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Govt regulator says interest rates extremely attractive…

We can interpret a sentence to mean several different things…   Take for example the following comments made by the head of the Office of Superintendent of Financial Institutions (OSFI), Julie Dickson:

– “current levels of interest rates have already made borrowing extremely attractive to all borrowers.”  (Wall Street Journal)

– “Extremely low rates will be with us for even longer than envisaged before the summer.” (Globe and Mail)

What does that mean to you?   To me, it simply means we are in a historic low interest rate environment.. with an economy that is better off than the rest of the world…  add it all up and it looks like a pretty good time to borrow, if you ask me… Borrowing for a house is NOT the same as borrowing for a car or a trip… A house is a tangible asset.. it appreciates tax-free.  It’s a good investment…

Borrowing to invest

Speaking of borrowing to invest…. rental properties have never looked more attractive…  Borrowing to invest is NOT a bad thing and it is NOT what the regulators and economists are concerned about… They are concerned about borrowers that have borrowed to their absolute maximum capacity and cannot afford to miss a day’s work without being in danger of defaulting on a payment…

Take a bow Canadians… we are doing great!

Last time I checked, Canadians were acting as conservative as ever…. paying down their mortgages faster and borrowing at a slower pace…  Look at these stats from The Montreal Gazette:

– “In Canada, an average of 63 per cent of a household’s home value is equity, while in the U.S. this figure is just 39 per cent.” (Matthieu Arseneau, National Bank).

– “In Canada, 40 per cent of homeowners have no mortgage debt; in the U.S. it’s 31 per cent.” (Matthieu Arseneau, National Bank).

– “Debt amounts to just 24 per cent of a household’s average net worth in Canada, while it’s 29 per cent in the U.S.”  (Matthieu Arseneau, National Bank).

– “Mortgage debt, which was climbing by 10 per cent or more through last year, has throttled back to a six-per-cent pace. Other consumer borrowing hasn’t grown at all over the past year.” (Benjamin Tal, CIBC World Markets).

–  “More than 70 per cent of all mortgage-holders are on an accelerated payment schedule, Tal says, adding: “That’s a smart use of low interest rates.” (Benjamin Tal, CIBC World Markets).

Hmmm… the economists tell us we are doing pretty good, judging from those comments….

Final thoughts.

If interest rates were 6%, 7% or 8%, what we would the media be saying?   ‘INTEREST RATES AT HIGHEST LEVEL IN 10 YEARS!’ … or something like that…  and I bet we would also see this headline…  ‘BANKS WARN THAT FURTHER RATE HIKES ARE ON THEIR WAY….BEST TO LOCK INTO A LONG TERM FIXED RATE NOW’…..

Use your own judgement… seek out professional, non-biased (non-bank) advice…. Hey, I don’t know about you, but I’d rather borrow at 2.60% for aVariable rate or 3.39% for a Fixed rate, than 6%, 7%, or 8%…..  We are experiencing historical low interest rates… they will be here a little longer but they won’t last forever.. enjoy them now… take advantage…

Posted Interest rates

Variable rate increases again..

Lenders have begun to raise their Variable rate mortgages again…. The second increase in less than a month.  A look at the Bank websites and you will Variable rate pricing is now at Bank Prime less 0%….  that’s 3.00%…   And although ‘3.00%’ sounds like a good rate, a Variable rate at Bank Prime less 0% is not good.

The Banks have gone from an advertised rate of Prime less 0.65% to Prime less 0% in about one month’s time.   Of course, the best wholesale rates through mortgage brokers now sit at Prime less 0.50% and will probably go to Prime less 0.40% after the dust settles.

So what’s causing the Banks to increase their Variable rate mortgages?   They tell us there are “profitability concerns”.   In simple talk, that means they simply want to increase their profit margins now that rates are expected to stay low for some time to come.   They also want to force us to take the much mortgage profitable 5 year fixed rate mortgage, now sitting at 3.99% (RBC website special rate)..    Keep in mind, there are better rates to be had in the wholesale market…. 3.49% seems to be the best 5 year fixed rate today.

But even 3.49% is too high.  The spread between the 5 year govt of Cda bond (1.45%) and 3.49% is still over 2.00%.   Historically, this spread has been between 1.10% and 1.40%..    It’s simply math…. the Banksters are saying ‘ka-ching, ka-ching”.

Posted Interest rates

Mortgage refinances are down nearly 40%.

Mortgage refinances are down in Canada according to CMHC…. No big surprise to those of us in the Mortgage industry…   The govt has made it more difficult to access money over the past 3 years with all the Mortgage rule changes.    They have accomplished their goal of trying to discourage us from borrowing more.

Here’s a look at some of the rule changes that made an impact:

-mortgage refinances are capped at 85% loan to value from 95% loan to value just a few years ago.

-maximum amortization for hi-ratio mortgages (over 80% loan to value) is 30 years.  Down from 40 years.

-variable rate mortgages and mortgages with terms less than 5 years must be qualified at the Bank’s POSTED 5 year fixed rate… this too will squeeze out many more borrowers as it forces us to qualify at the much higher POSTED rate…. 5.39% vs a discounted fixed rate of 3.49%….

The Banksters are happy to see you take the much higher 5 year fixed rate vs the lower, Variable rate (current Variable is hovering around 2.40%… RBC is advertising their  and Bank’s are advertising their 5 year fixed rate special offer at 4.24%…..).   Banks make more money on the 5 year fixed vs the Variable rate.  Remember that when choosing your next mortgage term.

Oh, and by the way, there are better Fixed rates out there…  we are currently seeing 3.49% for 5 years from the wholesale market.

Posted Interest rates

Bond market drops… expect fixed rates to follow.

It’s the morning after the US govt agreed on a new Debt Ceiling…… and like a scene from ‘The Hangover’, many of us are waking up to unfamiliar surroundings with a big headache and an uncertain feeling in our stomach…. let’s call it a ‘financial hangover’.   The global stock markets are down…..giving back all gains made this year…  The Chinese credit agency has downgraded the US credit rating...

The 5 year Canada govt bond yields has dropped to 1.84%...  A level only seen twice before…  first, just after the October 2008 US mortgage crisis and again late last year.

So what’s the good news??   This should mean lower fixed mortgage rates are coming… let’s hope the Banks move as fast to cut the rate as they do when they raise them.   This also means less chance of any rate hikes….

Enjoy the low rates.

Posted 1 Comment on Banks quick to raise but slow to lower rates Interest rates

Banks quick to raise but slow to lower rates

Nothing new about this story…. Since April 11-2011, the 5 year bond yields went from 2.87%,  down to 2.10% on June 24th, and have gone up slightly to 2.34% on July 1st….  Remember, fixed rates are closely tied to the govt of Canada bond yields…So that means the Banks would have lowered their fixed rates accordingly and then raise them slightly, right?

Well, not really…  On April 11th, the Big Six Banks posted rates were 5.69%.. they went down slightly to 5.39% recently but are back up to 5.54%…   What’s wrong with math…?  Why didn’t the Banks reduce their rates accordingly?    It’s called MAXIMIZING your PROFIT…  The banks want to earn a little more at the borrowers expense.

I find it kinda funny but also frustrating when I see articles reporting that Bank profit margins on mortgages is shrinking…  The spread between the 5 year bond yield and the posted 5 year fixed rate is around 3.20%…  and historically, it’s been around 2.50% and sometimes even as low as 2.00%….  Where’s the fierce competition, I wonder?

Banks are a business that want to maximize their profits… Let’s not forget this.