Today, the Bank of Canada held the overnight rate at 5% for the sixth consecutive meeting and pledged to continue normalizing its balance sheet. Governor Macklem confirmed that inflation is moving in the right direction, labour markets are easing, and wage pressures appear to be dissipating. In today’s release of the April Monetary Policy Report (MPR), the central bank forecasters lowered their 2024 inflation forecast to 2.6% from 2.8%. However, the Governing Council needs more evidence to be confident that the downtrend in inflation is sustainable.

In contrast, the US CPI data released today for March showed that underlying inflation topped forecasts for the third consecutive month, and the US jobs data also beat estimates. This is in direct contrast to the news of better-than-expected inflation in Canada and the easing of labour markets. The Canadian economy is far more interest-rate sensitive than the US because mortgage terms are far shorter. Over 60% of all outstanding mortgages are up for renewal in the next two to three years, adding to monthly mortgage payments. That process has already begun.

While the Canadian economy slowed at the end of last year, more recent data suggest a bounceback in the first quarter. The Bank revised up its forecast for GDP growth in the first half of 2024 but reduced its economic outlook for next year. The Bank expects inflation to hit its 2% inflation target in 2025.

Bottom Line

Governor Macklem’s prepared opening statement at today’s press conference was more dovish on inflation than in prior months. “We are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained,” Macklem said in the prepared text.  If things go according to today’s MPR forecasts, policymakers are likely to begin cutting the overnight rate in June.

Still, Macklem called further declines in core inflation “very recent,” adding that the bank wants to “be assured this is not just a temporary dip.”

“While inflation is still too high and risks remain, CPI and core inflation have eased further in recent months,” officials said in the policy statement.

The next decision date is June 5, when overnight swaps traders pared their bets to about a 50-50 chance of a 25 basis point cut at that meeting, down from over two-thirds before today’s data release. A July rate cut is fully priced in.

We will know more this coming Tuesday when the March CPI data (along with the federal budget) are released. April CPI will be posted on May 21.  As the chart below shows, inflation data in Canada is rapidly approaching the 2% target, well ahead of the US, although set backs can’t be ruled out. For example, gasoline prices have risen since early February. However, the proportion of CPI sectors showing less than 1% gains is rising as those showing more than 3% increases are falling fast.

Courtesy of Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Image Credit: Sasan Hezarkhani Unsplash

Amortization can be viewed as the time it will take you to repay your mortgage without making extra payments.  It can be adjusted to increase or decrease your mortgage payment and interest due.  Mortgage payments are calculated by spreading out the repayment of the mortgage amount at a certain interest rate over a specified period of time, called the amortization period.  The length of your amortization affects how quickly you become mortgage-free. It also affects how much interest you’ll pay over the lifetime of your mortgage.  A longer amortization results in paying a lower mortgage payment and more interest overall, whereas a shorter amortization results in paying a higher mortgage payment with less interest overall.

Amortization Benchmarks
The benchmark amortization period is typically 25 years when discussing mortgage products.  25 years is also typically the basis for standard mortgage calculators.  However, 25 years is not the only option when it comes to mortgage amortizations.  They can be as short as 5 years, and as long as 35 years!

Benefits of a Shorter Amortization
Opting for a shorter amortization period will result in paying less interest overall during the life of your mortgage.  A shorter amortization means you will also become mortgage-free faster and may give you access to your home equity sooner with proper planning.  However, by choosing to pay off your mortgage over a shorter time frame, monthly payments will be higher.

Benefits of a Longer Amortization
If your income is irregular, and you are at the maximum of your monthly budget, or if you’re considering your first home, you may need to consider if having more of your cash flow directed to mortgage payments will be of benefit to you.  You might opt for a lower payment and to save up for lump sum payments to save on interest instead without being obligated to make higher regular payments.  Smaller monthly mortgage payments may make home ownership less daunting for first-time buyers, and can free up additional monthly cash flow for other priorities.  A longer amortization period can sometimes get you into your dream home sooner too, as it can allow you to qualify for a slightly higher value mortgage than a shorter amortization might.

Accelerating Amortization
Bi-weekly payments split your monthly payment in two, and are paid every 14 days.  Paying at this frequency shortens a 25-year amortization by roughly 3.5 years without making extra lump sum payments, and can save thousands in interest as well.  Two months of the year, you’d make 3 bi-weekly payments instead of two.  Those two months’ additional payments bring the principal of the mortgage down more rapidly, reducing the interest due and reduces the amount of time it takes to repay the mortgage as well.

Let’s Chat!
I would be happy to help with the decision for the amortization that best suits your requirements and ensures you have adequate cash flow. You may not be stuck with the amortization schedule you choose at the time you got your mortgage. You can in some cases shorten or lengthen your amortization at a later date in addition to making extra payments on your mortgage.

Ideally, one should re-evaluate their mortgage at renewal time (every 3, 5, or 10 years depending on your mortgage term).  During renewal is a great time to review your amortization and payment schedules or make changes if they are no longer working for you.  But if you need assistance with cash-flow or ways to save on interest within your term and renewal is still some time away, there may still be options to review.

If you have any questions or are looking to get started on purchasing a home, don’t hesitate to reach out any time, I am always happy to help.

Adapted from DLC Marketing

Image Credit: Jon Tyson on Unsplash