Some odds and ends from the week’s mortgage rate action…

The Misleading Core…

One can be forgiven for wondering why the BoC cut the overnight rate ¼ point on Wednesday when its official “core” inflation measure is above target.

As it turns out, core inflation (which has stubbornly risen to 2.3%) doesn’t tell the whole story. Governor Stephen Poloz believes the “underlying trend” is actually much lower at 1.50% to 1.70%. “The Bank of Canada tries to strip out transitory factors in determining the underlying trend,” explains DLC Chief Economist Dr. Sherry Cooper. The biggest transitory factor at the moment is the boost in import (input) prices caused by our plunging loonie.

“But this is not inflation,” she explains. “Inflation isn’t a one-shot increase in prices. It’s an ongoing spiral up in prices.”

Don’t get too hung up on the BoC’s 2% inflation guideline either, Dr. Cooper cautions. “Inflation targets aren’t meant to be binding without judgment,” especially with the “R word” looming.

The DoF may tap the brakes again

Seven years of mortgage rules can’t keep the major markets down. Debt levels and home prices continue deviating from incomes, despite the Department of Finance’s efforts.

With this week’s cut and record real estate numbers, things have gotten interesting. When you get heads of real estate companies joining the BoC’s chorus about housing vulnerability, you can rest assured that policy-makers are on high alert.

The last thing rule-makers want is a housing calamity. The second-last thing they want is to be seen as not being proactive before a housing calamity. For that reason, the odds that tighter mortgage guidelines are on the way have just leaped.

TD’s Gambit

TD was ready for the rate cut. It announced a 10 bps reduction in its prime rate just 12 minutes after the BoC’sstatement. It seemingly wanted to set the trend and perhaps get out in front of consumer backlash from banks withholding part of the quarter-point cut.

TD’s move would have been well played, had the other Big 5 matched its rate. But they didn’t. RBC, the biggest kahuna in Canadian mortgages, decided to trump TD’s less generous rate and drop prime by an extra 5 bps to 2.70%. “They just wanted to make TD look bad,” said one capital markets source.

Not to lose face (and business) over a 5-bps-rate difference, TD quickly relented and matched 2.70%. Being first to announce prime rate entails a lot more reputational risk than it used to.

The Banks Stole My 10 Beeps

About 1 in 4 mortgagors has a variable rate. And they choose variables because they expect to receive every basis point of BoC rate cuts.

But big banks haven’t been in a giving mood lately. They’ve passed along only 60% of the benefit of the last two rate cuts. This latest “spread pocketing” has driven the prime – overnight difference up to 220 bps, 45 bps higher than in 2008.

Here’s a look at how the prime – overnight spread has been creeping up.

But why?

RBC cited this as its reasoning for passing along only 60% of the rate cut:

“Our decision is consistent with the rate adjustment that we made in January when the Bank of Canada previously lowered their rate. It is meant to balance the interests of our clients who are always top of mind, with the costs that we incur to provide our products and services.”

What bank critics don’t acknowledge is that

• Every single year, shareholders demand to be fed with a steady diet of earnings and dividend growth.
• Banks have a minimum target spread they need to earn between what they lend and borrow at.
• The Bank of Canada’s rate cut instantly shrinks lender spreads on variables—partly because banks fund much of their variable-rate book from deposits. They can’t really lower those deposit rates since they’re already near/at zero. Banks feel they have little choice (if they want to maintain spreads) but to pass along only a fraction of the rate cuts.
• Adding fuel to the fire is that variable-rate MBS spreads have been steadily inflating this year—i.e., it’s getting relatively more expensive to fund variable rate mortgages using mortgage-backed securities.
• On top of that, funding costs have risen on other parts of their mortgage book, thanks in part to widening swap spreads.

The interesting part is that this time around, you can barely hear any consumer outcry in the media—compared to when the banks last pocketed some spread in January. And that’s just the way banks like it.

Coming Up Next for Rates

The markets are pricing in a fair probability of another BoC cut on September 9, 2015. By then, the Bank of Canada will have data confirming if Canada is in a technical recession, more visibility on oil prices, as well as two more employment and inflation reports.

If the BoC lowers another quarter point, there’s a good chance that banks will again hold back some of the cut.

As for fixed rates, 5-year yields have been in a clear downtrend and the 0.55% record low is just 15 bps away. If yields makes a new low, fixed rates will do the same. But the same margin concerns that kept banks from lowering prime ¼ point will also keep the average 5-year fixed – bond yield spread closer to 165 bps than the 135 bps of old. In other words, we may not see overly generous fixed-rate discounting for some time.

Buying a house or investment property? We often hear how important it is to get pre-approved for your mortgage amount: It helps us understand our maximum house-price, the down-payment required and the monthly payments we’ll need to make once we purchase the property. But the difference between the pre-approval and the approval process is so vastly different that many buyers are often left feeling stressed and anxious during the week or two that financing is being finalized.

To help you avoid this aggravation and anxiety, I’ve put together a little mortgage approval cheat sheet. This should help you understand what documents and paperwork you will need to actually get a mortgage—and reduce the stress during this period of the home buying process.

Mortgage pre-approval process

This isn’t actually a process—it’s more of a marketing tool. By setting up mortgage calculators, online instantaneous pre-approval applications, and advertising low mortgage rates banks and lenders are really trying to capture your mortgage business. Why? Because lending is a big business with phenomenal returns (see this CBC article about the “shadow” mortgage mortgage, or why people like you and me are risking our money by lending it out).

But that doesn’t mean the pre-approval process is useless. The biggest advantage is that you can lock-in your rate for 30 to 90 days, depending on the lender. If rates rise during that time, you’re protected with the price lock. If they fall, consider shopping around again to make sure you have the best rate and mortgage option.

Now, all you get with a pre-approval process is an open file at a lending institution (or mortgage broker, who should do the periodic-rate shopping automatically for you) and the rate-lock. That’s it. There is no guarantee that you’ll get approved for the mortgage, or that this is the final rate you will pay for your mortgage. Those details can only be determined when you actually apply for a mortgage.

And herein lies the dilemma: A lender won’t actually go through all the paperwork until you’ve made an offer on a real property. Why? Because a mortgage application is as much about assessing you as the borrower as it is about assessing the property being bought. For the vast majority of home buyers this isn’t a problem. However, those with high debt ratios, for the self-employed, or real estate investors who already own three or more properties, you’ll want to find a mortgage broker or lender that’s willing to review your paperwork during the pre-approval process. While many lenders won’t do this, it’s an important step if you don’t want to be scrambling during the financing stages of mortgage approval. Mortgage professionals that do a more thorough pre-approval verification are able to determine where you might get flagged by lenders and how and what to submit in order to satisfy lender mortgage requirements.

Mortgage approval process

So, you’ve found the perfect home, you put in an offer and won. Now it’s time to seal the deal and this boils down to money. So you call your lender to finalize the mortgage. That’s when you’re going to get hit with a list of paperwork that’s required for your application. The paperwork you’ll need includes:

* Personal information: Age, marital status, number and age of kids

* Employment details: This includes proof of income (such as T4 slips, copies of your last two paystubs, personal income tax returns, Notice of Assessments from the CRA for the last two tax filing years, and a letter from your company’s HR department stating your position, length of service and salary)

* If self-employed you’ll need to provide: Incorporation documents, if applicable, as well as financial statements of the corporation for the last two to three tax years. You’ll also be required to submit full personal tax returns as well as CRA Notice of Assessments for both the corporation as well for you personally. The lender may also ask to see portions of your books, such as your General Ledger or Profit & Loss statements. Talk to your accountant or bookkeeper for these reports.

* Other sources of income: Typically this is a statement on your part, but the lender could ask for back-up documentation. Other income can include pension, rental income, part-time work, etc. You’ll probably be asked for copies of your tax returns, or copies of paystubs or rental income documentation

* If you already own property: A copy of the mortgage statement on your current property and a copy of last year’s property tax statement and, perhaps, this year’s up-to-date property tax statement.

* Current banking information: Including bank, branch, accounts and balances

* Verification of your down payment: This can be a snapshot of a bank account where the money is currently deposited, or a letter from a family member stating that the money is a loan or gift

* Consent to run a credit history search: Every lender will either verbally ask for permission (and then obtain your Social Insurance Number) or ask you to sign an authorization form allowing them to pull your credit history.

* List of debts (otherwise known as liabilities): This is where people sometimes opt to exclude a few items owed, but you need to resist this urge. Your credit history will show all outstanding money owed, so be upfront and honest. Provide a list of what is owed, to whom you owe it to and what monthly payments, if any, you put towards paying down the debt. The list should include student loans, credit card balances, car loans, monthly lease (or lease-to-own) arrangements and personal loans.

* Copy of the listing: You will need to print off a copy of the MLS listing and include this in your mortgage documentation package.

* Copy of purchase document: You will need a copy of the document you signed to buy the home. Known as the Agreement to Purchase and Sale, it’s the thick document that states the address, what’s included/excluded and the price, deposit and down-payment you agreed to.

* Condo documentation: If you’re buying a condo or strata-townhome, you’ll also need to include thecondo corporation’s financial statements and status certificates.

* Rural property: You’ll need to include the certificate for the well and/or septic tank if you’re property isn’t on municipal water and sewer.

If you want to reduce your stress during the financing phase of your home purchase, and you don’t want to or can’t submit all this information prior to finding a property then consider gathering up all this documentation ahead of time. Just having all the documentation at the ready will reduce your workload and free you up to concentrate on last-minute requests.

This article was borrowed of course from the internet!  Many thanks to its contributor.