Proposed changes to mortgage rules may force some consumers to consider more volatile variable rate mortgages in order to qualify under a strict stress test proposed by Canada’s banking regulator.
Guidelines published by the Office of the Superintendent of Financial Institutions in July, which the agency is now receiving feedback on, would change the qualifying rules for uninsured mortgages in Canada — a less regulated segment of the market made up of consumers who have down payments of 20 per cent or more.
The rules under consideration would force consumers to qualify for loans based on the rate on their contract plus 200 basis points, a move that might lead some people into shorter term loans that have lower rates and are therefore easier to qualify for.
“It could be one of the unintended consequences,” said Benjamin Tal, deputy chief economist with CIBC World Markets Inc., about the changes. Tal believes OSFI will modify its proposal before it is finalized and one of the factors under consideration could be how the rules might discourage Canadians from locking in their rates.
Rob McLister, the founder of ratespy.com, said the potential impact of the changes can be seen when examining the current yield curve, which shows longer term rates are still much higher. As an example, with the prime rate now 3.2 per cent and the average discount on a five-year variable rate mortgage around 65 basis points, that means those consumers would have to qualify based on a rate of 2.55 per cent plus 200 basis points or 4.55 per cent.
“Generally, the variable will be cheaper. Maybe the one-year or two years (even more so). We have people who can’t qualify because of 10 basis points. I think it will force at least 10 per cent of uninsured borrowers to look at shorter-term rates that have more risk,” said McLister, who notes the average five-year fixed rate mortgage is more like 3.19 per cent.
Those consumers looking for the safety of a five-year rate would end up having to qualify based on 5.19 per cent with the 64 extra basis points meaning they could get a larger loan by borrowing at short-term rates.
The Bank of Canada has raised its overnight lending rate twice in the last two months and may do so again in October. Such hikes, which affect variable-rate products that are tied to prime, are part of the risk that comes with a floating rate product.
McLister said a typical conventional borrower would qualify for a home that’s about six per cent more expensive by choosing a lower more volatile variable, one- or two-year rate instead of a “safer” five-year fixed.
That assessment was based on latest median household income from Statistics Canada, average non-mortgage debt, a 30-year amortization and a 20 per cent down payment
The OSFI changes fly in the face of previous government policy, which had tried to entice people into longer-term products by making the qualifying easier.
Consumers with less than 20 per cent down on a mortgage and their loans backed by Ottawa already must qualify based on the five-year Bank of Canada qualifying rate of 4.84 per cent. That rule change was made in October, 2016 but previously those high-ratio borrowers could use the rate on their contract if they were locking in for five years or longer.
Robert Kavcic a senior economist with Bank of Montreal, said households in Toronto — currently facing rapidly declining sales and an average price correction of almost 25 per cent from the April peak, can withstand more rate increases but he agrees people on the fringe may turn to shorter-term money to get into the housing market.
“I think the goal is to make sure people can pay higher rates two or three years down the road,” said Kavcic.”It does sound like there is more caution (about proposed changes) given what is happening in the Toronto market.”
Those with mortgages will feel the hike the most
The Bank of Canada is hiking its benchmark interest rate by a quarter point to one per cent. So, what does that mean for people with credit card debt or a mortgage?
Economist Bryan Yu with Central 1 Credit Union says if you’re carrying a lot of debt on your credit card, you’ll probably start to notice higher interest charges.
“They’re going to be facing the quarter-point increase on terms of that debt for their servicing… That’s a quarter point on an annual basis. So, it is going to be a bit of a pinch going forward.”
“Likely, we are going to see a couple more hikes going forward,” he speculates. “But I think at this point, it will be relatively stable for most individuals until about next year.”
So, it might be a good time to start chipping away at that balance.
“They should keep in mind that this is sort of the early stages of a longer-term rate cycle. So, they may want to be looking at paring back some of that debt over time,” says Yu.
“When it comes to credit card debt, it’s a normally high cost debt, unlike mortgages, which is relatively cheap money. So you don’t really want to be holding on to that type of a debt going forward because of the high cost associated with it. So, if you are looking at paying off any debts whatsoever, it should be those high-cost loans.”
For those with a mortgage, Economist Tsur Somerville with UBC explains who’ll feel this rate hike the most:
“If you have an adjustable rate mortgage, then your mortgage payments will be going up very, very soon. And if you’re on a fixed rate mortgage, it means that when you renew, you’re going to be looking at higher payments then.”
Somerville says while the Bank of Canada hiking its trendsetting rate won’t alone make a huge impact, it’s part of a process that is increasing the cost to borrowers, which could dampen the real estate market.
“You start seeing increases in what people will have to pay on their mortgages. That affects pricing and affects demand.”
He adds first-time buyers will be most affected. “Those are the people who are entering mortgages; they’re not carrying an existing mortgage. So, we would expect those to be the people who all of a sudden are looking at qualifying for a smaller mortgage and having higher payments on a mortgage than the existing amount.”
This is the second time this year that the Bank of Canada has moved the benchmark higher.
“I think if we get a third and fourth hike, I think that a kind of accumulated pattern that starts to have an effect on people,” says Somerville. “Any one-off effect, the amount and payment is relatively small and you can sort of brush it all off. But when they start piling up, [it starts] making a difference.”
Source: MoneySense.ca – Martin MacMahon and Denise Wong, News 1130
Variable-rate mortgages becoming more important to the market – study
In a recent study, RateHub revealed that while the spread between fixed and variable offerings has shrunk to 0.2 per cent of a percentage point in 2016, movement in the two product types has demonstrated a larger divergence in the past few months.
The best five-year variable rates available in Toronto since November 1 is at 1.83 per cent, while the lowest available fixed-rate product climbed slightly by 0.35 per cent, up to 2.44 per cent.
“We’ve seen increased interest in variable rates,” RateHub co-founder and CanWise Financial president James Laird told Global News.
Laird explained that the rise in bond yields will trigger increases in fixed-rate payments, while the BoC’s benchmark interest rate (which influences variable-rate products) is expected to remain stable for most of the year.
Also, the stricter stress test implemented by the federal government late last year will make variable-rate mortgages—which would end up being the relatively inexpensive options—more enticing.
Laird emphasized, however, that these are just predictions, and there is no assurance that the trend in the spread between fixed and variable rates will sustain itself all year. Would-be borrowers who should ensure they can manage a rate increase before they go with variable-rate mortgages, he added.
The Bank of Canada has kept interest rates unchanged at 0.5%, meeting market expectations.
Following the announcement, the Canadian dollar was rallying a bit against the US dollar, climbing to around $1.337, better than the $1.342 the loonie traded at ahead of the announcement.
The statement indicated that the BoC sees the economy evolving broadly as it expected, with the BoC saying (emphasis ours):
Financial market volatility, reflecting heightened concerns about economic momentum, appears to be abating. Although downside risks remain, the Bank still expects global growth to strengthen this year and next. Recent data indicate that the U.S. expansion remains broadly on track. At the same time, the low level of oil prices will continue to dampen growth in Canada and other energy-producing countries
And while the BoC’s decision Wednesday wasn’t expected to materially change the outlook for markets, it does kick off a busy period for central bank announcements, as the European Central Bank will announce its latest decision tomorrow morning and the Bank of Japan and Federal Reserve will follow next week.
Here’s the full statement from the BoC:
The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.
The global economy is progressing largely as the Bank anticipated in its JanuaryMonetary Policy Report (MPR). Financial market volatility, reflecting heightened concerns about economic momentum, appears to be abating. Although downside risks remain, the Bank still expects global growth to strengthen this year and next. Recent data indicate that the U.S. expansion remains broadly on track. At the same time, the low level of oil prices will continue to dampen growth in Canada and other energy-producing countries.
Prices of oil and other commodities have rebounded in recent weeks. In this context, and in light of shifting expectations for monetary policy in Canada and the United States, the Canadian dollar has appreciated from its recent lows. With these movements, both the price of oil and the exchange rate have averaged close to levels assumed in the January MPR.
Canada’s GDP growth in the fourth quarter was not as weak as expected, but the near-term outlook for the economy remains broadly the same as in January. National employment has held up despite job losses in resource-intensive regions, and household spending continues to underpin domestic demand. Non-energy exports are gathering momentum, particularly in sectors that are sensitive to exchange rate movements. However, overall business investment remains very weak due to retrenchment in the resource sector.
Inflation in Canada is evolving broadly as anticipated. The factors that pushed total CPI inflation up to 2 per cent will likely unwind in the months ahead. Measures of core inflation are at or just below 2 per cent, boosted by the temporary effects of past exchange rate depreciation. Material excess capacity in the Canadian economy will continue to dampen inflation.
An assessment of the impact of the upcoming federal budget’s fiscal measures will be incorporated into the Bank’s April projection. All things considered, the risks to the profile for inflation are roughly balanced. Meanwhile, financial vulnerabilities continue to edge higher, in part due to regional shifts in activity associated with the structural adjustment underway in Canada’s economy. The Bank’s Governing Council judges that the overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate, and the target for the overnight rate remains at 1/2 per cent.
Source: Business Insider – Myles Udland
Alternative lender Meridian has launched the first shot in the spring mortgage wars with a one-year fixed mortgage rate of 1.69 per cent.
“As we are quickly approaching the busy spring home buying season, this is the perfect time for people to evaluate their home buying options by getting a pre-approval now,” the credit union said in a release Tuesday announcing the offer.
The deal is the lowest mortgage rate currently on offer from any lenders, for any term, listed on RateSupermarket.ca. It also comes with a so-called 20/20 prepayment ability, which means the borrower is able to pay off 20 per cent of the principal in any given year. The borrower can also increase the monthly payment up to 20 per cent of the original payment plan each year.
The move is a first strike in the battle for market share in the upcoming spring buying season. The big banks have raised their mortgage rates incrementally over the past 12 months in some cases, even as the Bank of Canada has twice slashed its benchmark rate, and yields in the bond market — where the banks borrow from to get money to loan out to mortgage buyers — are also getting cheaper.
In recent years, mortgage lenders have been keen to cut their rates in the lead-up to the busy spring buying season in order to gain market share.
Meridian’s announcement came with a potshot against the big banks, who haven’t passed on the full extent of the last two central bank rate cuts to consumers by lowering their consumer rates by the same amount.
“Meridian is going against the trend set by banks and lenders of raising their fixed mortgage rates,” the credit union said in a release.
“As a member-owned financial institution, we are able to take advantage of the current bond and lending environment and pass those savings onto our members.”
The move also comes just ahead of a deadline announced last fall, that as of February 15, buyers of homes costing more than $500,000 must have a minimum of 10 per cent down. Right now the minimum is five per cent.
More than two-thirds of mortgage-holders opt for fixed-term loans, according to the most recent data from the Canadian Association of Mortgage Professionals.
The average price of a Canadian home rose 12 per cent in 2015 to $454,342 at the end of December, the Canadian Real Estate Association said.
Source: Pete Evans, CBC News Posted: Feb 02, 2016
The Bank of Canada today maintained its benchmark interest rate at 0.5 per cent.
The rate affects the saving and borrowing rates that Canadians get from their lending institutions banks. The central bank cut its rate twice last year in an attempt to stimulate the economy.
Headed into the decision, economists were evenly split as to whether the bank would cut again or stand pat.
More to come