The last year was a policy shock, especially regarding interest rates and their effect on mortgage rates. MLA Advisory reached out to Mortgage Specialist and Owner of Nest Mortgage Scott Gingles as our mortgage expert to shed some light on what we might expect from the coming year. Here, Scott answers our questions about what 2023 may bring forth and what buyers should do if they are in – or entering – the market this year.
Q: LOOKING BACK ON 2022, WHAT STOOD OUT TO YOU?
It was hard not to notice the historical rise of interest rates in efforts to reign in heightened inflation; seven rate hikes over eight announcements and nine months absolutely stood out. Beyond the obvious total cost increases, these rate hikes created mortgage qualification challenges. Both fixed and variable rates increased by about 4% over the year, and the ‘stress test’, or qualifying rate, increased by over 40%. Unsecured debt held by borrowers also increased significantly, which further impacts borrower qualification. Some of my colleagues have coined it “The Great Pause,” where rates were high, activities slowed, supply increased, and yet values did not plummet as significantly as some expected.
Q: WHAT DO YOU EXPECT THE ECONOMIC LANDSCAPE TO BE IN 2023?
There has been a lot of talk by analysts on the possibility of a pause in the Bank of Canada’s rate tightening cycle. Some speculate this could be the case in the Bank’s first meeting later this month. The Consumer Price Index dropped from 8.1% in June to 6.3% in December. Inflation is seemingly stickier as of late and hovers well above the 2% target we’re aiming for, and core inflation, which removes volatile components such as food and fuel, actually increased. In addition to inflation, the Bank of Canada also looks at other macro influences like GDP and employment. Canada’s GDP continues to grow modestly despite rising interest rates, and over the break, we saw some strong employment numbers that completely blew our year-end expectations. Both fuel higher wages and in turn, fuel inflation.
The next Bank of Canada meeting is on January 25th, and the Bank of Canada remains firmly focused on tempering inflation. While some analysts were expecting a pause in further hikes at this meeting, these numbers now lead the market to expect another 25 basis point increase. Tiff Macklem, Governor of the Bank of Canada, furthered that expectation, indicating he would rather over-tighten than under-tighten, the latter of which could result in a deep recession. The U.S. central bank has made it clear it plans more rate hikes, which garners attention given the integration of the Canadian and American economies. New economic data available before the announcement on the 25th will provide a fresh look at how the battle against inflation is going.
Q: WHAT ARE YOUR 2023 RATE PREDICTIONS?
Normally, interest rate increases take 18 to 24 months to work their way into the economy. We are only about 10 months into the current tightening cycle. It is reasonable to expect another 25 basis-point increase in the near term and a “wait and see” approach thereafter. Looking ahead at nine to 12 months from today, some suggest we may see rate cuts, which would be welcomed news. Cuts would support normalizing rates approximately 1 to 2% lower than we can secure today.
Q: WHAT ARE SOME OPTIMUM MORTGAGE STRATEGIES TO CONSIDER FOR 2023?
The first strategy to look at is in the products, as in fixed versus variable mortgages. As bond yields are currently indicating, fixed rates will almost certainly lead in terms of the lower of the two traditional mortgage products. The challenge with securing a fixed rate today, despite knowing it will likely outperform variable rates in the short term, is that you may be fixing your rate and payments near the peak. In nine to 12 months from now, you may wish you went “short” (or variable).
My second recommendation is a rate hold strategy. As even the most knowledgeable analysts have admitted, no crystal ball exists. If you are considering purchasing or have a purchase lined up, securing a rate hold at the best rates today with a brokerage like Nest is a prudent strategy. As there is no cost nor obligation, we will review the best rates, products, and options between now and completion to ensure you are receiving the absolute best setup for your purchase.
Q: WHAT IS YOUR ADVICE FOR THINGS A BUYER CAN DO TODAY TO PREPARE FOR A PURCHASE IN 2023?
Beyond securing a rate hold, as mentioned, getting pre-qualified is important. Given today's interest rate environment, understanding your payment, budget, and monthly outlay is important. One of the simplest ways to do this is through Nest’s mortgage app. The single best thing you can do to prepare for a purchase this year is to engage with a broker and brokerage, such as Nest. We have over 200 lenders to work with who offer thousands of mortgage products with no cost or obligation and can provide expert advice. Mortgages are all we do, so you’re truly speaking with experts in securing the best rates and mortgage plans.
Q: WHAT IS YOUR ADVICE FOR HOMEOWNERS WITH EXISTING MORTGAGES?
You should always understand what your mortgage options are. Book a call with a mortgage advisor like Nest to review your options. Knowing if and when you can source a better rate or source equity is important. You may want to use equity to consolidate debt and lower monthly outlay, to add value to your home, to capitalize on investments like RRSPs, securities, or additional property, or you might be able to re-amortize to lower your monthly payment.
A Nest Advisor can determine your trigger rate, amortization, and optimal strategy to navigate the higher-than-desired Prime rates we see these days. Regarding renewals, the spread in rates offered by competing financial institutions is greater than we have seen in years. Renewing with your existing lender without having a mortgage broker review your best options could prove very costly. That review comes at no cost to the borrower, so it’s an easy step to take to ensure you’re being given the best rates.
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Being prepared and informed about your options is more important than ever. If you’re a prospective buyer, reach out to a mortgage advisor such as Nest Mortgage, who can help you get pre-qualified and get a rate hold from over 200+ lenders.
