Monday Market Musings: Canadian Mortgage Outlook Amidst Global Shifts
Jamie Ushko • September 9, 2024
As we kick off another week, the financial markets seem deceptively calm. But with key economic data on the horizon, Canadian homeowners and prospective buyers should stay alert. Let's dive into the numbers and see how they might impact your mortgage.
Canada: Charting Its Own Course?
The Bank of Canada has cut rates three times since June 6th, 2024. Interestingly, our dollar has held steady:
- Current CAD: 0.73681 USD
- June 5th (pre-cuts): 0.7304 USD
This resilience suggests the BoC might continue its independent path, potentially leading to more rate cuts that could benefit variable-rate mortgage holders.
U.S. Inflation: A Key Indicator
Wednesday brings crucial U.S. inflation data:
- Previous: 2.9%
- Expected: 2.6%
Why it matters: Lower U.S. inflation could influence our mortgage rates. A positive report might signal continued downward pressure on Canadian rates.
Historical Perspective: Market Dips and Rate Cuts
Let's look at past crises and their impact:
- Dot Com Bubble (2000-2002):
- US500 loss: 40%
- Fed rate drop: 4.75%
2. Financial Crisis (2007-2009):
- US500 loss: 52%
- Fed rate drop: 2.50%
3. Pandemic (2020):
- US500 loss: 35%
- Fed rate drop: 1.50%
4. Today (Aug 30 - Sept 6, 2024):
- US500 loss: 4.35%
- Fed rate change: None yet
Data source: Trading Economics
What this means for Canadian mortgages: If the U.S. holds steady due to minimal market pressure, it might slow the pace of rate cuts in Canada, potentially stabilizing mortgage rates in the short term.
Looking Ahead
Market predictions suggest a 67.5% chance of a 0.25% U.S. rate cut on September 18th, with a 32.5% chance of a 0.50% cut. Fed Governor Christopher Waller has even hinted at supporting a rate cut:
"Considering the achieved and continuing progress on inflation and moderation in the labor market, I believe the time has come to lower the target range for the federal funds rate at our upcoming meeting," Waller stated.
What This Means for Canadian Homeowners and Buyers
- Variable-rate mortgage holders might see more relief if the rate-cutting trend continues.
- Those looking to buy should stay ready – we could see more favorable rates in the coming months.
- Fixed-rate mortgage holders should consider talking to a mortgage professional about potential refinancing opportunities.
Remember, while current trends look positive for borrowers, it's crucial to stay informed and consider your unique financial situation. As always, I'm here to help you navigate these changes and find the best mortgage solution for your needs.
Stay tuned for updates as we navigate this eventful week in the financial markets!
Jamie Ushko
Mortgage Broker
The idea of owning a vacation home—your own cozy escape from everyday life—is a dream many Canadians share. Whether it’s a lakeside cabin, a ski chalet, or a beachside bungalow, a second property can add lifestyle value, rental income, and long-term wealth. But before you jump into vacation home ownership, it’s important to think through the details—both financial and practical. Start With Your 5- and 10-Year Plan Before you get swept away by the perfect view or your dream destination, take a step back and ask yourself: Will you use it enough to justify the cost? Are there other financial goals that take priority right now? What’s the opportunity cost of tying up your money in a second home? Owning a vacation home can be incredibly rewarding, but it should fit comfortably within your long-term financial goals—not compete with them. Financing a Vacation Property: What to Consider If you don’t plan to pay cash, then financing your vacation home will be your next major step. Mortgage rules for second properties are more complex than those for your primary residence, so here’s what to think about: 1. Do You Have Enough for a Down Payment? Depending on the type of property and how you plan to use it, down payment requirements typically range from 5% to 20%+ . Factors like whether the property is winterized, the purchase price, and its location all come into play. 2. Can You Afford the Additional Debt? Lenders will calculate your Gross Debt Service (GDS) and Total Debt Service (TDS) ratios to assess whether you can take on a second mortgage. GDS: Should not exceed 39% of your income TDS: Should not exceed 44% If you’re not sure how to calculate these, that’s where I can help! 3. Is the Property Mortgage-Eligible? Remote or non-winterized properties, or those located outside of Canada, may not qualify for traditional mortgage financing. In these cases, we may need to look at creative lending solutions . 4. Owner-Occupied or Investment Property? Whether you’ll live in the home occasionally, rent it out, or use it strictly as an investment affects what type of financing you’ll need and what your tax implications might be. Location, Location… Logistics Choosing the right vacation property is more than just finding a beautiful setting. Consider: Current and future development in the area Available municipal services (sewer, water, road maintenance) Transportation access – how easy is it to get to your vacation home in all seasons? Resale value and long-term potential Seasonal access or weather challenges What Happens When You’re Not There? Unless you plan to live there full-time, you'll need to consider: Will you rent it out for extra income? Will you hire a property manager or rely on family/friends? What’s required to maintain valid home insurance while it’s vacant? Planning ahead will protect your investment and give you peace of mind while you’re away. Not Sure Where to Start? I’ve Got You Covered. Buying a vacation home is exciting—but it can also be complicated. As a mortgage broker, I can help you: Understand your financial readiness Calculate your GDS/TDS ratios Review down payment and lending requirements Explore creative solutions like second mortgages , reverse mortgages , or alternative lenders Whether you’re just starting to dream or ready to take action, let’s build a plan that gets you one step closer to your ideal getaway. Reach out today—it would be a pleasure to work with you.
If you have a variable rate mortgage and recent economic news has you thinking about locking into a fixed rate, here’s what you can expect will happen. You can expect to pay a higher interest rate over the remainder of your term, while you could end up paying a significantly higher mortgage penalty should you need to break your mortgage before the end of your term. Now, each lender has a slightly different way that they handle the process of switching from a variable rate to a fixed rate. Still, it’s safe to say that regardless of which lender you’re with, you’ll end up paying more money in interest and potentially way more money down the line in mortgage penalties should you have to break your mortgage. Interest rates on fixed rate mortgages Fixed rate mortgages come with a higher interest rate than variable rate mortgages. If you’re a variable rate mortgage holder, this is one of the reasons you went variable in the first place; to secure the lower rate. The perception is that fixed rates are somewhat “safe” while variable rates are “uncertain.” And while it’s true that because the variable rate is tied to prime, it can increase (or decrease) within your term, there are controls in place to ensure that rates don’t take a roller coaster ride. The Bank of Canada has eight prescheduled rate announcements per year, where they rarely move more than 0.25% per announcement, making it impossible for your variable rate to double overnight. Penalties on fixed rate mortgages Each lender has a different way of calculating the cost to break a mortgage. However, generally speaking, breaking a variable rate mortgage will cost roughly three months of interest or approximately 0.5% of the total mortgage balance. While breaking a fixed rate mortgage could cost upwards of 4% of the total mortgage balance should you need to break it early and you’re required to pay an interest rate differential penalty. For example, on a $500k mortgage balance, the cost to break your variable rate would be roughly $2500, while the cost to break your fixed rate mortgage could be as high as $20,000, eight times more depending on the lender and how they calculate their interest rate differential penalty. The flexibility of a variable rate mortgage vs the cost of breaking a fixed rate mortgage is likely another reason you went with a variable rate in the first place. Breaking your mortgage contract Did you know that almost 60% of Canadians will break their current mortgage at an average of 38 months? And while you might have the best intention of staying with your existing mortgage for the remainder of your term, sometimes life happens, you need to make a change. Here’s is a list of potential reasons you might need to break your mortgage before the end of the term. Certainly worth reviewing before committing to a fixed rate mortgage. Sale of your property because of a job relocation. Purchase of a new home. Access equity from your home. Refinance your home to pay off consumer debt. Refinance your home to fund a new business. Because you got married, you combine assets and want to live together in a new property. Because you got divorced, you need to split up your assets and access the equity in your property Because you or someone close to you got sick Because you lost your job or because you got a new one You want to remove someone from the title. You want to pay off your mortgage before the maturity date. Essentially, locking your variable rate mortgage into a fixed rate is choosing to voluntarily pay more interest to the lender while giving up some of the flexibility should you need to break your mortgage. If you’d like to discuss this in greater detail, please connect anytime. It would be a pleasure to walk you through all your mortgage options and provide you with professional mortgage advice.
