Prime Rate Cut; Dec 4, 2019

With the latest developments the Bank of Canada (BoC) has clear path to reduce the Prime rate from 3.95 to probably 3.70%

The Bank of Canada is feeling the pressure to get back into the game with a rate reduction and one obstacle has now been removed.

The bank held its rate the same for an 8th straight meeting on October 30th.

At the same time it has clearly signaled it may not be able to hold that line much longer.

The bank pointed directly at trade conflicts (such as the U.S. – China tariff war) as the key cause of a global economic slowdown and around the world more than 35 other central banks have already cut rates in an effort to keep growth up.

The U.S. Federal Reserve has made three cuts in the past several months.  That has boosted the strength of the Canadian dollar which makes the country’s exports more expensive on the world market which is unwelcome.

Great news that the Bank is not concerned that a drop in interest rates will trigger a renewed frenzy of debt-funded consumer spending.  It is satisfied that the biggest component of household debt – mortgages – have been stabilized by the B-20 regulations.  And another big obstruction has been removed.  The federal election is over so the bank can operate without risking the appearance of political favoritism.

Fixed rates are still the way to go right now.

They are close to the all time 119-year lows right now.

Mortgage Mark Herman

 

A lesson from RBC’s mortgage rate increase

I love this article from the Globe as it explains why rates are going up a bit and what expectaions are for the near term.

Call for a rate hold if you are thinking of buying in the next 4 months!

“Borrowers who use a mortgage broker pay less …,” Bank of Canada.

See our reviews here: https://www.markherman.ca/CustomerREVIEWS.ubr

Mark Herman, Top best Calgary mortgage broker

The lesson home buyers should take from RBC’s mortgage rate hike

Variable rate mortgage – how payments will change for the new rate

We are getting many calls on this so here is how it works for MOST of the banks.

The Bank of Canada (BofC) reduced their Prime rate by 1/4 % or .25% last week to 0.75% from 1% where it has been for about 3 years.

The banks took a while to decide ifthey were going to lower their rates as well. 3 times before the banks have either not passed on the entire rate reduction to customers or not moved at all and kep the savings to themselves.

Now that most banks have lowered their rate by .15% this is how payments are impacted:

a.    If they have an Adjustable Rate Mortgage – ARM mortgage – then the rate will be the new rate starting on the “effective date.”
b.    The payment after the next payment will change to reflect this new rate. (So if you pay monthly on the 1st, the Feb 1st payment will be your current payment, but the March 1st Payment will be the new payment, If you pay weekly every Friday, this Friday will be the same payment but the next Friday will be the new payment)
c.    Because the rate has gone down, your payment will decrease.
d.    Because the interest rate has gone down, the next payment that is still at your existing payment amount will apply a little more to your principal.
e.    Customer will receive a letter with their new payment amounts in the snail-mail.

Hope that clears things up a bit.

Call if you have questions.

Mark Herman, Top Calgary Alberta Mortgage Broker.

Residential Market Update – Mortgage Rates to stay low for a while.

A great summary of where we are today in relation to the economy and the housing market.

There have been a couple of highlights for the Canadian housing market in the past week:

  • the U.S. Federal Reserve announcement that it is committed to low interest rates until 2015 and
  • the latest global housing outlook that puts this country in better shape than most.

Anyone looking for a new mortgage or a mortgage renewal will likely be heartened by the American central bank’s interest rate pledge. The commitment to low rates makes it harder, but not impossible, for the Bank of Canada to move on its desire to increase rates.

However, that desire got a boost from Canada’s economic think-tank, the C.D. Howe Institute. It says the central bank needs to change the way it calculates inflation to take into account rising house prices. The institute says the current calculation keeps inflation lower than it really is and puts the Bank of Canada at risk of keeping rates too low for too long.

As for the global housing outlook, it shows Canadian prices continue to rise, albeit more slowly than a year ago. But around the world, countries showing price declines outnumbered gainers by more than two to one.

Possible Mortgage Rate Increase from these 112.7 year lows?

We are able to watch some indicators that drive mortgage interest rates. This is how we can guess what rates are going to do over a 10 day or so period.

Right now the spread on Canadian 5 year mortgage bond is 1.795%. This is WELL BELOW the comfort zone of 1.90% and 2.10%.  Can we potentially see a rise in interest rates?

Hard to say as the spread has be bouncing all over the last few days, but it could trigger a small rise in rates if it does not bounce back soon.

What does this mean?

  • If you are going to buy a home, or are planning on moving up or
  • have a mortgage that is up for renewal in less than 120 days from now, or know someone who does, then
  • CALL for a rate hold at today’s super low rates ASAP. We answer the phone from 9 am to 10 pm every way, holidays and weekends included.

Other Key Points about Mortgage Brokers:

  • We have access to all the banks.
  • The banks pay us for doing their work for them so there are no fees to clients for our services.
  • The rates and terms & conditions are better than the Big 6 offer.
  • We offer unbiased, expert advice; we only do mortgages and nothing else; and have been 1 of the top-10 brokers in Canada for the last 5 years.

Please feel free to call or reply with comments or questions.

These are exciting times,

Mark Herman, AMP, B. Comm., CAM, MBA-Finance

1 of the Top-10 brokers of 1,700 at Mortgage Alliance

Direct: 403-681-4376

Accredited Mortgage Professional | Mortgage Alliance – Mortgages are Marvelous

Toll Free Secure E-Fax: 1-866-823-1279

E-mail: mark.herman@shaw.ca | Web: https://www.markherman.ca/

A study conducted by Maritz Canada showed customers renewing or renegotiating with a mortgage broker’s help reported a rate decrease of 1.40%, compared to a decrease of 1.00% among all mortgage renewals.

Brokers are your best choice for seeking home financing advice and assistance.

Why putting less than 20% down can lead to a better mortgage rate

This is true – the banks are sending us 2 rates … 1 rate for a CMHC/ Genworth insured mortgage and a slightly higher one for more than 20% down – or a conventional mortgage that is not insured.

The article below fully explains why.

By Garry Marr, Financial Post May 3, 2012

It doesn’t make much sense, but a skimpy down payment on a home might actually get you a better mortgage rate in today’s market.

Blame the government subsidy known as mortgage default insurance, which ultimately makes it less risky to lend money to someone who has only 5% down compared to someone with 20%.

Consumers with less than 20% down must get mortgage default insurance in Canada if they are borrowing from a federally regulated bank. The cost is up to 2.75% of the mortgage amount upfront on a 25-year amortization but that fee comes with 100% backing from the federal government if the insurance is provided by Crown corporation Canada Mortgage and Housing Corp.

“It’s already happening,” says Rob McLister, editor of Canadian Mortgage Trends, who says secondary lenders are now offering rates that are 10 to 15 basis points higher for a closed five-year mortgage for uninsured consumers.

The crackdown on mortgage insurance announced by Jim Flaherty, the federal Finance Minister, could exacerbate the situation. Mr. Flaherty, who mused to the Financial Post editorial board last week about getting CMHC out of the mortgage insurance business, has placed the agency under the authority of the country’s banking regulator, the Office of the Superintendent of Financial Institutions.

Mr. Flaherty also put in new rules on bulk or portfolio insurance. The banks had been paying the insurance premium on low-ratio mortgages – loans with more than 20% down – because it was easier to securitize them.

However, Mr. Flaherty says those loans will no longer be allowed in the government’s covered bond program.

“Long story short, it is going to tick up rates to some degree,” Mr. McLister says. “You are seeing an interesting phenomenon where if you go to get a mortgage today, you are oftentimes quoted a higher rate on a conventional mortgage. Presumably you have less risk because you have more equity.”

“There is a question on whether they will continue doing that or raise rates overall to compensate for higher conventional mortgage costs,” Mr. McLister says.

“When we can’t securitize a deal, there is a different cost of funds but the bank continues to offer the same rate,” said Ms. Haque, adding her bank did charge a premium for stated income deals, which usually means self-employed people, but removed the difference last week. The premium was 20 basis points.

“Looking at the competitive landscape, it was a disadvantage,” she says. “We were aiming to target pricing that was specific and for the risk appetite for that deal itself. We didn’t want one [deal] compensating for the other.”

But the banks have bigger fish to fry than just your mortgage. Those with the larger equity position in their homes may be a costlier mortgage to fund, but they also could be a future line-of-credit customers. There’s also the potential for other business such as RRSPs and TFSA, so losing a few basis points might make more sense in the long run.

Peter Routledge, an analyst at National Bank Financial, says he wouldn’t want to be an investor in a bank that approached its business any other way, though he did acknowledge there is a cost to keeping those conventional mortgages. “It’s in effect a subsidy,” Mr. Routledge says.

While banks may be eating some of the costs for people who are not eligible for a subsidy, if they continue down that road they might not be able to match the rates some of the secondary lenders are able to offer with insured mortgages.

It doesn’t sound like much, but the difference between, say, 3.14% and 3.29% on a $500,000 mortgage amortized over 25 years would be about $3,500 extra in interest on a five-year term.

It’s true that those people getting the better rate pay a hefty fee up front in insurance premiums, but they also represent a greater risk to the taxpayer. Do they deserve a better rate?

gmarr@nationalpost.com

Banks Have Canceled their 4-year Promos – Rates on the rise.

Still time to get a rate hold at the old rates if you hop to it.

The banks 2.99% four-year fixed promotions were intended to last until February 29. RBC and others have cancelled them early.

The nation’s banks rates are now:

  • 4-year fixed “special offer” by 40 bps to 3.39% – ours is at 2.99% – live deals only, closing in 30 days or less
  • 5-year fixed “special offer” by 10 bps to 4.04% – ours is at 3.09% / 3.25% – live deals only, close in 30 days or less
  • 5-year fixed posted rate by 10 bps to 5.24% – ours is at 3.29%, 120 day rate hold

Some quick points on these changes:

  • Other major banks are expected to match some or all of RBC’s rate increases.
  • For just 10-20 bps more (i.e., 3.09-3.19%) you can find several brokers offering 5-year fixed mortgages. That’s a reasonable premium for one extra year of rate protection.
  • RBC’s 4.04% five-year “special offer” is almost a full point above 5-year fixed rates on the street. No one other than the most novice mortgage shoppers take this rate seriously.
  • RBC spokesman Matt Gierasimczuk attributed today’s rate increases to this:

“Our long-term funding costs have gone up considerably due to global economic concerns and, while we have held off in passing on these rate changes to our clients, it is now necessary for us to increase this mortgage rate.” (Source: Bloomberg)

  • We can find nothing to suggest RBC’s 4-year fixed funding cost rose 40 basis points since mid-January. It has among the lowest cost of capital in Canada and other lenders have recently launched new 2.99% four-year specials of their own (one of them today). That is some pretty bad spin they are trying to put on.
  • The Globe and Mail quotes sources who say that regulators were unhappy with the “price war” that followed BMO’s 2.99% five-year special. That may be somewhat linked to this announcement, hints the article. The government is clearly worried that low rates may incite borrowing and inflate the debt balloon further.

Rates, spreads and all the rest

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.

 

How do we (mortgage brokers) know rates are going up?

Hi All – many people ask how we know that rates are going to change ahead of time. Below is a sample of the data that we read on a daily basis. If you were motivated enough to read things like this every day – or figure them out for yourself – then you would know too. Or, just let a mortgage broker do it.

MARKET COMMENTS

Bond yields today are roughly where they were a week ago but there has been plenty of volatility over the intervening period.

Last week yields were pushed higher by in-line or better than expected economic data in Canada (Manufacturing Sales Growth, Trade Balance) and the US (Retail Sales Growth, Initial and Continuing Jobless Claims, Trade Balance), together with a sense of optimism that the European debt crisis will be resolved and/or that concerted steps there would be taken to protect the banking system.

Generally speaking, “good” economic news tends to push bond yields higher as market participants are less interested in the safety bonds provide.

Notwithstanding last week’s developments, yields have come back down today as worse than expected economic data in the US and a clarification from Germany that a once-and-for-all solution to Europe’s debt crisis will not be forthcoming and that markets should expect such crisis to extend into next year.

In all, these developments present the global economy in better shape than what we thought at the start of the week, and the rise in rates reflects that change.

Canadian debt levels no cause for alarm, economist says

Her comments below are right on.

roma luciw

Globe and Mail Blog

Posted on Monday, September 19, 2011 6:40PM EDT

A report that showed Canadian household debt levels have topped U.S. ones should be taken with a grain of salt, according to one economist.

In a note released Monday, National Bank of Canada’s Matthieu Arseneau says the Canadian government’s indicator on household debt “does not lend itself well to such an international comparison owing to the considerable differences between the social safety nets of the two countries.”

At first glance, personal disposable income levels appear much lower in Canada than in the United States. Mr. Arseneau attributes that to higher tax levels in Canada that are used, in part, to fund our national health care system.

Americans, meanwhile, must allocate nearly 20 per cent of their personal disposable income to paying for health care, he says. “If we adjust for this factor, the debt ratio of U.S. households exceeds that of their Canadian counterparts by 12 per cent.”

A report released last week showed that Canadian household debt rose to a record high in the second quarter, surpassing levels seen in the United States since the start of the year.

Statistics Canada said last Tuesday that the ratio of household credit-market debt – which includes mortgages, consumer credit and loans – to personal disposable income climbed to 149 per cent from 147 per cent in the first quarter. That’s the highest level since Statscan started gathering figures in this category in 1990.

The government agency attributed the growing debt to higher mortgages and increased consumer credit borrowing.

With interest rates slated to remain at low levels for the foreseeable future, Canadians are taking on both mortgages and consumer loans. Policy makers have expressed concerns about high household debt levels and warned against what could happen if rates were to rise.

In his note, Mr. Arseneau also noted that the Statscan ratio represents only one facet of the financial health of households.

“If we consider the ratio of debt to net worth, which is still markedly higher in the United States, we understand why household deleveraging is ongoing south of the border whereas nothing of the sort is happening in Canada,” he said.

Mr. Arseneau concluded his note by warning of the need to be vigilant, because excessive household debt levels “could represent a risk factor for Canada’s economic stability down the road.”