Rate hike or not?

There are, once again, conflicting headlines with regard to the economy and the future of interest rates. On the one hand Canada’s recovery is picking up faster than expected,  which had the Bank of Canada’s (BOC) Mark Carney hinting at the eventual increase of interest rates – perhaps sooner than later. Both the central bank and the International Monetary Fund lifted their Canadian forecasts for the year, suggesting a slightly better global scenario is benefiting our labour market and boosting business confidence.

On Tuesday, April 17, Carney left his key rate untouched for a 13th consecutive decision – the 1 per cent overnight rate has been holding steady since September 2010. The balancing act for Carney is to ensure inflation stays under control as the economy strengthens, but without dampening consumer spending and/or curtailing business investment that will be crucial to the country’s growth over the next couple of years.

The BOC clearly laid out its case for raising rates. The bank boosted its 2012 growth forecast for Canada to 2.4%, from 2 % in January. While it cut its 2013 forecast to 2.4 per cent from 2.8 per cent, policy makers said the economy will be back at full tilt in the first half of 2013, instead of in the third quarter of that year.

Then a few days ago, Statistics Canada reported the inflation rate had dipped to 1.9% in March -- the first time since September 2010 that the rate has fallen below the Bank of Canada’s target of 2%.  So now what?

Over the past couple of years the mortgage industry has repeatedly warned Canadians to be careful with their finances because interest rates are bound to rise eventually. Yet the variable rate was deeply discounted until a few months ago and fixed rates have fallen to historic lows. And now, with Carney hinting that rates will rise, the mortgage industry is once again preparing clients.

When we take a look at the bigger picture there are some influences that suggest rates may not increase until much later than the summer of 2012 or Carney may even wait until 2013.

First of all, the U.S. Federal Reserve Board said it will stick with its near-zero rate until 2014, putting pressure on Canada to keep its prime rate as is. The rebound in the United States, Canada’s chief export market, seems to be coming in short bursts – forward momentum, then a retreat – suggesting that the U.S economy is still vulnerable and unsteady. Considering this is an election year, it’s likely to stay that way until the election is over. 

Secondly, the euro crisis, until a few days ago, was no longer considered an urgent threat, and then came the collapse of the Dutch government and once again Europe is in deep. 

Thirdly, at the mere hint of an interest rate hike, the loonie shot up more than a full cent against the U.S. dollar, which does not bode well for many of our business sectors.

Last week Carney did say the “timing and degree” of interest rate moves would depend on developments in the coming weeks. Those developments are already here. And while he has hinted at a summer hike, well, without a crystal ball, it’s still too early to call. Last July, Carney sent a strong signal that higher rates were coming, only to reverse that stance in September.  Avery Shenfeld, chief economist at CIBC World Markets said recently, “It won’t take much of a disappointment in growth for the Bank to further delay this next round of rate hikes.”

TD Economics believes that the BOC cannot raise interest rates by more than one percentage point while the Federal Reserve is on hold. Doing so would result in a dramatic rise in the loonie and could weaken the economy.

One thing we can be sure of is that when the hikes do come, they will be gradual.

The home financing experience

Guest Blog by Mark Kerzner, President TMG The Mortgage Group

Fifteen years ago my wife and I bought our first home. This anniversary brings to mind two somewhat related thoughts.

First, the home buying experience itself. I am not talking about the stress of looking, prioritizing must-haves, or going from open house to open house. I am referring to the specific night when we negotiated the deal.

On that night we were sitting outside in our car -- it was cool and foggy -- while our agent went in and out of the house to deal directly with the listing agents and vendors. The entire transaction took about three hours to complete. We really had no idea what conversations were taking place on the inside and we weren’t a party to it. We were relegated to the tight and uncomfortable confines of our car mulling over all of our own what-if scenarios. At the end of the day a deal was struck and we purchased our first home.

We found the whole process completely devoid of all interaction. You would think if you were making a $300,000+ purchase you would feel good about it, or at least a bit valued. Imagine going into Cartier and being told to wait in the closet while your representative negotiates for your watch from the jeweler? Or imagine buying a Ferrari and not being allowed to test drive it first? Your house is the biggest purchase you will likely ever make yet the buying process can be extremely impersonal to the extreme.

Then it came time to arrange the mortgage. Our banking relationship was with a large national trust company so, of course, we went into the branch to arrange for our financing. I believed I really did my homework before I went in and was seeking 100 basis points (bps) below their posted rate on a 5-year fixed rate mortgage.  I wasn’t going to settle for less. I had no idea what the average spreads or profits were on the bank's mortgages, I just knew I wanted a discount of 100 bps.

The generalist we spoke with said she was authorized to discount only 50 bps despite the fact that all our banking products were with that institution. To go beyond that level she would have to speak with the branch manager.  This reminded me of a car buying tactic dealerships use to take advantage of unsuspecting buyers. It was also when I decided on a new personal philosophy that I will deal only with those who have the authority to deal with me directly.

Today mortgage clients have tons of information at their fingertips -- perhaps too much. Social media combined with the Internet and transparency of information is helping the consumer become much more informed than ever before.

When I arranged my first mortgage, I would never had thought about what China’s GDP, the Euro Crisis, Canadian monetary policy, covered bonds, CMHC debt ceilings, etc., would have to do with me getting a mortgage.  I didn’t understand “spreads”, discounting or cash backs. I don’t even know if the 100 bps was a good deal, but I got it in the end.

All this information is likely to confuse a great many people. It is also possible that information conveyed inaccurately by uneducated people may sway some into products they shouldn’t be in. For example, interest only HELOCs for first time homebuyers arranging financing may not be the best fit athough it may represent the best cash-flow option.

I believe the banks, their branch networks and sales forces have taken a page from the mortgage broker model. I believe it was the broker channel that first started to really educate the consumer – offering transparent pricing and expert advice.  The banks have copied the brokers.

Copying is the highest form of flattery. I think with all the information at our collective fingertips it is vital to continue to seek out the advice of a mortgage professional – a broker. In their role as an expert, combined with their unique ability to offer choice they are best position to help you, the end consumer, navigate through these very murky waters.

There are still good mortgage products available

It’s been a year since the Government of Canada last implemented changes to the mortgage rules. Since March of 2011, when the rules went into effect, there has been a slow down in the refinance market, yet home sales have not been seriously affected.  Then the government warned Canadians about increasing debt loads and there were worries around specific mortgage products and loose qualifying criteria for self-employed individuals and for new immigrants. Many lenders pulled their Stated Income programs for these groups. With the bond market reacting to the economic crisis in Europe and the U.S. slowdown, the fixed rate dropped to record lows and lenders started to eliminate discounts on their variable rates.

House prices have stabilized; the economy is showing modest growth and the Bank of Canada may start increasing its prime lending rate at the end of 2012. While some of the changes have impacted the market, there are still a number of mortgage products available. Let’s take a look at what’s gone and what’s left.
Here’s a recap of the changes:

•  The maximum amortization period for mortgages was reduced to 30 years from 35 years for insured mortgages with loan-to-value ratios of more than 80 per cent. This made it more difficult for some first time home buyers to qualify for a mortgage but also reduces the total lifetime interest payments families make on their mortgages.

• The maximum amount home owners can borrow to refinance their mortgages went from 90% to 85% of the value of their homes. Refinancing was a tool used by many homeowners to consolidate their high interest debts.

•  Government insurance backings on lines of credit secured by homes were withdrawn.

•  The Canadian Housing and Mortgage Authority’s (CMHC) funding cap has almost been reached. CMHC is the provider of government-backed mortgage loan insurance. Because the government will not increase that cap, CMHC will no longer bulk insure mortgages for lenders. The result is that CMHC will curtail its activity, which might make it more challenging to get approved for a high-ratio loan.

So what is left? Lots!

•  A few lenders still offer 35 year amortizations.

•  Lenders still offer Purchase Plus products for renovations, on both new purchases and on refinances.

•  Cash Back products are still available that help buyers with down payments and closing costs.

•  First time home buyers can still qualify for a mortgage if they borrow the down payment.

•  Stated income products are still available for the self-employed through a few lenders

•  Lines of credit are still available but are not insured.

•  A few lenders are starting to discount their variable rates.

Everyone has a unique situation. To find a product that works for you, talk to a mortgage professional.

When is a good time to buy a house?

A recent RBC survey found that Canadians are conflicted about whether to purchase a home this year. While a majority believes it is the right time, more than 70 per cent say they will hold off.

The likely reason is, again, conflicting messages in the media. Headlines warn that Canadians are still taking on too much debt; that the condo market in Toronto and Vancouver is slowing down; that interest rates are set to rise; that the market is softening; and that we’re still in a housing bubble. On top of that there are rumblings of inflation going up, the price of gas is up, and the jobs situation is still somewhat precarious. So what is a home buyer to do?

Decide whether you want to buy a house, if you have the means to buy a house, and then go out a find one. The most important factor is your personal readiness.  A home is a long term investment and its value will fluctuate up and down over the course of your tenure in it. It is both a commitment and an achievement that reflects your aspirations and lifestyle, and offers a great deal of personal satisfaction, as well as financial stability.

There is no good or bad time to purchase. Mortgage rates and house prices will fluctuate but over the long term, home ownership is a sound investment that compares well with other investments. When you invest in mutual funds, the mantra for most is buy and hold. Similarly, your home is a buy and hold investment.

If we examine the current situation we find historic low interest rates, a housing market where the prices in most markets are stabilizing, a healthy economy that is growing and an inflation rate that is holding steady, thanks to the fiscal policies of our government. So, the sooner you get into your new home, the sooner you will begin to build equity and reap the financial rewards, as well as the personal ones.

Ask yourself:

• Are you at the point in your life where the idea of homeownership is attractive and makes sense, both now and for the long term? 

•  Do you qualify for a mortgage, and how much? If you don’t know, talk to a mortgage professional.

•  Can you manage the mortgage payments as well as other expenses that may come along with homeownership, such as maintenance costs and higher insurance fees?

•  Do you have a down payment?

•  Do you have a strategy to take advantage of this low interest rate environment to more aggressively pay down your mortgage and accumulate equity?

If you answered yes, then start to explore your options; find out what’s available and what’s involved. It’s the right time to buy.

Some studies have us scratching our heads

There’s a quote that says that 95% of what you worry about never happens. If you read the recent report released by the Human Resources Professional Association together with the financial services firm of Deloitte, you would think that Canada is doomed. The alarming report, titled, Canada Works 2025, claims that aggressive outsourcing will hollow out Canadian business; prolonged economic recovery will have left people without jobs and jobs without skilled people; and immigration will sputter in response to the country's lacklustre global brand.

This is the projection if Canada keeps to the status quo. The report is an analysis of the demographic, technological, environmental and economic factors that will shape Canadian society in the upcoming years and draws on insight from 52 world thinkers within the business, academic and government sectors, as well as extensive in-house and secondary research.

On one hand, these reports are good to shed light on situations that may happen -- at the very least, it should initiate interesting discussions about what to and what not to do to sustain the future of Canadian life. On the other hand, if we examine what these “thinkers” were examining, we’ll see that many of the recommend strategies are already in place.

The Canadian government and private sector companies are already making some of the necessary changes to create a strong, sustainable Canada.

One recommended strategy includes making formal adjustments for the aging workforce such as: flexible work-time arrangements; pension incentives; phased retirement; wellness programs; and self-paced work environments. Both the private and public sectors have already implemented these strategies. Even the recent changes to the retirement age will have a positive affect going forward.

Another recommend strategy is matching post-secondary course offerings to employment market demand. Hmmm, community colleges have been doing that for years. Course offerings have to be relevant to the marketplace or the college wouldn’t survive.

Another area is reforming immigration to more effectively leverage the contributions of new Canadians. This has been a topic of discussion for the last two years and no doubt the government will address the issue in upcoming sessions.

The report also suggests that Canada make calculated investments in industry and infrastructure. While it’s true that cost-cutting may have its drawbacks, it’s also a good idea to invest in these areas – when the money is available, which is likely in the very near future. The Canadian government has shown it has the wherewithal to protect and grow the economy.

Yes, it’s important to have studies to see where we’re at and where we are going but we need to be wary of doom and gloom predictions, especially in areas where changes are already taking place.