Interest rate increase has winners

Believe it or not, the recent .25% rise in the prime interest rate is an indicator of a healthy economy. Despite trade tensions, Canada’s economy looks to be weathering the tariff storm well, for now.

There is no doubt the Canadian economy is resilient. The country has weathered a few storms since 2008, but still chugs on – somewhat flat at times, but never stagnant. The focus of the Bank of Canada (BoC) is on stimulating the economy and keeping inflation in check. The inflation rate has been inching up and is now at 2.2%, still well within the Bank’s comfort zone. Maintaining low, stable and predictable inflation is key to fostering an environment where Canadians can prosper. 

There are many factors that contribute to rising interest rates. Since the economy has been in recovery mode for a while, it now makes sense the BoC would start raising the rate, given a few economic indicators.

One of the main indicators that point to a continued healthy economy is the job numbers. Without jobs, household budgets get tighter, consumer purchases slow down, manufacturers scramble to reduce inventory, which could lead to lay-offs, and bankruptcies rise. And job loss is also the leading cause of mortgage default.

In June, the economy added 31,800 positions. At the same time the unemployment rate rose to 6%, from 5.8% in May. The higher jobless rate is considered a good sign by analysts who see it as more people optimistic about finding a job.  Average hourly wage growth has maintained the same level as last month at 3.6%. 

What we don’t know is the effect of NAFTA negotiations and how an extended trade war will affect the economy. What we do know is how the recent increase will impact Canadians in the short term. 

First, the cost of borrowing will increase for customers with variable-rate loans and mortgages, but those with money in savings accounts and guaranteed investment certificates will benefit. When interest rates are low, there’s less motivation to save. 

The rate hike may also make Canadians think twice before adding to their debt loads. Canadians are carrying a record amount of debt -- $1.8 trillion and growing -- because of low interest rates. Hopefully, as rates rise, consumers will reconsider adding to their debt loads.

Seniors and retirees also benefit from rising rates. Seniors now have the opportunity to generate higher interest income, which may help them manage rising costs.

With people living longer, those with pension plans are in a better financial position against running out of money. 

The housing market is cooling a bit because of the new rules introduced this year, which may help affordability for future homeowners as the pressure to bring prices down grows. We are not seeing this happen yet in strong urban markets like Toronto and Vancouver.

There’s a fine line between interest rates that are too high or too low and how they may help one segment of our population and hurt another. 

While we have no control over interest rates, we do have control over our responses by thinking more carefully about our finances – our savings and our borrowing – so we’re not caught in challenging situations, no matter what the rates do.

How to prepare for rising interest rates

Over the past few years it seemed every expert was telling us that interest rates would be rising, and now after years of record low rates, the Bank of Canada (BoC) has started to raise them. The first increase was in July, the first in seven years from 0.5 per cent to 0.75 per cent, citing “bolstered” confidence that the Canadian economy has emerged from years of slow growth.

Canada’s largest banks matched the central bank’s move by raising their prime rates by a quarter-percentage-point to 2.95 per cent. Prime rates influence the cost of borrowing on floating-rate loans, including variable-rate mortgages, credit lines and student loans. It’s expected the BoC may continue to raise the prime rate incrementally over the next few months and into 2018.  However, economic conditions change and so do outlooks and forecasts.

Fixed-rate mortgages are tied to bond prices and yields and currently they are fairly flat. There is some talk about the impact of risk-sharing going forward in the mortgage market, but for now, all quiet of that front.

So, here we at a crossroads again when getting a mortgage. Do you take the fixed rate or the variable rate? And once again, the answer is – it depends.

Many home buyers choose a fixed rate because they know exactly how much principal and interest they pay on each regular mortgage payment throughout the term. However, when interest rates go down, they can’t take advantage of that to save money on interest.

Variable rates continue to be popular among home buyers, with fixed rates gaining favour because they continue to be relatively low. At this writing, a five-year fixed rate varies from 2.89% to 3.09% while a variable rate ranges from 2.2% to 2.6%.

A study of mortgage data from 1950 to 2007 found that by choosing a variable rate mortgage, Canadians saved $20,000 in interest payments over 15 years, based on a $100,000 mortgage. At that time, homeowners were better off with a variable rate mortgage than a fixed rate mortgage 89% of the time.

In today’s market variable and fixed rates do not look as if they’ll be dropping.  It is possible that rising interest rates are here to stay, but it’s important to ask the question: Is it just a blip or a trend?  Time will tell.

In the meantime, it might be prudent to prepare for rate increases this year and through 2018.  Here are some suggestions:

• Lock in your mortgage.  When prime rates start rise, variable-rate mortgage holders may be vulnerable. This is a personal decision and is based on your risk tolerance. At minimum, consult your mortgage broker to find out what works best for you.
• Don’t commit to long-term GICs. It doesn’t make sense to tie up your money for five years in an environment where rates are likely to rise.  Speak to your investment counsellor.
•  Stay short-term with bonds. When rates rise, bond prices go down. That doesn’t mean stay away from bonds, just invest in the short-term. Again, speak to your investment counsellor.

We have been in an historically-low interest rate environment for eight years now -- it looks as if it may change.  

 

 

Stressing over the debt-to-income ratio? Don’t!

The debt-to-income ratio has hit the headlines again.  This time the ratio rose to 167.3 % in the fourth quarter of 2016 compared to 166.8% in the third quarter. That means for every dollar of disposable income, consumers owe $1.67.

This increase has been fuelled by mortgages and low-interest rates, which has some policy-makers getting antsy.  They’re concerned at what could happen if rates rise. Yet consumers have been able to pay their debt relatively easily. And low interest rates have allowed consumers to pay down more of their mortgage principal, with payments split almost evenly between interest and principal in the fourth quarter.

Benjamin Tal, Deputy Chief Economist for CIBC, isn’t having it and is calling an end to the debt-to-income ratio. In his weekly Market Insight he calls the ratio the most quoted number and the most useless economic indicator. The main reason is what the number is assessing versus what it doesn’t assess.

For example, it’s unlikely that consumers will pay off their mortgage in a year, yet the total debt amount is factored into the debt-to-income ratio.  Mortgage debt accounts for 65.5% of ratio.  The ratio also looks only at the debt of consumers who already have debt rather than the income of people with and without debt.  Perhaps not a totally accurate picture, then.

According to Tal, in a “normally functioning economy, debt will rise faster than income.”  The ratio is designed to rise and has only fallen twice in the past 25 years. 

Tal also pokes holes at the pace of increasing debt. Here are the numbers:

• Total real household debt is now rising by just over 4%, in line with the recovery of the 1990s
• Consumer credit is  rising by only 2.5%, slowest pace over the past 30 years (non-recessionary)
• Mortgage credit rising by 5.2%, which is low
• Household incomes rising at 2.5%, the long-term average
• Seems pretty normal.

TD Bank economist Diana Petramala wrote “Debt growth has accelerated somewhat, but it is not growing at the double-digit pace that would typically be considered dangerous.”

Equifax has reported that 46% of consumers were decreasing their debt.

So, Tal is pretty clear when talking about debt -- make sure to say something about what’s included in that debt. The simple catch-all number may be too simple for a complex story.

If you are carrying high interest debt and want to talk about opportunities to consolidate by refinancing, speak with a mortgage broker.

Negative interest rates and you

I have a great deal for you – give me $100 and I will give you back $99. No? Well, that would be the result of a negative interest rate scenario The Bank of Canada’s  (BoC) Stephen Poloz has alluded to as an option  in case of another global  economic crisis. We’re not there yet and it is unlikely we will ever get there, but if we did, it’s not likely consumers would be impacted in a big way.

So what would happen if we had sub-zero interest rates? First of all, that loan deal presented at the beginning of this article would be the scenario for the banks. When you put money into a deposit account, you earn money on that deposit. For example, if you deposited $100 and 0.5% interest rate, you end up with $100.50. A negative interest rate works the other way. If you deposited $100 at a negative 0.5% interest rate, you would end up with $99.50.

If banks were to keep borrowing from the BoC, they would be paying for the privilege of doing so. The idea is to force the banks to be more liquid. Instead of saving, they get a financial return by using more of their funds for loans.

It’s not a “normal” response to an economic crisis but a few countries have gone there recently – Denmark, Sweden and Switzerland, for example. The BoC has other tools and the new government is working on a stimulus package that will likely help get the country growing again.

Loans may cost less but loans wouldn’t necessarily be easier to get -- consumers would still have to qualify. And unlike in Denmark, where some banks are paying mortgage holders a small monthly interest on their home loans, that is not likely to happen here.  Also, if rates did go sub-negative, it likely wouldn’t mean added banking fees for saving-account customers either.  If that were to happen, consumers would just hoard their cash.

“The lower rates go, the more likely you are to spend,” said Carlton University economics professor and monetary policy expert Nicholas Rowe in an interview with Global News. And low interest rates stimulates the economy because, “it’s a big encouragement to go out and spend your money,” he added.

As for mortgages, the variable rate might be affected but fixed rates are depended on the bond market.  In fact discounts from prime on variable mortgages have actually decreased significantly in recent weeks. Encouraging home ownership is good for the economy overall because when people buy homes, they also buy other goods for that home.

There are two reasons to cut interest rates: to stimulate the economy through increased borrowing and consumption and to devalue the currency to boost exports.

There may be some good news on that front.  Many Canadian economists expect good news in the upcoming months.  Although it has taken longer than expected for the economy to depend less on the oil sector and more on the manufacturing sector, growth is expected in 2016 and 2017.

A lot is riding on the federal government’s new stimulus package, aimed at kick-starting a sluggish Canadian economy. Although the details have not yet been released, BMO Capital Markets thinks it will lead to economic growth. They crunched the numbers and say, at best, “stimulus would lift GDP growth by a bit more than 0.5% next year.”

If so, BMO’s call for just over 2% economic growth in 2016 and 2017 edges a bit higher to 2.5%.
Although it’s not likely we’ll see negative interest rates, it’s good to know there is a plan in place, just in case.

Consult a mortgage professional for sound mortgage planning

The housing market has dominated the headlines over the past years. Rumours of rate hikes have never materialized. The market didn’t crash. Prices continue to increase in large urban centres. Despite the most recent recession, Canada’s housing market soldiers on and is still at the core of media commentary and policy revisions.

Since 2011 we have seen changes come into effect to restrict mortgage lending in Canada, and those changes continue today – all in an effort to curb the market.

The housing market continues to be a vital component to the success of the Canadian economy as it has during the past decade. In many respects, the industry has helped to stabilize a faltering economy.  By allowing consumers an opportunity to purchase by taking advantage of low interest rates or to tap into their equity for either spending or investing purposes, the mortgage channel has contributed positively to consumer spending and confidence.

While debt-to-income levels are indeed at its highest point in Canadian history, over the past 20 years personal lines of credit have accounted almost exclusively for the surge in total consumer debt and consumer credit card debt has surged at higher levels than mortgage debt. However, consumers are managing their debt loads well.

Earlier this year, The Canadian Association of Mortgage Professionals (CAAMP) published a report titled A Profile of Home Buying in Canada.  The report offers information on homebuyers, and profiles some key aspects of their decision making process, as well as the financial parameters of their decisions. Here are the highlights:

•  Each year in Canada, about 620,000 households move into dwellings they have purchased
• Of those 620,000 approximately 45% (280,000) are first-time buyers -- most between the ages of 25 and 34.
• Single-detached homes (estimated at 360,000 per year, or 57% of the total) account for the largest share of home buying for all of Canada. 
• On average, the homebuyers made down payments of about $119,000, equal to one-third of the price of the homes. 
•  For first-time buyers, down payments averaged $67,000, equal to 21% of their average purchase price.
•  Buyers do relatively little shopping when they chose their real estate and mortgage professionals.
• Among the buyers who obtained financing, only 16% did not consult  a mortgage professional 
• Only 9% of borrowers say they did not shop for mortgage quotes  
•  56% of mortgage borrowers consulted mortgage brokers 
• Mortgage brokers are used most often by for first-time buyers 

The growth of the housing will remain neutral in the near term. The resale market activity is widely anticipated to remain close to current levels for the rest of the year and into 2016.  And low interest rates are with us for awhile.

Here’s the track record for the mortgage broker channel:

1.  On average,  consumers using a mortgage broker saved 19bps on their interest rates (Competition in the Canadian Mortgage Market, Bank of Canada Review, Winter 2010-2011, p.5) 
2.  Those who renewed or renegotiated recently with a mortgage professional reported an average rate decrease of 1.4 points, compared with 1.0 point among all renewers. (Maritz Research Canada, January 2011)
3. Since 1992 changes to the Bank Act, the Big 8 (Big 6 plus Desjardins and ATB) now own more than 80% of mortgage assets in Canada. In the wake of that reduction in competition, the mortgage brokerage channel has grown by over 300% (from 10% to 30%).  This competition IS in the best interest of consumers.

As a country, we are fortunate to have weathered the global recession and we have managed to grow through the most recent “technical” recession. Canada is operating on sound financial principals and our housing and mortgage markets will continue to remain robust. It’s been proven that mortgage professionals  get better deals for Canadians and it’s been proven that competition is vital to Canadians’ best interests.

Clearly, home buyers, other than new home buyers, would benefit from consulting with a mortgage professional.

Don’t get caught up in the headlines

By Dan Pultr
Vice-President, British Columbia, TMG The Mortgage Group

Despite what seems like a focus on statistics that creates fear in the media, Canadians are still making their mortgage payments, while enjoying the cheapest borrowing environment in history.

 Not that long ago, all headlines were focused on the household debt to income ratio, which has proven to be a poor indicator of the financial situation of Canadian households.  That ratio, actually, has decreased recently, but the “number” alone is the focus of headlines.   

More recently, attention has turned to foreign ownership – that this may be causing a housing bubble in certain parts of Canada. However, the data doesn’t support this hypothesis and even the most anecdotal analysis suggests that most of the sales activity by foreign buyers has been in high-end homes (north of $3M) in Vancouver and Toronto.

The reality is in Canada, there is nothing to fear.  Even if all of the headlines were true and the most concerning of assumptions became reality, Canada is not in any way in a similar situation to that of the U.S. pre-financial crisis.  Nor is Canada the same as it was eight years ago.

Let’s look at the facts. Canada is currently enjoying the lowest interest rate environment in history.  It has never been more attractive for homeowners to borrow money.  Five-year fixed rates are around 2.6% to 2.75% and 5-year variable rates are nearing 2%.  Notwithstanding these low rates, lenders focus on providing mortgages to only the most creditworthy applicants with provable income. 

Since the Global Financial Crisis in 2008, the lending landscape in Canada has drastically changed.  At one time we had  American sub-prime lenders operating here such as Accredited Home Lenders, Wells Fargo, and GE Money, to name a few.  However, capital requirements imposed by the Canadian government made it almost impossible for these small lenders to survive.

The mortgage business was also much more attractive to banks and investments banks and many prime lenders such as Macquarie, First Line, and ING have left the mortgage channel completely. We didn’t see new lenders for a long time, until recently. 

The Canada Mortgage and Housing Corporation (CMHC), The Office of the Superintendent of Financial Institutions (OSFI)and the Ministry of Finance have changed mortgage lending rules and have increased compliance requirements, which have eliminated most of the riskier lending such as the No Income Qualifier (NIQ). We also once had 40-year amortizations, 100% financing (including on rental properties), refinances to 95% of the value of a home, and stated income loans with very little documentation.

We’ve had five policy changes so far and the introduction of mortgage underwriting scrutiny via B-20 and B-21.  Ask a self-employed borrower trying to get a mortgage and he or she will tell you how more challenging it is today than it was 10 years ago.

 Yes, if you’re credit worthy and have provable income, you will enjoy the lowest rates ever. Often borrowers get annoyed in this new lending era, where the need for paperwork and more paperwork seems daunting. Lenders require more information, more paperwork, and more due diligence -- more everything.

Canada’s delinquency rate is at 0.28% -- its lowest rate since 2007 -- and close to the lowest rate in history.  That means that for every 10,000 mortgages, only 28 of them currently have missed three mortgage payments in a row.  In the U.S, the delinquency rate is 5.77%.  It’s comforting knowing that if the market should take a turn, the housing market would be fine.

So in reality, Canada is actually doing pretty well.  Our government has focused on ensuring the people who get mortgages can afford to pay them. Despite these changes, our mortgage and housing markets are still growing.   This is good news for the future of these markets. 

Make sure to speak with a mortgage broker so  they can help you navigate our current lending environment to ensure you get the best mortgage to meet your unique needs.

Housing slow down heralding a more balanced economy

For the past four years economists have been warning us of a slowdown in housing activity, of lowered house prices and of interest rate increases. None of which have come to pass, until now, with the exception of interest rate increases and clearly, no one really knows what will happen with rates.

“Real estate, it has nine lives,” said Benjamin Tal, deputy chief economist at CIBC in an interview with the Globe and Mail. “Every time it’s supposed to slow down because of interest rates, something bad happens elsewhere that keeps interest rates low…”

Here are the most recent predictions from the Canada Mortgage and Housing Agency (CMHC).

New-home construction will slow over the next two years as low oil prices continue to take their toll on the economy despite rock-bottom interest rates.  Prices of resale homes will rise 3.4% this year before slowing to 1.5%.

Oil-dependent provinces such as Alberta and Saskatchewan will be hit hardest.  Home prices will likely decrease below the national average in Alberta.

In the rest of Canada the slowdown will be due to the shifting preferences among buyers. Where once buyers set their sights on higher-priced, newly built detached homes, they will start looking at buying older entry-level resale homes and more affordable new builds, such as townhouses and condos.  A healthy supply of condos and townies has kept those prices more affordable.

In Canada’s two high-priced markets – Vancouver and Toronto, demand for detached homes may fall because they are just not as affordable. However, just outside of these two hubs, prices are affordable.

CMHC also predicts that mortgage rates will rise slightly over the next two years, with five-year posted rates set to range from 4% to 5.5% this year, rising to 4.2% to 6.2% next year – caveat: We’ll see.

Many economists also say that our housing market is overvalued. Some say upwards of 60% compared to rent, some say about 30%, but the consensus seems to be between 10% and 20%.  But we may be looking at the wrong comparison.  What’s really important is a mortgage holder’s ability to pay.  And that means people need to stay working. 

So far, job numbers are good. The unemployment rate is holding steady at 6.8 %. Compared to a year earlier, Canada has added 161,000 jobs (a gain of 0.9 per cent) and the total number of hours worked has grown by 1.2%. Full-time jobs have risen by 1.8% over the past year. 

However Canadians are carrying large debt loads. At last count in March the debt ratio was 163.6% -- a record high. However, in June the debt ratio declined. It appears that in a low interest rate environment, consumers pay down debt.   Benjamin Tal said in an interview, “We have seen in the past that Canadians use low interest rates to actually pay down debt faster, as opposed to add to their debt…”

It looks as if consumers don’t have a problem paying their debts…unless interest rates shoot up past “historical norms”.  Yet, how many years have to pass before something becomes history?  We’ve been living with low interest rates since 2008 – that’s seven years. It could be that low interest rates are now the “norm”.

We are living in times that are defying textbook scenarios on the economy. Clearly world economies have changed. It’s not likely that interest rates will skyrocket in the next few years, given what’s happening in the world; it is more likely they may start to increase… slightly. 

What we’re seeing today is the correction that economists predicted would happen two years ago. With it will come a more balanced, stable economy where people are happily working, who are able to pay their debts, where interest rates are “low normal” and  where house prices are affordable. 

In the end, economists will look back and say that everything unfolded as it should.

How will the recent rate cuts impact mortgage regulations

By Mark Kerzner, President, TMG The Mortgage Group

With the latest Bank of Canada (BoC) rate cut to 0.50% comes a reminder that many would like us to believe our housing market is tenuous.  Once again there is a lot of discussion about just how overheated our market is and the dire circumstances many current homebuyers are likely to find themselves at renewal time.

First, let’s think about why the Bank of Canada decided to cut interest rates once again last week. In January the BoC surprised many of us and cut the overnight rate in response to a rapid decline in oil prices.  This time around it did so because the Canadian economy has not rebounded the way the Bank had hoped.

In an effort to stimulate spending, the Bank used one of its levers to lower the cost of borrowing. In doing so the value of the loonie further decreased thereby making imports more expensive and exports cheaper. The hope is that foreigners will both invest in and buy Canadian goods.  The caveat to that appears to be Canadian real estate where many economists and policy makers would prefer that no additional investment takes place. The problem is, it’s hard to have it both ways.

The Canadian housing market is resilient – no doubt about that. But when we speak of the Canadian real estate market we really have to speak in terms of what is happening in Toronto and Vancouver and then the rest of Canada … the latter is nowhere near as hot as the former.

For the past seven-(ish) years the Bank of Canada, the Government of Canada, our mortgage Insurers and our lenders have introduced numerous lending restrictions designed to strengthen the underlying housing market, soften a blow at the time of renewal  --in the event of increased mortgage rates -- and reduce the rate of home price appreciation.  In the wake of these last two rate cuts, discussions are heating up again.

Now we are hearing rumours of increased down payment requirements as well as possibly reducing the maximum amortization. Both of these changes could have a significant impact on the market – and I do not believe the policy makers are looking for ‘significant’ market changes immediately preceeding an election. They could, however, prove to be precursors to a discussion to take place later this Fall.

In late 2008 the Bank of Canada reduced the overnight rate and the banks passed along only 3/4 of the reduction. So far in 2015 the banks have passed along only 30 of the 50 basis points.

While the banks do incur costs with each change to the overnight rate they are also ‘banking’ additional spread on both new and on their existing books of business. With arrears remaining at very low historical rates, and the high quality of borrowers, the banks are already protecting themselves from a potential overheating of the housing market. As such, to potentially trigger a downturn in the Canadian housing market by pushing regulations too far, such as increasing the down payment requirement to 10%, would not be prudent.

In the event the down payment requirements were to increase to 10% approximately 20% of first-time homebuyers could be affected. Some will find the means to borrow additional down payments and others may seek out secondary financing. At the margin, for the homebuyers that remain in the market, their cost of borrowing will increase.

Another “buy”-product of lower interest rates are lower bond yields. People look for better returns on their investments and some will move funds into equities.  Perhaps this will prove to be a good long-term investment strategy, though in the long run, real estate investing may turn out to be a sounder investment approach.

The reality is, in the wake of a massive global recession (2008-2009), followed by major geo-political uncertainty and a perilous Eurozone, our economy, and especially our housing market, have done phenomenally well. The steps taken over the past 6-plus years have proven prudent.

Once again we find ourselves in a sort of conundrum – borrowing costs are getting cheaper, the economy is stagnating yet our housing market, at least in two major cities, continues to push forward.  My concern is that we overshoot and impact one of the main engines -- first-time homebuyers -- that drives the marketplace.

I think it’s important to ensure that families who invest in real estate have the strength and ability to do so. I do not believe that policy makers should be trying to massage the actual market itself. As such, here are a few recommendations they may wish to consider.

• Register all first-time homebuyer mortgages at 30 or 35-year amortizations but set qualifications as well as payments at 25 years.  In the event of a future default, payments could then be set at 35 year amortizations to allow for some flexibility and preservation of cash flow.

• Keep the down payment minimum at 5%, though in certain geographic locations require liquid assets equal to 7.5% (plus closing costs).

• Index the cut off where mortgage insurance can be obtained. For instance a number of years ago a policy was created that restricts mortgage insurance on properties that were greater than $1M. That number should be indexed to allow for natural price appreciation (or depreciation) and geographic factors in the market.

 The housing and mortgage markets in Canada have proven to be resilient. Now more than at any point in our young history, it is vital for Canadians to seek the expert advice of mortgage brokers to navigate their options.

Interest rates dominate headlines again

By Mark Kerzner
President TMG The Mortgage Group

It seems as though we have come out of the gates of 2015 with a bang!

Just when we thought we turned the subject of front page news over to the OIL industry, it seems to have come back full circle to mortgages and interest rates.

As a nation, we have never seen bond yields and the overnight rate at these low levels. And the cost of funds inherent in those two areas have resulted in historical low rates for both variable and fixed mortgages. In addition, it is very rare when the yields on the 5-year bonds, and the return that regular investors earn on government guarantees, is actually lower than the overnight rate. That’s the case at the time of this writing (bond yields at 0.64% and the overnight rate at 0.75%). This usually implies some rough economic times ahead. 

What is remarkable though, is that with the latest 0.25% reduction in the Bank of Canada overnight rate the banks chose to lower their PRIME rate(s) by only 0.15% thereby 'banking' the difference as enhanced margins
To put that move in context; never before have banks moved their PRIME rates by less than 0.25%. At the same me time the banks lowered the interest rates they pay on savings and investment accounts by the same 0.25% that the Bank of Canada lowered its overnight rate.

The banks have collectively said their margins are under pressure and this was an opportunity to alleviate that. On the one hand, it’s interesting to me to see the banks continue to erode their own margins by heavily discounting rates when their margins are eroding. On the other hand, when they lower the PRIME rates they are lowering the rates on a portfolio basis as opposed to when they decrease discounting on an ARM, which is reflected in only subsequent new deals put on the books.

That said, I simply cannot imagine a day when the Bank of Canada has to increase its overnight rate and the banks 'collectively' say, "My margins are large enough so I am just going to keep the PRIME rate lower and not raise it (by the full amount)."

I find the argument that the banks are mitigating a potential housing bubble and protecting the Canadian consumer from overextending very difficult to accept.  If that were the case they could simply set limits on rate buy-downs and discretionary pricing.

There is a silver lining for us as brokers in all of this news. Can you imagine the conversation a first time homebuyer would have going into a branch to discuss the impact of the news of the day on their buying decision? Now picture the same conversations taking place with an educated, professional, full time mortgage broker. As uncertainty abounds, it is absolutely vital that mortgage consumers seek out the expertise of a broker to navigate their mortgage financing needs.

Did the mortgage market do what we thought it was going to do in 2014?

By Susan Ashton, BComm, AMP, TMG The Mortgage Group

As we all know, predictions and forecasts are all well and good but sometimes they fall short of what actually happens. While I might be able to predict, with some level of certainty, what is going to happen tomorrow, the longer the time frame, the harder it is to “hit the nail on the head”.

So let’s start with last December’s Globe and Mail article – Five Canadian Mortgage Market Predictions for 2014. I thought it would be fun and interesting to revisit this article and see how accurate it really was.

Keep in mind that Rob McLister of Canadian Mortgage Trends, the author of The Globe and Mail article, is one of the thought leaders when it comes to shooting straight from the hip about the mortgage industry and where’s it’s going. Here’s what he said would happen in 2014:

1. Prediction: New mortgage rules – Expect more rule tightening in 2014 designed to reduce mortgage risk for lenders, mortgage default insurers and the government. By definition, those rules will make it slightly harder to get approved for some mortgages and further slow the housing market.

What actually happened: Well, when it comes to new mortgage rules, we certainly saw lots of changes in 2012 and 2013, but fewer in 2014. We had CMHC cut their Self-Employed/Stated Income and Second Home products but there were no changes to the Genworth and Canada Guaranty (the two private insurers) products, so this hasn’t had a significant impact on approvals. We have seen lenders starting to change the way they view payments for debt servicing purposes on personal lines of credit. Where once we could use the actual interest–only payment, as long as it was proven, most lenders want us to use 3% of the outstanding balance. We still had a couple of lenders who would use the lower payment amount, but these last remaining lenders will discontinue this practice at the end of this year so I predict more restrictions in 2015 than we saw in 2014.

2. Prediction: Credit unions will steal market share – Since they’re provincially regulated, credit unions have more flexible lending guidelines than federally regulated banks. They’ll use that to their advantage in addition to marketing more heavily, both online and to mortgage brokers. We’ll also see some big mergers this year as credit unions seek out economies of scale.

What actually happened: Credit Unions are definitely increasing their market share. While I can’t say that I am using them more, they can do things that OSFI regulated lenders just can’t.  I expect it will take more time than one year to see Credit Unions really make a noticeable dent in market share.

3. Prediction: Stronger online player – A new online model is sacrificing commissions for volume. This trend will heat up competition industry wide, delivering greater mortgage discounts to all consumers.

What actually happened: Some online brokers do compete on rate though the full service brokerage model remains alive and well. Your mortgage is more than just rate – it’s about getting the best product for your situation; it’s about getting the right advice for your situation and it’s about protecting your future.

4. Prediction: Hybrid mortgages will grow more popular – Economists and government officials have been warning us of higher rates for four years. So far they’ve been wrong, and now many consumers aren’t sure what to believe. More Canadians will hedge their rate bets with hybrid mortgages (part fixed and part variable).

What actually happened:  Hybrid mortgages are definitely talked about more, but I’ve found that clients want the stability of a fixed rate payment, or the advantage of the lower payment/rate that a variable offers. Mainly it’s the savvy, yet risk adverse, investors who talk hybrid mortgages. These products represent a great opportunity to speak with your mortgage associate about what is right for you.

5. Prediction: Consumer IQs will increase – For those in the mortgage industry who prefer an uninformed consumer, your days are numbered. Canadians will spend more time researching rate comparison websites, online mortgage forums, news portals, blogs, calculators and other online mortgage tools. They’ll become increasingly savvy about fine print like penalty calculations, rate blend policies and refinance restrictions.

What actually happened: Consumer IQs are most certainly getting higher. The Internet has brought about change and transparency in the industry, which has benefited consumers. The younger generation also educates themselves online prior to making any sort of purchase – another great thing for the industry. I love to work with clients who come into my office, armed with great questions with a goal of learning even more. The perfect client! This will only continue as the amount of available information grows.

So there it is. Rob McLister just released his predictions for 2015 in the Globe and Mail. Let’s see how well he predicts the market next year.

Stay tuned!

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.

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.