Negative interest rates and you

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

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

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

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

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

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

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

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

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

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

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

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.

TMG brokers are a giving group

By Mark Kerzner, President, TMG The Mortgage Group

We are living in a volatile time. Every day there seems to be an economic or geo-political eruption somewhere in our ever-shrinking world. Even though our attention is fixed elsewhere, there are many great causes to support (especially during this time of year) in our own backyard.

TMG The Mortgage Group Canada Inc (TMG) has operated a charitable foundation for a number of years supporting local charities and families in need. While we continue to support our local communities we were introduced to the Breakfast Club of Canada two years ago and decided to get involved on a national scale.

And while the personal story of its founder Daniel Germain is very captivating, it was learning that one in seven  children in Canada go to school hungry each and every day that called us to action.  We met with and were interviewed by the Breakfast Club of Canada (BCC) to see if we were a corporate fit.

In our first year we raised over $54,000 through corporate fundraising initiatives, and also encouraged grassroots volunteering.

As we complete our second year supporting this amazing charity we are on target to raise $125,000. Perhaps more rewarding is the way that this was accomplished.  TMG brokers and staff across the country have taken it upon themselves to organize fundraising events in a number of very creative ways. They range from long distance walks to golf tournaments and auctions. In addition, a large number of TMG brokers make a donation with every mortgage they originate.

For me, one of the most rewarding days of the year is when we get to volunteer in the schools themselves during TMG’s National Breakfast Day. On November 19th, 15 teams from coast-to-coast made and served nutritious breakfast for students and got to see firsthand the appreciation from the wonderful students themselves.

Here are just a few of the comments we’ve received.

This was amazing! The gentlemen who came to my breakfast club were kind and generous and, most importantly, wonderful with the kids, Thanks TMG!” – Moncton

I want to start by thanking you and your team on behalf of our school for this morning’s treats to our students. The TMG team served over 100 smoothies to our students. – Winnipeg

Just wanted to say a BIG thank you to everyone involved in today’s volunteer effort – it was a huge hit with the kids and the TMG team was absolutely fantastic! We so appreciated their enthusiasm and positive attitudes – and, of course, the delicious smoothies! – Hamilton

These community events are where inspiration meets activism. What results is even great commitment to giving back. This is also why I am optimistic that next year will result in an even greater contribution to this wonderful initiative.

I am proud just to be a part of it.

Mark

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.

Proud to be named Vice-Chair of CAAMP

Friends:

I remember the first CIMBL (precursor to CAAMP) conference I attended 16 years ago. As a newly-minted mortgage executive I recall an excitement, enthusiasm and a sense that we were all learning and growing together. I knew at that moment that this was a very special industry and it was an association I would admire for many years to come.  CAAMP was a place where new and seasoned mortgage professionals would come together, share best practices and chart a course for the future.

Looking back on this past year it is remarkable to me the ground we have covered as an Association and what lies ahead.  I feel privileged to have been part of the discussion, and debate, over many issues that impact our industry and the members we represent.

Having sat behind ‘closed doors’ I can tell you that I feel your Board worked tirelessly on your behalf over  the past year.  The passion, commitment and understanding they have for our industry will continue to propel the Association forward, representing our member’s interests in a very meaningful way.  I feel privileged to be recognized as the Vice Chair of CAAMP for the upcoming year.

I advocate for CAAMP because:

1.  Our association is inclusive of brokers, lenders and suppliers alike.  That mix actually makes our voice stronger when we are lobbying in Ottawa.
2. Our different (broker, insurer, lender, etc) yet interdependent businesses helps unify our day-to-day business interests.
3. Members are aligned in seeking a very strong and growing broker channel in Canada. 
4. Quite honestly, because it is in my DNA, I have a deep passion for this industry and the people it serves just as the staff and volunteers at our association have. 

CAAMP is not perfect – but we are engaged.  We will continue the positive work done in recent years and be even more approachable to our members, still more relevant to our stakeholders and better coordinated with our regions.

I am extremely proud to count myself among such a committed and passionate group of fellow CAAMP Board members. I am confident that our Board will represent the voices of ours members.

If you have any feedback or seek to get more involved please reach out to me or any of your directors directly at any time:  www.caamp.org/board-of-directors

Cheers,

Mark

Consult a mortgage professional for sound mortgage planning

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

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

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

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

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

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

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

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

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

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

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

Canadians seem to love debt

Canadians have a growing love affair with debt. Household debt hit a new record in August as consumer spending jumped 2.3 % in the second quarter of the year, despite the fact that we are also in a recession, “technically” speaking.

So where is this debt coming from? Well, we’re buying houses, cars, furniture and clothing. Household credit is rising its fastest since 2012 – 80% of that is due to an increase in mortgage debt. In 2013, the pace of credit growth was 2% -- it’s now rising to just under 3%.

Retail sales has had its best start to the year in the past decade. Credit-card spending has gone up by 8% this year; spending on restaurants and fast food is up more than 12%. And we’re pouring more money into home improvements. Spending on home improvements has increased by 10% in the second quarter of the year.

So why is this happening? Being employed helps. The unemployment rate is holding steady at about 6.9%. Low borrowing costs also helps. The Bank of Canada rate is .50% and mortgages, both variable and fixed are at historical lows. In fact, consumer spending has stepped in as the fuel for the economy ever since the slowdown in our resources sector. 


Are we vulnerable?  It is indeed a concern for policy makers and it is unlikely that consumer spending can power the economy for too long. There is also a huge discrepancy among the provinces. Ontario and British Columbia are strong markets, while spending and consumer confidence have taken a hit in Alberta and Saskatchewan. Also, spending has not matched income growth. 
Higher debt loads also mean that consumers now spend an average 14% of after-tax income on their debts. This is up from 11% in 1990, even though interest rates have plunged from 14% back then to below 1% today.
So what now?  When you look at the global economy, we don’t see a pretty picture – most economies are experiencing slow growth. Because Canada depends on trading partners for much of its growth, we must wait for other countries to start their turnarounds.

Moody’s Analytics chief economist Mark Zandi had this to say in an interview in the Financial Post. “I think [consumers] feel a little bit tired,” he said “There has been a lot of debt accumulation and leverage. I don’t think Canadian consumers can lead the way for the economy.”

It’s still going to take some time. The U.S Fed recently decided to hold steady its prime rate, a tacit acknowledgement that its economy still isn’t up to growth expectations.

The Bank of Canada’s Governor Stephen Poloz has been on the talk circuit, spreading words of encouragement.

 “Canada has seen this movie before,” he said in a speech to the Calgary Economic Development, a body funded by the city and private-sector partners. “We’ve adjusted to rising prices; we can adjust to falling ones. These adjustments are never easy. They are often difficult and painful for affected individuals and their families. But they are necessary.”

Eventually, however, policy-makers and the Canadian government will need to find a way to grow the economy by boosting exports, hiking government infrastructure spending or spurring capital investment from businesses in order to give consumers a break.