The Bank of Canada has cut the overnight rate for the first time in four years, a welcome relief to borrowers nationwide.  The prime rate, which sits at 2.2% above the overnight rate, will subsequently drop from 7.2% to 6.95%.  Variable and adjustable rate borrowers, as well as borrowers with Home Equity Lines of Credit (HELOCs), will all benefit.

Economic Insights

The Bank noted the US is showing deceleration in economic activity, and conversely, activity picked up in the euro area during the first quarter of 2024. China’s economy is growing, driven by exports and industrial production, though their domestic demand is still weak.  Overall, inflation is continuing to ease globally in most advanced economies.

The Bank also noted that in Canada, after stalling in the latter part of 2023, economic growth resumed, though more slowly than forecasted.  Employment growth was also cited as being slower than that of the working-age population, but with wage pressures moderating.

The full press release can be viewed via this link.

What Does This Mean For Borrowers?

The reduction in the overnight rate will translate into more favorable borrowing costs for property owners and potential buyers.

Variable rate borrowers with payments that don’t change with changes in the prime rate will see a reduction in mortgage interest costs, but their payments will remain the same.  Most major banks’ variable mortgage payments stay the same with changes in the prime rate.  Adjustable rate borrowers will see a reduction in interest costs and their payments will drop accordingly.

HELOC rates will also drop with today’s .25% reduction in the overnight rate.

The drop in the prime rate will not affect fixed rate borrowers’ mortgage rates or payments.  Though with bond yields dropping recently, a reduction in fixed interest rates may be on the horizon too.

Extent of Interest Rate Savings

Depending on the rate and amortization, mortgage interest costs per $100,000 will decrease by approximately $14 monthly.   Borrowers will save about $21 monthly on lines of credit interest costs per $100,000.

Strategic Financial Planning

Expectations for further cuts this year are for a 40% chance of another reduction in July, a 100% chance of another cut by September, and another by December.  Predictions roughly total a reduction of .75% off the prime rate for 2024.

I am here to help you navigate the implications with strategic advice tailored specifically for you.

If you’d like a review of the opportunities as they relate to growing your net worth, please feel free to be in touch.  I am always happy to help.

Image Credit: Sasan Hezarkhani, Unsplash

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.

Dr. Sherry Cooper

Chief Economist, Dominion Lending Centres

Image Credit: Rose Butler, Unsplash

Though it’s a great idea to review your mortgage each year, there is never a better time for a mortgage review than in the year leading up to your renewal.

Take advantage of this point in your mortgage; your wallet will thank you.  Here’s why:

Get a Better Rate: Explore other lenders for preferable interest rates without breaking your mortgage at renewal time. With interest rates expected to start coming down soon, reaching out to explore the market could potentially save you considerably over the next term.

Consolidate Debt: Renewal time is also an excellent opportunity to assess your existing debt and decide whether consolidating it into your mortgage is beneficial. Whether it’s holiday credit card debt, car loans, education loans, or other debts, consolidating your mortgage streamlines your payments into one, potentially at a lower interest rate than through other sources.

Renovations: Renewal time can also provide a great opportunity to tap into home equity for renovations, such as modernizing your kitchen, making bathroom upgrades, or updating your landscaping.

Investing In Other Properties: Home equity can also fund the down payment or outright purchase of a vacation home or investment property.  Or you could use it to help your kids purchase their first home. Whether you’re considering doing this now or in the future, you could always use this time to add a home equity line of credit to your mortgage at renewal.  Whether you use the funds now or in the future, it’s great to plan ahead so you can act on opportunities when they arise.

Planning for Retirement: Adding a line of credit before you retire can help set you up to access the equity in your home after you no longer qualify due to reducing your income from work.  Doing this at renewal will allow you to switch to the lender with the best terms for you without incurring a penalty.

Adjust Your Mortgage To Your Current Needs and a Changing Rate Environment: Switching between fixed and variable rates, shorter or longer terms, or adjusting your amortization to pay less interest, or to lower your payment may also be possible at renewal.

Aligning your mortgage with your future plans, while keeping current circumstances in mind, helps keep you sustainably on track to reach your financial goals.  Feel free to reach out at any time for a complimentary mortgage review.  I’m always happy to help!

Adapted from DLC Marketing

Image Credit: Tyler Nix

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

When applying for a mortgage, one of the factors lenders review is your credit score.  Many prospective property owners don’t pay much attention to this metric until they begin a mortgage pre-qualification discussion. However, your credit score is one of the most important aspects of a mortgage application when it comes to maximizing your purchasing power at the best possible rate.

Credit scores range from 300 to 900; the higher the number the better.  Lenders sometimes offer a greater mortgage amount relative to your income if your credit score is at least 680.

Your score is based on spending habits, repayment, and general credit behaviour including:

• Previous payment history
• Your credit usage relative to your total credit limit
• How long you have had your credit in good standing
• Frequency of seeking new credit
• Your credit mix – this is the overview of the number of each type of credit facility you have across credit cards, loans, lines of credit, etc.

Improving your credit score an be a gradual process, but is well worth it. Here are some tips to help you get started:

1. Pay Your Bills In Full and On Time: If you are unable to afford the full amount, pay at least the minimum required as shown on your monthly statement to prevent any reports of late payments, those reduce your score.
2. Pay Down Your Debts: If you are carrying balances from month to month and are wondering how to pay them down with any extra funds beyond the minimum payment due on each one, there are a few strategies you can employ to pay down debt quickly. Pay down highest interest debt first.  You might then consider paying off lower balances next, to ultimately free up extra cash flow each month to direct to paying off larger balances.  Some weigh paying off debt against the return they can earn on investments and choose to invest should the rate of return be higher than the rate of interest on debts.  A good financial planner can help you decide where to concentrate those efforts.
3. Keep Balances Within 30% of Their Limits: This is key when it comes to managing debt and maintaining a good credit score. Using all or most of your available credit will lower your score. Your goal should be to use 30% or less of your available credit. If you have a limit of $1000 on your credit card, you should keep your balance below $300.
4. Credit and Loan Application Management: Reduce the number of credit card or loan applications you submit. Multiple applications in a short period can reduce your score.

Whether you have debt or not, there are ways to manage what you owe to position your finances to your best advantage and to plan for an eventual property purchase.  If you have questions or if you’d like to start your next pre-qualification discussion early to see when you might be ready to buy or refinance property, please feel free to reach out.  Also, if you have a mortgage renewal question, or know of others who could use my assistance, I’m always happy to help.

The Consumer Price Index (CPI) rose 2.8% year-over-year in February, down from the 2.9% January pace and much slower than the 3.1% expected rate. Gasoline prices rose in Canada for the first time in five months, which led many analysts to forecast a rise in February inflation as seen in the US. However, offsetting the increase in gas prices was a deceleration in the cost of cellular services, food purchased from stores, and Internet access services.

Excluding gasoline, the headline CPI slowed to a 2.9% year-over-year increase in February, down from 3.2% in January. Prices for rent and the mortgage interest cost index continued to apply upward pressure on the headline CPI.

On a monthly basis, the CPI rose 0.3% in February, the same as in January. The most significant contributors to the monthly increase were higher travel tours and gasoline prices.

On a seasonally adjusted monthly basis, the CPI rose 0.1% in February.

Prices for food purchased from stores continued to ease year over year in February (+2.4%) compared with January (+3.4%). Slower price growth was broad-based, with prices for fresh fruit (-2.6%), processed meat (-0.6%), and fish (-1.3%) declining. Other food preparations (+1.4%), preserved fruit and fruit preparations (+4.0%), cereal products (+1.7%), and dairy products (+0.6%) decelerated in February.

February was the first month since October 2021 that grocery prices increased slower than headline inflation. The slower price growth is partially attributable to a base-year effect, as food purchased from stores rose 0.7% month over month in February 2023 due to supply constraints amid unfavourable weather in growing regions and higher input costs.

While grocery price growth has been slowing, prices continue to increase and remain elevated. From February 2021 to February 2024, prices for food purchased from stores increased by 21.6%.

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 two ticks to 3.2% in February, and the median also declined two ticks to 3.1% from year-ago levels, as shown in the chart below.

Bottom Line

The next meeting of the Bank of Canada Governing Council is on April 10. Before then, we will see two more important data releases:

1. The Bank of Canada Business Outlook Survey and Canadian Survey of Consumer Expectation and;
2. The Labour Force Survey for March.

Neither of these reports will likely derail the central bank’s move to cut interest rates by the June 10 meeting. Indeed, they could begin to cut rates at the April meeting. This would no doubt trigger a whopping Spring housing market, which is likely to be strong. There is significant pent-up demand for housing, and the prospect of home price increases could well move buyers off the sidelines if a surge in new listings comes to fruition.

The Canadian economy is particularly interest rate sensitive because of the vast volumes of mortgages that will be renewed in the next two years. Mortgage delinquency rates are already rising, so a gradual decline in interest rates is welcome news.

As the chart below shows, the three-month rolling average growth rates for the CPI trim and median core measures averaged 2.2% in February–their lowest reading in three years.

According to the Royal Bank economists, “Building on the January CPI report that was already showing broad-based easing in price pressures in Canada, the February report today reaffirmed those trends. Different measures of core inflation decelerated, and the diffusion index that measures the scope of inflation pressures also improved. That measure, however, was still showing slightly broader price pressures than pre-pandemic “norms”, suggesting there’s still room for more improvement.”

With the economy’s slow growth trajectory, the central bank has every reason to begin cutting interest rates soon.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Image Credit: Sasan Hezarkhani, Unsplash

Today’s StatsCanada Labour Force Survey for February was a mixed bag and shows the dramatic effect of surging immigration. Canadian employment rose by a much stronger-than-expected 41,000, dominated by a 71,000 rise in full-time jobs.

The employment rate–the proportion of the population aged 15 and older who are employed–fell a tick to 61.5%. This is the fifth consecutive monthly decline, the most extended period of consecutive decreases since the six months ending in April 2009 during the global financial crisis. The Bank of Canada has emphasized the importance of the employment rate in recent commentary.

The employment rate in February 2024 was down 0.9 percentage points from the recent peak of 62.4% observed in February 2023. This downward trend is associated with the unprecedented ballooning of the working-age population.

The unemployment rate increased 0.1 percentage points to 5.8% in February, offsetting the decline in January. The unemployment rate has held relatively steady in recent months, at 5.8% for three of the past four months. This follows an upward trend from April 2023 to November 2023, when the rate increased from 5.1% to 5.8%. The labour force participation rate—the proportion of the population aged 15 and older who were employed or looking for work—held steady at 65.3% in February.

The labour force jumped 76,000 last month and is up more than 550,000 in the past year, while the adult population has surged by more than 1 million people (+3.2%), compared with a job increase of 368,000. Even very strong job growth is not keeping up with the torrid influx of new workers, dampening wage inflation.

Most of the new jobs were in the service sector, led by employment in accommodation and food services following a decline in the prior month. Also rebounding was employment in professional, scientific, and technical services. On a year-over-year basis, employment in this industry was up 85,000 (+4.6%), the second-largest year-over-year increase among industries, after transportation and warehousing (+104,000; +10.6%).

In February, average hourly wages were up 5.0% year-over-year, following an increase of 5.3% in January. This is still above the Bank of Canada’s comfort zone, although policymakers suggested that wage inflation appeared to have peaked in this week’s policy statement.

Bottom Line

We will see one more Labour Force Survey on April 5th before the Bank of Canada meets again on April 10th. The all-important CPI inflation data will be released on March 19th.

Today’s report, while strong, suggests that the surge in the working-age population and the decline in job vacancies could continue to temper wage inflation. The Bank of Canada will need more proof before it releases the brakes and lowers interest rates.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Image Credit: Rose Butler, Unsplash

Today, the Bank of Canada held the overnight rate at 5% for the fifth consecutive meeting and pledged to continue normalizing the Bank’s balance sheet. Policymakers remain concerned about risks to the outlook for inflation. The latest data show that CPI inflation fell to 2.9% in January, but year-over-year and three-month measures of core inflation were in the 3% to 3.5% range. The Governing Council projects that inflation will remain around 3% over the first half of this year but also suggests that wage pressure may be diminishing. The likelihood is that inflation will slow more rapidly, allowing for a rate cut by mid-year. 

The Bank also noted that Q4 GDP growth came in stronger than expected at 1.0% but was well below potential growth, confirming excess supply in the economy.

Employment continues to rise more slowly than population growth. During the press conference, Governor Macklem said it was too early to consider lowering rates as more time is needed to ensure inflation falls towards the 2% target.

Bottom Line

The Bank of Canada expects that progress on inflation will be ‘gradual and uneven.’ “Today’s decision reflects the governing council’s assessment that a policy rate of 5% remains appropriate. It’s still too early to consider lowering the policy interest rate,” Macklem said in the prepared text of his opening statement. The Bank is pushing back on the idea that rate cuts are imminent.

High interest rates are dampening discretionary spending for households renewing mortgages at much higher monthly payments. As the economy slows in the first half of this year, the BoC will signal a shift towards easing. This could happen at the next meeting on April 10, when policymakers update their economic projections. This could prepare markets for a June rate cut.

“We don’t want to keep monetary policy this restrictive longer than we have to,” Macklem said. “But nor do we want to jeopardize the progress we’ve made in bringing down inflation.”

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Dr. Sherry Cooper

Image Credit: Yvonne Assen, Unsplash