12 May

Shopping for a mortgage? Oil’s collapse has changed the equation = Good News for Property Investors

Investment (Rental) Properties

Posted by: Garth Chapman

Canada’s oil industry is fighting for its life. In 2014, a barrel of crude sold for US$100-plus. This week, supply and demand got so distorted that people literally had to be paid to take a barrel of oil.

Oil’s decline is a mega-trend that will directly or indirectly affect Canadians for decades to come. It will even affect the price we pay for mortgages.

History has shown that variable and short-term mortgages outperform longer fixed terms. The dis-inflationary effect of oil’s slow demise could weigh on rates and reinforce that trend.


A SIDELINED BANK OF CANADA

There will be “no increase in [Bank of Canada] policy rates until at least 2023,” Mr. Brown projects. And a similar chorus echos throughout economist-land.

All else being equal, the economic drag from a contracting oil sector could exert downward pressure on rates for more than a decade, past the end of the COVID-19 crisis.

 


LOWER BORROWING COSTS

Calamity in the oil patch and general economic devastation are nothing to celebrate. They’re tragic. But if they’re going to happen, one should at least capitalize on one silver lining: lower borrowing costs.

Read more

30 Mar

What Direction are Interest Rates Headed, and what should we do?

Challenging Times

Posted by: Garth Chapman

What Direction are Interest Rates Headed, and what should we do?

  • Context – Let’s first look at the key elements and actions driving interest rates and economic activity right now
    • Liquidity crisis
      • Remember 2008. The capital markets dried up and the huge gaps had to be filled. Now is similar but with an entirely non-economic cause.
      • “The Bank of Canada (BoC) is meeting twice a week with the senior leadership of the Big-Six Banks. The cost of funds for the banks has risen sharply. CMHC is buying large volumes of mortgages from the banks, which, along with CMB purchases by the central bank, will shore up liquidity.” Dr. Sherry Cooper of DLC
  • CMHC has acted to provide liquidity for the Banks by buying large tranches of mortgages and has bumped the quantity of those purchases once already. This frees up lending capacity for the banks by returning the cash to their balance sheets.
    • The Federal Government has acted to provide liquidity for businesses by way of loans, tax and other deferrals
    • The Federal Government has announced a new program, the Canada Emergency Wage Subsidy (CEWS) program which is to provide to companies that have a 30% loss of revenue up to a 75% wage subsidy to help Businesses keep & return workers to payroll retroactive to March 15.  The initial announcement indicated that payments will be capped at 75% of $58,700 an employee’s annual income, so $1,129 per week for up to 12 weeks (again these are the initial indications, yet to be fully unveiled, because, well they’re more than likely not yet fully decided).
    • The Federal government has acted to provide liquidity for individuals with several programs, the largest being the $2,000 monthly to all with COVID-related loss of income.
  • Bank of Canada has acted to provide liquidity for businesses and individuals by lowering the Overnight Target Rate 3 times in 10 days, a total of 1.50%. Biggest and fastest cuts ever.
  • Commercial financing is largely frozen right now.
  • Paradox – the Prime rate has dropped by 1.50% in the last 2 weeks, but mortgage rates are going up
    • Background
      • Prime directly drives only Variable Rate mortgages and HELOC’s and Personal Lines of Credit (PLC).
      • Fixed rates are driven primarily by Government of Canada Bond Yields.
      • Hi-ratio insured mortgage rates are lower than uninsured rates. That is counter-intuitive to the inherent relative risks and is due to mortgage regulatory changes of recent years.
    • Variable rates are down by 1.50%, but the discounts to Prime have nearly disappeared.
      • Hi ratio insured from Prime less 1.0% or better, to Prime less 0.2% at best.
      • Uninsured from Prime less 0.5% or better, to Prime less 0.0% at best.
    • Fixed rates are wildly gyrating, the first increases ~2 weeks ago was about increasing spreads on banks cost of money. Since then it is supply and demand, due to reduced staffing levels, massive inflow of mortgage payment deferrals calls, and huge volumes of applications (now dropping).
    • Due to the above: Fixed rates are up ~0.50% over the last week, a bit less for hi-ratio insured mortgages, after dropping initially when the Bond market yields crashed.
  • Where we are today – see these self-explanatory three CHARTS below:

https://www.ratehub.ca/prime-mortgage-rate-history

https://www.ratehub.ca/5-year-variable-mortgage-rate-history

https://www.ratehub.ca/5-year-fixed-mortgage-rate-history

  • Normal BoC action: inflation low — rate low; inflation high — rate high (and why)
    • BoC mandate is to keep inflation within a range, that is adjusted from time to time.
    • For the foreseeable future, liquidity issues will be paramount. That will last at least until our economy, and that of our major trading partners, is largely back up and running.
  • Why rates might go up instead?
    • Currently lenders can’t keep up – very high new mortgage applications during February and early March. This will return to near-normal as deferral calls diminish, and buyers stop buying.
    • Risk – Michael Campbell’s MoneyTalks comments this week:
      • “What happens when lenders worry about mid-term and long-term lending? Then you have no market”
      • “How long can Central Banks keep interest rates low when increasing risk demands that they rise? It’s like loading a spring. Will it take 1 month, 12 months, 18 months? No-one knows, but the risk is there.”
    • What happens if Canada’s government takes on so much debt that institutional and international investors who buy those bonds begin to demand higher, perhaps much higher, returns on those bonds. And if the same occurs in most of the rest of the developed world it seems to me the impact of that would be a scarcity of capital.  These things would yield increased inflation and in turn higher interest rates for Canadians.   See the below chart of  the Government of Canada 5-year Bond yields from 2000 to March 30, 2020. How far yields have fallen. These have been an extraordinary last 20 years, especially the last 12 since 2008.

  • What to expect over the next 90-180 days
    • Variable Rate Mortgages: discounts to the Banks’ Prime Rates: Have all-but disappeared, and I don’t see that changing in the short term. I suspect those discounts should return somewhat close to previous levels once the economy is up and running to a reasonable level.
    • Fixed Rate Mortgages: I believe should come back down as the Bond markets settle – BUT – that might not happen, depending on how much higher the costs of supporting Canadian economy goes. And it could go up significantly.
      • Note- as my friend Jeff Gunther said on a call today “when rates move they move quickly”. And I would add sometimes “also by a lot”.
    • Lenders will reduce LTV limits in various markets. Some lenders will (and already have) vacate various markets and/or various products lines. One Monoline is out of the Prairies, another is out of both insured and uninsured lending in the Prairies, and two more are already out of uninsured lending in Alberta. This is driven by investors backing away from perceived risks, and by Monoline lenders’ volume capacities due to reduced staffing etc.
    • Given that more than half of the mortgage industry (Brokers and Bankers) are working from home, allow 30 to 45 days minimum for purchases to close.
    • Anyone who wants to switch lenders and has a maturity date (renewal date) in the next ~30-40 days closing should get confirmation in writing that the new lender can close that quick. If there’s any doubt, ask your existing lender to renew you into an open mortgage, if possible.
  • Crystal Ball
    • I don’t know about yours, but my crystal ball appears to be faulty over the last two weeks. Each day it shows me a different future.
    • We are in uncharted waters. National economies world-wide are more interconnected than ever. There are more moving parts than ever before.
    • Liquidity is the big risk issue over the mid and long term. The risk is whether or not it is manageable. Some pundits think it will eventually prove to NOT be manageable, that the BoC, CMHC and the federal government will run out of capacity to provide liquidity.
    • We have been in an ultra-low interest rate environment for over a decade now. Many in the financial world have been predicting for several years an interest rate rise. Some base this in part on the growing under-funded pension liabilities created by such low rates for so long. John Mauldin is one of those
    • No-one knows where interest rates are going in the longer term. Rest assured they will go up and they will go down, but we don’t know when or in what order.
    • I think we are beginning to see the amazing ingenuity and creativity that many people employ when the chips are down, and that makes me believe we will find our way through this without wide-scale destruction of our developed economies. Having said that, the risk is that if this goes very badly, it could well be worse than the 1930’s.
  • What are we to do?
    • Cash is King, so preserve your cash as best you can. Take all available payment and other deferrals that you can get. Preserve available capital in your HELOCs and PLC’s.
    • Some people I know believe banks will selectively lower PLC limits or cancel some altogether. They go so far as to recommend you should take 75% of cash available in your PLCs now and put that money in an account at a different bank.
    • If you want a home equity line of credit, apply yesterday. Recessions are not conducive to getting great deals on HELOC rates, but again, cash is king. And once you are out of work a HELOC will be more difficult to qualify for, notwithstanding the excellent suite of supports from various levels of government.
    • If you get a 5-year fixed rate, try to pick a lender with a fair interest rate differential penalty (aka Monoline lender). The big-6 banks’ IRD penalties are on average roughly 2.5 to 3 times higher.
    • For those who believe Prime will stay low and that Fixed rates will not climb much above current rates, a Variable rate mortgage may be the way to go until the Fixed rates market settles somewhat and those rates drop back down so you lock in.
    • If you are truly concerned about, or if your financial stability is vulnerable to, interest rise shock, consider a 7-year or a 10-year term fixed rate mortgage.  I have seen 7- year and 10-year rates as low as 0.6% to 1.0% above the 5-year Fixed rates recently.
      • Note- These low long term rates tells us the some of the institutional lenders believe rates will indeed remain low for 7-10 years.
    • Protect yourself in all your income and debt management decisions, and whatever you do, do it as fast as you can reasonably do it, and based on your risk tolerance. The less tolerance you have the more protective you should be.
30 Mar

Why Are Mortgage Rates Rising? by Dr. Sherry Cooper

Interest Rates

Posted by: Garth Chapman

As Dr. Cooper writes below this is a time of enormous change and challenge.  Yet I find myself surprised and pleased with the responses from our federal government, and from the Alberta government, as well as several other Provinces and Municipalities. The programs announced as of March 29 are breath-taking in scope and breadth.  We are going to make it through this, but in the meantime there will likely continue to be swings in mortgage interest rates, both up and down.  In another post today I will explore what is happening, why and what I think we should do.

Now back to Dr. Cooper’s article “Why Are Mortgage Rates Rising?

Over the past month, the Bank of Canada has lowered its overnight rate by a whopping 1.5 percentage points to a mere 0.25%. Many people expected mortgage rates to fall equivalently. The banks have reduced prime rates by the full 150 basis points (bps). But, since the second Bank of Canada rate cut on March 13, banks and other lenders have hiked mortgage rates for fixed- and variable-rate loans. That’s not what happens typically when the Bank cuts its overnight rate. But these are extraordinary times. 

The Covid-19 pandemic has disrupted everything, shutting down the entire global economy and damaging business and consumer confidence. No one knows when it will end. This degree of uncertainty and the risk to our health is profoundly unnerving.

Read more here

2 Jul

What Rate Will I Get with Today’s Mortgage Categories?

Buying & Refinancing a Home

Posted by: Garth Chapman

Once upon a time it was fairly easy to answer the question “what rate will I qualify for?”  Back then higher down-payments resulted in lower interest rates on your mortgage.  Now neither of those are the case.

Once upon a time you either had a high ratio or a conventional mortgage.

Now you will have an insured, or insurable or uninsurable mortgage.  The reference to insurance is what most people understand as a high ratio mortgage insured by CMHC, Genworth or Canada Guaranty.

Once Upon a Time:

  • High ratio mortgage – down payment less than 20%, with insurance (aka CMHC fees) paid by the borrower.
  • Conventional mortgage – down payment of 20% or more, and the lender had a choice whether to insure the mortgage or not at their own expense.

Now it is more complicated:

  • Insured – Most often a down-payment or refinance equity below 20%. A mortgage transaction where the insurance premium is or has been paid by the borrower, which often means a high ratio mortgage.
    • Interest rates are the lowest in the range.
  • Insurable – Fits all the same guidelines as an insured mortgage but the borrower has more than 20% for a down payment.  A mortgage transaction that is often portfolio-insured at the lender’s expense.  Property must be valued at less than $1MM that fits insurer rules and is qualified at the Bank of Canada benchmark rate over 25 years with a down payment of at least 20%.  Property cannot be a Rental.  The loan-to-value and your FICO (credit) score will determine what rate you qualify for.
    • Interest rates are slightly lightly higher than insured rates.
  • Uninsurable – All mortgages that can’t be insured.  Examples include refinances, single unit rentals (rentals between 2-4 units are insurable), purchases and transfers for properties with valued at over $1MM, equity take-out’s greater than $200,000, amortizations greater than 25 years.
    • Interest rates are at the higher end of the range, and are determined based on loan-to-value (LTV) %.

What does this mean when it comes to shopping for best rates and terms when your mortgage matures and you have the opportunity to move it to another lender?

  • If your mortgage was originally insured (borrower paid insurance), we can get insured rates.
  • If your mortgage was originally back-end insured (basically the same as being conventional) we can get insurable rates.
  • If your mortgage was placed before October 2016, we can grandfather the insurable rates even if it was a $1 million+ value house or 30 year amortization. It then depends if it was insured (client paid insurance) or conventional as to whether we get insured or uninsurable rates now.
  • If your mortgage was placed after October 2016 and the property value was over a $1 million or the mortgage had a 30 year amortization, we are restricted to uninsured rates.
12 Mar

Will the cost of money fall in 2019?

Interest Rates

Posted by: Garth Chapman

On March 6th The Bank of Canada (BoC) held the line on the Overnight Rate which drives the Banks’ Prime Rates.  The direction the BoC decides to take with rates is a direct reflection of today’s economic state; a threat of a recession or other industry-related downturn will prompt it to cut its rate in efforts to encourage liquid borrowing and stimulate the economy.  Read more here

I believe it is quite possible we will see that happen later in 2019, as the Canadian economy continues its slide, suffering from softer consumer spending, an under-performing housing market, and lower-than-expected exports and business investment.

Capital Economics, a London-based research consultancy notes the recent tone from senior officials signals the bank is set to sideline plans to raise the trend-setting rate to its neutral range, between 2.5 and 3.5 per cent. ““It’s not hard to see why officials are concerned,” Brown wrote in a research note. “The available data suggest that GDP fell for the second month running in December, by 0.1 per cent. Worse still, that weakness appears to have been broad-based.”

More from Capital Economics here.

This is good news for borrowers.

6 Jan

A Short History of Changes to Canada’s Mortgage Rules Since the 2008 Financial Crisis

Home Ownership

Posted by: Garth Chapman

Actions taken since the 2008 financial crisis to address the federal government’s concerns about Canada’s housing market.

Before the 2008 FINANCIAL CRISIS

This was a time of easy money for Canadian mortgage borrowers.  The below were some of the many options available during this time:

  • 100% financing options (aka $0 down).
  • 40-year amortizations.
  • Cashback mortgages (you get cash from the lender after closing in exchange for a higher rate).
  • 95% Loan-to-value ratios on refinances.
  • 5% down-payment on rental properties.
  • You qualified for fixed and variable rate mortgages at the contract rate (the rate you pay, not a higher rate – no stress test).
  • No limit for your gross debt-service ratios (GDS) if you had strong credit.

July, 2008:

  • After briefly allowing the CMHC to insure high-ratio mortgages with a 40-year amortization period, then Conservative finance minister Jim Flaherty moved to tighten those rules by reducing the maximum length of an insured high-ratio mortgage to 35 years.

February, 2010:

  • Responding to concern that some Canadians were borrowing too much against the rising value of their homes, the government lowered the maximum amount Canadians could borrow in refinancing their mortgages to 90% of a home’s value, down from 95%.
  • The move also set a new 20% down payment requirement for government-backed mortgage insurance on properties purchased for speculation by an owner who does not live in the property.

January, 2011:

  • The Conservative government tightened the rules further, dropping the maximum amortization period for a high-ratio insured mortgage from 35 years to 30 years.
  • The maximum amount Canadians could borrow via refinancing was further lowered to 85% of a home’s value.

June, 2012:

  • A third round of tightening brought the maximum amortization period down to 25 years for high-ratio insured mortgages.
  • A new stress test was also introduced to ensure that debt costs are no more than 44 per cent of income for lenders seeking a high-ratio mortgage.
  • Refinancing rules were also tightened for a third time, setting a new maximum loan of 80 per cent of a property’s value.
  • Another new measure limited the availability of government-backed insured high-ratio mortgages to homes valued at less than $1-million.
  • Limit the maximum gross debt service (GDS) ratio to 39% and the maximum total debt service (TDS) ratio to 44%.

December, 2015:

  • The recently elected Liberal government moved to tighten lending rules for homes worth more than $500,000, saying it was focused on “pockets of risk” in the housing sector.
  • The package of measures included doubling the minimum down payment for insured high-ratio mortgages to 10% from 5% for the portion of a home’s value from $500,000 to $1-million.

October, 2016

  • All INSURED mortgages with less than 20% down must qualify at benchmark rate (currently 4.64).  The details – borrowers who take out insured mortgages that are fixed-rate loans of five years or longer will be subjected to a “stress test,” by qualifying at the Bank of Canada’s Benchmark rate (then about 2% higher than a typical 5-year fixed rate).  This same stress test is already in place for all mortgage terms of less than 5 years and for those taking a Variable Rate.
  • Ottawa unveiled new measures aimed at portfolio insurance, a type of bulk insurance that banks use for mortgages with down payments of 20 per cent or more.  Starting Nov. 30, the federal government will now require portfolio-insured mortgages to qualify under the same criteria used for the insurance taken out on homeowners with small down payments. Portfolio-insured mortgages will now be limited to a maximum amortization period of 25 years and a maximum purchase price of less than $1-million. It requires all portfolio-insured mortgages to be owner-occupied, prohibiting insurance on rental homes and investment properties. This change handed the banks a huge advantage over the Monoline mortgage lenders, and increased their market share and ultimately allowed the banks to increase mortgage interest rates.

January, 2018:

  • Stress Test now applies to all Mortgages – Home buyers with a down payment of 20% or more will be subject to stricter qualifying criteria (also known as a “stress test”) that would determine whether a homebuyer would be able to afford their principal and interest payments should interest rates increase.  REFINANCING an existing property (20%+ Equity) will also be subject to the stress test.  For qualification, the stress test will use either the 5-year benchmark rate published by the Bank of Canada or the customer’s actual mortgage interest rate plus 2.0%, whichever is the higher.  Estimated reduction in borrowing for the average borrower, 15-20%
  • OSFI directs lenders (excluding credit unions and private lenders) to have internal risk management protocols in higher priced markets (sometimes called “hot real estate markets” like Toronto and Vancouver). This is a continuation of a policy already in place. Many mortgage lenders have been following the principles of the policy for the last 10 to 12 months.
  • Elimination of “bundles mortgages.” – Mortgage lenders (excluding credit unions and private lenders) are prohibited from arranging with another lender: a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law. This is often referred to as “bundling” or “bundle partnership”.
6 Jan

Why Your Neighbour’s Kid is Getting a Better Mortgage Rate Than You

Interest Rates

Posted by: Garth Chapman

 

There once was a time (in 2016 actually) when a client could call and ask what mortgage rate they could expect, and a competent Mortgage Broker could determine the answer in a few seconds.  Those days are gone.

And during that same time a larger down-payment and long established credit history would result in a better interest rate.  That too is gone.

And also back in the day (yes, 2016) one could refinance their home and expect to get a rate roughly equal to the rate they would enjoy if they were purchasing that same property with a mortgage of the same amount.  Yup, you guessed it…gone.

So what’s going on?

The answer is that, in short, the federal government has effectively decided to give preferential rates to home buyers who have very small down-payments.  That’s not necessarily what they intended, but it has become a very counter-intuitive result.

Read more on this here…

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 below). Expect to pay at least 10 to 20 bps more than rock bottom rates if you haven’t purchased your property yet.

  • A pre-approval is really merely a rate hold, UNLESS all of the documents that will ultimately required have been collected, AND your complete file has been fully underwritten by a mortgage lender. Most lenders will no longer underwrite pre-approvals because only about 15% of those become live purchases, but experienced Mortgage Brokers will have at least one lender that will).
  • The rate held on pre-approvals are referred to as a ‘Rate Hold’ and it will always be higher than that same lender will offer on a ‘live purchase’ on the same day to the same borrower. That is because the lender must hedge against potential rate increases over the period of time the rate is held for, which is normally 90 days and can be 120 days.

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