Even those who predicted the central bank’s interest rate hike last night did not expect that today’s interest rate hike would be 100 BPS, a direct 1% increase. The central bank’s overnight interest rate is now 2.5%, and tomorrow the Prime rate of commercial banks will rise to 4.7%.
The main reason why the Bank of Canada is so excited is that this morning the United States announced that the CPI reached 9.1%. The previous rounds of interest rate hikes obviously failed to curb inflation. Canada expected the Federal Reserve to aggressively raise interest rates, so it jumped the gun.
Because P will rise sharply tomorrow, many economic activities related to P will be greatly impacted.
1. Currently, when applying for a mortgage loan, borrowers can only apply for a floating interest rate with the lowest stress test interest rate of 5.25%, and the borrowing capacity is 5 times the annual income, because the actual contract interest rate of the floating interest rate is lower than 5.25% after +2%. The floating interest rate is related to P. Starting tomorrow, the minimum interest rate for this stress test should rise to at least 6.15%. A borrower who can apply for 100,000 dollars today will have a loan amount of 91,000 dollars tomorrow. Borrowing capacity fell by 9% to 10%.
2. Borrowers with floating rate loans, such as BNS and NBC mortgages, will have their monthly payments increased next month. The bank will send a notice to each borrowing household. Because the floating rate loans of these two banks implement the equal principal repayment method.
3. The remaining five major banks: TD, CIBC, BMO, RBC, and HSBC all have equal repayment payment models. If it is a floating rate loan from one of these banks, you can calculate the trigger rate yourself, which is to divide the monthly payment by the principal and then multiply it by 12 = trigger rate. There is this trigger rate in the loan contract, but it is not accurate because it will change as long as the repayment is accelerated. Compare the trigger interest rate you calculated with the floating interest rate you see in your account tomorrow. If the trigger rate is higher, it means that the interest expense has exceeded the monthly payment. This monthly payment remains unchanged. The actual interest expense minus the monthly payment is how much interest is added to the principal every month. If you do not accelerate the repayment of the principal, interest will be added back to the principal every month. If the principal exceeds 105% of the initial loan principal, the bank will issue a notice requiring the borrower to increase the monthly payment or accelerate the repayment of the loan. When the actual interest rate reaches the trigger rate, you will not be required to increase your monthly payment immediately.
4. For borrowers who use a credit limit, the interest rate will increase by 1% tomorrow. If you only pay the minimum payment every month, interest will also be added to the loan principal. When the accumulated principal exceeds 105% of the limit, the bank will also be triggered to require accelerated repayment. After interest rates are raised, loan balances accumulate faster.
5. If the approved floating rate loan is disbursed after July 14, the monthly payment will be calculated based on the P after the increase.
6. If the mortgage has a floating interest rate, the repayment must be accelerated, otherwise the interest expense will be too high. Reject the temptation of all other investments and just go all-in on paying off your mortgage.
7. Real estate transactions will enter a state of extreme contraction, and homeowners will gradually withdraw their listed properties and turn them into rentals. Buyers who were on the fence simply stopped watching and went on a trip. The remaining "just sold" houses are all good deals. Investors will find gold everywhere when they return. In the world of investment, when 90% of people are afraid to buy, 10% of people will come to harvest.
8. Some people will advise you to "change your mind" and buy pre-construction properties to avoid the period of high interest rates. People underestimate the likelihood of something they don't like happening; they overestimate the likelihood of something they want to happen. This is human nature, but unfortunately, it is always used by salespeople to sell. When interest rates are low, "second-hand houses are hard to come by, and you can choose whatever you want when buying pre-construction properties." The echo is still there. People who signed contracts for pre-construction properties last year are now anxious. The pre-construction property market has been at a trough since June this year. Because the HST on the transfer of pre-construction properties began to be levied in May, even speculators have stopped touching pre-construction properties. The current sales techniques for new buildings have improved: a certain building is designed by a master, and a certain building has a government-subsidized down payment project. Investors need to keep pace with the times and actively block all information about pre-construction properties. “Those who live by crystal balls end up eating broken glass.” - Dalio. “Poop sprinkled with raisins is still shit” - Charlie Munger.
9. The stress test interest rate has increased, and the borrowing capacity has dropped by 10%, which means that the down payment has to be increased. The money in the bank of Mommy and Daddy is trapped in the stock market, and some first-time homebuyers have once again been unable to get a car because they acted too slowly. Investors will join the wolf among the sheep and spread across the world.