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.

The U.S debt ceiling and Canada

There’s lots of talk south of the border as the deadline to raise the debt ceiling looms. Many Canadians are scratching their heads wondering what the heck it all means and should it matter to us. It’s a good question but the answer is complicated. 

Raising the debt ceiling allows the U.S Treasury to borrow more money to fund the business of government. Right now the government is in a partial shutdown, meaning many programs including social programs have stopped operating and workers have been sent home.  Not raising the debt ceiling means the U.S. Treasury will run out of money and won’t be able to cover its bills. If that happened, it would be a historical first.

No one really knows what would happen next. Some liken it to the Lehman Brothers collapse in 2008 that sent the U.S. economy into a recession, with global consequences, only this time it would be far worse.

 “A default would be unprecedented and has the potential to be catastrophic,” a U.S. Treasury report said. “Credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”

That’s not good.

The U.S. debt limit came into effect in 1917 to help Congress pay for World War One. It has been raised periodically to cover any shortfalls in government spending. In 2011, the Tea Party Republicans refused to approve raising the debt ceiling unless certain spending cuts were made – this time the impasse is about Obamacare.

Financial experts suggest that if the debt ceiling is not raised and the U.S. government defaults, the first thing that might happen is that investors will lose confidence and stock markets will fall, not only in the U.S., but globally as well. Borrowing costs will increase and economies will slow down. But those same experts agree that U.S. Congress will likely stop bickering and make concessions to avoid default. 

Last week, President Obama held a press conference sending a message to Congress on how ridiculous it was to keep their “no deal” stance. U.S. business and U.S. markets have sent loud and clear messages to Congress to not push the country to the brink of default. The Republican Party is now viewed favourably by only 28% of Americans, down from 38% in September. This is the lowest favourable rating measured for either party since Gallup began asking this question in 1992.

A  Globe and Mail article on October 16, 2013, questioned if even having a debt ceiling was a good idea. A University of Chicago January survey of U.S. economists found that a majority strongly agree that “a separate debt ceiling that has to be increased periodically creates unneeded uncertainty and can potentially lead to worse financial outcomes.” 

The reason economists don’t like it is because of how much it sets back economic growth worldwide.  Central Banks around the world are already making contingency plans.

Tomorrow, October 17 is deadline day. When one country is a powerhouse for global economic growth and is vulnerable to the whims of one small sector of its constituency, then perhaps the economic model needs to changed.

Can you afford to buy a house?

With rising interest rates, overvalued real estate and a lackluster economy, are first time home buyers and average income households being priced out of the housing market. Perhaps. Now that five-year fixed rates have increased two-thirds of a percentage point or more – up from 2.89% to 3.79% -- in the past month, first time buyers may find their dream of owning their first home out of reach, for now.

It was getting tougher to qualify for a mortgage when the government made changes to the rules, but now it seems to have solidified with the recent rate increases. There are other challenges as well. When qualifying applicants lender look at ratios to determine the percentage of household income that is allowed to go towards housing costs – that ratio is approximately 32%. The average non-mortgage debt load is approximately $28,000.

So, let’s say you have an average income of $70,000, your credit score is in the 700s, which is good, and your debt load is $28,000. You are looking for a modestly-price home because you don’t want to be house poor and have managed to save $15,000, which is 5% of a $300,000 home.  At the current 5-year fixed rate of 3.59%, amortized over 25 years – you don’t qualify. If we could amortize over a longer period, which we could a couple of years ago, then your housing costs ratio would fit, but your total debt, which includes your housing costs and all your other debt would disqualify you.

What could you afford? A mortgage of $213,000.  Depending on where you live in Canada -- that may not be an option. An affordability review of the real estate market across Canada by RBC shows that, nationally, the condo market is affordable with housing costs approximately 28.1%. However, costs for two-storey houses eats up to 48% of household incomes, with Vancouver coming in at 87.2%, Toronto and Edmonton at 62.7%. The most affordable cities have housing costs at 34.4%. The most interesting finding is that these affordability numbers have been pretty much the same since1985. Although Vancouver and Toronto are above their long-term affordability averages, those averages have always been above 32%.

So what can you do? There are options – paying off debt is the big one. A mortgage professional will be able to guide you, offer you options and devise a plan to help you achieve your dream of home ownership.
What will happen next in the housing market? No one can predict that, but some analysts believe that prices will start coming down. They also believe the economy will start to grow again next year as the world economies finally emerge from a prolonged recession. That would be welcome news for Canada, where growth has stagnated. It would mean better job prospects and higher earnings and a thriving economy.

Mortgage rates may not go down, but higher earnings, and less debt means you will be able to afford the house of your dreams.

Rising interest rates and your mortgage

By Mark Kerzner
President, TMG The Mortgage Group

Over the past few years it seemed every expert was telling us that interest rates would be rising, but after years of record low fixed rates, I think many of us stopped believing the headlines. 

With bond prices dropping and yields on the rise, those rates (fixed-rate mortgages) that are tied to bond yields have shown dramatic movement over the past month. For the most qualified, the rates on 5-year fixed mortgages have increased from a low of 2.89% to 3.59%, and are potentially still rising.

The term, “jumping on the band-wagon” now comes to mind. We see it most often with professional sports teams, fads, and sometimes even with politicians. It seems we may be seeing it in the mortgage industry as well. In the past week, I’ve read a number of articles speaking to the virtues of variable-rate mortgages.


Are variable-rate products quickly becoming the better option?

Do you remember the days of 5-year adjusted rate mortgages (ARM) priced at PRIME – 75 or even PRIME – 90? If you were fortunate enough to have one of those products and stayed with it over the course of the term, you’ve come out a winner. Since the last PRIME – 75 funded approximately four to five years ago, those rates have become extinct and now those clients renewing their mortgages have a choice to make.

Should they renew into a current ARM product at PRIME – 40(ish)or take the security of a fixed-rate term in the fear that rates will continue to rise?

Economists are predicting the Bank of Canada will hold the overnight rate steady into 2014. That said, take these predictions with a grain of salt as many of those same economists had already called for increases back in 2012 and 2013. Economic conditions change and so do outlooks and forecasts.

When looking to determine if there will be interest rate shock it’s important for mortgage renewers to consider not just their current effective interest rate, which may be PRIME – 75 or 2.25%. Rather, focus on what the rates were at the time the mortgage was funded when PRIME was 4.75% (August 2008) to the current rate options. 

In many cases there will be no shock at all, especially if clients took advantage of hold-the-payment options while rates started to decrease. For example, the effective interest rate and payments set at the time of funding was 4% and current 5-yr. fixed mortgages can still be had at the 3.39 to 3.69% range.

Relatively speaking, variable-rate mortgages are cheaper today at PRIME (3%) – 40 than they were five years ago when they were at PRIME (4.75%) – 75.  The spread between fixed rates and variable rates is sometimes referred to as the “rate premium” or even “fixed rate insurance” and is a good evaluator of the attractiveness between fixed and variable.

This time, five years ago, that spread was approximately 150 basis points (5-yr. fixed rates averaged 5.50%). Today that spread is around 100 basis points. If that spread grows, variable-rate mortgages will again become more attractive compared to their fixed-rate counterparts.

Before making any final decisions keep in mind two last items. First, in late 2008 both fixed rates and PRIME were dropping. Today, PRIME is remaining flat for the time being while fixed rates are rising.  Second, credit and lending guidelines have changed significantly in the past five years.

Today’s borrowers are better qualified and have fewer opportunities to defer interest costs using extended amortization and lower down payment options.  Those who are willing to take the additional risks of variable products are better equipped to do so than those in the past even though the risk premium is effectively higher than it was five years ago. 

That said, our rate environment today compared to August 2008 is quite different since both variable and fixed rates do not seem to be dropping. To really understand the best option, it’s best to discuss these factors with a dedicated mortgage broker. He or she will review the various products available and can help clients select the best one that fits lifestyle and financial goals.

Understanding the impact of these rising rates

It is possible that rising interest rates are here to stay, but I think it is important to ask the question: Is it just a blip or a trend? For those who believe it is a trend, here are a few important factors to keep in mind in a rising interest rate environment:

1. Affordability. According to its latest quarterly report, RBC says its affordability index reversed course, meaning housing has gotten relatively more expensive, in two of the three categories it measures. Mortgage rates in isolation don’t mean very much. What is really important though is how much your payment is relative to your income.

2. More people will select variable even though they still must qualify on the artificially-set benchmark rate. This is simply a reality of the mortgage business.  I see this trend continuing as long as the Bank of Canada does not raise its overnight rate.

3. Reduced demand for housing may result in lower home pricing. If affordability does become an issue, and more potential buyers are forced to the sidelines, then fewer people will be looking for houses. Economics would then dictate that with fewer people looking and supply remaining constant, this would lead to falling home prices.

4. Short term rush into the housing market for those sitting on the fence.  The flipside to point #3 above is that there are a great many people who have been looking at purchasing.  Rate increases might trigger buying activity out of concern that rates will keep rising and they may be priced out of the market.

5. If rates are on an upward trajectory make sure you get pre-approved with a rate hold as soon as possible. Fixed rates may be on the rise but you can often protect yourself against major increases, on a short term basis, with a rate hold.

6. If rates continue to rise and you originated your mortgage at your bank branch you must shop your mortgage at renewal.  There may be thousands of dollars at stake. This topic has been covered numerous times and there are many tips to be had. (http://blogger.mortgagegroup.com/2013/06/save-at-renewal-time-by-using-mortgage.html)

In the end, market volatility breeds uncertainty but it also brings opportunity. This is an ideal time to talk mortgage strategy with your mortgage professional.  The strategy is vital and is, in many respects, more important than the rate.

It may be time to consider the variable rate or, from a historical context, it may be a great time to consider locking in to a fixed-rate product.  Either way, it’s up to you to be proactive and seek out advice.

What’s happening with interest rates?

Interest rates are on the rise.The Big banks have been inching up their rates since May, but have now moved quickly to 5-year fixed rates ranging from 3.79% or 3.89%, which is a 60 basis point hike from what they were six months ago.  The 5 year bond yields have themselves increased by 80+ basis points since the Spring.

However, variable mortgage rates and the prime lending rates are not increasing – yet. So, if you have a line of credit, your rates are staying the same.  If you have a variable mortgage rate or an adjusted rate mortgage (ARM), you’re safe for now.Only fixed mortgage rates are increasing.If you are renewing a mortgage, this is where you’ll likely feel the impact.

If you opted for a variable rate mortgage, today’s variable rates are, on average, around 2.65% compared to 2.1% five years ago. However, 5-yr. fixed posted rates were hovering around six per cent in 2008, but a mortgage professional could get a discounted rate from 4.2% to 4.9%. As fixed rates rise and the Prime rate stays put, now may be a good time to speak with a mortgage professional about the benefits of going variable.

But if banks follow RBC’s lead, then it will be tougher to qualify for a variable rate. The Royal Bank not only increased its fixed rates but also its benchmark rate for qualifying borrowers for variable rates and for fixed rate terms less than five years. The increase is a 20 basis points jump, from 5.14% to 5.34%, which means a household will need approximately $1,100 more income to get a variable-rate mortgage on a $300,000 house with 5% down.

This is also not a good time to wait it out, thinking that rates will come down as they have in the past. It may not be the case this time. Consumers have been getting the message about curbing household debt and have become better money managers.The housing market is showing signs of life and house prices are stabilizing. The economy is moving forward and low rates are just not sustainable anymore.

Fixed rates rely of bond markets. Bond yields are climbing higher so fixed rates climb right along with them. In June, the 5-year yield was up as much as 20+ basis points in less than 48 hours, driven by optimistic economic comments from the U.S. Fed. In CIBC’s Weekly Market Insight for July 12, 2013, chief economist Avery Shenfeld said, “As we move into 2014, better growth will see the Fed accepting a further climb in long rates.”

Stephen Poloz, the new Governor of the Bank of Canada said he would be holding the prime rate at 1 per cent. This is the number banks use to determine their lending rates for lines of credit and variable-rate mortgages. Poloz also added, “Over time, as the normalization of these conditions unfolds [growing economy], a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2-per-cent inflation target.”

That’s a nice way to say that rates will be going up. When is hard to predict,  but all indications are for early-to mid 2014.

Housing market breathes again

After months of somewhat depressing news for the housing industry, Canada’s housing market is showing signs of life. The buzz now is about a soft landing rather than a bubble bursting. Demand has increased in most parts of the country and new construction activity is increasing. Home prices are rising as well.
Despite warnings from analysts about a housing bubble, housing-market data are showing few signs of a sharp correction. A housing bubble is a type of economic bubble that occurs periodically in real estate markets,  characterized by rapid increases in valuations of housing until they reach unsustainable levels and then decline.

Minister Jim Flaherty tightened mortgage rules for a fourth time last year, concerned that an overbuilding of condos could lead to sharp price declines. Former Bank of Canada Governor Mark Carney identified record household debt as the biggest domestic risk to the economy.

However, our low interest rate environment has kept any bubbles or sharp corrections in check.  Now, the impact of Flaherty’s changes seems to be fading.

Households that put their purchase decisions on hold because of the stricter deadlines are now becoming more active. The latest data from Statistics Canada show that the number of homes changing hands is relatively steady, after a period of steep year-over-year sales declines. Even condo developers, who scaled back their activity, seem to be jumping back in. 

Even the Canadian Real Estate Association (CREA) has updated its forecast for home sales activity. May's sales were up 3.6 percent from April, a sign of momentum and the largest month-over-month increase in almost two and a half years. However, affordability may continue to be an issue as home prices tick upwards.

Benjamin Tal, deputy chief economist with CIBC predicts that prices will go down in the next year or two, but not by much. “Prices have held up so far because, as demand has fallen, so has the number of homeowners listing their properties for sale, Tal said in an interview with the Globe be and Mail. “I do not see smoke. I see a boring, slow process over five to seven years that will take fundamentals and prices back in line.”

All the signs point a recovery in the housing market and consumers are deciding to move forward with their purchase intentions. It’s a great time to discuss options with your mortgage professional who can help you navigate the waters of interest rates and mortgage products to find something that fits your financial goals.