How the US economic outlook will affect Canadian mortgage rates & What is going on with those Credit Unions

Some insight for all of you rate watchers and shoppers out there. Ben Bernanke, US Fed chief recently held a scheduled press conference to “add transparency” to future fed plans for the monetary policy. As Canadian rate markets are largely influenced by the US, I noted a few points that should be interest:

• “Exceptionally low” U.S. interest rates will last for an “extended period.” The Fed has used that “extended period” phrase since March 2009.
• U.S. inflation is picking up but “longer term inflation expectations have remained stable and measures of underlying inflation are still subdued.”
• 2011 U.S. growth expectations have been cut to 3.1% (from 3.3%)
• The U.S. labour market is in a “very, very deep hole”
• Long-term U.S. unemployment is the “worst” it’s been since WWII
• Rising oil prices are “bad for the recovery.”

Because of Canadian ties to US rate markets, we can expect this news to imply that there will continue to be downward pressure from the US market when it comes to Canadian rate pricing, including the Bank of Canada and how it handles the overnight lending rate. Many economists have moved their target for the rate rising back from the May 31^st meeting to conclude a rate hike is more likely on the July 19^th meeting.

Also, many clients have been inquiring about rate specials available through Credit Unions, including Coast Capital, Vancity and G+F Financial. It is important to note that turn-around times at this moment can be up to 3 weeks (just to hear a yes or a no) and these specials are VERY restrictive, especially for investors. Lending area, type of property (owner occupied only typically), product, qualification method, etc are all factors that will disqualify the majority of customers, who have waited for weeks for a response. Please contact me for more information but understand the differences between major banks, who typically offer their best rate no matter where or what you buy, versus a credit union trying to soak up market share. You will find that many brokers are not advertising these rates because their turn-around times and guidelines make it difficult for a large percentage of the market to qualify.

Bank of Canada stays put, fixed rates slipping?

Bank of Canada keeps it's overnight lending rate untouched March 1st

The Bank of Canada surprised few on Tuesday, March 1st by announcing that the overnight lending rate (which is what the banks’ Prime rate is derived from) remained untouched at 1%. Most are still anticipating seeing more action from the government into late Spring or even early summer. In the fixed rate world, bond have begun to slip and some lenders are now offering slightly more competitive rates than available last week. Not big changes, but if the slide continues, more of the major banks may get more competitive.

35 year amortizations soon giving way to 30 years for insured mortgages

Time is running out if you are planning on making a purchase this year with less than 5% down to get the lowest possible payment, and to qualify for as much as possible. Remember, you only need to write an offer and have the financing request be submitted to your lender before March 17th to be eligible (you don’t need to close before March 18th). With the reduction in amortization increasing payments, the average client will qualify for 7.5% less than what they qualify for now.

Rates are still low and you can keep your payments low if you act!

Rates up, get your rate hold for the Spring market

After bond yields rose .25% 2 weeks ago, the last few lenders rose rates by about the same amount by the middle of last week, putting 5 year fixed rates above 4% with most lenders except for “Quick close specials” (deals closing in 30-60 days),

 

Since then, bonds have cooled and we may re-enter a roller-coaster phase with rates that we have seen the past 2 years if bond yields fall again. If you are planning on purchasing a property in the spring market make sure to get a rate hold for up to 120 days to ensure that rates don’t continue to rise, costing you thousands in additional interest.

More government regulations to slow an accelerating debt-to-income ratio

Finance Minister Jim Flaherty announced more changes to insured mortgages Jan 17^th, 2011. Although these changes aren’t as aggressive as we saw in April of 2010, they will still effect many borrowers obtaining an insured mortgage in the spring. The following changes have been made:

 

–          Maximum amortization reduced from 35 years to 30 years for mortgages higher than 80% financing

–          Maximum refinance allowed reduced from 90% to 85%

–          Home Equity Line of Credits (HELOC’s) are no longer insured by CMHC

 

Of these, the amortization and refinance reduction are due to have the biggest effect on the marketplace. Currently very few lenders offered high ration (insured) HELOC’s so no big news here.

 

However, reducing the amortization reduces flexibility of commissioned or business for self clients who see large but normal fluctuations in their monthly income. Often it is advised to have the lowest payment possible with good pre-payment options, so that when times are good, additional payments can be made and when times are bad the payments are minimal.

 

Not a significant number of clients were seeking 90% (or previously 95%) financing on their residences but now at 85%, it makes little sense to refinance more than 80% of the home value, as the extra 5% will cost 2.15% of the new total loan amount or 3.90% on the new money being added.

 

I would be surprised to see many lenders change the amortization for conventional deals (80% financing or less) but often banks will follow rules laid out by CMHC. This wouldn’t affect the majority of investors who are now required to put 20% down anyways, but if the amortization is reduced we will see clients qualifying for less money on their portfolio. We should know more within the next two weeks regarding any potential changes to conventional business done with the lenders.

Getting set up for 2011

As we begin 2011, now is a good time to get your mortgage binder prepared,” says Kyle Green of Mortgage Alliance (778-373-5441, kgreen@mortgagealliance.com). As your accountant will require a number of these documents, it would be good to hold copies in a folder for mortgage approval on your next purchase, refinance or renewal. Keep in mind banks are getting pickier and we are finding that the lowest rates are often the through the lenders that ask the most questions and demand more documentation. Here are the documents that you can keep organized to make your next mortgage venture easier:

 

–          2008 and 2009 (and 2010 once you have it) Notice of Assessments

–          2008 and 2009 (and 2010 once you have it) T1 Generals (the forms your accountant or you fill in and send to the government)

–          Most recent annual mortgage statements for all of your properties (you should receive the 2010 statements in January or February)

–          Copies of your lease agreements for all of your properties

 

When you apply for a mortgage, more up to date information may be necessary (update job letters, recent paystubs, recent asset statements, etc) but having your tax information properly filed and organized will make your life a lot easier when applying. If you have 2 or more rentals you know that rounding all of the information up can sometimes be a pain. Your accountant needs the info anyways, so keep your records clean!

More Changes for investors? Really?

We have seen some recent changes in the mortgage market for rental properties yet again, as more lenders continue to make it tougher not only to qualify, but to get the best rate on the market for a rental property,” says Kyle Green of Mortgage Alliance (778-373-5541, kgreen@mortgagealliance.com). “Almost all non-bank lenders (ie brokerage only, not Big 5) have priority rates for owner occupied homes only, and are charging a premium on the rate of .15% to .2% for all rental property mortgages. All would be well if the Big 5 were great for lending to real estate investors but the reality is that these banks all use what is called a “50% add to income” method of calculating rental income. When all is said and done, $1,000 in rental income only amounts to $200 in borrowing power! For those who need to use a lender who will take a larger percentage of rental income to qualify, you might be paying a rate premium that you wouldn’t have paid 6 months ago.

Bank of Canada stays put, Line of Credit rates becoming more competitve with select lenders

The Bank of Canada didn’t surprise anyone on Tuesday, making no changes to the overnight lending rate. Most predictions are pegging late first quarter or early 2nd quarter rises in Prime in 2011.

Although we are likely a year or two away from Canadian banks offering Prime instead of Prime +1% on Line’s of Credit, there are a few lenders that have come down in rate through 2010, as low as Prime +.5%. Contact Kyle Green of Mortgage Alliance for more details at 778-373-5441 or kgreen@mortgagealliance.com.

Bank of Canada meets, keeps Prime rate at 3%

Bank of Canada representatives met on Tuesday, Oct 19^th and decided to change their tune by keeping the overnight lending rate at 1%,” says Kyle Green of Mortgage Alliance (1-888-531-8890, cell 604-551-8976 or kgreen@mortgagealliance.com). “Most economists predicted that they are unlikely to raise rates and at this point, are unlikely to raise them at their next meeting in early December. Below is a summary for the BoC’s rationale:

 

• The BoC sees a “weaker-than-projected recovery in the United States.” (No revelations there.)
• The potential exists for “a more protracted and difficult global recovery.”
• “…domestic considerations…are expected to slow consumption and housing activity in Canada.”
• “Inflation in Canada has been slightly below the Bank’s July projection.”
• “The inflation outlook has been revised down and both total CPI and core inflation are now expected to converge to 2% by the end of 2012.” (As long as inflation doesn’t threaten to exceed the Bank’s 2% target for any extended period, that’s generally good news for mortgage rates.)
• The 1% overnight target rate “leaves considerable monetary stimulus in place.”

The Bank also adjusted its growth forecasts as follows:

• 2010 growth cut to 3.0% from 3.5%
• 2011 growth cut to 2.3% from 2.9%
• 2012 growth raised to 2.6% from 2.2%

The resounding theme here is that things are worse than the Bank of Canada predicted, as the US recession still lingers here in Canada.

 

In other news, right now a lender we have a powerful relationship with has dropped their 5 year special rate to 3.33%! Please note that conditions do apply, so please call me for details.

 

The full report is available at http://www.bankofcanada.ca/en/fixed-dates/2010/rate_191010.html

Prelude to Bank of Canada Meeting Oct 19th

With the next Bank of Canada meeting coming next Tuesday, Oct 19^th, most economists are predicting a hold on the overnight lending rate,” says Kyle Green of Mortgage Alliance (1-888-531-8890, 604-551-8976 or kgreen@mortgagealliance.com). “All 5 of the big Canadian banks have predicted that there will be no increases in Prime for the remainder of the year, with some banks like CIBC banking on the Prime rate holding until Q2 2011. This prediction gives them a forecast of 1.75% by Q4 2011, with the average of the Big5 predicting rates will be 2% by the end of 2011 (meaning Prime will be 4%).

 

At this rate, it would appear as though the variable rates will continue to outpace fixed rates until the end of 2011, but after that a 3.5% fixed rate will begin to shine as variable rates continue to rise into 2012.