Well, the end of 2023 sounds like a long way away, but it is only 16 months and time flies!  Rules are changing for two types of home equity mortgages:

HELOC

A Home Equity Line of Credit, or HELOC, is a mortgage product that contains a conventional fixed amount mortgage, and a rotating Line of Credit portion.  The Line of Credit portion is available to the lender at any time with flexible payment options, including interest only payments.  Right now, the limit of a HELOC is 80% Loan to Value (LTV).  So, for example, if you have a $100,000 home, you can have a HELOC up to $80,000.  Starting at the end of 2023, the maximum LTV for this type of product will be reduced to 65%.

REVERSE MORTGAGES

Reverse mortgages are financial products offered to people over the age of 55. There are no income requirements to qualify.  The home owner can draw funds at any time, or sometimes it is set up to have an amount added to the mortgage each month with a payment of that amount to the home owner.  No payments are required, and any interest accumulated is simply added to the principal of the mortgage.  So with time, the principal increases.  These are relatively new products in Canada, and traditional LTV maximums have been creeping up over the past few years.  They currently sit around 60%.  Government regulations will cap these types of products at 65% LTV as well to keep it in line with HELOCs.

It seems in the mortgage world, the rules are constantly changing, and knowing what’s coming down the pipe is helpful when making decisions about buying or refinancing. Reach out anytime for a no-obligation review of your situation, and some thoughts on the best approach for you.

We hear it on the news daily right now, the Bank of Canada is raising interest rates in an effort to reduce inflation. What does this mean, and what is the relationship between interest rates and inflation? This involves some very complicated and high-level economic theory, but I will try to explain a simplified explanation.

INFLATION

During times of spending, or what the economists would call “excess spending”, consumers have extra cash and a feeling of comfort with spending more money. As we live in a supply and demand economy, the demand goes up, and supply goes down. This puts pressure on prices as suppliers see opportunity to raise prices and scarcity also leads to higher prices due to competition in the marketplace. Due to COVID, we are also experiencing an unprecedented time of undersupply of many types of goods. This causes inflation, or an increase in prices. As costs spiral up, the concern is they may go up too quickly, and people will eventually not be able to afford basic necessities of life, and then we enter into a period of recession.

HOW DOES INCREASING INTEREST RATES AFFECT INFLATION…

As the governments see prices rising, and demand rising, they need to slow down the process, and by reducing buying power, the system slows down. By increasing interest rates, the cost of credit goes up, and consumers feel less comfortable borrowing money. As well, they may decide to invest in interest bearing accounts instead of spending their money. This slows down consumer demand, increasing supply, and thus slowing the process of inflation. This has an effect of stabilizing the economy – sort of cooling off an economy that is a bit overheated, so to speak.

The latest 1% interest hike by the Bank of Canada is an attempt to be one step ahead of inflation. There will be more increases, but we are unlikely to see another one of this magnitude. For more information about how to weather these latest interest rate trends, feel free to contact me for a no obligation consult.