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HT/Oaken just increased their 5y GIC rate to 2.5%. I think rates will be notching up fairly rapidly now that the BOC and fed have signalled increases coming. I doubt they will get objectively high, but I see the central bank rates returning to 1.5% and retail savings rates back at 3%.
 

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HT/Oaken just increased their 5y GIC rate to 2.5%. I think rates will be notching up fairly rapidly now that the BOC and fed have signalled increases coming. I doubt they will get objectively high, but I see the central bank rates returning to 1.5% and retail savings rates back at 3%.
I'm not so sure, it doesn't make sense for retail savings rates to be way above the bank of Canada rate.

We have mortgages at less than 1%.

A lot of people have mortgages rates less than 2%.

If the BoC rate flies up, we're going to have a lot of problems.

I think rates should go up, but I think the deleveraging will be painful if not dangerous.

The difference between a 1% mortgage and a 3% is substantial.
 

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People are stress-tested for a rate of something like 5%.

But raising rates will sure have an effect, but it's a better solution as opposed to letting the inflation run like crazy.

Anyways, the system is broken and it'll be the same story again. They'll start rising the policy rate, we'll reach near 2% policy rate, the yield curve will invert, the market will crash, the rate will be dropped back down. Save the rich people. Let the poor stay poor. Don't reduce the wealth gap.
 

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They'll start rising the policy rate, we'll reach near 2% policy rate
You really think they will get that high? The current Bank of Canada policy rate is 0.25%.

I think they will barely get to 1% by the end of this year. That would be 3 increases of 25 basis points each. Canadians are very high leveraged and already this will be painful for most people. Businesses, who depend on ultra low rates, will also start screaming in pain.

Hopefully I'm wrong, and hopefully we have much higher interest rates. As a fixed income investor I'd really like better yields in my portfolio.
 

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The difference between a 1% mortgage and a 3% is substantial.
Not really.
Not unless you're extremely bad with money and totally strapped.

People always find a way to pay for housing. It's important. People forego luxuries to afford it. People will find a way.
 

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You really think they will get that high? The current Bank of Canada policy rate is 0.25%.

I think they will barely get to 1% by the end of this year. That would be 3 increases of 25 basis points each. Canadians are very high leveraged and already this will be painful for most people. Businesses, who depend on ultra low rates, will also start screaming in pain.

Hopefully I'm wrong, and hopefully we have much higher interest rates. As a fixed income investor I'd really like better yields in my portfolio.
We don't agree often, but you're right.

We won't even see 1% in 2022.
I think 0.75% would be the max.
But I'm betting on only 0.50.
They will hike once and that's it, imo.
 

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You really think they will get that high? The current Bank of Canada policy rate is 0.25%.
Yes, we'll reach 1% this year and they'll try to reach 2% next year, but it won't happen, because as soon as we reach 1.5% we'll be near a market crash trigger.

And then market crash in 2023 or maybe 2024 and then interest rates back to 0.25%... or less.

We won't even see 1% in 2022.
I think 0.75% would be the max.
But I'm betting on only 0.50.
They will hike once and that's it, imo.
Maybe, because we like to save the rich.
 

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A few random comments, data points and historical perspectives;
1. Mortgage cost. Floaters are tied to Bank of Canada controlled policy rate (more on this below) whereas fixed rate mortgages are referenced to rates that are subject to market forces. As long as inflation evolves as expected, market forces will move up bond yields and pull up fixed mortgage rates.
2. The policy rate is going up. Probably faster than most appreciate. It's pretty clear that fiscal policy is driving this thing. Monetary policy (low overnight rates) can't solve supply chain issues. Or keep restaurant workers salaries whole. This is more than abundantly clear to central bankers who do this for a living. As long as Gov'ts are driving stimulus the Central Bankers know they are wasting time and money with artificially low overnight rates that just lead to other problems.
3. Now that Powell has his job renewed, and BoC has their mandate renewed they can be "independent". See point 2 above.
4. BoC's stated "neutral rate" is 1.75% to 2.75%. Historical tightening cycle ~ a year and +1.5%
5. Historically equities do okay in the early phase of a tightening cycle, volatility increases and tail events occur more often than models would predict.
6. People are only surprised by things they have never experienced before.
 

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Maybe, because we like to save the rich.
Naw, politicians like votes, and a happy spending public is "good' for everyone.

Very few people really understand the harm from high inflation and excessively low rates.

The people who will get hurt with high inflation are lower wealth, those who get hurt by rising rates and high inflation are the middle wealth.
Don't worry about the rich, they'll be fine no matter what.

You could always go seize their assets, then they'd be screwed too, but you'd also be kneecapping the the economy, which again hurts the poor more.
 

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People are stress-tested for a rate of something like 5%.

But raising rates will sure have an effect, but it's a better solution as opposed to letting the inflation run like crazy.
Not to take this thread on a tangent but if people are stress tested for getting a mortgage at 5% before getting a property why would it matter if their mortgage rate went up from 2% to 3%? (not actual mortgage rates but just as an example). Would it not be assumed they can cover the payments up to 5% interest?
 

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Not to take this thread on a tangent but if people are stress tested for getting a mortgage at 5% before getting a property why would it matter if their mortgage rate went up from 2% to 3%? (not actual mortgage rates but just as an example). Would it not be assumed they can cover the payments up to 5% interest?
Yes, they should. There's no reason why we should not raise rates. Other than continuing inflating the assets of the rich and eroding the savings of the poor due to inflation and low rates.
 

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Not to take this thread on a tangent but if people are stress tested for getting a mortgage at 5% before getting a property why would it matter if their mortgage rate went up from 2% to 3%? (not actual mortgage rates but just as an example). Would it not be assumed they can cover the payments up to 5% interest?
In theory yes, in reality no.

I know that I could not afford the mortgage I was approved for.
 

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Most people's spending is always at a limit. An increase to mortgage rates will be met with mortagors extending term duration to keep payments affordable. Some that were at the limit will feel the squeeze and either sell toys to make it work. Realistically we would need larger quicker increases to pop the housing bubble. It will however make it harder for those trying to buy their first properties to do so unless housing prices come down to make it a wash.

I fear inflation more than I do a rate increase. Savers have been punished for far too long. an increase of 1% over the next year or so should not really draw this much attention. I watched some talking heads last night speak about the tech wreck we are experiencing. What a laugh. Prices are where they were 3 weeks ago. A 15 day chart looks scary but a 3 or 5 year chart shows their meteoric rise. It's all about perspective.
 

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In theory yes, in reality no.

I know that I could not afford the mortgage I was approved for.
I see. Now I am curious. Would you say this is the case because your financial situation changed? (lower income job than before etc).

I do not have a mortgage but I do see how if people were stress tested for 5% but only actually pay 2% interest on their mortgage then it would make sense to just spend that 3% difference on other items.

It will however make it harder for those trying to buy their first properties to do so unless housing prices come down to make it a wash.
Can you elaborate on this? If banks are charging 2% interest rate currently and overnight interest rates raise and then banks are now charging 3% interest rate wouldn't that not matter because everyone gets stress tested at 5%?
 

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I'm hearing that about half of buyers are failing the stress test but still being approved under what is called a variance -- which is basically alternative criteria to determine if they have the means to afford the mortgage. This is all supposedly legit, but it sounds very opaque to me.
 

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Discussion Starter · #118 ·
I do not have a mortgage but I do see how if people were stress tested for 5% but only actually pay 2% interest on their mortgage then it would make sense to just spend that 3% difference on other items.

Can you elaborate on this? If banks are charging 2% interest rate currently and overnight interest rates raise and then banks are now charging 3% interest rate wouldn't that not matter because everyone gets stress tested at 5%?
You need to apply for a mortgage to see the ridiculously high amount the bank would be willing to lend you. It is way higher then people can actually afford. I suspect the math that goes into it accounts for the fact that they assume those same people will simply stop spending money on other items in life and focus on the higher mortgage amount, if rates rise. In any case, since real estate prices have become almost unaffordable, people have been taking out those maximum lending amounts, for quite a long time now.

Two problems when their interest rates and payments rise:

1) Too many people will just generate more debt by using credit cards and LOC to pay for the other items they will still want, that they have become sort of dependent on.
2) If rates keep going up they tend to create a slow down in economic growth, that can create the unemployment necessary for all these problems to hit the fan at the same time. All stress tests assume a continuation of the family income.

That is the real problem. The stress test on a higher amount is meant to give some slack to account for this but it has yet to be tested if it will be enough.
 

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I know that I could not afford the mortgage I was approved for.
I see. Now I am curious. Would you say this is the case because your financial situation changed? (lower income job than before etc).
Nope, the "qualification" amounts are ridiculous IMO.

Can you elaborate on this?
Run the numbers
I just ran with the defaults from a government calculator.
I came up with After Tax income, in Ontario.

For a Gross income of 60k, they say you can qualify for a mortgage of $200k, and payment of $1163.21/month
With their assumptions that's $1963.21/month in total debt. (+ heat & property tax)

Not bad, right?
But your after tax income is $3816/month, so you're left with $1850/month for everything else.
Electricity, car insurance, water bill, internet/cell phones, (another 300-400) leaving you with $1450/month, or about $300/week
The average family spends $220wk on food. How much does a week of groceries cost in Canada? We crunched the numbers - National | Globalnews.ca

This leaves $80 for gas, clothing and all the other incidentals. Let alone any savings.

I think most people have trouble affording the maximum mortgage they legally qualify for.

As Optsy says, you have to apply and see what kind of mortgage they'd offer you, but you could run the government calculator, then see how it fits into your budget. I think the amounts they let you borrow are almost predatory.
 

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I see. Now I am curious. Would you say this is the case because your financial situation changed? (lower income job than before etc).

I do not have a mortgage but I do see how if people were stress tested for 5% but only actually pay 2% interest on their mortgage then it would make sense to just spend that 3% difference on other items.


Can you elaborate on this? If banks are charging 2% interest rate currently and overnight interest rates raise and then banks are now charging 3% interest rate wouldn't that not matter because everyone gets stress tested at 5%?
The stress test for 5% is one metric that is used. Some open LOCs to get the down payment which is lower as a % of total mortgage than many years ago but definitely higher in dollar amount. Many first time home buyers also have other debt which will push them into the range where payments and COL exceed the threshold. Interest rates go up (for both lending and savings) to curb inflation. This means the cost of all other goods will be increasing at the same time or after the mortgage. As long as property values increase faster than Total debt ratio nobody sees the problem as long as debt servicing ratio is met.

I know we were preapproved for almost double in what we were seeking for our mortgage. That was over a decade ago so some metrics may have changed but to be the lenders role is to keep us as indebted without going into default. Competition from other lenders result in the variances mentioned by @nathan79 so that they can push the boundaries. As long as defaults are kept below a certain limit the lenders are operating within bounds.
 
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