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Economic Insights from Dr. Sherry Cooper

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Economic Insights from Dr. Sherry CooperWhat the next few years will bring? Insights from Dr. Sherry Cooper 

Update February 2023

Even bond traders and economists are stumped about what the next few years will bring. The repercussions of a global economy that stopped suddenly, shed millions of jobs and initially contracted 30% only to rebound in a flash on the back of free-money government programs are still being felt.

Predicting where the economy goes from here risks taking comfort in spurious accuracy. We’ve never experienced a similar set of circumstances. With hindsight, we now see that policymakers have made severe errors—taking interest rates to unprecedented lows and flooding the system with massive fiscal stimulus has precipitated global inflation; home prices in Canada surged 50% in the three years following the pandemic; variable-rate mortgages were much cheaper than fixed-rate loans as the central bank cut overnight rates to 25 basis points.

The volume of mortgage originations surged, with a record proportion, in VRMs. Now many borrowers have hit their trigger points. The banks allow the amortization of rising interest payments owed, easing the near-term pressure on borrowers. Those with adjustable-rate loans have seen their monthly payments rise seven consecutive times, with likely another rate hike next week. This, in addition to inflation, has reduced household purchasing power. Many are hoping that interest rates fall to pre-COVID levels soon.

Initially, the central banks argued that inflation was transitory. Many are betting that the old forces that worked to keep inflation under control for years would reassert themselves. The federal banking regulator is now proposing additional restrictions on mortgage lending to highly indebted households.

We hope for the best but must prepare for a slow return to 2% inflation. Home prices have fallen but are still up more than 35% from pre-pandemic levels. Labour markets are still robust, but a slowdown is inevitable. This will be a transition year with little likelihood of interest rate cuts. The Bank of Canada will pause soon to see if the lagged effects of higher rates further reduce inflation. Few believe the 2% target will be hit this year or next. The benchmark policy rate, now at 4.25% will not return to its pre-COVID level of 1.75%.

 

What to Know about Second Mortgages

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What to Know about Second MortgagesA second mortgage is a mortgage that is taken out against a property that already has a home loan (mortgage) on it. Generally people take out second mortgages to satisfy short-term cash or liquidity requirements, have an investment opportunity or to pay off higher-interest debts (such as credit cards and student loans) that a second mortgage might offer. 

If you are considering a second mortgage for any reason, here are a few key points to keep in mind:

Second Mortgages and Home Equity: Your second mortgage and what you can qualify for hinges on the equity that you have built up in your home. Second mortgages typically allow you to access up to a max of 80% of the home value; very few lenders will consider a second mortgage over 80% of the home value.

For example, if you are seeking an 80% Loan-to-Value loan (“LTV”):

House Value $850,000
80% LTV (maximum mortgage amount) $680,000
less: First Mortgage ($550,000)
Amount Available Through Second Mortgage $130,000

Second Mortgages and Interest Rates: When it comes to a second mortgage, these are typically higher risk loans for lenders. As a result, most second mortgages will have a higher interest rate than a typical home loan. There is also the option of working with alternative and private lenders depending on your situation and financial standing. Keep in mind, typically lenders who offer a second mortgage are private lender MICs (Mortgage Investment Companies) – in addition to some trust companies and credit unions. For major banking institutions, you would need to hold your first mortgage with them in order to be considered for a second mortgage.

Second Mortgage Payments: One advantage when it comes to a second mortgage is that they have attractive payment factors. For instance, you can opt for interest-only payments, or you can select to pay the interest plus the principal loan amount. Work with your mortgage broker to discuss options and what would work best for your situation.

Second Mortgage Additional Fees: A second mortgage often comes with additional fees that you should be aware of before going into the transaction. These fees can vary widely but often are a percentage of the mortgage.  Other fees to consider include appraisal fees, legal fees to set up the second mortgage and any lender or broker administration fees (particularly with alternative or private lenders).

Second mortgages are a great option for many homeowners and, in some cases, may be a better solution than a refinance or a Home Equity Loan (HELOC). If you are interested in learning more or want to find out if a second mortgage is right for you, don’t hesitate to reach out to me today.

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Economic Insights from Dr. Sherry Cooper

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Economic Insights from Dr. Sherry Cooper - Dominion Lending Centres

Economic Insights and Real Estate Market Prospects for 2023 and beyond.

What a year this has been. In the face of red-hot inflation, the Bank of Canada raised its policy rate by a whopping 400 basis points to 4.25%. First to cool was the housing market, where buyers moved to the sidelines and mortgage rates surged.

Home prices fell, especially in Toronto and Vancouver. The economy appears to have slowed, and inflation has fallen to 6.8%--down from 8.1% earlier this year. But core inflation is sticky, and wages are rising rapidly. The Bank of Canada is adamant it will beat inflation to the 2% target level, even if it causes a recession.

As we move into 2023, I expect at least one more rate hike—probably a mini one—and then a pause. But the Bank will not cut the policy rate next year. A mild recession will ensue, home prices will fall somewhat further, and by 2024 the economy will begin to recover, and buyers and sellers in the housing market will re-engage. Inflation won’t go back below 2%, and interest rates will not return to pre-COVID levels.

The Canadian economy has never been so interest sensitive. Debt-servicing costs are at record levels. Many will feel the pinch when their mortgages renew in the coming years. The unsustainable housing froth of the pandemic years will not return. Still, the underlying value will be solid as the Canadian population snowballs owing to the rapid influx of immigrants.

 

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Post-Holiday Debt Consolidation

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Debt Consolidation Strategies.

The holidays are a season of giving and often times, households can often find themselves carrying some extra debt as we enter the New Year.

If you happen to be someone currently struggling with some post-holiday debt, that’s okay! Whether you’ve accumulated multiple points of debt from credit cards or are dealing with other loans (such as car loans, personal loans, etc.), you are likely looking for a way to simplify your payments – and reduce them.

Rolling them into your mortgage could be the perfect solution. In fact, consolidating other forms of debt into your mortgage has multiple benefits, including:

  • Helping you pay off your loans over a longer period of time
  • Allowing for reduced interest rates when compared to a credit card
  • Being easier to track with one single payment per month
  • Reduce your total monthly outlay of debt repayments

If you’re still not sure if this is the right solution for you, here is an example… if you have $30,000 of credit card debt, you are probably paying approximately $600 per month and $500 per month of that is likely going directly to interest. If you let me help you to roll that debt into your home equity and monthly mortgage, your payment for this $30,000 portion would drop down around $175 per month, with interest charges closer to $140 per month. That is huge savings!

While debt consolidation through refinancing will increase your mortgage, the benefits can be well worth it when it comes to interest savings, time and stress. Keep in mind, you’ll need a minimum of 20 percent equity in your home to qualify for this adjustment.

If you are looking for a way to simplify (or get out of) debt, reach out to me today! I would be happy to take a look at your current mortgage and walk you through the debt consolidation process, or help you come up with an alternative option that may help suit your needs.

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