An Alphabet Soup of Economic Predictions

Which is Canada Most Likely to Experience?

You’ve likely heard of analysts using letters of the alphabet to describe the potential paths for Canada’s economic recovery.

Will that graph of the country’s GDP look like a V or more like a U? Perhaps even a W, but hopefully not an L.

Below we take a brief look at what each of the recovery shapes mean, which is most likely, and how that might affect the country’s housing markets.

Let’s take a look at the letters that have been employed to describe the “shape” of where Canada’s economy has been and where it’s headed:  

V-Shaped: The most optimistic of the scenarios, this forecasts the steep decline in Canada’s GDP bouncing back quickly and returning to pre-COVID levels in short order.

U-Shaped: Similar to the “V” recovery, but this scenario anticipates a longer period of low or no growth. However, it also describes an eventual quick return to pre-COVID growth levels. 

“Nike Swoosh” Shaped: This is a variation of the “U-shaped” recovery, but describes a more gradual and prolonged period of economic recovery.  

W-Shaped: Like the V-shaped scenario, except the W forecasts a second steep decline in economic performance—possibly due to a second wave of the virus—followed by a second quick recovery to more normal levels.

L-Shaped: This is the most dreaded of them all, describing a persistent recession that doesn’t see the economy returning to pre-COVID levels potentially for many years.
 
Which Recovery Path is Most Likely?

There’s much disagreement over which model is likely to play out.

Some expect the economy to face continued headwinds for at least the next year, with some ups and some downs, perhaps along the lines of a W-recovery.

“Our economic forecast envisions the economy continuing to operate well below full capacity into 2021,” economists with RBC Economics wrote in a research note. “The road to recovery will be slow, and it could be quite bumpy.”

Others remain optimistic that the V-recovery is still taking shape.  

“The good news is that the incoming data continue to suggest a recovery that is about as v-shaped as we could reasonably have hoped for,” noted Neil Shearing, Group Chief Economist at Capital Economics. “The bad news is that sustaining the pace of recovery will get increasingly difficult from here.”

In a separate research note, economists at Capital Economics added, “In terms of fundamentals, it now seems clear that household income has not fallen by anywhere near as much as we expected in the second quarter, despite the slump in employment.”

Then there are others who don’t think any letter—in the English language or otherwise—can accurately describe the path that lays ahead.

“I don’t think a letter is going to neatly capture what we’re going to be looking at,” Douglas Porter, chief economist at BMO, told the Financial Post. 

What’s the Impact on Canada’s Housing Market?

The fallout for the real estate and mortgage markets has been a big unknown since the start of the crisis, largely because both supply and demand fell in unison.

“The fact both sides of the demand-supply equation fell in virtually equal proportions…revealed an important characteristic of COVID-19,” RBC economist Robert Hogue wrote. “To date, it hasn’t created market imbalances.”

While home sales plummeted in April by 57% as the effects of the lockdowns took hold, the decline in home prices has so far been limited in many markets.

And with sales already rebounding in May by nearly 57% and new listings seeing a 69% increase, there are signs some markets may be back to posting year-over-year price increases in short order.

As of May, MLS benchmark prices were up year-over-year in the Greater Toronto Area (+9.4%), Greater Vancouver (+2.9%), Montreal (+11%), Ottawa (+15.7%) and Halifax (+9.3%), according to the Canadian Real Estate Association.

Still, as economic fundamentals remain below potential for the foreseeable future and as government assistance programs, such as CERB and the mortgage payment deferrals, come offline this fall, many expect modest price declines.

“We believe downward price pressure will build in most markets in the coming months,” wrote Robert Hogue of RBC Economics. “Nationwide, we expect benchmark prices to fall 7% by the middle of 2021, though believe a widespread collapse in property values is unlikely.”

Mortgage Insurers Making Headlines

CMHC Makes Policy Changes – Genworth & Canada Guaranty Stay Put

It came as a surprise to many mortgage industry insiders when the Canada Mortgage and Housing Corporation (CMHC) announced its plan to further tighten their lending guidelines on July 1, 2020. Thankfully for many potential homeowners, Canada’s two private insurers, Genworth and Canada Guaranty, have decided not to follow suit.

Citing a need to mitigate its exposure (and taxpayer’s) to what the Crown Corporation’s CEO Evan Siddall’s predicts will be a drop in house values by as little as 9% and as much as 18% due to COVID-19, and a potential surge in household debt from 176% to 200% through 2021, they implemented changes that would cut purchasing power by up to 11%.

Under CMHC’s new guidelines, which is set to go into effect on July 1, 2020, the following will apply:

• Maximum Gross Debt Service (GDS) ratios, or the max percentage of home ownership debt payments ie principal, interest, taxes, condo fees and heat when compared to gross income, will be lowered to 35% (from 39%)
•  Maximum Total Debt Service (TDS) ratios, or the max percentage of total personal debt payments relative to gross income, will be lowered to 42% (from 44%)
• The minimum credit score needed to qualify will rise to 680 (from 600) for at least one household borrower
• Many non-traditional sources of down payment that “increase indebtedness” will not be permitted. 

However, borrowers will still be able to access their RRSPs through the Home Buyers Plan or a home equity line of credit on another property they own.

According to Mortgage Professionals Canada, 61% of first-time home buyers buy with less than 20% down. And 20% of down payment funds come from borrowed sources. This move by CMHC could cut purchasing power by up to 11%.  For example, a family earning $100,000 with 5% down, with no other debt, would qualify for a $320,000 mortgage (approx.) Under the new CMHC guidelines that mortgage amount gets reduced to approx. $280,000.  

Siddall said in a statement, “COVID-19 has exposed long-standing vulnerabilities on our financial markets, and we must act now to protect the economic futures of Canadians. These actions will protect home buyers, reduce government and taxpayer risk, and support stability of housing markets while curtailing excessive demand and unsustainable house price growth.”

Critics of the move wondered out loud at the timing of these changes, when provinces have begun easing lockdown restrictions to kickstart the economy, they felt it was counterproductive to efforts focused on regaining confidence in the housing sector.  

Paul Taylor, CEO of Mortgage Professionals Canada was quoted as saying, “…I think the timing for the introduction of these restrictions is poor, especially since the Federal government itself is pouring billions of dollars into the economy to keep it afloat.”

Canada’s Private Insurers Hold Firm

In Canada, federally regulated lending institutions such as banks, non-bank lenders, credit unions and trust companies, are required to insure high ratio mortgages – those with less than 20% down –against default. There are three insurers in Canada -- CMHC is a federal Crown Corporation and Genworth and Canada Guaranty are private sector suppliers of mortgage insurance. 

After reviewing their policies and CMHC’s decision, the two private insurers have decided to NOT follow CMHC’s lead. Both insurers made statements defending their current underwriting polices and are confident in their ability to manage risk. This is positive for borrowers.

As the economy starts its slow climb to recovery, we have seen positive signs across the country as sales start to increase. 

When it comes to real estate, consumer confidence is key. As we continue to ease restrictions, continue to practice safe protocols, and consumers start to feel comfortable again, we may see both homebuyers and those critical home sellers become more active.

It’s hard to say what the true impact to the market might have been if all three insurers had decided to tighten their rules. It’s clear that having a competitive market for mortgage insurance greatly benefits homebuyers. 

Where would you prefer to live?

As we move into Spring, and as provinces across the country begin easing restrictions, The Canadian Real Estate Association (CREA) is hopeful that home sales will start to tick up. The housing and mortgage markets have adapted to COVID-19 and have put safety measures into place with virtual house tours and electronic document signing.

According to available data from Realtor.ca, Canadians are spending more time looking at properties on the site. During the week of March 9, visits dropped by 30%; however, since April 12 traffic has crept back up by 14%, and consumer inquiries through the site rose by 25% -- similar to levels during the same period last year.

Consumer confidence is also on the rise. The Bloomberg Nanos Canadian Confidence Index ticked up slightly to 38.73 in its second-straight gain after more than two months in free fall.

Canada Mortgage and Housing Corp. (CMHC) reported that construction of multi-unit housing projects remained strong in some provinces last month despite COVID-19.  The agency saw growth in Ontario, Saskatchewan and Manitoba in April.

Deputy Chief Economist for CIBC World Markets believes the hit to the real estate market isn’t as “significant as perceived”. In an interview with Real Estate News Exchange, Tal said, “For the real estate market, if this recovery is going to be relatively long, it means that interest rates will remain relatively low,” said Tal. “That’s positive.”

REMAX has just released its latest report, “Best Places to Live 2020: Canada Livability Report,” and has found “glimmers of hope” for the months ahead.

Liveability, according to the report, is about quality of life at a local level -- ‘A neighbourhood’s dynamism, or lack thereof, involves a delicate convergence between independent small businesses, public institutions, arts and culture, green spaces and housing, to name a few. Here’s what the report found.

Ninety-one per cent of Canadians have at least one important liveability factor when considering a neighbourhood they live in now or would like to live in, in the future. Affordability topped the list at  61%, followed by:

• Walkability (37%)
• Proximity to work (34%)
• Low density neighbourhoods (30%)
• Proximity to transit (30%)
• Access to green spaces/dog parks (30%)

For city lovers, liveability criteria such as proximity to transit, access to green spaces and parks, proximity to good schools and neighbourhood vibrancy (access to art and culture) tops the list for families with or without children.  Various neighbourhoods such as Old Town Toronto and Beltline in Calgary best suit their overall needs.

Retirees prefer areas with access to green spaces and walking paths, proximity to health care or pharmacies, and quietness -- Mill Woods Park in Edmonton and Melville Cove in Halifax are among the top preferred neighbourhoods.

For affordability, Winnipeg and Edmonton are top regions. In Ontario, it’s regions like Ottawa, Windsor and Durham.

Edmonton is ranked at the top for most liveable city. Other cities that ranked high are:

• Ottawa, with neighbourhoods such as Centretown and Lower Town.
• In Victoria, the most up-and-coming neighbourhoods including Colwood and Langford. 
• Winnipeg neighbourhoods Bridgwater Forest, Charleswood, and Devonshire Park. 

Highlights

• Most respondents say they like their quality of life and liveability in the neighbourhood they currently live in (90%):

                * 62 % say they like it a lot

• Eight in 10 (82%) would make at least one sacrifice to live in the neighbourhood that meets their liveability “must-haves”:

                * 30 % would sacrifice dog parks
                * 29 % would sacrifice arts and culture
                * 26 % would sacrifice property size
                * 26 % would sacrifice proximity to parking options (carpool lots, parking garages)

• Seven in 10 (72% ) would search the internet (i.e. Google search) to look for information about new neighbourhoods they are interested in moving to:

                * 39% would ask a real estate agent
                * 38 % would go by word of mouth
                * 15 % would rely on news and market trends reported in the media

Despite reports of slowing economic conditions there are promising signs that that the housing market will make a comeback, although it may take a while for a full recovery.

In the meantime, with many still home bound, there’s no harm in looking at the real estate listings to see what’s available in a neighbourhodd that fits your liveability criteria.

For a deeper dive into the report, read it here.

Mortgage Interest Rates in the COVID-19 Economy

Mortgages and interest rates are still talked-about topics in the current economic climate.

Here’s a recap. In January 2020, just prior to the pandemic surfacing in Canada, a five-year fixed rate was trending at approximately 2.89% to 3.09%. Fixed mortgage rates are loosely based on bond yields, which were trading at 1.5%.

The Bank of Canada’s (BoC) overnight rate, or key lending rate was 1.75% and the prime lending rate was 3.95%. Variable mortgage rates and lines of credit are based on the prime rate. At the time, mortgage lenders were offering discounted prime rates for new deals – some as high as 1%.

By March 2020, 5-year bond yields fell as low as 35 basis points and fixed-rate mortgage rates also fell to as low as 2.39%, but then went up to about 2.84 to 2.99%%, but are now starting to trend downwards again.

Also, in March, The BoC, cut its overnight rate three times - - it now sits as .25%. Most lenders also lowered their prime lending rates to 2.45%; however, the deep discounts have disappeared. Variable-rates are sitting at approximately Prime minus 20 basis points, or 2.25%.

It's commonly thought that five-year fixed mortgage rates are connected to five-year bond yields and that cuts to the BoC’s overnight rate will result in lower fixed rates. The two are not actually connected. Similarly, variable-rate mortgages were thought to be connected to the BoC’s overnight rate, and historically this has been the case, but it’s not written in stone.

In the current economic environment, the “traditional” rules are out the window, simply because what the economy is going through is unprecedented and everyone is moving cautiously.

Despite low bond yields and cuts to the prime rate, lenders are considering other factors – the rise in unemployment for one. One of the main indicators pointing to a continued healthy economy is jobs. Without jobs, household budgets get tighter, consumer purchases slow down, manufacturers scramble to reduce inventory, which could lead to lay-offs, and bankruptcies rise. Job loss is also a leading cause of mortgage default.

Statistics Canada reported that the country lost one million jobs in March, but that’s only a glimpse since the data is based on surveys in the week that started March 15. For perspective, economists suggest Canada's unemployment rate right now is likely around 20%, from an “average” of 5%. As you can see, the economic situation has been volatile and conditions can change daily.

Because the outlook is uncertain, and future mortgage defaults may be higher, lenders built risk premiums into their rates and we saw mortgage rates increase, despite the signs that borrowing costs were reduced.

The Government is keeping the economy afloat by injecting billions of dollars of financial support into the economy and, by default, instilling a small degree of confidence in Canadians. However, it’s likely that Canada will be in a recession – as some economist say it is now, and will take many months to recover.

The housing market is a vital component to the success of the Canadian economy. In many respects, the industry can help to stabilize a faltering economy.  Having said that, not everyone is out of work and consumers are still buying and selling houses.

There is an end game here and eventually the economy will start humming along. Jobs will return slowly, and low interest rates will likely be around for a while as we start the hard road to recovery.

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.

Important Mortgage Features to Consider

Real estate continues to be a hot commodity in most parts of the country, despite the many changes we’ve gone through over the last few years. Prices in some areas are up and listings are in short supply in other areas, but the housing market overall has been moderating over the last year, and analysts are forecasting a balanced market for the rest of 2019 and into 2020.

Interest rates are comparatively low and competition among lenders to offer favourable rates is high.  It’s always a good idea to read the fine print to make sure you’re getting the best mortgage product, at the best rate, for your particular need.

Because lenders do differ, it’s important to know what features are important to you before deciding on a lender. Here are six characteristics of mortgages to assist home buyers assess their offers:

1. Blend and Extend. The “increase and blend” option has been around for almost 20 years and may be an option in some situations. For example, if your current lender doesn’t allow a change in the maturity date, then you’re locked into the remaining time left on the term.  While that’s not the end of the world, in a rising rate environment this can be inconvenient. If you’re moving up, and buying at your maximum loan-to-value, you probably don’t want just a 1 to 2-year term, and with the new benchmark rule, you may not even qualify.  If rates have dropped since the original mortgage you could run into the “Interest Rate Differential” (IRD), which might be too large and you can’t move.  
2. Early Payout Penalty Calculation. Some chartered Banks are known for their extremely large IRD penalties.  If you don’t know whether you’ll keep the mortgage for the entire term then make sure you understand the payout penalty. 
3. Mortgage Registration. Is the mortgage registered as a non-standard charge, either a running account, or a collateral charge? If so, then it becomes challenging to switch this mortgage out to take advantage of lower rates, although collateral switches are becoming more widely available. Consider this scenario: If the lending institution knows you will have to incur $1,000 or more in possible costs, as well as put in the time and effort to complete a refinance with another lender, then there might be little incentive to offer you best rates at renewal time when a small rate reduction might be enough to keep your business. On the other hand, there are advantages such as making it easier to qualify with fewer expenses down the road if you need to access additional funds.
4. Pre-Payment Privileges. Is the lender offering 10/10, 15/15, or 20/20?  That means allowing prepayments of 10%, 15 % or 20% annually on the outstanding balance of the mortgage.  Also, can these lump sum payments be made anytime per year or only at the mortgage anniversary? And how easy is it to make lump sum payments? Do you have to go into the branch, call a 1-800 number? Or can you simply go online and do it.  These are important factors to consider.
5. Porting Features. This feature can vary from lender to lender. Read the fine print, especially if you know you might need to move before the mortgage maturity date. Some lenders require a sale and purchase to occur on the same day in a port, which can be inconvenient. A more flexible, and available program allows typically up to 60 days gap or 60 days overlap; and then there can be exceptions allowing longer periods beyond that.
6. Online Access. All of the chartered Banks offer online access as do a number of monoline lenders. Generally online access allows you to see your balance, make additional lump sum payments, or make a payment increase. This can be a time-saving feature for tech-savvy consumers. 

There is more to getting a mortgage than just rate. Talk to a mortgage broker first who can help you navigate the mortgage terms and who can help you find the best product for your needs.

A time of great change

As you probably know, the mortgage rules are changing once again, effective January 1. The introduction of the minimum qualifying rate (stress test), this time for uninsured buyers, may be the toughest change so far. Uninsured mortgages account for 46% of the country’s $1.5 trillion mortgage credit, according to the Bank of Canada.

 A survey by Mortgage Professionals Canada found that this requirement would disqualify about one in five potential home buyers.

Doug Porter, chief economist for BMO said that the last set of changes took 5 to 10 per cent of buying power out of the market and estimates that the new changes will do the same.

Paul Taylor, President of Mortgage Professional Canada said the new stress test will further reduce purchasing power, especially for first-time homebuyers. “Since everyone must qualify their GDS and TDS limits at least at the Bank of Canada 5-year benchmark, every home buyer now potentially sees their eligible loan amount reduced as a result of an artificial interest rate carrying cost.”

Since this means buyers can afford less house, the changes may dampen the overall market, not just for first-time home buyers. If existing homeowners can’t afford to move up, some may decide to not move at all.

“If there is a reduction in housing market activity between 10% and 15% as we expect, based on the analysis of our Chief Economist, Will Dunning, we would expect to see a large reduction in housing starts as well,” Taylor added.

The Ontario Real Estate Association has called these changes, “overkill” that will hurt middle class families. It’s those families who may not be able to take advantage of better rates and/or better mortgage products at renewal time. This may force them to stay with their existing lender.

“We believe many non-prime borrowers will turn to financing from credit unions, MICs and privates,” Taylor added. “In the alternative space, where interest rates are already in the 6-10% range, having to qualify at a rate 2% higher than contract will disqualify some borrowers. This incents competitors to traditional lenders to offer rates that may be higher but easier to qualify for, as long as they are less than 2% higher.”

Having fewer options is significant for the economy and for consumers.  While these rules will have a minor negative impact on large Canadian banks, it’s the overall mortgage volume from banks, monolines and non-prime lenders that may be affected. This change may impact their overall lending volume an could impact the entire housing market.

“We expect this to be a drag on the overall economy, specially in areas of the country that have had balanced or declining housing market activity,” Taylor said. “There is no doubt that this policy will supress demand, which will have a negative impact on the market and the spin off industries that are reliant on housing market activity. The irony of course, is that the government is at risk of creating the very situation that these policies are designed to avoid by triggering a housing market slowdown.”

And, the change will impact the mortgage broker industry as well.  

Andrew Matheson, Area Vice-President, TMG Atlantic has crunched the numbers and has determined that home buyers will need 20% more income to qualify. “This could make it more challenging for those refinancing.”

“I’m also concerned that consumers may be pushed into higher interest credit products or even turn to their credit cards,” he said. “And new home buyers may have to find a co-borrower or use the bank of Mom and Dad.”

He’s already seen the Atlantic market tightening up, especially in rural areas. “A client who use to qualify for a mortgage in an urban area could qualify in a rural area,” Matheson explained.  “That’s not the case anymore. Lenders are now looking for stronger credit profiles.”

Matheson is fielding many calls from clients and potential purchasers about the implications of the rule changes. “There is a lot of uncertainty,” he said. “I understand the need for changes in hot cities like Toronto and Vancouver, but they’re are a bit over-the-top for Atlantic Canada. The onus is on mortgage brokers to educate purchasers and help them plan their purchase.”

This sentiment is shared by Taylor. “Given the sheer number of changes that have occurred or are about to occur in the past year, the mortgage finance world has become much more uncertain and complex,” he said. “Borrowers, now more than ever, need the expert advice of a mortgage broker to find the right rate with the right terms that suit their individual situation.”

While the new rules do not apply to credit unions yet, those that securitize loans may be impacted since market participants only buy compliant mortgages.

There’s evidence that credit unions are already thinking along those lines. Meridian, one of Ontario’s larger credit unions, says it’s reviewing B-20 even though it “does not technically apply to our business.”

“Meridian will consider that guideline as we are a prudent and responsible lender with a strong balance sheet,” Meridian president and CEO Bill Maurin told BNN in an email.

There may be an upside, however. Despite a slowing economy, consumers remain confident, population growth is strong, job growth has been good and we still have relatively low interest rates.

While January 1, 2018 is the date the new stress tests to take effect, it’s expected that lenders will make the changes before then. That said, now is the best time for Canadians to seek out the advice of a mortgage professional for their expertise and flexibility in the marketplace.

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.  

 

 

A new world view – the impact of the Millennial generation

The world has changed dramatically over the past eight years since the Global Recession hit in 2008. The biggest change and one that will have the biggest impact to future economies is the changing demographics of the world’s population.

Millennials (ages 18-34) have now surpassed the Baby Boomer generation (ages 51-69) and Gen X’ers (ages 35 to 50) will surpass Boomers by 2028. These two groups, Millennials and Gen X’ers,  are quite opposite to Boomers in their spending habits, in their lifestyle choices, and their personal goals and will have a definite impact on our economies worldwide
.
Their spending habits, for example, are vastly different: Millennials are thrifty, buying more but spending about a quarter less on average than Boomers or Gen Xers, according to a new TD Bank report.

Research has found that Millennials are “confident, self-expressive, liberal, upbeat and open to change.” There are also some interesting differences between them and older generations. Here is how they match up on what they consider the ultimate reward for paid employment:

1.  Boomers want a prestigious title and the corner office.
2.  Gen Xers want the freedom not to have to do something.
3. Millennials prefer meaningful work.

About having children

1.  Boomers are controlled, their children were planned.
2. Gen Xer’s are doubtful about the possibility of becoming parents.
3. Millennials are definite about parenthood and view marriage and parenthood as more important than careers and success.

Another important difference is that Millennials are savers, smart shoppers and very tech savvy.  They are better money managers than older generations and live within their means. Despite the burden of student debt they seem to have money.

The Sharing Economy

What older generations considered “must-haves” are no longer important. For example, 30% of Millennials do not intend to purchase a car in the near future. Instead, they like the idea of Uber. They like to travel but check out sites like Airnb. Hotels and rental car companies have already begun to feel the effects.

The Freelance Economy

The freelance or “gig” economy has been growing for the past 10 years.  Millennials like the flexibility of freelance work for its flexibility. One reason is they are vastly under-employed despite having the most education and freelancing has become a viable alternative.

What about housing?

They like the idea of home ownership. According to the TD Bank study, the top three priorities for Millennials before purchasing a home include saving for a down payment, paying off debt and having a steady job. And 63% of them are considering purchasing a home in the next two years. Because they are a generation of savers, nearly two-thirds are saving for a down payment, citing it as the biggest hurdle. Other key findings include the following:

•  One-fifth of Millennials (19% ) plan to supplement their savings for a home with financial assistance from friends and family, and 65% plan to have a spouse or partner as a co-signer
• They want to pay off their mortgages quickly.
• Seventy-eight per cent want move-in ready homes. 
• Seventy-seven per cent  percent cited mortgage rates as the most important factor when purchasing a home
• Eighty per cent of Millennials feel commute time is key when purchasing a home. These location factors weigh heavily on their decision about buying in increasingly expensive urban housing markets.

Here’s what they don’t want to do:

• Move into a smaller house than they initially desired (68%)
• Sacrifice amenities e.g., convenient access to shops and services (81%)
• Compromise on their top choice of neighborhood (80%)

The New Economy

While it’s hard to predict what will happen in the future, it’s clear that Millennials and the technology revolution have already impacted global economies. What they do, their attitudes and behaviours are leading indicators of what's to come -- what they do will shape the rest of the world. They represent a huge shift in how people learn about the world around them and how they engage in it. Perhaps it’s time for a rethink about what is “normal” in today’s economy and work towards adapting to the changes.

New down payment rule change – will it affect you?

By Mark Kerzner, President TMG The Mortgage Group

What a difference a week makes.

The new Liberal government is making its voice heard loud and clear with respect to the Canadian housing market and its concerns about an overheated housing market in certain cities in Canada.

By increasing down payment requirements for properties greater than $500,000 the Minister of Finance, Bill Morneau took the position that, “The actions taken … prudently address emerging vulnerabilities in certain housing markets, while not overburdening other regions.”

While the industry knew changes were being considered, only a few would have bet on the speed with which they were delivered.

It is important to understand that increasing down payments has been talked about for many years and the results could have been much more severe.  I suppose, at its core, down payment minimums could simply have increased to 10% across the board. In presenting it this way the Minister has recognized geographic market differences. Please refer to the chart below for a simplified display of the extent of the change (showing that its maximum impact is increasing down payment to 7.5% for homes valued at $999,000, or $25,000)

Without a doubt the real estate sector, including the mortgage market, remain top- of-mind with our new finance minister. This change, along with some proposed changes from OSFI related to lender capital requirements, and CMHC changes related to guaranteed fees in the mortgage-backed securities market will surely lead to incremental costs for our mortgage funders.

These two additional changes seemed to have been timed to bring about a series of changes at the same time, which taken together, are designed to curtail a rising housing market. It is important that we are as aware of them as we are of the down payment increase.

When funding costs for our lender partners increase, they are likely to be passed along to consumers in the form of higher rates.  These increased direct costs to consumers, in the form of higher down payment requirements, combined with higher funding costs will certainly impact affordability on the margin. In doing so, the government is hoping it will create more balance in the market – perhaps by slowing it down in certain areas.

And while the intended ‘targets’ were likely Toronto and Vancouver, CIBC deputy chief economist, Benjamin Tal wrote a report that showed the unintended consequences may be felt more in cities such as Calgary, Victoria, Edmonton and Hamilton as those cities have a higher percentage of high ratio sales between $500,000 to $1M.  That said, overall impact is estimated to be less than 3.5% of the market.

For more than half a decade we have been working though times of increased regulation and oversight.  Some of those changes have brought about the increased use of secondary and private lenders for some, and increased down payment requirements for others. And while costs may have increased on the margin for some, ultra low interest rates along with a high degree of consumer confidence have buoyed housing markets in many markets across the country.

For years we have advocated government and policy makers to tread carefully around broad stroke changes to increase down payments. Given the government's intent to make this policy change I am pleased to see that it was done on the margin and took into consideration regional market realities.  The Department of Finance has drafted the following FAQ for more context.

While our initial reaction is always concern, I think it’s reasonable to estimate that these changes will not dampen the real estate markets to the point of collapse. In fact, we will continue to operate in a very robust and confident lending environment.

As we are assessing this latest change, it’s important to remember there are still a number of very important items on the radar as it relates to potential changes in mortgage regulations. These include foreign ownership in a broad sense and Canadian residents buying investment properties. Since both of these items already require at least 20% down payment, other levers may be evaluated as a means to influence the market.

Mortgage brokers save consumers money, whether or not they use a broker. That is because competition breeds responsiveness. Even though we are living through a period of heightened regulatory oversight, the broker channel continues to grow. The reason is that consumers need and value our experience and expertise to navigate the mortgage landscape, ultimately sourcing them the lender and product best suited for their financial need.

If you are a mortgage consumer reading this, I urge you to contact your mortgage broker today.

The Habits of a First Time Homebuyer

The housing market generates a lot of economic activity in Canada. Not just home selling and buying and construction  but also for those industries connected to housing such as legal services, moving companies, landscaping companies, home improvement companies, etc.  Each year, approximately 620,000 households move into newly-purchased homes in Canada.  Of those about 45% or 280,000 are first-time buyers, most between the ages of 25 and 34, and many in the 45 to 64-age group.

Single-detached homes are the most popular house type purchased and accounts for 57% of all sales. The average price is about $347,000. The average down payment for first timers equals 21% of the price of the home.

Earlier this year, the Canadian Mortgage and Housing Corporation (CMHC) conducted an online survey looking at the home buying experiences of first timers. Here are the highlights:

•  Loans and gifts from parents and other family members account for 7% of down payments
• 3% of all down payment come from RRSP withdrawals
• 81% financed their purchase through a mortgage
•  Fixed rates are the most common rates
•  Most mortgages have five-year terms

Online Use

There’s more! First time buyers are heavy online users and do their research. A whopping 83% of them went online to get more information about mortgage options and features – about half went to lender sites and a third went to mortgage broker sites. While online, 83% used mortgage calculators, 73% did their own financial assessment and about 4-in-ten got their pre-approval online.

Social media is another big draw – 56% used Facebook; one-third used a Forum; and 30% used a blog. Twenty-six per cent used a mobile device to get their info and one-in-five used a mortgage-related app.
And they shop! Seventy-one per cent contacted either a lender or a broker and 53% negotiated a better interest rate than the one they were originally offered.

Using a Mortgage Pro

Using a mortgage professional has become more popular among first timers, up from 42% in 2014 to 55%. A key driver is getting the best rate and the idea of a “great deal” was a strong influence as to who would get their business. About 4-in ten were referred to a specific broker and 79% of those ended up using that broker.

Satisfaction Factor

Seventy-eight per cent of first timers were satisfied with their experience working with a mortgage professional. And 43% said they would likely use a broker for their next mortgage. The one area that brokers seem to lag is in post transaction follow-up.  Fewer than half of first-time buyers received any follow-up. What would they like? Many of them said useful information including long term mortgage/financial strategies and advice on how to manage financial difficulties.

Concerns and Uncertainties

It’s no surprise that first time buyers are less confident than repeat buyers.  Even with all the research they’ve done, many still feel a little overwhelmed about the process and have a lesser understanding of their options than repeat buyers. Even more felt uncertain of what to do or where to get help if they were facing some financial difficulties.

Fifty-five per cent had concerns about the buying process and much of it had to do with the unexpected rise in the costs of owning a home. Thirty-eight per cent of then did incur unexpected expenses.

The mortgage industry is a competitive business. Mortgage professionals work with a wide variety of clients. They counsel and educate clients and help them understand the buying process.  A broker also makes sure to understand what a first time home buyer needs   and pays attention to both their financial goals and their personal goals – and not just in the short term.

It’s not surprising that more home buyers are turning to mortgage brokers  to help them navigate the daunting process of buying a home. That number will continue to grow as the mortgage industry, with its variety of options and products, becomes more complex; and as the needs and  the profiles of  first time home buyers continue to evolve.

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.

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.

No panic necessary over interest rate increases

(Blogger's note: To everyone's surprise, the BoC lowered the interest rate on Tuesday, January 21 to .75%. The impact if that is yet to be seen and will be addressed in another blog. This blog addresses the two types of interest rates and what consumers should understand about them.)

Interest rates have once again become a hot topic in the media. Just prior to oil prices nose diving, the Bank of Canada (BoC) hinted that the overnight rate would likely start rising in 2015. Of course, the media had a heyday with headlines of how rising rates will affect affordability for homeowners and talk of “bubbles” started to emerge…again. (See Blogger's note above)

It’s important to understand which interest rate the media is discussing because there are two very different types of rate – fixed and variable – and both rates are determined by very different criteria.

The rate making most of the headlines is the prime rate. The prime interest rate, which the Bank of Canada (BoC) controls, is what determines variable interest rates.  The focus of the BoC is on stimulating the economy and keeping inflation in check. The best way to stimulate the economy is to get people to spend money, so keeping interest rates low is beneficial.  Until oil prices starting tumbling, the economy was recovering and starting to grow and the BoC started talking about raising rates.

The BoC rate is currently at .75% -- this is the borrowing rate for lenders. The Bank’s prime interest rate is 3%. Variable rate mortgages are based on the BoC rate. When rates do rise, it is usually in small increments and over time will start to add to the amount consumers pay for credit facilities like lines of credit, overdrafts and variable-rate mortgages. In today’s mortgage market, five-year variable-rate mortgages are available in the prime minus 0.50% to prime minus 0.70% range.  Even with potential incremental rises in the prime rate, these discounted rates, are still attractive.

There are many factors that contribute to rising interest rates. Since the economy was in recovery, it only made sense the BoC would start raising the rate. But lower oil prices may have put a hold on that decision. The BoC has already expressed concern about the impact of sharply lower oil prices on the economy, and is likely to be more cautious about when to start increasing rates. As we have seen, the BoC lowered the rate.

Fixed rates, on the other hand, are at historic lows and it looks as if they will stay low for awhile. Fixed rates are based on bond markets, independent of what’s happening with the prime rate. The Bond market, like all markets, fluctuates daily. Lower oil prices and market volatility is exerting downward pressure on bond yields and fixed mortgage rates. Today, five-year fixed mortgage rates are as low at 2.79% to 2.99%

Here’s a closer look at bond markets:

* Bond yields are set like many other prices - by the forces of competition between supply and demand
• If there are more investors wanting to buy bonds, as is often the case when they sell equities, bond yields tend to drop
• Financial Institutions use the spread between interest charged to borrowers and paid to investors to cover their costs and generate some profit

With all the insecurity in the market today, investors are buying bonds and yields continue to drop and are now below 1.10%.

So does this mean fixed rates will drop? Some experts think so. However, John Bordignon, EVP for Paradigm Quest doesn’t think so. “While I believe fixed rates will remain stable, there is still volatility in the market and lenders are still cautious about lowering the fixed rates,” he said.

Bordignon doesn’t rule out the occasional promotional fixed rate discount, but because the costs of mortgages have gone up, lenders are not likely to tighten the spreads.

The choice of opting for a fixed rate versus a variable rate is ultimately a personal decision. Each situation is unique and its best to discuss the options with a mortgage professional. But when the headlines are screaming doom and gloom for interest rates, make sure to understand what type of interest rate they’re referring to.