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.

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!

Here’s what we know about First-Time Homebuyers

In May 2014, the Canada Housing and Mortgage Corporation (CMHC) completed an on-line survey of 860 first-time buyers from across Canada. All who responded had taken a mortgage transaction in the previous 12 months and all were one of the prime decision-makers within their household for matters relating to housing finance and mortgages.

First-Time Buyers and Technology

• The majority of First-time buyers (84%) went online when gathering information about mortgage options and features. Among these, more than half (55%) went to lender sites and one-third went to broker sites. First-time buyers showed a high likelihood of visiting a broker site (33%).

• Overall, First-time buyers were much more active online compared to other mortgage consumers – they engaged in a variety of activities -- 80% used a mortgage calculator, 63% completing a financial self assessment, 42% either got pre-approved or filled an online form and 20% engaged in an online conversation.

• Twenty-three per cent used mobile devices to access mortgage related information, however; desktops are still preferred by almost nine-in-ten.

•  The use of social media as a tool when looking for a mortgage is increasing and was much more prevalent. In 2014, 40% of First-time buyers going online looked to social media when researching their mortgage options. This up from 28% one year ago. Social media used -- 58% used Facebook, and 38% used either online forums or blogs. Overall, online forums and blogs were found to be the most useful social media platforms for mortgage related information. Half of First-Time Buyers using online forums and 44% using blogs rated the information obtained through these platforms as “very useful.”

•  Social media is starting to play a role in how first-time buyers interact online. About one-in-five using social media (21%) posted a review or rating of either a broker or lender and 30% used social media to find a referral to use a specific professional (i.e. broker, lender, real estate agent or other professional).

Homebuying Process

• During the home buying process first-time buyers interacted with a variety of individuals. Seventy-nine per cent were in contact with a family member, 73% with a mortgage lender or a 72% with a real estate agent. Slightly more than half (55%) reported interacting with a mortgage broker.

•  Overall, 60% of first-time buyers mentioned that they had concerns during the home buying process. The nature of the concerns or uncertainty stems mostly from unforeseen costs. Forty per cent reported they actually incurred unexpected expenses during the home buying process. Among those unforeseen costs, the most common were adjustments (40%), lawyer fees (36%) and land transfer taxes (30%).

Experience with Lenders and Brokers

• Approximately four-in-ten (37%) of first-time buyers received a recommendation to use a specific mortgage professional. These recommendations came primarily from family members and real estate agents. Among those receiving a recommendation to use a specific lender, 37% came from a family member and 22% from a real estate agent.

• Almost half (48%) arranged their mortgage through a mortgage broker.

• Among those using a broker, 50% reported obtaining a mortgage with a lender other than the financial institution they were dealing with the most at the time.

•  Seventy per cent were satisfied with their mortgage professional and showed a greater likelihood of using their broker again in the future.

The survey findings are positive indicators that consumers are increasing their knowledge about financial matters. Consumers who educate themselves about their financial options are able to make consistent, informed financial decisions and that will help them to achieve their goals.

The survey also makes clear that mortgage professionals are in a unique position to help educate consumers about their mortgage options and ways to pay off that mortgage sooner. 

It’s been all about elections

We seem to be living in an election merry-go-round. In Ontario we recently had our provincial election. Torontonians are living through a municipal election. Canadians are prepping for a federal election in 2015. The US seems to be in an election cycle every two years. And within our industry we just completed the CAAMP election.

I am ‘electioned’ out! I can tell you from the prospective of both a voter and a candidate that our elections are long – too long.

The CAAMP election started with some consideration and a formal nomination by the end of August. Then there was preliminary campaigning and discussions throughout the first two weeks of September and then there is the actual election - which is essentially a two-week window.

Campaigning is exhausting. It is in and of itself almost a full time job. There were two things that really impressed me during the CAAMP campaign.

1. The level of engagement of voters was fantastic. I believe this will be recorded as one of the highest levels of voter turnout in recent years. Members were talking, debating, concerned, enthusiastic… you name it.

1. The level of support I received from countless people throughout the industry. This election (at least in Ontario) seemed to cross-organizational boundaries. It really seemed to be one that put the industry first.  For our industry to be strong we must have a collective voice with our lender and supplier partners. To me that voice was reaffirmed in this election.

Though I initially wrote this post before the CAAMP election results were known, I can tell you that as a successful candidate I am eager to work with the Board and the Association to represent our incredible industry.  When we put our collective passion, commitment and talents into our industry we will all succeed immeasurably.

I wish everyone a terrific FALL season and hope to see many of you in Montreal in just a few short weeks.

Cheers,

Mark

Talk of housing bubbles may be just hot air

The latest housing price statistics from the Canadian Real Estate Association (CREA) has created a buzz in the media and talks of bubbles and an overvalued housing market have resurfaced.  According to CREA, the average house price has risen 5% over last year.

What that number does not show, however, is the lowered house prices in many markets such as Saint John and Victoria, for example. The red-hot markets in Vancouver, Calgary and Toronto are skewing the average according to CIBC economists Benjamin Tal and Avery Shenfeld and more than one-quarter of the sales are now in cities where house prices are increasing by less than the current rate of inflation – approximately 2.10 percent in August of 2014.

The CREA stat is no reason to panic once the numbers are broken down. The majority of that price gain are for high-end homes in the most expensive cities in the country—Toronto and Vancouver, said Avery Shenfeld in a Globe and Mail article and in the “their urban cores, as opposed to lower-priced alternatives in the suburbs.”
Evan Siddall, CEO of Canada Mortgage and Housing Corporation (CMHC) also sees no need to worry. Interestingly CMHC has a Housing Price Analysis and Assessment tool that gauges the housing market and takes into account the following:

•  Overheating of demand in the market

• Acceleration in prices

• Overvaluation in prices

• Overbuilding

The assessment of Canada’s housing market at the moment shows no immediate problems at the national level. Sidall was quoted as saying, “Our educated opinion is that growth in house prices in Canada will moderate.”

This opinion is shared by many in the industry. John Bordignon, EVP, Strategic Development at Paradigm Quest says it boils down to supply and demand. “Certainly low mortgage interest rates have fuelled some of the increase in activity,” he said. “However, when we analyze the market, we can see that the increased price in the high-end market are skewing the average and cannot be sustained simply because that same price appreciation is not occurring in the move-up market.”

At the high-end of the housing spectrum we have a seller’s market, he explained – more buyers then there are homes, which would naturally increase the price. However, tighter mortgage lending guidelines coupled with changes to mortgage insurance regulation have priced out first time home buyers, making it more difficult for the move-up market to move. Higher prices at the top-end may be also causing some affordability issues among those considering a move up.

“Eventually, those high-end prices should moderate – when there are no buyers, prices come down, which is happening to prices in the mid-range due to fewer first time buyers.”

The two stats that bode well for Canada’s housing market according to Bordignon are employment levels and low interest rates. “Corrections occur when unemployment rises, interest rates increase and house prices continue to rise. Here in Canada, we have stable employment levels and interest rates are still relatively low.

Despite the talk of bubbles, resale activity has been relatively stable over the past few years. Unit sales have fluctuated between 35,000 and 40,000 units per month according to a report by CIBC’s Benjamin Tal. Sales of units at the low-to-mid price range have fallen notably since 2010. Sales for the mid-to-high price range have risen modestly and sales for the upper end of the market have increased rapidly.

“In the Toronto market, for example, we see that the more expensive the property is, the faster its price rises,” Tal said. “A household that owned a single-detached property valued at say $600K and would like to move up, would have to pay extra not only for the jump in category, say $900K, but also for the fact that the price of the move-up property has risen faster than the price of their own property.”

Despite all the talk of the ups and downs of house prices, the mortgage lending market remains robust. Mark Kerzner, President of TMG The Mortgage Group has watched activity in housing market rise and fall for many years and although tighter regulations over the past few years have slowed activity somewhat, overall the market is healthy.

“We’ve had a low rate environment for many years now, and while fixed rates are poised to increase due to higher bond yields, ARM discounts are also increasing thereby making ARMS more attractive. We anticipate PRIME will likely stay low into the first half of next year as the Bank of Canada stays the course with its benchmark rate that’s still at 1%,” he said.

Kerzner also highlights the fact that the Canadian economy is healthy and affordability is in check despite the increased regulatory insight. “Qualified buyers are still able to access very low rates and lenders are offering a variety of mortgage products to suit the needs of more buyers,” he said.

“If we examine the current situation we see low interest rates, a housing market where the prices in most markets are stabilizing, a healthy economy that is growing and an inflation rate that is holding steady,” he said.

“The most important factor is your personal readiness.  A home is a long term investment and its value will fluctuate up and down over the course of your tenure in it. It is both a commitment and an achievement that reflects your aspirations and lifestyle, and offers a great deal of personal satisfaction, as well as financial stability.”

Yes, prices have increased in a few cities so it’s important to analyze what’s going on in your local market because all real estate is local. Mortgage rates and house prices will fluctuate but over the long term, homeownership is a sound investment that compares well with other investments. When you invest in mutual funds, the mantra for most is buy and hold. Similarly, your home is a buy and hold investment.

Hello Friends and Colleagues

Although post-Labour Day symbolizes an end to summer and the start of a new school year for millions of Canadian students and their families, there is also a sense of renewal and excitement as a new year settles in.

As my wife and I helped prepare our three kids for school last week, I was reminded of just how quickly time passes, as well as the sense of anxiousness with what lies ahead.

For me, this “new year” is even more significant than the one we typically welcome in the cold of winter on January 1st. 

New beginnings allow us to review and reaffirm our current path while, at the same time, they encourage us to adapt and adjust our habits as we add and pursue new goals.

During the past few weeks I have spent some time thinking and reminiscing about the state of our industry – and more specifically – the state of our national association. I have always felt very much connected to the mortgage brokerage industry in Canada, working as an executive with our lenders and as president of a national mortgage brokerage. I now feel compelled to seek your support to become a Director (ONTARIO) of CAAMP.

I remember the first CIMBL (predecessor of CAAMP) conference I attended nearly 15 years ago. As a newly-minted mortgage executive I recall the excitement, the enthusiasm and that sense that we were all learning and growing as an industry. I knew at that moment that this was a very special industry and it was an association I would admire.  It was a place where seasoned mortgage professionals would come together, share best practices and chart a course for the future.

It seems there has been considerable chatter lately about the role of CAAMP, the regional associations, and the overlap between them. Questions around the need for a national association coupled with discussions about a broker’s only association have also been on the table. This is healthy dialogue and I am pleased to see the level of engagement about our representation in our industry.

I would like to take this opportunity to tell you the three key reasons why I continue to advocate for CAAMP:

1. I welcome the fact that our association is inclusive of brokers, lenders and suppliers alike. I feel that mix actually makes our voice stronger with the folks we are lobbying in Ottawa.
2. The fact that we share a board of directors to oversee this national association helps unify our day-to-day business interests. 
3. The majority of members are aligned in seeking a very strong and growing broker channel in Canada. 

CAAMP has been very effective in many respects but is not perfect.  A few areas where I see that CAAMP must improve are:

Co-ordination with all industry associations:events, sponsorship opportunities, research, government relations, etc. Doing so will benefit not just members of the various associations, but the strength and voice of our industry as a whole

In addition, CAAMP has to be more responsive and approachable. It has to advocate the broker channel while improving its events and symposiums. CAAMP has to remain the best source for government and the media with respect to all-things-mortgages.

Over the years I have asked my teams, “What is the solution? Don’t just tell me your challenges; tell me the recommendations to fix them.”

At this point in my career, I feel I must get more involved. I want to be part of the solution.

I have been a member of our national association since 2001 and an AMP since 2007. On a personal level, I feel that CAAMP has provided me with an opportunity to connect with a large number of people across our industry over the years. The way I see it, ours is a very small, close industry and the opportunities to interact with our colleagues, suppliers, and competitors have proved priceless.

I appreciate your support and welcome your feedback, comments and questions.

Cheers to a “new year” and a new perspective.

Mark

Avoid common mistakes when purchasing a home

Young Canadians feel that housing is still a good investment, according to the 21st Annual RBC Home Ownership Poll. Nearly nine-in-ten (86%) of those aged 25-34 believe that owning a house or condo is a very good investment, up from less than eight-in-ten (78%) in 2013. Interest in purchasing has increased in nearly every region in the country from last year. This change in buying intention bodes well for the housing market and shows a renewed confidence in young buyers.

Those potential home owners named job stability and manageable debt levels as the reasons why they would consider buying. Among those likely to buy a home within the next two years, four-in-ten will be first time homebuyers.

The old adage “Buyer Beware” however, still holds true. Most homeowners admit to making at least one mistake when they purchased their home according to the last year’s RBC Home Ownership Poll. While owning a home is a dream come true for many, it can also be stress-laden if you find you’ve made an error.

Here are 10 mistakes to watch out for when you take the leap:

1. Property needed work – a lot of it. Even with a home inspection, new homebuyers may get into a home and find it costs more than they expected to make improvements.  Don’t rush in, sit down and plan.
2. Not having a bigger down payment.  Having a larger down payment can lower mortgage payments, which could help with the household budget.
3. No Home Inspection. If you skip the step you might find the repairs needed may be astronomical, especially if you purchase an older home. An inspector will look at the overall foundation and structural features of the house, the plumbing system, will look for the presence of mould or pest infestations, check the heating and air conditioning, as well as the electrical system.
4. Not budgeting for the increased costs. Consider all the costs involved and create a realistic budget.  There are monthly mortgage payments, property taxes, and utility bills. On top of that you’ll probably want to redecorate, buy new furniture etc. Plan your budget accordingly. 
5. Not knowing the closing costs. Closing day is coming and you get the call from the lawyer to come in and sign the papers and, oh, bring a certified cheque or bank draft for X amount of dollars. WHAT? Yes, fees and disbursements. There’s the land transfer fee, the title fee, the lawyer’s fee, etc. Don’t get caught short.
6. Forgetting about future needs. If you’re planning on having kids, shop accordingly.  
7. Not getting a pre-approved for a mortgage. You won’t know what price range you can afford and what a lender will give you without a pre-approval. It’s easy, it’s free and absolutely necessary. If something turns up that may prevent you from purchasing, a mortgage professional can offer you solutions.  
8. Falling love with a house. Fall in love with each other but not with a house. You will not listen to the advice everyone is giving you. You will ignore the obvious cracks in the foundation because it has 18ft. ceilings and that great stone fireplace you’ve always wanted. Beware of buyer’s remorse.
9.  Not checking market value of neighbourhood. This can cause some purchasers to pay too much. Especially a home that has been upgraded to the max in an area that won’t keep its value – unless you plan to live there the rest of your life.
10.  Focusing too much on interest rates. Don’t rush in to a market because the rates are low. And don’t focus on getting the lowest rate. Focus on the mortgage loan and term that works for you and your financial situation.