Mortgage renewal

You can calculate your payments by taking into account the balance amount to be renewed, the interest rate, and the remaining amortization.

Renewing your mortgage is when you renew your mortgage balance under new terms (rate, term, payment frequency), but the balance and amortization remain the same.

Refinancing is when you add additional financing to your balance and readjust all other conditions (rate, term, payment frequency, amortization).

Hello everyone and welcome to this new edition of Property Perspective. Today, I have the great pleasure to be with Matthieu Arseneau  

Hi Matthieu  

Hi Simon 

and with Andrée Desrosiers.  

Hello Andrée  

Hello Simon 

Our topic today, the importance of preparing a budget way before your next mortgage renewal. But before we jump into that discussion, let's talk about the macroeconomic context influencing the real estate. 

So, question for you, Matthieu. We know that the Bank of Canada kept its key rate unchanged recently despite the high inflation. Do you think it was the right decision to make? 

Simon, a couple of weeks ago there was a concern, and investors were worried about another rate hike from the Bank of Canada because of the resilience of inflation. I think it was a good idea to hold rate. In fact, I'm still concerned about the rate hikes that already occurred during the summer and I don't think those were necessary given when we're looking at the economic situation at this point. What I show on this chart is the real policy rate.  

So, policy rate minus core inflation in different countries. It gives us an idea of the real cost of funds for borrowers and that's why they're important for the impact on the economy. And, as you can see on that chart in Canada, it's the most restrictive monetary policy among G7 countries at this point. So yes, a good idea to take a pause, especially that we didn't get the full impact yet of all those rate hikes that occurred over the past few quarters, in fact, even the first one that occurred in in Q 1/20/22, we didn't get the full impact on consumption. For example, it takes 8 quarters according to the Bank of Canada to get the full impact. 

What it means is there's 43% of those rates, the impact of those rate hikes, there's 43% left to get for the impact on consumer. So, and that's sizable. So that's the reason why taking a pause looking at the situation and there is concern in this context for bumpy rolls for consumers in the in the months ahead. 

So Matthieu, weakening economy, stagnation of GDP in the third quarter, what can we expect next?  

Yes, as you mentioned, stagnation in the last quarter there was a stagnation in Q2 as well, but it's perhaps more fragile than it appeared at first. Because OK stagnation - but this is occurring at a time where population is booming. So, a surge in population, when you look at real GDP per capita, just to adjust for this population boom, you can see that there's an impact on the economy of those rate hikes. Real GDP per capita is declining 2.4% over the past year and that's drop off this magnitude as only been observed during recession on basis in Canada. So that's already a big impact and as I mentioned, there's further impact to come.  

And when you look at confidence, it does not suggest a rebound of the economy in the months ahead.  

When you look at consumers' confidence at level that we saw during the pandemic or during the 2008, 2009 recession because of inflation, because of the payment shock, interest payment shock that Andrée will talk about in a few minutes. So that does not suggest that the consumer is very strong to support the economy at this point.  

And when we look at the confidence of small and medium enterprises, we can see that the level of confidence is low as well. So that does not suggest a hiring spree in the next few months.  

So, in such a context, we have a conservative scenario, potentially small contraction of the GDP in Q4 and Q1 in Canada given the current context.  

So, although the economy is halting as you just mentioned, Matthieu, the housing shortage continues. What are the conclusions of your latest report on that? On that front, because of the population boom that I just mentioned, there has been a rebound in activity in the resale market, home prices rebounded as well. So - but that led to deterioration in affordability in Q3 after some improvement in the prior quarters. 

Because on top of on price increase there has been significant increase in five-year mortgage rate as well. So Last data show, that it's the highest in 20 years on that front. So, and in such a context it's not surprising to see that resale market is moderating sharply given the rise in mortgage rate.  

So, over the past few months there, there has been a decline in activity perhaps households are looking at what the adoption on the rental market, but on that front it's not way better for affordability when you look at rent prices increasing at above 7% on a year over year basis that's the highest in 40 years. And it's very unusual to see rent in Canada rising faster than inflation as we are currently seeing.  

In fact, the spread is the highest in over the last five decades. So that's very, very unusual. Clearly there's a dwelling shortage in Canada and it's impacting the economy at this point.  

Thank you, Matthieu. A lot of uncertainty in the market. Thank you for setting the table for the discussion with Andrée and Andrée, given the economic context that we just saw 

and which is likely to prevail potentially in 2024-2025, what can owners expect when renewing their mortgage? 

A very good question, Simon. In fact, homeowners who will have to renew their mortgage in 2024 or 2025, the risk experiencing a significant increase in their payment. Let me give you an example. If you have a mortgage that when it's going to come to renewal, your balance is 250,000, your remaining amortization period is 20 years, and your actual rate is 3%. If you renew at a rate of 5%, your annual payment will increase by more than 3000 or 250 per month.  

If you renew at 6%, then the increase, the annual increase will be over 4750, which translates in almost $400 per month.  

So, as you can see this is a significant increase and I've been very conservative with my numbers because we know that many people have rates that are actually 2% and even lower than that.  

And I don't think you can find a mortgage right now, a 5-year mortgage at 5%, it's a lot more around 6.5%. So that's going to be a shock for many customers and this shock is not the only one that that we have in the last year, you know with inflation and all that, just look at the food, you know grocery and things like that. So, it's gonna be very sensitive for people in the months to come.  

Concerning what you just said, how can homeowners prepare for such increases?  

In fact, Simon, however your situation may have changed. OK, we have to return to basis and budget is one of the best financial tools to keep yourself on the right course. OK. It is important to review on a yearly basis your budget to make sure you are still financially stable and in control of your finances. And when you do the budget, you always have to look at your expenses, naturally. And you look at your mandatory expenses and your, what we call optional expenses.  

On the mandatory side, well, you have to eat, you have to have a place to stay, you've got to pay your taxes even though you don't like it. And on the optional side, you have all that we call, you know, the restaurant expenses, theatre, gifts that you may do on several occasions, even the second car, you know, maybe an optional expense.  

We never make these choices by pleasure, but they may be necessary. And if you do that exercise right away and that you make sure that you've got enough room to cover this increase in payment that we just said earlier, maybe, you know, around 500, even $600.00 per month, then when you will renew your mortgage, you will already have included this increase in your budget. So, you will then be in a much better place to meet your new financial requirements. So hard choices to make another day.  

Yes.  

Thank you very much for your great advice.  

My pleasure. 

So, after listening to Matthieu and Andrée, I strongly suggest that all homeowners with a mortgage renewal coming in next years should as soon as possible spend some time updating their budget. I'm convinced that in doing so you might avoid stress and potentially bad surprises at renewal time. 

So, thank you very much for being with us today and join us again for our next Property Perspective in the coming weeks.