The Unprecedented Rise of Canadian Rental Prices: A Critical Failure of the Central Banking System11/25/2023 In a startling turn of events, Canadian rental prices have soared to unprecedented levels, surpassing income growth for the first time in 60 years, according to a recent report by BMO. The surge in rental prices, with an annual growth rate of 8.2% in October 2023, is the highest recorded since 1983. This alarming trend is outpacing the underlying trend in personal income, which has seen average annualized growth of 3.9% over the past five years [1].
The root causes of this phenomenon can be traced back to the excessive leverage facilitated by the prolonged period of low interest rates. Central bank research indicates that keeping interest rates excessively low for an extended period has contributed to inflated home prices worldwide, including in Canada [2]. This has allowed investors to dominate the market, displacing first-time buyers and further driving up housing costs. The impact of this surge in rental prices goes beyond economic implications. It highlights a critical failure of the central banking system and raises concerns about the sustainability and affordability of housing for Canadians. The scale at which rapid leverage expansion has driven up home prices and subsequently influenced rental costs hasn't been witnessed since the collapse of the Bretton Woods agreement and the era of "too big to fail" banks. This is a rare event in the global monetary standard and calls for a closer examination of the policies and mechanisms governing the housing market. As Canadians grapple with the soaring cost of renting, it becomes imperative to address the underlying factors contributing to this situation. Finding a balance between stimulating economic growth and ensuring affordable housing for all citizens is crucial. The current state of escalating rental prices serves as a wake-up call, urging policymakers to reevaluate their strategies and take necessary steps to rectify this critical failure of the central banking system. [1]: Source: Canadian Rents Outpace Income For The First Time In 60 Years: BMO [2]: Source: Central bank research on low interest rates and home prices
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If you're considering paying off your mortgage early, you may be surprised to learn that you could face a prepayment penalty. In Canada, prepayment penalties are a common practice among lenders, and they can significantly impact your finances. In this article, we'll explore what prepayment penalties are, how they work, and which provinces in Canada allow them. What Are Prepayment Penalties? A prepayment penalty is a fee that a lender charges when a borrower pays off their mortgage before the end of the term. This fee is meant to compensate the lender for the interest they would have earned if the borrower had continued to make regular mortgage payments until the end of the term. Prepayment penalties are typically calculated as a percentage of the outstanding mortgage balance or as a certain number of months' worth of interest. The exact amount of the penalty will vary depending on the lender and the terms of the mortgage. How Do Prepayment Penalties Work? Prepayment penalties are usually triggered when a borrower pays off their mortgage in full or makes a lump sum payment that exceeds the allowed prepayment amount. This amount is usually a percentage of the original mortgage amount, such as 20% or 25%. For example, if you have a mortgage of $300,000 and your prepayment amount is 20%, you can make a lump sum payment of up to $60,000 without incurring a penalty. However, if you make a payment of $70,000, you will be charged a prepayment penalty on the extra $10,000. Why Do Lenders Charge Prepayment Penalties? Lenders charge prepayment penalties to protect themselves from potential losses. When a borrower pays off their mortgage early, the lender loses out on the interest they would have earned if the borrower had continued to make regular payments until the end of the term. Prepayment penalties also discourage borrowers from refinancing their mortgage with a different lender, as this would result in the original lender losing out on the interest they would have earned. Which Provinces Allow Prepayment Penalties? In Canada, prepayment penalties are allowed in all provinces and territories except for Quebec. However, even in provinces where prepayment penalties are allowed, there are certain restrictions and regulations in place. Provinces That Allow Prepayment Penalties The following provinces and territories allow prepayment penalties:
Provinces That Don't Allow Prepayment Penalties The only province in Canada that does not allow prepayment penalties is Quebec. This is due to the Consumer Protection Act, which prohibits lenders from charging penalties for early mortgage repayment. Restrictions and Regulations Even in provinces where prepayment penalties are allowed, there are certain restrictions and regulations in place to protect borrowers. For example, in Ontario, lenders are required to provide borrowers with a prepayment penalty disclosure statement that outlines the penalty amount and how it is calculated. In addition, some provinces have limits on the amount of the prepayment penalty. For example, in British Columbia, the penalty cannot exceed three months' worth of interest, while in Alberta, the penalty cannot exceed the lesser of three months' worth of interest or the interest rate differential (IRD). How to Avoid Prepayment Penalties If you want to avoid prepayment penalties, there are a few strategies you can use:
Conclusion Prepayment penalties are a common practice among lenders in Canada, and they can significantly impact your finances if you're not aware of them. It's important to understand how prepayment penalties work and which Provinces in Canada allow them. By negotiating with your lender and choosing a mortgage with a lower prepayment penalty, you can avoid these fees and save money in the long run. Weakness in Canada's housing markets is spreading beyond Vancouver and Toronto, with national home sales down 5.8% and new listings down 2.3% in October, according to the Canadian Real Estate Association. High interest rates and affordability concerns are driving the weakness, and the decline in sales is outpacing the pullback in new listings. Home prices were generally flat in October, with the MLS Home Price Index down 0.8% month-over-month but up 1.1% from last year. Economists expect tough market conditions to continue into 2024, with prices potentially falling further.
BRACING FOR IMPACT: THE LOOMING MORTGAGE CRISIS IN CANADA AND THE PROACTIVE STEPS TO MITIGATE IT11/16/2023 By 2026, as a staggering $400 billion in mortgages come up for renewal, homeowners may face monthly payment surges of up to 48%. This is a serious concern, particularly for those tied to negatively amortizing loans, which can extend the loan's duration because only interest is being paid monthly.
What's even more concerning is that the most substantial challenge is expected to hit in 2026, especially for variable-rate mortgages. These homeowners have managed to maintain consistent monthly payments despite rising interest rates. However, if interest rates do not decrease, they could face a sudden and intense payment shock, potentially as high as 84% in 2026. This is a financial wake-up call like no other. Even in the years leading up to 2026, the situation isn't much better. Shocks of 32% in 2024 and 33% in 2025 have been predicted by experts. This is a gradual but definite rise, increasing the financial burden year by year. There is a possible lifeline, though. If the Bank of Canada's overnight rate drops by 100 basis points, the payment shock in 2024 and 2025 could be reduced to around 22 or 23 percent. However, to significantly mitigate the impact in 2026, the rate would need to drop to 0.25 percent. Given the current financial landscape and the conflicts unfolding in the Middle East, this is seen as an unlikely scenario. This predicament isn't just a challenge for homeowners. It's a major hurdle for Canadian banks as it impacts revenue growth, increases the risk of mortgage delinquency, and may lead to greater losses on other credit forms. As a borrower, you can mitigate some of these risks by working with your lender or renegotiating your mortgage terms altogether. #mortgagebroker #paymentshock #mortgages #canadianbanks #mortgagerenewal #mortgageadvice #bankofcanada #interestrates |
By: Sarah ColucciSenior Mortgage Agent, Lic. M14000929 Categories |