Why BMOs rate cut is good news for everyone

By Mark Kerzner, President of TMG The Mortgage Group

Last week BMO announced a cut to its 5-year fixed mortgage rate to 2.99%. This really isn’t a surprise since this is the third Spring in a row that the banks have been cutting fixed rates as a way to kick start the lending season. In both 2012 and 2013, then Minster of Finance quickly spoke against the move. This time, however, we have a new Minister of Finance who has stated that he will stay out of the mortgage market.

And like the last couple of times, the rate cut has given the broker industry a higher profile among consumers.

The first time we saw this offer we might have thought it was a blip, the second year we may have thought it a coincidence. Now that’s it’s happened again, we can safely call it a trend – during the Spring market, pricing seems to get hyper competitive. This is good news for both the mortgage industry and for consumers.

When BMO first introduced a 2.99% fixed rate more than two years ago, we posted a blog titled, BMOs Slap in the Face. Dan Pultr, Vice President of B.C. wrote, “brokers are silently cheering because this additional publicity will bring a renewed focus to the mortgage market; and the more noise generated by the banks, the more questions and more phone calls we get from clients.  As mortgage professionals, one of our goals is to educate the consumer to ensure they make the very best decision when it comes to their mortgage." 

In March 2013, we again wrote an article about the competitive mortgage market in the wake of BMO lowering its rate, albeit briefly, to 2.99%.

Let’s take a closer look at BMO’s recent 5-year, low-frill special:

•  It comes with a lower maximum amortization: 25 years max
• There is less lump-sum pre-payment ability: 10% maximum per year
• There’s a smaller payment increase option:  Up to 10%, once per year
• It’s a locked term:  The low-rate mortgage is fully closed unless you sell the property, refinance (with BMO only), or early renew into another BMO mortgage. In other words, unless you sell, you're not leaving BMO for 5 years.

Combine that with the fact that BMO's interest rate differential (IRD) for early payout is one of the worst out there; consumers may not want to risk being caught should they sell or have to pay out early.

There is, however, one big difference with this year’s rate offer -- the market was already at or near the 2.99% level. In some respects the banks have lagged instead of led.

Once again, the positive aspect is that it raises awareness for the mortgage industry and helps brokers reinforce their value proposition.

The other positive, is that other lenders will likely follow suit and match BMO’s rate or even go lower, which is good news for  consumers. So, whichever way you look at it – BMO’s rate-cutting trend is a win-win situation.

Gen-Yers and home ownership

There are nine million Gen-Yers or “millennials” in Canada, many of whom are financially savvy, have control of their money, take a long-term approach when investing and are keen to own their own homes.  Despite high student loans to repay and fewer job opportunities, millennials are thinking about money in very different ways than their parents.  According to TD’s 2013 Investor Insights Report, this group is saving to invest; they use the Internet to track the stock market through their mobile phones and are skeptical of financial advice, meaning they do their research.

The Index also found that millennials start investing when they are 20, compared to Boomers who started investing, on average, at age 27.  They would like to invest even more of their money, making them a group with serious financial clout. For many, home ownership is a priority.

Here are some facts about millennials; new learning we can all benefit from:

1. Millennials take a conservative approach when investing.  Forty per cent take a long-term, buy-and-hold approach. 
2. They currently invest 18% of their income but would like to invest up to one third of their income. The TD Investor Insights Index found that saving for retirement was a top investment goal followed by saving to buy a house, then travel, then achieving financial independence.
3. Millennials love TFSAA accounts because of the flexibility.
4. They are independent, ask a lot of questions about investments and do their research.

In 2013, the Canada Mortgage and Housing Corp, (CMHC) held seminars identifying this age group as a growing opportunity for the Ontario housing market. While millennials accounted for 15 per cent of home ownership demand in Ontario in 2012, by 2016 they will own about 35 per cent of the province’s homes.

About one-third or 30% of those interviewed online said they expected assistance from parents or family. Nearly two-thirds (61%) said they have made cuts to their lifestyle to save for their first home.

The interest in home ownership is nationwide. A Bank of Montreal report released on March 18, found that first-time home buyers have increased their home purchase budget by six per cent to approximately $316,000. In Vancouver, Calgary and Toronto, those budgets are even higher. Fifty-three per cent of home buyers in the Calgary market will even break their budgets for the right home, compared to the national average of 33%.

In British Columbia, the Gen Yers are redefining the housing market there according to Melanie Reuter, director of research for the Real Estate Investment Network who has written a report about it.
“They are a more urban group, no longer dependent on a car, partly because of cost, and partly because they genuinely care about sustainability.” she said in a Globe and Mail interview. “They didn’t get their driver’s license the day they turned 16, it’s almost a badge of pride they wear, not needing a vehicle.”

They use transit, so will want to be located close to work, and close to transit hubs. Many were likely raised in townhouses or condos, and are familiar with living in smaller spaces. “They also like new spaces, as opposed to old houses they’ll have to spend weekends fixing up,” Reuter added.

For 35% of millennials, finding trustworthy advice is their biggest challenge. Twenty-seven per cent learned about savings and investing from their parents and family, 18% are self-taught and nearly half (48%) manage their own portfolios online.

The latest Market Insights from the Canadian Association of Accredited Mortgage Professionals (CAAMP) found that millennials  are a little nervous and apprehensive about investing in a home; however,  the majority of those who are homeowners are comfortable with their decisions and would make the same decision again. 

Interestingly, the report also found that mortgage brokers are a key channel for millennials looking for mortgage information, advice and arranging their mortgages, and turn to brokers 40% of the time. The broker’s value as an advisor, coupled with a strong customer service approach hits home with this age group. Younger clients see brokers as valuable consultants helping them to understand their options.

It’s a group that can’t be ignored.

Housing collapse? What housing collapse?

Bad news trumps good nearly every time in the media, especially in the financial media. Interest rates are going up, interest rates are getting cut. Consumers are in trouble with too much debt, consumers can handle their debts. We’re in a recession, were in a depression, we’re fine. There’s the housing bubble that never happened, but some are still waiting for it, and the latest -- escalating house prices and lack of affordability.

For the most part, the constant worry reporting by the media and the economists and pollsters who feed those headlines is overblown.

We have low interest rates, which will likely be here for awhile. We’ve heard how rates are on the uptick, but we’ve been hearing that since 2010 – it’s like the boy who cried wolf.  While it’s true that fixed rates did go up slightly, we’re back to discounted variable rates at 2.6%. And those 5-year fixed rates are sitting at 3.39% or less. We’re back to the future!

A look at housing prices across Canada and we see a picture that’s not so bad. Sure, the two inflated markets—Toronto and Vancouver – have crazy pricing, but in the rest of Canada, house prices seem to be rising at modest levels, unless, of course, you’re buying in a hot market – these markets come and go. 

StatsCan’s latest survey of financial security, released on February 24, shows that the median net worth of Canadian households reached nearly $244,000 in 2010. That’s up 44.5 per cent since 2005. While debt still remains historically high -- $27,368 (less mortgage debt) in the fourth quarter of 2013 according to Trans Union, most Canadians are wealthier than they’ve ever been.  

Overall, total family assets in Canada rose to $9.4 trillion in 2012, with the value of families' principle home representing one third of the total assets. Pension assets, including employer plans and private pension plans, made up 30% of the total, while other real estate holdings — rental properties, cottages, timeshares and commercial properties — represent almost 10%.

Will there be a rebalancing or a correction? It’s true that, after a long period of spending, consumers will cut spending to pay debt; however, Benjamin Tal’s (Deputy Chief Economist for CIBC), Weekly Market Insight Report, found that consumer spending rose 3.1% in the fourth quarter of 2013 and the savings rate remained stable at 5%.  Household debt is still a concern because it is still rising, albeit it more slowly than in previous years. 

Low interest rates, coupled with steady job creation, and a slight increase in wages, bodes well for the future of housing.

The Volatile Jobs Market

 In December, 2013, the economy lost 45,900 jobs instead of gaining what economists projected would be 14,000 jobs.  The unemployment rate rose to 7.2 per cent from 6.9 per cent in November and the dollar started to tank.

Then Statistics Canada reported on February 7, 2014 that the Canadian economy added 29,400 jobs in January and the unemployment rate declined 0.2 percentage points to 7.0 per cent. Analysts had estimated 20,000 jobs would be added last month.  The unemployment rate also slid 0.2 percentage points from December to 7.0 per cent for the first month of the year as the number of full-time jobs increased.

It’s hard to determine what those numbers mean. Is the economy healthy or not? The January numbers did offset the December losses somewhat, which means the economy is generating approximately 15,000 jobs a month.  That’s not bad, but nothing to write home about, wrote CIBC Deputy Chief Economist Benjamin Tal in his Weekly Market Insight report.

Minister of Finance Jim Flaherty said the said the job trend was good. "This is comforting as we plan the budget and plan modest, steady job growth in Canada," he said in a Globe and Mail report.

But a few economists remain cautious although it does represent a “nice recovery” said BMO Capital Markets chief economist Doug Porter, in a report. “In other words, the underlying trend in job growth is just firm enough to keep up with labour force population growth -- no better, no worse."

A more important indicator is the export market, which many economists and the Bank of Canada hope will lead Canada out of a sluggish economy. The trade deficit has widened $1.7 billion in December. This was a billion wider than the market expected.  Right now, the economy has paused, or at least that’s what a few economists are saying.  

The export market is key to Canada’s growth because without an active export market, Canadian goods are not leaving the country and no outside money is getting in. A healthy export market means more jobs as the manufacturing sector gears up to meet demand. It also means more investor confidence and a growing economy.

 Tal says Canada is in a non-linear recovery, but also says that, economically, the upcoming months will be uninspiring. Add the trade deficit to very low inflation, and a devalued loonie and we have an under performing economy. 

Instead of focusing so much on house prices and debt, a new consideration with our economy is that we are now lagging behind the G7 countries, which have already started their recoveries.

Lower loonie may not be so bad

A devalued loonie, coupled with low inflation, comes talk that the Bank of Canada (BoC) might consider cutting its overnight lending rate. The Canadian dollar hit its lowest level in three years last week, falling to 90 cents and the first time it has closed below 94 cents since June 2010. Could the BoC cut its rate to lower than the 1% it’s currently at? It could, according to some economists.  However, by looking at other new developments, the answer may be no.

The Canadian economy, over the past few years, has been buoyed by consumer spending and the housing sector, as we waited for global economies to turn the corner. As those economies start to ramp up their production, and as the American economy, our largest trading partner, starts to strengthen, it puts more pressure on our currency. The jobs numbers from Statistics Canada haven’t been great, and the trade deficit keeps widening. To stay competitive, something has to give, so our dollar starts to drop in value. This is not necessarily a bad thing for Canada’s big picture.

Earlier this week, the banks started quietly lowering their fixed mortgage interest rates. Then, BoC Governor Stephen Poloz’s rate announcement maintained the 1% prime lending rate, but his report also mentioned that low inflation was a concern. It remains at 1.2%. Poloz, however, doesn’t want to encourage more consumer spending, which is why he may not touch the trendsetting rate.

Another reason, of course, is that a weakened dollar is actually good for the economy.  Consumers will feel the immediate pinch with higher costs at retail outlets and grocery stores. Travel will cost more and cross-border shopping may not be a bargain anymore but the upside to the economy will eventually benefit most consumers.

A weaker dollar is good news for the manufacturing sector and exporters and to the people who work in those sectors. It means more jobs, income increases and bonus payments.  When consumers have more money, they will spend it, which will pump up a slowed retail sector. The lower loonie will also increase competitiveness and help sustain the economy.

While the retail and tourism sectors will be hit, there’s flip side. Canadians may decide to stay in the country and explore Canada. Cross-border shoppers may stay home and spend their money locally. Since American travellers are the most important source of tourism revenue for Canada, a lower loonie may start attracting them again. 

Like it or not, the weaker dollar may be here to stay. For now it may end up being the fuel to fire up the sluggish economy.

Mortgage stats and you

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

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

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

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

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

Other highlights:

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

Interest Rates

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

Equity Take-Out

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

Real Estate/Mortgage Market

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

Mortgaging Activity

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

Good news for interest rates

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

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

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

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

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

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

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

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

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

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