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.