24 Oct

Oct 24th – Bank of Canada raised rates again 5th time since 2017

General

Posted by: Michael James

RBC, TD, CIBC and BMO raise prime rates following Bank of Canada interest rate hike

 

 

As was universally expected, the Bank of Canada’s Governing Council hiked overnight rates this morning by 25 basis points taking the benchmark yield to 1-3/4%. This marked the fifth rate increase since the current tightening phase began in July 2017 (see chart below). The central bank stated it would return the overnight rate to a neutral stance, dropping the word ‘gradually’ that was used to describe the upward progression in yields since this process began. Market watchers will certainly note this omission. For the first time in years, the Bank has acknowledged it expects to remove monetary stimulus from the economy entirely.

So what is the neutral overnight rate? According to today’s Monetary Policy Report (MPR), “the neutral nominal policy rate is defined as the real rate consistent with output sustainably at its potential level and inflation equal to target, on an ongoing basis, plus 2% for the inflation target. It is a medium- to long-term equilibrium concept.” For Canada, the neutral rate is estimated to be between 2.5% and 3.5%, which implies that at a minimum, three more 25 basis point rate hikes are likely over the next year or so.

The Bank of Canada emphasized that the global economic outlook remains solid and that the U.S. economy is particularly robust, but is expected to moderate as U.S.-China trade tensions weigh on growth and commodity prices. The new U.S.-Mexico-Canada Agreement (USMCA) eliminated a good deal of uncertainty for Canadian exports, which will reignite business confidence and investment. Business investment and exports have been of concern in recent quarters, and the Bank is now looking towards a resurgence in these sectors, augmented by the recently-approved liquid natural gas project in British Columbia.

A continuing concern, however, is the decline in Canadian oil prices. Western Canada Select (WCS), a local blend that represents about half of Canada’s crude oil exports, has declined about 60% since July as global oil prices have risen (see chart below). WCS plunged below US$20 a barrel last week posting the biggest discount to West Texas Intermediate (WTI) on record in Bloomberg data back to 2008. WCS generally tracks heavy oil from Canada, which typically trades at a discount to WTI because of quality issues as well as the cost of transport from Alberta to the refineries in the U.S.

Canadian pipelines are already filled to the brim. The inability of the Canadian oil industry to build a major pipeline from Alberta to either the U.S. or the Pacific Ocean is increasingly dragging down domestic oil prices. Oil-by-rail shipments to the U.S. are at an all-time high, but this is an expensive and potentially unsafe option and precludes Canadian oil exports to China and Japan.

An even broader concern is the impact of higher interest rates on debt-laden consumers. The Bank is well aware of the risks, as the MPR cited that “consumption is projected to grow at a healthy pace, although the pace of spending gradually slows in response to rising interest rates… Higher mortgage rates and the changes to mortgage guidelines are affecting the dynamics of housing activity. Housing resales responded quickly to the new mortgage guidelines, and the level of resale activity is expected to continue on a lower trajectory than before the changes. New home construction is shifting toward smaller units, although stronger population growth is estimated to raise fundamental demand for housing.”

Household credit growth has slowed, and the share of new mortgages with high loan-to-income ratios has fallen. The ratio of household debt to income has levelled off and is expected to edge downward (see chart below).

Low-ratio mortgage originations declined by about 15% in the second quarter of 2018 relative to the same quarter in 2017 (see charts below). The MPR shows that “while activity fell for all categories of borrowers, the drop was more pronounced for those with a loan-to-income ratio above 450%, leading to a decline in the number of new highly indebted households”.

Bottom Line: The Bank of Canada believes the economy will grow about 2% per year in 2018, 2019 and 2020, in line with their upwardly revised estimate of potential growth of 1.9%. The Bank asserts that mortgage tightening measures of the past two years have “reduced household vulnerabilities,” although the “sheer size of the outstanding debt means that vulnerability will persist for some time”. That is Bank of Canada doublespeak. What it means is expect three more rate hikes by the end of next year.

 

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drcooper@dominionlending.ca

 

13 Dec

Global News- New Mortgage Rules 2018 – the new era

General

Posted by: Michael James

New mortgage rules 2018: A practical guide

By  National Online Journalist, Money/Consumer  Global News

WATCH: New mortgage rules mean you might have to buy a smaller home.

 A A 

Come Jan. 1, 2018, Canadians getting, renewing or refinancing a mortgage might have to prove that they would be able to cope with interest rates substantially higher than their contract rate.

New rules by Canada’s federal financial regulator announced in October mean that even borrowers with a down payment of 20 per cent or more will now face a stress test, as has been the case since January of 2017, for applicants with smaller down payments who require mortgage insurance.

Ottawa has already moved to tighten the rules around the mortgage market six times since July 2008, with a series of regulatory tweaks aimed at limiting the amount of debt that Canadians and financial institutions take on.

This is the seventh turn of the screw — and it could have a big impact.

Some 10 per cent of Canadians who got an uninsured mortgage between mid-2016 and mid-2017 would not have qualified under the new standards, a recent analysis by the Bank of Canada suggested.

LISTEN: Erica Alini joins Tasha Kheiriddin to discuss the new mortgage rules 

READ MORE: New mortgage rules could shut out 10% of low-ratio homebuyers: Bank of Canada

To put a number on it, the rules will likely affect about 100,000 homebuyers, who would qualify for a mortgage for their preferred house today but will likely fail the stress test for an equally large loan next year, according a report published by Mortgage Professionals Canada, an industry group.

Here’s how the new guidelines might affect you:

If you’re planning to buy a house with a downpayment of 20 per cent or more next year

The stress test means that financial institutions will vet your mortgage application by using a minimum qualifying rate equal to the greater of the Bank of Canada’s five-year benchmark rate (currently 4.99 per cent) or their contractual rate plus two percentage points.

If you’re going be house-hunting next year, this may force you to settle for a less expensive home than you would be able to buy today. Or, you might have to wait and save up for a larger down payment.

READ MORE: Here’s how much house you’ll be able to buy with the new mortgage stress test

The rules might force Canadians to set their eyes on homes that are up to 20 per cent cheaper. But since few homebuyers are stretching their finances to the limit when applying for a mortgage, the average target price reduction will likely be smaller, $31,000, or 6.8 per cent, according to Will Dunning, chief economist at Mortgage Professionals Canada.

Of the 100,000 or so prospective home buyers that will hit a snag because of the stress test next year, Dunning estimates that about half will be able to make a different purchase than they had planned. The rest will give up on a home purchase.

READ MORE: New data shows how much it costs to rent a 2-bedroom unit across Canada

If you’re renewing your mortgage next year

Lenders don’t have to apply the stress test to clients renewing an existing mortgage.

This means that if you fail the stress test, you’ll probably get stuck renewing with your current financial institution, without being able to shop around for a better rate.

In some cases, “renewing borrowers may be forced to accept uncompetitive rates from their current lenders,” Dunning noted.

READ MORE: Failed the mortgage stress test? Alternative lenders await — at a price

If you’re refinancing your mortgage

If you’re planning on refinancing your mortgage, you’ll have to qualify according to the higher stress-state rates rather than your existing contractual mortgage rate, explained James Laird, president at Toronto-based CanWise Financial.

Say, for example, that you bought a $400,000 home and have a $100,000 mortgage balance left. You’d like to borrow $50,000 more for a renovation. You have a five year fixed-rate mortgage at 3.3 per cent.

Today, your lender would make sure that you can take on a $150,000 loan at 3.3 per cent, said Laird.

Starting next year, your financial institution would have to vet that $150,000 loan using a 5.3 per cent rate. If you’re close to the borrowing limit today, you might have to settle for a smaller loan.

READ MORE: Home renovations: The 4 big risks of borrowing against your house to pay for it

Four cases in which the rules likely won’t affect you

As they generally do, financial regulators have allowed for measures that will ease the transition, making sure the new rules don’t disrupt transactions that are underway by not yet completed in early 2018.

If you sign a purchase agreement on a new home before Jan. 1., lenders won’t have to apply the stress test even if you apply for a mortgage in the new year, said Laird.

This holds for pre-construction sale and purchase agreements, too, he added.

“Usually there’s eventually a cutoff,” said Laird, though in this case it’s not yet clear when that will be.

If you are pre-approved for a mortgage, some lenders will give you 120 days starting Jan. 1 to buy your new home without worrying about the new rules.

The same holds for mortgage refinancing. If you have a mortgage refinance commitment in place by Dec. 31, you have 120 days to follow suit, said Laird.

Of course, the stress test won’t have much of a concrete impact on you if you pass it. Borrowers with plenty of spare financial capacity will be able to go about their business.

WATCH: What you need to know about getting a mortgage

About credit unions

The Office of the Superintendent of Financial Institutions (OSFI) rules only apply to federally regulated financial institutions, meaning Canadians might be able to continue borrowing without a stress test if they turn to provincially-regulated credit unions.

READ MORE: As tougher federal mortgage rules loom, will Canadians turn to credit unions?

In the past, however, credit unions have voluntarily adopted new federal standards on mortgage rates “pretty quickly,” said Laird.

Still, adopting rules on a voluntary basis means they would be able to make some exceptions, he added.

The stress test measures only one of three risk metrics lenders look at, said Laird. Essentially, it ensures that borrowers’ housing expenses compared to their income remain below a certain threshold even if rates rise.

But when evaluating a borrower, financial institutions also look at the size of the loan compared to the price of the house, as well as credit scores.

A credit union that has voluntarily adopted the stress test, might make an exception for a family with very strong credit scores and a down payment considerably higher than 20 per cent, even if they fail to qualify under the new rules by a small margin, said Laird.

© 2017 Global News, a division of Corus Entertainment Inc.

11 Dec

Great Post on Evaluating your Variable Rate Mortgage – no panic!

General

Posted by: Michael James

IS IT TIME TO LOCK IN A VARIABLE RATE MORTGAGE?

Approximately 32 per cent of Canadians are in a variable rate mortgage, which with rates effectively declining steadily for the better part of the last ten years has worked well.

Recent increases triggers questions and concerns, and these questions and concerns are best expressed verbally with a direct call to your independent mortgage expert – not directly with the lender. There are nuances you may not think to consider before you lock in, and that almost certainly will not be primary topics for your lender.

Over the last several years there have been headlines warning us of impending doom with both house price implosion, and interest rate explosion, very little of which has come to fruition other than in a very few localised spots and for short periods of time thus far.

Before accepting what a lender may offer as a lock in rate, especially if you are considering freeing up cash for such things as renovations, travel or putting towards your children’s education, it is best to have your mortgage agent review all your options.

And even if you simply wanted to lock in the existing balance, again the conversation is crucial to have with the right person, as one of the key topics should be prepayment penalties.

In many fixed rate mortgage, the penalty can be quite substantial even when you aren’t very far into your mortgage term. People often assume the penalty for breaking a mortgage amounts to three months’ interest payments, which in the case of 90% of variable rate mortgages is correct. However, in a fixed rate mortgage, the penalty is the greater of three months’ interest or the interest rate differential (IRD).

The ‘IRD’ calculation is a byzantine formula. One designed by people working specifically in the best interests of shareholders, not the best interests of the client (you). The difference in penalties from a variable to a fixed rate product can be as much as a 900 per cent increase.

The massive penalties are designed for banks to recuperate any losses incurred by clients (you) breaking and renegotiating the mortgage at a lower rate. And so locking into a fixed rate product without careful planning can mean significant downside.

Keep in mind that penalties vary from lender to lender and there are different penalties for different types of mortgages. In addition, things like opting for a “cash back” mortgage can influence penalties even more to the negative, with a claw-back of that cash received way back when.

Another consideration is that certain lenders, and thus certain clients, have ‘fixed payment’ variable rate mortgages. Which means that the payment may at this point be artificially low, and locking into a fixed rate may trigger a more significant increase in the payment than expected.

There is no generally ‘correct’ answer to the question of locking in, the type of variable rate mortgage you hold and the potential changes coming up in your life are all important considerations. There is only a ‘specific-to-you’ answer, and even then – it is a decision made with the best information at hand at the time that it is made. Having a detailed conversation with the right people is crucial.

It should also be said that a poll of 33 economists just before the recent Bank of Canada rate increase had 27 advising against another increase. This would suggest that things may have moved too fast too soon as it is, and we may see another period of zero movement. The last time the Bank of Canada pushed the rate to the current level it sat at this level for nearly five full years.

Life is variable, perhaps your mortgage should be too.

As always, if you have questions about locking in your variable mortgage, or breaking your mortgage to secure a lower rate, or any general mortgage questions, contact a Dominion Lending Centres mortgage specialist.

DUSTAN WOODHOUSE

Dominion Lending Centres – Accredited Mortgage Professional
Dustan is part of DLC Canadian Mortgage Experts based in Coquitlam, BC

4 Dec

Incredibly Strong Jobs

General

Posted by: Michael James

Incredibly Strong Jobs Report in November, Q3 GDP Growth Slowed On Weak Exports and Housing

bbeb58f0-afea-4686-96a8-3a54496def66The highly anticipated November Labour Force Survey, released this morning by Stats Canada, surpassed all forecasts breaking multi-year records. Employers added a whopping 79,500 jobs last month, bringing the gains over the past 12 months to nearly 400,000. November’s data posted the most robust job market since the 2008-09 recession as the jobless rate plunged to 5.9% in November, down from 6.3% in October. Average employment growth of 32,500 per month over the last year is the fastest pace since 2007. The 5.9% jobless rate, was only lower for a single month before the recent recession—a time when the economy was operating beyond its longer-run capacity limits.
Employment grew across most industries led by manufacturing, retailing and education. Construction jobs increased for the second consecutive month. The employment increase in November was mainly among private sector employees, as both public sector employment and the number of self-employed was little changed.

The employment gain for November is the 12th straight, the longest since the 14-month span that ended in March 2007.

Some of the most substantial gains were in central Canada, with Quebec’s unemployment rate falling to 5.4%, the lowest level on record back to 1976, and Ontario’s at the lowest level since 2000 at 5.5% (see table below). The national jobless rate of 5.9% has fallen 0.9 percentage points over the past 12 months.

Great news for the consumer was the 2.8% November increase in average hourly earnings, up from 2.4% in October and the fastest rise since April 2016. Much of that increase has come in the last few months as wage growth accelerated sharply—finally a bit of evidence that tight labour market conditions are feeding through to wages. If that trend holds up, it will be hard for the Bank of Canada to remain on the sidelines much longer.

One piece of contrary evidence was a sizeable drop in average hours worked that retraced much of the gain seen in recent months. The Bank of Canada has flagged below-trend hours worked as a sign of labour market slack, but other indicators point to very tight job market conditions. The strength of the job market will no doubt impact the Bank of Canada’s assessment. The Canadian dollar surged on today’s news.

Q3 GDP Growth Slowed

The strong jobs market has been reflected in the rise in consumer spending, noted in another report released today by Stats Canada, helping to offset the slowdown in exports and housing. GDP growth in the third quarter slowed to 1.7%, down sharply from the 4.3% gain in the prior three months. This slowdown was expected as the Q2 pace of expansion was unsustainable. The Bank of Canada estimates that the longer-term potential growth rate is close to 1.7%.

GDP growth in Q3 continued to be concentrated in household spending with a stronger-than-expected 4.0% increase that built onto a 5.0% surge in Q2. Government investment spending also jumped higher, though, and business investment rose for a third straight quarter — albeit at a more modest pace than over the first half of the year. Offset came from a large, but expected, pullback in net trade.

Exports fell sharply in the third quarter subtracting 3.4 percentage points from the growth rate. The decline was mainly attributable to motor vehicles and parts (-9.0%), primarily passenger cars and light trucks. Imports were virtually unchanged.

Household spending represents a record proportion of the overall economy (see chart below). The compensation of employees increased 1.3% in nominal terms in the third quarter, a quicker pace than in the previous 11 quarters. Wages and salaries rose 1.9% in goods-producing industries and 1.1% in services-producing industries. Regionally, Ontario and Quebec continued to fuel wage growth in the third quarter.

Housing investment weakened, posting the first back-to-back quarterly decline in investment in residential structures since the first quarter of 2013. Ownership transfer costs, which reflect activity in the resale housing market fell sharply for the second consecutive quarter.

Monthly GDP data, also released this morning, were perhaps more encouraging than the quarterly data regarding near-term growth implications. September GDP rose a stronger-than-expected 0.2% (nonannualized) to more-than-retrace a 0.1% dip in August. That left somewhat stronger momentum at the end of the quarter than we previously assumed. The data are still pointing to a slowing in underlying GDP growth from the outsized pace from mid-2016 to mid-2017 but is also still fully consistent with the Bank of Canada’s view that growth will be sustained at a modestly above-trend 2% pace going forward.

Dr. Sherry Cooper

Dr. Sherry Cooper

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

21 Jun

THINGS MORTGAGE PROFESSIONALS WISHED THE SELF EMPLOYED KNEW

General

Posted by: Michael James

Borrowed from Pam Pikkert in Red Deer, AB:

What your Mortgage Broker wishes the self-employed borrower would understand… This intrepid group of risk takers are entrepreneurial and help keep the economy moving but all too often we meet with these people and have to give news we would rather not give. So let’s look at what we wish they knew.

1. Surround yourself with professionals. You are the expert in your field without a doubt, but that doesn’t translate to being able to do it all.
Having a knowledgeable book keeper and a well-qualified accountant can save you a fortune in tax deductions and time lost. They are in your corner come tax time and heaven forbid through an audit by the CRA. Their job is to know the ins and outs of taxes so that you can put your focus on growing your business.
A lawyer is also invaluable. They will protect you against loopholes you didn’t know to look for in contracts.
Mortgage professionals are also a must. A Dominion Lending Centres Mortgage professional can help you with your home, a rental portfolio if you plan to diversify and commercial lending when you are ready.

These Professionals allow you to have the right documentation available for mortgage lending purposes!

2. You can’t have your cake and eat it too. The lending landscape in Canada has totally shifted in the past few years. Long gone are the days of simply stating what you earn without any verification of such and being offered a mortgage with little money down and low rates. If you choose to write off as much of your income as possible to avoid as much taxes as possible, then you will pay a higher interest rate on your mortgage

You have to prove the money you make to get the money you need!

3. You have to keep your affairs up to date. That means getting the accountant prepared financials, filing your annual returns and most importantly paying your taxes. If you have a large outstanding tax balance, you are going to find it nearly impossible to get a mortgage. Taxes trump mortgage in order of who gets paid first so there are no prime or near prime lenders out there who will lend to you until these are paid.

Tax documents need to reflect what you claim as taxable income and have no taxes owing to CRA.

4. The magical number in the mortgage world is 2. You have to have a 2-year history of self-employment with accompanying documentation to be able to proceed with the mainstream lenders in most cases. You also need 2 types of credit each with at least a $2,000 limit to keep your credit strong. Be aware of how debt may affect your purchasing ability. A large credit balance and a high vehicle payment will dramatically affect your ability to purchase a home. That $13,000 line of credit or a $400 vehicle payment will each decrease your purchasing power by $100,000.

The bottom line is this, make sure that you use your whole team. If you are wanting to buy a home within a couple of years then before you go fully self-employed or purchase that new truck or write off all the income you can, talk to your mortgage professional to ensure you are not inadvertently putting your home ownership goals on hold.

15 Jun

Historical Mortgage Purchasing Power – interest rates not the driver you think it is!

General

Posted by: Michael James

Borrowed from the class-act Dustan Woodhouse – author, presenter, and DLC Super Broker

MORTGAGE-GEEK HISTORY

The average person if stopped on the street and asked; Are today’s low interest rates driving up house prices? Would likely say ‘yes’.
They would be wrong.
And we can let their lack of understanding pass, after all we can agree that math mostly sucks.
However to ask a Realtor, banker, or your Mortgage Broker this question and get the same answer is another story, for them to say ‘yes’ to this question is a large red flag.
Following are some basic numbers that might surprise you, unless you are a Mortgage Broker.

2007
A buyer with 10% Down and a $100,000 annual gross income.
At the time rates were ~4.99% and amortizations were capped at 40 years
Maximum mortgage amount?
~$630,000

Moving along…
2016
A buyer with 10% Down and a $100,000 annual gross income.
At the time rates were ~2.49% and amortizations were capped at 25 years
Maximum mortgage amount?
~$630,000

But then something happened, in response to rising prices and an apparent lack of understanding as to basic math, our Federal Government changed the rules.
And our average person on the street that answered that first question, they were totally cool with things being tightened down, until they went to apply for a mortgage themselves…and found this new reality:
2017
A buyer with 10% Down and a $100,000 annual gross income.
With rates still ~2.49% and amortizations still capped at 25 years.
Maximum mortgage amount?
~$508,500

The exact same household with $100,000 annual income, impeccable credit, a 10% down payment was told, in this very competitive market with a 0.27% arrears rate, a group of households that made it through the 2008/9 meltdown just fine, that now, in 2017, they needed to have their purchasing power cut back by ~$121,500.

If you have any questions, give me a call to discuss at 604.770.4900.