Chad Moore Calgary Mortgage Broker

I’m reminded, the only certainty in life is uncertainty.

The second largest bank failure in the U.S. happened late last week—I’m sure you heard.  

We also had the Bank of Canada take a breather on their rate hiking war-path.  

Have you heard of the silent Mortgage bail out in Canada right now …?I’ll wrap everything up around Canadian Mortgage rates for you …

Looming U.S. Rate Hikes—Maybe, Maybe Not?

Last week there was talk of the U.S. Federal Reserve possibly hiking rates another 50 basis points.   The Bank of Canada clearly signaled a rate pause, and announced as much last week. 

This was a concern, and here’s why … 

We might think the Bank of Canada operates independently of our Federal Government, and international banking community—but that is really tough to actually do. 

For starters, the Bank of Canada is a member of the Bank of International Settlements (BIS)—along with the majority of other countries in the world.  These central bankers meet and generally synchronize policy response in a coordinated effort.

Second, we all know the U.S. Federal Reserve is the elephant in the room.  The U.S. is the the top economy in the world, and the worlds current reserve currency. 

The Bank of Canada can be moved and influenced by a lot of international forces.  Seeing these international and domestic pressures converge is rather interesting.  

What Happens If The U.S. Raises Rates, And BoC Does Not?

Mid-last week there was A LOT of concern about how the Bank of Canada might respond to continued interest rate hikes in the U.S. 

Why?

Well, one major concern is currency markets.  

Formally, central bankers do not comment on, cite any plans, direction or manipulation of currency markets.  That’s a major no-no.  

However, if there is a big divergence in central bank rates between our countries (I.E., the U.S. Fed raising rates with the BoC pausing rate hikes) the Canadian dollar will decrease.  

The threat then is imported goods from the U.S. cost more, continuing inflationary pressure in the midst of a slowing Canadian economy.  

Canada is a major exporter of oil and gas, which helps support our currency relative to the U.S.  This is especially helpful for AB’s economy, as the U.S. is our largest trading partner whom we sell to!

Second Largest Banking Failure In U.S. History …

Wow.  And just like that the threat of a U.S. rate hike of 50 basis point dissipates, and fixed Mortgage rates are sure take a nose-dive.  Who saw that coming?

I think we’ve all been shocked at the speed and pitch of rates hikes over the last year.  With the amount of debt in the system, financial pressure continues to mount domestically and internationally.  Something big finally broke.

You might remember …about 5-weeks ago, a large developer in Vancouver filed for bankruptcy protection (link).  Many parts of Canada’s economy is feeling the pinch of high borrowing costs. 

Canadian Banks Are Silently Bailing Out Mortgage Holders …

I think I own my house.  However, I’ll quickly find out that if I stop making payments to my lender—they quickly come calling.  

Quite literally, my Mortgage loan is a liability on my personal balance sheet.  My Mortgage payment is an expense line on my personal income statement.

My Mortgage is an asset on my banks balance sheet.  My Mortgage payment is a revenue line item on my banks income statement. 

The collateral (securitization) is the house, which is incredibly important to the banks.  Market value of the house is how they recoup their capital if borrowers default on their Mortgage.  If distressed borrowers flood the market with homes for sale—that is a problem—for the banks.  

So the banks are allowing some variable rate Mortgage holders to go backwards.  In some cases, peoples Mortgage payments are not covering the interest.  The banks are allowing Mortgage balances to grow, pushing back amortizations (total time to repay the Mortgage) …back to 30, 35, 40+ years.  

The thinking is hold on for dear life (#hodl) for rates to ease so people can repay (accelerate) their Mortgage payments again. 

The problem with this plan might show up at renewal time.  If a borrower started with a 30 year amortization, but was allowed for that amortization to extend backward, at renewal their chronological amortization would be 25 years.  The bank might require their payment to match this amortization, which would be painful. 

Conclusion:

So, what’s the opportunity here?

1.  To the extent systemic risk grows there is a possibility of central banks peaking interest rates.  If rates pause, and pending a myriad of other factors, rates might move lower.   

2.  Uncertain economic times flood money into the bond market—dropping fixed interest rates.  Variable rate holders seeking safety, certainty and no further exposure to rate hikes might choose to lock in a fixed rate.  Call me to discuss.

3.  Lower rates increase home affordability, and lower borrowing costs.  You guys know I’m not a “purchase pumper” so don’t hear that from me.  However, lower rates are appealing when borrowing hundreds of thousands of dollars.  

I hope this high level summary and update has been helpful.  If so, pass along this email.  Reach out if you have any Real Estate questions. 

Talk soon,
Chad Moore

P.S.

Are you planning to sell and purchase a home?  I’ve just launched the “Ultimate Home Transition Blueprint“.  

This is a presentation designed for people who are at the initial stages of planning their home transition (6-12 months out).  This also works for people closer to transitioning, but there is less time to make adjustments—all good!

Not that you care, but you can see me on video, which I have not done is a long time!!