[HN Gopher] Bank of Canada increases policy interest rate by 75 ...
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Bank of Canada increases policy interest rate by 75 basis points,
continues QT
Author : jbay808
Score : 57 points
Date : 2022-09-07 18:24 UTC (4 hours ago)
(HTM) web link (www.bankofcanada.ca)
(TXT) w3m dump (www.bankofcanada.ca)
| spaghettiToy wrote:
| I need to stop reading the news, it makes me quezy... But I
| wonder if ignoring news is going to make me ignorant.
| mabbo wrote:
| It will be interesting to see what happens to the housing market.
|
| Mortgages in Canada have to be renewed every 2-5 years. Rates
| renegotiated. There have been rumblings for years that there are
| a huge number of homeowners who would be unable to pay their
| mortgage with a 1% increase in rates. Now we've seen rates go
| from 1.9% to 5.4% in a year, with more rises to come.
|
| All the while, we've had a housing bubble going on. My condo at
| one point had doubled in price from what I bought it for 7 years
| ago, based on neighbouring units for sale (and sold). And it was
| already inflated in value back then.
|
| How many homeowners were barely able to afford a $1.5m home[0] 3
| years ago at rates of 2%, and are paying $6,300/month, and in the
| next 6 month will renew their mortgage at 5.4% and be unable to
| afford $9,000/month?
|
| Those houses will go up for sale, and that is how bubbles pop.
|
| [0]What, you think $1.5m is too much for a house? Take a look at
| realtor.ca and browse most neighbourboods of Toronto. That much
| won't get you much, for the moment. Also, it's CAD so take 30%
| off.
| onlyrealcuzzo wrote:
| The much bigger problem is that home prices are going down,
| rapidly, and that's leveraged. Prices are down 16% in Toronto
| [1]. On the average 5:1 leverage - that's down 80% - anyone who
| bought in the last 1 year (a record number of buyers) is
| looking at steep loses.
|
| Combine that with the fact that Canadians - like Americans
| pre-2008 - increasingly finance their lifestyles with HELOCs
| [2].
|
| It looks like Australia and Canada might get their financial
| crisis they averted by kicking the can down the road in 2008.
|
| [1]
| https://www.bloomberg.com/news/articles/2022-09-02/toronto-h...
|
| [2] https://www.mpamag.com/ca/specialty/specialized-
| lending/how-....
| AzzieElbab wrote:
| I do not think you can get much financing from HELOC if you
| are a new buyer. Not enough equity yet. But even without
| HELOC new buyers are going under
| itsoktocry wrote:
| This is true, but the point is it isn't _only_ new
| homeowners getting harmed. It 's also _old_ homeowners
| financing lifestyles on margin.
| jbay808 wrote:
| Another interesting twist is that mortgage interest is
| counted towards the CPI in Canada, so the increase in
| mortgage payments won't result directly in any loss of
| consumption demand. It may even increase it.
| [deleted]
| dangerboysteve wrote:
| This, forget the mortgages, it's the HLOCs that are the
| issue, people using them to finance lifestyle, renovations,
| investment and buy more real estate. example: https://twitter
| .com/ronmortgageguy/status/156755118509536870...
| johnnymorgan wrote:
| This is a great run down on the issues.
|
| There are other problems that are going to crop up, the
| demographics issue in Canada is a big one and we are seeing it
| in the labour market already
| chollida1 wrote:
| For the American's that don't know. In Canada our banks won't
| give you a 25 or 30 rate.
|
| We typically renew our rates every 5 years, while still
| amortizing our mortgages over 25-30 years. So rate adjustments
| tend to hurt more than they do in the US.
|
| Our overnight rate is now 3.25% so we're a bit ahead of our
| neighbor to the south.
|
| And our equivalent to the dot plot suggests no more rate raises
| this year, though we do have a chance for one more in December,
| but unless our inflation rate jumps again, we're probably done
| until the US catches up to us.
|
| I guess I should note that the new 3.25% rate is 25bps above what
| the BOC considers to be the neutral rate.
|
| Our two year rate( the one I tend to think is the most important)
| is currently trading around 3.62% which is up, while the 10 year
| hasn't really budged, indicating that the markets think we may be
| close to the end of rate hikes.
|
| Our inflation rate "falling" to 7.6% in July from 8.4% in June
| also suggests that rate hikes are starting to work.
|
| We're in a weird not often seen situation where we are seemingly
| heading into a recession with full employment and high inflation
| and already high interest rates(by recent memory) while also
| having high debt levels for both individuals and businesses.
|
| The BOC( and US FED) have been pretty clear which side they'll
| come done as they have constantly said inflation is job #1, so
| people with debt will be feeling pain for along time to come
| rinze wrote:
| > And our equivalent to the dot plot suggests no more rate
| raises this year
|
| They say this in the linked press release, though: "Given the
| outlook for inflation, the Governing Council still judges that
| the policy interest rate will need to rise further."
|
| I guess we'll see what happens by the end of October. I
| wouldn't be surprised if they keep hiking.
|
| edit: a missing space.
| ryanisnan wrote:
| As a variable rate holder, I am not the most pleased.
| chx wrote:
| I personally never understood how could anyone take a
| variable rate mortgage. I would never have a good night's
| sleep. But that's just me.
| throw0101c wrote:
| Going with a variable rate mortgage would have been
| better at least 75% of the time, as possibly as much as
| 90%:
|
| * https://www.ratespy.com/the-most-misconstrued-study-in-
| mortg...
|
| * http://astarmortgage.com/pdf/moshe.pdf
|
| We just happening to be in a rising rate environment
| currently.
|
| There are two types of variable mortgages:
|
| > _With a fixed payment, when prime rate rises you simply
| pay more interest and less principal, and vice versa when
| prime falls. But your actual payment stays the same
| (unless rates soar so much that you're not even covering
| the minimum interest due, which is rare)._
|
| > _That's opposed to an adjustable rate mortgage (ARM)
| where both your payment and interest cost vary as prime
| rate fluctuates._
|
| * https://www.ratespy.com/offers-fixed-payment-variable-
| mortga...
|
| > _With a VRM, a rise in the interest rate leaves the
| regular mortgage payment unchanged but the interest
| charged rises and the amount of the payment allocated to
| pay down the principal balance drops and this means it
| will take longer to pay-off the mortgage. A lower rate
| has the opposite effect accelerating your pace of
| mortgage repayment._
|
| > _With an ARM, a rise in the interest rate results in a
| rise in the regular mortgage payment to cover the higher
| interest cost to ensure that the dollar amount allocated
| to pay down the mortgage principal remains intact. On the
| flip side, a drop in rates will drop your regular payment
| without accelerating the pace with which you repay the
| debt._
|
| * https://www.mortgagesandbox.com/news/types-of-variable-
| rate-...
| happyopossum wrote:
| That kind of analysis really only works well for people
| who make a lot of housing purchases, and have cash
| reserves to cover rising rates.
|
| For most people, who get one mortgage on their primary
| home (which they live in), the potential downside if
| you're in that 25% is 'lose your house', so it's not
| unwise to go with a fixed rate that you know you will be
| able to pay for the life of the loan.
| bryanlarsen wrote:
| It's often the opposite, at least in Canada. In Canada,
| fixed rate is only fixed for 5 years. A variable rate
| mortgage goes up and down gradually. A fixed rate
| mortgage sees massive changes in rate every 5 years.
| itsoktocry wrote:
| Most banks have 10 year fixed, too.
|
| But going long term fixed means you're in a forecasting
| competition with the bank. It's no gimme.
| throw0101c wrote:
| > _That kind of analysis really only works well for
| people who make a lot of housing purchases, and have cash
| reserves to cover rising rates._
|
| The VRM has no rising costs: your monthly payments are
| the same. It's just the amount of principle paid off each
| month changes:
|
| * if rates rise (like now), less principle is paid off
|
| * if rates drip (the 10 years before this particular
| moment), more principal is paid off
|
| But what gets taken out of your chequing account would be
| the same.
| itsoktocry wrote:
| VRMs also have a trigger rate where payments increase,
| you can't accrue principal. Not sure how the banks will
| handle this yet, it's not in their interest to crush
| marginal mortgage holders.
| liketochill wrote:
| It was cheaper than fixed for the last 15 years
| idiocratic wrote:
| Marginally, from a historic perspective.
| bawolff wrote:
| It should almost always be cheaper - you're trading risk
| of rate changes for lower prices on average. The person
| you are responding to is almost certainly aware of this.
| galdosdi wrote:
| I felt the same way until I learned that in much of the
| world, super long (eg 30 year) fixed rate (no penalty for
| early payment) mortgages just aren't available
|
| This is apparently a weird mostly unique to the USA
| thing, probably driven by complex subsidies. And that's
| why owning a home in the USA is such a good deal--
| because it's the only way to get a 30 year fixed early-
| repayable mortgage, which, especially at the rates that
| were available for the last 15 years or so, is such an
| insanely good deal it's pretty much free money.
|
| If you really think about it, why would any rational bank
| take this bet? If rates go up, you have an unfairly low
| rate and they can't do anything about it. If rates go
| down, they still lose because you can just repay early
| through a refinance. And 30 years is a long time to
| guarantee a rate.
|
| The only reason a bank would offer such a crazy bargain
| is subsidies.
| Tiktaalik wrote:
| For the last several decades, over the long term they've
| been the better option.
| jbay808 wrote:
| (Assuming you're an American). In Canada, "fixed rate"
| generally means fixed for 5 years only. So while there is
| a difference between fixed and variable, it's not a huge
| difference in terms of peace of mind; all mortgages are
| essentially variable rate in some sense.
|
| A lot of Canadians opt to try their luck with variable,
| especially since it's usually cheaper on average, and
| usually cheaper up front.
| dangerboysteve wrote:
| Much of this was realtors and mortgage brokers pushing
| buyers into variable for various reasons. One, to get
| more buying power and for brokers the chance to make more
| commissions with sorter term variable rate mortgages
| (more future renewals).
| koolba wrote:
| Most jurisdictions let you repay in full without penalty
| so assuming you can refinance down the road or simply
| sell the place during the lock period, you come out
| ahead.
|
| It doesn't change nightly either. It's in fixed windows
| every X months (e.g. every six months) and the maximum
| delta per hike or drop is usually fixed as well.
| chollida1 wrote:
| > They say this in the linked press release, though: "Given
| the outlook for inflation, the Governing Council still judges
| that the policy interest rate will need to rise further."
|
| Well I was just talking about this year so its entirely
| possible(and I'd say probable) they hike next year
|
| > I guess we'll see what happens by the end of October.
|
| Probably not, the BOC doesn't meet again till December so I'm
| not sure what we'd see at the end of October.
| throw0101c wrote:
| October 26 and December 7:
|
| * https://www.bankofcanada.ca/core-functions/monetary-
| policy/k...
| rinze wrote:
| > Probably not, the BOC doesn't meet again till December so
| I'm not sure what we'd see at the end of October.
|
| From the linked press release: "The next scheduled date for
| announcing the overnight rate target is October 26, 2022."
| chollida1 wrote:
| Oh, shoot, you are indeed correct and I am wrong on this
| :(
|
| I misread the dot plot. Thanks for correcting me, so we
| could indeed see a hike in October, though the current
| plot suggests a max of 25bps for the end of the year.
| dragontamer wrote:
| There seems to be a fair bit of "demand destruction" here in
| the USA. Hard for me to tell if its from our 2.25%ish overnight
| interest rates, or if it is due to inflation.
|
| Either way, the September 20th meeting is currently expected to
| be +.75% by the bond futures market. So I think we're gonna
| catch up to you sooner, rather than later.
| onlyrealcuzzo wrote:
| "Demand destruction" is one way to look at it.
|
| The other is that artificially low interest rates synthesized
| demand, and this is a normalization.
| dragontamer wrote:
| I mean, whatever it is, there's fewer people buying things.
| (or many people buying fewer things). So I don't see much
| point arguing the semantics / precise words used to
| describe the phenomenon.
| brianmcc wrote:
| >> We're in a weird not often seen situation where we are
| seemingly heading into a recession with full employment and
| high inflation and already high interest rates(by recent
| memory) while also having high debt levels for both individuals
| and businesses.
|
| Hi from the UK too :-)
|
| High energy prices and fuel costs here are just annihilating
| people's spending ability, yet Bank of England has been upping
| interest rates similarly aggressively, to, you know, reduce
| people's spending ability. Fun times. And the people with
| serious disposable money to spend are seeing better savings
| rates and so... have _more_ money to spend!
|
| I think there's simply a "this is the tool we've always used to
| combat inflation so here we go" attitude among central banks.
| IIRC Japan took a more nuanced view and bet on inflation being
| transient and with a distinct (COVID plus Russia/Ukraine) cause
| _different_ to normal inflation causes, and they seem to be
| doing pretty well?
|
| https://tradingeconomics.com/japan/inflation-cpi
| bryanlarsen wrote:
| And because Japan is not raising interest rates as highly,
| its bonds aren't in demand so its exchange rate is falling.
| This makes imports more expensive which will increase
| inflation.
|
| So people will take this as evidence that Japan did the wrong
| thing and other central banks did the right thing, when
| really it's the rate raises at other banks causing Japanese
| inflation.
| jbay808 wrote:
| The main difference is that the Bank of Japan, unlike the
| rest of the world right now, _wants_ more inflation.
| michael1999 wrote:
| That's not strictly true. See
| https://www.rbcroyalbank.com/mortgages/mortgage-rates.html#p...
|
| While 25-year fixed is uncompetitive (9.75% !!!!!! vs 5.9% on a
| 3-year fixed), the banks definitely sell them.
| jbay808 wrote:
| Does anybody _buy_ them?
| dangerboysteve wrote:
| Those inflation numbers can change once more data a looked at.
| throw0101c wrote:
| > _For the American 's that don't know. In Canada our banks
| won't give you a 25 or 30 rate._
|
| Section 10 of the Canada's federal _Interest Act_ states
| (emphasis added):
|
| > _10 (1) Whenever any principal money or interest secured by
| mortgage on real property or hypothec on immovables is not,
| under the terms of the mortgage or hypothec, payable until a
| time_ more than five years _after the date of the mortgage or
| hypothec, then, if at any time after the expiration of the five
| years, any person liable to pay, or entitled to pay in order to
| redeem the mortgage, or to extinguish the hypothec, tenders or
| pays, to the person entitled to receive the money, the amount
| due for principal money and interest to the time of payment, as
| calculated under sections 6 to 9,_ together with three months
| further interest in lieu of notice, no further interest shall
| be chargeable, payable or recoverable _at any time after the
| payment on the principal money or interest due under the
| mortgage or hypothec._
|
| * https://laws-lois.justice.gc.ca/eng/acts/i-15/page-1.html
|
| So since penalties on cancelling >5 year term mortgages are
| restricted, which means banks have no (major) recourse if you
| cancel a >5 year mortgage, so the banks have little incentive
| to offer >5 year mortgages. (Amortization periods are >5 years
| of course.)
|
| The US has no such restriction, and so if you cancel a 30 year
| mortgage there, banks can theoretically go after you for the
| entire amount of lost profits.
|
| Note that, while there have been some spikes, interest rates
| have been on a generally centuries-long trend of going lower:
|
| * https://www.visualcapitalist.com/700-year-decline-of-
| interes...
|
| * https://www.bankofengland.co.uk/working-paper/2020/eight-
| cen...
|
| Renewing often has, in general, gotten you a lower rate. It's
| why, historically speaking in Canada, going with a variable
| rate mortgage would have been better at least 75% of the time,
| as possibly as much as 90%:
|
| * https://www.ratespy.com/the-most-misconstrued-study-in-
| mortg...
|
| * http://astarmortgage.com/pdf/moshe.pdf
|
| We just happening to be in a rising rate environment currently.
|
| This may be a reason, and not the only one, or unrelated to the
| situation entirely.
|
| > _Section 10 of the Interest Act (Canada) allows a borrower
| who is a natural person to prepay a mortgage loan or hypothec
| having a term of 5 years or more at any time after the first 5
| years, in exchange for 3 months' interest payments (in addition
| to the principal and interest owing). This right of prepayment
| protects individuals from being locked into a long-term
| mortgage at a high interest rate with either no ability to
| prepay or with prepayment subject to a large penalty. However,
| the same rule restricts individuals from negotiating their own
| prepayment terms which may preclude them from securing more
| favorable long-term financing._
|
| * https://obj.ca/article/five-interest-rate-provisions-be-
| awar...
|
| * https://www.mondaq.com/canada/real-estate-and-
| construction/1...*
| happyopossum wrote:
| > The US has no such restriction, and so if you cancel a 30
| year mortgage there, banks can theoretically go after you for
| the entire amount of lost profits.
|
| That would be a good explanation for why loans are structured
| like that in Canada, except for this last sentence - this
| virtually never happens. I have never seen, let alone taken
| out, a 30 yr mortgage with a prepayment penalty.
|
| Like, I honestly don't know if any banks are issuing them.
|
| --editing to add:
|
| Did a little research, and yes - there are some loans with
| prepayment penalties, but in no cases do they seem to "go
| after you for the entire amount of lost profits". It's
| generally a fixed %age of the loan value, and the penalty
| expires fairly early in the loan (2-3 years seems to be
| common, some go to 5).
| throw0101c wrote:
| > _I have never seen, let alone taken out, a 30 yr mortgage
| with a prepayment penalty._
|
| Hence the the use of the word _theoretically_.
| voisin wrote:
| > while still amortizing our mortgages over 25-30 years
|
| I thought the government eliminated the 30 year amortization?
| [deleted]
| chollida1 wrote:
| No, any of the banks will give you a 30 year amortization.
|
| it was the longer duration mortgages they killed. There was a
| small windows where they allowed durations longer than 30
| years but they killed those recently.
|
| Probably a very wise decision given the real estate market in
| Canada.
| throw0101c wrote:
| > _No, any of the banks will give you a 30 year
| amortization._
|
| A federally regulated bank may offer a 30 year
| ammortization if you put i >=20% equity. Non-federally
| regulated institutions (e.g., provincially regulated credit
| unions) may offer more options too.
| BoGs83 wrote:
| Only if you need CHMC insurance max is 25 years. Otherwise if
| you put down 20% you can have 30 years since you do not need
| CHMC.
| nine_zeros wrote:
| Could someone enlighten, why does Canada not have a 30 yr fixed
| interest rate mortgage like the US?
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