Category Archives: variable rate mortgages

New financing rules could drive more consumers into more volatile mortgages

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.

CONVENTIONAL BORROWER

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.”

Source: Financial Post – Gary Marr gmarr@postmedia.com

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What the latest rate hike means for you

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.”

Effect on mortgages

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

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Canadian housing bear warns proposed mortgage rule changes may close the Bank of Mom and Dad

A former MP and popular finance blogger is warning a federal watchdog’s proposed changes to the mortgage qualification process could have a dire impact on housing markets across Canada.

Garth Turner, whose Greater Fool blog has ruffled more than a few feathers, suggests a move to “stress test” all uninsured mortgages, rather than just insured mortgages with downpayments of less than 20 per cent, will curb demand considerably.

“It’s been seven years since we’ve had consistently rising interest rates and we’ve never had this kind of stress test before,” Turner tells BuzzBuzzNews.

“I just can’t in honesty tell people, that ‘Oh, you know, go to Cambridge or Montreal or Halifax or Edmonton for a bargain property because I think properties are going to be feeling a downward tug,” he continues.

SEE ALSO: The Bank of Mom and Dad: the ways Toronto parents help theirs kids buy homes

Last month, the Office of the Superintendent of Financial Institutions published a draft of its reworked Guide B-20 — Residential Mortgage Underwriting Practices and Procedures, which included the broader stress test proposal.

By stress testing all mortgages, Turner suggests a large chunk of the prospective-homebuyer population will be pushed to the sidelines as they will no longer be able to finance their purchase, thus reducing demand and, ultimately, leading to outright price declines.

It’s a regulatory change that Turner is convinced will take place before the end of the year.

“We all have the same mortgage rates coast to coast, we all have the same mortgage approval regulations coast to coast, so these are universal changes that are going to affect every buyer in Canada,” Turner says.

Currently, a homebuyer can go to an alternative or sub-prime lender or even the Bank of Mom and Dad to borrow money to boost their downpayment to 20 per cent or more, avoiding any stress test. But the new regulations would close this loophole.

“Credit is going to be drying up somewhere between 17 and 20 per cent simply because of the stress test alone, and that’s a pretty significant number of people to take out of the market,” he adds.

“The only workaround is going to be the people who get mortgages from non-bank lenders,” says Turner, citing provincially mandated credit unions as an example.

He refers to some credit unions as “time bombs,” estimating a number of them have 90 per cent of their assets tied up in residential mortgages.

“Talk about risk: it’s flashing red.”

Source: BuzzBuzzHome.com –  

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Variable-rate mortgages becoming more important to the market – study

Variable-rate mortgages becoming more important to the market – study

The gap between the number of borrowers going for fixed and variable rates has become larger recently, pointing to the increasingly important role that variable-rate mortgages are playing in the Canadian housing market.

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.

Source: MortgageBrokerNews.ca – by Ephraim Vecina | 07 Feb 2017
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Bank of Canada holds benchmark interest rate at 0.5%

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 – 

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Mortgage rates, charges decisive factors for consumers

A combination of reasonable mortgage rates, no unexpected charges, and special features were the most important factors in consumers’ choice of mortgage originator, according to a recent survey conducted by financial services firm D+H.

The study’s results accompanied the increased popularity of the internet as a valuable resource for would-be borrowers, giving them more confidence in their transactions as well as making them more wary of hidden fees.

“People are asking the right questions. Even a caveman could find the lowest mortgage rates online within seconds. What you can’t learn as easily are the hidden costs, including mind-blowing penalties, inflated blend and increase rates (the rates lenders charge on any new money you add to your mortgage), ridiculous rates to convert from a variable mortgage to a fixed, aggravating fees to switch lenders, restrictions when porting your mortgage, and so on,” mortgage columnist and RateSpy.com founder Robert McLister wrote in a February 28 piece for The Globe and Mail.

McLister stated that the results pointed at the growing importance of a second informed opinion, apart from online information, in determining the best mortgage rates available.
 
“It’s no surprise, then, that two out of three borrowers value the person arranging their mortgage more than the lender itself. And they should. Lender reputation is immaterial compared to proper guidance and mortgage flexibility,” McLister said.

The survey also revealed that the largest contributor to consumer satisfaction is the absence of time pressure, which can be achieved by the broker going the “extra mile” to assist with the details.

“Besides time pressure, the survey found the biggest headaches for borrowers were paperwork, uncertainty about getting the best rate and finding the time to meet with a banker or broker,” McLister noted.

Source: MortgageBrokerNews.ca – by Ephraim Vecina | 02 Mar 2016 

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A turret is on your wishlist, you say? Here’s your chance (plus, it comes with a massive house)

Royal LePage

Someone who wants to entertain family and friends in a warm and inviting environment — and be surrounded by exceptional craftsmanship — will enjoy this home, says listing agent Anita Rapp of Royal LePage Real Estate Services. “No luxury detail has been overlooked and many of the furnishings were custom made to blend seamlessly with the open family-friendly floor plan.”

For example, a curved couch was designed and built to fit into the window-wrapped turret and will be left for the new owner to enjoy.

The custom-built brick-and-stone home offers more than 7,000 square feet of living space including a finished lower level that has heated floors and a fireplace in the recreation room. A large, classic skylight sends natural light downstairs through the staircase opening.

Royal LePage

Royal LePage The 7,000-square-foot house is on a 74×176 irregular lot in an exclusive neighbourhood.

 

A grand entrance is sure to impress guests. The foyer — at 28×17-feet — has heated marble flooring and white wainscotting. The living room has a fireplace; the dining room also has wainscotting. Both rooms have coffered ceilings that lend a grand feeling; other rooms have elaborate tray ceilings. The main floor is lush with extensive mouldings and a warm palette.

Outfitted for casual dinners or entertaining a crowd, the kitchen has a breakfast area with a rich wood built-in desk with storage and bookshelves and a walkout to a deck.

The 74×176-ft. irregular lot has a completely fenced yard with lush gardens, a pool and a waterfall feature, Rapp says.

Royal LePage

Royal LePage The master ensuite is very spacious and features the same detailing as the rest of the house.

 

The library, family room and master bedroom each has a fireplace for quiet relaxation in front of the fire. A cathedral ceiling lends an airy feeling to the master suite. His-and-hers closets keep fashion plates happy. The large ensuite has an inlay marble floor, furniture-like cabinetry, a standalone tub surrounded by windows, a large glass shower and separate WC.

Each of the bedrooms has a four-piece ensuite, so bathroom lineups are non-exisitent.

A games room with a dance area provides a fun place for young and the young at heart to boogie, and overnight company can enjoy the guest suites. A wine cellar helps makes entertaining a breeze, and to work off the extra glass of red, a gym beckons upstairs.

“Many dollars have been spent on sensational upgrades,” Rapp says.

“My favourite spaces are the family room, with its enormous bowed window overlooking the stone patio and resort-like pool area, and the master bedroom, which has the look and feel of a five-star spa with heated, inlaid marble flooring, a deep soaker tub and a steam shower,” Rapp says.

St. Andrews Windfields
21 Don Ridge Dr. (York Mills Road and Yonge Street)
Asking price: $5.95 million
Taxes: $27,273 (2015)
Bedrooms: 2; Bathrooms: 7
MLS# C3368728

Royal LePage

Royal LePage The tree-cloaked rectangular pool features a trio of waterfalls, a spa and several seating areas.

Source: Connie Adair, Special to National Post | February 8, 2016

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