It is likely that if  you were part of the 35% of Canadians holding a mortgage it could have felt like a noose was slowly cutting your oxygen supply. That is unless the smoke from forest fires, started simultaneously by arsonists, makes it less painful. On the other hand, millions more  of Americans  could be joining the millions already on food stamps that saw their benefits decrease, while the cost of feeding oneself increased, nutritional values plummeted and more money was sent to Ukraine. In reality, the cost of money has been rising at an unprecedented rate, in fact, exponentially for many.

Unfortunately, renewal notices are starting to arrive for those holding fixed mortgages in the 2% vicinity. In Canada, many that qualified for a conventional mortgage from the implementation of what is referred to as a stress test, did so by qualifying at a rate greater than the their prescribed rate.

For many borrowers, an annual combined income of $150k was needed to qualify for the average mortgage well above $500k, probably closer to $1million. Consequently, with rates rising as quickly as they are, the bankers know that many will not be able to renew or qualify at present rates. The  qualifying rate is now much greater than previous and instead of qualifying with a combined salary of $150k, now $200k is needed. What if one of the family members lost their job during the pandemic, what chance will they have to even step foot into a bank? The bankers are aware of this, presenting rates in the 5-6% range that are ridiculously high and could be considered a form of legal extortion.

Many will have no choice but to submit to the extortion or walk away from their so-called treasure, otherwise known as home ownership.  The cost of borrowing will double or triple for many depending on the debt load carried. Life is also becoming unaffordable for many.

When money was cheap to borrow, those that had the means, went on a spending spree. It became the norm. Rather than incorporating  prudent financial management by lowering the debt by increasing payments at the qualifying rate to significantly lower the amortization rate (reducing the number of years in the life of the mortgage), people added more debt while money was cheap. 

Evidently, cheap money makes those that aren’t responsible enough, feel empowered. Keeping up to the Jones’s is a shell game allowing people to maintain a false image that doesn’t necessarily reflect the truth of one’s actual state of affairs. The ugly truth occurs when the Repo Man shows up or the for sale sign unexpectedly is planted on your neighbours front lawn.

For a multitude of individuals that last bastion of credit was the attached line of credit facility on the property or credit cards maintaining exuberant interest rates. It will take even more years to pay off, especially if one only pays the bare minimum.  I recently, reconnected with a previous client who was or still is a practicing lawyer. He said , Philip if you want to make money over the next 10 years become a lawyer in Estate or Family Law. Sit back and watch families disintegrate and the fireworks never end.

Nonetheless, in Canada the BOC could ignore the plight of individuals and families to follow the antidote of tough pills to swallow. The potential for raising rates again at the July 12th meeting is becoming increasingly possible. The phrase, “You will own nothing and be happy”, could become the reality. The American ADP report released today shows 497k new jobs created in the Private Sector in June. This is greater than the May reading of 267k  and much higher than the 228k estimated.

The Employment number is out Friday and could add fuel to the fire to continue to raise rates further regardless of runaway inflation. Brace yourself for the summer storm that is brewing. Meanwhile, the USD Index rises toward the 103.50. Precious Metals retract because of the renewed strength in the USD based on assumptions. Gold sits around the $1900/oz level and Silver well below $23/oz. On the other hand, Oil is now below the $71/B, sliding from above $72/B. As a result the Cad$ slips toward the 0.75 cent level.