I attended IMBA’s annual Mortgage Broker conference yesterday. IMBA is Ontario’s Mortgage Broker association. It was a good conference but it seemed to be a smaller crowd than in years past…..a result of the recession, I’m sure.
Nevertheless, it’s a great place to see all the Lenders and industry businesses in one location. I noticed a lot of smaller lenders were popping up and that’s a great sign for Borrowers as more competition is always good.
There were also lenders capitalizing on the new Mortgage Rules as CMHC tightened their lending policies earlier this week…. The smaller lenders fill a growing void for Canadians that want to buy an investment property or are self-employed and cannot provide traditional income verification. These lenders also signal improved confidence in the Canadian real estate market.
No surprise, the Bank of Canada did not raise their key rate today, keeping it at 0.25%. This rate directly affects the Bank Prime rate which is 2.25%. But as so many Economists have forecast, this appears to be the end of the record low Mortgage rates.
But it’s not that bad… we have enjoyed record low rates (almost free money, some would say) for well over a year.. and they are only starting to climb.. we’ll be enjoying low rates Variable rates for some time yet…
In it’s press release, the Bank of Canada stated “the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus. The extent and timing will depend on the outlook for economic activity and inflation, and will be consistent with achieving the 2 per cent inflation target.”
The big question on everyone’s mind is how fast and by how much will rates increase… Here’s what to look for when it comes to what affects Variable rates:
- Inflation (the target rate is 2% and we are currently at 1.6%…if this increases then the Bank of Canada will want to increase the Bank rate)
- unemployment (currently sitting at 8.2% if we have higher than expected unemployment then this also puts pressure to keep the Bank rate low
- Canadian $ in relation to the $U.S. (today, the Canadian $ jumped over $1.016 and a high $ is bad for Exports and Manufacturing….the higher the Bank Rate, the higher $ will usually increase)
Fixed rates are more volatile as they are affected by the Bond Market… The Bond Market seems to have priced in a 50bps increase by the Bank of Canada as Bond Yields increased by 0.126% to 3.19% at the time this article was written. The Banks have increased Mortgage Rates by 0.85% over the past 3 weeks and should hold until the Bond yields increase to above 3.40% or 3.50%….Historically, the Banks want to earn a spread of around 1.20% and 1.30%.
Royal Bank increased their fixed mortgage rates again by 0.25%….that’s an 0.85% increase in 2 weeks… Scotiabank increased their rates shortly afterwards. We can expect the other Major Banks to follow this latest increase.
What’s interesting about this move is that the bond market has not increased by the same amount…. On February 15th 2010, the 5 year Bond yield was 2.53%…today, it’s 3.08%….Mortgage Lenders and Banks want to earn a 1.20% to 1.30% spread in the wholesale mortgage market… Today’s best 5 year fixed rate mortgage is 4.39% but will increase to around 4.64%…. That puts the spread all the way up to a whopping 1.56%.
By the way, not all Lenders have increased their rates… there are still Lenders with rates in the 4.39% range but we should expect them to follow suit…
On April 19th, you might be forced to take a 5 year fixed rate mortgage….
There has been a lot of media talk about the new Mortgage Rules…. On April 19th, the rules for Borrower’s with less than 20% down payment will come into effect…. But let’s clarify…
There was an article in the Vancouver Sun last week that talked about an internal document that was distributed by CMHC to Mortgage Brokers… Here is a quote from that internal document:
“Clarification on Qualifying Interest Rate
Effective April 19, 2010, the qualifying interest rate used to assess borrower eligibility will change only for loans with a loan to value ratio (LTV) greater than 80% as follows:
Fixed Rate Mortgages and Variable Rate Mortgages: For loans with a fixed rate term of less than 5 years and for all variable rate mortgages, regardless of the term, the qualifying interest rate is the greater of the benchmark rate1, and the contract interest rate. For loans with a fixed rate term of 5 years or more, the qualifying interest rate is the contract interest rate.
Mortgages with Multiple Interest Rates (e.g. Multi-Component Mortgages): Each component must be qualified using the applicable criteria defined above.
1CMHC defines the benchmark rate as the Chartered Bank – Conventional Mortgage 5-year rate that is the most recent interest rate published by the Bank of Canada in the series V121764 as of 12:01 AM (Eastern Time) each Monday, and which can be found at: http://www.bankofcanada.ca/en/rates/interest-look.html“
Did anyone pick up on that….? Today’s best 5 year fixed rate is around 4.29%… If you take a 5 year fixed rate, then your mortgage is qualified using that rate… no problem… BUT, if you take a shorter term or a variable rate product, then you must qualify using the BANK POSTED rate which is 5.85% today.
Put another way, a $300,000 mortgage with a 25 year amortization requires an annual income of $74,000 if you selected a 5 year fixed rate or longer term….BUT what if you wanted shorter term or the popular Variable Rate product which is currently 1.75%? …then you would need to qualify with the BANK POSTED rate of 5.85% and that would require a household income of $84,000…..
I don’t know about you, but Variable Rate mortgages are still very attractive…it’s too bad many of us won’t be able to make that choice when we buy our next home…
Genworth Financial is kicking off the traditional Spring housing market with a week of Online seminars… Each day has a different theme….The goal is to educate prospective homebuyers and borrowers so they can make informed decisions….
The website is Homeownershiphelp.ca and here’s the schedule of events…
|WEDNESDAY APRIL 14
||Test Your Knowledge
||Tips on Purchasing and Owning a Home
|Learn the importance of good credit and how your credit history is established
||Find out how to reconcile what you want with what you can afford
||Understand the steps of home purchasing in Canada
||Take the Homebuyer 101 course
||Find out the fast facts that will help make your dream home a reality