12 Mar

BANK OF CANADA CONCERNED ABOUT TRADE RISKS

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Posted by: Jennifer Koop

BANK OF CANADA CONCERNED ABOUT TRADE RISKS

The Bank of Canada held rates steady today, as expected, highlighting “trade policy developments” as an “important and growing source of uncertainty for the global and Canadian outlooks.”

As the seventh round of NAFTA negotiations commenced in Mexico City, President Trump dropped a bombshell late last week, threatening to impose a 25% tariff on imported steel and a 10% tariff on imported aluminum for national security reasons. The news reverberated around the world, causing U.S. trading partners in Europe to announce potential retaliatory actions quickly. The European Union raised the stakes for Trump by aiming levies on the GOP heartland, saying it would slap tariffs on products like Harley-Davidsons, Kentucky bourbon and Levi, bluejeans if President Trump goes ahead with his plan. Paul Ryan, Speaker of the House, is the Republican Representative from Wisconsin, headquarters of Harley-Davidsons. He immediately urged the President to stand down or ‘to be more surgical’ on tariffs. Hardliners such as Secretary of Commerce Wilbur Ross argued that any retribution would be trivial.

Well-known Republican economic advisors to the president warned that the tariff plan would do more harm than good, having adverse effects on consumers and many companies that use imported metals in the production of their products. The number of jobs lost in the auto sector and construction, for example, could be far more significant than the positive impact on the comparatively few jobs in the steel industry mainly in Pennsylvania. Prices of many products would rise including infrastructure costs, energy and food products.

Canada is ground zero in this maelstrom as the number-one exporter of steel and aluminum to the U.S., supplying $7.2 billion of aluminum and $4.3 billion of steel to the United States last year. Trump has often accused China of forcing U.S. steel and aluminum companies to fold by inundating the market with cheaper materials, but Trump thus far has refused to exclude Canada from the tariff proposal, holding Canada hostage to a favourable NAFTA deal.

Canada and the rest of the world are hoping that reasonable voices are going to prevail, but the resignation of Gary Cohen, White House Economic Adviser and formerly President of Goldman Sachs, is a victory for the protectionists (and immigration hawks). A registered Democrat, Cohn was regarded as one the few political moderates close to the president. His absence will amplify voices like Commerce Secretary Wilbur Ross and trade adviser Peter Navarro who back the president’s impulses to buck convention and pick trade fights on a global stage.

Housing Another Factor Postponing Rate Hikes

Even before the escalating trade tensions, the Bank of Canada was concerned about the impact of rising mortgage rates and new mortgage guidelines on housing, a significant contributor to the 3% growth in the economy last year. “Strong housing data in late 2017, and softer data at the beginning of this year, indicate some pulling forward of demand,” according to the Bank of Canada press release. The central bank is monitoring the economy’s sensitivity to higher interest rates, pointing out that “household credit growth has decelerated for three consecutive months.”

Inflation has edged upward to close to the 2% target. Wage growth has firmed, but even with the hike in minimum wages, the rise in compensation remains smaller than usual at full-employment.

The Bank of Canada commented once again that the economic outlook is expected to warrant higher interest rates over time, but some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential with inflation on target. The next scheduled Bank of Canada policy announcement is April 18 when the full economic outlook will be updated in the quarterly Monetary Policy Report.

To be sure, if the Trump administration goes ahead with the tariffs, the Bank will keep rates steady in April as well. Investors have pared bets on rate hikes after weaker-than-expected fourth-quarter growth, turmoil in global equity markets and the sharp decline in the Canadian dollar. Traders are not pricing in another rate hike until July according to Bloomberg News calculation on overnight index swaps. A month ago, expectations pointed to at least one increase by May. By the Bank of Canada’s measure, interest rates are still about two percentage points below what it would consider “neutral” for the economy.

 

Courtesy of Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

30 Jan

8 THINGS YOU CAN DO TO GET THE BEST RENEWAL

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Posted by: Jennifer Koop

8 THINGS YOU CAN DO TO GET THE BEST RENEWAL

With 47 per cent of homeowners scheduled to renew their mortgages this year, 2018 is a year of change for lots of Canadians.
Here are the top 8 things you can do to get the best renewal:

1. Pull out your mortgage renewal now, and start early. When you are proactive instead of reactive you can see if there is anything on your credit score or lifestyle that we can modify to ensure you are positioned for the best renewal. You are only in a position to do this when you start early- in the last year of your mortgage you will have the most amount of options available. For example, there can be an inaccuracy in your credit report or you may be considering an income/job change that would impact your options. We can look at timing accordingly for you.

2. Do not just sign the renewal offered. Lenders can change the terms of your mortgage, and the renewal you are signing can cost you up to four per cent of your equity if you are with the wrong lender for your current life stage.

3. Most people think the best rate is the best renewal – WRONG. The terms are most important and with all terms moving or selling is the only reason most people think they would ever break a mortgage- THIS is simply not the case, a change in the interest rate market, divorce, health, job change, investment opportunity and many other reasons would contribute to a future modification being beneficial for a consumer.

4. Take into consideration lender history. The lender can have a higher prime then anyone because they know the cost to leave outweighs staying the course. The lenders are very smart with their calculated risks- and this is not something they have an obligation to disclose.

5. Remember your lender has a bias – their job is to handcuff you so they can make as much profit off you as possible- don’t be a victim.

6. Do not shop each lender on your own, it takes points off of your credit score. All lenders have different rates based on your score and you want to position yourself to get the best. By using a mortgage professional, they can shop multiple lenders protecting your credit using only one application, while the rate variation can be on average a half a percent!

7. Don’t get sucked into the online rate shopping- any monkey can post a rate online and you can drive yourself crazy looking at something that does not exists. In today’s complex mortgage market there are significantly different rates based on – insured mortgage vs uninsured mortgage, switch vs refinance, purchase or renewal, principal residence vs rental, salary or self-employed, 600 credit score or 700 credit score, amortization of 20 years to 30 years, type of property condo vs house, and leased land or freehold. The variations can mean a difference in thousands of dollars. Like diagnosing a medical condition, you can’t go online, you do have to put in the appropriate application and supporting documents to verify which options are available to you that will result in the lowest cost in borrowing.

8. Remember your mortgage is the largest debt and investment most of us have, when you contact an independent mortgage professional, we are going to invest all the work and expertise and advise you in your best interest regardless if we get your business. We may after our review advise you to stick with your existing lender, or make another recommendation for you. We are only here to enhance your finances and save you money, and there is no cost for our service.

Thank you Angela Calla, Dominion Lending Centres, for writing this article.

15 Dec

NEW MORTGAGE RULES COMING JAN 1 BOOST NOVEMBER HOME SALES

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Posted by: Jennifer Koop

NEW MORTGAGE RULES COMING JAN 1 BOOST NOVEMBER HOME SALES

So here we are in the lead-up to the January 1 implementation of the new OSFI B-20 regulations requiring that uninsured borrowers be stress-tested at a mortgage rate 200 basis points above the contract rate at federally regulated financial institutions. It is no surprise that home sales rose in advance of the new ruling. Even so, activity remains below peak levels earlier this year and prices continue to fall in the Greater Toronto Area (GTA) for the seventh consecutive month.

In a speech this week, Governor Poloz of the Bank of Canada confirmed his continued concern about household indebtedness. Indeed, data released this week by Statistics Canada showed that households continued to pile on debt in the third quarter. The household-debt-to-disposable-income ratio rose by a percentage point to 171.1% last quarter. Relative to assets and net worth, debt also edged higher, but those ratios are much closer to longer run levels, painting a far less dire picture of household finances. And even with households taking on more debt, the share of income needed to service that debt was little changed in Q3, as it has been over the last decade. That will change as the Bank of Canada continues to raise interest rates gradually. However, the prevalence of fixed rate mortgage debt means households won’t feel the increase all at once. Instead, the debt service ratio is likely to rise only gradually. The rising cost of borrowing and more stable home prices should slow credit growth in the year ahead.

But with so much attention paid to the imprudent borrower, I think it is important to reiterate that the vast majority of Canadians responsibly manage their finances. For example, roughly 40% of homeowners are mortgage-free, and one-third of all households are debt-free. Another 25% of households have less than $25,000 in debt, so 58% of Canadian households are nearly debt free. Hence, mortgage delinquency rates are meagre.

The Canadian Real Estate Association (CREA) reported yesterday that home sales jumped 3.9% from October to November–the second most significant increase in two years. Home sales have now risen for the fourth consecutive month, led by a 16% jump in the Greater Toronto Area (GTA), which accounted for two-thirds of the national rise. Even so, sales activity in the GTA was significantly below year-ago levels. Victoria, Ottawa and Regina also recorded strong gains, while Calgary, Edmonton and Montreal posted modest increases.

Not all markets participated in the rally, though. Vancouver was among the few holdouts. Resales fell for a second-straight month by 3.7% in the Vancouver area where affordability strains represent a major issue for buyers.

New Listings Shot Up

Many sellers decided to list their properties ahead of the mortgage rule changes. New listings rose by 3.5% in Canada between October and November. Most of this increase took place in the Toronto area where new listings jumped by a whopping 22.9%. A report released earlier this month by the Toronto Real Estate Board showed that active listings in Toronto rose modestly above their 10-year average in recent months after plunging to historic lows at the start of this year. Pressure has come off Toronto-area buyers as they are now presented with more options. This could soon be the case in Vancouver too. New listings rose sharply in November and, with resales declining in the past couple of months, the sales-to-new listings ratio is finally moving toward more balanced conditions (see charts below).

The number of months of inventory is another important measure of the balance between housing supply and demand. It represents how long it would take to liquidate current inventories at the current rate of sales activity. There were 4.8 months of inventory on a national basis at the end of November 2017 – down slightly from 4.9 months in October and around 5 months recorded over the summer months, and within close reach of the long-term average of 5.2 months. At 2.4 months, the number of months of inventory in the Greater Golden Horseshoe region is up sharply from the all-time low of 0.8 months reached in February and March.

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Price Pressures Eased

The Aggregate Composite MLS® Home Price Index (HPI) rose by 9.3% y-o-y in November 2017 marking a further deceleration in y-o-y gains that began in the spring and the smallest increase since February 2016. The slowdown in price gains mainly reflects softening price trends in the Greater Golden Horseshoe housing markets tracked by the index, particularly for single-family homes.

Toronto single-family house prices were down 11.6% over the past six months ending November 30 (see chart below). GTA condo prices have fared better, up 0.3% since late May, but the rise is minuscule in comparison to the booming price gains evidenced before the Ontario government’s ‘Fair Housing Plan’ that introduced, among other things, a 15% tax on non-resident foreign purchases of homes.

 

On a year-over-year basis, benchmark home prices were up in 11 of the 13 markets tracked by the MLS HPI. After having dipped in the second half of last year, benchmark home prices in the Lower Mainland of British Columbia have recovered and now stand at new highs (Greater Vancouver: +14% y-o-y; Fraser Valley: +18.5% y-o-y). Benchmark home prices rose by about 14% on a y-o-y basis in Victoria and by 18.5% elsewhere on Vancouver Island in November, on par with y-o-y gains in October.

Price gains have slowed considerably on a y-o-y basis in Greater Toronto, Oakville-Milton and Guelph but remain above year-ago levels (Greater Toronto: +8.4% y-o-y; Oakville-Milton: +3.5% y-o-y; Guelph: +13.4% y-o-y).

Calgary benchmark home prices remained just inside positive territory on a y-o-y basis (+0.3%), while prices in Regina and Saskatoon were down from last November (-3.5% y-o-y and -4.1% y-o-y, respectively).

Benchmark home prices rose 6.7% y-o-y in Ottawa, led by a 7.6% increase in two-storey single-family home prices, by 5.6% in Greater Montreal, driven by an 8.3% increase in prices for townhouse/row units, and by 4.6% in Greater Moncton, led by a 7.8% increase in one-storey single-family home prices. (see table below)

The MLS® Home Price Index provides the best way of gauging price trends because average price trends are prone to be strongly distorted by changes in the mix of sales activity from one month to the next.

The latest on the national housing numbers from @DLCCanadaInc Economist @DrSherryCooper:

27 Oct

Bank of Canada on Sidelines, as Expected – Dominion Lending Centres

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Posted by: Jennifer Koop

BANK OF CANADA ON SIDELINES, AS EXPECTED

 

BOC Will Raise Rates Only Cautiously

Our own Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres reports:

The Bank of Canada held overnight interest rates at 1.0% following two consecutive rate hikes at the July and September meetings. It was widely expected that the Bank would take a breather this round. The central bank also released its quarterly Monetary Policy Report (MPR) today, in which it forecast that growth would be 3.1% this year, 2.1% in 2018 and 1.5% in 2019. The rapid pace of economic growth over the past four quarters surprised the Bank on the high side. Going forward, the Bank forecasts GDP to moderate to a more sustainable pace.

Exports and business investment are expected to contribute to growth over the forecast horizon. In contrast, “housing and consumption are forecast to slow in light of policy changes affecting housing markets and higher interest rates.” The Bank went on to say that “because of high debt levels, household spending is likely more sensitive to interest rates than in the past.” I would go one step further and suggest that higher sensitivity to interest rates is all the more so because of the OSFI stress testing of borrowers at 200 basis points above current contract mortgage rates.

The central bank continues to expect global growth to average roughly 3.5% over the 2017- 2019 period, noting that uncertainty remains high regarding geopolitical developments and fiscal and trade policies. Notably, the renegotiation of NAFTA will have a meaningful impact on the economies of North America, but given the uncertainty, the Bank economists have left this factor out of the base case projection.

Measures of core inflation have edged up as expected, but the Bank now forecasts that inflation will rise to 2% in the second half of 2018, which is a bit later than anticipated in the July MPR reflecting the recent strength in the Canadian dollar.

Business investment contributes to increases in capacity and productivity; hence the Bank of Canada now assumes that annual growth of potential output is 1.5% over 2018-19, which is slightly above the assumption since April 2017. How fast the economy can grow without triggering inflation is a big issue these days. The central bank will publish a full reassessment of this critical point in April 2018. The higher the level of potential growth, the lower the estimated level of the “neutral” nominal policy rate–the level of the overnight rate that is consistent with the Bank’s target of 2% inflation. The Governing Council of the Bank of Canada now estimates the neutral rate to be between 2.5% and 3.5%. The Bank’s economic projection is based on the midpoint of this range– 3.0%. In other words, the Governing Council of the Bank of Canada estimates that it will ultimately raise the policy rate from the current level of 1.0% by 200 basis points to 3.0% once the economy is at full employment. That is a substantial proportional jump in rates, which would undoubtedly slow interest-sensitive spending, and nothing is more interest-sensitive than housing. Which makes you wonder why the financial institutions’ regulator (OSFI) has been so intent on further tightening mortgage credit conditions.

The tone of today’s policy statement was decidedly more dovish–cautious about future rate hikes–than in July and September. Why is that? Firstly, the Bank came under a good deal of criticism for hiking rates more rapidly than expected, reversing the two rate cuts implemented (unexpectedly) in 2016. Secondly, the Bank sees significant risks to the outlook. These risks are delineated in the MPR as follows:
• A shift toward greater protectionist trade policies in the U.S. that weaken Canadian exports
• A more substantial impact of structural factors (Internet, digitization, robots) and prolonged excess supply on inflation (higher potential growth)
• Stronger real GDP growth in the U.S. (owing to prospective deregulation and tax cuts)
• Stronger consumption and rising household debt in Canada
• A pronounced drop in house prices in overheated markets

The Bank of Canada sees the risks to the inflation outlook as balanced–in other words, it is just as likely for inflation to move above forecasted levels as below them. Hence, the Bank will be cautious in raising interest rates in the future and their actions will be data dependent. In their words, “while less monetary policy stimulus will likely be required over time, Governing Council will be cautious in making future adjustments to the policy rate. In particular, the Bank will be guided by incoming data to assess the sensitivity of the economy to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation. “

27 Oct

TIME TO LOCK IN A VARIABLE RATE MORTGAGE?

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Posted by: Jennifer Koop

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 localized 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.

We would like to thank Tracy Valko – Dominion Lending Centres for writing this piece.

 

 

20 Oct

NEW MORTGAGE CHANGES DECODED

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Posted by: Jennifer Koop

This week, OSFI (Office of the Superintendent of Financial Institutions) announced that effective January 1, 2018 the new Residential Mortgage Underwriting Practices and Procedures (Guidelines B-20) will be applied to all Federally Regulated Lenders. Note that this currently does not apply to Provincially Regulated Lenders (Credit Unions) but it is possible they will abide by and follow these guidelines when they are placed in to effect on January 1, 2018.

The changes to the guidelines are focused on
• the minimum qualifying rate for uninsured mortgages
• expectations around loan-to-value (LTV) frameworks and limits
• restrictions to transactions designed to work around those LTV limits.

What the above means in layman’s terms is the following:

OSFI STRESS TESTING WILL APPLY TO ALL CONVENTIONAL MORTGAGES

The new guidelines will require that all conventional mortgages (those with a down payment higher than 20%) will have to undergo stress testing. Stress testing means that the borrower would have to qualify at the greater of the five-year benchmark rate published by the Bank of Canada (currently at 4.89%) or the contractual mortgage rate +2% (5 year fixed at 3.19% +2%=5.19% qualifying rate).

These changes effectively mean that an uninsured mortgage is now qualified with stricter guidelines than an insured mortgage with less than 20% down payment. The implications of this can be felt by both those purchasing a home and by those who are refinancing their mortgage. Let’s look at what the effect will be for both scenarios:

PURCHASING A NEW HOME
When purchasing a new home with these new guidelines, borrowing power is also restricted. Using the scenario of a dual income family making a combined annual income of $85,000 the borrowing amount would be:

Current Lending Guidelines

Qualifying at a rate of 3.34% with a 25-year amortization and the combined income of $85,000 annually, the couple would be able to purchase a home at $560,000

New lending Guidelines

Qualifying at a rate of 5.34% (contract mortgage rate +2%) with a 25-year amortization and the combined annual income of $85,000 you would be able to purchase a home of $455,000.

OUTCOME: This gives a reduced borrowing amount of $105,000…Again a much lower amount and lessens the borrowing power significantly.

REFINANCING A MORTGAGE

A dual-income family with a combined annual income of $85,000.00. The current value of their home is $700,000. They have a remaining mortgage balance of $415,000 and lenders will refinance to a maximum of 80% LTV.
The maximum amount available is: $560,000 minus the existing mortgage gives you $145, 0000 available in the equity of the home, provided you qualify to borrow it.

Current Lending Requirements
Qualifying at a rate of 3.34 with a 25-year amortization, and a combined annual income of $85,000 you are able to borrow $560,000. If you reduce your existing mortgage of $415,000 this means you could qualify to access the full $145,000 available in the equity of your home.

New Lending Requirements
Qualifying at a rate of 5.34% (contract mortgage rate +2%) with a 25-year amortization, combined with the annual income of $85,000 and you would be able to borrow $455,000. If you reduce your existing mortgage of $415,000 this means that of the $145,000 available in the equity of your home you would only qualify to access $40,000 of it.

OUTCOME: That gives us a reduced borrowing power of $105,000. A significant decrease and one that greatly effects the refinancing of a mortgage.

CHANGES AND RESTRICTIONS TO LOAN TO VALUE FRAMEWORKS (NO MORTGAGE BUNDLING)

Mortgage Bundling is when primary mortgage providers team up with an alternative lender to provide a second loan. Doing this allowed for borrowers to circumvent LTV (loan to value) limits.
Under the new guidelines bundled mortgages will no longer be allowed with federally regulated financial institutions. Bundled mortgages will still be an option, but they will be restricted to brokers finding private lenders to bundle behind the first mortgage with the alternate lender. With the broker now finding the private lender will come increased rates and lender fees.
As an example, we will compare the following:
A dual income family that makes a combined annual income of $85,000 wants to purchase a new home for $560,000. The lender is requiring a LTV of 80% (20% down payment of $112,000.00). The borrowers (our dual income family) only have 10% down payment of $56,000.. This means they will require alternate lending of 10% ($56,000) to meet the LTV of 20%.

Current Lending Guidelines
The alternate lender provides a second mortgage of $56,000 at approximately 4-6% and a lender fee of up to 1.25%.

New Lending Guidelines
A private lender must be used for the second mortgage of $56,000. This lender is going to charge fees up to 12% plus a lenders fee of up to 6%

OUTCOME: The interest rates and lender fees are significantly higher under the new guidelines, making it more expensive for this dual income family.

These changes are significant and they will have different implications for different people. Whether you are refinancing, purchasing or currently have a bundled mortgage, these changes could potentially impact you. We advise that if you do have any questions, concerns or want to know more that you contact a Dominion Lending Centres mortgage specialist. They can advise on the best course of action for your unique situation and can help guide you through this next round of mortgage changes.

 

We would like to thank GEOFF LEE, Dominion Lending Centres – Accredited Mortgage Professional for writing this.