It was a year marked by escalating interest rates, but now it’s time to turn the page on the challenging financial climate of 2023. From a Bank of Canada overnight rate of 4.25% at the close of 2022 to the current rate of 5%, coupled with a surge in bond yields influencing fixed rates, Canadians felt the impact. However, there’s optimism on the horizon as relief is anticipated.
Rate Cuts Are on The Way
In 2024, the anticipation of rate cuts has been generating considerable buzz and speculation. Economists aren’t wondering if the Bank of Canada will cut the overnight rate, but when they will. While nothing is set in stone, there are compelling reasons to believe that Canada could be the first country to cut rates as early as April. Here’s why:
- High Canadian Debt Levels: One of the primary drivers for rate drops is the alarming levels of Canadian debt. Canada has one of the highest household debt-to-income ratios in the world. According to a report by Equifax, total consumer debt came in at $2.4 trillion in Q3 2023, an increase of $80.9 billion from the same period last year. In terms of non-mortgage debt, total card balances reached $113.4 billion in the third quarter of 2023, an all-time high, representing a 16% increase from the same period last year.
- Mortgage Renewal Payment Shock: A looming $900 billion mortgage renewal payment shock is on the horizon for 2024 to 2026 according to RBC. This impending financial strain will be another crucial factor in the Bank of Canada’s decision to lower interest rates, providing relief to homeowners facing hefty mortgage payment increases and preventing an economic downturn. While rates won’t return to their pandemic lows, every rate cut will help homeowners with their renewals.
- Mortgage Interest as a Significant Component of Current Inflation: Mortgage interest plays a pivotal role in current inflation rates. As mortgage rates rise, the higher interest paid increasingly contributes to the overall inflationary pressure. At the end of 2023, mortgage interest costs are one of the primary reasons we haven’t yet reached the 2% inflation target. This is why the Bank of Canada has said they would drop rates before inflation reaches the target.
- Canada Heading into a Recession: With economic indicators like negative GDP and rising unemployment pointing towards a potential recession, the Bank of Canada will use rate cuts to cushion the impact of an economic downturn and help reignite the economy.
Strategies to Navigate Your Finances
Given anticipated rate cuts, now is the time to consider how you can effectively maneuver the expected environment in 2024. Here are some strategies for various scenarios.
- Focus on Your Mortgage Renewal Early: For individuals with upcoming mortgage renewals, early preparation is key. At renewal, you can shop the market to make sure you get the best deal possible, making this an important moment of opportunity!
If your financial situation is becoming difficult, renewal is a fantastic time to discuss consolidating your debts to get one manageable payment. Debt consolidation can also boost your cash flow, save on interest costs, and potentially improve your credit score.
Another option, if you are struggling with all your monthly obligations, is to consider extending your amortization for cash flow relief. Joe Purewal is a Mortgage Renewal Expert and will discuss all your options and guide you toward the perfect renewal plan that fits your needs and budget.
- Consolidate Debt Now: Consolidating debt before renewal through refinancing or a short-term second mortgage is another strategy that may be beneficial in our current economic environment. By consolidating debts into a single, lower-interest mortgage or line of credit, monthly payments can be reduced, making it easier to manage your overall debt load.
Debt consolidation through refinancing involves breaking your current mortgage and replacing it with a bigger new mortgage to cover your mortgage and other debts. A second mortgage gives you the option of not breaking your mortgage and incurring fees, and it lets you keep your low fixed-rate mortgage if you have one.
- Consider a Variable or Adjustable-Rate Mortgage: Given the prospect of declining rates, it’s time once again to consider a variable or adjustable-rate mortgage. With an Adjustable Mortgage, when the Bank of Canada lowers rates, your monthly payment decreases, providing a cash flow boost—a good option for strained budgets. With a Variable Mortgage, your payments remain constant regardless of Bank of Canada rate changes. Lower rates mean you pay off more principal. Your choice depends on your cash flow needs and your financial goals.
Advice for Homebuyers: Seize Opportunities
We anticipate that lower rates will cause the housing market to head back toward its peak. Bidding wars, no-condition offers, sellers not willing to negotiate, and escalating prices could return, leading to stress and anxiety. The following factors have led us to this conclusion:
- Chronic Lack of Housing Supply: CMHC estimates that 3.5 million more homes are needed by the end of the decade to return to affordability, yet we are not on track to meet the current goal let alone an additional 3.5 million homes.
- Growing Population: Canada’s growing population continues to drive housing demand. Homes aren’t being built fast enough to accommodate this increase in housing needs. According to a study conducted by the Fraser Institute, from 2018 to 2022, Ontario added an average of 239,915 people per year, of which 153,065 were immigrants, or 64% of Ontario’s population growth. However, an average of 70,828 new homes were completed each year, resulting in a ratio of 3.4 new people to each new housing unit. That is quite the deficit!
- Parental Support in Home Purchases: Parents assisting their children in buying homes is a prevailing trend. The intergenerational wealth transfer from the Baby Boomers to succeeding generations will continue to unfold and has become an important driver of the housing market. According to Sagen’s first-time buyer study, six in ten first-time buyers received financial support in some form from their families.
Don’t Wait – Seizing the Opportunity
Seizing the opportunity could mean buying your dream home at a reduced price and with the lowest possible downpayment. For example, if you’re eyeing a $950,000 home, you’ll need to put down 5% on the first $500,000 and 10% on the remaining amount, totaling $70,000 – a 7.4% downpayment. Once that $950,000 home crosses the $1 million mark, you must make a hefty 20% downpayment. Imagine the regret of missing out on locking in your dream home at a significantly lower price and downpayment!
Yes, interest rates are high right now, but remember your rate is only relevant during your mortgage term. The victory you achieve from purchasing a house at a great price lasts a lifetime!
For potential homebuyers, the advice is clear: don’t wait. Lower interest rates can act as a catalyst for the housing market, driving prices higher. Seizing the opportunity now can result in significant long-term financial benefits. Suppose you need help qualifying for a mortgage. In that case, we can discuss strategies like gifted downpayment, getting one or more cosigners, co-ownership with a family member or friend, letting renters help pay your mortgage, borrowing from your RRSP, and alternative lenders.
Get Expert Insights: Turn to Mississauga Mortgage Broker Joe Purewal
In navigating our complex mortgage and real estate markets, seeking professional guidance is paramount. Mississauga Mortgage Broker Joe Purewal provides insights and strategies tailored to individual financial goals. Joe’s perspective adds valuable context and will help ensure you make informed financial decisions. With a focus on personalized advice, Joe Purewal crafts tailored strategies for clients based on their unique financial circumstances and long-term goals.
As we anticipate the Bank of Canada’s move to lower the overnight rate, Canadians find themselves at a pivotal moment. By understanding the factors influencing this shift and employing strategic financial moves, you can navigate the challenges and seize opportunities in Mississauga, Toronto, and the GTA. Taking proactive steps, like getting expert advice from Mississauga Mortgage Broker Joe Purewal, can make a significant difference in weathering a financial storm and capitalizing on emerging trends. As the pages turn on the era of high rates, it’s time to prepare for the rates that we expect in 2024 and seize opportunities as they arise.