This seems to be the topic of this week … what can I use for down payment on my home?
All banks DO ACCEPT these approved methods to gather down payment for a home.
Acceptable Sources of Down Payment:
Ineligible Sources of Down Payment
The new Tax-Free First Home Savings Account (FHSA) and the
FTHBI – First Time Home Buyer Incentive were the government matches your down payment up to 5% ARE both great ideas!
Mortgage Mark Herman, top Calgary Alberta Mortgage Broker since 2004!
Bank of Canada holds its policy interest rate steady, updates its outlook
Against the backdrop of a decelerating economy and growing calls for less restrictive monetary policy, the Bank of Canada made its final scheduled interest rate decision of the year today.
That decision – to keep its overnight policy interest rate at 5.00% – was broadly expected. What was not entirely expected (or welcome) was the Bank’s statement that it is “still concerned” about risks to the outlook for inflation and “remains prepared to raise” its policy rate “further” if needed.
The Bank’s observations are captured in the summary below.
Since August, we have been saying the VARIABLE RATE mortgage is the way to go, and this proves we were right on the money.
Mortgage Mark Herman, top Calgary Alberta and Victoria BC mortgage broker
Inflation facts and housing market commentary
- A slowdown in the Canadian economy is reducing inflationary pressures in a “broadening range” of goods and services prices
- Combined with a drop in gasoline prices, this contributed to easing of CPI inflation to 3.1% in October
- However, “shelter price inflation” picked up, reflecting faster growth in rent and other housing costs along with the continued contribution from elevated mortgage interest costs
- In recent months, the Bank’s preferred measures of core inflation have been around 3.5-4%, with the October data coming in towards the lower end of this range
- Wages are still rising by 4-5%
Canadian economic performance
- Economic growth “stalled through the middle quarters of 2023 with real GDP contracting at a rate of 1.1% in the third quarter, following growth of 1.4% in the second quarter
- Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year
- Exports and inventory adjustment “subtracted” from GDP growth in the third quarter, while government spending and new home construction provided a boost
- The labour market continues to ease: job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly
- Overall, these data and indicators for the fourth quarter suggest the economy is “no longer in excess demand”
Global economic performance and outlook
- The global economy continues to slow and inflation has eased further
- In the United States, growth has been stronger than expected, led by robust consumer spending, but is “likely to weaken in the months ahead” as past policy rate increases work their way through the economy
- Growth in the euro area has weakened and, combined with lower energy prices, has reduced inflationary pressures
- Oil prices are about $10-per-barrel lower than was assumed in the Bank’s October Monetary Policy Report
- Financial conditions have also eased, with long-term interest rates “unwinding” some of the sharp increases seen earlier in the autumn. The US dollar has weakened against most currencies, including Canada’s
Summary and Outlook
Despite (or in the Bank’s view because of) further signs that monetary policy is moderating spending and relieving price pressures, it decided to hold its policy rate at 5% and to continue to normalize its balance sheet.
The Bank also noted that it remains “concerned” about risks to the outlook for inflation and remains prepared to raise its policy rate further if needed. The Bank’s Governing Council also indicated it wants to see further and sustained easing in core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and “corporate pricing behaviour.”
Once again, the Bank repeated its mantra that it “remains resolute in its commitment to restoring price stability for Canadians.” As a result, we will have to wait until next year for any sign of rate relief.
The Bank’s next interest rate announcement lands on January 24, 2024.
In the meantime, please feel free to call me and discuss financing options that will empower you in this economic cycle, and the ones ahead.
Finally some good news for buyers.
Buy soon before everyone that did not buy sees this data and tries to by tool
Mortgage Mark Herman – top, best Calgary mortgage broker
Queston 1: What about all these (negative amortizing) mortgages that will now take 71 years to pay off?
Yes, they are called VRMs – Variable rate Mortgages – and we don’t really offer/sell /even talk about them for that exact reason – what if the rates rates jump? And they did.
We do offer ARMs – Adjustable Rate Mortgage – and we do recommend as of August 2023 because:
- Rates have topped and are slowly on the way down right now so the rate will go down
- The current rate starts lower than the 1, 2, 3, and 4 year fixed right now; and ARM rates should be below the 5-year fixed by Fall of 2024.
Question 2: What is the difference between VRM and ARM?
- With an ARM – adjustable rate mortgage – the amount of your payment will go up and down based on the changes of the prime lending rate
- The VRM – Variable rate mortgage – your mortgage payment amount always remains the same. It does not go up and down with changes in the prime lending rate. And when rates jump to 4x what they were when your loan started, then you are not even paying interest any more, and end up at 70 years left to pay it off.
As the article below states, VRMs are mostly from BMO, CIBC, Royal Bank and TD.
ARMs – Adjustable rate mortgages – are what we offer, they can’t have a negative amortiztion and we don’t have any customers that were affected with negative loans.
Mortgage Mark Herman, best top Calgary mortgage broker
Concern over rise in negative amortization mortgages
On October 30th, the Bank also highlighted concern over negatively amortizing mortgages. Negative amortization occurs when a borrower’s monthly mortgage payment is less than the interest due on the loan and the outstanding mortgage balance grows over time rather than declining. This phenomenon is mostly associated with variable rate mortgages.
Those who bought or refinanced homes during the pandemic, when interest rates were at their lowest, heavily opted for variable rate mortgages (VRMs). In Canada, most VRMs come with fixed payments, where the interest portion is determined by the prevailing prime lending rate, while the rest is used to repay the principal. As a result, the Bank of Canada’s series of rate hikes – from 0.25% to 5% – has propelled growth in negative amortization mortgages with terms exceeding 30 years.
As of July 31, negative amortization mortgages were 24% of total mortgage portfolios (insured and uninsured) for BMO, CIBC, Royal and TD. This is equivalent to $277 billion in mortgages – up from virtually nil a year ago. National and Scotia mainly offer adjustable-rate mortgages – as rates change the mortgage payment changes to keep the amortization period fixed – so both banks have negligible exposure to negative amortization within their mortgage portfolios.
Variable Rate Exposure (as of July 31, 2023)
Source: Fitch Ratings
Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OFSI), has announced regulatory changes to address risks related to mortgages in negative amortization. Effective early next year, banks will be required to maintain a higher amount of capital, reflecting the elevated risk associated with mortgages in negative amortization when the loan-to-value ratio (LTV) surpasses 65% (i.e. when the outstanding mortgage balance is 65% or more of the value of the underlying property). The proposed changes are designed to incentivize banks to reduce the volume of mortgages that could potentially go into negative amortization.
Mortgage repayment trends
To assess how borrowers are reacting to the increase in rates, the prepayment report for floating rate 5-year mortgage-backed securities (MBS) pools, published by CMHC, serves as a valuable tool. Although it doesn’t pinpoint individual issuers, the report offers a comprehensive look at trends within the banks’ variable-rate mortgage (VRM) portfolio.
Report data indicates that borrowers with VRMs have been effectively managing impacts of rising rates by making partial principal payments or transitioning to fixed-rate mortgages. Enforcement activity, which is undertaken when a borrower is unable to make mortgage payments, has been minimal, which suggests that despite the rise in rates, defaults have remained low.
Also, the majority of non-amortizing mortgages, where payments are covering interest only, were recorded between November 2022 and February 2023. This is a positive sign that banks have taken measures to limit the growth of these mortgages.
One caution is around borrowers whose mortgage rates have exceeded the trigger point – that is, the rate at which the regular payment is no longer enough to cover the full amount of interest accrued since the last payment. These borrowers might encounter payment shock when their loans mature and are re-underwritten based on the original amortization but at higher rates and with larger principal amounts.
Those who were first-time homebuyers with high loan-to-value ratios, purchasing at or close to peak prices in 2020 or 2021, could face significant challenges during renewal, particularly if their equity position has been significantly eroded. Similar to Fitch, we anticipate that delinquency rates will not rise in 2024, remaining within the expected range of 0.2-0.25%.
Last week, the Bank of Canada held its policy rate at 5%. The decision was expected given slowing in the economy and modest improvement to core inflation measures.
The Bank is likely at the end of its tightening cycle. How soon it eases rates – and how low will rates go in the near to medium term – is the question #1
ANSWER: The general view from market economists is that we could see some easing of the overnight rate by mid-2024.
Question #2: How low. how far will Prime come down?
ANSWER: Prime is expected to come down a total of 2%.
DETAILS of Prime Cuts
- Prime is 7.2% now / November 2nd, 2023,
- Prime is expected to get down to to 5.2% or a bit lower, like 4.75% – 5.25% range by the end 2025; which looks like this:
- June/ July 2024, 1st Prime cuts = 6 months
- Prime reduction by o.25% every quarter = 1% less / year for the next 2 years = 24 months
- so these together = 30 months.
With Prime coming down, now is the time for you to take advantage of the Variable Rate reductions.
Variable Rates via brokers are at Prime – o.9%, while the Big-6 banks rates are Prime – o.15%.
YES, broker rates are 6x better than at the Big-6 lenders, o.9 – o.15 = o.75% better. It’s true!
Mortgage Mark Herman; Best Top Calgary Mortgage Broker for first time home buyers.
When might rates begin to fall?
The Bank’s latest Monetary Policy Report (MPR) also provides signals that we can monitor to gauge when rates could start declining.
When interest rates rise, one of the main ways monetary policy affects the economy is through reduced consumer spending on durable goods, like appliances, furniture and cars. Prices for durable goods, except for cars, have dropped from 5.4% to -0.4%, while prices for semi-durable goods, like food and clothing, have decreased from 4.3% to 2.1%. We’re still experiencing delays in delivering cars. As a result, manufacturers are concentrating on selling more expensive vehicles with higher margins and are offering fewer discounts from list prices.
Inflation in service prices, excluding shelter, has slowed from 5.1% to 1.5%. If bond rates begin to drop, we will see a gradual decline in mortgage costs. The challenge will be rental costs, which are soaring due to the very limited availability of rentals and the continuous influx of newcomers. Increasing housing supply is key to reducing rental prices. However, that is a problem that will take years to resolve given the significant shortage of housing.
Currently, the Bank is concerned about inflation expectations, corporate pricing behaviour, and wage growth. As noted in its Monetary Policy Report, “As excess demand eases, inflation is expected to slow. At the same time, inflation expectations should also fall, businesses’ pricing behaviour should normalize, and wage growth should moderate. So far, progress has occurred but somewhat more slowly than anticipated.”
The Bank will be careful to ensure that inflation expectations inconsistent with its 2% target are not embedded in corporate pricing and wage expectations. A slowing economy should help to lower those expectations.
The general view from market economists is that we could see some easing of the overnight rate by mid-2024.
NERD STUFF: Maintaining a restrictive rate policy
The Bank can maintain a restrictive policy even without increasing rates any further, simply by keeping rates at their current level. With the overnight rate at 5% and an inflation rate of 3.8%, the real policy rate is 1.2%. This rate is restrictive, since it is higher than the neutral real rate of interest, which the Bank estimates to be between 0 and 1%.
The neutral real rate of interest is the level of interest that neither stimulates nor restrains economic growth. In other words, it is the rate at which the economy is in balance, with stable prices and full employment. Therefore, when the real rate of interest is restrictive, we would expect GDP to slow.
In its recent Monetary Policy Report (MPR), the Bank is forecasting economic growth to average less than 1% over the next few quarters, while potential output growth is expected to average 2%, mainly due to population growth and increased labor productivity. This should lead to a negative output gap (low demand and a surplus of products) and lower inflation.
UGH! The BoC whacks borrowers again.
Mark Herman, Top Calgary Alberta Mortgage Broker
Yesterday, the Bank of Canada increased its overnight interest rate to 5.00% (+0.25% from June) because of the “accumulation of evidence” that excess demand and elevated core inflation are both proving more persistent and after taking into account its “revised outlook for economic activity and inflation.”
This decision was not unexpected by analysts but is disconcerting – as is the Bank’s pledge to continue its policy of quantitative tightening.
To understand today’s decision and the Bank’s current thinking on inflation, interest rates and the economy, we highlight its latest observations below:
Inflation facts and outlook
- In Canada, Consumer Price Index (CPI) inflation eased to 3.4% in May, a “substantial and welcome drop from its peak of 8.1% last summer”
- While CPI inflation has come down largely as expected so far this year, the downward momentum has come more from lower energy prices, and less from an easing of “underlying inflation”
- With the large price increases of last year removed from the annual data, there will be less near-term “downward momentum” in CPI inflation
- Moreover, with three-month rates of core inflation running around 3.5% to 4% since last September, “underlying price pressures appear to be more persistent than anticipated”, an outcome that is reinforced by the Bank’s business surveys, which found businesses are “still increasing their prices more frequently than normal”
- Global inflation is easing, with lower energy prices and a decline in goods price inflation; however, robust demand and tight labour markets are causing persistent inflationary pressures in services
Canadian housing and economic performance
- Canada’s economy has been stronger than expected, with more momentum in demand
- Consumption growth was “surprisingly strong” at 5.8% in the first quarter
- While the Bank expects consumer spending to slow in response to the cumulative increase in interest rates, recent retail trade and other data suggest more persistent excess demand in the economy
- The housing market has seen some pickup
- New construction and real estate listings are lagging demand, which is adding pressure to prices
- In the labour market, there are signs of more availability of workers, but conditions remain tight, and wage growth has been around 4-5%
- Strong population growth from immigration is adding both demand and supply to the economy: newcomers are helping to ease the shortage of workers while also boosting consumer spending and adding to demand for housing
Global economic performance and outlook
- Economic growth has been stronger than expected, especially in the United States, where consumer and business spending has been “surprisingly” resilient
- After a surge in early 2023, China’s economic growth is softening, with slowing exports and ongoing weakness in its property sector
- Growth in the euro area is effectively stalled: while the service sector continues to grow, manufacturing is contracting
- Global financial conditions have tightened, with bond yields up in North America and Europe as major central banks signal further interest rate increases may be needed to combat inflation
- The Bank’s July Monetary Policy Report projects the global economy will grow by “around 2.8% this year and 2.4% in 2024, followed by 2.7% growth in 2025”
Summary and Outlook
As higher interest rates continue to work their way through the economy, the BoC expects economic growth to slow, averaging around 1% through the second half of 2023 and the first half of next year. This implies real GDP growth of 1.8% in 2023 and 1.2% in 2024. The Canadian economy will then move into “modest excess supply” early next year before growth picks up to 2.4% in 2025.
In its July Monetary Policy Report, the Bank noted that CPI inflation is forecast to “hover” around 3% for the next year before gradually declining to 2% in the middle of 2025. This is a slower return to target than was forecast in its January and April projections. As a result, the Bank’s Governing Council remains concerned that progress towards its 2% inflation target “could stall, jeopardizing the return to price stability.”
In terms of what Canadians can expect in the near term, the Bank had this to say: “Quantitative tightening is complementing the restrictive stance of monetary policy and normalizing the Bank’s balance sheet. Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation. In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the 2% inflation target. The Bank remains resolute in its commitment to restoring price stability for Canadians.”
September 6th, 2023 is the Bank’s next scheduled policy rate announcement. Will there be 1x more increase?
Using Return-To-Work Income while on Maternity Leave to buy a home IS possible in Canada.
Are you on maternity leave and trying to buy a home, but the bank will not use your income? This is a common reason home buyers find us on the internet or their realtors send them to us.
We CAN use your FULL RETURN TO WORK SALARY as qualifying income, if you have a “return to work date” that is less than 12 months away from your home purchase possession date.
Big-6 banks do not do this and we have no idea why. It frustrates everyone, and broker lenders have no issue with it.
Mortgage Mark Herman, Top-Best Calgary mortgage broker near me.
And while we are it – our lenders also use CCB – Canadian Child tax Benefit – for all children aged UNDER 16, when the mortgage starts.
Big-6 banks don’t use this … not sure why that is.
What else about Broker Lenders?
Broker lenders are all secure, and many are publicly traded, and all are audited by the same staff the investigate all of the Big-6 banks.
Broker lenders also have payout penalties that are 500% to 800% LESS than the way Big-6 banks do it. Here are the links for that specific data on my blog:
- General explanation: https://markherman.ca/payout-penalties-how-the-big-5-banks-get-you/
- Details of all the lenders and their specific math: https://markherman.ca/fixed-rate-mortgage-penalties-larger-than-ever/
Broker lenders ALWAYS renew you are best rates, while Big-6 banks know that 86% of mortgages that renew will take the 1st offer so they “bump the rate” on you. Then you have to call in/ go in to chisel them down.
- At broker lenders, they expect you to call us to check the rates and we would jump at the chance to move you to a different lender and get paid again … so you get best rates with broker banks.
There is lots more to … call to find out.
Mortgage Mark Herman, licensed in Alberta since 2004.
Bank of Canada increased Consumer Prime to 6.45% – exactly as expected for the last 5 months. January 25th is the next BoC interest rate announcement & I hope it is a 0.25% increase and then holds there for all of 2023. We will see…
Mortgage Mark Herman, Best Calgary mortgage broker with a Master’s degree in Finance.
Today, the Bank of Canada increased its overnight benchmark interest rate 50 basis point to 4.25% from 3.75% in October. This is the 7th time this year that the Bank has addressed inflation and means the policy rate is now as high as it has been in 15 years.
We summarize the Bank’s observations below, including its forward-looking comments on the need/likelihood of future rate increases below:
- CPI inflation remained at 6.9% in October, with many of the goods and services Canadians regularly buy showing large price increases
- Measures of core inflation “remain around 5%”
- Three-month rates of change in core inflation have come down, “an early indicator that price pressures may be losing momentum”
Canadian Economic and housing market performance
- GDP growth in the third quarter was stronger than expected, and the economy continued to operate “in excess demand”
- The labor market remains “tight” with unemployment near historic lows
- While commodity exports have been strong, there is growing evidence that tighter monetary policy is restraining domestic demand: consumption moderated in the third quarter
- Housing market activity continues to decline
- Data since the October Monetary Policy Report supports the Bank’s outlook that growth will essentially stall” through the end of this year and the first half of 2023
Global inflation and economic performance
- Inflation around the world remains high and broadly based
- Global economic growth is slowing, although it is proving more resilient than was expected at the time of the Bank’s October Monetary Policy Report
- In the United States, the economy is weakening but consumption continues to be solid and the labor market remains “overheated”
- The gradual easing of global supply bottlenecks continues, although further progress could be disrupted by geopolitical events
Although the Bank’s commentary noted that price pressures that are driving high inflation may be losing momentum, it went on to say that inflation is “still too high” and that short-term “inflation expectations remain elevated.” In the Bank’s view, the longer that Canadian consumers and businesses expect inflation to be above the Bank’s 2% target, “the greater the risk that elevated inflation becomes entrenched.”
Given these economic signals, the Bank’s Governing Council stated that it “will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target.”
It concluded its statement with a familiar refrain: “We are resolute in our commitment to achieving the 2% inflation target and restoring price stability for Canadians.”
Analysts and commentators will seek to interpret those outlook comments for signs that the Bank has reached or believes it is close to reaching the terminal point in its current rate-hike cycle. For now, that remains a question of debate and speculation that will turn on future economic signals.
January 25th is the next BoC interest rate announcement. I hope it is a 0.25% increase and then holds there for all of 2023. We will see…
|Our Staff Economist, Dr. Sherry Cooper, has this to say about the Details of the latest Rate Increase.