Tuesday, March 17, 2020

Government, Monetary Policy and Fiscal Policy Reactions to COVID-19

By Mark Kerzner, President TMG The Mortgage Group

There was a second emergency reduction in the Overnight rate of 50 basis points on Friday, March 13 – to ensure market liquidity, and in response to the unprecedented economic impacts of the COVID-19 virus.  Many are anticipating yet another 50-basis points reduction that would bring the overnight rate to 0.25% in the near future.

Rates ultimately received by the end consumer are determined based on discounts or premiums from BANK Prime rates

One of the big questions following the latest emergency Overnight rate reduction by the Bank of Canada last Friday was whether or not Banks would follow suit with their PRIME rates and if so by what amount.

Yesterday afternoon it was confirmed that Prime lending rates are dropping but the price that new consumers will pay for variable based lending products may in fact be staying flat or potentially going up.  Discounts from bank PRIME of up to 1% appear to be vanishing. For existing variable rate and line of credit clients, your rates should be decreasing.

Just to reiterate, existing discounts for variable in-force mortgages are not changing.  Current discounts would related to new, renewing and refinancing mortgage clients who are choosing variable rate products.

After the Global Financial Crisis over a decade ago, variable rate discounts went from P-85 to P+100 almost overnight. One difference is that the ARM was a much more popular product a decade ago as the spread between it and fixed rate was much more pronounced. Today, the vast majority of consumers have been taking fixed mortgages, and are likely going to continue to do so.

Some have been asking questions about how is it now, that with the reduction in PRIME rates, are we seeing increases in mortgage lending rates.  As bond yields fluctuate (in part due to the oscillating markets) and liquidity premiums starting to dramatically increase, the cost of funds and the desired margins earned by lenders increases.

The Government and Regulators are using other fiscal policy stimulants to work to protect the economy as well.

To stabilize funding, the Government of Canada, through CMHC, announced yesterday they were buying $50 billion of insured mortgage pools.

OSFI mandates the rate of the Domestic Stability Buffer – a rate of capital that is set aside to safeguard against shocks in the system. Over the past few years that amount has continually increased.

It was less than a year ago in April 2019, that the Big 6 banks were required to hold risk weighted capital of 2.25% against the backdrop of increasing indebtedness of Canadian households and increasing ‘vulnerabilities’ faced by those lending institutions.

Lowering the capital requirements to 1% increases the ability for banks to lend approximately $300B in freed up capital. This is largely anticipated to support small business loans, helping those firms meet immediate business and payroll obligations.

In the mortgage world one announcement that received attention on March 13th was OSFI suspending consultation on the minimum qualifying rate for uninsured mortgages. This means the previously announced changes to the Stress Test were now not coming into force. I can assume that OSFI and the Minister of Finance never likely imagined rates dropping this low and having people qualify at 4% (or lower) when they likely consider 4% to be a more normalized rate to begin with (and not a buffer rate).

For those with mortgages, it’s now very important to speak with a licensed mortgage broker to assess options you may have available to refinance, early renew, extend term, choosing longer term fixed rate products, etc.

For those of you in financial distress who are existing mortgage consumers you have a variety of options available to you. A mortgage professional can help you navigate that landscape with your current lender and potentially with your mortgage insurer as well.  Options may include, payment deferral, loan re-amortization, capitalization of outstanding interest arrears and other eligible expenses and special payment arrangements.

This situation is unprecedented and is requiring swift and significant action.

The Bank of Canada and the Federal and Provincial Governments are setting up defence mechanisms during this unprecedented global pandemic. Ensuring the financial system operates, protecting deposits, ensuring liquidity, and providing a means of support for business continuity are at the forefront.

A mortgage professional has always been best suited to guide you through your personal situation and to provide you with options worthy of consideration. That has never been truer than Today.

Saturday, March 07, 2020

Recent changes may be good news for homebuyers

We’ve had back-to-back changes recently in the mortgage world – one direct, one indirect. The benchmark rate used to qualify will change downwards starting April 6, 2020, and the Bank of Canada (BoC) just cut its key lending rate from 1.75% to 1.25%.

Two years ago, the stress test was introduced as a safeguard against rising interest rates, to make sure homebuyers would still be able to make their mortgage payments if their rate increased. To qualify for a mortgage, buyers need to qualify at the greater of 2% higher than the contract rate or the Bank of Canada’s average 5-year rate, which today is 5.19%.

Earlier this month, Minister of Finance, Bill Morneau, announced changes to the benchmark rate used to determine the qualifying rate for insured mortgages – mortgages with less than 20% down payment. This change will come into effect on April 6, 2020.

There has been mixed response from the financial community about this change. For some, the new qualifying rate will make it more affordable; for others, it won’t make much of a difference, especially in hot-market areas, where prices are rising quickly.

Then, on Wednesday, March 4, 2020, the BoC cut its key lending rate by 50 basis points, from 1.75% to 1.25%, which had an almost immediate effect on lines of credit and variable-rate mortgages -- banks dropped their prime rate from 3.95% to 3.45%.

This means that borrowing costs for mortgages, auto loans and other lines of credit are set to head lower. Consider a $400,000 mortgage on a 2.95% variable rate. The mortgage rate would shift to 2.45%, and mean about $100 per month in savings.

Why is this happening?
The interest rate drop comes on the heels of the US Federal Reserve’s decision to lower its rate by .50 points due to the global economic challenge posed by the uncertainty of the coronavirus that will likely affect domestic spending. The BoC’s rate cut of the same percentage took many by surprise – it was expected that rate would drop a quarter of a percentage.

There were also other yellow alerts prior to the coronavirus – a drop in global equity markets and in oil prices, created uncertainty in the financial markets. It wasn’t a stretch to think that the same drop in confidence would hit consumers as well. The BoC does not want to jeopardize domestic growth.

With regard to the stress test, there has been pushback from some economists and housing experts who say that the new stress test will just further fuel the housing market.

Here’s what we know about the stress test
  • Currently, the stress test for insured mortgages is 5.19% (the minimum rate at which homebuyers must qualify, no matter the actual contract rate.)
  • The new stress test, if it was in place today, would be approximately 4.89%.
  • The Big Banks will no longer determine the stress test rate. This is good news. Banks have been hesitant to cut their-five-year posted rates (which the stress test is based on). This has made it more challenging for borrowers to qualify for a mortgage.
  • Borrower’s will have slightly more purchasing power

Here’s what we don’t know
  • How it will affect the average buyer. This will depend on a variety of factors, including the location of the property being purchased. In smaller markets, the new benchmark could help affordability for some buyers – in larger markets such as Vancouver or Toronto, it may have little effect.
  • If it will affect home prices. More consumers qualifying for a mortgage may increase demand and put upward pressure on prices – there is still a shortage of properties available for sale.
  • The new benchmark calculation, as stated, is more flexible. If interest rates continue to fall, then, in many cases, buying power would also increase.

As always, time will tell how all this will play out and there is talk that the BoC will cut the rate at least once more this year.
What does this mean for fixed versus variable-rate mortgages?
Fixed rates are priced on the bond market, which have fallen quite dramatically since January, so it’s likely that fixed rates will continue to move lower.  Now, with the BoC rate cut, and the banks following suit by dropping their prime rate, variable-rate mortgages will also drop.
Many factors go into deciding whether to choose a fixed or variable mortgage, and it’s a topic to discuss with your mortgage professional.
For now, these changes could be good news for homebuyers.

Monday, January 27, 2020

Know Your Words – Mortgage Words, that is

Buying a home is a big investment. With so much at stake, it’s important learn what you can about the homebuying process as well as understanding the “language” of mortgage lending.

A recent survey conducted by the Financial Consumer Agency of Canada, and the Bank of Canada in 2019 suggested that homeowners don’t have a good understanding of the terminology used in mortgage lending. A large percentage -- 74% of homeowners or soon-to-be homebuyers -- did not fully understand what a mortgage term or amortization period were.

So, to help you better understand what you’re getting into, here is a partial list of terms to increase your mortgage knowledge.

  • Adjustable Rate Mortgage (ARM): A type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. The interest rate resets based on the lender’s Prime rate plus or minus a variance. With most ARM mortgages, different from VRM mortgages (variable rate mortgages) the mortgage payment adjusts automatically with each change in interest rate.
  • Adjustment Date: A date used by the borrower and lender to move payment dates to a schedule that suits the borrower. Between the funding date and the adjustment date, the borrower typically pays interest only vs. principal and interest.
  • Amortization Period: The number of years over which you have to repay a loan. The most common period is 25 years for a first-time homebuyer.
  • Benchmark Rate:  A qualifying rate set by the Bank of Canada and can be adjusted at any time.  All insured and insurable mortgages must meet the standard affordability tests (Gross Debt Service and Total Debt Service) “as if” the interest rate is the Benchmark Rate. Also referred to as a “stress test”.  Designed to ensure that borrowers and the housing market can sustain higher interest rates.
  • Bridge Financing: (Also referred to as Interim Financing) A loan against a property being sold allowing the owner to use their equity to purchase a new property and take possession of the new property before the Closing Date of the sale.  There must be a firm sale of the property being sold.
  • Closed Mortgage: A mortgage whose term cannot be altered until maturity, unless the lender agrees and the borrower agrees to pay a fee called a pre-payment penalty.
  • Collateral Charges: Unlike a standard mortgage, a collateral charge is often re-advanceable, meaning the lender can lend you more money after closing without you needing to refinance and pay a lawyer. A collateral charge may not be transferable -- it cannot be assigned (switched) to a new lender like a regular mortgage.
  • Deposit: Money placed under the care of a third party (real estate representative, lawyer or notary) by the purchaser when he makes an Offer to Purchase. The money is paid to the vendor upon closing the sale or returned if the conditions are not satisfied. This is typically held in trust.
  • Downpayment: The part of the home purchase money that is not paid out of the mortgage loan.
  • Equity: The total value of the owner’s interest in a property, calculated as the value of the home less the total outstanding obligations.
  • Fixed Rate Mortgage: A mortgage for which the rate of interest is fixed for a specific period of time (See term).
  • Gross Debt Service Ratio (GDS): The percentage of the borrower’s gross monthly income that is used for monthly housing payments (principal, interest, taxes, heating costs, and half of any condominium fees).
  • HELOC: A home equity line of credit (pronounced hee-lock) is a loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower's equity in his/her house. These are often re-advanceable.
  • Insurable Mortgage: This type of mortgage can now be considered the new “insured mortgage”. These are still eligible for default insurance but may be portfolio-insured at the lender’s expense or high-ratio insured at the client’s expense.
  • Insured Mortgage: A mortgage transaction where the default insurance premium is paid by the client, as is typical in a high-ratio mortgage. 
  • Interest Rate Differential (IRD): A compensation charge that may apply if you pay off your mortgage prior to the maturity date, or pay the mortgage principal down beyond the amount of your prepayment privileges, usually in a fixed-rate mortgage.
  • Loan-to-Value: The amount of the mortgage loan compared to the value of the property.
  • Monoline Lender: Monoline lenders focus on just mortgages as opposed to banks and credit unions which offer a variety of services. 
  • Mortgage Default Insurance: If you have a high-ratio mortgage (more than 80% of the lending value of the property) your lender will probably require that you purchase mortgage loan insurance, which is available from CMHC, Genworth Canada or Canada Guaranty.
  • Mortgage Life Insurance: Provides coverage for your family should you die before your mortgage is paid off. This insurance can be purchased through your mortgage professional.
  • Open Mortgage: Allows the borrower to pay any amount of the principal, including the entire balance, off at any time without penalty. You may pay a higher interest rate for the flexibility of an Open Mortgage, but perhaps warranted if a sale is anticipated or in the case of buying property to fix up and sell.
  • Portable Mortgage: A mortgage with an option that allows a buyer to transfer a current mortgage to a new property. (Subject to full borrower and property approval)
  • Qualifying Rates: The rate used to qualify a borrower for a mortgage. Lenders use these rates to calculate your debt-service ratio, which is the ratio between your debt and income. This serves as a gauge of your ultimate ability to repay the obligation over the life of the mortgage.
  • Stress test and Stress Test Rate: Similar to Benchmark Rate and used for uninsurable mortgages. The Stress Test rate is the higher of the contract rate plus a government defined increment, currently at 200 basis points, or the current Benchmark Rate. All uninsurable mortgages must meet the standard affordability tests (Gross Debt Service and Total Debt Service) “as if” the interest rate is the Stress Test rate. Designed to ensure that borrowers and the housing market can sustain higher interest rates.
  • Term: The length of time that mortgage conditions, including the interest rate you pay, are in effect. At the end of the term, the borrower (you) can pay off the mortgage or renew for another term. Mortgage terms can range from six months to ten years; the most common is 5 years.
  • Un-insurable Mortgage: These mortgages are not eligible for default insurance and apply to refinances, rental properties, stated income clients, and on purchases greater than $1M.
  • Variable Rate Mortgage (VRM): A type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan.  The interest rate resets based on the lender’s Prime rate plus or minus a variance.  With most VRM mortgages, different from ARM mortgages (Adjustable Rate Mortgage), the mortgage payment does not adjust automatically change with each change in interest rate.  The lender typically reminds you that you may adjust the payment by contacting them. 

Of course there are more, but these seem to be the ones that homebuyers often ask about. If you need clarification or have question, contact your mortgage professional.

Wednesday, January 08, 2020

Reduce your holiday debt

Happy New Year! As we enter this new decade, do you have some spending regret?  You promised to stick to a budget; you promised to scale down and have an old-school, back-to-basics, holiday. But some items were just too hard to resist.

Well, you’re not alone. Holiday spending has been ticking up over the past few years, according to a report from PWC Canada. While the 2019 numbers aren’t out yet, PWC predicted that holiday spending would be up 1.9% to an average of CA$1,593. Why? Canadians’ confidence in the economy and their own personal finances is up. And while a quarter of Canadians planned to spend more than they did in 2018, it’s younger shoppers who are leading the charge, with 42% of Gen Z and 35% of millennials bringing more joy to their world.

Every holiday season, many consumers reach their debt limit. And January is when there is a rise in bankruptcy filings and consumer proposals.

What can you do?

Here are a few tips to help get rid of that extra debt quickly.

Create a budget
Know where you’re at financially and start wherever you are. If you’re unsure of where to start, try a budgeting app. Once you know what you earn and what you spend each month -- it helps to see those numbers written out and itemized -- any monies left over can be used to pay off debt.  See what bills have high-interest rates, and pay those off first.

Change spending habits in the short-term
Put away the credit cards. Pay at least the minimum amount owed to avoid extra fees, but if you can, pay extra to get that debt down faster. Look at your other expenses and see where you can trim.  You can review your grocery budget; cancel subscriptions and/or put memberships on hold.

Find, or negotiate, a lower interest rate
Credit card interest rates can be notoriously high. Sometimes, if your payments have been current, creditors may be willing to reduce the rate if you simply ask. Your card company wants to keep your business, after all, and now is when competitors unleash their most attractive balance-transfer campaigns.

Get a game plan to pay off multiple cards/debts
If you’re still stuck with high-interest cards, list them in order of rates, highest to lowest. A reasonable approach is to attack the highest-interest cards first (making sure you pay the minimum on the other cards) and work your way down.

Consolidate debt
This doesn’t actually reduce debt but it can make monthly payments easier and if the loan has a lower interest rate than a credit card, then you’ll save dollars in the long run.  If you own a home, consider speaking with a mortgage professional for a way to consolidate debt.

Refinance Your Mortgage
Mortgage rates are lower than consolidation loans and the increase can be amortized over the life of the mortgage. If you think refinancing may work for you, contact your mortgage professional and review all your current debts.

Use your holiday bonus
If you got one, consider using it toward paying off debt rather than spending it on a vacation or other luxury purchases. I know, you worked hard to get it, but you’ll be less stressed in the long run.

Life insurance loan  
If you’ve been paying into a life insurance policy that has built up a cash value, check to see how much is available to you. You won’t be cancelling your policy but companies may let you borrow the cash that’s been accumulated.

Don’t despair, there is usually a  solution for everything.