Mortgage 101 – The Wave Of Rising Rates | July 24, 2023

How are homeowners preparing for rate increases? In a new edition of Mortgage 101, Clinton Wilkins and Todd Veinotte are discussing the impact of interest rate increases on mortgages and how homeowners can weather the storm, according to the type of rate they are in.

LISTEN to the conversation on Spotify and Apple

Todd Veinotte 00:04
Mortgage 101 your guide to homeownership. We have new listeners all the time. And as a matter of fact, I receive emails from people who say that they really enjoy the show. But for those who don’t know who you are, why don’t you let everybody knows a bit about what you’re all about?

Clinton Wilkins 00:19
My name is Clinton Wilkins. I’m a mortgage broker here in Halifax. I’ve been doing this for 17 years. And over that period of time, we’ve done over 5000 transactions and, you know, almost $1.4 billion worth of mortgages. Every day, I say, I’ve seen it all. But every day I see something new. So mortgage lending, I think is super exciting. Honestly, it’s one of these times that it’s really in the news, and I’m glad that we’re here part of the conversation on City News, or wherever you listen to your podcasts. You know, I think we have a lot of really great listeners as well.

Todd Veinotte 00:50
I thought you’re gonna say 5000 shows.

Clinton Wilkins 00:52
5000 shows? Well, when we get to 5000 shows we’ll have a party. Don’t worry, we’ll invite everyone.

The impact of interest rate increases

Todd Veinotte 00:57
Exactly. Alright, so yeah, and we do talk about, obviously, mortgage lending. But there, there’s so much to discuss. And now interest rates is front and center. Everybody’s talking about interest rates, with the Bank of Canada setting the interest rate at 5%. This last increase. So obviously, somebody’s lending rate would be what, 6.5? What would it generally be now?

Clinton Wilkins 01:23
So just to give a little background, the Bank of Canada met last week on Wednesday, and they set the key overnight rate at 5%. The bank prime rate is now 7.7%. And if you have a variable rate mortgage, or any unsecured debt, or any, you know, debt that’s, you know, connected to variable, you know, Bank of Canada prime and to the bank prime, you know, your payments have gone up, or your amortization has gotten gotten gotten longer. So certainly it has had a major impact. And you know, we’re really talking to customers every day about what does that impact look like? And, you know, we have a lot of clients that are in a variable, you know, historically, there’s a certain percentage, like 40% of customers are in a variable rate. So certainly Canadians are starting to feel the pinch. And I know I talked to you about Equifax and TransUnion, had put out some writing that consumers are starting to miss some of their loan payments. It’s because it’s not just mortgage interest, people are really feeling the burnout, we were talking about this before our show. It’s about fuel cost, and food cost that’s really driving up some of these inflation numbers. But the good news is, this week, the Bank of Canada came out with a release saying that inflation was down to about 2.8%. Still very high driver, the cost of housing, and obviously the cost of food. And I mean, these are impacting everybody, right? It’s it doesn’t matter. If you own a home, or if you rent, everybody’s starting to feel the burn here. And when the Bank of Canada increases these key overnight rates, it impacts businesses access to credit, their cost of credit consumers, you know, everyone is starting to be impacted. And what the government is trying to do is really slow the economy and bring that down to, you know, a really a recession is what they’re looking for.

How are variable rates impacted?

Todd Veinotte 03:10
Alright, so you’re talking seven point, what again?

Clinton Wilkins 03:13
7.2 is the bank primary for the majority of bank lenders.

Todd Veinotte 03:16
So somebody who’s had a variable, what would they be at seven around that 7.2?

Clinton Wilkins 03:20
Well, I would say normally, lenders are usually below the prime rate. So you know, anywhere from you know, 100 basis points below, to 50 basis points below, to 30 basis points below, below, you know, the variable rate you’re looking at is somewhere coming up on 7%. It’s between 6 and 7%. That’s where you’re at if you’re in a variable rate in terms of a mortgage.

Todd Veinotte 03:41
Okay so a year ago, when somebody would have, or perhaps a bit before that –

Clinton Wilkins 03:47
Even if we talked two years ago, before even the increases started.

Todd Veinotte 03:50
A variable was at what?

Clinton Wilkins 03:51
Like 1.45, 1, 2%.

Todd Veinotte 03:55
Right. So if somebody let’s say, has a half a million dollar mortgage. Okay, what does that look like when it comes to their payment? Well, how much of an increase? Are we talking here?

Clinton Wilkins 04:05
So now, obviously, the interest rates have gone up significantly. So maybe their interest rate has gone up 3x. But their payment has not doubled. And people don’t really understand that piece. I think what they don’t understand is with the interest rates going up so much, they just assume, okay, if the interest rate doubles, my payment doubles. But that’s not what happens. Because every payment is made up of an interest component and a principal component. Obviously, the interest piece has certainly gone up.

Todd Veinotte 04:32
Right, but the payment piece has not.

Fixed rate mortgages are a big commitment

Clinton Wilkins 04:34
Not the principal portion of the payment. So I hear from customers where their payment has gone up 50%, for example, it hasn’t doubled, but it’s gone up by 50%. And you know what? That’s significant. And it’s certainly having an impact. And some customers are choosing to refinance their mortgage or maybe renew it early or convert it into a fixed rate. But not every solution is right for everyone. Like I have people email me, well, what should I do? Everybody’s situation is different, you know, I think it’s it’s really important to look at, you know, is the payment still within your reach? What’s your level of risk tolerance? What do you think’s gonna happen with rates over the next one to two years? What’s happening with your life in the next couple of years? Because some people take the variable because it was cheaper. Some people took the variable because they want to have the flexibility to be able to break their mortgage early and know that it’s only going to cost them three months of interest. You know, other people, you know, are somewhere in between. And, you know, if you’re planning on keeping your house and not planning on making any changes, maybe fixed rate is right for some people, but it’s not right for everybody. I think you need to really know when you enter into a fixed rate mortgage, it is a commitment. And the banks are like the casinos, they don’t lose. And typically, if you break a fixed rate mortgage early, you’re going to pay either three months interest, like you would if you break a variable rate, or you’re going to pay an interest rate differential. And it’s whatever is larger, and the banks really don’t know even what the interest rate differential will be down the road. Because it’s really what you’re borrowing that mortgage at, and what the rates are at that time, if you were to break it, and how much time is left on on your terms. So lots of factors that obviously impact what the penalty will be. But historically, Canadians break their mortgage early, a large, large percentage. So I think that’s something to think about when you take a fixed rate mortgage.

Riding the wave of interest rates

Todd Veinotte 06:24
Alright, so somebody has a variable mortgage, and they and they go fixed rate, should they look at potentially a 3 year fixed, or 5 year fixed, because –

Clinton Wilkins 06:34
I would say the most popular right now is a three year. But historically, a five year fix is the most popular. 60% of Canadians will take that type of product.

Todd Veinotte 06:42
But right now, we’re –

Clinton Wilkins 06:44
We’re not in a normal time.

Todd Veinotte 06:45
Well, and we’re looking at perhaps we’re at the crest here of this interest rate, or we’re nearing that crest.

Clinton Wilkins 06:51
I would say.

Todd Veinotte 06:51
So in the next three, certainly five years, that’s going to come down. So if you get stuck in a fixed rate now, then –

Clinton Wilkins 06:58
You may be really in it for the long run.

Todd Veinotte 07:00
The long run at 7 point, whatever, where’s the variable in two years, you could be looking at 3 or 4%.

Clinton Wilkins 07:06
Now, don’t get me wrong. Every rate today is starting with a 5 or 6 I would say pretty much. And sometimes clients are coming up for renewal. And they’re like, you know what my rate was 4%. I just want to keep my 4% rate. Well, that rate doesn’t exist anymore. Once your term is up, your term is up. And that rate then needs to, you know, obviously be renegotiated that time.

Todd Veinotte 07:27
But am I making sense though, if if somebody goes with a five year fixed right now –

Clinton Wilkins 07:32
It is a commitment.

Todd Veinotte 07:34
And probably rates are gonna go down over the next five years.

Clinton Wilkins 07:38
I would assume in the next one to two years, we’re gonna see rates go down, especially if we start going into a recession type situation.

Todd Veinotte 07:44
Exactly. So a three year fixed term, or even perhaps, could you do a one year fixed?

Clinton Wilkins 07:48
You could certainly do a one year but you know, the banks aren’t stupid. The one year fixed, very, very expensive, you’re paying about anywhere from six and a half up to like seven and a half percent for a one year fixed. So it just depends on which lender you’re going to go to.

Todd Veinotte 08:00
So I would think, and we’re almost out of time in this segment. But perhaps we can talk about the stress test and how that’s now changed.

Clinton Wilkins 08:07
Huge, huge impact, obviously, as the rates are higher that stress test is even harder to qualify. So certainly something to talk about later in the show.

Todd Veinotte 08:14
Yeah, we can talk about the stress test. Also in the show today, we’re going to talk about pride and homeownership.

Clinton Wilkins 08:18
That’s right Pride is here. And you know, I It’s been a tumultuous time, I think, for Pride in Halifax as well so we’ll touch on that.

Todd Veinotte 08:24
And perhaps a few other things, and some more music choices. Hopefully you can match my incredible opener.

Clinton Wilkins 08:30
Alright, well, we’ll wait for the next next segment and we’ll see which song is going to be up next.

Todd Veinotte 08:35
Alright, it’s Mortgage 101 your guide to homeownership with myself, Todd Veinotte and Clinton Wilkins. We will be right back.

Clinton Wilkins 08:49
If you’ve liked what you’ve heard, and you want to learn more, feel free to visit us online at Tim clinton.ca