What the Latest Interest Rate Changes Mean for Investors


Daniel Patton: I'll first explain what a trigger rate is for those that maybe don't know. And for those that don't know, you should pay attention in case this is you. When you have a variable rate, there's really two types of variable rate.

If the recent rate increase and potentially more to come has you second guessing what you should be doing with regards to your real estate investing portfolio, you're gonna want to listen to this week's episode. this is a recording from a recent virtual event that we ran with Daniel Patton of BM, select a division of Butler mortgages, giving his views and ideas around interest rates, the increasing interest rates and what real estate investors should be doing, all that after the break.

Alfonso Salemi: Daniel Patton from BM Select. He has worked in the mortgage business and helped grow Butler mortgage into the number one brokerage for investors, Daniel and his team have years of experience planning, strategically helping investors from all areas, both outside and inside of Ontario, Daniel was ranked number 14 mortgage broker in Canada, but number one in our hearts, for sure.

By CMP magazine, along with his team of investor savvy mortgage experts, uh, they have to, uh, they have looked to build, but it's already been an amazing journey. Welcome Daniel. Thank you so much for joining us. I know it's been a, probably a busy day for you. I'm sure you haven't taken any calls from any investors about, you know, this, this small little announcement or anything like that, but, uh, really thank you on behalf of the REITE club and the REITE club community.

Thank you for graciously giving us your time tonight and sharing some insights. 

Daniel Patton: Oh my, my pleasure buddy. Always a joy to be on with the REITE club team. And, uh, I have to correct one thing. Listen, we have to get you some updated stats. I was number one last year, Alfonso, man, you got my number 14 was from like two, three years ago. I gotta get you some updated stats. I correct you there. I have to, my ego says I have to make sure I say that. No problem. 

Alfonso Salemi: We only wanna deal with the. Facts. We wanna make sure that we get everything right. So definitely. Okay. So number one, by CEO.

Daniel Patton: that's not the number people care about today, right? The number of people care about that's about today is the overnight rate. Like you mentioned, that's, that's the big news today. but Daniel, yeah. Like, you know what, let let's start. I got a bunch of questions for you here, but you know, how does. Interest rate change affect people's buying power.

Alfonso Salemi: And, you know, maybe kind of give us an overall, obviously cover with the facts. I'm assuming most people have already heard the news that are on here tonight. But for those that haven't maybe give us a little bit of an overview, what the, what the bank of Canada did today. 

Daniel Patton: Right? So the, the, the bank of Canada increased their overnight lending rate by 0.75, which means prime rate for everybody is going to be going up 0.75 percent.

What that means for people is anybody that has a fixed rate. You're not, you're not affected today. You may be affected on renewals. If you have upcoming renewals this year, that's something that might affect you. But if you have fixed rates, it doesn't really affect you where it affects most investors right now is the investors that have variable rates or balances on home equity lines of credit, because those are the rates that have gone up.

To put it into sort of a dollar figure when you're talking a 0.75 to a 1% increase. Cause if you remember, Alfonso was a couple months ago, prime rate went up 1%. So 0.75 to 1% per hundred thousand is roughly an extra 50 bucks per month in terms of payment. So a $400,000 mortgage that might increase your payment by around $200.

Now, depending this is something we can talk about as well, depending on the type of variable mortgage you have, your payments may or may not be affected, but that's, uh, that's how prime rate is going to affect us as investors and mortgage holders, variable rate for the most part and home equity lines of credit.

One other area. This will be a little restricting now to the public as well is the qualifying rate. So when you ask, how does this affect us as buyers? Well, one of the things, maybe people, not everybody knows is. When you're qualifying for a mortgage, right? The bank is not running your numbers at the five year fix rate, right?

Or the five year variable. The rule is you have to run it at the stress test. And the stress test is I have to qualify a purchaser at 2% above their contract rate. So today or yesterday, let's say if you had four, let's say prime was at 4.7 today it's up to four, 5.45. But if you had, let's just say prime minus 30 and prime yesterday was 4.7.

Your rate was 4.4%. Right? And I would qualify your pre-approval at 6.4% because that's 2% above your contract rate. So when an increase like this happens to prime rate, not only does it affect monthly payments for those invariable rate mortgages, but it will lower people's preapproval. For two reasons.

One that qualifying rate is now higher, so it makes it harder to qualify for a higher number. And remember when I'm running mortgage preapprovals for people, if they have existing mortgages that have mortgage payments, if those mortgage payments are impacted, if they increase because of prime rate, all of that could contribute to a lower preapproval on the other side, 

Alfonso Salemi: Gotcha. Okay. So now we're talking like, you know, like I I've gone through it now personally, right. Looking, you know, looking for home, obviously qualifying for 2%, you know, that, that, uh, that stress test rate, um, when we're talking about investors, are those same things applying when you're looking at an investment property, like, you know, versus whether maybe it's a corporation or a building, uh, obviously, you know, if it's less than, you know, depending on the lender four or five units, you know, over a certain amount is commercial. How does that impact like an investor from a personal standpoint or from their corporation or the building standpoint of qualify? 

Daniel Patton: Yeah, it, it will affect it. It, well, let's, let's separate the two. So when you're buying residential you're for the most part, it's like five, six units or less. There's like one bank that might consider five or six units as, as residential.

But everybody else it's four units for the most part or less is residential. So this, the qualifying for residential is very standard when you're a bank or when you're trying to borrow money for a bank in terms of mortgage dollars, the banks. Amongst other things is looking at three main criteria, right?

They're asking, do you have the minimum down payment? And is it from an acceptable source? They want to verify that you have good credit. And the third is debt service, income versus debt. And that income to debt service ratio is a part of that stress test. So when the stress test goes up, whether you're an investor or not on the residential side, everybody is affected in that sense, because the qualifying rate, if you're a buyer is going up.

Now when you're buying multi-family commercial, it's a bit different. The qualifying of the building is done more on, on a DCR, the financials of the building. So the income coming in versus the liabilities of that property now an increased to prime can affect that as well. Why? Because remember they're taking into consideration, what would the mortgage payment be as of today versus the rental income coming in?

If rates go up, it's gonna have a higher liability to it, which could affect the DCR. Thus the bank may require on multifamily, more down payment, things like that to try to offset some of their debt service. So yeah, I mean, it doesn't, it doesn't help people get preapproved, you know, when rates go up for sure.

You know, but one of the things, you know, we've sort of lived in a market where. For the last 10 years, we've been very restrictive in our rules. You know, there hasn't been a lot of new product to market aside from, you know, uh, creative financing and things like that. Like, uh, but outside of the bank, the bank, isn't creating new lending products.

One of the hopes and times like this is if it does become more, you know, difficult to qualify. If it's hard for people to qualify that maybe we'll have some ingenuity in this, in the field. And maybe the banks will have some new product come along to maybe help some of the first time home buyers and people that are struggling to keep up with the pace of inflation.

Alfonso Salemi: Yeah, there's definitely some announcements, uh, $2 billion. And, and I know I'm, I'm have my ear to the ground. There's 200 million for rent to own programs that, uh, that the, that the government's announcing. I don't think anybody is, is relying on, you know, the government to have that silver bullet to create that solution or, or in know, maybe the banks need to be a little bit creative with some other products that, that they'll be launching.

I guess, you know, you touched upon it, uh, really quickly, but maybe we can go over it again. So the standard fix rate versus the variable, if you're looking to kind of, you know, start some new financing or looking at that new product, what are you recommending? Um, I know, I think it was earlier in the year, you know, the bank was saying, oh, no, we're good for this year.

We're gonna wait till early 20, 23. And then boom, all of a sudden, the last, you know, few announcements, maybe first touch upon a little bit about the, the standard. Versus variable rate. And, you know, it's an, investor's looking to start, to qualify what you would recommend, obviously it's situational, but to maybe some general, uh, general rules to look at.

Daniel Patton: Obviously a question we get every day fixed versus variable. So a few things I, I would consider for sure. I think my driving force right now is I wanna balance risk versus a good rate. Right. And when I talk about risk in terms of my mortgage, I mean like a, a long term, a fixed rate at a long term, I wanna be very conscious of, of, of that because one of the things that can happen, which I'll explain is when you lock into a high fixed rate mortgage and the bond yields come down and rates come down, or the bond yields go up and rates come down, I should say, And you want to break that mortgage.
[00:09:41] Your penalty can get really expensive. And this happened right when COVID right, right before COVID happened, interest rates were going up. You were sitting around 3 7, 9, 3, 8, 9 at the time. And right when COVID hit rates dropped, the fixed rates came down to like two and a half, two, you know, 199, I think HSSBC had at one point.

All those people with 4% interest rates thought, well, look, I'll just call the bank and break my mortgage and take a lower rate. Well, when you do that, you have to understand if you're in a five year fixed rate mortgage and you want to break that term, the bank is going to look at, well, look, we have this money loaned out at let's just say 4% and you want to break it. And, you know, we got that money out at two and a half percent. We're gonna lose money on that. So we're gonna charge you the client, the interest that we're gonna lose on that. And that's where you can start to see 20, $30,000 penalties.

That's just a side note. Why do I say that? Because fixed rates today, you know, you're roughly five and a quarter could get all the way up to 5 79 on a five year. So you're somewhere in the mid fives on a five year term, where are rates gonna be in a year from now? And two years from now, we don't have a crystal ball. We know in the short term, they're probably gonna continue to go up.

I mean, look, they're they said today with this increase of 0.75, that, you know, they indicated they're not done so we can expect perhaps another quarter point in October. But, you know, once we get to a leveling off period, That's the start. And inevitably, maybe next year, maybe in year two, we'll start to see those rates come back down and you just want to be very careful of being locked into a five year fixed rate and then rates coming down and you wanting to break that mortgage.

Long winded answer to your question. You're not possible, but variable rate or a shorter fix rate would be where I would lean. So maybe a one or a two year fix rate. You know, you can get in around five and a quarter. It's a reasonable rate right now, you know, variable rate, you know, with today's increase.

I mean, some banks are prime minus 0.1. So if prime today is 5.45, you're getting at 5.35. Now this is an interesting time. Remember this. Close to an inverted yield curve, right? And this happened again in 2017, that's where in mortgage terms, this is where fixed rates are actually lower than variable, right?

This is a sign of a recession looming. This is, this is interest nobody takes. Or why would you take a variable rate if it's higher than a fixed rate? So this will start to put pressure on the banks to, you know, potentially lower the discount to, you know, potentially lowering fixed rates. Like, we'll see, but this is this isn't normal.

I think this has only happened four times in our, in the history of our country where we've been in the middle of this inverted yield curve. And after this increase today, you're gonna start to see variable rates are getting a little bit higher than fixed rates. Now I say that, but I still like variable.

Why? Because I do think that rates will come back down over the next two to five years. Maybe not this year, you know, maybe not the first half of next year, but I do think rates will inevitably come back down. So those people that are in variable rates, you will inevit. Not a prediction. This isn't recorded, right? Alfonso, you're not gonna play this back in a couple years. 

Alfonso Salemi: We're holding you to it. You are in charge of what the bank of Canada does being of course, . 

Daniel Patton: I just think in the long term, like most variable rates hindsight will tell us that it was the lower rate in time. Unless we somehow lucked into locking into 269 or made a, you know, great decision earlier this year, locking in at two and a half or under 3%.

But it's gonna be a long time before we see that. So one to two year terms, variable rates, I still like, because the penalty on variable is only ever interest, uh, three months of interest. So we always know the penalty costs. We're never gonna get stuck with these big 20, $30,000 penalties. If we're with a big bank variable, 

Alfonso Salemi: Well, and you know what, Daniel, like, again, you, you mentioned you, you don't have the crystal ball. Uh, even the bank of Canada. I think, uh, our friend TIFF, there has come out and even admitted, Hey, maybe we made a mistake and, and you know, we, we're trying to change a couple things. And I think, you know, even outside consultants that they're, they're working with now to, to talk about what future plans are.

And, and again, we're not gonna hold you to, to anything that you say here tonight, but what do you think, like you have already alluded to it a little bit, that the next announcement in October, you know, potentially, you know, they they've indicated we're not done yet, but is there a tipping point or something that maybe they wanna see where they're like, okay, Hey, we're gonna wanna get inflation down to a certain number or, you know, what something in, in the economy that you to, to kind of get to that rate to say, Hey, we are done or, or it is gonna level out a little bit. And obviously, you know, this is your best guess. And, and, and just, just like anybody else, you. You know, properly predict that 

Daniel Patton: I think we're getting close. I think we're getting close. You know, 3% is sort of the neutral rate for the bank in terms of the overnight lending rate, anything above 3% and you start to get into a little bit more high risk.

The fact that we're at three and a quarter today, a lot of economists didn't think we'd hit 3%. So we're now in a position where I believe we are headed, you know, for a recession. I think that, you know, if we're not already in one, we're certainly headed for one. Um, and it's gotta stabilize first. I think these last two increases for it to go.

I mean, look, it's gone up 3% since the beginning of the year. 3% prime rate sat at 2.4, 5%. I don't think we've seen an increase like this since the nineties. I mean, it's, so this is new to investors, you know, trigger rates is something that we've never talked about in mortgages before this year, right? Like that's, that's all, this is a new, a new field for a lot of people. 

Alfonso Salemi: Well, and, and this is how I know, you know, you're our seasoned vet. That was the next question that I had on the, on the docket here is the trigger rate. You know, that's been, uh, you know, widely talked about there's all types of stuff on the news and, and different, uh, different sources and, and different, uh, you know, obviously social media, uh, people that are putting it out there, maybe for those that, that are hearing it for the first time, or don't fully understand it, give us a little bit of an explanation in how we can prepare ourselves, uh, or, or be prepared as investors, uh, when we're talking about trigger rates. Great. 

Daniel Patton: I'll first explain what a trigger rate is for those that maybe don't know. And for those that don't know, you should pay attention in case this is you. So. When you have a variable rate, there's really two types of variable rate, right? There's the variable rate where if prime rate changes your mortgage payments change, and then there's a static variable rate where your payments don't change.

Now you have to think mentally for the past, you know, few increases, the people who have had their mortgage payment changing feel like they're getting the sort of the bad end of the stick. Right? They're looking at it, going rates are going up. My payments are going up. I'm sitting here looking at other people and their payments aren't changing.

They think that they're losing, but what's happening with those people is, remember if your payment is changing, you're attacking the same amount of principle every month. So think let's just imagine if you had a $2,000 a month mortgage payment and you're paying a thousand towards principle and a thousand towards interest.

Well, if rates go up and your payment goes up, you are paying a thousand dollars of principle, but maybe now 1500 of interest because your interest has gone up. That's normal. Those people they'll just be affected with this increase the same way they always have been. The rates go up a bit. Their payment goes.

The trigger rate is more relevant to static variable to the people whose payments have not changed. Okay. And you have to imagine what's happening to the people whose payments don't change. If they're paying again, same number. If they're paying $2,000 a month at the start of the year, and they're paying a thousand dollars towards principle and a thousand dollars towards interest, if that interest, if that interest keeps going up and their payment's not changing, what's happening is they're not paying a thousand dollars of principle anymore.

They're now paying $1,500 of interest in maybe $500 of principle. So inevitably what happens in a market where rates keep going up? These people will hit the point where their mortgage payment is now interest only because their rate has gone up. When that happens, you hit what's called the trigger rate.

And the trigger rate is basically where the bank will call you and ask and, and give you three suggestions or, or opportunities, options to bring your amortization in line because you can't have interest only mortgages. So they'll, they'll ask for one, a cash call. So they'll ask you to pay them a lump sum of money to bring your principal mortgage down.

If you want to try to stay on the same payment, two they'll, you can lock into a fixed rate where your payments are gonna go up anyways, and you have to lock into today's fixed rates. Or three, you can increase your variable rate mortgage payment, like everybody else has had to do. But inevitably this is, we've never had this before Alfonso.

And ever since I've been doing mortgage, I've been doing this for 20 years. We've never hit trigger rates, but 3% in one year, a lot of people who haven't been affected are potentially about to be affected. And if you want a quick sort of example, I use this, this is a quick idea. I always say, check with your bank.

Do you have your calculator Alfonso? We'll do a quick example. All right. So if you have your calculator, pull it up, but this is check with your bank for sure. But here's a rough. Calculation, you can use to figure out your triggering. So I need two pieces of information. One, I need your annualized mortgage payment.

Let's just say Alfonso. You said to me, okay, well, Dan, I'm paying $3,000 a month for my mortgage, so I'd go okay. 3000 times 12. Remember if you're paying biweekly, you'd do it times 26. If you're paying weekly, you do it times 52. So you take your monthly mortgage payment, you annualize it. So times 12, take that number and divide it by the mortgage balance.

Just say you owe 600 and 600 grand. So divide that number by 600,000 Alfonso and then multiply that number by 100. And that. We'll give you a rough idea of your trigger rate. So what rate did that give you? 

Alfonso Salemi: That gave me six, so six. There you go. Percent six. 

Daniel Patton: That's a rough now. It's not exact, but if, if you're worried about, am I gonna hit my trigger rate, call your bank to confirm, but that's a rough idea you can use.

Alfonso Salemi: That's a great piece of advice and, and definitely, uh, for all of you that are listening to this, you know, that's again a rule of thumb or, or just a kind of a general, but it gets you close, right? That six number is pretty close to that, you know, 5.5 or five, or we were talking about fixed rates or where you're currently at.

That that's a great calculation to kind of keep in the back pocket. You know, to see that, but definitely yeah. Reach out to, you know, your bank or whoever you're holding that mortgage to get that, uh, to get that information. Um, alright, so there, we could talk like all night, definitely. You know, you're so much information, so much knowledge that you have to share you and the BM select team are just a phenomenal group of people hopping out investors.

What's the advice that you're giving to, you know, whether it's, you know, green, newer in real estate investors kind of mid-range that have been, you know, in the game four or five years or for those veteran real estate investors, little bit of, you know, kind of general advice. Um, you know, I don't wanna ask you the general cause is it a good time to, I invest, I think investors it's, you always have to adapt. You always have to change, but what are some of the challenges that we should, you know, try to avoid or things that we can prepare ourselves as we're in this environment, as we currently talk about right now. So some general. Rule of thumb stuff. 

Daniel Patton: I mean, look aside from, you know, you have to build a good team of people around you, you know, unless this, unless this is your full-time job and you have all the answers, you, it's a super important to have a strong realtor.

It's super important to have a strong finance team, a strong coach, like a good network of people, 100%. But you know, one thing about times like this is like, you know, it's an interesting question, you know, what do I tell people? It's like, not much changes, to be honest with you, you know, interest rates are a number it's just a part of the equation of investing.

It's not the driving force. It doesn't mean rates go up. I stop investing. It means if rates go up, I have to be diligent with my numbers. I have to understand what my payments are. What's my. Monthly out and my monthly in just to a basic understanding. So I think that times, like this are actually interesting, you know, it's not like I don't, I'm not one of those people that says, well, now's a great time to invest because to be honest with you, real estate is always a good time to invest.

I'm a long term investor. You know, I might be a little careful on fast money right now, you know, flips and things like that. Not to say you can't make money on it, but I'm a long term real estate investor. And what I like about long term real estate is that if you look at a snapshot of real estate in Canada, over the 5, 10, 15, 20 years. It goes up. It's a supply and demand question. So be diligent. This is an opportunity now that we haven't seen in a long time, you know, when was the last time in, especially in Southern Ontario, where you could go out, put in offers under listing, you know, no competition, right? So not a time to be irresponsible or reckless, but a time to be strategic for sure. But rates going up isn't, shouldn't be the driving force. It's definitely a consideration, but it's just a part of the equation. Like anything. 

Alfonso Salemi: Well, wonderful, wonderful advice, Daniel, you know what, uh, truly appreciate the time that you're taking. Uh, I know today was a busy day, the last, you know, few weeks, few months, I don't think there's a time where you're not busy.

You you're constantly working and helping for your clients. Uh, uh, and, and you do a great job for them. Thank you for, for taking the time, sharing that advice. Daniel, thank you. Thank you. Thank you so much for your time. Thank you. The know great information and, uh, as always, uh, appreciate you being a valued member of the REITE Club community. Thanks again. 

Daniel Patton: My pleasure, everyone. Thank you so much.