After only a month into 2018, many of us are still holding to our pledges, either by resolutions, wishes or perhaps just quiet determination, shared among a few people close to us, to make 2018 the best year we’ve ever had. Decisions around our finances and our homes can play a big part in our overall happiness deck, as we think about ways to move our lives forward, into a brand-new year. With many people wanting to enter the home market, in Ontario and across Canada, and numerous others wanting to upgrade to their ultimate dream nest, and still many more needing to at least renew their mortgage, getting the best deal on the mortgage for the home you really want is no small consideration toward making 2018 a truly great and memorable year.
Waves of Challenges in 2017 for Mortgages in Canada
2017 saw many challenges for mortgage applicants, ranging from a foreign-buyers-tax in Ontario, to two successive rate increases by the Bank of Canada over the summer, to a brand new stress test, initiated by the OSFI, this time for uninsured borrowers with at least 20 per cent down, rounding out the year. The foreign-buyers-tax and rate increases really pumped the brakes on the housing market in the latter half of 2017, especially in key markets like the GTA, which saw housing starts drop by “42 per cent in October,” over the same period in 2016 – Globe and Mail.
2018 Will Offer Its Own Trials When You Apply for a Mortgage
2018 will encompass a different set of challenges, for those navigating the turbulent waters of the Canadian housing market, building upon many of the developments from last year. The new stress test for uninsured borrows is expected to put a chill on the housing market across the country, especially in B.C. and Ontario. Many economists and industry analysts have been predicting some level of rate increase by our central bank, ranging from 25 to 50 basis points on the low end, to as much as 100 basis points, depending on who you ask. All the while, the NAFTA elephant sits quietly in the room… creating more uncertainty for our economy the longer it remains undecided exactly how trade arrangements and relations will pan out with our biggest trading partner in the world.
January 2018 Starts with a New Stress Test for Uninsured Borrowers
The new mortgage stress test for uninsured borrowers from federally regulated lenders came into full affect on January 1st, 2018. This new regulation, instituted by the Office of the Superintendent of Financial Institutions (OSFI), is ostensibly designed as a hedge to insulate mortgage applicants from shocks to the financial system, specifically increased mortgage rates. Now all borrowers, regardless of their down payment amount, will be required to prove that they can make their mortgage payments if their current mortgage rates were to increase by two full percentage points, or the five-year rate posted by the Bank of Canada, whichever is higher at the time they apply for their mortgage.
On the surface, this rule change may seem like a sound measure to help protect Canadians from acquiring more debt than we can afford, but the real effects of these measures will impact some individuals more drastically. Many potential first-time homebuyers, who have been saving up their 20 per cent down payment, so they could save on mortgage insurance and mortgage payments, will be shut out of the market. Another key segment that will be significantly impeded by this regulation are ‘move-up’ buyers as their spending power will be considerably reduced:
One TD Bank economist has estimated that a potential buyer of a $1-million home who put 20 per cent down would see their purchasing power knocked down by about 15 per cent. – CBC
Curtailing the spending power of these two key segments is expected to have a cooling effect on the housing market across the country, but some areas will likely be hit harder than others, according to an economic outlook report released by Desjardins in December, 2017:
“The recent growth leaders, Ontario and British Columbia, could be particularly hard hit by the expected slowdown in the housing market,” reads the report. “As we know, Toronto and Vancouver are where the housing market grew so extensively in recent years.” – BuzzBuzzNews Canada
Mortgage Rates Expected to Continue Upward in 2018: Biggest Risk for Mortgage Applicants
As much as the new stress test is expected to put a drag on the Canadian housing market, the prospect of rising interest rates is widely considered to be a greater challenge for those seeking a new or renewed mortgage in 2018. In a recent Reuters poll of industry analysts:
While the majority of analysts surveyed said the new mortgage rules will have a “significant” impact on housing market activity, most said higher interest rates pose the biggest risk. – BNN.ca
With a very strong Canadian jobs report released by Statistics Canada in November of 2017, oil prices stabilizing, stronger manufacturing, rising exports and sustained inflationary pressures, a host of prominent economists and experts are predicting some level of additional rate increase by Canada’s central bank in 2018.
Among other experts, both Frances Donald, Senior Economist at Manulife Asset Management and Evan Dudley, Assistant Professor of Finance at the Smith School of Business, at Queen’s University, are predicting a couple of rate increases in the coming year:
Dudley anticipates the central bank will raise interest rates twice in the year ahead to give the economy a “soft landing.” – Queen’s University
A little further along the scale of interest rate predictions, a senior BMO economist forecasts that the Bank of Canada will raise its key rate three times over the coming year for a net increase of 0.75 percentage points:
“We see a 75-basis-point increase in the bank rate in 2018, with the three 25 bp increases coming in March, July and October,” says Jennifer Lee, senior economist at BMO. (25 basis points equals a quarter of a percentage point.) “This will dampen housing activity.” – Money Sense
Economists at RBC go even further, predicting an expected increase in the central bank’s key overnight lending rate of 100 basis points this year:
With the economy growing at a healthy pace, Royal Bank economists say that they expect the Bank of Canada to hike its overnight rate by another 100 basis points to two per cent by the end of 2018. – CTV
Central Bank Raises Key Interest Rate by 0.25% in January 2018
It appears that the chorus of economic experts, citing a series of rate increases to be expected over the coming year, have been affirmed in their predictions, right out of the starting gate. On January 17th, 2018, the Bank of Canada raised its overnight lending rate by 25 basis points (Financial Post), citing a healthy economy and inflationary pressures as the key factors driving this decision. However, the rosy economic optimism for Canada hinges on one critical element that is creating a great deal of uncertainty… NAFTA.
NAFTA Wild Card Creates Uncertainty for The Bank of Canada
The current upward pressure on Canadian interest rates is powered by an assumption that trade relations with the United States will stabilize and continue for the mutual prosperity of both countries. The longer that NAFTA negotiations drag on, the more uncertainty is cast over Canada’s economic prospects, even if a decent trade deal is hammered out with the U.S., according to BMO Capital Markets chief economist Doug Porter:
“I would say that the number one risk for Canada, with a bullet, is NAFTA. Even if it isn’t ‘terminated,’ the associated uncertainty is doing no favours for the economy.” – BNN.ca
Another very reputable senior economist, Benjamin Tal with CIBC, further highlights the fact that NAFTA negotiations seem far from resolved toward a positive outcome and that if a deal is not reached, any rate increase by our central bank will likely be put on hold:
… negotiations over NAFTA are still unresolved,” says Tal. “That’s a big deal, and if NAFTA is terminated by the U.S., we believe any rate increases will be put on hold. – Money Sense
Hatch is Ready to Get Cracking for You
At Hatch, we’ll be paying close attention to how these economic factors develop in 2018, and exactly how mortgage rates and regulations will affect the options our valued clients can choose from. As an experienced Canadian Mortgage Broker, with over 30 years of experience, our Papa Bird, Dan Martel, works diligently to ensure that you will get a very competitive rate for your mortgage, and terms ideally suited to your specific home ownership needs. Simply fill out our convenient online mortgage application and we’ll get cracking!