With interest rates now on the rise, 2 Questions: How much? & How fast?
- Rates are up by 1.45% on the Variable already (Prime was 1.75% and is now 3.2%)
- There HAS BEEN a 1 x .25% increase and 1 x .5% increase so far = .75% so far
- Expected increases are 1 x .5% or .75%, and 1 x .25% still to come.
- so expect Prime to get to 3.95% from 3.20% today, April 25th.
- Insured variable rates are at Prime – 0.95% = 3.2 – .95% = 2.25% today
- and they are expected to increase to 3.95% – .95% = 3.00% and then hold and decrease in the Fall of 2022.
- these rates are lower than the current 5-year fixed rates of about 4% and are expected to come down in the Fall, 2022.
Traditionally the Bank of Canada has used 0.25% as the standard increment for any interest rate move up, or down. Occasionally the Bank will move its trendsetting Policy Rate by .50%, as it did at its last setting on April 13.
The last time the central bank boosted the, so-called, overnight rate by ½% was 20 years ago. Now the Bank seems to be laying the ground work for an even bigger increase of .75% at its next setting in June. There has not been a three-quarter point increase since the late 1990s.
Inflation remains the key concern for the BoC. In March the inflation rate hit 6.7%, a 30-year high. The central bank wants to see inflation at around 2.0%. But it does not expect that to happen until sometime late next year.
Bank of Canada Governor will “not rule anything out” when it comes to interest rates and taming inflation. “We’re prepared to be as forceful as needed and I’m really going to let those words speak for themselves.”
While higher inflation was not unexpected as the economy recovered from the pandemic, it is lingering longer than anticipated. The Bank says this is largely due to:
- on-going waves of COVID-19, particularly in China, that have disrupted manufacturing and the supply chain;
- the Russian invasion of Ukraine; and
- spending fuelled by those rock-bottom interest rates that were designed to keep the economy moving during the pandemic.
The Bank is thought to be aiming for a Policy Rate of between 2% and 3%. That is considered a “neutral” rate that neither stimulates nor restrains the economy.
At the current pace, that could be reached by the fall of 2022.
Love it when the newspapers do the telling for us.
Almost 40% of all mortgages are via brokers now. Up from 25% 15 years ago. There is a reason to use a broker that has been in business for 15 years or longer, like Mortgage Mark Herman of Mortgages Are Marvellous.
Joe Samson & Associates of CIR Realty asked 32 top mortgage experts our tips for home buying. The results are interesting for sure. And I do agree with most all of what they say.
A great set of top mortgage tips for sure.
Here is a link to the post: http://www.joesamson.com/blog/canadas-top-mortgage-experts-give-away-their-best-mortgage-tips.html
I sent back 3 tips for each part of the question … they are below.
#1 tip in the buying process: use a top broker with at least 5 year experience because we have more pull, get more exceptions, and get better standard rates for your mortgage. Ensure you send in all the documents ahead of time BEFORE shopping so they can all be reviewed to ensure the purchase goes smoothly. People lose sleep due to the bank making them run around like crazy getting all the docs after they buy and the entire file may not work. Getting all the data in before shopping ensures a smooth purchase and ensure you are shopping in the right price range. There is nothing more disappointing than looking at 350k condos, putting in an offer and getting a decline and then having to buy for 200k. Of course all the 200k condos are nowhere as good as the 350k ones … that is why they cost almost 2 times as much!
#1 tip for the actual property: I would rather have the smallest/ least attractive home in a great community than the best home in a poor location/ area/ community. With the great community you get all the great amenities – family skating rinks, good friendly neighbors, etc.
#1 tip for the mortgage: Biweekly accelerated payments cuts the effective amortization down by few years. That is a huge difference by doing nothing other than paying every time you get a pay check. (It is not worth doing weekly payments as the cash budgeting will always leave you short at least 2 times a year and the $100 NSF fee will put you father behind than ahead.) And paying even a little bit more in the first 5 years of your mortgage will end up saving you 3 times that in the end. So that $5000 now will end up saving you $15,000 over the life of the mortgage in interest! And remember to take a holiday, not just pay that mortgage down!
Please feel free to call or reply with comments or questions.
Mark Herman, AMP, B. Comm., CAM, MBA-Finance
WINNER: #1 Franchise for Funded $ Mortgage Volume at Mortgage Alliance Canada, 2013 and 2014!
Accredited Mortgage Professional | Mortgage Alliance | Mortgages are Marvelous
Mortgages are Marvellous just won the #1 mortgage brokerage for all of Canada, based on total value of funded mortgages at Mortgage Alliance, Canada’s largest SuperBrokerage with more than 100 offices and 1,800 agents from coast to coast.We also won this in 2013 so this is 2 years in a row.
Congratulations to all of our team.
We think it is becuase of our process – ensuring your deal will work BEFORE you buy and getting all the docs in and duscussing your deal with the bank BEFORE you buy!
Mark Herman, Top Calgary Alberta mortgage broker.
These comments below are in addition to the report last week that said that because Toronto has:
lots of in-migration,
New to Canada migration and
no other kinds of homes being built in the inner city
they do need all of these new condos and it is not a bubble. Interesting.
Economists to condo investors: Smile!
Written by Vernon Clement Jones
Condo investors in Toronto have every reason to be keep smiling, with two separate bank reports suggesting their assets are almost certain to retain their value at the same time their cash flow gets buoyed by rental demand.
“As CMHC… mentioned, capital return for investors who bought new condominiums and decided to rent them once the construction was complete, could earn superior returns than on other investment products,” reads Laurentian Banks’ July economic outlook. “Furthermore, condominiums rents are generally 40% more expensive than apartments of same dimensions in the Toronto CMA, the most important spread in the whole country.”
RBC is also weighing in on the future of Canada’s most controversial housing market, suggesting there’s no indication condos, despite what most see as a glut of inventory, are in a bubble.
Far from it.
“Based on market activity to date,” say economists for the heftiest of Canada’s big banks, “the total number of new housing units (condos) completed by builders has not exceeded the GTA’s demographic requirements and is unlikely to do so by any significant magnitude in the next few years.”
That dual analysis effectively counters concerns that T.O.’s high-rise properties are primed to fall in value as renters find themselves spoiled for choice and investors are forced to slash prices. The naysayers are also worried that even new construction will be subjected to a major price correction and in the short-term, a phenomenon directly tied to mortgage rule changes making it harder to win financing.
That could, in fact, still happen, although not likely on the scale many analysts had predicted earlier this year, says Laurentian in its analysis.
Here is the news release from the Canadian Association of Accredited Mortgage Professionals (CAAMP):
The Federal Finance Minister announced further changes to Canada’s mortgage insurance rules. Four measures were announced:
1. Amortizations reduced to 25 years
2. Refinancing limited to 80%
3. Properties purchased at over $1 million no longer eligible for mortgage insurance
4. GDS and TDS set at 39% and 44%
5. Line of Credits – LOCs – will soon be limited to 65% of the home value or LTV (Loan to Value.)
How the changes will be applied…
So we have until July 9th to get as many applicants under contract in order to access the current mortgage insurance rules. Possession on these contracts must be completed prior to Dec. 31, 2012.
Applicants going under contract on a home purchase drawn up after July 9th will have to qualify for a mortgage under the new guidelines. We will update all pre-approvals on July 9th under the new insured mortgage guidelines.
Q1. What is required to qualify for an exception to the new parameters?
A. The new measures will apply as of July 9, 2012. Exceptions will be made to satisfy a binding purchase and sale, financing or refinancing agreement where a mortgage insurance application has been made before July 9, 2012. While the changes come into force on July 9, 2012, any mortgage insurance applications received after June 21, 2012 and before July 9, 2012 that do not conform to the measures announced today must be funded by December 31, 2012.
These guidelines have existed for some time but are now more solidified. Lenders typically require that borrowers have a credit score of greater than 680 to qualify for these elevated GDS and TDS levels. Now that we are limited to a 25 year amortization knowing exactly what the upper limits on GDS and TDS are going to be critical.
Q2. Why is the Government limiting the maximum gross debt service (GDS) and total debt service (TDS) ratios?
A. The GDS ratio is the share of the borrower’s gross household income that is needed to pay for home-related expenses, such as mortgage payments, property taxes and heating expenses. The TDS ratio is the share of the borrower’s gross income that is needed to pay for home-related expenses and all other debt obligations, such as credit cards and car loans.
The new measure announced today will set the maximum GDS ratio at 39 per cent and reduce the maximum TDS ratio to 44 per cent. These debt service ratios measure the share of a household’s income that is required to cover payments associated with servicing debt. Both measures are already used by lenders and mortgage insurers to assess a borrower’s ability to pay. Setting a GDS limit and reducing the TDS limit will help prevent Canadian households from getting overextended and reduce the number of households vulnerable to economic shocks or an increase in interest rates.
More Technical Nerdy Data:
CAAMP believes that Canadians understand the importance of paying down their mortgages. These changes, together with new OSFI underwriting guidelines – also to be announced today – may precipitate the housing market downturn the government so desperately wants to avoid. The changes take effect July 9, 2012.
CAAMP was pleased that it was again successful in ensuring the 5% down payment rule remains intact; however, the government may have overreached with this latest round of changes.
-Important to note that these rules apply in high-ratio insured mortgage – not conventional mortgages. We will likely see changes to conventional lending over time. Many lenders will opt to apply the same rules to all mortgages but there will be exceptions. Many lender is Canada now only offer insured mortgage regardless of the down payment so these rules are going to impact the majority of applications.
-We have seen changes every year for the last four years and in all cases existing mortgages already approved under the old rules were exempt from the rule changes. I would expect the same response this time with existing approved files not being affected by the current changes. I will let you know as soon as I have some understanding of how pre-approvals will be affected.
-In his new release this morning Jim Flaherty specifically mentions the Toronto/Vancouver condo market so rather than restricting condo development in those two cities they have opted to impact the entire country. They also mention the concern over Canadian household debt which had already consistently been dropping.
-OSFI the mortgage regulator is also expect to make mortgage related changes today. 65% maximum finance for lines of credit and amortization restrictions relative to age have been discussed as additional possibly changes. There is going to be a lot of confusion relative to news releases so check in with me if you have questions on specific client situations.
1. Item one is pretty severe. Fewer buyers will qualify to get into the market, those that do qualify took a haircut on what they can afford.
2. Reduced from 85%. Somewhat immaterial because the reduction from 90-85% limited the refinance market significantly already. Now even more Canadians will not be able to move high interest debt into extremely low interest mortgage debt.
3. We don’t see a lot of insured mortgage files in this price range. This rule appears to be focused directly on Toronto and Vancouver.
4. This one needs some clarification. These higher GDS and TDS ratios have always been around but limited to very high credit score applicants. I will try to get some clarification on the specifics of this changes. I believe that this item is just solidifying rules that have been very subjective historically.
Here is more bad news on collateral mortgages.
People refuse to sign a 3 year cell phone contract but then for some reason have no problem in losing every single thing you have ever made and be sued into bankruptcy by your bank for taking one of these mortgages. Again, we do not offer them but TD, Scotia, ING, and RBC have them as STANDARD. I would rather take a new 3 year cell phone contract!
Beware the pitfals of collateral mortgages
By Mark Weisleder | Sat Jul 30 2011
When you apply for a mortgage, you usually just ask about the term, amount, interest rate and monthly payment. Not many people understand the difference between a conventional mortgage and a collateral mortgage. Yet many banks are now asking borrowers to sign collateral mortgages — and it could result in them being tied to this bank, for life.
With a normal conventional mortgage you bargain for a set amount, rate and amortization. Say the property is worth $250,000 — you bargain for a $200,000 loan, at 3.5 per cent, a five-year term/25-year amortization, payments of $998.54 per month.
A conventional mortgage is registered against the property for $200,000. If all the payments are made on time, the mortgage is renewed on the same terms every five years and no prepayments are made, the balance is zero after 25 years.
Should another lender decide to lend you money as a second mortgage, there is nothing stopping them from doing so, subject to their own guidelines. Under normal circumstances the principal balance on a conventional mortgage goes only one way, down. In addition, banks will accept “transfers” of conventional mortgages from other banks, at little or no cost to the consumer.
A collateral mortgage has as its primary security a promissory note or loan agreement and as “backup,” a collateral security, being a mortgage against your property. The difference is that, in most cases, the mortgage will be for 125 per cent of the value of the property. In our example, the mortgage registered will be for $312,500. But you will only receive $200,000. The loan agreement will indicate the actual amount of the loan, interest rate and monthly payments.
The collateral mortgage may indicate an interest rate of prime plus 5-10 per cent. This will permit you to go back to this same bank and borrow more money from time to time, without having to register new security. The lender will offer you a closing service, to register the mortgage against your property, at fees that will be cheaper than what a lawyer would charge you. Sounds good so far, doesn’t it?
However, this collateral loan agreement has different consequences, which are usually not explained to the borrower.
• Most banks will not accept “transfers” of collateral mortgages from other banks, so the consumer is forced to pay discharge fees to get out of one mortgage and additional fees to register a new mortgage if they move to a new lender. Thus the bank is able to tie you to them for all your lending needs indefinitely because it will cost you too much to move.
• Lenders may be able to use the collateral mortgage to offset any other unpaid debts you have. Offset is a right under Canadian law that says a lender may be able to seize equity you have in your home, over and above the mortgage balance, to pay, for example, a credit-card balance, a car loan, or any loan you may have co-signed that is in default with the same lender. In essence any loans you may have with that lender may be secured by the collateral mortgage. Nobody goes into a mortgage thinking about default, but “stuff” happens in people’s lives and 25 years is a long time.
• Let’s say your house value is $200,000. A collateral first mortgage registered on the property is $250,000. The amount owing on the mortgage is $150,000. If you were to need an additional $20,000, but the lender declines to lend it for any reason, then practically speaking you won’t be able to approach any other lender. They will not go behind a $250,000 mortgage. Your only way out would be to pay any prepayment penalty to get out of the first mortgage and pay any additional costs to get a new mortgage.
• Let’s say your mortgage is in good standing but you default under a credit line with the same bank. The bank could in most cases still start default proceedings under your mortgage, meaning you could lose the house.
• Some lenders are offering collateral mortgages in a “negative option billing” manner. Unless you are informed enough to say you want a conventional mortgage, you will be asked to sign documents for a collateral mortgage.
I spoke with David O’Gorman, the president and principal mortgage broker with MortgageLand Inc. He tells me it is his duty under the law to ensure the “suitability” of any mortgage he arranges for a consumer.
He would be hard pressed to justify the recommendation of this type of collateral first mortgage to any consumer, without disclosing both verbally and in writing the points listed above, and he believes the consumer should have their own lawyer review everything before they sign.
Lending money to people without proper explanation of the consequences is wrong. The banking regulators need to look into this practice and stop it. In the meantime, do not sign any mortgage document without discussing it first with your own lawyer.
This is an article that was sent to me. It is totally technical and I love it. This is the real reason behind what are the lowest rates we have ever seen.
It also explains why the days of Prime -.95% are GONE for what looks like a long time.
In between the lines is says rates are going to go up quickly as soon as there is a sniff of recovery.
In the last few days, RBC and Scotiabank have eliminated their advertised variable-rate discounts.
They’re now promoting variable mortgages at prime + 0.10%, twenty basis points more than their previous “special offers.”
Prime + 0.10% (i.e., 3.10%) is an interesting number. A few months ago consumers thought that fat variable-rate discounts were here to stay. Variables above prime will now come as a shock to some people.
The banks are well aware of that. They know that pricing above prime impacts consumer psychology.
They could have priced at prime. Spreads are not that horrendous. But pricing above prime makes more of an impact. It makes higher-profit fixed rates more appealing and it mentally prepares consumers for potentially higher VRM premiums down the road.
That said, banks are not just arbitrarily sticking it to borrowers. Far and away, the main reason variable rates are worsening is that banks’ costs are rising.
At the moment, there are multiple factors at play:
• Higher risk premiums are compressing margins.
O We have Europe to thank for the that.
O The TED spread, a measure of interbank credit risk, just made a new 2½ year high. As volatility increases, banks have to factor that into their funding models.
O Another reflection of risk is the most recent floating rate Canada Mortgage Bond (which some lenders use to fund variable-rate mortgages). It was issued at a 15 basis point premium over the prior issue in August.
• Margin balancing is an underlying bank motive.
O Banks have publicly stated their desire to even out margins between profitable fixed rates and low-margin variables, and they’re slowly doing just that.
O Back in September, RBC Bank exec David McKay put it this way: “…Given the dislocation between fixed and variable, the very, very thin margins (of variables), we felt we needed to move prices up in our variable rate book.”
• New regulations (e.g., IFRS) have boosted the amount of capital required for mortgage lending.
O That has lowered the return on capital for mortgages, and thus influenced rates higher.
• Status Quo for prime rate doesn’t help margins.
O Lenders partly rely on deposits (that money rotting in your chequing and savings accounts) to fund VRMs.
O Demand deposit rates rise slower than prime rate. So, when prime goes up, some lenders get wider margins temporarily.
O When expectations changed three months ago to suggest that prime rate will fall or stay flat (instead of rise like expected), it was bad news for some deposit-taking lenders. That’s because they now have no spread improvement to look forward to in the near-to-medium term.
O MBABC President Geoff Parkin says that until recently, “lenders have been prepared to accept low (VRM) profit margins with the knowledge that, as the prime rate inevitably rises, so too will their profit on variable mortgages.” As it turns out, the inevitable is taking longer than the market expected.
More good news on the market outlook.
November 6, 2011. 8:33 pm
Pay attention. Something’s happening here,” says Don Campbell, president of the Real Estate Investment Network in Canada.
Campbell is paying attention to the all the reports coming out these days showing some positive economic news for Alberta and Calgary. Good economic growth. In-migration levels rising. And employment growth leading the way in Canada.
The real estate market lags the economy by about 18 months, he says.And the economy is in recovery. We’ve now seen the job growth and the population growth starting to affect the rental vacancy rates which have gone down, resulting in rents rising.
Campbell says that by the spring of 2013, and perhaps by the fall of 2012, there will be a real strong upward pressure on demand for resale homes in Calgary and surrounding areas.
He predicts there will also be a jump in listings at that time which will keep a little bit of a cap on the price increases. So will continued world economic turmoil.
But even with that Calgary should expect strong price growth in the value of resale properties.
“I think you’re going to see a nice steady eight to 10 per cent increase in 2013 in average sale price for Calgary (year-over-year),” says Campbell, one of the authors of the book Secrets of the Canadian Real Estate Cycle.
I love this data below as it is easily summarized into: World events mean that mortgage rates in Canada are going to stay low for about another year. This is great news for people in the variable as rates (Prime) were expected to rise and they are not going to for a while now. Fixed rates will also stay low too so everyone wins.
If you are not sleepy right now then do not bother to read the rest of this below. Perhaps bookmark it for a sleepless night and use the powers of economic speak to zonk you out then.
On Wednesday September 7, 2011, 4:51 pm EDT
Watching the Bank of Canada’s language on the economy change over the past year is like seeing a healthy, upbeat person gradually come around to the idea that a serious illness is overtaking them.
A year ago, the central bank was continuing the slow process of raising its key interest rate toward familiar levels, as the western world began to put the financial cataclysms of 2008 behind it. On Sept. 8, 2010, the target rate for overnight loans between banks rose to one per cent.
And here’s how the world economy looked to the Bank of Canada — getting better, but though not steadily: “The global economic recovery is proceeding but remains uneven, balancing strong activity in emerging market economies with weak growth in some advanced economies,” the Bank of Canada said in September of 2010.
And Canada’s economy — buoyed by demand for commodities like oil, gas, uranium and fertilizer — was recovering: “The Bank now expects the economic recovery in Canada to be slightly more gradual than it had projected in its July Monetary Policy Report (MPR), largely reflecting a weaker profile for U.S. activity,” the central bank’s statement read at the time.
It was canny, however, about forecasting any further increases in rates, sensing possible trouble ahead: “Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook.”
That was code for don’t get too excited, folks: a lot could still go wrong — and it did.
Remember that for more than a year, from April 2009 to June 2010, the central bank’s key rate had been 0.25 per cent — effectively zero, or maximum stimulus, as a rising Canadian dollar did some of the bank’s inflation-cooling work and the world began to recover its appetite for Canadian commodities.
The bank had gradually increased its key rate over the next few months to 0.75 per cent. Then came the bump to one per cent exactly a year ago.
Since then, as Europe’s debt problems have flared in Greece, Ireland, Portugal and Spain, and in some people have taken to the streets to protest government attempts to curb spending and remain solvent, the Bank of Canada’s key rate has been rock steady at one per cent.
Now watch how the language has moderated, as central bank economists saw the economy flattening:
On Oct. 10, leaving the rate at one per cent, the bank said: “In advanced economies, temporary factors supporting growth in 2010 — such as the inventory cycle and pent-up demand — have largely run their course and fiscal stimulus will shift to fiscal consolidation over the projection horizon .… The combination of difficult labour market dynamics and ongoing deleveraging in many advanced economies is expected to moderate the pace of growth relative to prior expectations. These factors will contribute to a weaker-than-projected recovery in the United States in particular.”
By Dec. 7, it saw recovery “largely as expected,” but sounded the first note of bigger trouble ahead: “At the same time, there is an increased risk that sovereign debt concerns in several countries could trigger renewed strains in global financial markets.”
On Jan. 18, 2011 — happy new year! — there were signs the economy was rebounding all too well, with government spending in the U.S. and Canada showing up in growth all over. As well, Canadian commodities remained hot sellers, pushing up the value of the Canadian dollar.
In fact, the bank said, “the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada’s current account deficit to a 20-year high.”
Translation: “No need to raise interest rates.”
On March 1, the recovery kept pushing ahead, driven by exports, but the bank left rates unchanged, and stuck with this now-boilerplate paragraph at the end of its release: “This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered.”
On April 12, the bank forecast 2.9 per cent gross domestic product growth in 2011 and 2.6 per cent in 2012 — all good, with robust spending and business investment leading investors to “become noticeably less risk-averse.”
And yet, searching the horizon for clouds, the bank saw enough to stick with its boilerplate: “This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of material excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered.”
By May 31, however, the bank began to see some of its more horrible imaginings coming true, and the boilerplate was dropped. Again leaving the key rate at one per cent, the bank said global inflation might be growing, but “the persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.”
Stimulus might be “eventually withdrawn,” it said, but “such reduction would need to be carefully considered. ”
On July 19, the bank’s language noted slower-than-expected U.S. economic growth, Japan recovering at a lower-than-expected pace from its nuclear disaster, and said “widespread concerns over sovereign debt have increased risk aversion and volatility in financial markets.” In other words, investors were getting jumpy about how Europe might pull itself together without major defaults and weakened currency.”
And on Wednesday, laying out all the factors that are besetting global growth and the Canadian economy, the bank finally sounded a doctor facing a sick patient.
It didn’t explicitly suggest returning to more stimulus (lowering interest rates), as some economists had forecast it might, but the bank no longer expected to withdraw economic stimulus:
“In light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.”