 04:52
I would say the bulk of borrowers likely would require

Todd Veinotte 04:55
Right the bulk but 10, 15% whatever percent –

Clinton Wilkins 04:58
There’s gonna be some people that are just going to have to eat the renewal at that higher payment.

Todd Veinotte 05:01
And then what and then potentially not be able to make it and foreclosure perhaps?

Challenges facing rural areas

Clinton Wilkins 05:05
Or maybe they need to list the home for sale. There’s very few foreclosures in urban Halifax. The foreclosures are in rural Nova Scotia. The losses are in rural Nova Scotia by in large Todd. I’m not saying exclusively, don’t get me wrong, but the people that are having a problem making their payments, and the people with more credit issues, and the people that have a harder time selling their home are in more rural areas because it takes longer to sell a house in rural. And there’s less employment opportunities in rural. So when we talk on our show about you know, alternative lenders and private lenders not having as big of an appetite and rural Nova Scotia, that’s why because if they have to take a home back, it’s probably going to take longer to sell it. That’s just the reality.

Todd Veinotte 05:49
Okay, so also in something else in the news cycle this weekend, we don’t really have a lot of time yet to get to, perhaps we can get to the next segment, but let’s tease it up. And that’s when people have their interest, they’re paying much more on interest, they’re paying nothing on printable and the amortization would go out –

Clinton Wilkins 06:05
Negative.

Todd Veinotte 06:06
Negative right.

Clinton Wilkins 06:07
So there’s certainly a whole cohort of borrowers that have a variable rate mortgage with a static payment.

Todd Veinotte 06:13
Static payment. That’s difference.

Clinton Wilkins 06:14
And we had we had a special report on your radio show about these borrowers. Some of these borrowers have amortizations that are negative. So what that means is every time their payment is generated, the actual amount that they owe, goes up.

Todd Veinotte 06:31
Okay, I want to get into that because lots to talk about there. Okay, Mortgage 101 your guide to homeownership with Clinton Wilkins and myself Todd Veinotte, we’ll be right back.

Clinton Wilkins 06:48
If you’ve liked what you’ve heard, and you want to learn more, feel free to visit us online at teamclinton.ca