12 Jul

June Home Sales In Canada Show Early Signs Of A Pick-Up After BoC Easing

Latest News

Posted by: Dean Kimoto

Early Signs Of Renewed Life In June Housing Markets

The Canadian Real Estate Association (CREA) announced today that national home sales rose 3.7% between May and June following the Bank of Canada’s rate cut. While activity was still muted, it wasn’t nearly as weak as the media recently portrayed.

“It wasn’t a ‘blow the doors off’ month by any means, but Canada’s housing numbers did perk up a bit on a month-over-month basis in June following the first Bank of Canada rate cut,” said Shaun Cathcart, CREA’s Senior Economist. “Year-over-year comparisons don’t look great mainly because of how many buyers were still jumping into the market last spring, but that’s a story about last year. What’s happening right now is that sales were up from May to June, market conditions tightened for the first time this year, and prices nationally ticked higher for the first time in 11 months”.

New Listings

The number of newly listed properties rose 1.5% last month, led by the Greater Toronto Area and British Columbia’s Lower Mainland. As of the end of June 2024, there were about 180,000 properties listed for sale on all Canadian MLS® Systems, up 26% from a year earlier but still below historical averages of around 200,000 for this time of the year.

As the national increase in new listings was smaller than the sales gain in June, the national sales-to-new listings ratio tightened to 53.9% compared to 52.8% in May. The long-term average for the national sales-to-new listings ratio is 55%, with a sales-to-new listings ratio between 45% and 65%, generally consistent with balanced housing market conditions.

“The second half of 2024 is widely expected to see the beginnings of a slow and gradual return of buyers into the housing market,” said James Mabey, Chair of CREA. “Those buyers will face a considerably different shopping experience depending on where they are in Canada, from multiple offers in places like Calgary to the most inventory to choose from in over a decade in places like Toronto.

At the end of June 2024, there were 4.2 months of inventory nationwide, down from 4.3 months at the end of May. This was the first time that the number of months of inventory had fallen month over month in 2024. The long-term average is about five months of inventory.

Home Prices

The National Composite MLS® Home Price Index (HPI) increased by 0.1% from May to June. While a slight increase, it was noteworthy because it was the first month-over-month gain in 11 months. Regionally, prices are still generally sliding sideways across much of the country. The exceptions remain Calgary, Edmonton, and Saskatoon, and to a lesser extent Montreal and Quebec City, where prices have steadily increased since the beginning of last year.

That said, there have been more recent upward price movements in other markets, including across Ontario cottage country, Mississauga, Hamilton-Burlington, Kitchener-Waterloo, Cambridge, London-St. Thomas, and Halifax- Dartmouth.

The non-seasonally adjusted National Composite MLS® HPI stood 3.4% below June 2023. This mostly reflects how prices took off last April, May, June, and July – something that has not been repeated in 2024.

Bottom Line

Housing activity will gradually accelerate over the next year as interest rates continue to fall. Yesterday, bond yields fell considerably due to the marked improvement in the June US inflation data. Markets are now pricing in a 90% chance of a Federal Reserve rate cut in September, allaying fears that the Canadian dollar will decline precipitously if the Bank of Canada continues to go it alone in easing monetary conditions.

Next week’s CPI data will determine whether the Bank of Canada cuts rates at their July confab or waits until the September meeting. A further reduction in core inflation will open the doors to another rate cut on July 24, particularly given the continued rise in the Canadian unemployment rate. Rising monthly mortgage payments in the wake of record renewals will continue to slow discretionary consumer spending, providing further impetus for Bank of Canada rate cuts.

Please Note: The source of this article is from SherryCooper.com/category/articles/

8 Jul

Will rising unemployment hasten the Bank of Canada’s coming rate cuts?

Latest News

Posted by: Dean Kimoto

Canada’s labour market stumbled in June, with the unemployment rate rising more than expected to 6.4%.

Despite the disappointing report, economists largely think the Bank of Canada will continue to bide its time before delivering its next rate cut.

The economy saw a net loss of 1,400 jobs in June, according to figures released today by Statistics Canada. It consisted of a gain of 1,900 part-time positions but a loss of 3,400 full-time jobs. This fell well below economists’ expectations of a 25,000 position gain.

Who’s feeling the economic pain?

Job losses were concentrated in transportation and warehousing (-12,000; -1.1%) and public administration (-8,800; -0.7%), while significant gains were reported in accommodation and food services (+17,000; +1.5%).

“We are seeing job losses in areas like manufacturing, office work, and solid jobs, but massive increases in fast food, accommodation (hotels), etc.,” rate expert Ryan Sims observed. “We are trading in good paying positions for temporary, low-wage positions,” a trend he says has been going on for some time.

Canada’s national unemployment rate has risen 1.3 percentage points since April of last year, equating to 1.4 million unemployed individuals in June, an increase of 42,000 from May.

StatCan’s data also reveal that only 21.4% of those unemployed in May transitioned to employment, a lower rate than the pre-pandemic average of 26.7%. Additionally, the proportion of long-term unemployed (more than 27 weeks) rose by 4 percentage points to 17.6%.

“A lower proportion of unemployed people transitioning into employment may indicate that people are facing greater difficulties finding work in the current labour market,” StatCan observed.

The most affected groups include youth aged 15 to 24, with their unemployment rate rising 0.9 percentage points to 13.5%, and new immigrants, whose unemployment rate increased to 12.7%.

Economists from National Bank highlighted the imbalance between job creation and recent strong population growth.

“Job creation hasn’t kept pace with the population’s meteoric rise for some time now,” economists Matthieu Arseneau and Alexandra Ducharme wrote in a note. “A stagnation in employment as observed in June, while the population is up by 100K, is a recessionary deviation.”

Regionally, Quebec experienced a net loss of 18,000 positions (-0.4%), while New Brunswick and Newfoundland and Labrador saw employment gains of 3,000 (+0.8%) and 2,600 (+1.1%) positions, respectively.

The Bank of Canada’s rate cut: July or September?

While Canada’s may not be seeing sharp job losses under the weight of high interest rates and a weak economy, that doesn’t change the fact that the June employment numbers were “awful,” says Bruno Valko, VP of national sales for RMG.

“We see this in our industry with clients and their battles to buy homes, renew at higher rates, and so on,” he wrote in a note to subscribers. “Hopefully, now, the economists see our true job market. It is not resilient. It is weak [and] the Bank of Canada will notice.”

BMO Chief Economist Douglas Porter emphasized the data’s significance, stating, “This report drives home the point that the Canadian labour market can simply no longer be considered tight—in fact, it is quickly tipping in the other direction.”

Still, most economists believe the Bank of Canada will tread cautiously before delivering its next anticipated rate cut, which could come as early as its next meeting on July 24, or not until September 4.

“As a standalone result, the softening job market raises the odds of a Bank of Canada rate cut,” Porter wrote. “However, wages remain the very definition of sticky, which will give the Bank pause.”

Average hourly wages in June were $34.91, representing an annual growth rate of 5.4%, up from 5.1% in May.

Porter added that for the BoC to go ahead with a rate cut in July, the June inflation results, to be released on July 16, would need to be “exceptionally tame.” He suggested that while the weak job market sets the stage for further rate cuts later this year, variable-rate mortgage borrowers may not see rate relief this month.

Leslie Preston, an economist at TD, pointed out that key economic indicators due before the BoC’s July 24 rate decision will play a crucial role in determining whether the BoC makes a rate move in July or September.

“In either case, Canada’s economy is not falling off a cliff and we expect rate cuts will be gradual over the remainder of the year,” she wrote.

This article was written for Canadian Mortgage Trends by:
Steve Huebl
Steve Huebl is a graduate of Ryerson University’s School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.
14 Jun

Average Canadian rent hits an all-time high of $2,202

Latest News

Posted by: Dean Kimoto

Average rents across Canada are now up 32% from their pandemic lows.

The average asking rent in May was $2,202, up $200 from the previous month and 9.3% from a year ago, according to the latest monthly report from Rentals.ca.

Rent prices have been climbing steadily in recent years, rising $540 or 32% since hitting their low of $1,662 in April 2021.

“Canada’s rental market is entering the peak summer season with continued strength,” said Shaun Hildebrand, President of Urbanation, which co-released the report.

“Markets such as Vancouver and Toronto that had experienced some softening in rents in previous months are stabilizing near record highs, while many of the country’s mid- and small-sized cities are still posting double-digit rent increases,” he added.

The Rentals.ca report noted that rents have averaged an annual growth rate of 9.1% over the past three years. However, when incorporating the declines experienced in 2020 and 2021, the five-year average growth rate is more moderate at 4.7%.

Saskatchewan led the provinces in rent price growth

Provincially, rents increased the most in Saskatchewan, up 21.4% to $1,334. Alberta and Nova Scotia weren’t far behind with average year-over-year increases of 17.5% and 17.1%, respectively.

Quebec was the only province to record a month-over-month decline in apartment rents during May, dipping 0.6% from April to an average of $1,999.

At the municipal level, Regina led rent price growth, with an annual rise of 22% to $1,381.

Among mid-sized markets, Quebec City and Waterloo topped the list, with average annual rent increases of 20% and 19%, respectively.

Average asking rent in May Year-over-year increase
Toronto, ON $2,784 -1%
Vancouver, BC $3,008 -4%
Montreal, QC $2,037 +6%
Calgary, AB $2,093 +8%
Ottawa, ON $2,190 +3%
Regina, SK $1,381 +22
Winnipeg, MB $1,636 +10%
Halifax, NS $2,209 +17%

This article was written for Canadian Mortgage Trends by:

Steve Huebl
Steve Huebl is a graduate of Ryerson University’s School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.
11 Jun

Fixed mortgages are falling. Experts explain why and weigh in on fixed vs. variable

Latest News

Posted by: Dean Kimoto

Both existing homeowners and new homebuyers are benefiting from a drop in interest rates seen over the past week.

Following last week’s Bank of Canada interest rate cut, which lowered rates for existing variable-rate mortgage holders, bond yields also plunged, triggering reductions in fixed-mortgage rate pricing.

Last week, Government of Canada bond yields, which influence fixed mortgage rates, slipped 36 basis points before partially recovering. Mortgage providers across the country responded by lowering their fixed mortgage rates by as much as 25 basis points, or 0.25%.

Rate reductions were seen across all terms, although predominantly in 3- and 5-year terms.

Mortgage broker and rate analyst Ryan Sims told CMT the rate drops are due to last week’s Bank of Canada rate cut, as well as the rise in bank mortgage default rates and weakening economic data, including slower-than-expected GDP growth and easing inflation.

“Also, let’s keep in mind that 5-year fixed rates—even after this recent slide—are still about 20 bps higher than where we were back in January,” Sims said. “‘Range-bound’ would be a good term [to describe the latest rate movement].”

“But if we continue to see inflation slip lower, that should be supportive of higher bond prices and lower yields,” he added. “Of course, if we start to see inflation pick back up, then expect the opposite.

Big banks are the big exception

While most lenders have been busy lowering their rates, the Big Banks have remained largely silent.

Posted special rates from all of the big banks remain practically untouched over the past month, aside from some discretionary pricing, sources say.

As Ron Butler of Butler Mortgage has told CMT in the past, interest rates typically “take the elevator on the way up, and the stairs on the way down.”

Sims speculates that the chartered banks are hoping to take some profit as they see their loan losses mount.

“Over the last six months, the Big 5 have written off over $3 billion of bad debt…and no, I don’t mean loan loss provisions,” he said. “Being a little slow to drop rates will give them a little padding to make it back up, albeit slowly.”

Sims also believes the banks want to see if last week’s rate changes are a ‘knee-jerk’ reaction to the Bank of Canada rate cut, or if they’re more sustained. If the rate cuts hold, he suspects rate drops from the big banks will follow in the coming week or so.

Where do rates go from here?

Expect mortgage rates to fluctuate going forward, taking their direction from bond yield movements in response to economic data.

“The path for rates will remain unpredictable as always, and certainly not a straight line down,” Sims said.

Similarly, Butler tells CMT that rates will trend lower from here, the journey will be uneven.

“Expect a bumpy decline, but eventually lower rates than today,” he said, adding that borrowers shouldn’t expect any mortgage rates below 4% this year.

As it stands, the lowest nationally available mortgage rate currently stands at 4.59% from Citadel Mortgage. That’s for 5-year fixed default-insured mortgages only, or those with a down payment of less than 20%.

Which mortgage offers the best value?

But while 5-year fixed mortgage rates are currently among the lowest, borrowers may be wary about locking in for such a long term given the likelihood that rates will continue to decline from here.

That begs the question: for today’s mortgage shoppers, which mortgage term currently offers the best value over the term of the mortgage?

For Butler, the answer is a 3-year fixed mortgage, which can be had for as low as 4.84% for a default-insured mortgage and 5.19% for a conventional mortgage, according to data from MortgageLogic.news.

While Sims said he tends to favour variable rates over the longer term, he finds the spread right now is too great at roughly 115 basis points, and thinks a fixed term makes more sense.

“For the variable to make sense, you would need to see another five cuts [in addition to the June rate cut] to break even,” he told CMT. “Will we get five cuts? Probably, however the timing may take a lot longer than people realize.”

That could result in variable-rate borrowers overpaying at the beginning of their term in the hopes of lower rates down the road. But Sims says the other factor to consider is that banks and other lenders don’t pass along the full magnitude of the rate cuts, particularly if mortgage losses start to mount.

“If someone is comfortable with the payment, then the fixed mortgage will win out,” he added. “Less stress, less hassle, and a lot of predictability. And in today’s environment, predictability is worth something.”

However, mortgage broker Dave Larock of Integrated Mortgage Planners recently posted some comparisons on fixed rates vs. variable and how each would perform under several different scenarios.

His conclusion? Depending on the simulation, either product could be a good choice and save the borrower money over the longer term.

“There is no way to know for sure where rates are headed, but if we are, in fact, near the peak of the current interest-rate cycle, the odds should favour variable-rate mortgages,” he wrote.

“[But] if you’re a more conservative and risk-adverse borrower, I think 3-year terms are still the best choice among today’s fixed-rate options,” he added.

This article was written for Canadian Mortgage Trends by:
Steve Huebl
Steve Huebl is a graduate of Ryerson University’s School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.
6 Jun

Bank of Canada Cuts Overnight Rate 25 bps to 4.75%

Latest News

Posted by: Dean Kimoto

A collective sigh of relief as the BoC cut rates for the first time in 27 month

Today, the Bank of Canada boosted consumer and business confidence by cutting the overnight rate by 25 bps to 4.75% and pledged to continue reducing the size of its balance sheet. The news came on the heels of weaker-than-expected GDP growth in the final quarter of last year and Q1 of this year, accompanied by CPI inflation easing further in April to 2.7%. “The Bank’s preferred measures of core inflation also slowed, and three-month measures suggest continued downward momentum. Indicators of the breadth of price increases across components of the CPI have moved down further and are near their historical average.”

With continued evidence that underlying inflation is easing, the Governing Council agreed that monetary policy no longer needs to be as restrictive. Recent data has increased our confidence that inflation will continue to move towards the 2% target. Nonetheless, risks to the inflation outlook remain. “Governing Council is closely watching the evolution of core inflation and remains particularly focused on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.”

As shown in the second chart below, the nominal overnight rate remains 215 basis points above the current median CPI inflation rate, which shows how restrictive monetary policy remains. The average of this measure of real (inflation-adjusted) interest rates in the past 30 years is just 60 bps. The overnight rate is headed for 3.0% by the end of next year.

Bottom Line

There are four more policy decision meetings before the end of this year. It wouldn’t surprise me to see at least three more quarter-point rate cuts this year. While the overnight rate is likely headed for 3.0%, it will remain well above the pre-COVID overnight rate of 1.75% as inflation trends towards 2%+ rather than the sub-2% average in the decade before COVID-19.

Please Note: The source of this article is from SherryCooper.com/category/articles/
31 May

Weaker-than-expected Canadian Q1’24 GDP Growth Increases Odds of a Rate Cut Next Week

General

Posted by: Dean Kimoto

The likelihood of a rate cut next week has increased due to disappointing Canadian GDP growth. Real gross domestic product (GDP) only rose by 1.7% (seasonally adjusted annual rate) in the first quarter of this year, which is well below the expected 2.2% and the Bank of Canada’s forecast of 2.8%. Fourth-quarter economic growth was revised to just 0.1% from 1.0%. These figures have led traders to increase their bets on a Bank of Canada rate cut when they meet again next week.

In the first quarter of 2024, higher household spending on services—primarily telecom services, rent, and air transport—was the top contributor to the increase in GDP, while slower inventory accumulation moderated overall growth. Household spending on goods increased modestly, with higher expenditures on new trucks, vans and sport utility vehicles.

On a per capita basis, household final consumption expenditures rose moderately in the first quarter, following three quarters of declines. Per capita spending on services increased, while per capita spending on goods fell for the 10th consecutive quarter.

Business capital investment rose in the first quarter, driven by increased spending on engineering structures, primarily within the oil and gas sector. Business investment in machinery and equipment also increased, coinciding with increased imports of industrial machinery, equipment and parts.

Resale activity picked up in Q1, driving the rise in housing investment, while new construction was flat. Ontario, British Columbia and Quebec posted the most significant volume increases in resales, while prices in these provinces fell in the first quarter.

New housing construction (+0.1%) was little changed in the first quarter, as work put in place decreased for all dwelling types except double houses. Costs related to new construction, such as taxes and closing fees upon change in ownership, increased in the quarter and were mainly attributable to newly absorbed apartment units in Ontario.

The household savings rate reached 7.0% in the first quarter, the highest rate since the first quarter of 2022, as gains in disposable income outweighed increases in nominal consumption expenditure. Income gains were derived mainly from wages and net investment income.

Investment income grew strongly in the first quarter of 2024 due to widespread gains from interest-bearing instruments and dividends. Higher-income households benefit more from interest rate increases through property income received.

Household property income payments, comprised of mortgage and non-mortgage interest expenses, posted the lowest increases since the first quarter of 2022, when the Bank of Canada’s policy rate increases began.

Bottom Line
This is the last major economic release before the Bank of Canada meets again on June 5. Traders in overnight markets put the odds of a rate cut at next week’s meeting at about 75%, up from 66% the day before. Bonds rallied, and the yield on the Canadian government two-year note fell sharply, reflecting this change in sentiment.

The Bank of Canada has good reason to cut the overnight policy rate next week. Core inflation measures have decelerated sharply in recent months, and the economy is growing at a much slower pace than the central bank expected. The Bank has been very cautious, and there remains the possibility that they will wait another month before pulling the trigger on rate cuts, but at this point, we see no reason to delay any further.

Please Note: The source of this article is from SherryCooper.com/category/articles/
24 May

OSFI says mortgage payment shock poses a key risk to Canada’s financial system

Latest News

Posted by: Dean Kimoto

Canada’s banking regulator says high borrowing costs and a wave of expected renewals in the coming 18 months pose key risks to Canada’s financial system.

With 76% of outstanding mortgages expected to come up for renewal by the end of 2026, OSFI says homeowners face the risk of payment shock, particularly those who took out mortgages between 2020 and 2022 when interest rates were at historic lows.

“Households that are more heavily leveraged and have mortgages with variable rates but fixed payments will feel this shock more acutely,” OSFI said in its Annual Risk Outlook for 2024-25. “We expect payment increases to lead to a higher incidence of residential mortgage loans falling into arrears or defaults.”

OSFI notes that financial institutions could face higher credit losses in the event of a weakened residential real estate market. It added that mortgages that have already experienced payment increases, such as adjustable-rate mortgages, are already showing higher rates of default.

In response to this risk, OSFI said its previously announced loan-to-income limits for lenders’ uninsured mortgage portfolios will help “prevent a buildup of highly leveraged borrowers.”

In March, OSFI confirmed that federally regulated banks will have to limit the number of mortgages that exceed 4.5 times the borrower’s annual income, or in other words those with a loan-to-income (LTI) ratio of 450%.

“We do not expect these limits to be binding under the current interest rate environment,” OSFI noted, adding that these institution-specific loan-to-income limits are “supervisory actions” and that no additional details could be disclosed.

Additionally, OSFI said its decision in December to leave the minimum qualifying rate for uninsured mortgages unchanged at the greater of the mortgage contract rate plus 2% or 5.25% will “help ensure borrowers can still make payments if they experience negative financial shocks…”

Fixed-payment variable-rate mortgages still a concern

OSFI also once again singled out variable-rate mortgages with fixed payments as a “specific concern.”

These mortgage products, which are offered by most big banks except for Scotiabank and National Bank, keep monthly payments fixed even as interest rates fluctuate. When rates rise, as they have over the past two years, less of the monthly payment goes towards principal repayment and a greater portion ends up going towards interest costs.

These mortgage products currently make up about 15% of outstanding residential mortgages in Canada.

“If mortgage rates remain elevated, the financial commitment required by borrowers to return to their contractual amortization (for example, lump-sum payment, mortgage payment increase) may put financial strain on many of those households,” OSFI said.

This isn’t the first time OSFI has voiced its concerns about fixed-payment variable-rate mortgages. Last fall, OSFI head Peter Routledge told a Senate standing committee that the regulator views such mortgages as a “dangerous product” that put certain borrowers at increased risk of default.

While he said OSFI’s role is not to “impose a judgment on product design,” Routledge did say OSFI believes “the system would be healthier with less of that product.”

Other risks facing Canada’s financial system

OSFI’s Annual Risk Outlook also addressed other risks facing the financial system. Those include:

  • Wholesale credit risk

OSFI says wholesale credit risk, which includes commercial real estate (CRE) lending as well as corporate and commercial debt, “remains a significant exposure for institutions.”

The regulator noted that higher interest rates, inflation and lower demand “have put CRE markets under pressure” and that it expects these challenges to extend into 2024 and 2025.

  • Funding and liquidity risks

OSFI notes that liquidity risks “are a persistent concern” and can arise if depositor behaviour shifts dramatically.

“Funding and liquidity risk remains linked to credit risk as deteriorating conditions can negatively impact securitization markets,” it said. “This can trigger increased liquidity risk for institutions that rely on securitization as a key source of funding.”

In response, OSFI said it plans to broaden and intensify its assessment of liquidity risk.

This article was wrtten for Canadian Mortgage Trends by:

Steve Huebl
Steve Huebl is a graduate of Ryerson University’s School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.
23 May

Canadian CPI Inflation Eased In April, Raising the Chances of a June Rate Cut

Latest News

Posted by: Dean Kimoto

The Consumer Price Index (CPI) rose 2.7% year-over-year (y/y) in April, down from 2.9% in March. This marks the fourth consecutive decline in core inflation. Food prices, services, and durable goods led to the broad-based deceleration in the headline CPI.

The deceleration in the CPI was moderated by gasoline prices, which rose faster in April (+6.1%) than in March (+4.5%). Excluding gasoline, the all-items CPI slowed to a 2.5% year-over-year increase, down from a 2.8% gain in March.

The CPI rose 0.5% m/m in April, mainly due to gasoline prices. On a seasonally adjusted monthly basis, it rose 0.2%.

While prices for food purchased from stores continue to increase, the index grew slower year over year in April (+1.4%) compared with March (+1.9%). Price growth for food purchased from restaurants also eased yearly, rising 4.3% in April 2024, following a 5.1% increase in March.

According to Bloomberg calculations, the three-month moving average of the rate rose to an annualized pace of 1.64% from 1.35% in March. That’s the first gain since December.

The Bank of Canada’s preferred core inflation measures, the trim and median core rates, exclude the more volatile price movements to assess the level of underlying inflation. The CPI trim slowed to 2.9% y/y in April, and the median declined to 2.6% from year-ago levels, as shown in the chart below. Rising rent and mortgage interest costs account for a disproportionate share of price growth, with shelter costs up 6.4% year-over-year. Growth in mortgage interest costs slightly decreased in April but remained 24.5% higher than a year ago.

The breadth of inflationary pressures narrowed again in April, with the proportion of the CPI basket experiencing growth exceeding 3%, decreasing to 34% from 38% in March.

Bottom Line

April’s inflation readings largely met expectations but with underlying details (including further slowing in the BoC’s preferred ‘core’ measures) pointing to a further reduction in inflationary pressures. The Bank of Canada is as concerned about where inflation will go in the future as where it is right now. Still, Canada’s persistently softer economic backdrop (declining per-capita GDP and rising unemployment rate) increases the odds that price growth will continue to slow. The case for interest rate cuts from the Bank of Canada continues to build. The central bank has every reason to cut rates at their next meeting on June 5. Still, given the BoC’s extreme caution, we must consider the possibility that they will wait until the July meeting to take action, and only if inflation continues to recede.

Please Note: The source of this article is from SherryCooper.com/category/articles/
15 May

Why you shouldn’t fear a credit score drop when applying for a mortgage

General

Posted by: Dean Kimoto

In the complex world of home financing, a common concern among our clients involves the impact of credit inquiries on their credit scores. Often, the thought of a mortgage credit check can make potential borrowers hesitant and fear it might lower their overall credit scores.

We’ve all heard it before…

“Can’t you just use my free Borrowell report?”

“I don’t want anyone to pull my credit, it will hurt my score!”

Oh sure, sometimes our prospective clients just want a judgment call on their borrowing power and in most cases, I am comfortable assessing files without having to pull their official credit history. I’ve taken several client files pretty far without going through a hard inquiry.

However, without a complete history and proper credit report, my advice and opinions on their borrowing power will be filled with disclaimers, just in case there are any outstanding balances, loans, or late payments my client has either forgotten or has not yet disclosed to me. And, of course, sometimes there are outright errors in the credit report.

Understanding credit inquiries in mortgage applications

As mortgage professionals, it’s our duty to clarify and reassure clients about the realities of credit inquiries and the minimal impact they typically have.

Let’s dive into why borrowers shouldn’t worry excessively about their mortgage credit inquiry. To be clear, if someone wants a formal mortgage pre-approval or even a rate hold, then yes, absolutely, we have to pull a credit report.

Here’s the reality:

  • Minimal impact: A single credit inquiry usually has a very small effect on your credit score, potentially lowering it by just 5 to 8 points.
  • Credit score buffer: Most diligent credit users have a score buffer that more than compensates for the minor deductions caused by inquiries.
  • Purpose of building credit: Remember, a big reason for maintaining a good credit history is to utilize it when making significant decisions like buying or refinancing a home.

In essence, avoiding a credit check could hinder your ability to get pre-approved for a mortgage. It’s crucial to let your mortgage professional proceed with the necessary checks to ensure you’re on the right track to securing your home loan.

Canadian home sames soften in June

Real-world insights into credit inquiries

Note to our readers: For client privacy, the names of the subjects in this story have been changed. The values mentioned in this story are accurate and true. These case studies are presented to educate Canadians in a couple of different home purchase situations. One is for move-up buyers, and the other is about first-time homebuyers.

Case Study 1: The high achievers with credit concerns

  • Client Story: Tiana & Leo
  • Combined household income: $181,600
  • Current home value: $695,000
  • New home value: $910,000
  • Client goal: Selling their townhome to purchase their forever home

Tiana and Leo live in a townhome in Kitchener and recently they came to us wanting to be pre-qualified for a mortgage. They and their two kids are excited about moving up to their forever home. But there was a snag—Tiana was very hesitant about us pulling her credit report. She feared it might negatively impact her credit score.

Their outcome: Why it pays to check even if you’re scared!

With a bit of guidance and reassurance about the process, Tiana and Leo agreed to let us proceed with the credit inquiry, which of course is a standard step in the mortgage pre-approval process.

Drum roll please…

When we checked her credit, Tiana had a pristine score of 900! The absolute pinnacle, something we only see once in a blue moon! Clearly, she had nothing to worry about. It doesn’t get any better than 900!

Naturally with that credit score (Leo’s score was also very high), securing the pre-approval they wanted became a piece of cake!

Case Study 2: Multiple inquiries, minimal impact

  • Client story: Fiona & Bart
  • Combined household income: $251,700
  • Current home value: N/A – they are first-time buyers
  • New home value: $1,600,000
  • Client goal: They Are Ready To Purchase Their First Home

Fiona and Bart, a forward-thinking couple in their early thirties, approached us with a clear goal: they were ready to purchase their first home. Unlike many first-time buyers, they were quite relaxed about the entire credit scoring process, understanding its necessity in the home-buying journey.

Their outcome: Stable scores through multiple inquiries

Given that a credit report’s validity lasts only 30 days, we found ourselves needing to pull their reports multiple times as we journeyed from pre-approval to final approval, while at the same time negotiating with two different lenders over a few months.

Additionally, each bank required their own credit pull. Despite the frequency of all these inquiries, the impact on their credit scores was really minimal.

Here’s how it played out:

  • Initial score: Fiona started with 823, and Bart with 834.
  • During the process: Fiona’s score fluctuated slightly, dropping to 817 before returning to 823, showing her credit score’s resilience. Bart’s score dipped modestly to 822.
  • Final score: By the end of the process, both scores remained strong and high, demonstrating that multiple inquiries (in this case, five consecutive inquiries in the span of three months), when done within a proper context, do not have a significant detrimental effect.

Credit score comparison

This is a comparison chart for all the dates and inquiries we made for Fiona and Bart. You can clearly see that even with five credit inquiries, there were minimal changes to both of their scores.

This experience underscores the importance of not sweating the small stuff. Multiple inquiries might sound daunting, but in the structured environment of mortgage applications, they are just part of the process and are less impactful than often feared.

Why mortgage credit inquiries should not deter you

Understanding the nuances of credit inquiries can significantly ease the concerns of both mortgage professionals and their clients. Personal credit expert Richard Moxley notes that multiple mortgage-related inquiries over 45 days only impact your Equifax Canada score as a single inquiry, and with TransUnion Canada, the same is true over a 15-day period.

This minimizes the impact on your credit score and highlights the importance of proceeding with necessary credit checks during the mortgage application process.

Key takeaways:

  • Educate clients: As mortgage professionals, it is our responsibility to educate clients about the true impact of credit inquiries.
  • Reassure borrowers: Reassure your clients that a high credit score is built to withstand such inquiries, particularly when they are crucial for securing a mortgage.
  • Encourage transparency: Encourage clients to consent to credit pulls to facilitate a smoother pre-approval process.

By demystifying the impact of mortgage credit inquiries, we can help clients move forward with confidence, knowing their credit health is secure and their home financing is on track.

24 Apr

Fixed mortgage rates are rising. What’s the deal?

Latest News

Posted by: Dean Kimoto

As variable-rate mortgage holders eagerly anticipate the Bank of Canada’s first rate cut, fixed rates are heading in the other direction: up.

After peaking in early October, Government of Canada bond yields—which lead fixed mortgage rates—plummeted by 125 basis points, or 1.25 percentage points, by early January.

Since reaching that low, they’ve rebounded by approximately 60 bps, with around 25-bps worth of those gains seen in the past three weeks. As a result, fixed mortgage rates are being taken along for the ride.

Strong economic data to blame

Rate expert Ron Butler of Butler Mortgage says 2- to 5-year fixed mortgage rates are up across various lenders by anywhere from 15 to 30 bps in recent weeks.

Butler says the gains are being driven primarily by recent U.S. data, including strong employment, GDP and inflation figures.

As we reported earlier this month, U.S. CPI inflation in March was up 0.4% month-over-month and 3.5% on an annualized basis. That caused some economists to speculate that U.S. rate cuts could get pushed out to later this year, or potentially even until next year.

On Wednesday, U.S. Federal Reserve Chair Jerome Powell seemed to confirm those calls when he said a “lack of further progress” on the inflation front could lead to interest rates staying higher “for as long as needed.”

In Canada, where GDP growth and employment have held up better than expected, markets still see the first Bank of Canada rate cut being delivered at either its June or July rate meetings, though that can always change.

Where could fixed rates go from here?

Rate expert and mortgage broker Ryan Sims, who predicted the rise in rates in a CMT column published earlier this month, thinks fixed rates still have some room to rise.

“I still see mortgage rates going up, although I would think another 20 to 30 bps would do it,” he told CMT. “The gap between fixed and variable is too much, and the bond market had priced in a lot of cuts that I don’t think will happen for a lot longer than people thought.”

The average deep-discount 5-year fixed rate available for insured mortgages (those with a down payment of less than 20%) is currently around 4.79%. “I think we see it get to 5.29%,” Sims said.

While fixed rates are widely expected to resume their decline once Bank of Canada rate cuts are imminent, Sims says there’s a wildcard that should be considered: that fixed rates continue to rise even as the BoC’s benchmark rate falls.

“Canada’s fiscal policy is in bad shape, and I think you could see government bonds, and by default mortgage rates, pick up—regardless of [BoC Governor] Tiff Macklem dropping overnight rates,” he said. Rate cuts that are delivered too soon could be seen as a “panic move” by international markets and help drive yields higher, he notes.

“People forget that interest rates are about perceived risk, and after [this week’s] budget, risk in Canada, at least from an investing perspective, went up,” Sims added. “I could easily see another 20 to 30 bps into Canada government yields over the next 12 to 18 months just on risk—regardless of what overnight rates actually do.”

 

This article was written for Canadian Mortgage Trends by:

Steve Huebl
Steve Huebl is a graduate of Ryerson University’s School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.