IN FOCUS： Growing panic over interest rate hikes for homeowners
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Summary
In this episode, we take a look at how the Bank of Canada has been hiking interest rates to the tune of about 3.5% so far this year, and how those rate hikes, although designed to slow inflation, are directly affecting current homeowners and those who are looking to get into homeownership in the near future.
Transcript
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Hello, I'm Melanie Rizdin with the Western Standard. Thanks for joining me for this edition
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of In Focus. Homeowners, this one is for you. This evening, we're going to take a close look
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at the several Bank of Canada interest rate hikes over 2022 to the tune of about 3.5% so far this
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year and how those rate hikes, although designed to slow inflation, are directly affecting current
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homeowners and those who are looking to get into homeownership in the near future. Joining me this
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evening is Danielle DiMarco, a mortgage broker for 16 years and owner of Mortgage Line in Calgary.
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Danielle, thanks for joining me. Thanks for having me. Now, according to a former Bank of Canada
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governor, the current head of Canada's central bank, increasing key interest rates as quickly as
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he did was the right decision. He said the rate hikes needed to keep inflation low came too slow
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and according to an opinion piece in the Financial Post, the Bank of Canada should now pause rate
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hikes and reflect. Just curious what your thoughts are on the idea behind these kinds of rate hikes
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being how we're going to control inflation. Do you want to start there? Yeah, that's a good
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place to start so essentially i mean the basic idea is that if we're charging more for interest
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rates or the government is charging more and money is more expensive to borrow then typically we would
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see people borrow less of it which then reduces and curbs spending which then brings down inflation
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so that's kind of the the general idea behind it um obviously as mortgage brokers we would
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love there to be some regulation on maybe outside spending credit cards things like that but of
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course mortgages are much more easy to regulate for the government so that's where they tend to
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do all of their regulations so when they are increasing the interest rates again idea is to
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curb the spending which helps with inflation so it is the right idea um you know i was recently
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listening to uh chief economist dr sherry cooper with dominion lending and she had the exact same
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sentiment, which is these rate hikes needed to happen. The stress test needs to remain in place
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in order to help curb that inflation. Now, looking at these rate hikes, just having a kind of
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snapshot over the last kind of year and a half, those interest rates stayed the same for quite
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some time. Looks like for a good chunk of last year, they didn't even move. But then we saw an
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increase start to start to happen around march of 2022 and then it has been a steady increase
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since then yeah so this year has been um one of the largest increases we've seen in a short term
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obviously people are feeling it home buyers and homeowners are feeling it so about three and a
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half percent increase kind of since the start of this year which translates as far as mortgage
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rates go and we're talking about homeownership and payments between lenders and on average about
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3.7 percent we've seen interest rates go up from the start of this year until now so as you can
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imagine that has greatly affected home buyers and homeowners and i mean i think intuitively i think
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most average people would look at it and say well how are we helping inflation by making the cost
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of living even more by by you know ramming up the um the interest rates and then making you know
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payments for for mortgages more expensive when everything else is more expensive the cost of gas
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the cost of food you know how are people going to how are people going to survive this so let's kind
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of map out how these rate hikes can and will affect current homeowners yeah for sure that's
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a great question so um i always like to kind of divide it between home buyers and home owners
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it's going to affect people differently as a home owner you will if you're on a variable rate
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mortgage so keeping in mind a variable rate mortgage is the type of mortgage where as the
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prime lending rate increases or decreases your interest rate that you're being charged by your
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lender will increase or decrease and therefore your payment may depending on your product increase
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or decrease so those people are the ones that are really feeling the the changes in the interest
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rates here because we're seeing on average, and to give you a rough idea, the prime lending rate
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changed October 26th. So the day before October 25th, as compared with October 26th, homeowners
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would have seen again on average about a $30 per month increase for every $100,000 of mortgage
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balance. So someone with a $400,000 mortgage, you're potentially seeing $120 a month increase
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on your mortgage, which is a lot for some people. And obviously it just goes from there, the higher
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the mortgage typically the you know you're going to see a higher increase um as for an actual home
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buyer so let's say you're out there and you're in the market for a new home and you're house hunting
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um which october 25th again that same date to october 26th so we're talking overnight
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when we're talking about people purchasing they could actually spend 25 000 less on a new home
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than they could the day before and again that's because as interest rates increase that stress
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test rate that the government has set that says hey anybody who's qualifying for a mortgage we
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need you to qualify at a higher interest rate just to make sure if in the events rate go up you can
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still make your payments so as that goes up obviously the amount you can spend goes down
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so we're seeing home buyers affected in one way with their mortgage payments and we're seeing or
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sorry homeowners affected in one way with their mortgage payments and home buyers affected with
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how much they can actually spend while they're house hunting right of course and so this has
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been um you know quite a large jump in the span of less than a year as far as interest rates go
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uh so somebody that say we're not looking at variable rates somebody who's locked in i know
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for for us you know we have a locked in rate when it comes to the renewal of that rate
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uh or the renewals of renewal of that mortgage we're going to see um you know a big jump in
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interest rates from what we i'm pretty sure i have a mortgage that's probably locked in um you know
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under three percent right now and when that comes up for renewal that's gonna be quite a big jump
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to the interest rates of today uh so you know what what what can you say to homeowners who are
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potentially facing that is there any strategies is there anything they can do yeah for sure so i mean
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actually something i've implemented myself personally and i'm in this every day is i made
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sure as soon as these rates started going up um even before actually but as soon as you can
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changing your payment frequency is a great example so people who are paying monthly if you can afford
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to pay accelerated bi-weekly or if you can afford to increase your payments at all during this time
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while your rates are still lower that's going to help bring that principal balance down so when you
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do come up for renewal at the end of the day hopefully your mortgage balance or not hopefully
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it will be lower than what you were expecting so hopefully that combined with the higher interest
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rate will help offset a little bit of that increase for you so kind of getting that mortgage
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paid down as low as you can before you're coming up for renewal is a great option we've been talking
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to a lot of clients who are taking some of their lump sums that they've had to set aside in savings
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or gic's things like that putting those down against the mortgage to also same thing reduce
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that mortgage balance right because well and we'll just clarify to any of those excess payments that
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you make or those loans and sums and stuff go straight to the principal rather than the interest
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correct 100 yeah so that directly brings your mortgage balance owing down so not only does it
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save you on interest over time but like i said because the balance is going to be lower when
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you come up for renewal your mortgage payment should technically you know be lower because
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that mortgage balance is lower obviously lower than what it would be if you hadn't paid it down
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we're still going to see increases i mean we'd be dreaming if we didn't think we were going to see
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increases on renewal we typically do anyways but now that combined with higher rates we're
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definitely going to see increases but we can offset it a little bit by pre-paying and then
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something else we can do as well as when you're coming up for renewal it's really important to
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discuss options don't just sign on that dotted line so it's really critical that you're looking
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at all of the options of which one is extending out that amortization so maybe to lengthening that
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a time of your mortgage that amortization that might lower your payments by even a couple few
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hundred dollars a month to help offset that increase in interest rate so there's always
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options there so just make sure you're talking to an expert so that you can explore all of those
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options the last thing we want people to do is you know sign on a dotted line go into a fixed rate
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when to be honest with you i'm sure you're going to ask me but we're we're kind of recommending
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variable right now anyways um we don't want you to be stuck in a mortgage that has high penalties
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high fees that you can't redo after you sign right yeah and you know what for a lot of um
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new home buyers or people who are looking to buy a lot of this this terminology may not even make
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sense for for amortization so amortization is for how long you've had your mortgage for
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and so what you're saying is increasing that amortization when it comes to renewing your
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mortgage means instead of you paying it down now maybe there's 10 years left owing on it but you
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extend it to another 15 therefore kind of breaking up that that um that increase that would be kind
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of hitting some people hard we're talking uh you know in in some cases you know six seven eight
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hundred nine hundred thousand or sorry dollars more a month in a payment yeah
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offset that by kind of relengthening how long you're going to pay that mortgage
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down for exactly exactly extending out that length of your mortgage so we have
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what's called a term typically you see like a three four five year term with
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the mortgage but that amortization is what your payments based over and so
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they standard amortization is 25 years but depending on your mortgage you may
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able to extend it out to 30 so yeah your example is perfect someone who maybe has 10 years left
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might want to consider extending out to 15 20 25 just to kind of combat the increase in interest
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rates here for the next little bit and then wait when rates come down you can always again pre-pay
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that mortgage to offset that longer amortization and pay it off quicker again well and i know again
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for for sort of newbies coming to the to the table and trying to figure all of this out it's it's it
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can be a lot to try and process so i know what was helpful for me early on was meeting with a
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mortgage broker um you know even yourself danielle you're full of all sorts of options that can
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really help um work out a a program or a mortgage or a you know a strategy that is best suited for
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sort of each individual's situation yeah that's kind of what we pride ourselves on as mortgage
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brokers is that we are listening to our clients we're asking you all of the right questions to
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take into consideration what are your plans what are your goals you know do you want to pay your
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mortgage down quickly is it a rental property so all of these questions are going to come into play
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how long do you want to home own this home for that's going to help us decide okay do we take
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a shorter term a longer term do we go fixed do we go variable you know are you comfortable with
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payment changes are you a riskier investor are you more conservative investor so all of these factor
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in and if you're not being asked those questions then that's kind of a red flag you want to make
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sure you are being asked all of these questions so that that mortgage is being properly set up for
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you and and again like you mentioned uh instead of signing on the dotted line so of course when
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your mortgage with a bank it comes up for renewal you get sort of mortgage renewal documents and
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it's sort of here's our standard rates and you know sign here and it's typically for a similar
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term to what you've had or or you know you can select the terms but but without really understanding
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the difference in in how quickly that's going to be paid down if you switch to to your bi-weekly
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payments or even understanding like hey i can't afford this mortgage payment at this rate anymore
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you know having that conversation about re-amortizing or extending that those conversations
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are really um incredible and and uh you know speaking to somebody who knows what they're doing
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is is obviously very helpful in a time like this where there's a lot of um you know homeowners and
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new buyers that are really struggling to figure out they're almost panicking how are we going to
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manage with interest rates this high yeah and we are definitely seeing some panic we're fielding
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calls from people you know my rates going up to this my renewals this i can't afford my payment
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so we are going through all of those strategies consistently on a daily basis with multiple people
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right now so you know if you're thinking if anyone's out there thinking they're the only one
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who's panicking you're not um you know and right now having that conversation with your broker
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before you're coming up for renewal is a really great place to start so then we're getting ready
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we can sometimes even renew a mortgage early and it's worth it because we can lower payments before
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rates go up so there are tons of options out there nobody is expected to sift through them
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all by themselves so definitely uh reach out chat with someone ask the questions have them ask you
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the right questions and provide you some guidance right now we had a rate increase uh they did start
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in march so we had a rate increase in march then in april june july september october the next
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expected announcement is december 7th and as i mentioned um you know some are calling for the
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bank of canada just hold your horses let's let's just kind of keep it where it is right now what
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are your thoughts on that yeah so there's mixed reviews you're going to some see some people who
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want you know there to be that hiatus and some that are saying no we still need to go a little
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bit further to kind of curb this inflation bottom line is we're probably going to see another
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increase in december um likely though hopefully around a quarter point so not as much as people
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were maybe anticipating we just saw that half point recently a quarter point december and then
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the talk is potentially between zero percent and half a percent next year so nothing hopefully
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major next year and we might even see them take that hiatus next year um but yeah i would say
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it's safe to assume that come december we're probably going to see another quarter point
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increase here so what kind of rates are we looking at now for say you know like a regular five-year
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term or what give me some idea of where we're sitting um and let's talk historically where
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we've been yeah so um you know if we were to say i picked a few numbers here here for you just to
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kind of see so in 2000 let's say in january of 2000 so we're talking about 22 years ago
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we're looking around you know over eight percent about eight point three four percent three point
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eight point three four percent on average for a fixed rate and six and a half for a variable
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right fast forward to you know january of 2022 this year we're at we were at 3.44 for a fixed
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and under two percent for a variable right that is a drastic difference and and one thing i always
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like to kind of clarify for people is anybody that's only really relatively new to the housing
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environment within let's say the last five years let's say first-time home buyers for example
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they've come into a time where over the last few years we've seen an abnormally low interest rate
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and that's not normal um or normal quote unquote for what we've seen historical averages are kind
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of that mid high four percent range so where we're at now might be a little bit higher than average
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but not much and where we're anticipating that we're going is kind of in that end of 2023
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to 2024 we're going to start to see those fixed rates come down but we're still thinking we're
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going to end in that mid four percent range so just to be kind of up front with everybody you
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know that mid four percent range is is quite reasonable but yeah today october 2022 we're
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around 5.64 on average for a five-year fixed and we're around five and a half percent average for
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a five-year variable gotcha so speaking then to like you said millennials uh new home buyers those
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who have yet to get into home ownership what kind of strategies you want to um to to point out or
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have them focus on as far as as making plans to get into home ownership yeah so i would say one
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big thing is really this word stands out to me is don't procrastinate um getting into the market
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is better than sitting and waiting and waiting and waiting we saw just to give you an example
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home buyers who went out house hunting september of 2021 as compared with today they're able to
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spend 120 000 less on a new home on average just because of where interest rates started and where
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they've come with that stress test rate for people who are waiting for the market trying to time house
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prices and interest rates they actually outpriced themselves out of that style of home or home that
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they wanted just by waiting so i would encourage home buyers to you know just go for it uh you
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can't time the market perfectly we are going to see rates come down likely in 2023 end of into 2024
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so you know we kind of talk about this all the time but fixed or variable which is better and
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and right now if you can ride out the variable rate and you're comfortable with it then you
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could purchase a home get into the market get your equity build up right as house prices are
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continuing to remain stable or possibly even increase but you're paying down your mortgage
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and not somebody else's and then we do come up for renewal like we mentioned earlier you know
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or when you're you're seeing these rates come down in 2023 and 2024 that's when you might call your
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broker back and say okay should i lock in now to a fixed rate so at least you're not missing that
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year and a half and two years of home ownership equity build up and debt pay down so i would say
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don't procrastinate is one of my biggest strategies for for millennials or anybody really that's just
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trying to get into a home i'm sure it's probably um changed the focus for new buyers as well and
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when we're talking about what they can qualify for i know for quite some time here with the very low
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interest rates um apartments condos things like that were sort of just kind of crickets right
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like people were were sort of skipping over those because the interest rates were allowing them to
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be able to get into homes with yards and garages and things like that but are we are we likely
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going to see a difference there then yeah absolutely and we already have so um you know
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housing markets are showing that condo purchases and townhouse purchases are steadily increasing
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they've even jumped a little bit some would say and that is exactly like you said it's because
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that stress test rate has increased so much it's affected home buyers qualifying ability
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so really that's the price point that they're able to get in at whereas before we were you know 100
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120 000 more you could get into that single family home so yes the condo market the townhouse market
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we're definitely going to continue to see a rise in that market and you know just for anybody that's
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out there supply is still low i mean we've seen all across the board but as it pertains to the
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housing market supply is low and there's still that demand and calgary is a phenomenal city
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speaking you know specifically to calgary we are significantly lower priced than the vancouver and
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the Toronto and we are much more affordable we've got tech companies setting up shop that are going
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to create thousands of jobs over the next couple of years we've got the oil industry you know our
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economy is going to remain strong so we don't really see house prices coming down that much
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per se so what does that mean it means that if you're going to wait to time interest rates but
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rates are going up over the next year year and a half and house prices are remaining stable you're
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going to continue to outprice yourself and continue to lower the amount that you can spend as a house
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hunter right well and speaking of you know supply versus demand and the fact that uh that condos and
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apartments and and whatnot were sort of uh low demand before um would you say there's sort of
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ample ample opportunity for the pickings there um at this stage yeah i mean i would say there's
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definitely a decent supply of condos out there and townhouses out there and so that allows home buyers
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to be a little bit picky and to make sure they're getting what they want in that price range but
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again coming back to what you mentioned before as far as strategy goes i would say just get into the
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market right if a condo is where you're going to start that's great it's a starting point and you
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can move on from there down the road and move up as as interest rates maybe come down and as your
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incomes increase and as time goes on but again at least you're building up that equity you own that
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asset and you're paying down your own mortgage not someone else's absolutely yes i i would say
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strategy wise getting out of the rental market getting into home ownership uh you you will
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always be putting money in back into your own pocket uh at the end of the day yeah exactly
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all right well my so my suggestion for for those of you that are looking to purchase something new
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or even have questions, you're a little bit concerned about when your mortgage is coming
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up for renewal. And hey, you can always talk to a mortgage broker about renewing early,
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if that makes sense. I mean, there's times when it does, maybe times when it doesn't.
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But I think the key for advice from me and, you know, from my experience with homeownership is
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talk to a mortgage expert, talk to somebody who can walk you through all of these different
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scenarios that may make sense for you absolutely relying on an expert is critical yeah all right
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well danielle will include uh some contact information for you as well but if you you
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know if you have been working with a mortgage broker i highly recommend make some phone calls
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get some questions answered make sure that you're well advised before you you make any moves but
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also you know in preparation if you are looking to purchase a home thanks danielle for joining
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me and sharing some of your insights into this climate that we're moving through. Again,
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millennials probably not used to seeing interest rates like this. Some of us were alive when
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interest rates were much higher. So I guess we should be thankful that they're nowhere near
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where they could be. Exactly. And thanks Mel for having me. I really appreciate it. All right. Thank