Mortgage stats and you

Amortizations are falling, rate discounts are increasing and consumers have flocked to fixed rates. Those are a few of the trends found in the Canadian Association for Accredited Mortgage Broker’s (CAAMP)  Annual State of the Residential Mortgage Market report.

At the same time the Canadian Real Estate Association (CREA) has also revised its outlook to take into account a more buoyant market than expected. National sales activity has been stronger than anticipated. And Canada is staying the course with its prime rate at least until 2015.

CREA’s forecast for national sales activity has been rebalanced with a modest upward revision this year to reflect stronger than expected sales for the year-to-date. Sales are forecast to reach 449,900 units in 2013. In 2014, national activity is forecast to reach to 465,600 units, a rebound of 3.5 per cent, and in line with its 10-year-average. The forecast increase reflects a gradual strengthening of sales activity alongside further economic, job, and income growth combined with only slightly higher mortgage interest rates.

So where do you fit in? The following highlights of CAAMP’s report  were compiled by Canadian Mortgage Trends.

1. 16% of homes purchased in 2013 had amortizations over 25 years
2. 8% of respondents believe the housing bubble will burst within the next five years
3. 82% of new mortgages for homes purchased in 2013 were fixed rate mortgages
4. 2% of buyers with less than 20% down chose a variable rate mortgage 
5. 40% of new mortgages in 2013 were obtained from a mortgage broker.
6. 70% of households with mortgages have 25% or more equity
7. 57% of 2013 homebuyers were first-time buyers
8. 84% of mortgages on homes purchased in 2013 had an original amortization of 25 years or less
9. 16%  of borrowers  increased the amount of their payments in the past year – the average monthly increase was  $400 
10. 17% of borrowers  made a lump sum payment – the average amount was $14,000

Other highlights:

• 43% of current mortgage holders  consulted a mortgage broker about getting a new mortgage
• 68% of respondents agreed their mortgages are "good debt"

Interest Rates

•  3.23% is the average mortgage interest rate for mortgages on homes purchased in 2013
•  3.20% is the average mortgage interest rate for mortgages renewed in 2013, which averaged 0.82 percentage point lower than prior to their renewal

Equity Take-Out

• 11%  of homeowners took equity out of their home in the past year with $57,000 the average amount
• $59 billion is the estimated amount of total equity take-out in the past year
• $16.6 billion was used for debt consolidation and repayment
• $15.1 billion was used for investments
• $12.3 billion was used for home renovations

Real Estate/Mortgage Market

• 9.52 million: The number of homeowners in Canada
• 4.28 million: The number of renters in Canada
• 5.58 million: The number of homeowners with mortgages (who may also have a home equity line of credit (HELOC))
• 3.94 million: The number of homeowners who are mortgage-free
• 2.3 million: Number of total homeowners who have HELOCs

Mortgaging Activity

• 450,000 of households bought homes over the past year
• 400,000 of buyers took on mortgages

Good news for interest rates

By Mark Kerzner, President, TMG The Mortgage Group Canada Inc.

There’s good news on the interest rate front. In the Bank of Canada’s (BoC) most recent announcement it maintained its prime rate at 1%, however with one slight difference. Since 2012, the BoC’s report has included a tightening bias, warning Canadians that rates would soon rise. That bias was removed from BoC Governor Stephen Poloz’s recent report. Instead he is planning to hold the overnight interest rate at these low levels at least into 2015. The reason? Low inflation and a slow economy.  Inflation is sitting just above 1% (the BoC likes it near 2%) and annual economic growth is limping along at 1.6%. 

In the late Spring, it looked as if the end of these ultra low rates was near. The US FED had signaled it was going to slow down its Quantitative Easing (QE) of reducing its massive $85 billion dollars/month injection into the markets. Bond yields spiked approximately 80 bps shortly thereafter. This spike in yields led to an increase in fixed interest rates and a collective exhale at the BoC. After all, increasing rates would help to slow down the perceived overheating of the housing market.

At the same time, many consumers sitting on the sidelines saw the wave of increased rates coming and they 'bought forward'. This means they were potential buyers, but acted more quickly than they otherwise might have, to take advantage of the ultra low interest rates.

Just as the mortgage industry started to get comfortable with the recent round of increased mortgage rates, bond yields started to taper off – 40 basis points in fact -- over the past few weeks. If yields continue to fall, or even if they stay stable for a period of time, there may be some reductions in fixed rates yet again. And while this is welcome news for many, it is concerning for officials in Ottawa.

Also, variable rates are near prime-0.50% and the trend is towards bigger discounting. Now that the BoC has said there won’t be an increase until 2015, variable-rate mortgages will likely become more popular.

Since the BoC has not been able to raise rates nor curb spending in the housing market – sales in many markets continue to grow and house prices continue to rise. One way the Government can control the housing market is by making changes to the mortgage guidelines, so we might get some rule changes again.

In a meeting with private sector economists, Finance Minister Flaherty said he was not intending to interfere with the housing market "at this time." That would imply that he is not going to make any changes just yet.  What we have learned over the past five years is that "just yet" certainly means "it may be coming sooner than you think."

If, and that’s a BIG IF, the government believes that home prices are continuing to escalate out of control, and the housing market is overheating, it may act. What is holding them in check right now seems to be the notion that the market has 'bought forward’.  This may have caused a positive blip in housing activity in recent months.

Over the next few weeks we will have to pay close attention to housing market activity in Canada to see if it is indeed tapering, and also have to watch the impact if fixed interest rates do drop. In this respect, lower rates may not be such a great thing because we could be facing a fifth round of changes.  The talk on the street is if there are changes coming, it might be capping amortizations on conventional loans to 25 years, similar to high ratio loans.
We will wait and see.

The U.S debt ceiling and Canada

There’s lots of talk south of the border as the deadline to raise the debt ceiling looms. Many Canadians are scratching their heads wondering what the heck it all means and should it matter to us. It’s a good question but the answer is complicated. 

Raising the debt ceiling allows the U.S Treasury to borrow more money to fund the business of government. Right now the government is in a partial shutdown, meaning many programs including social programs have stopped operating and workers have been sent home.  Not raising the debt ceiling means the U.S. Treasury will run out of money and won’t be able to cover its bills. If that happened, it would be a historical first.

No one really knows what would happen next. Some liken it to the Lehman Brothers collapse in 2008 that sent the U.S. economy into a recession, with global consequences, only this time it would be far worse.

 “A default would be unprecedented and has the potential to be catastrophic,” a U.S. Treasury report said. “Credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”

That’s not good.

The U.S. debt limit came into effect in 1917 to help Congress pay for World War One. It has been raised periodically to cover any shortfalls in government spending. In 2011, the Tea Party Republicans refused to approve raising the debt ceiling unless certain spending cuts were made – this time the impasse is about Obamacare.

Financial experts suggest that if the debt ceiling is not raised and the U.S. government defaults, the first thing that might happen is that investors will lose confidence and stock markets will fall, not only in the U.S., but globally as well. Borrowing costs will increase and economies will slow down. But those same experts agree that U.S. Congress will likely stop bickering and make concessions to avoid default. 

Last week, President Obama held a press conference sending a message to Congress on how ridiculous it was to keep their “no deal” stance. U.S. business and U.S. markets have sent loud and clear messages to Congress to not push the country to the brink of default. The Republican Party is now viewed favourably by only 28% of Americans, down from 38% in September. This is the lowest favourable rating measured for either party since Gallup began asking this question in 1992.

A  Globe and Mail article on October 16, 2013, questioned if even having a debt ceiling was a good idea. A University of Chicago January survey of U.S. economists found that a majority strongly agree that “a separate debt ceiling that has to be increased periodically creates unneeded uncertainty and can potentially lead to worse financial outcomes.” 

The reason economists don’t like it is because of how much it sets back economic growth worldwide.  Central Banks around the world are already making contingency plans.

Tomorrow, October 17 is deadline day. When one country is a powerhouse for global economic growth and is vulnerable to the whims of one small sector of its constituency, then perhaps the economic model needs to changed.

Can you afford to buy a house?

With rising interest rates, overvalued real estate and a lackluster economy, are first time home buyers and average income households being priced out of the housing market. Perhaps. Now that five-year fixed rates have increased two-thirds of a percentage point or more – up from 2.89% to 3.79% -- in the past month, first time buyers may find their dream of owning their first home out of reach, for now.

It was getting tougher to qualify for a mortgage when the government made changes to the rules, but now it seems to have solidified with the recent rate increases. There are other challenges as well. When qualifying applicants lender look at ratios to determine the percentage of household income that is allowed to go towards housing costs – that ratio is approximately 32%. The average non-mortgage debt load is approximately $28,000.

So, let’s say you have an average income of $70,000, your credit score is in the 700s, which is good, and your debt load is $28,000. You are looking for a modestly-price home because you don’t want to be house poor and have managed to save $15,000, which is 5% of a $300,000 home.  At the current 5-year fixed rate of 3.59%, amortized over 25 years – you don’t qualify. If we could amortize over a longer period, which we could a couple of years ago, then your housing costs ratio would fit, but your total debt, which includes your housing costs and all your other debt would disqualify you.

What could you afford? A mortgage of $213,000.  Depending on where you live in Canada -- that may not be an option. An affordability review of the real estate market across Canada by RBC shows that, nationally, the condo market is affordable with housing costs approximately 28.1%. However, costs for two-storey houses eats up to 48% of household incomes, with Vancouver coming in at 87.2%, Toronto and Edmonton at 62.7%. The most affordable cities have housing costs at 34.4%. The most interesting finding is that these affordability numbers have been pretty much the same since1985. Although Vancouver and Toronto are above their long-term affordability averages, those averages have always been above 32%.

So what can you do? There are options – paying off debt is the big one. A mortgage professional will be able to guide you, offer you options and devise a plan to help you achieve your dream of home ownership.
What will happen next in the housing market? No one can predict that, but some analysts believe that prices will start coming down. They also believe the economy will start to grow again next year as the world economies finally emerge from a prolonged recession. That would be welcome news for Canada, where growth has stagnated. It would mean better job prospects and higher earnings and a thriving economy.

Mortgage rates may not go down, but higher earnings, and less debt means you will be able to afford the house of your dreams.

Rising interest rates and your mortgage

By Mark Kerzner
President, TMG The Mortgage Group

Over the past few years it seemed every expert was telling us that interest rates would be rising, but after years of record low fixed rates, I think many of us stopped believing the headlines. 

With bond prices dropping and yields on the rise, those rates (fixed-rate mortgages) that are tied to bond yields have shown dramatic movement over the past month. For the most qualified, the rates on 5-year fixed mortgages have increased from a low of 2.89% to 3.59%, and are potentially still rising.

The term, “jumping on the band-wagon” now comes to mind. We see it most often with professional sports teams, fads, and sometimes even with politicians. It seems we may be seeing it in the mortgage industry as well. In the past week, I’ve read a number of articles speaking to the virtues of variable-rate mortgages.


Are variable-rate products quickly becoming the better option?

Do you remember the days of 5-year adjusted rate mortgages (ARM) priced at PRIME – 75 or even PRIME – 90? If you were fortunate enough to have one of those products and stayed with it over the course of the term, you’ve come out a winner. Since the last PRIME – 75 funded approximately four to five years ago, those rates have become extinct and now those clients renewing their mortgages have a choice to make.

Should they renew into a current ARM product at PRIME – 40(ish)or take the security of a fixed-rate term in the fear that rates will continue to rise?

Economists are predicting the Bank of Canada will hold the overnight rate steady into 2014. That said, take these predictions with a grain of salt as many of those same economists had already called for increases back in 2012 and 2013. Economic conditions change and so do outlooks and forecasts.

When looking to determine if there will be interest rate shock it’s important for mortgage renewers to consider not just their current effective interest rate, which may be PRIME – 75 or 2.25%. Rather, focus on what the rates were at the time the mortgage was funded when PRIME was 4.75% (August 2008) to the current rate options. 

In many cases there will be no shock at all, especially if clients took advantage of hold-the-payment options while rates started to decrease. For example, the effective interest rate and payments set at the time of funding was 4% and current 5-yr. fixed mortgages can still be had at the 3.39 to 3.69% range.

Relatively speaking, variable-rate mortgages are cheaper today at PRIME (3%) – 40 than they were five years ago when they were at PRIME (4.75%) – 75.  The spread between fixed rates and variable rates is sometimes referred to as the “rate premium” or even “fixed rate insurance” and is a good evaluator of the attractiveness between fixed and variable.

This time, five years ago, that spread was approximately 150 basis points (5-yr. fixed rates averaged 5.50%). Today that spread is around 100 basis points. If that spread grows, variable-rate mortgages will again become more attractive compared to their fixed-rate counterparts.

Before making any final decisions keep in mind two last items. First, in late 2008 both fixed rates and PRIME were dropping. Today, PRIME is remaining flat for the time being while fixed rates are rising.  Second, credit and lending guidelines have changed significantly in the past five years.

Today’s borrowers are better qualified and have fewer opportunities to defer interest costs using extended amortization and lower down payment options.  Those who are willing to take the additional risks of variable products are better equipped to do so than those in the past even though the risk premium is effectively higher than it was five years ago. 

That said, our rate environment today compared to August 2008 is quite different since both variable and fixed rates do not seem to be dropping. To really understand the best option, it’s best to discuss these factors with a dedicated mortgage broker. He or she will review the various products available and can help clients select the best one that fits lifestyle and financial goals.

Understanding the impact of these rising rates

It is possible that rising interest rates are here to stay, but I think it is important to ask the question: Is it just a blip or a trend? For those who believe it is a trend, here are a few important factors to keep in mind in a rising interest rate environment:

1. Affordability. According to its latest quarterly report, RBC says its affordability index reversed course, meaning housing has gotten relatively more expensive, in two of the three categories it measures. Mortgage rates in isolation don’t mean very much. What is really important though is how much your payment is relative to your income.

2. More people will select variable even though they still must qualify on the artificially-set benchmark rate. This is simply a reality of the mortgage business.  I see this trend continuing as long as the Bank of Canada does not raise its overnight rate.

3. Reduced demand for housing may result in lower home pricing. If affordability does become an issue, and more potential buyers are forced to the sidelines, then fewer people will be looking for houses. Economics would then dictate that with fewer people looking and supply remaining constant, this would lead to falling home prices.

4. Short term rush into the housing market for those sitting on the fence.  The flipside to point #3 above is that there are a great many people who have been looking at purchasing.  Rate increases might trigger buying activity out of concern that rates will keep rising and they may be priced out of the market.

5. If rates are on an upward trajectory make sure you get pre-approved with a rate hold as soon as possible. Fixed rates may be on the rise but you can often protect yourself against major increases, on a short term basis, with a rate hold.

6. If rates continue to rise and you originated your mortgage at your bank branch you must shop your mortgage at renewal.  There may be thousands of dollars at stake. This topic has been covered numerous times and there are many tips to be had. (http://blogger.mortgagegroup.com/2013/06/save-at-renewal-time-by-using-mortgage.html)

In the end, market volatility breeds uncertainty but it also brings opportunity. This is an ideal time to talk mortgage strategy with your mortgage professional.  The strategy is vital and is, in many respects, more important than the rate.

It may be time to consider the variable rate or, from a historical context, it may be a great time to consider locking in to a fixed-rate product.  Either way, it’s up to you to be proactive and seek out advice.

What’s happening with interest rates?

Interest rates are on the rise.The Big banks have been inching up their rates since May, but have now moved quickly to 5-year fixed rates ranging from 3.79% or 3.89%, which is a 60 basis point hike from what they were six months ago.  The 5 year bond yields have themselves increased by 80+ basis points since the Spring.

However, variable mortgage rates and the prime lending rates are not increasing – yet. So, if you have a line of credit, your rates are staying the same.  If you have a variable mortgage rate or an adjusted rate mortgage (ARM), you’re safe for now.Only fixed mortgage rates are increasing.If you are renewing a mortgage, this is where you’ll likely feel the impact.

If you opted for a variable rate mortgage, today’s variable rates are, on average, around 2.65% compared to 2.1% five years ago. However, 5-yr. fixed posted rates were hovering around six per cent in 2008, but a mortgage professional could get a discounted rate from 4.2% to 4.9%. As fixed rates rise and the Prime rate stays put, now may be a good time to speak with a mortgage professional about the benefits of going variable.

But if banks follow RBC’s lead, then it will be tougher to qualify for a variable rate. The Royal Bank not only increased its fixed rates but also its benchmark rate for qualifying borrowers for variable rates and for fixed rate terms less than five years. The increase is a 20 basis points jump, from 5.14% to 5.34%, which means a household will need approximately $1,100 more income to get a variable-rate mortgage on a $300,000 house with 5% down.

This is also not a good time to wait it out, thinking that rates will come down as they have in the past. It may not be the case this time. Consumers have been getting the message about curbing household debt and have become better money managers.The housing market is showing signs of life and house prices are stabilizing. The economy is moving forward and low rates are just not sustainable anymore.

Fixed rates rely of bond markets. Bond yields are climbing higher so fixed rates climb right along with them. In June, the 5-year yield was up as much as 20+ basis points in less than 48 hours, driven by optimistic economic comments from the U.S. Fed. In CIBC’s Weekly Market Insight for July 12, 2013, chief economist Avery Shenfeld said, “As we move into 2014, better growth will see the Fed accepting a further climb in long rates.”

Stephen Poloz, the new Governor of the Bank of Canada said he would be holding the prime rate at 1 per cent. This is the number banks use to determine their lending rates for lines of credit and variable-rate mortgages. Poloz also added, “Over time, as the normalization of these conditions unfolds [growing economy], a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2-per-cent inflation target.”

That’s a nice way to say that rates will be going up. When is hard to predict,  but all indications are for early-to mid 2014.

Housing market breathes again

After months of somewhat depressing news for the housing industry, Canada’s housing market is showing signs of life. The buzz now is about a soft landing rather than a bubble bursting. Demand has increased in most parts of the country and new construction activity is increasing. Home prices are rising as well.
Despite warnings from analysts about a housing bubble, housing-market data are showing few signs of a sharp correction. A housing bubble is a type of economic bubble that occurs periodically in real estate markets,  characterized by rapid increases in valuations of housing until they reach unsustainable levels and then decline.

Minister Jim Flaherty tightened mortgage rules for a fourth time last year, concerned that an overbuilding of condos could lead to sharp price declines. Former Bank of Canada Governor Mark Carney identified record household debt as the biggest domestic risk to the economy.

However, our low interest rate environment has kept any bubbles or sharp corrections in check.  Now, the impact of Flaherty’s changes seems to be fading.

Households that put their purchase decisions on hold because of the stricter deadlines are now becoming more active. The latest data from Statistics Canada show that the number of homes changing hands is relatively steady, after a period of steep year-over-year sales declines. Even condo developers, who scaled back their activity, seem to be jumping back in. 

Even the Canadian Real Estate Association (CREA) has updated its forecast for home sales activity. May's sales were up 3.6 percent from April, a sign of momentum and the largest month-over-month increase in almost two and a half years. However, affordability may continue to be an issue as home prices tick upwards.

Benjamin Tal, deputy chief economist with CIBC predicts that prices will go down in the next year or two, but not by much. “Prices have held up so far because, as demand has fallen, so has the number of homeowners listing their properties for sale, Tal said in an interview with the Globe be and Mail. “I do not see smoke. I see a boring, slow process over five to seven years that will take fundamentals and prices back in line.”

All the signs point a recovery in the housing market and consumers are deciding to move forward with their purchase intentions. It’s a great time to discuss options with your mortgage professional who can help you navigate the waters of interest rates and mortgage products to find something that fits your financial goals.

Renegotiating your mortgage agreement

It’s a familiar story. You buy a house and lock into an interest rate for a five-year mortgage term. Then something changes in your life midway through the term and the current mortgage doesn’t meet your needs. Or mortgage rates have gone down substantially and you would like some interest rate relief, so you consider renegotiating the mortgage agreement. However, there will be a cost and that cost will most likely determine whether you renegotiate or not.

The first step is to decide what your new needs are. Do you have to move because you’ve been transferred? Do you simply want to renegotiate to get a lower interest rate to ease your monthly payment? Do you need to make some significant home improvements? Have you accumulated debt and would like to consolidate? 

If you opted for a variable rate mortgage, the prepayment penalty may be the least costly. If, however, you opted for a fixed rate, the calculation is a bit more complicated. And different lenders offer different terms and conditions.

Here’s how it works. There are two types of mortgages – fixed and variable-rate mortgages.  For the most part, variable-rate mortgage charges are three months interest. Fixed-rate mortgages have different rules. They use the interest rate differential. Different lenders have different ways of making this calculation but basically it’s the lost interes,t calculated at the current contract rate, minus the market rate at the time the penalty is calculated, for the remaining term.

If at the time of the calculation, the market rate is higher than your contracted rate, then the lender will only charge three months interest penalty. After all, the lender stands to make more money at the higher rate.  However, if the rate is lower, then you get hit with the rate difference.

Some lenders are pretty clear with their calculations, others however are not.  You’ve no doubt heard about penalty fees in the thousands of dollars. Here’s how that happens. Let’s say you have a contracted five-year rate at 2.99% but you want to break it in the second year.  Some lenders won’t use that rate to calculate the differential but will use their posted rate, which is substantially higher.  A posted rate of 5.14 per cent, for example, would create an interest differential of 2.15 per cent. If your mortgage is in the $300,000 range, then the penalty will be in the $10,000 range. That’s a hefty sum.

There are also options to help reduce those prepayment charges. Many mortgage agreements allow you to prepay a certain amount without triggering a charge. You might consider prepaying a portion of the mortgage before renegotiating so your charge is calculated on the balance. But beware; some lenders have rules on how close to the date of renegotiation you can make those prepayments.

If you’re renegotiating because you’re moving, you can avoid prepayment charges by porting the mortgage, which means you take your existing interest rate, terms and conditions to your new home.

If you’re renegotiating to take advantage of lower interest rates, some lenders will allow you to blend- and-extend the mortgage until the end of the term. Your old interest rate gets blended with the new term’s rate. You will probably get charged an administration fee.

There may be benefits over the long term to renegotiating your existing mortgage if it fits with your overall financial goals. It’s always a good idea to get advice from a mortgage broker who can offer options and solutions.

Insights from the poker table

By Mark Kerzner, President, TMG The Mortgage Group Inc.

After writing a series of blog posts on interest rates, credit guidelines and the mortgage industry, I ventured out a while ago and shared my personal experience as a hockey coach (http://blogger.mortgagegroup.com/2013/05/business-lessons-i-learned-as-hockey.html). I appreciate the feedback I received and was encouraged to post again of a more personal nature. As always I welcome your feedback and comments.

I have long since been a fan of poker. A number of years ago I became a part-time student of the game, Texas Hold-Em, to be specific. I like the combination of playing the cards I was dealt and playing my opponents at the table. I liked the strategy and the math – calculating both my odds as well as pot odds, which is simply the amount that I would have to bet divided by the amount that was already in the pot. At that point I decide if my pot odds are worth it with respect to my odds of winning a hand. I like the thinking, the interaction and the winning --though that part has been few and far between. 

How many times have we all heard sayings like "life is too short" or “you have to live for the moment"? After years of having, and finding, excuses I finally decided to go "to the show" and play in one of the World Series of Poker (WSOP) bracelet events.  I have played some small tournaments and regular games with friends but I always wanted to play in a WSOP event.

The World Series of Poker along with World Poker Tour (WPT) are probably the best known tournament events. The WSOP Main Event takes place each year and has more than 8,000 participants putting in $10,000 each. The event I played in was NOT the main event but it was a bracelet event nonetheless. There were approximately 2,300 participants in the event I played in. The winner, Chris Dombrowski won $346,332 for his efforts. 

Sure, the money involved in winning would have been great, but truthfully, I wanted to play for the experience. I wanted the opportunity to sit in a tournament with thousands of other would-be poker hopefuls trying my luck at the tables with both amateurs and professionals alike.

Over the past ten years or so, poker has become much more mainstream. We’ve had the opportunity to watch the game being played on television and we get to peak at the hole cards.  We’ve become familiar with names such as Negreanu, Brunson, Hellmuth, and Esfandiari. As amateurs we have the opportunity to play with these pros. Other than an occasional golf pro-am I can't think of many other sports (ok, insert laughter here … poker is a sport?) where a casual player gets to play alongside a professional with a chance, albeit very slight, at a great run. Simply put, I had that opportunity and I had to take it.

In the end I was pleased with my play though I was knocked out on my third all-in mid-way through Day 1 with what some people are telling me was only a marginal hand --pocket 10s, short stacked, fifth to act, and one raiser ahead of me. More than that, I loved the experience. I will return, but I will also keep my day job.

 Speaking of my day job, similar to my poker play, I often look for insights for how I can keep improving. When the cards are not coming your way there is an opportunity to practice patience. There are also opportunities to “make your own luck.”  As with poker there are ups and downs in our industry with rates and guideline changes and lenders entering and leaving the marketplace. It is vital to stay focussed. Sometimes when others are becoming more passive there is actually an opportunity to act and invest.

That’s why I am so passionate about mortgage brokers and the mortgage industry. Regardless of the hands they are dealt with respect to credit guidelines, mortgage restrictions, and intense competition from bank branches, they are steadfast in their direction, ensuring that the best interests of the clients are handled first.

Reviewing the relationship of interest rates and bond yields

By Mark Kerzner, President, TMG The Mortgage Group Canada Inc.

It has been said in the past that when the US sneezes Canada is very likely to catch a cold. That reference shows just how intertwined the Canadian economy is with the US. For a number of years since the start of the great recession Canada has lauded itself for its performance in the wake of extreme economic weakness in its G8 counterparts, including the US. At this time however, we seem ready to be bracing for that head cold again.

Economists are starting to forecast an economic rebound in the US beginning later this year and in to 2014.  Unemployment rates continue to drop, housing prices are starting to rebound and given what we have all learned regarding the "wealth effect" we know that when consumers feel richer they start spending. The overall economy looks like it is growing with GDP forecasts in the US now above 3%. Given this US economic optimism the FED has signalled it is going to stop purchasing $85+ billion a month in US Treasuries and Mortgage Securities (some of you may have seen this referenced as Quantitative Easing (QE)).  Note: they have not said they are stopping the capital injection, just that at some point in the future they are going to. This has the markets concerned about inflation along with economic optimism are driving yields higher.
Here is a quick refresher with respect to bond yields

• Bond yields are set like many other prices - by the forces of competition between supply and demand. One relationship to note is that as prices go up, yields go down (and vice versa).
• If there are more investors wanting to deposit their savings for 5 years (purchasing 5 year bonds) the 5-year bond yields will tend to drop
•  Bond yields will tend to increase if investors expect inflation to increase or an economy to be strong.  This happens because investors want to ensure their funds do not lose purchasing power over time
• On average, the 5-year bond rate has declined over the past 15 years.

The bond market is a good gauge for the establishment of mortgage pricing. Most financial institutions, regardless if they are selling in the MBS, CMB, etc will still use the spread between bond yields and mortgage rates as a means of establishing pricing. The historical correlation between the bond and fixed mortgage rates is over 90%.

 

And while we know there is a very strong connection between bond yields and mortgage rates what has become increasingly unclear is the spread that financial institutions are expecting to make these days. So while we can usually determine the direction of rate movement, the magnitude of those movements are somewhat harder to predict.

 

On May 1st 5 year bond yields were 1.15% - 5 year rates were 2.89% to 2.94%

On May 17th they were 1.32% - rates remained fairly stable. There were a few quick close promotions that ended.

On June 6th they were 1.42% - rates had begun to creep up and were in the 2.94% to 3.04% range

On June 19th they were 1.55% - 5 year rates continued to creep up and were in the 3.04% to 3.19% range

Today they are sitting at approximately 1.85% and we are hearing of more impending rate increases - some as high as 3.39 to 3.49%.

 

Between May 1st and today bond yields have increased by approximately 70 basis points while pricing has only increased approximately 50 to 60 basis points. That means that either there are going to be further rate increases or lenders are prepared to earn smaller spreads during this Spring market.

 

Brokers and consumers alike have all enjoyed these historical low rates as well as a prolonged period of stability (of interest rates). Now with bond yields starting to spike what does this mean for rates and where will it all net out? That is the million dollar question. If you believe that the FED will hold true to its word and stop purchasing billions in Treasuries and Mortgage Securities, the US Housing market will continue to rebound, and global economies will strengthen thereby purchasing more exports than yields will keep climbing. If on the other hand you feel that we are still not out of the words with respect to a global economic crisis and thereby a prolonged US recovery we may see some relief from this latest upward yield pressure.

 

In the meantime, the "insurance" spread of taking a 10 year term has narrowed considerably and should be considered for some, especially where payment security is sought. On the other hand, the discount of ARM to 5 year fixed (the difference in rate between a discounted variable product against a 5 year fixed) has also grown, meaning for some who feel that although yields are rising, the Bank of Canada is likely to leave the overnight rate alone for some time to come, should consider a discounted ARM.

 

We are experiencing more market volatility than we have become used to in the last little while. If it continues, and I suspect it will, we will see more regular rate movements than we have in the past 6 months or so.

 

Save at renewal time by using a mortgage broker

Consumers are becoming much more informed about mortgages and mortgage products before taking the plunge into home ownership. According to the Canadian Mortgage and Housing Corporation’s (CMHC) 2013 Consumer Survey, 70% of buyers researched terms and conditions, 60% discussed the pros and cons of various mortgage products with professionals and 59% compared interest rates.

Because consumers are highly engaged, they are more confident about their mortgage decisions, according to the survey. Still, with all that research, more than half contacted a mortgage broker to get further clarification. This is a good move, considering how much the mortgage rules have changed over the past few years.
The survey also found 81% of buyers were totally satisfied with the experience with their brokers and would most likely use that broker again. An overwhelming 75% would highly recommend their broker to family and friends.
A study recently released by RBC Economics found that low mortgage rates have helped make owning a house largely affordable in the first quarter of 2013, with low risk that rates will move up sharply.  It’s likely that this low interest rate environment will go on for the next two years. 

The year 2008 was one of the biggest years for mortgage originations in Canada. That means a large percentage of those mortgages are now maturing. Discounted variable rates were popular and those discounts no longer exist, so those mortgage holders will be facing increased mortgage costs.  For most homeowners, their biggest monthly expense is a mortgage payment. Yet the CMHC survey found that 39% of households automatically renew their mortgages when the term is up instead of trying to find a better deal.

When you’ve done your homework prior to purchasing a home, it only makes sense to do as much research at renewal time. Quite often the renewal rate offered to you by your lender is higher than the market average.
There may also be material changes in your household. Perhaps you’ve started a family, or one of you has been promoted.  This is another good time to contact a mortgage broker to review your financial situation and see what makes sense for you to do.

Here are some tips to make sure you’re getting the best mortgage product for you:

• Get going early. Contact your mortgage broker four to six months ahead of renewal time. Most lenders will guarantee a discounted rate for four months but your renewal agreement is usually sent only 30 days ahead of your maturity date.
• Do your homework. Let your mortgage broker shop the rates for you and get you the best deal, tailored to your particular situation. If you decide to switch lenders, there are no penalties at renewal time.
• It’s not always about interest rate. Don’t fixate on rate. There are other options that may appeal to you such as changes to amortizations or changes to the rate type. 
• Let a broker negotiate on your behalf.  If you don’t like negotiating and don’t have the time to do the research, your mortgage broker will do the legwork for you. Homeowners who use a broker at renewal time usually pay less than those who don’t use one.

Business Lessons I Learned as a Hockey Coach

By Mark Kerzner, President, TMG The Mortgage Group Inc.

In the past I have written a lot about lenders in the mortgage channel, interest rate forecasts, mortgage guideline changes and the impact of those changes in the industry. With this post, I'm taking a completely different approach. Today, I want to share with you a recent personal experience coaching my son's hockey team and the lessons he taught me about business.

My seven-year-old son loves hockey and I am at least partially to blame. Truthfully, I couldn't be happier. He teases me with his love of the Vancouver Canucks and Pittsburg Penguins but I believe deep down he is a die-hard Toronto Maple Leafs fan, just like his dad.

Last year was his first in organized hockey. It was a traumatic experience for both parent and child. Evan was not the best player in the league. In fact he was close to being the worst (only a parent can say that). During opening weekend he didn't even want to go onto the ice because "my equipment is hurting me." So without even his first fall on the ice he was already in pain. Yikes!

When he finally did get on the ice it was mostly down and up… okay, it was really only down -- he had a really hard time getting up. Even getting to practice was a chore. It wasn't a lot of fun.

For a hockey-mad parent, dreams of future NHL stardom quickly evaporated. Then the trauma started. My son was traded. Not only did he have to change teams but was traded for a really great player. While his previous team graciously welcomed their new goal-scoring sensation, Evan was left to fill the proverbial skates of one of the best players on his new team. He even had to don his jersey and adopt his number.

While he took it in stride and was happy to move instantly up the standings with his new team, I on the other had didn't. I couldn't understand how you trade one of the worst for one of the best. I couldn't understand why I wasn't consulted. Did I mention though that he totally took it in stride? He also improved. He finished year one at 0 goals and 3 assists.

This year I vowed things would be different and I took matters into my own hand - literally. I decided that I would coach my son's hockey team so that a trade was out of the question. I was paired with two other amazing coaches and then the seeds of change were planted.

Our team started off weak but we encouraged the kids to do their best while instilling some basic fundamental skills - shoot the puck up the boards!  We won only four games in our first four months. Then the magic happened.

The kids were having fun and so were the coaches. They started to play like a team. They started to support one another. And more than anything else, they started to commit. They were working hard during games and in practices. This was rubbing off on my son as well.

Evan scored his first ever goal while I was away on business. I was devastated - I wasn't sure when the next one would come, but then they did. By the end of the year, Evan was fifth in team scoring with 10 goals and 17 points (he had 1 goal and 2 assists mid-way through the year).  His coaches and his dad were really proud. More importantly, so was he.

But more than that, his team, which finished the year as the 7th overall seed and went 6-1-1 down the stretch, got to play in the Championship Game.This was an incredible experience for me. I was so proud of the team. I was so proud of my son.

The odd thing with this experience is that, as coaches, we are supposed to teach our players. The parents reinforced that with end of year support for our efforts. However, it was really the team who taught the coaches a whole lot more.

 
Lessons I Learned:

Be Positive and good things will happen.
We never got down in the dumps with our slow start.  We knew we would get better and we did.

Always keep (your feet) moving.
In hockey when you are stationary it is easy for someone to skate around you. In life that is true as well. Stay in motion and make things happen.

Working together as a team is far more effective than relying on a few star individuals to carry you to the end.       
That is as true in life as it is in sports.

Hard work pays off.
Our team committed themselves both in games and in practices as well. With sports, as with work, nothing is automatic. Becoming a success means dedicating yourself to constantly becoming better, to understand the market, the guidelines and the opportunities so that you can best serve your clients unique needs.

Protect the ones you love.
OK, I know the right answer is to give the ones you love support and slack to find their way. Give them encouragement, put them in an environment where they can and will thrive ..but truthfully, I do think that it’s okay for a parent to want to protect a child, especially if it is in light of wanting to provide them with an environment where they can thrive. Sometimes a parent really does know best.

I also think it is okay from a business perspective as well. You do this for your customers on a regular basis -- you assess their needs and make recommendations that are supportive and realistic. At the end of the day you are the expert and the voice of reason. 

By the way, we lost the Championship game in a very hard fought battle.

Employer of Choice for TMG The Mortgage Group Canada Inc.

(Toronto) TMG The Mortgage Group Canada Inc., took home The Employer of Choice Award at the Canadian Mortgage Awards on Friday, May 10, held at the Liberty Grand in Toronto. TMG is the first brokerage in the past five years to win this award.

It has been an exciting year for the 23-year-old company. In November of 2012, TMG was named the Best Companies to Work for in B.C. at an Awards Gala the Fairmont Hotel in Vancouver. Also in November 2012, TMG was honoured with The Canadian Association of Accredited Mortgage Professional’s Partner in Excellence Award at its annual conference.

 “It was truly an amazing moment when TMG The Mortgage Group was announced as the winner,” said Mark Kerzner, President of TMG. “This reward recognizes the "family values" culture that founders Debbie and Grant Thomas have fostered.”

TMG is recognized as a caring, innovative, company that strives for mutual success.  “We continuously value the tremendous brokers, agents and associates who are part of the TMG family but at the end of the day this award is a reflection of the commitment, passion and dedication of our best –in-class employees. ”

Consider a mortgage broker first

By Mark Kerzner, President TMG The Mortgage Group Inc.

So what comes first - the chicken or the egg? In the real estate industry that question gets turned into the following -- if I am going to buy a house do I speak with my mortgage broker or Realtor first?

First of all, kudos if you knew that it’s vital to speak with both a mortgage broker and a Realtor when you’re thinking about buying a home. Some will choose the simpler and often more ineffective path of trying to sell a house privately. Some will blindly walk into a bank branch to apply for a mortgage from a financial generalist.

TMG The Mortgage Group strongly encourages our clients to use a licensed Realtor for buying and selling real estate. They are experienced professionals who know your local market and can guide you through the processes of purchase agreements, deposits and conditions. TMG brokers work with many Realtors and will often refer clients to those who have proven to be exceptional and professional service providers.

As well, mortgage brokers often receive referrals from qualified and valued real estate agents and we are grateful for those relationships that we have developed. Those Realtors know that mortgage brokers are professionals, just like they are, and who are experts in their fields. Furthermore, they know that successfully removing financing conditions on agreements of purchase and sale are vital to completing the real estate transaction.

Consider your own experience with the professionals in your life and those you turn to for advice. In my own experience, I think the following:

• I trust my accountant implicitly. He understands my financial health and goals. From time to time I ask him if he knows a good life insurance broker, financial advisor, etc.
• I trust my circle of friends. Many of us went to school together, hang out, do business together, have fun, etc.. Some are lawyers, accountants, entrepreneurs, Realtors, teachers, and I refer people to my circle of friends whenever I can.
• I trust my referral sources and lender partners. They understand that our purpose is to provide access to choice and unbiased advice, leading to the most appropriate mortgage financing solutions for your unique situation.

What is still a little unclear to me though is why more home purchasers and sellers do not go to their mortgage broker before doing anything else. Just as Realtors are uniquely equipped to refer clients to mortgage brokers, so too are mortgage brokers with respect to Realtors.

 On HGTV’s Property Virgins, the host begins by confirming that the house hunters on the show have been pre-qualified for a mortgage so they can determine the price range of the houses worth looking at.  At that point they can start their housing search.

Even if you’re selling, consider speaking with your mortgage broker first. Here’s why it makes sense. If you’re selling you may be buying as well. If you’re “moving up” to a larger, more expensive home, then you will need to know what you qualify for. If you have a mortgage and wish to pay it off you will want to understand penalty and breakage costs. Alternatively, you may wish to port (transfer your mortgage) with an increase or decrease to the mortgage balance. A mortgage broker can assist in all of these scenarios. 

Know where you stand. Know what you can afford.  Start your next real estate transaction with a conversation with a mortgage broker first.