Not all insurance products are created equal. One of the most common mistakes people make is assuming they have coverage when they don’t. While you may have one kind of insurance, it won’t cover everything. It is important to understand all of the different products to ensure you are properly covered. To help you have a better understanding, there are four main options below.

Default Insurance

This is mandatory for home purchases when the buyer puts less than 20% down. In fact, this is how lenders accept lower down payments, such as 5%. It actually helps buyers access comparable interest rates offered with larger down payments.

Default insurance typically requires a premium, which is based on the loan-to-value ratio (mortgage loan amount divided by the purchase price). This premium can be paid in a single lump sum, or it can be added to your monthly mortgage payments. In Canada, most homeowners know of the Canada Mortgage and Housing Corporation (CMHC), which is run by the federal government.  We also have two private companies, Sagen Financial and Canada Guaranty, who provide this insurance.

Home Insurance

Next, is another mandatory insurance option that MUST be in place before you close the mortgage. This type of insurance protects your home against things like fire damage, as well as the contents in your home. Flood and earthquake coverage can also be an option, but it is not always included. Depending on your location, protection from a natural disaster can be added as well. Please note that not all homes or properties are insurable, so you will want to review this sooner rather than later.

If you are insuring a condo or townhouse, the strata’s insurance will typically protect the building and common areas, but you are responsible for the inside of your unit, including your contents. You should also ensure your policy covers the difference in the strata’s deductible, should a claim arise.

Title Insurance

Another policy that potential homeowners may encounter is title insurance. Every single lender in Canada requires you to purchase title insurance on their behalf. You also have the option of purchasing this for yourself as a homeowner, to protect you from existing liens and fraud. Title fraud typically involves someone using stolen personal information, or forged documents, to transfer your home’s title to him or herself – without your knowledge.

Similar to default insurance, title insurance is charged as a one-time fee or a premium with the cost based on the value of your property.

Mortgage Protection Plan

Lastly, we have our mortgage protection plan coverage. This is an optional coverage, but one that is extremely important as it protects you and your family, should something happen. Think of it as a life and disability policy for your mortgage. For instance, if someone on the mortgage is no longer able to contribute due to disability or death, your mortgage payments will be covered.

The Bank of Canada Hiked Rates Again And Isn’t Finished Yet

On Wednesday, the Bank of Canada raised its target for the overnight rate by 75 basis points to 3.25% and signaled that the policy rate would rise further. The Bank is also continuing its policy of quantitative tightening (QT), reducing its holdings of Government of Canada bonds. This puts upward pressure on longer-term interest rates.

While some Bay Street analysts believed this would be the last tightening move this cycle, the central bank’s press release has dissuaded them of this notion. There has been a misconception regarding the so-called neutral range for the overnight policy rate. With inflation at 2%, the Bank of Canada economists estimated some time ago that the neutral range for the policy rate was 2%-to-3%, leading some to believe that the Bank would only need to raise their policy target to just above 3%. However, the neutral range is considerably higher, with overall inflation at 7.6% and core inflation measures rising to 5.0%-to-5.5%. In other words, 3.25% is no longer sufficiently restrictive to temper domestic demand to levels consistent with the 2% inflation target.

Canadian Growth

As the Bank points out in Wednesday’s statement, though Q2 GDP growth in Canada was slower than expected at 3.3%, domestic demand indicators were robust – “consumption grew by about 9.5%, and business investment was up by close to 12%. With higher mortgage rates, the housing market is pulling back as anticipated, following unsustainable growth during the pandemic.”

Wage rates continue to rise, and labour markets are exceptionally tight, with job vacancies at record levels. We will know more on the labour front with the release of the August jobs report this Friday. But the Bank is concerned that rising inflation expectations risk embedding wage and price gains. To forestall this, the policy interest rate will need to rise further.

Traders are now betting that another 50-bps rate hike is likely when the Governing Council meets again on October 25th. There is another meeting this year on December 6th. I expect the policy rate to end the year at 4%.

Bottom Line

The implications of Wednesday’s overnight rate hike are considerable for the housing market. The prime rate will now quickly rise to 5.45%, increasing the variable mortgage interest rate another 75 bps, which will likely take the qualifying rate to roughly 7%.

Fixed mortgage rates, tied to the 5-year government of Canada bond yield, will also rise, but not nearly as much. The 5-year yield has reversed some of its immediate post-announcement spike and remains at about 3.27% (see charts below). Expectations of an economic slowdown have muted the impact of higher short-term interest rates on longer-term bond yields. This inversion of the yield curve is consistent with the expectation of a mild recession next year. It is noteworthy that the Bank omitted the usual comment on a soft landing in the economy in today’s press release. Bank economists realize that the price paid for inflation control might well be at least a mild recession.

Another implication of Wednesday’s policy rate hike is the prospect of fixed-payment variable-rate mortgages taken at the meager yields of 2021 and 2022, hitting their trigger rate. There is a good deal of uncertainty around how many these will be, as the terms vary from loan to loan, but it is another factor that will overhang the economy in the next year.

We maintain the view that the economy will slow considerably in the second half of this year and through much of 2023. The Bank of Canada will hold the target policy rate at its ultimate high point– at least one or two hikes away– through much of 2023, if not beyond. A return to 2% inflation will not occur until at least 2024, and (as Governor Macklem says) the Bank’s job is not finished until then.

Let’s talk about financial stress. If you lost your job tomorrow, would you be okay? Having financial knowledge allows you to better assess your options and create a plan without getting overwhelmed. However, even with the best plans and all the financial literacy in the world, it’s impossible to completely eliminate financial stress. So, how do you cope? We’ve created a short list of suggestions below.

Have a clear picture of your financial situation.

What is your average monthly spend? Do you know how much you owe, the interest rate on your debts, and how much you pay each month in interest charges? Have you ever tracked and categorized your expenses to identify areas where you could cut back if required (ie. car payments, dining out, home improvements, etc.)? Avoiding these questions is understandable because the answers may lead to some hard lifestyle choices. However, turning a blind eye will only lead to never-ending financial stress.

Accept your mistakes.

Move on from any emotional reaction and learn to live with poor financial decisions from your past. Regret and anger won’t make that beach vacation you booked on your credit card disappear! It’s time to start paying for it.

If you need to pass on a night out with the gang to put $75 towards your card instead, then do it. More than 50% of Canadians live paycheque-to-paycheque so you won’t be the only one!

Set small, achievable financial goals to bolster confidence and measure progress.

If you have credit card debt, try adding $100 to your monthly minimum credit card payment. If you have no credit card debt, open a TFSA and contribute $100 a month towards that instead. A hundred bucks might seem like a modest amount, but it is a realistic goal that will get you started and will help a lot more than you think. Let’s take a look at the numbers.

• $100/month deposited into your TFSA ($1200/year) from age 18 to 65 will grow to almost $400,000 based on historical stock market returns
• Adding $100 monthly to the minimum 3% payment on a $5000 credit card will cut the time required to pay off the balance from 251 months down to 38 months and save you $4500 in interest charges

Get inspired and stay motivated.

Follow a personal finance YouTuber or blogger, hang a goal chart or progress tracker, talk with a friend or relative who has the same issues and work together — there are lots of methods and resources available to help you, even with a limited budget.  It’s critical to maintain a positive attitude and don’t beat yourself up — there are plenty of others in the same boat!

Achieving the goal of eliminating financial stress will take time, but learn to cope and stay focused on your goals! It will be worth it in the end.

Rising inflation combined with a strengthening post-pandemic economy, gives both reason and opportunity for the Bank of Canada (BOC) to further raise interest rates through to the end of 2022 and beyond.

The 1% increase to the benchmark overnight rate in early July was a wake-up call. Unfortunately, they were not bluffing and are prepared to act aggressively. Depending on how inflation trends, we could be looking at interest rates that are 1% or 2% higher within the next year.

Before jumping into the effects of higher interest rates, we should clarify one common point of misunderstanding about the prime rate and the BOC overnight rate. The prime rate is the basis for most variable rate loans, including mortgages and lines of credit. It is determined by the major banks and currently sits at 4.7%; 2.2% higher than the BOC overnight rate. Although these two rates are different, the key takeaway is that the prime rate moves in lockstep with any changes to the BOC rate, usually within a few days.

Now that we have that out of the way, just how will future interest rate hikes affect your debts?

Variable Rate Mortgages

Canadians holding a variable rate mortgage surged in 2021 and now stands at about 50%. Any rise in the BOC rate is met by an equal rise in variable rate mortgages. The impact is very clear and takes effect quickly. A 1% increase will add around $200 to the monthly payment on a $500K mortgage. Keep in mind that the interest rate has already risen 2.25% since the beginning of 2022!

Home Equity Lines of Credit (HELOC)

HELOCs usually have a variable interest rate that will rise in conjunction with any BOC rate hikes. A $100,000 balance carried on your HELOC will cost you about $20 more in interest each month for every 0.25% increase by the BOC.

Credit Card Debt

The interest rate on your credit card and how it can be adjusted are outlined in your cardholder agreement. There is usually little correlation between credit card rates and the rates set by the central bank. However, credit card rates are already so astronomically high that it is unlikely you would even notice a 1% increase! Our advice is to attack any outstanding credit card balance ASAP.

Personal Lines of Credit

There are fixed and variable rate options out there. If you selected the lower variable rate when you signed your agreement, expect to pay more going forward on any outstanding balance.

Car Loans

Most car loans in Canada are fixed, but the average fixed rate is rising quickly and now sits at about 5.25%. While not common, variable rate car loans are available and your payment could be affected by interest rate hikes.

Student Loans

There are provincial and federal student loan programs with different interest options so the effect of rate hikes will vary. The default choice for Government of Canada student loans is variable interest “at prime”. There is also a fixed rate option at “prime + 2%”. The point is mute right now as interest charges are currently suspended, but variable rate student loan holders will see a significantly higher payment when interest charges resume in April of 2023.

Most of us will be paying more interest as we move through 2022 and into 2023. A mortgage or some other debt may be inevitable and not all debt is bad. It’s important to understand your interest expense and adjust your repayment priorities accordingly.