25 Oct

Bank of Canada’s Rate Hike Had A Hawkish Tone (meaning more to come)

Economy

Posted by: Garth Chapman

The article ‘Poloz Rate Hike Had A Hawkish Tone’ originally appeared on the DLC website Poloz Rate Hike Had a Hawkish Tone

Note: All the Banks have already follow suit with 0.25% increases to their Prime Rates.

As was universally expected, the Bank of Canada’s Governing Council hiked overnight rates this morning by 25 basis points taking the benchmark yield to 1-3/4%. This marked the fifth rate increase since the current tightening phase began in July 2017 (see chart below). The central bank stated it would return the overnight rate to a neutral stance, dropping the word ‘gradually’ that was used to describe the upward progression in yields since this process began. Market watchers will certainly note this omission. For the first time in years, the Bank has acknowledged it expects to remove monetary stimulus from the economy entirely.

So what is the neutral overnight rate? According to today’s Monetary Policy Report (MPR), “the neutral nominal policy rate is defined as the real rate consistent with output sustainably at its potential level and inflation equal to target, on an ongoing basis, plus 2% for the inflation target. It is a medium- to long-term equilibrium concept.” For Canada, the neutral rate is estimated to be between 2.5% and 3.5%, which implies that at a minimum, three more 25 basis point rate hikes are likely over the next year or so.

The Bank of Canada emphasized that the global economic outlook remains solid and that the U.S. economy is particularly robust, but is expected to moderate as U.S.-China trade tensions weigh on growth and commodity prices. The new U.S.-Mexico-Canada Agreement (USMCA) eliminated a good deal of uncertainty for Canadian exports, which will reignite business confidence and investment. Business investment and exports have been of concern in recent quarters, and the Bank is now looking towards a resurgence in these sectors, augmented by the recently-approved liquid natural gas project in British Columbia.

A continuing concern, however, is the decline in Canadian oil prices. Western Canada Select (WCS), a local blend that represents about half of Canada’s crude oil exports, has declined about 60% since July as global oil prices have risen (see chart below). WCS plunged below US$20 a barrel last week posting the biggest discount to West Texas Intermediate (WTI) on record in Bloomberg data back to 2008. WCS generally tracks heavy oil from Canada, which typically trades at a discount to WTI because of quality issues as well as the cost of transport from Alberta to the refineries in the U.S.

Canadian pipelines are already filled to the brim. The inability of the Canadian oil industry to build a major pipeline from Alberta to either the U.S. or the Pacific Ocean is increasingly dragging down domestic oil prices. Oil-by-rail shipments to the U.S. are at an all-time high, but this is an expensive and potentially unsafe option and precludes Canadian oil exports to China and Japan.

An even broader concern is the impact of higher interest rates on debt-laden consumers. The Bank is well aware of the risks, as the MPR cited that “consumption is projected to grow at a healthy pace, although the pace of spending gradually slows in response to rising interest rates… Higher mortgage rates and the changes to mortgage guidelines are affecting the dynamics of housing activity. Housing resales responded quickly to the new mortgage guidelines, and the level of resale activity is expected to continue on a lower trajectory than before the changes. New home construction is shifting toward smaller units, although stronger population growth is estimated to raise fundamental demand for housing.”

Household credit growth has slowed, and the share of new mortgages with high loan-to-income ratios has fallen. The ratio of household debt to income has levelled off and is expected to edge downward (see chart below).

Low-ratio mortgage originations declined by about 15% in the second quarter of 2018 relative to the same quarter in 2017 (see charts below). The MPR shows that “while activity fell for all categories of borrowers, the drop was more pronounced for those with a loan-to-income ratio above 450%, leading to a decline in the number of new highly indebted households”.

Bottom Line: The Bank of Canada believes the economy will grow about 2% per year in 2018, 2019 and 2020, in line with their upwardly revised estimate of potential growth of 1.9%. The Bank asserts that mortgage tightening measures of the past two years have “reduced household vulnerabilities,” although the “sheer size of the outstanding debt means that vulnerability will persist for some time”. That is Bank of Canada doublespeak. What it means is expect three more rate hikes by the end of next year. 

24 Feb

Looking for your best mortgage rate? Here are 20 questions to ask

Interest Rates

Posted by: Garth Chapman

An excellent article in the Globe and Mail describes the new complexities in Canada’s mortgage market. It used to be that most borrowers with decent credit and income would receive roughly the same interest rate offer. But those days are gone. Read on…

Looking for your best mortgage rate? Here’s 20 questions to ask

“What’s your best mortgage rate?” was once a fairly straightforward question. These days, it’s impossible to respond intelligently to it without asking a litany of other questions.

That’s true today more than ever thanks to recent federal rule changes. Ottawa’s changes to regulations have jacked up lenders’ costs – and the lowest mortgage rates – on refinancings, amortizations over 25 years, million-dollar properties, single-unit rental properties and mortgages where the loan-to-value ratio is between 65.1 and 80 per cent.

So be prepared to play a game of 20 questions to find your best rate in today’s market. Note that thanks to new mortgage rules, which make it more expensive to lend to people who the government deems higher risk, the last six questions on this list have taken on a whole new importance.

Here are those questions:
1) What’s the term?
• Mortgage contract length (“term”) and rate type (fixed or variable) are usually the biggest factors impacting your rate.
• As of this writing, the cheapest five-year fixed rate, for example, costs 50 basis points (bps) more than the cheapest five-year variable rate. (Note: 100 basis points equals one percentage point, so 47 bps equals 0.47 percentage points.)

2) Is the mortgage for your primary residence, a second home or a rental that you won’t live in?
• If you rent out the property and don’t live there, you’ll pay up to 25 bps more than if it were your primary residence.
• The cheapest rates are seldom available on second homes or unusual properties.

3) Can you adequately prove your income?
• If you can’t, forget about the lowest rates. In most cases you’ll pay at least 150 bps more.

4) Where is the property located?
• The province matters. The lowest one-year fixed rate in New Brunswick, Newfoundland, Prince Edward Island, Northwest Territories, Nunavut and Yukon is over 30 bps more than in Alberta, British Columbia and Ontario.
• The city matters, too. You’ll cough up at least 10 bps more than the lowest market rate (on the term you want) if your property is rural. The reason: if the borrower doesn’t pay, it’s harder for the lender to sell a rural property.

5) When is the closing date?
• The longer you want your rate guaranteed, the more you’ll pay. A 90– or 120-day rate hold typically costs at least 10 bps more than a 30-day rate hold

6) Can you live with prepayment restrictions?
• Some lenders now charge 10 bps above their lowest rates if you want to prepay an extra 5 to 10 per cent on your mortgage.
• One of the country’s lowest rates currently allows no prepayments at all.

7) Can you live with portability headaches?
• If you move to a new home, certain deep discount lenders will force you to close your old property and new property on the same day (good luck with that). Otherwise you’ll pay a penalty.
• Remember that if you’re using the equity in a property you’re selling for the down payment on your new property, and that new property closes before your old one, you’ll usually need extra cash or a bridge loan. Not all lenders offer bridge loans.
• You’ll often pay 5 to 15 bps more, compared to the lowest market rate, to have a full 90 days of porting flexibility and access to bridge loans.

8) Can you live with refinance restrictions?
• If you want the freedom to refinance early with any lender, some lenders will charge you 10 bps more than their lowest rates for that privilege.
• If you want to cash out more than $200,000 in equity, you’ll often pay at least 15 bps more than the cheapest market rates.

9) Can you live with a large penalty?
• More than three-quarters of the fixed mortgages sold in this country do not have, what I’d term, “fair” penalties. In other words, if you break the mortgage contract early, you’ll often pay through the nose (more on that).
• Some lenders offer both high– and low-penalty options, with the low-penalty mortgages costing 10 bps more. But even with that rate premium, you’d likely still pay less than if you broke a fixed mortgage with a high-penalty lender, like a major bank.

10) What type of property is it?
• A few lenders charge 5 to 10 bps more for high-rise condos, depending on your equity and other factors.

11) Do you want good rates when you renew and/or if you refinance early?
• Some lenders try to stick their renewing or refinancing customers with horrid “special offer” rates (they’re not so special, trust me).
• If you want a lender that’s highly competitive after you close, you’ll often pay at least 10 bps more than the cheapest market rate.

12) Do you have any credit flaws like bankruptcy, consumer proposal or unpaid debts?
• If so, some lenders won’t even touch you. The ones who will, will charge 50 to over 200 bps more than the lowest rate in the market.

13) Do you have a property address already or is it a pre-approval?
• You’ll almost never get the best rate on a pre-approval (more on that). Expect to pay at least 10 to 20 bps more than rock bottom rates if you haven’t purchased your property yet.

14) How big is the mortgage, as a percentage of your home value?
• If you’re a well-qualified borrower, “loan-to-value” (LTV) is the second-most-important factor in determining the rate you’ll pay.
• If your LTV, for example, is 80 per cent instead of 65 per cent, you’ll often pay at least 15 bps more than the best market rates.
• Oddly enough, someone with an 80 per cent LTV will pay up to 20 bps more than if they had a 95 per cent LTV. Why? Because mortgages with less than 20 per cent equity cost lenders less, since borrowers must pay for their own default insurance.

15) Can you pass the government’s “stress test”?
• If you’re getting an insured mortgage (which is usually required if you have less than 20 per cent equity), you must prove you can afford a payment at the Bank of Canada’s five-year “benchmark” rate. That rate is roughly two percentage points higher than your actual “contract rate.”
• If you can’t do that, but you have at least 20 per cent equity, some lenders will let you qualify on your “contract rate” instead, which is much easier, but you’ll pay at least 15 bps more.

16) What is your credit score?
• If your credit score is less than 680, it could cost you a minimum of 10 bps more. A few lenders won’t deal with you at all, and others will limit their rate specials to borrowers with scores of 700 or 720.
• By regulation, a sub-680 credit score will also limit the amount of debt you can carry if you want a competitive rate.

17) Are you purchasing, refinancing or merely switching lenders?
• A refinance today costs 15 to 50 bps more than the lowest market rate on a purchase.

18) What is/was the property’s purchase price?
• Many lenders now charge 15 bps more if your property value is more than $1-million.

19) Is your mortgage already insured?
• If it is, and you’re simply switching lenders with no changes to the mortgage, you’ll save at least 10 bps compared to average discounted rates.

20) How long of an amortization do you require?
• Many lenders, including big banks, are now charging 10 bps extra for amortizations over 25 years.

The above list of questions is by no means exhaustive. And there are always exceptions. One is if you’re asking for a renewal rate from the lender who presently holds your mortgage. If you send them a copy of various competitor’s rates, you won’t need to answer all these questions to get their lowest rate.

Ottawa’s new mortgage rules have made factors such as healthy credit scores, purchase price and amortization lengths more important. The changed regulations have led some lenders to advertise as many as 10 different rates for a five-year fixed mortgage alone.
Today’s landscape requires lenders and mortgage brokers to factor in more criteria than ever before when setting rates. So if you see a red– hot bargain advertised on a lender or broker’s website, it’s bound to have caveats. Get ready to ask–and answer–plenty of questions.

18 Oct

New mortgage Stress test to be imposed on Canadians effective Jan 1, 2018

Economy

Posted by: Garth Chapman

On October 17th Canadians awoke to the news that the nation’s banking regulator (OSFI) has announced that they will in fact go ahead on Jan 1, 2018 with a stress test for all conventional mortgage borrowers (those with more than 20% down).

This new Stress test will require that home-buyers (and those refinancing existing homes) who do not require mortgage insurance because they have a down payment (or existing equity) of 20% or more, will have to prove they can continue to make payments if interest rates rise by 2.0%. In fact it even goes a little further than that. “THE MINIMUM QUALIFYING RATE FOR UNINSURED MORTGAGES TO BE THE GREATER OF THE FIVE-YEAR BANK OF CANADA BENCHMARK RATE (that rate today is 4.89%) OR THE CONTRACT RATE PLUS 2.0%

The impact on buyers will be a reduction in their maximum mortgage amount of at least 20% and as high as 25%.

So if you are currently considering the purchase of a home, it is important to know that a purchase that closes after Dec 31, 2017 will have to qualify under the new rules, unless (maybe, we’ll know soon) you have a firm contract and a signed mortgage commitment in hand prior to Dec 31. Barring your having that, the mortgage amount you now qualify for will not be the amount you qualify for on Jan 1, 2018.

As has happened with past rule changes we expect that there will be clarifications issued around these dates to ensure that banks will honour the mortgage commitments signed by buyers, borrowers who have a home under contract and have waived all conditions. If so then buyers with firm purchase contracts and signed mortgage commitments should be able to close those purchases after Jan 1 as planned.

As to new-builds, well the question there is “how far out will they be able to close those deals under the terms of the mortgage commitments they have signed”.

On that front, Jencor has access to new-build mortgage commitments for 12 months at 3.29% where the appraisal can be done prior to signing the mortgage commitment and removing the finance condition, with an inspection just before possession to confirm completion of the build only.

This is huge, as there is thereby no risk of a lower future value wreaking havoc with the financing at time of possession.

If you are a pre-qualified purchaser you should now call your Mortgage Advisor or Banker and find out what your new maximum purchase price is effective Jan 1, 2018.

Garth

6 Nov

Interest Rates are on the move up so what is going on?

Interest Rates

Posted by: Garth Chapman

Well here we are now with a shift in the market and they always seem to come rather suddenly.  We have announcements today from a number of lenders that their rates are headed up. This will surely spread to virtually all the banks within days.

So what is behind this?

5-year bond yields drive 5-year mortgage rates in Canada

The 5- year benchmark Canadian Bond yield as of today Nov 6 is 1.04%  It has been as low as 0.6% in mid-September, and as high as 1.5% in January 2015, so quite a large range there.  This latest rise has bit into the spread lenders want to achieve, so we are now beginning to see increases in mortgage interest rates.

It seems to me the banks these days are less predictable than at any time in my memory as to just what yield they want, which makes it harder than ever to predict interest rate movements.

What is happening in the rest of the world and how does that impact us?

Bond markets around the world have been experiencing slowly increasing interest rates for the last few weeks.  The big bond traders around the world trade hundreds of billions of dollars in bonds daily seem to be pricing in an increase in the US Fed Rate in December.

If the US Fed does increase its overnight rate ,which has direct impact on variable rates, we will continue to see the variable discount decrease.  We are already off from the Prime less 0.65% rates we saw in the busy summer period.

Conclusions and Recommendations

This may be the beginning of a larger and longer move up, or it may just be a small adjustments. Hey, rates could even head back down next month, as we have seen happen over the last couple of years. World events can change markets very quickly and sometimes to large effect.

For Buyers on the fence, lock in a Rate Hold to protect against rate increase  for as long as 120 days.

For Borrowers with variable rate mortgages who have been planning to lock those mortgages in to a fixed rate when the fixed rates go up, now is a good time to review that plan.

19 Jul

The Good Old Days, when homes were cheap, or were they?

Financial

Posted by: Garth Chapman

Ahhh, the good old days.

Or were they, economically speaking? Let’s take the early 1980’s as an example.

We bought a home in early 1981 near the bottom of the housing crash caused by PE Trudeau’s NEP (National Energy Policy), which dropped that home’s value by about 20% from $111,000 to the $91,000 that we paid.

Oh, and we sold that home 5 years later in 1986 for a $4,500 loss at $86,500. Our thinking was that we were at the bottom and it was time to buy a more expensive home as it would appreciate more as the economy improved. That turned out very well, but that’s another story…

My income as a 27 year-old in a middle management job then was $42,000. Interest rate was around 18%, but our provincial government bought the rate down to 12%.

At 10% down the mortgage was $83,640 with a monthly payment of $863. In 1981.

That same house is now easily $450,000. So at the same 10% down the mortgage would be $414,720 and at an easily obtainable fixed rate of 2.69% the monthly payment would be $1,897. Income for same job now would be about $120,000.

So income is up nearly 300%.
Home price is up nearly 500%.
Down-payment is up from 2.2% to 3.8% of annual income.
Mortgage payment is DOWN from 25% to 19% of monthly income.

So the down payment is a tougher burden, but the monthly cost of the mortgage is way-way down. Hence we live in bigger fancier homes and/or drive nicer cars, have 3 TVs, take more vacations, etc, etc.

Ahhh, the good new days.

 

19 Jul

Understanding what drives Variable rates and Fixed rates

Financial

Posted by: Garth Chapman

Your Variable Mortgage Rates are driven by your bank’s Prime Rate which is set individually by each Bank. They normally (but not always) move in sync with changes in the Overnight Rate, which is set by the Bank of Canada (BoC) and is used as a basis for one-day (or “overnight”) borrowing between the major lenders and financial institutions.

The BoC is responsible for monetary policy, the goal of which is to keep inflation near the mid-point of a 1 to 3 per cent target range, ideally 2%. The BoC is equally concerned with significant movements in the inflation rate, both above the 2% mid-point and below it. When demand is strong, it can push the economy against the limits of its capacity to produce. This tends to raise inflation above the midpoint, so the BoC will raise interest rates to cool off the economy. When demand is weak, inflationary pressures are likely to ease. The BoC will then lower interest rates to stimulate the economy and absorb economic slack.

So when the economy heats up and there is a threat that inflation could get beyond the 1 to 3 per cent target the BoC may increase the overnight rate, which drives the Prime Rate. The schedule of dates when the BoC reviews and sets the Overnight Rate is found here http://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/

Fixed Mortgage Rates are driven by the Bond markets. Typically, when bond rates (also known as the bond yield) go up, interest rates go up as well. And vice versa. Don’t confuse this with bond prices, which have an inverse relationship with interest rates.

Investors turn to bonds as a safe investment when the economic outlook is poor. When purchases of bonds increase, the associated yield falls, and so do mortgage rates. But when the economy is expected to do well, investors jump into stocks, forcing bond prices lower and pushing the yield (and mortgage rates) higher.

The spread between 5-year Government of Canada Bonds and 5-year mortgage rates varies within a range that has fluctuated in recent years. You can follow the 5-year Bond Yield in Canada on the BoC website here and you will notice that a period of Bond yield increases or drops will almost always be followed by a corresponding change in fixed rates for mortgages.

17 Jul

Ten obstacles to getting the best mortgage rate

Interest Rates

Posted by: Garth Chapman

Have you ever wondered why your neighbour or brother-in-law just got a lower or higher interest rate on a new mortgage than you just got?

Reasons for differences, and sometimes they are significant, can be many and varied, including your income, income source, province of residence, type of property being mortgaged, credit score, specific privileges required, and much more.

To help explain all this, here is a good article from the Globe and Mail describing why once you have chosen the term and rate type for your mortgage, you may find that interest rates for that same term can vary by a percentage point or more.

Ten Obstacles to Getting the Best Mortgage Rate