Tag Archives: interest rates

TD Bank Cuts Its 5-Year Posted Rate

Will the Stress Test Rate Follow?

After six long months of no changes to the big banks’ posted rates, TD Bank broke the ice on Tuesday by lowering its 5-year posted rate to 4.99% from 5.34%.

While the big banks adjust their “special” rates regularly (as RBC did last week), changes to their higher posted rates are more rare. And the move is important because it means other banks are likely to follow, and if enough do, it will lead to a drop in the 5-year benchmark qualifying rate…i.e. the stress test rate.

That would be welcome news to the countless mortgage shoppers out there who are struggling to qualify at the current benchmark rate of 5.19%.

“Based on current market conditions, lower funding costs have led to a growing variance in customer rates versus posted rates,” a TD spokesperson told BNN Bloomberg. “This rate decrease aligns TD’s 5-year fixed posted rate more closely with current customer rates.”

And that’s all true. Bond yieldswhich lead fixed mortgage rateshave plummeted roughly 30 basis points since the start of the year. And the big banks keeping their posted rates artificially higher (in TD’s case, it hasn’t cut its 5-year posted rate since March 2019), has started to draw attention from key industry players.

The OSFI Effect

TD’s rate drop suspiciously comes just days after a speech from Ben Gully, Assistant Superintendent at the Office of the Superintendent of Financial Institutions (OSFI), which regulates federal financial institutions.

Ben Gully, Assistant Superintendent, OSFI
Ben Gully, Assistant Superintendent, OSFI

In his speech, Gully admitted the use of the benchmark qualifying rate as the floor of Guideline B-20 stress testing for uninsured mortgages is “not playing the role that we intended.”

“For many years, our data showed the difference between the benchmark rate and the average contract rate was about 2%,” Gully said. “However, the difference between the average contract rate and the benchmark has been widening more recently, suggesting that the benchmark is less responsive to market changes than when it was first proposed.”

Some in the industry suspect that speech was the stick that broke the camel’s back and finally pushed the banks (or at least one of them) to adjust their qualifying rate.

Ron Butler of Butler Mortgage said TD’s move “absolutely” was a result of Gully’s comments, and he expects others to follow within the next week.

“We will see a 4.89% qualifying rate in the spring, if not sooner,” he told CMT.

Impact on the Stress Test

mortgage stress testEven if the qualifying rate were to drop that much, a 30-bps reduction would still only have a “minimal effect” for buyers  struggling to qualify, he said. Anecdotally, Butler estimates about 300 to 400 mortgage applicants he deals with each year have trouble qualifying under the stress test.

A recent survey from Zillow and Ipsos found that half of Canadians (51%) say they are concerned that stricter rules will prevent them from qualifying for a mortgage, up five points since 2018.

If the qualifying rate were to drop to just 4.99%, that would require roughly 1.8% less income in order to qualify for the average Canadian home, according to Rob McLister of RateSpy.com. It would also increase buying power by nearly 2%.

“These effects may seem small at the margin, but they’re magnified when you’re talking about thousands of buyers across Canada,” he wrote. “A lower stress test rate would also help refinancers qualify for bigger loans. Someone with an average home making $100,000 a year would qualify for a $9,000 bigger mortgage (+/-) if the stress test rate dropped to 4.99% from 5.19%.”

The ball is now in the court of the other Big 5 banks to determine what happens to the qualifying rate. You can be sure many prospective homebuyers will be watching closely.

Source: Canadian Mortgage Trends – Steve Huebl February 5, 2020
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Latest in Mortgage News: Stress-Test Rate Drops After a Year of No Change

 

The benchmark posted 5-year fixed rate, which is used for stress-testing Canadian mortgages, fell yesterday in its first move since May 2018.

The Bank of Canada announced the mortgage qualifying rate drop to 5.19% from 5.34%. This marks the first reduction in the rate since September 2016.

The rate change came as a surprise to most observers, since it’s based on the mode average of the Big 6 banks’ posted 5-year fixed rates. And there have been no changes among the big banks’ 5-year posted rates since June 21.

As reported by RateSpy.com, the Bank of Canada explained today’s move as follows:

“There are currently two modes at equal distance from the simple 6-bank average. Therefore, the Bank would use their assets booked in CAD to determine the mode. We use the latest M4 return data released on OSFI’s website to do so. To obtain the value of assets booked in CAD, simply do the subtraction of total assets in foreign currency from total assets in total currency.”

If that sounds convoluted, RateSpy’s Rob McLister tells us this, in laymen’s terms: “What happened here was that the total Canadian assets of the three banks posting 5.34% fell much more than the total Canadian assets of the three banks posting 5.19%. The 5.19%-ers won out this week,” McLister said.

Of the Big 6 banks, Royal Rank, Scotiabank and National Bank have posted 5-year fixed rates of 3.19%, while BMO, TD and CIBC have posted 5-year fixed rates of 5.34%.

“It’s one of the most convoluted ways to qualify a mortgage borrower one could dream up, McLister added. “It’s almost incomprehensible to think random fluctuations in bank assets could have anything to do with whether a borrower can afford his or her future payments.”

In his post, McLister noted the qualifying rate change means someone making a 5% down payment could afford:

  • $2,800 (1.3%) more home if they earn $50,000 a year
  • $5,900 (1.3%) more home if they earn $100,00 per year

Teranet Home Price Index Continues to Record Weakness

Without seasonal adjustments, the monthly Teranet-National Bank National Composite House Price Index would have been negative in the month of June. Thanks to a seasonal boost, however, the index rose just 0.5% from the year before.

Vancouver marked the 11th straight month of decline (down an annualized 4.9%), while Calgary recorded its 11th monthly decline (down 3.8%) in the past 12 months.

“These readings are consistent with signals from other indicators of soft resale markets in those metropolitan areas,” the report said.

But while Western Canada continues to grapple with sagging home sales and declining prices, markets in Ontario and Quebec are already posting increases following weakness in the first half of the year.

Prices in Toronto were up 2.8% vs. June 2018, while Hamilton saw an increase of 4.9% and London was up 3.3%. The biggest gains continue to be seen in Thunder Bay (up 9.2%), Ottawa-Gatineau (up 6.3%) and Montreal (up 5.4%).

Don’t Expect Housing Market to Catch Fire Again

Don’t hold your breath for another spectacular run-up in real estate as seen in recent years, say economists from RBC.

“A stable market isn’t a bad thing,” noted senior economist Robert Hogue. “This is sure to disappoint those hoping for a snapback in activity, especially out west. But it should be viewed as part of the solution to address issues of affordability and household debt in this country…It means that signs indicating we’ve passed the cyclical bottom have been sustained last month.”

Home resales in June were up marginally (0.3%) compared to the previous year, which Hague says provides “further evidence that the market has passed its cyclical bottom.”

Meanwhile, the national benchmark home price was down 0.3% year-over-year in June, “tracking very close to year-ago levels.”

Hague says these readings are good news for policy-makers, who he says want to see “generally soft but stable conditions in previously overheated markets.”

Source : Mortgage Broker News – STEVE HUEBL  

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What to do about your debt after the interest rate hike

Should you act upon future rate hikes now?

TORONTO — Many consumers will soon find their debt loads heavier now that Canada’s central bank and the country’s biggest commercial lenders have raised their benchmark rates by one-quarter percentage point.

The country’s biggest banks raised their prime rates after the Bank of Canad hiked its overnight lending rate Wednesday by a quarter of a percentage point to 1.25 per cent.

It’s a challenge for Canadians still struggling to cope with the record amounts of consumer debt they amassed after the 2008 financial crisis because lenders use their prime rate as a benchmark for setting some other short-term rates including variable-rate mortgages and lines of credit. A hike is good news for savers as the prime rate also affects interest rates for savings accounts.

If you’re contemplating how to best take advantage of the increased rates or avoid falling into further debt, personal finance expert and Ryerson University business professor Laleh Samarbakhsh shared her advice.

Q: Now that the rate has gone up, what financial choices should I be making?

A: With the interest rate increase, debt becomes more and more expensive. Before you do anything, you have to understand what kind of debt you have to start with.

We have good types of debt and bad types. Good types can include any investment that is made to contribute to progressing your future. For example, a student loan is a good type of loan because you are investing in your ability to make more money. At the same time, debt you have from real estate or your primary residence is considered a good type of debt because you’re accumulating equity.

Focus first on what is considered bad debt like credit card debt, lines of credit or any kind of debt with higher interest rates and no future investment. Pay off the debt with the higher interest rate first, but also consider what debt you have that is tax deductible.

Q: If I have some money in a Tax-Free Savings Account, but also some debt, should I pull out that money in the account and pay off the debt?

A: A lot of times people might consider borrowing from a lower debt to cover a higher debt or borrowing from a TFSA to make a payment. My recommendation is if you have some tax deductibility because of debt you have, keep it. As much as paying off debt is important, if you won’t be able to pay off all your debt, you can use the deductibility you have from some to save on taxes and create an income to pay off the high-interest or bad debt.

We have had a successful year on the investing market, so if an individual makes contributions to their TFSA and has a portfolio with a higher return of 20 per cent or 25 per cent, it makes sense to keep that because the advantage is no tax being paid in the TFSA.

Q: What should I do if I have been looking at buying a home or if I just bought a home and am dealing with a mortgage?

A: For individuals who care about their credit score and are applying for a mortgage shortly, consider your credit limit. The types of debt that have a credit limit should be paid off first to release your capacity.

The typical concerns after a hike are usually individuals with mortgages because those are the biggest debts people carry. My advice would be for individuals with variable mortgage rates to consider locking down a fixed mortgage rate.

Q: What should I do if I have no debt, but want to take advantage of the hike?

A: Saving is making even more sense now because savings accounts will have fairly higher interest rates, so if you have no debt, my recommendation is to start with capping your Registered Education Savings Plan contributions first because that brings you tax savings.

Once the RESPs are capped, I would also invest in a Tax-Free Savings Account. The interest you make is tax-free, so I recommend maximizing your TFSA contribution.

After that, there are lots of forums and markets for investment and you can consult with your financial adviser about what is best to invest in at the time.

Q: Some economists think we might see further interest rate hikes later this year. Should I act on those rumours now?

A: It’s hard to predict what is going to happen, but we know the decade of low interest rates are over. It’s important to be more careful with spending and what kind of debt we are taking on and how and what the plan for repaying it is.

If you’re concerned, take action sooner rather than later and don’t let it bring mental pressure to your daily life.

This interview has been edited and condensed for clarity and length.

Source: MoneySense.ca – by Tara Deschamps, The Canadian Press 

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How rising interest rates are squeezing homeowners

Mortgage holders on tenterhooks as they prepare for Bank of Canada’s next rate announcement Oct. 25

Gerry Corcoran is bracing for Oct. 25. That’s when the Bank of Canada will make its next interest rate announcement, on the heels of two consecutive rate hikes. Corcoran said he can’t afford a third.

“A lot of us with variable rate mortgages are on pins and needles because we’re like, ‘Are we going to get hit again?'”

‘It’s kind of smacked my finances around a little bit.’– Gerry Corcoran, new homeowner

Corcoran, 38, signed the mortgage for his two-bedroom condo in Stittsville back in June.

Two weeks later, on July 12, the Bank of Canada announced a rate increase of .25 per cent, the first increase in seven years. It was followed by a second .25 per cent increase in September.

As someone with a variable rate mortgage, Corcoran says those small rate hikes have had a sizeable impact. He estimates they’ll cost him about $65 per month.

While it’s a cost he says he can absorb, as a new homeowner Corcoran only has a few hundred dollars a month in disposable income. It’s also meant he’s had to put on hold his plan to enrol in his employer’s matching RRSP program until next year.

“It’s kind of smacked my finances around a little bit,” he said. “It hurts.”


 


Gerry

‘A lot of us with variable rate mortgages are on pins and needles because we’re like, ‘Are we going to get hit again?” (Ashley Burke/CBC News)

Homeowners in ‘panic mode’

After years of record-low interest rates, people in the mortgage business say they’ve been waiting for this other shoe to drop.

Erin MacDonell, a mortgage agent with Mortgage Brokers Ottawa, says she saw a spike in calls after the rate hikes. Many callers were eager to buy — or refinance their mortgages — before rates went up again.

“People are in a little bit of a panic mode,” MacDonell said.

But even if interest rates continue to climb, she says a new federal “stress test” will help mortgage holders weather the changes.

Erin MacDonell, mortgage agent, ottawa mortgage brokers

Mortgage agent Erin MacDonell says calls from both potential buyers and homeowners looking to refinance spiked when the Bank of Canada announced a rate increase in July. (Ashley Burke/CBC Ottawa)

Under the safeguard introduced last October, a borrower had to be approved against a rate of 4.64 per cent for a five-year loan — even though many lenders are offering much lower rates. That rate is now 4.84 per cent.

The test applies to all insured mortgages where buyers have down payments that are less than 20 per cent of the purchase price.

“No one should be struggling too, too much,” MacDonell said.

Instead, she predicts future rate hikes will simply mean “people won’t be qualifying for as big of a house as they maybe wanted in the past.”

Gerry Corcoran says despite being forced to tighten his belt, buying was still the right choice for him.

“At the end of the day, even with mortgage and condos fees, I am still paying less to own this place than [I’d pay] to someone else to rent it.”

Source: Karla Hilton · CBC

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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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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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