Slight mortgage rate increase on the way?
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!
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: http://markherman.ca/
1 Graph Shows Why Mortgage Rates Are Lower in Jan 2015
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
Graph Summary
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.
Market Summary
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
Oil Price & Mortgage Interest Rates
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.
Retail Sales: Alberta spends the most
“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.
http://www.660news.com/2014/11/25/alberta-leads-the-way-as-canadian-retail-sales-soar/
Why Alberta Does NOT have a housing bubble; or What is supporting Alberta home prices …
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
What Rates Could Do to Affordability
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…
…On Affordability
- 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.
Footnotes:
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
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: http://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?
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.
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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.
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