This link does a great job explaining why rates are coming down right now for mortgages.
- Events that could cause a stock market crash tend to also cause a “flee to safety” and the 5-year Canadian Mortgage Bond is that safety net.
- When investors buy these bonds the demand goes up so the bonds pay less as everyone wants them.
- The lower cost of the bond means a lower interest rate on your mortgage
This should be a short term blip, so if you are buying a home take advantage of it quickly
Mark Herman, top Calgary mortgage broker
The Big-5 banks do not love you, they love your money, and now they can “trap” you in their mortgages if you fail the Stress Test.
Highlights of the last post are below. The post from January is here: https://markherman.ca/how-the-big-5-banks-trap-you-in-their-mortgages/
The new mortgage rules – called the B20 – allow the banks to renew you at almost any rate they want – or at least not a competitive one – if your credit, income, or debts should mean you can’t change banks.
If your mortgage is at your main bank they can see:
- your pay and income going into your accounts
- debt balances on your credit report
- what your credit score is
- your debt payments
- your home/ rental addresses so they can accurately guess at your home value.
ALL THIS MEANS they can calculate if you can pass the new “Stress Test.”
If you can’t pass it then they know you can’t change banks, are you are now totally locked into them for your renewal. They can renew you at POSTED RATES … 5.34%, not actual discounted rates they offer everyone, today (June 2019) about 2.99%.
The GOOD NEWS is broker banks do not do any of this … so having your mortgage at your main bank only helps them “grind you” later on. …. so how convenient is having your mortgage at your bank now?
Highlights of the article link below are:
Canada’s biggest banks are tightening their grip … as new rules designed to cut out risky lending make it harder for borrowers to switch lenders … the country’s biggest five banks … are reporting higher rates of renewals by existing customers concerned they will not qualify for a mortgage with another bank.
“B-20 has created higher renewal rates for the big banks, driving volumes and goosing their growth rates,” said an analyst. “It’s had the unintended consequence of reducing competition.”
Royal Bank of Canada (RBC), said last month that mortgage renewal rates [are up …] due in part to the B-20 regulations.
Ron Butler said, “Even if they are up-to-date with their repayments, borrowers may find they don’t qualify with other lenders so they’re stuck with their bank at whatever rate it offers,” he said.
Senior Canadian bankers such as RBC … and TD … voiced their support for the new rules prior to their introduction, saying rising prices were a threat to Canada’s economy.
While analysts say RBC and TD are expected to benefit from higher-than-normal retention rates in 2019, not everyone is sure borrowers will benefit.
“The banks are becoming more sophisticated in targeting borrowers who would fail the stress test and they can charge them higher rates at renewal knowing they can’t move elsewhere,” Butler said.
The graph below shows the expected Alberta GDP growth rate for the end of 2015 and 2016. The numbers are still positive – just not as high as they were before.
If the Calgary to Edmonton corridor was a country it would have the 2nd highest growth rate in the world after China.
Now these numbers are back to earth, things will continue as normal as oil slowly works it’s way back to about $70 a barrel.
Mark Herman, Top Calgary, Alberta mortgage broker
Click on the chart to see it larger.
We watch lots of technial things to see where rates are going. One of those is the CMB – Canadain Mortgage Bond.
Today, the benchmark government of Canada five year bond yield ended the week at 0.79%, up from 0.73% the previous week.
that means that fixed rates may move up from their 2.74 – 2.79% soon.
Get your rate hold / applicastion in!
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
The graph below shows why rates have found what we think is a short term low. This will not last forever so be sdure to get a rate hold now!
30 day Canadian Mortgage Bond (CMB) trend – below
The banks get their money for mortgages from the CMB … this is a short term oddity right now. This trend will change soon and is from:
- the quick drop in oil prices
- the surprise rate cut from the Bank of Canada on Prime
- and other world economic activity.
The Bank of Canada has certainly shaken things up with its surprise 0.25 bps rate cut. Even more so because Governor Stephen Poloz has left the door open for a further cut.
Poloz explained that the BoC trimmed its rate as “insurance” for the broader economy in light of the fallout from falling oil prices. He went on to say the Bank was prepared to take out more insurance.
Concerns about unemployment, slowing economic growth and deflation have obviously trumped past worries about record high household debt-to-income ratios.
However, it is not a sure bet that the lower central bank rate will inflate the Canadian real estate bubble. Canadians have established a history of using lower rates to pay down debt, rather than adding to it.
All this from Calgary’s top mortgage broker, Mark Herman
This is an easy way to see the relationship between oil prices and mortgage interest rates.
Mark Herman, Top Calgary Alberta mortgage broker.
The path between the price of oil and the cost of your mortgage may seem long and winding and hard to follow, but it does exist.
Oil is a major component of Canada’s economy. Energy accounts for about 25% of Canadian exports and oil is a significant part of that. Oil is now selling for about half what it was just a few months ago.
Lower oil prices mean less royalty money for governments. Low oil also means the main driver of employment in Canada – the Alberta oil patch – is likely to slow as well as energy firms cut back operations. Employment is one of the key indicators the Bank of Canada watches when determining interest rate policy.
Falling oil prices are likely to have an, overall, negative effect on Canada?s economy, exerting downward pressure on the Bank of Canada rate, and therefore variable mortgage rates. The impact on GDP and employment will likely hold down government bond yields and, in turn, fixed mortgage costs.
“More support of Calgary and Alberta home prices; the high-value jobs in Calgary pay more and the 40,000 people a year that move to Alberta are spending that money. The numbers are mind blowing.”
Mark Herman; Calgary, Alberta mortgage broker
Jonathan Muma Nov 25, 2014 10:25:24 AM
Albertans love to shop.
That’s according to the latest report from Statistics Canada which shows retail sales are up $6.7-billion, or 7.4 % from a year ago through the first nine months of this year.
That’s the highest annual growth rate in the country.
The next closest province is British Columbia at 5.3 %, and Canada overall, retail sales grew to $42.8-billion, up 4.5% from a year ago.
The article below echoes the theme of many of my posts – Inbound migration to Alberta is supporting home prices. Our growth at 6% is 1% less than India – the world leader. My new favorite quote is below, “Alberta actually has the dynamics or properties you’d normally see in emerging economies.”
Lamphier: Hot air can’t bust a housing bubble that doesn’t exist
EDMONTON – If I’ve read one story about a possible U.S.-style housing bust in Canada, I’ve read a hundred.
Indeed, the Toronto-centric national media, whose world view apparently extends from the Don Valley Parkway to Highway 427, seem absolutely obsessed by the topic. Barely a week goes by without another breathless warning from some Toronto economist, columnist or TV news anchor about a looming price collapse.
It’s complete nonsense, in my opinion. For starters, there is no national housing market. Prices vary wildly from place to place, and always will. So while Toronto or Vancouver look pricey, many other cities — including Edmonton— simply don’t.
Of course, I’m just a newspaper scribbler. But when one of the world’s top economic forecasters says the gloom and doom crowd is out to lunch, well, that’s not as easy to dismiss.
Stefane Marion, chief economist and strategist at Montreal-based National Bank, was recently ranked among the top 20 forecasters in the world by U.S.-based Bloomberg Markets magazine. He’s the only Canadian to make that prestigious list.
In Marion’s view, those who insist that Canada’s house prices are “bubbly” — as Britian’s Economist magazine recently argued, and as The Globe and Mail dutifully reported — simply don’t understand what drives housing in the first place.
It’s simple demographics, he says. Canada’s population grew by 1.2 per cent in 2012, versus just 0.8 per cent in the U.S., and 0.2 per cent in the eurozone. Japan’s population, on the other hand, has shrunk for six straight years.
The big reason? Immigration. Newcomers accounted for fully 60 per cent of Canada’s population growth last year, he says, far more than the U.S. or Europe.
What’s more, 55 per cent of those newcomers are between the ages of 20 and 44, when many are launching careers, getting married, starting families, and yes, buying new homes.
Japan is at the opposite end of the spectrum. Its aging population, low birth rate and aversion to immigration curbs demand for housing. Yet the same Economist article that slammed Canada’s housing market as bubbly argues that Japan’s house prices are “undeservedly flat,” Marion says.
“If you don’t have household formation where are your home prices going to go? That’s the key right there. That’s where Canada really, really is different from other countries,” he says, notably in high-growth provinces like Alberta.
“It does explain why the new housing market or home resale market in Alberta seems to be so tight all the time. This is key. Household formation is just surging,” he says. “So it fascinates me that we have economists coming out and taking a shot at Canada and not taking that into account.”
That was one of several key insights Marion offered to local bank clients and advisers at a packed luncheon that was organized by Angus Watt, managing director, individual investor services at National Bank Financial.
Marion’s generally upbeat outlook for the Canadian and Alberta economies jives with the positive tone of Bank of Canada governor Stephen Poloz’s latest comments.
“We are now close to the tipping point from improving confidence into expanding capacity,” Poloz told a Vancouver Board of Trade audience on Wednesday.
Looking ahead, Marion says he expects those demographic trends to continue over the next five years. In the key 20-to-44-year age cohort, he expects India to lead all nations in population growth, at seven percent, followed by Canada, at four per cent. On the flip side, countries like Germany, France, Italy, Russia, China and Japan will show marked declines.
“Alberta would be just behind India, at six per cent. So that shows you how potent this growth is for Alberta. Alberta actually has the dynamics or properties you’d normally see in emerging economies.”
Turning to the oil markets, Marion says despite declining U.S. consumption, falling imports and soaring production — up an astounding 47 per cent in the U.S. since 2006 — Canada’s exports south of the border remain strong.
The biggest loser? OPEC, whose share of U.S. imports has declined from 55 per cent in 2008 to just 46 per cent last year, he says.
“By next year the U.S. will produce as much crude as it did in the 1980s, so we have to cope with this energy revolution in the U.S. . . . but Canada is shipping as much oil and petroleum products to the U.S. as all of OPEC put together. I never thought this would happen anytime soon, so that’s a big, big deal.”
As for TransCanada’s proposed $12 billion Energy East oil pipeline, which would carry Alberta bitumen to refineries in Quebec and New Brunswick, Marion says the potential economic upside for Canada is big, since it would displace higher-priced Brent crude imports from unstable countries like Algeria, Kazakhstan and Angola.
© Copyright (c) The Edmonton Journal
Here is a great article on rates and what is expected for the year ahead.
Remember the 10 year term is at the all time low of 3.69% right now!
What Rates Could Do to Affordability
When it comes to home values, mortgage payment affordability acts like a giant lever.
A meaningful rise in mortgage payments (relative to income), would bear down on home prices, and vice versa.
Given this relationship and today’s towering home values, mortgage affordability is centre stage. That has inspired a stream of articles about whether swarms of people will default when rates “normalize.”
But how worrisome is that threat really? For insights, we turned to BMO Capital Markets Senior Economist Sal Guatieri.
To preface everything, here are some data points to consider…
- According to BMO, home ownership is “affordable” (for the median buyer) when mortgage carrying costs—monthly payments, property taxes, heat, etc.—don’t exceed 39% of family income.
- Nationwide, we’re at about 31.6% today.1
…On Mortgage Payments
- If we look specifically at mortgage payments, BMO says the average-priced house currently consumes 28% of median household income, based on non-discounted mortgage rates.2
- That puts us right at the long-term average (see chart below)
- This 28% falls to 23% for people living outside Vancouver and Toronto.
- Compare these numbers to the peaks of 44% in 1989 and 36% in 2007.
What if rates normalize?
The first step is to define “normal.” We can be reasonably confident that the new normal is less than the old normal. Reasons for that include the long-term downtrend in our domestic growth rate (see chart) and proactive inflation control by the Bank of Canada.
To pump life into the economy, the BoC has kept Canada’s overnight rate at just 1.00% for 902 straight days. According to Guatieri, “A normalized overnight rate would be closer to 3.50% given the inflation target of about 2.00%.”
This implies that short-term rates should theoretically jump by about 2.5 percentage points…someday. In turn, long-term rates (such as 5-year fixed rates) should rise less, maybe 200 basis points says Guatieri. That would push 5-year fixed mortgages somewhere near 4.99%.
Other things equal, these new “normalized” rates would drive up mortgage carrying costs (assuming 10% down) from 31.6% of gross income today to 37.2%. That would still fall below BMO’s threshold of unaffordability, which is 39%. But keep in mind, these affordability metrics don’t include other personal debt like car payments and credit cards.
How will borrowers be affected?
RBC Economics writes, “Residential property values are elevated in Canada and, for many households, ownership remains accessible only because of rock-bottom mortgage rates.”
(Higher incomes have also helped affordability, notes BMO.)
But escalating interest rates aren’t necessarily a death knell. Reason being, “the eventual rise in rates will take place at a time when the Canadian economy is on a stronger footing, thereby generating solid household income gains,” says RBC. That, in turn, “would provide some offset to any negative effects from rising rates.”
The key word there is “some.” Guatieri estimates that, “To fully (our emphasis) offset a two percentage point increase in rates, household income would need to rise 19%, which could take six years if average income grows at the 3% average pace of the past decade.”
Incidentally, for major affordability damage to be done, we’d need something equivalent to a rate shock and/or serious unemployment. A rate shock is a fairly rapid increase in mortgage rates of “more than two percentage points,” Guatieri explains.
How far off is the threat?
It’s difficult to estimate the probability of a rate shock, Guatieri acknowledges. “The debt market is even pricing in a small probability of a BoC rate cut later this year.”
RBC notes, “We expect the Bank of Canada to leave its overnight rate unchanged at 1% throughout 2013 and raise it only gradually starting in early 2014—a scenario posing little in the way of imminent threat.”
Take that rate forecast for what it’s worth, but regardless, “affordability is not a major problem and should not become one even when rates normalize,” Guatieri writes in this report.
That’s true even in three of the fastest growing provinces—Newfoundland, Alberta and Saskatchewan.
The affordability exceptions, not surprisingly, are detached homes in Vancouver, Toronto and Victoria. Not coincidentally, these three markets are among the most prone to the one thing that helps affordability the most: a material price correction.
1 Based on a 2.99% 5-year fixed rate, property taxes equalling 1% of home value, $150 per month for heating cost, a 25-year amortization, plus fourth-quarter 2012 data provided by BMO, including: Q4 household income estimated at $75,300, an average seasonally adjusted home price of $361,523 and a down payment equalling half of personal income (i.e., $37,600 or ~10%).
2 Same assumptions as above, save for the mortgage rate. BMO uses an interest rate of 4.1% for its analysis. This higher rate makes comparisons easier over the long-run, since discounts were smaller in the past and since discounted rate data from the 1980’s is scarce.
Rob McLister, CMT