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A softened stance on future rates hikes into 2019

Back in October it was “clear sailing, all ahead full”.  Now the forecast is calling for headwinds and choppy seas and poor visibility.

When the Bank of Canada bumped its trend setting rate to 1.75% the economic statement spoke of full capacity, full employment, growing wages and rising inflation.  The Bank and market watchers were confident interest rates would continue their measured, upward march.

But that straight path has taken a turn, and in December the BoC did not move up, it stepped aside.

In the main, the central bank is being dictated by international developments.  Expanding trade disputes, obstructive tariffs and falling oil prices are weighing on the Canadian economy.  The uncertainty has led to a pull-back in business investment and projections for GDP growth have been reduced.

The Bank has shifted away from saying the economy is operating “at” capacity and is now being vaguer, saying the indicators show the economy is operating at “close” to capacity.  In the language of central bankers that is a very wide gap.

The Bank of Canada has also softened its stance on future rate hikes.  It had been saying rates would have to climb to their neutral level – neither stimulating nor retarding the economy.  Now it says rates will have to rise into the neutral range.  The Bank is not saying what that range is, only that we will know it when we see it.  Given the inflation forecast we may be much closer to that range than previously thought.

All that said, the variable rate mortgage is more so a viable alternative for some. Contact us for a no-charge assessment of your current mortgage today!

 

Residential Market Commentary - CMHC's new rules

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Canada Mortgage and Housing Corporation is making a couple moves that will send ripples through the mortgage market.  One could give lenders access to more confidential financial information about borrowers.  The other could ease frustrations for a group of borrowers that has consistently had problems securing loans.

According to documents obtained by Reuters, through a freedom of information request, the federal housing agency wants the Canada Revenue Agency to take a “more direct and formal role” in verifying income statements made on mortgage applications.  Right now the CRA does not verify income claims for lenders, even with the permission of the borrower/taxpayer.

A two-year plan drafted by CMHC shows the agency is concerned about a systemic risk posed by mortgage fraud.  The agency has said there is no evidence of widespread fraud in Canada, but it also says its information is limited.

The CMHC plan says paperless transactions, pressures to close deals quickly, rising prices and new regulations can “create strong incentives for individuals or mortgage professionals to engage in … fraud.”  A spokesperson also says CMHC is developing data-driven systems to screen for commission fraud, where a lender or a broker may have encouraged a borrower to exaggerate income claims.  The documents reveal the agency intends to start publishing statistics on mortgage fraud.

At the same time CMHC says it wants to make it easier for the self-employed to qualify for a mortgage.  The agency says it is giving lenders more guidance and flexibility to help self-employed borrowers.  The effort focuses on those who have been running their business – or have been in the same line of work – for less than 24 months.  The new policy is set to take effect October 1st.

   

A CHIP Customer Story

Customer Story – Silver Divorce (It happens)

The client was referred to a Mortgage Broker by an existing client to help out his mother with the financial aspect of her separation/divorce.

Client Details:

Early 70’s, retired with limited income, Mrs. Smith wanted to keep the only home she has known her entire adult life.  In order for her to keep her house, she required funds to pay out her husband for the balance of the division of assets.  She had sufficient income to qualify for a “traditional” mortgage, but she did not want the burden of payments given she was going to be on her own and wanted to have a little breathing room.

Solution:

Although Mrs. Smith had some investments she could have used to buy out her spouse, she felt more secure leaving her investments alone and to tap in to the equity to satisfy her requirement under the separation agreement.  We set up a CHIP for the maximum she approved for and advanced only what she needed to pay out her ex.  This left her with some available credit to use down the road if she needed it after things settled.

Outcome:

Having an unexpected major life change come upon her, she was able to meet her financial obligations in the divorce while not incurring any extra monthly obligations that would have put an added strain on an already difficult time in her life.

Mrs. Smith was thrilled that her broker was able to come up with such a suitable solution for her.  She was able to keep the home she loved and to maintain some normalcy in her retirement.
   

Mortgage & Housing Update

 

Housing markets continue to adjust to regulatory and government tightening as well as to higher mortgage rates. The speculative frenzy has cooled, and multiple bidding situations are no longer commonplace in Toronto and surrounding areas. Home prices in the detached single-family space will remain soft for some time, and residential markets are now balanced or favour buyers across the country. The hottest sector remains condos where buyers face limited supply.

Owing to the housing slowdown, a general slowing in the Canadian economy and significant trade uncertainty, the Bank of Canada will continue to be cautious. But as inflation trends higher, we expect the Bank to hike interest rates once again this summer and possibly in the fall as well.

Last week, the Bank of Canada increased the qualifying (posted five-year fixed) mortgage rate from 5.14% to 5.34% in response to benchmark mortgage rate increases at most of the chartered banks. TD bank led the rate hikes when it increased its posted rate for a five-year fixed mortgage by a whopping 47 basis points to 5.59% on April 25.

The central bank qualifying rate is separate from the actual mortgage rates offered by banks to borrowers but is used to assess homebuyers who are seeking loans. The higher rates come as an estimated 47% of all existing mortgages will need to be refinanced in 2018, up from the 25 to 35% range in a typical year, according to a recent CIBC Capital Markets report.

A rise in government bond yields preceded the slew of bank hikes. The yield on the Government of Canada benchmark five-year bond was 2.25% this morning, compared to 1.02% a year earlier. Fixed-rate mortgages tend to move with government bond yields of a similar term, reflecting the change in borrowing costs.

Competitive pressure among the banks appears to be heating up as BMO last week offered what is possibly the largest-ever discount on variable rate loans. The bank is promoting a variable five-year mortgage at 2.45%, a full percentage point below its own benchmark rate. This morning, TD Bank joined is rival in offering a highly discounted variable mortgage rate effective until the end of the month. Canada's lenders often provide special spring mortgage rates as homebuying activity picks up. These moves come amid slowing mortgage growth.

Borrowers still have to qualify based on the much higher Bank of Canada posted rate of 5.34%.

We offer a mortgage review, free of charge, no obligation... contact us today for yours!

   

The Mortgage Insurance Market & Wholesale Lenders

The Mortgage Insurance Market & Wholesale Lenders

The Canadian mortgage market used to be very simple. We had the big banks, credit unions, and trust companies.

However, almost 20 years ago, the Canadian government made three major changes to the Canadian mortgage industry. First, the government and CMHC put their weight behind Canadian mortgages by guaranteeing an insurance payout to lenders in the event that a borrower does not pay. Yes, the Canadian taxpayers are on the hook if CMHC goes under.

Second, Canada also began to allow lenders to pay for mortgage insurance for their borrowers, even though the insurance was not required. Borrowers would not know that their mortgage is insured, rather the lender would pay for, and insure the mortgage on the “back end” in order to make the mortgage less risky. I.E: if the borrower did not pay, the insurer would pay the lender (just as they would pay if the borrower had less than 20% down payment and was charged for insurance themselves).

And third, Canada allowed its lenders to bundle up their mortgages and sell them to investors. The securitization of mortgages (the process of taking the mortgages and transforming them into a sellable asset) allowed investors to purchase many mortgages at once, knowing there would be a specific return. The return here would be just less than the interest rate on the various mortgages (less because the lender has to make a little bit of money for creating the mortgage bundle or security).

Now, mortgage investors are looking at two things: investment return and mortgage risk. The lower the risk of an investment, the lower the return an investor may be willing to see. Because Canadian lenders can insure their mortgages against default (non-payment), investors are very keen on purchasing these mortgages. Thus, investors provide lenders with a lot of inexpensive money to lend out, which in turn, provided for better interest rates for borrowers.

As an aside, an example of investors may be one of Canada’s large banks, an American bank, pension funds, and/or other financial institutions.

The result was the emergence and major growth of mortgage finance companies, called wholesale lenders or monoline lenders.

Monoline lenders, encouraged by access to cheap capital, set up efficient mortgage underwriting (approval) operations and were able to provide flexible mortgage products and better-than-the-banks interest rates for their clients.

The overwhelming majority of wholesale lender mortgages are back-end insured by the lender, packaged up, and sold to investors.

What is interesting here is that wholesale lenders will insure mortgages transferred from one institution to another – something that banks do not do. This allows for better interest rates when renewing with a wholesale lender than if renewing with your current bank lender.

If you have any questions related to your mortgage give us a call!

   

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