Hiking Through Inflation

Hello, Canada! Let's have a chat. We know everything is costing more and living is more expensive – gas, groceries, and yes, even mortgages. – To echo what Lauren van den Berg, President & CEO of Mortgage Professionals Canada stated today:

Today’s Bank of Canada announcement confirmed that Canada’s economy is still stronger than expected, with people spending more than expected. This includes a strong housing market, with more demand than supply, pushing up prices. Immigration is helping, adding demand but also more workers.

Inflation in Canada has dropped from 8.1% last summer to 3.4% in May, which is good news for us. However, the Bank does expect inflation to stay around 3% for the next year before gradually dropping to 2% in mid-2025 – this is later than previously expected. So buckle up.

You know, in the world of finance, we often deal with words like inflation, monetary policy, and overnight or policy rate. But let's break it down together.

For a moment think about interest rates like the weight in a backpack. Well, the Bank of Canada just added a few more rocks to ours. They've raised the overnight rate to 5% moving most lenders Prime rate to 7.2%. While this effects both variable and adjustment rate mortgages, fixed rates which are affected by bond yields have also been steadily rising.

This of course makes the financial journey a bit harder for homeowners with variable mortgages. But just like any hiker knows, there are ways to manage a heavier load.

Remember, it's not about the weight, it's about how you carry it. Maybe it's time to refinance or consider converting to a fixed-rate mortgage vs a ‘wait & see’ approach. But just like our backpack, everyone's mortgage is unique. It's essential to find the 'just right' solution for your situation.

Now, what about inflation? Let's imagine inflation as unpredictable weather during our hike. It can suddenly make everything more difficult, turning a fun hiking trip into a challenging endeavor.

Remember, the best hikers are always prepared for changes in the trail. The Bank of Canada is like a seasoned weather forecaster, sure sometimes a forecast can be wrong as climate changes unexpectedly…[opens an umbrella?] requiring a forecast to be updated, when it's nice and sunny, everything's smooth. But when the weather turns stormy, our hike becomes more challenging.  The Bank of Canada’s job is to actively adjust the forecast to keep the hike pleasant and money in our pockets.

Imagine you're on the trail, your backpack is heavier than ever, and it has started to pour.  Each time the Bank of Canada hikes interest rates – it might seem like homeowners are being pulled into a financial quagmire.  Many of you are left wondering why. Why, in the midst of an already challenging environment, are rates being pushed up further? The answer lies in the Bank's end goal: economic stability. They’re not the cause of the Storm—though it may feel like it, but rather, they are a partner aiming to keep the economic the climate favourable, ensuring inflation doesn't race ahead and devalue our hard-earned money.

Although interest rate changes are beyond our control, homeowners can still take steps to manage their financial situation proactively and effectively. It redirects the conversation towards actionable steps, how we carry our load, rather than uncertain predictions.

We can weather the storm by making smarter choices with our money. In economic terms, higher rates mean people are less likely to take out loans for big purchases, and that can help slow down spending and, in turn, inflation. Now’s the time to look for ways to increase our income and reduce non-essential spending.

We know these are challenging times, and this is a lengthy hike we're on, but we're in this together. Our team is ready to guide you if needed, whether that's changing the straps on your backpack, changing your hiking gear, so you can take on the steeper path, or helping you keep an eye out for changes in the weather forecast. We're here to help you understand what this means for you and find solutions until things get better. No challenge is too great to overcome when we face it with resilience, creativity, fortitude, and ingenuity. Let's turn the page together, facing these new financial realities head-on because we've navigated change before, and we'll do it again.

Bank of Canada's Noteable Highlights

• Revised Inflation Outlook: The Bank of Canada expects inflation (the general increase in prices) to be higher and more persistent than previously forecasted. The impact: Homeowners might see the cost of living go up which can make managing finances more challenging.
• Excess Demand and House Prices: Demand in the economy is exceeding supply, and this is expected to last longer than anticipated. Alongside this, house prices have risen more than expected. The impact: Homeowners could see the value of their homes increase, which could positively impact net worth, but it could make entering the housing market more difficult for first-time buyers.
• Tradable Goods Prices: Prices for tradable goods (items we import or export) are higher than expected. The impact: Homeowners may face higher costs for certain goods, potentially straining their budgets.
• Consumption Outlook and Labour Market: The outlook for consumer spending has been revised up due to a stronger housing market and tighter labour market. The impact: Homeowners might find it easier to secure work or negotiate for higher wages, but may also spend more, impacting savings.
  Household Financial Health and Interest Rates: With interest rates rising, households may have to cut back on discretionary spending. However, many households are in a healthy financial position due to strong labour markets and savings accumulated during the pandemic. The impact: Homeowners may need to adjust their budgets to accommodate for higher interest costs, particularly those with high levels of debt.
• Household Financial Stress: Some households are experiencing significant financial stress, shown by an increased reliance on credit card debt and falling behind on payments. The impact: Homeowners facing financial stress may need to cut back significantly on spending or seek financial advice.
• Rate Increases and Mortgage Renewals: The full effect of rate increases has yet to be felt by some borrowers. More households will face higher debt-service costs as they renew fixed-rate mortgages. The impact: Homeowners with mortgage renewals coming up may face higher payments, especially those with variable-rate mortgages, which could impact monthly budgets.
• Effect of Higher Rates on Mortgage Holders: So far, one-third of mortgage holders have been directly affected by higher rates. This is expected to increase in the coming quarters. The impact: More homeowners will have to adjust to higher mortgage payments, potentially affecting their financial comfort and requiring budget adjustments.