The Piattelli Perspective: Get Your Cash Flow In Order Sooner Rather Than Later
Updated: Jul 27, 2022
Back in the Fall of 2021, after the Bank of Canada failed to increase interest rates, I was concerned about seeing mortgage rates float above 5%.
Well we're here. We're at 5%.
So what they're doing now is trying to play catch up, which is why we've seen these drastic increases in 2022.
This is just a testament to the fact that they should have been raising rates by a quarter of a point back in 2021.
The Bank of Canada and our Liberal Government are going so far with this drive to tame inflation which the Liberals created and the BoC has neglected are now in the process of destroying our economy and forcing a recession onto us.
So, what's going to happen?
There's a double whammy. We're going to have increased rates and house prices are going to be devalued as demand is going to slow down significantly, there's going to be so many more people priced out of the market.
If our government wants any means of managing or maintaining some level of semblance within the housing market, then they need to do away with the stress test.
The Stress Test Today For New Homeowners
The stress test was brought in in 2013 to make sure that people who had rates of 1.89% or 2.89% would be able to afford the 5% rates. They had to qualify at a higher rate to essentially prove to the lender you could keep paying your mortgage should rates increase.
Now, if we keep applying the stress test rules, we're looking at people trying to qualify at 7.25% to 7.5%. This is going to crush the market, which will ultimately have a negative impact on housing values.
The Stress Test Today For Current Homeowners
Rates have risen, we’re now at that 5% rate which people initially qualified at. However, many people are panicking because they don’t have the money to pay for the added interest cost.
What people don't factor in is their lifestyle and cash flow. Sure, they were qualified at 5%, but they were only paying between 1.89% to 2.89%.
They adjusted their lifestyle with the payment; new car, new furniture, new business, etc. In our day-to-day, it’s our rampant inflation that’s stretching people’s wallets. That's why you read so many articles about people being $200 away from being broke.
Unfortunately or fortunately, we adjust life to cash flow. And it doesn't matter whether your income is $5,000 a month or $12,000 a month, we adjust to whatever cash flow we have for disposable income.
The issue for folks renewing this year is they aren’t used to paying 5% or higher. It’s hard to find an extra $50 sometimes, let alone $450 for the mortgage payment.
Not only will people have to adjust their lifestyles—less going out, buying the good quality meat, not going shopping—but some may even have to look at refinancing.
Again, those who have to refinance, need to qualify at the current stress test rates…see where I’m going here?
I'm estimating that we’re going to be around 6.5% fixed rates and a 5% to 5.35% prime within the next few months.
Then I'm seeing a 15% drop in house prices in some of the more vulnerable areas of cities.
So the Bank of Canada and our Liberal Government aren’t really doing their jobs of protecting Canadians. They are not doing their jobs of protecting the middle class. And they're the ones who have created this financial burden that we're all bearing right now.
I am surprised that the Bank of Canada is being so aggressive after they were so passive for so long, trying to tell people that this was transitory.
Unfortunately, it's not going to get pretty in the next few months. It's going to be quite ugly for many, many people.
What We Can Do To Protect Ourselves
I strongly recommend anybody that has two or three years left on their mortgage if you can, bump your mortgage payment by $150 to $200 a month.
When your mortgage does come due and the interest rate is 6%, you've already adjusted. You have a smaller balance outstanding so you’ll have a lower balance being requested at the higher rate.
Instead of having to find $450 to $500 a month, you only have to find another $100 to $200 a month.
Get used to a different lifestyle and cash flow or adjust your cash flow over the next two to three years so that you don't get shocked when your mortgage is up for renewal.
Of course, everyone’s situation is different. Let’s evaluate your cash flow situation and get you ready for what’s ahead.