Mortgage Market Primer
Mortgage Market Primer (TD)
If you have any interest in the nitty gritty of Canada’s mortgage industry, TD Securities’ Eric Lascelles has put out this fantastic market overview: Canadian Mortgage Market Primer
Here are some of the more notable points…
- 70% of Canadian lenders are deposit-taking institutions (Page 1)
- 5-year GICs and the Interest Rate Act are two reasons Canadian mortgage terms are usually five years or less (Page 5)
- There is a difference between Adjustable Rate Mortgages (ARMs) and Variable Rate Mortgages (VRMs). Both have variable rates but the former has variable payments while the latter has “fixed” payments. (Page 5)
- For any term over five years, the pre-payment penalty cannot be greater than three months interest once five years have elapsed. (Page 7)
- “Given a mortgage delinquency rate of 0.44% and the assumption of a (pessimistic) recovery rate of 80%, this means that expected mortgage portfolio losses for Canadian lenders are less than 10 basis points per year for uninsured mortgages.” (Page 8)
- About 50% of Canadian mortgages are insured. (Page 8)
- “Even with an insured mortgage, the lending institution manages the mortgage, directly handling payment collection, foreclosure, and sale of the home, where applicable.” (Page 10)
- 29% of Canadian mortgages are securitized versus 60% in the U.S. (Page 10)
- $175 billion of the $275 billion in Canadian securitized mortgages (64%) are sold into the Canada Mortgage Bond (CMB) program. (Page 10)
- Canadian borrowers can usually prepay 10-25% of their mortgage each year without penalty, but the average prepayment is less than 1%. (Page 11)
- It is estimated that the Insured Mortgage Purchase Program (IMPP), which allowed the government to buy back mortgages during the credit crisis in 2008-2010, netted the government extra profit of roughly $187.5 million. (Page 11)
- Lenders (or their agents) must continue servicing a mortgage after it’s sold into the CMB program—including assuming all pre-payment and uncovered default-related costs. Mortgage Insurance does not make lenders completely whole in the event of default. (Page 13)
The CMB program intentionally operates on a break-even basis (Page 14)
- Mortgage defaults “would have to increase by three- to four-fold to compromise the profitability” of CMHC’s default insurance program. CMHC should have ~$8.8 billion in insurance retained earnings as a buffer for its insurance business in 2010. (Page 15)
- Like any insurance business, CMHC’s is not completely without risk. (See Page 16)
- The CMB program adds very little additional risk for CMHC. The underlying mortgages are already insured. (Page 15)
- 71% of mortgagors with CMHC insurance have “equity in their homes of more than 20%.” (Page 16)
- “Over 40% of CMHC’s total business in 2008 was in areas, or for housing options, that are less well served or not served at all by the private sector mortgage insurers.” (Page 17)
Canadian Prime rate to go up only a bit.
As expected the economy is not as hot as every one thought. That means that Prime – as below – is now predicted to go up to .5% and then hold there or up to 1% for the rest of the year.
This means that the Variable rates are now very attractive because we know where Prime is headed – as in holding constant. A variable at Prime -.6 today is 2.5-.6= 1.9%. The 5 year fixed are more like 4.30%
Weak Canadian GDP puts BoC on the spot
Eric Lam, Financial Post · Friday, Jul. 2, 2010
With Canada’s economy stumbling in April, adding fuel to speculation the country’s roaring recovery that began in September 2009 was coming to an abrupt end, economists warned Canada’s central bank will have to tread carefully on its plan to raise interest rates for the rest of the year.
Derek Holt and Gorica Djeric, economists with Scotia Capital, said the Bank of Canada “was not likely to be swayed” by Wednesday’s economic data. The pair maintain a forecasted 1.25% benchmark rate by the end of the year.
“There should be enough strength in the underlying economic momentum to dismiss the drag on GDP in April as something that does not portend the start of a new trend,” the pair say in a note.
In April, Canada’s gross domestic product neither expanded nor contracted, compared with 0.6% growth in March. Economists surveyed by Bloomberg had been forecasting 0.2% growth in GDP for April.
This is the first time in eight months Canada’s economy did not expand.
In its report, Statistics Canada blames the stagnant April on a “large decline” in retail trade of 1.7%, after a 1.9% gain in March. Declines in manufacturing and utilities also contributed to the underperformance while advances in mining, wholesale trade, the public sector and construction helped to offset the decreases.
Krishen Rangasamy, economist with CIBC World Markets, said it was too soon to jump to conclusions.
“It’s too early to conclude from this GDP report that the recovery is already waning,” he said in a note on Wednesday. “The excellent handoff from March means that we’re starting the second quarter from a higher base, which sets Canada up for a decent quarter despite a slow start.”
Michael Gregory, senior economist with BMO Capital Markets, said that while the 3% growth now expected is respectable, it is a bit of a letdown compared with the 5% to 6% growth figures seen earlier.
“It’s kind of like driving on the highway at 100 kilometres an hour, then getting off and going 50,” he said in an interview. “But 3% growth is still all right and where we see it for this year.”
The second half of the year will likely move quite sluggishly, however, as a lot of spending in housing, renovation and other big-ticket items was “pulled forward” due to the HST, introduced in July in Ontario and British Columbia. Mr. Gregory expects growth of about 2% on average in the fall and winter months.
Canada’s economy also faces headwinds from the sovereign debt crisis in Europe, an even worse slowdown in the United States, and possible fallout in China, he warned.
Warren Jestin, chief economist with Scotia Economics, said in a note on Wednesday that Canada’s position as a resource leader should help keep it afloat in the face of other developed countries, although “this won’t be a hard race to win.”
The situation in Europe is troubling for Mr. Gregory, but he suspects the combination of weakening housing, high unemployment and zero credit growth will hurt the United States.
“That buzz you hear about a possible double-dip recession is legitimate and will remain a worry for markets the rest of the summer and into the fall,” he said. “It’s why we think the Bank of Canada will be on hold for a while after July.”
Mr. Gregory figures the central bank will raise rates 25 basis points at its next meeting in July, then go on hold to see how things play out in Canada the rest of the year. It is likely the BoC will push rates to 1% by the end of 2010 and add another 1 percentage point to 1.5 percentage points in 2011.
“An environment of 3% growth is still something that requires higher interest rates,” he said. “Rapid buildup in household debt is a long-term risk.”
Canadian Mortgage Rates May Slide Down
Canadian 5 yr bond yield is at 2.34%. The spread, (based on the 5 yr rate published rate of 4.49%) has jumped far above the comfort zone at 2.15.
The banks dropped their posted rates by .10bps lasts week
Explanation:
The rate of return on the bond, can be read through a yield curve, If the increase in bond yield continues to go up, the spread will continue to shrink and this could be a trigger for interest rates to rise. Currently lenders are looking for a spread, between 1.50 and 1.75.
Residential Mortgage Rates Lowered
- 4.49% to 4.19% to 4.09% – depending on how long your rate hold is for a 5 year fixed
- 1.90% = Prime – .6% = 2.5%-,65=1.90% for a variable.
Residential Mortgage Rates Lowered
TORONTO, June 24 /JAC/ – Residential mortgage rate changes as and when announced by major lenders.
TORONTO, June 24 /CNW/ – RBC Royal Bank announced today that it is decreasing its residential mortgage rates effective June 25, 2010.
The changes are as follows:
Fixed Rate Mortgages
- Six-month convertible 4.85 per cent (decreased by 0.10 per cent)
- One-year closed 3.60 per cent (decreased by 0.10 per cent)
- Two-year closed 3.95 per cent (decreased by 0.10 per cent)
- Three-year closed 4.50 per cent (decreased by 0.10 per cent)
- Four-year closed 5.54 per cent (decreased by 0.10 per cent)
- Five-year closed 5.89 per cent (decreased by 0.10 per cent)
- Seven-year closed 6.85 per cent (decreased by 0.10 per cent)
- Ten-year closed 7.00 per cent (decreased by 0.10 per cent)
Special Fixed Rate Offers*
- Four-year closed 4.39 per cent (decreased by 0.10 per cent)
- Five-year closed 4.49 per cent (decreased by 0.10 per cent)
* The rates indicated are special discounted rates and are not the posted rates of Royal Bank of Canada. To calculate a rate discount compare the Special Offer rate against the posted rate for the applicable term.
Special Offers may be changed, withdrawn or extended at any time, without notice. Not available in combination with any other rate discounts, offers or promotions.
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For further information: Media contact: Gillian McArdle, (416) 974-5506
TORONTO, June 24 /CNW/ – TD Canada Trust has changed its mortgage rates, effective June 25, 2010.
The changes are as follows:
Fixed Rates To/Change:
- 6-month convertible 4.75% – 0.10%
- 1-year open 6.70% N/C
- 1-year closed 3.80% – 0.10%
- 2-year closed 4.30% – 0.10%
- 3-year closed 4.85% – 0.10%
- 4-year closed 5.54% – 0.10%
- 5-year closed 5.89% – 0.10%
- 6-year closed 6.20% – 0.10%
- 7-year closed 6.59% N/C
- 10-year closed 6.90% N/C
Special Fixed Rate Offers To/Change:
- 1-year closed 2.80% – 0.10%
- 4-year closed 4.39% – 0.10%
- 5-year closed 4.49% – 0.10%
- 7-year closed 5.25% N/C
- 10-year closed 5.59% N/C
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For further information: Tashlin Hirani, Media Relations, Corporate and Public Affairs, TD Bank Financial Group, (416) 982-3375
TORONTO, June 25 /CNW/ – CIBC (CM: TSX; NYSE) today announced the following changes in mortgage rates:
- Six-month convertible 4.85 per cent, down 0.10 per cent
- Six-month open 6.70 per cent, no change
- One-year open 6.45 per cent, no change
- One-year closed 3.60 per cent, down 0.10 per cent
- Two-year closed 3.95 per cent, down 0.10 per cent
- Three-year closed 4.60 per cent, down 0.10 per cent
- Four-year closed 5.54 per cent, down 0.10 per cent
- Five-year closed 5.89 per cent, down 0.10 per cent
- Seven-year closed 6.95 per cent, down 0.10 per cent
- Ten-year closed 7.00 per cent, down 0.10 per cent
These rates are effective Saturday, June 26, 2010.
Canadian Economy Gathering Steam
TORONTO, June 22 /JAC/ – The Canadian economy is gathering steam, with Western Canada leading the way and all provinces participating, according to the Provincial Outlook report issued today by BMO Capital Markets Economics. Canadian growth is expected to reach 3.4 per cent in 2010 and 3.1 per cent in 2011, providing a strong rebound from the 2.5 per cent decline in 2009.
“Real GDP will likely expand across the country in 2010, with the strongest growth rates seen in Western Canada as commodity-sector activity recovers from a depressed year in 2009,” said Michael Gregory, Senior Economist, BMO Capital Markets, pictured top-left. “The theme of the ‘West Outperforming the Rest’ should persist into 2011 as global commodity demand remains firm, while a strong Canadian dollar tempers growth in Central Canada and capital investment activity begins to wane in Atlantic Canada.”
Highlights include:
Western Canada
• Western Canada is poised to benefit from a rebound in commodity prices, firming global demand for raw materials and a lower overall cost environment in the energy sector.
• Oil prices have more than doubled from their recession lows, and investment activity in Western Canada has started to pick up as a result.
• At the same time, reduced royalty rates in Alberta and various incentives in B.C. and Saskatchewan have helped improve the energy economics in the region, and have removed some of the political uncertainty surrounding the Alberta royalty regime.
• Meantime, Western Canada’s post-recession fiscal hole is much shallower than in Central Canada, and as a result, the impact on growth of budget-balancing measures will be milder in the coming years, allowing real GDP growth of about 4 per cent per year through 2011.
Central Canada
• The recovery is also well underway in Central Canada, as auto production has rebounded from the depths of recession, and Ontario’s housing market has roared back to see record sales and price levels.
• While housing is expected to cool through the rest of 2010, and the manufacturing sectors in Ontario and Quebec will continue to bear the weight of a strong Canadian dollar, domestic demand will pick up the slack.
• Indeed, retail sales have rebounded to record levels in both provinces, as have the number of service-sector jobs.
• However, longer-term growth in the region will be challenged by fiscal restraint—Ontario faces the largest budget deficit in the country and Quebec has already begun to implement tax increases and spending restraint.
• Taken together, these factors all point to below-average economic growth of slightly less than 3 per cent per year through 2011.
Atlantic Canada
• Atlantic Canada’s outlook remains stable.
• Aside from Newfoundland & Labrador (which was hit by some one-time factors), the region saw very modest real GDP declines in 2009.
• One factor supporting growth during the recession was capital investment in both the public and private sectors.
• While government stimulus remains strong in the region, some major private-sector projects will wind down in the next few years.
• This, combined with an ongoing challenge in the manufacturing sector, will lead to below-average growth of about 2.5 per cent per year through 2011 in Atlantic Canada.
Alberta’s economy to rebound this year, lead nation in GDP growth
More good news on the economy that does not make the papers.
Alberta’s economy to rebound this year, lead nation in GDP growth
Oil sands investment boosts forecast of 4.1% spurt
CALGARY – Alberta will experience a significant economic rebound this year and lead the nation in GDP growth, says a report released today by Scotiabank.
The report forecast GDP growth of 4.1 per cent for the province while overall Canadian growth would be 3.6 per cent, the strongest advance in a decade for the country. In 2011, Scotiabank is forecasting Alberta economic growth at 3.4 per cent – tied with Saskatchewan for the best in Canada. Nationally, it is predicting Canadian GDP at 2.7 per cent next year.
Scotiabank said a strong pickup in investment will fuel growth in the energy and manufacturing sectors this year in Alberta.
“Investment has perked up in the oil sands, as easing costs and higher oil prices revived investment intentions in late 2009, with $2.2 billion in outlays scheduled for 2010 alone,” said the report. “Renewed activity in the industry will lead to significant benefits flowing through the economy, with manufacturing and services all heavily tied to conditions in the energy sector. While the bulk of investment will stem from oil sand development and tight oil plays, recent revisions to the province’s royalty framework are a major positive for the natural gas industry.”
mtoneguzzi@theherald.canwest.com
© Copyright (c) The Calgary Herald
Buying a house is about life timing – not market timing
Forget market timing, buying a house is about life timing
Homes are a long-term investment
ups and downs of the housing market is near-impossible, so the best time to buy is when you can afford it.
‘You know, you’re making the biggest mistake of your life. The housing market is going to fall.”
I got this great piece of advice from another journalist at the Financial Post, who has since left the newspaper, after buying my first home. Not exactly the type of thing you want to hear after taking on huge debt and making the biggest financial decision of your life.
Lucky for me, I didn’t heed that advice about Toronto’s red-hot real estate market — in 1998. I’m not going to say I made a shrewd business decision 12 years ago, or even six years later when I bought a larger house.
For me, it wasn’t a case of not following what turned out to be bad advice from a fellow business journalist. Nor was it about trying to time the market.
I was simply following the same pattern as most Canadians: I got married and decided to stop renting and buy something. Later came the need for a bigger home when the second kid was on the way.
Which brings us to today. The supply of housing is rising fast as people try to list their homes for sale before the market “crashes.” This is happening at the same time that demand is starting to wane. Economists and even the real estate industry, are all predicting a correction — the only argument being how severe it will be.
So, the question for anyone buying is: should you wait?
Don Lawby, chief executive of Century 21 Canada, thinks the strategy of waiting for a crash is not going to work during this economic cycle. “For a market to crash, you have to have people who are desperate to sell,” says Mr. Lawby. “People will [only sell] if they can’t afford their mortgage or they don’t have a job.” He doesn’t see a decline in prices, “unless you are predicting that mortgages will renew at a hefty premium — which is not the case — or a whole bunch of people are going to lose their jobs.” Mr. Lawby believes neither will happen.
And, he adds, you are really into a risky game if you are timing the market. “A house is a home. If all you are doing is looking at it as an investment — that’s what happened the last 15 years — it’s not just that. It’s a place to live and a place to raise a family,” says Mr. Lawby. Even Benjamin Tal, a senior economist with CIBC World Markets, who, last month, said in a report that Canadian housing is 14% overvalued, has doubts about playing the market. But he suspects that’s exactly what some Canadians will do.
“Is there a sense that prices will go down and people will wait? I think it might be an issue,” says Mr. Tal. “It won’t be the main reason [people don’t buy], but it will happen at the margins. The fact that people sell at the peak and wait to buy is a normally functioning market.”
But even if you do make the right call on housing prices, it could end up backfiring on you in other ways. For example, if interest rates rise fast enough, any gains you make on price could be erased by interest charges, says Mr. Tal. Edmonton certified financial planner Al Nagy says you need to think of your house the way you think about any long-term investment. “Whether it’s an investment for use in your retirement or a house to live in, it’s a long-term thing. The timing becomes less critical than it would be if it is a speculative [investment].”
And he says making a call on the housing market is as tricky as any other investment call. “It’s very rare you catch the bottom. You can’t let the market dictate when it’s time to buy. The time to buy is when you can afford it,” says Mr. Nagy.
Complaints about Mortgage Prepayment Penalties
TORONTO, June 9 /CNW/ – Complaints about the financial industry have reached record levels, according to new figures released today by the Ombudsman for Banking Services and Investments (OBSI).
OBSI looked into 990 banking and investment consumer complaints in 2009, representing a 48 % increase over 2008 and a more than tripling of the number of case files in just three years. OBSI also processed over 12,400 individual inquiries from consumers and small businesses in 2009.
As in recent years, OBSI saw more investment cases (599) than banking cases (391). Investment complaints continue to drive much of the overall increase in complaint volumes OBSI deals with. While banking sector complaints were up 21%, investment complaints were up a staggering 73%.
“The global economic crisis, coupled with sharp declines in financial markets, gave rise to much of the increase in complaints we saw,” said Douglas Melville, Ombudsman for Banking Services and Investments. “However, despite the improvement in the markets over the last year, complaint volumes remain high. We expect this to continue.”
OBSI looks into complaints about most banking and investment products and services including: debit and credit cards; mortgages; stocks, mutual funds, income trusts, bonds and GICs; loans and credit; fraud; investment advice; unauthorized trading; fees and rates; transaction errors; misrepresentation; and accounts sent to collections. Where a complaint has merit, OBSI may recommend compensation up to a maximum of $350,000.
“On the banking side, many of the complaints we saw dealt with mortgage prepayment penalties, rates on lines of credit, or fraud,” said Melville. “On the investment side, the vast majority of cases were related to the suitability of investment advice. Investment advisors need to fulfill their “know your client” obligations as well as explain the risks and characteristics of the products they are recommending.”
In 2009, consumers received compensation in 28% of cases reviewed by OBSI. The rate of compensation was 20% for banking complaints and 35% for investment complaints.
The Ombudsman for Banking Services and Investments (OBSI) is the national independent dispute resolution service for consumers and small businesses with a complaint they can’t resolve with their banking services or investment firm. As a free alternative to the legal system, we work informally and confidentially to find fair outcomes to disputes about banking and investment products and services.
Investment report ranks Calgary #1 in Canadian real estate markets
Investment report ranks Calgary #1 in Canadian real estate markets
CALGARY – Calgary is the best place in Canada to invest in the residential real estate market, according to a new report released today.
The Real Estate Investment Network’s report said that Calgary experienced one of its best economic and real estate periods in Canadian history a couple of years ago but then entered a strong, and needed correction.
“During the economic downturn, Calgary’s market is making a predictable correction resulting in slightly more affordable housing compared to recent years passed,” said the report. “It was economically impossible for the market to continue at the pace at which it was heading and now finds itself adjusting to market realities.
“This adjustment period, as the market searches for its new foundation from which to build, should continue in 2010 as the provincial economy is poised for another growth spurt.”
The REIN report said the in-migration pace in the city continuing to lead the country combined with the “renewed affordability” will help propel the local market over the coming years.
“We, fortunately, should not see the massive over-boom situation we previously witnessed as the market remains more in line with the fundamentals,” said the report.
Following Calgary as the top Canadian real estate investment cities are Kitchener-Waterloo-Cambridge, Edmonton, Surrey, Maple Ridge, Hamilton, St. Albert, Simcoe Shores (Barrie-Orillia), Red Deer, Winnipeg and Saskatoon.
“Successful real estate investing is all about identifying a town or neighbourhood that has a future, not a past,” said the report. “Sadly, many investors like to invest based on past performance; thus, they are constantly chasing the market. This is called speculating – not investing.”