4 Nov

What’s Happening with Mortgage Rates and What Might It Mean To You?


Posted by: Garth Chapman

History tells us that interest rates tend to go up much more quickly than they come down.  

A brief primer

  • Variable mortgage rates are driven by the Bank of Canada’s (BoC) Overnight Rate, as it effectively determines the banks’ Prime Rates.  The banks offer discounts to their Prime Rate to mortgage borrowers, and those discounts fluctuate with market conditions.
  • Fixed mortgage rates are primarily driven by the yields on Government of Canada bonds. 5-year bonds drive 5-year fixed rates. And those yields are driven by how the markets believe the national and world economies will perform going forward based on their expectations for inflation, GDP growth and other key economic measures, along with some guesswork…

So with all that in mind, here’s what’s been happening…

On October 27th the Bank of Canada left the Overnight Rate unchanged (which drives Variable rates).  If you saw that headline and thought mortgage interest rates would remain unchanged, you might be in for a surprise.  That is because the other half of the message was that the BoC was ending its QE bond buying program.  Other Central Banks around the world are now beginning to taper their QE. Ours is done, fini, kaputt.  And that QE program saw the purchase of hundreds of billions of dollars of Gov of Canada bonds during the pandemic, which in turn improved market liquidity, and kept those same bond yields artificially low. The Bank of Canada now owns c. 45% of all Gov’t of Canada bonds.

On Fixed rates

The announcement ending the QE program unleashed a run-up in Gov of Canada bond yields, which landed on top of the steady yield increases that began in late September.  And so with that, poof, our era of ultra-low Fixed interest rates appears to be over.

We’ve gone from a 5-year Gov of Canada bond yield of 0.85% to 1.50%, an increase of 0.65%, in less than 6 weeks.  So now Fixed rates are higher than they have been since the end of 2019, almost 2 years.  But…they’re still historically low. They just feel high right now.

On Variable rates

Markets are currently pricing in four or five BoC hikes to the Overnight Rate by the end of 2022.  Each increase is normally 0.25%.  So that indicates a potential Prime Rate increase from the current 2.45% to as high as 3.70% by end 2022, maybe.

Even if we do see five rate hikes in 2022 most Variable rate borrowers will still enjoy mortgage rates easily below 3%.  The last time we saw Variable rates above that was somewhere around 2008. We are still seeing steep discounts to Prime, with rates of Prime -1.0% and even lower with some lenders on certain products, all the way down to Prime -1.30%.

Sidebar – If you want to know how to determine when to convert a Variable rate mortgage to a fixed rate read my blog post The Fixed vs Variable Interest Rate Decision and scroll to the section near the bottom and is titled If I choose a Variable rate and I want to be able to convert that to a Fixed rate, how will I know when it is time to convert to a fixed rate?

So it seems we have now come off the bottom in terms of interest rates

How high they will go no-one really knows, and there are varying predictions from experts, from ‘not much higher’ all the way to ‘to the moon’.

Suffice to say that rates are still historically low, although it won’t feel that way for a few weeks or months until we get used to this new normal.  I remember not that many years ago getting a 3.59% rate on a rental property and thinking “Wow, it sure is nice to be well under 4 %!”

Also remember that we have been qualifying under the stress test’s Benchmark Rate for several years now, and that rate is currently 5.25%.  That has ensured that we all have some financial capacity to handle higher interest rates (read payments). Although that might impact some discretionary spending habits, we will be ok.

With change comes opportunity, and also risk

Opportunities always appear when things change in our world.  Those who pay close attention will see some opportunities in this what this changing interest rate market creates.  Some will be short term opportunities, and some longer term.

On the risk management side – it is always important to think about how you might want to act to protect yourself from outcomes that could cause you some pain. Talk to people who’s opinions and advice you respect and trust.

A few things some might want to consider

  • If you now have a Preapproval in place take a look at the expiry date for the rate that is held for you.  That is the date the mortgage must fund by in order to get that rate.  It is surely lower than what  you could get now.  Talk with your Mortgage Broker if you have questions on what that means for you.
  • If you are thinking of making a purchase then now is the time to get a Preapproval, in case rates continue to increase.
  • If you have a Variable rate, is it time to lock your rate in to a Fixed rate?  Knowing how you would you determine that is an important question.  I have a suggested methodology for handling that.  Feel free send me an email requesting it and I will send it to you.
  • Do you need access to capital to act on investments or for other needs?  Would a Line of Credit (HELOC) work for that?
  • Is it time to refinance your home or rental property while rates are still reasonably low?  An analysis might be in order.
  • Do you have some higher cost debt you would like to pay down? What is the best way for you to do that?  An analysis might be in order.

I’m always up for a call to discuss these or any other questions you may have.  You can email me, or call me, and leave a message if you miss me, or email me with to request a Zoom or phone call with your available days and times.

8 May

CIBC Deputy Chief Economist Benjamin Tal on the Economy and What to Expect


Posted by: Garth Chapman

I have followed CIBC World Markets Managing Director and Deputy Chief Economist Benjamin Tal for nearly 20 years. He has a solid track record. He’s what he’s saying about what to expect going forward in 2020 and beyond.

On the Economy:

Multifamily, office and industrial real estate will emerge from the COVID-19 crisis as winners, while losers will include the energy, transportation and hospitality sectors.
“It’s not a recession, it’s not a depression, it’s something in-between. It’s basically a frozen economy.”
Tal anticipates governments continuing to play a large role in the economy, as relief payments to get people through the crisis evolve into a more permanent universal basic income system.
Many companies will start thinking less in terms of profits and more in terms of resiliency.
More medical-related products and other essential goods will be produced domestically and there will be a move from “just-in-time” to “just-in-case” inventory systems.

On Real Estate:

Tal said real estate valuations being made now have very little value and people should be careful about making decisions based on the current economic situation. “I think the damage to the real estate market isn’t as significant as perceived.” Tal expects the Canadian economy to emerge from the recovery phase in 2022 or 2023 and that “the demand for real estate will remain very strong.”
The Canadian rental housing market is not in danger of collapse. Tal said the rent payment rate among those low-income earners was higher than for Canadian renters in higher income brackets. He attributes this to many low-earners now receiving a $500 weekly Canada Emergency Response Benefit payment from the federal government, which they’re using to pay rent.
The number of immigrants and non-permanent residents in Canada will decrease this year. A large percentage of those people are also renters, which will decrease demand for rental housing. Tal expects that to be balanced out somewhat by a reduction in supply due to a lack of apartment building completions, so the vacancy rate increase won’t be dramatic.
Commercial real estate sectors:
“But at the same time, I think that those who predicted that this market will collapse are overstating the damage. I don’t think that the move towards people working from home will be as dramatic as perceived, given the productivity aspect.”
“High-quality retail will remain in demand, and in fact it will improve,” said Tal. “I see significant damage to low-quality retail. This means that you will see e-commerce taking over.”
Tal didn’t address industrial real estate, beyond saying he’s still bullish on the sector.
Benjamin Tal’s 60 talk is here (you have to register to listen) https://www.realestateforums.com/portal/en/watch/watch.html
24 Apr

How You Can Access and interconnect your CRA and Service Canada Accounts online


Posted by: Garth Chapman

How You Can Access Online all your Interactions with your CRA and Service Canada Accounts…Online…Anytime

My Service Canada Account (MSCA) is a secure online portal that lets you apply, view and update your information for:

  • Employment Insurance (EI)
  • Canada Pension Plan (CPP)
  • Old Age Security (OAS).
  • And now also any of the many COVID-19 benefit programs for Canadians.

If you do not already have one, start by creating your Service Canada ‘My Service Canada Account’ here .

Within your ‘My Service Canada Account’ you should first setup or to confirm that your direct deposit account information is correct to facilitate the receipt to your bank account of any Government of Canada benefits, from CPP to OAS and EI and any of the many COVID-19 benefit programs.

To do this, login and go to ‘Service Canada account services’ and in the View/Change tab click on Canada Pension Plan (CPP) / Old Age Security (OAS) link and then click on ‘Payment information’ and then click on ‘2020’ and it will then display the payments you have received for both pensions by date.

Connecting your ‘My Service Canada Account’ with your CRA ‘My Account for Individuals’

From your My Service Canada Account, you can also securely access your income tax and other benefit information by clicking on the Canada Revenue Agency “My Account” button. This will connect you to your Canada Revenue Agency account without having to login or revalidate your identity. And if you have not yet registered for your online CRA ‘My Account for Individuals’ you can do this here Registration process to access the CRA login services

Learn how you can also sign in to your My Service Canada Account from your bank account login

My Service Canada Account: Register with your bank

Link between My Account and My Service Canada Account

The link provides you with a convenient connection between the Canada Revenue Agency’s (CRA) My Account for Individuals and Employment and Social Development Canada’s (ESDC) My Service Canada Account.

If you are registered for CRA’s ‘My Account for Individuals’ you can securely access ESDC’s My Service Canada Account without having to login or revalidate your identity. The link will take you directly to your My Service Canada Account within a single secure session, without having to sign in or register with MSCA.

Using the “Tell Us Once” feature you can now update and share your direct deposit banking information with both CRA and ESDC in one easy step.

Individuals receiving a Canada Pension Plan (CPP) benefit, will be able to update their banking information with one department and can choose to share it with the other. Canadians can choose to share direct deposit information through multiple service channels including:

How to get your CRA ‘statement of account’

Your Statement of Account is what you will need when applying for a mortgage in order to prove you have paid any money showing on your NOA as owing to CRA.

Login to your CRA ‘My Account’ and you will land on the ‘Overview’ page.  In the Accounts and section of that page click on ‘View statement of account’ and then print that page or save it as a pdf file.

30 Mar

COVID-19 Aid Programs: Gov’t, Banking, Utilities & Health related

Challenging Times

Posted by: Garth Chapman

All the COVID-19 Support Programs in Canada in one place

This is a great open-source Google Doc detailing, searchable, and categorized by need and situation. Brilliantly conceived. Updated frequently. https://drive.google.com/file/d/1lOJn7XS6ETIkbLRodYk681M_2dxkkQsc/view

Banks offering COVID-19 Relief on Auto & Personal Loans, Credit Cards, Credit Lines

Details of Major Banks offering relief in various forms

ATB Customer Relief Program

Credit Union customers – access to a variety of programs and solutions designed to ease difficulties with loan payments and short-term cash flow. Check with your Credit Union.

Important note – a payment deferral is not a forgiveness of the amount owed.  It means the payments are deferred to a later time, when we will have to pay them back, plus the cost of interest charges on the interest deferred.

CANADA – COVID-19 Economic Response Plan: Support for Canadians & Businesses


CERB: Canada Emergency Response Benefit

  • CERB will give workers who cease working or are receiving reduced employment income because of COVID-19 $500 per week for 16 weeks. The income will be taxable, but the gov’t will not deduct income tax at source.
  • Dutton Employment Law Group’s excellent CERB review and FAQ

NEW PROGRAM FOR BUSINESSES – CEWS – This should be a big help to Employees and Contract Employees

Canada Emergency Wage Subsidy (CEWS) – to help Businesses keep & return workers to payroll retroactive to March 15.

  • As a Canadian employer whose business has been affected by COVID-19, you may be eligible for a subsidy of 75% of employee wages for up to 12 weeks, retroactive from March 15, 2020, to June 6, 2020.
  • This wage subsidy will enable you to re-hire workers previously laid off as a result of COVID-19, help prevent further job losses, and better position you to resume normal operations following the crisis.CEWS details previously published:
    • CEWS provides a wage subsidy of 75% up to a maximum salary of $58,700 ($847 per week) for up to 12 weeks.
    • It is available to all Canadian businesses that experience a 15% revenue reduction in March and 30% reduction in April and May (compared to either 2019 figures or 2020 figures), or to an average of their revenue earned in January and February 2020. There is no overall limit on the subsidy amount that an eligible employer may claim.
    • The subsidy is retroactive to March 15, 2020.
    • Businesses may measure revenue on the basis of accrual accounting (as they are earned) or cash accounting (as they are received); once a method is selected, it must continue to be used.
    • Once an employer is found eligible for a specific period, they will automatically qualify for the next period of the program.
    • The CEWS will provide an additional amount to compensate employers for their contributions to the Canada Pension Plan, Employment Insurance, Quebec Pension Plan and Quebec Parental Insurance Plan paid in respect of eligible employees who are on leave with pay due to COVID-19.
    • The employer will be required to repay amounts paid under the CEWS if they do not meet the eligibility requirements.

Canada’s Federal COVID-19 Economic Response Plan – click the link for details on existing programs

NEW INFOIt appears that the federal government will use the CRA ‘My Account for Individuals’ to register for or to access electronic payments.  Apply here for an individual CRA account unless you already have an account.

SERVICE CANADA – when their office are closed you can make an online Request For Service here – This online service request form is a temporary measure to ensure continuity of critical services.

Link to all Federal COVID-19 Programs

  • These appear to be Automatic (but you should double-check on that):
    • Enhanced Canada Child Benefit for the 2019-2020 benefit year, by $300 per child
    • GST Credit increase
    • A one-time special payment by early May 2020 through the Goods and Services Tax credit. The average boost to income for those benefitting from this measure will be close to $400 for single individuals and close to $600 for couples.
    • Delay to Income Tax filing deadline to June 1, 2020 and payment deadline to Aug 31, 2020
  • These you must Apply for:
    • EI Work Sharing Program
    • Federal Student loan 6-month payment moratorium. Note: this is a deferment, not a forgiveness.

ALBERTA – Immediate relief for Albertans affected by the COVID-19 pandemic

NEW INFOyou will need a MyAlberta Digital ID account to receive Alberta government COVID-19 benefits,

There is normally a 10-day waiting period after uploading your driver’s license to the site waiting to receive by mail your verification code.

COVID-19 Supports for Albertans

  • Alberta student loan payments can access a 6-month, interest free, moratorium on payments.
  • Emergency isolation support – a one-time payment of $1,146 will be distributed to bridge the gap until the federal emergency payments begin in April.
  • Residential customers can defer electricity and natural gas bill payments for 90 days to ensure no one will be cut off, regardless of the service provider.

Important note – a payment deferral is not a forgiveness of the amount owed.  It means the payments are deferred to a later time, when we will have to pay them back.

Other Existing Income Supports for Albertans – click the link for details on existing programs

Covid-19 Government Resources for Albertan Renters & Property Owners – courtesy of ‘COVID-19 Resources’

UPDATED Health Resources official sites

For more information about COVID-19 itself, please check out these resources:

30 Mar

How to Get Through Tough Economic Times – COVID-19 edition

Challenging Times

Posted by: Garth Chapman

Why this is such a big deal that requires your full attention?

Because in just two months the COVID-19 pandemic has already become:

  • The single largest economic disruption and jobs crisis since the great depression
  • The most concentrated national efforts against a crisis since World War 11 since the Great Depression of the 1030’s
  • All of which is being driven by the biggest health emergency the world has seen since the Spanish Flu epidemic of 1918-1919.
  • This ain’t going away anytime soon.

The good news is that the Federal and Provincial governments along with municipalities across Canada have decided to throw everything we have at this. The federal government has made it clear they will spare no expense or effort to get us through this intact. Good on them.  Now it’s up to us to follow that model. We must do what needs to be done to keep our households and our businesses intact. We will have a vaccine within 12 months according to Bill Gates (look up what he and Melinda are doing on the medical front around the world).  So by sometime in 2021 we will be in recovery mode, and will likely enjoy a boom like we haven’t seen in decades (in most but perhaps not all markets).  So we need to bridge ourselves to that time of recovery.

So what are we to do?

Cash is King, so preserve your cash as best you can. Take all available payment and other deferrals that you can get. Preserve available capital in your HELOCs and PLC’s.

Protect yourself in all your income and debt management decisions, and whatever you do, do it as fast as you can reasonably do it, and based on your risk tolerance. The less tolerance you have the more protective you should be.

Read more on my recommendations as to how to protect yourself in my Blog Post What Direction are Interest Rates Headed, and what should we do?

What is Your Burn Rate?

Are you cash-flow positive or break-even, or negative?  If negative, what is your Burn Rate?  The term essentially means ‘by how much does your cash outflows exceed your inflows?’  For this exercise I recommend you assume all spending is not funded by lines of credit or credit cards etc.  So do your monthly or annual budget in this manner to determine if you have a ‘burn’ or not.  And if you do, you need to act to minimize the burn rate as best you can.  Cut spending, increase income if you can, look for debt payment deferrals, and if that is not enough, then look to other debt instruments to help or sell assets.

Now, let’s get down to the basics:

How to make a Budget (this is pretty complete) http://christianpf.com/how-to-make-a-budget/

So first, we need to take stock of our financial situation, and that means reviewing, or making, a household Budget. Below are 5 good products to help with that.  If you would like further advice or help with this send me an email and I will be happy to assist you.  After all, I’m a numbers guy 🙂

Here are 4 Household Budgeting Apps & Programs

MvelopesFREE VERSION is full featured online personal finance App based on the age-old envelope budgeting method, where you put your cash in envelopes, each marked to what the cash is for, and when it is gone, it is gone, resetting during the start of your next pay period.

You Need a Budget (YNAB) – $6.99 / month USD – packs in many features and improvements over earlier versions, and it intuitively teaches some solid budgeting practices.

Quicken – has 4 versions at varying costs Best for Those Who “Want It All”

The Below are Spreadsheet solutions:

Vertex42 – FREE – a great variety of Excel Spreadsheet based products. All the Vertex42™ budget templates can be downloaded for personal use and no charge.  See their household budget spreadsheet here

More Vertex42 Family Budget Planner Spreadsheets

5 Tips for Surviving Economic Uncertainty

from Money Coaches Canada

  1. Figure out how much you need to cover your expenses
  2. Develop new Cash Saving Habits
  3. Build Your Emergency Fund
  4. Remind yourself why you invested, not on what’s happening in the markets now
  5. Get Support (on the many federal and provincial initiatives to assist Canadians)

Also from Money Coaches Canada

Cash Flow in the Time of COVID-19


I saved the Best for Last

All the Support Programs available all across Canada

This is a great open-source document detailing, searchable, and categorized by need and situation. Brilliantly conceived. Updated frequently. https://drive.google.com/file/d/1lOJn7XS6ETIkbLRodYk681M_2dxkkQsc/view

30 Mar

What Direction are Interest Rates Headed, and what should we do?

Challenging Times

Posted by: Garth Chapman

What Direction are Interest Rates Headed, and what should we do?

  • Context – Let’s first look at the key elements and actions driving interest rates and economic activity right now
    • Liquidity crisis
      • Remember 2008. The capital markets dried up and the huge gaps had to be filled. Now is similar but with an entirely non-economic cause.
      • “The Bank of Canada (BoC) is meeting twice a week with the senior leadership of the Big-Six Banks. The cost of funds for the banks has risen sharply. CMHC is buying large volumes of mortgages from the banks, which, along with CMB purchases by the central bank, will shore up liquidity.” Dr. Sherry Cooper of DLC
  • CMHC has acted to provide liquidity for the Banks by buying large tranches of mortgages and has bumped the quantity of those purchases once already. This frees up lending capacity for the banks by returning the cash to their balance sheets.
    • The Federal Government has acted to provide liquidity for businesses by way of loans, tax and other deferrals
    • The Federal Government has announced a new program, the Canada Emergency Wage Subsidy (CEWS) program which is to provide to companies that have a 30% loss of revenue up to a 75% wage subsidy to help Businesses keep & return workers to payroll retroactive to March 15.  The initial announcement indicated that payments will be capped at 75% of $58,700 an employee’s annual income, so $1,129 per week for up to 12 weeks (again these are the initial indications, yet to be fully unveiled, because, well they’re more than likely not yet fully decided).
    • The Federal government has acted to provide liquidity for individuals with several programs, the largest being the $2,000 monthly to all with COVID-related loss of income.
  • Bank of Canada has acted to provide liquidity for businesses and individuals by lowering the Overnight Target Rate 3 times in 10 days, a total of 1.50%. Biggest and fastest cuts ever.
  • Commercial financing is largely frozen right now.
  • Paradox – the Prime rate has dropped by 1.50% in the last 2 weeks, but mortgage rates are going up
    • Background
      • Prime directly drives only Variable Rate mortgages and HELOC’s and Personal Lines of Credit (PLC).
      • Fixed rates are driven primarily by Government of Canada Bond Yields.
      • Hi-ratio insured mortgage rates are lower than uninsured rates. That is counter-intuitive to the inherent relative risks and is due to mortgage regulatory changes of recent years.
    • Variable rates are down by 1.50%, but the discounts to Prime have nearly disappeared.
      • Hi ratio insured from Prime less 1.0% or better, to Prime less 0.2% at best.
      • Uninsured from Prime less 0.5% or better, to Prime less 0.0% at best.
    • Fixed rates are wildly gyrating, the first increases ~2 weeks ago was about increasing spreads on banks cost of money. Since then it is supply and demand, due to reduced staffing levels, massive inflow of mortgage payment deferrals calls, and huge volumes of applications (now dropping).
    • Due to the above: Fixed rates are up ~0.50% over the last week, a bit less for hi-ratio insured mortgages, after dropping initially when the Bond market yields crashed.
  • Where we are today – see these self-explanatory three CHARTS below:




  • Normal BoC action: inflation low — rate low; inflation high — rate high (and why)
    • BoC mandate is to keep inflation within a range, that is adjusted from time to time.
    • For the foreseeable future, liquidity issues will be paramount. That will last at least until our economy, and that of our major trading partners, is largely back up and running.
  • Why rates might go up instead?
    • Currently lenders can’t keep up – very high new mortgage applications during February and early March. This will return to near-normal as deferral calls diminish, and buyers stop buying.
    • Risk – Michael Campbell’s MoneyTalks comments this week:
      • “What happens when lenders worry about mid-term and long-term lending? Then you have no market”
      • “How long can Central Banks keep interest rates low when increasing risk demands that they rise? It’s like loading a spring. Will it take 1 month, 12 months, 18 months? No-one knows, but the risk is there.”
    • What happens if Canada’s government takes on so much debt that institutional and international investors who buy those bonds begin to demand higher, perhaps much higher, returns on those bonds. And if the same occurs in most of the rest of the developed world it seems to me the impact of that would be a scarcity of capital.  These things would yield increased inflation and in turn higher interest rates for Canadians.   See the below chart of  the Government of Canada 5-year Bond yields from 2000 to March 30, 2020. How far yields have fallen. These have been an extraordinary last 20 years, especially the last 12 since 2008.

  • What to expect over the next 90-180 days
    • Variable Rate Mortgages: discounts to the Banks’ Prime Rates: Have all-but disappeared, and I don’t see that changing in the short term. I suspect those discounts should return somewhat close to previous levels once the economy is up and running to a reasonable level.
    • Fixed Rate Mortgages: I believe should come back down as the Bond markets settle – BUT – that might not happen, depending on how much higher the costs of supporting Canadian economy goes. And it could go up significantly.
      • Note- as my friend Jeff Gunther said on a call today “when rates move they move quickly”. And I would add sometimes “also by a lot”.
    • Lenders will reduce LTV limits in various markets. Some lenders will (and already have) vacate various markets and/or various products lines. One Monoline is out of the Prairies, another is out of both insured and uninsured lending in the Prairies, and two more are already out of uninsured lending in Alberta. This is driven by investors backing away from perceived risks, and by Monoline lenders’ volume capacities due to reduced staffing etc.
    • Given that more than half of the mortgage industry (Brokers and Bankers) are working from home, allow 30 to 45 days minimum for purchases to close.
    • Anyone who wants to switch lenders and has a maturity date (renewal date) in the next ~30-40 days closing should get confirmation in writing that the new lender can close that quick. If there’s any doubt, ask your existing lender to renew you into an open mortgage, if possible.
  • Crystal Ball
    • I don’t know about yours, but my crystal ball appears to be faulty over the last two weeks. Each day it shows me a different future.
    • We are in uncharted waters. National economies world-wide are more interconnected than ever. There are more moving parts than ever before.
    • Liquidity is the big risk issue over the mid and long term. The risk is whether or not it is manageable. Some pundits think it will eventually prove to NOT be manageable, that the BoC, CMHC and the federal government will run out of capacity to provide liquidity.
    • We have been in an ultra-low interest rate environment for over a decade now. Many in the financial world have been predicting for several years an interest rate rise. Some base this in part on the growing under-funded pension liabilities created by such low rates for so long. John Mauldin is one of those
    • No-one knows where interest rates are going in the longer term. Rest assured they will go up and they will go down, but we don’t know when or in what order.
    • I think we are beginning to see the amazing ingenuity and creativity that many people employ when the chips are down, and that makes me believe we will find our way through this without wide-scale destruction of our developed economies. Having said that, the risk is that if this goes very badly, it could well be worse than the 1930’s.
  • What are we to do?
    • Cash is King, so preserve your cash as best you can. Take all available payment and other deferrals that you can get. Preserve available capital in your HELOCs and PLC’s.
    • Some people I know believe banks will selectively lower PLC limits or cancel some altogether. They go so far as to recommend you should take 75% of cash available in your PLCs now and put that money in an account at a different bank.
    • If you want a home equity line of credit, apply yesterday. Recessions are not conducive to getting great deals on HELOC rates, but again, cash is king. And once you are out of work a HELOC will be more difficult to qualify for, notwithstanding the excellent suite of supports from various levels of government.
    • If you get a 5-year fixed rate, try to pick a lender with a fair interest rate differential penalty (aka Monoline lender). The big-6 banks’ IRD penalties are on average roughly 2.5 to 3 times higher.
    • For those who believe Prime will stay low and that Fixed rates will not climb much above current rates, a Variable rate mortgage may be the way to go until the Fixed rates market settles somewhat and those rates drop back down so you lock in.
    • If you are truly concerned about, or if your financial stability is vulnerable to, interest rise shock, consider a 7-year or a 10-year term fixed rate mortgage.  I have seen 7- year and 10-year rates as low as 0.6% to 1.0% above the 5-year Fixed rates recently.
      • Note- These low long term rates tells us the some of the institutional lenders believe rates will indeed remain low for 7-10 years.
    • Protect yourself in all your income and debt management decisions, and whatever you do, do it as fast as you can reasonably do it, and based on your risk tolerance. The less tolerance you have the more protective you should be.
30 Mar

My thoughts for landlords on mortgage payment deferrals in 2020

Challenging Times

Posted by: Garth Chapman

Aside from one’s own personal sense of obligations to those in need, I believe that society as a whole bears the obligation to help those in need, at all times, and most especially in extraordinarily challenging times.

At this time a very great many Canadians are in need. The Federal & Provincial governments are honouring society’s obligations by way of the many and growing supports, now at a point where it appears that no-one is at risk of not being able to pay for food and shelter and medical costs.

Governments leaned on the banks to provide payment deferrals to Canadians, and to support that are providing liquidity to those banks to allow the banks to do what the federal government has asked. This is an extension of the governments providing the obligated supports to Canadians in need.

Landlords taking deferrals does not deprive Canadian homeowners of their own opportunities to take deferrals. The banks won’t run out of capacity to offer deferrals because the federal Gov’t won’t allow that to happen. Through all this we will stand by our (mostly long-term) tenants and support them and provide information and advice on the programs and benefits as they work their way through this.

The rules Premier Kenney announced on March 27 are essentially what we believe we and our tenants should do. And we’ve conveyed that to our tenants.

Having thought through all that last week, we prefer to take most or all of the mortgage payment deferrals we can to buttress our cash reserves. Once we are through this if we have extra cash remaining we will use it to pay down HELOC debt on our rentals. Why? Because that interest rate is higher than the rate on our mortgages.

If we were in acquisition mode (we aren’t) we would use any such funds towards purchases.

Important note re Income Tax:

Notwithstanding the tax impact of reduced rent income, we must remember that mortgage interest is a tax deductible expense. Hence, mortgage interest deferred within a tax year will reduce taxable income, meaning income taxes owing will be higher. Bottom line: expect roughly a 40% tax on every dollar of mortgage interest deferred in 2020.

In Closing

In just two months this has already become:

  • The single largest economic disruption and jobs crisis since the great depression
  • The most concentrated national efforts against a crisis since World War 11 since the Great Depression of the 1030’s
  • All of which is being driven by the biggest health emergency the world has seen since the Spanish Flu epidemic of 1918-1919.

So what are we to do?

Cash is King, so preserve your cash as best you can. Take all available payment and other deferrals that you can get. Preserve available capital in your HELOCs and PLC’s.

Protect yourself in all your income and debt management decisions, and whatever you do, do it as fast as you can reasonably do it, and based on your risk tolerance. The less tolerance you have the more protective you should be.

Read more on my recommendations as to how to protect yourself in my post What Direction are Interest Rates Headed, and what should we do?

27 Mar

The Fixed vs Variable Interest Rate Decision

Buying & Refinancing a Home

Posted by: Garth Chapman

Fixed Vs Variable – How to decide…which way to go?

The choice between Fixed and Variable interest rate is one that many borrowers ask about.

This is a very common question and you are not alone. First, let’s help you to understand the differences between the two types of mortgages.   A Variable Rate Mortgage is where the interest rate charged and your monthly payment will normally change when there is any change to prime rate.  The prime rate can change up to 8 times per year.  A Fixed Rate Mortgage is where neither your payment or the interest rate will change at all during the term of your mortgage.

Both fixed and variable mortgages have their own advantages and disadvantages.

Advantages of a Variable Rate Mortgage:

  • When rates go down you benefit from that immediately and will see your payment drop – this means more towards the principal and less interest so your mortgage is paid off faster!
  • Historically variable mortgages have been significantly lower in rate than fixed mortgages
  • Variable rates offer you the freedom to convert at any time to a fixed rate mortgages especially when you see rates rising.

Advantages of a Fixed Rate Mortgage:

  • The fixed rate offers the security of locking in your rate
  • You may prefer peace of mind – the same mortgage payment every month with a guarantee not to change for the term
  • You will know exactly how much principle and interest you are paying with each payment.

There are at least three key elements to be considered when making this decision.

1) The fixed rate premium is the cost of taking the security of a (higher) fixed rate over a (currently lower) Variable rate. The fixed rate is always somewhat higher than the Variable rate.  Think of that rate premium as you would an insurance premium.  You pay the higher rate for the security of that rate not changing during the current term of the mortgage.

The spread does move around, and when it is less than 0.80% it is generally considered to be a ‘good buy’.  In May of 2012 we saw that spread drop to an all-time low, so low that we converted four existing mortgages from Variable to Fixed.  At that time Variable rates were at about Prime – 0.30% which translated to 2.70% and the lowest fixed rates for a 5-year term was 2.79% making the spread under 0.10%.  The spread between Fixed and Variable have remained below the norm from mid-2012 through to mid-2017, when it began increasing along with both Fixed and Variable mortgage rates.  In April of 2017 we converted 4 more mortgages to 5-year fixed rates because we believed fixed rate increases were upon us, and that the Prime Rate would also be increasing.

So on the financial side of this choice you can determine the cost of the rate premium in dollars per month or year, or during the term.  Then decide if the cost of that premium is worth paying.

2) Increased payment risk tolerance is about how well you are able to handle an increase in mortgage payments, which would be created by an interest rate hike following a Prime Rate increase).  I break this risk tolerance down into two components.

Financial risk tolerance is about your financial capacity to absorb an increase in mortgage payments.  This is something you can assess by reviewing your monthly budget. Less tolerance may point you to a Fixed rate mortgage.

Emotional risk tolerance is about how you sleep at night, and by that I mean do you worry about interest rates and your payment going up, and does your level of worry create any stress in your life?  If it does, then you may be more emotionally suited to a Fixed rate mortgage.

3) Qualifying Rate vs Actual rate of the mortgage contemplated.

You must qualify at the much higher Bank of Canada Benchmark rate when taking a Variable Rate mortgage, so that is something to confirm early on that will fit your qualifying criteria.

Understanding what drives Variable rates and Fixed rates

Your Variable Mortgage Rates are driven by your bank’s Prime Rate which is set individually by each Bank.  They normally (but not always) move in sync with changes in the Overnight Rate, which is set by the Bank of Canada (BoC) and is used as a basis for one-day (or “overnight”) borrowing between the major lenders and financial institutions.  The BoC is responsible for monetary policy, the goal of which is to keep inflation near the mid-point of a 1 to 3 per cent target range, ideally 2%.  The BoC is equally concerned with significant movements in the inflation rate, both above the 2% mid-point and below it.  When demand is strong, it can push the economy against the limits of its capacity to produce.  This tends to raise inflation above the midpoint, so the BoC will raise interest rates to cool off the economy.  When demand is weak, inflationary pressures are likely to ease.  The BoC will then lower interest rates to stimulate the economy and absorb economic slack.

So when the economy heats up and there is a threat that inflation could get beyond the 1 to 3 per cent target the BoC may increase the overnight rate, which drives the Prime Rate. The schedule of dates when the BoC reviews and sets the Overnight Rate is found here http://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/

Fixed Mortgage Rates are driven by the Bond markets

Typically, when bond rates (also known as the bond yield) go up, interest rates go up as well. And vice versa. Don’t confuse this with bond prices, which have an inverse relationship with interest rates.

Investors turn to bonds as a safe investment when the economic outlook is poor. When purchases of bonds increase, the associated yield falls, and so do mortgage rates. But when the economy is expected to do well, investors jump into stocks, forcing bond prices lower and pushing the yield (and mortgage rates) higher.

The spread between 5-year Government of Canada Bonds and 5-year mortgage rates varies within a range that has fluctuated in recent years.  You can follow the 5-year Bond Yield in Canada on the BoC website and you will notice that a period of Bond yield increases or drops will almost always be followed by a corresponding change in fixed rates for mortgages.

If I choose a Variable rate and I want to be able to convert that to a Fixed rate, how will I know when it is time to convert to a fixed rate?

Bond Yields and the Prime Rate don’t move in lock-step, so if you choose a Variable rate then you will need a mechanism or methodology to decide when it is time to convert that Variable rate to a Fixed rate. Without one you will more than likely end up making the switch long after you would like to have done so, and you will pay more. that is because we tend to make such financial decisions when laden with emotions such as fear, and we either panic and move too soon or we freeze and don’t act soon enough or at all.

So to manage that decision I strongly recommend that (to use a stock trading term) you set two ‘stop-loss’ orders to act as your trigger points to make the change to Fixed rate. One is your Variable trigger, that being when the Prime Rate reaches ‘x’%. The other is your Fixed trigger, that being when the 5-year (or any other term) reaches ‘y’%. Using those two management mechanisms will ensure you don’t miss the boat.

If you want to be even more sophisticated about this, you could review the Stop-loss rates annually, remembering that as time goes by without significant change in the Prime Rate you will have built up a nice buffer against the cost of an increase during the term of the mortgage.

You can follow what the best market rates are here http://garthchapman.ca/

The schedule of dates when the BoC reviews and sets the Overnight Rate is found here http://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/

For more on the subject read the Fixed or Variable Rate Mortgage? The Decision Checklist post by RateSpy.com

I hope this gives you some clarity on this complex subject, and on how to make and then manage your own interest rate decision.

1 Jan

Why Financial Independence is a Better Goal than Retirement


Posted by: Garth Chapman

I turned 65 this year, I’m not retired, and that is just fine with me. I enjoy what I do, especially on those occasions when I can truly help make a real difference to a family’s present or future.

In fact, it has long been my plan to not retire, but I wanted to ensure I didn’t HAVE to work.  My last 20+ years in business were primarily devoted to both enjoying what I do and to ensuring my own ‘Findependence’ or financial independence. Findenendence to me is largely about freedom to choose how you live your life.

I believe that this line of thinking helps to keep one young at heart. I particularly like how Clint Eastwood described how, at 89, he continues to work and behave like a much younger man. He said “I don’t let the old man in”.

Here’s an article on Financial Independence as a goal in place of retirement I think you might find interesting.

Why Financial Independence is a Better Goal than Retirement

12 Mar

Track Your Spending on the Go with the Best Budget Apps in Canada 2019


Posted by: Garth Chapman

We have found that crafting and sticking to a realistic budget has been a key in our own financial health.  In our early years together, after our expenses started to get ahead of our income, we started with a hand-written budget and an envelope for each expense item.  These days we have computers and smart phones, so it is so much easier now to create a budget and manage.  Here is a good breakdown of what is available in 2019.  Each of these Apps has a different approach, so you might just find the one that fits you from this selection of Apps.

From the article “Whether we like to admit it or not, money has a powerful influence on our lives. Your bank account balance affects whether you can pursue higher education, own a home and have a secure retirement. Having a good income is nice, but the health of your finances can often depend on how you manage the money you make, rather than on how much you make.

While it would be great if we could all afford to have our own personal financial manager, budgeting is something most of us must do on our own. Luckily, thanks to the popularity of smartphones and an ever-growing array of finance apps, it’s possible to have your own mobile money manager in the palm of your hand.

The best budgeting apps work by making it as easy and automatic as possible to see where your money goes. Many apps link directly to your financial accounts and instantly tabulate your savings and expenses. Others highlight key areas of concern like debt repayment or can show you where you’re overspending.”

Read more