Rumour has it that the biggest question coming out of the new mortgage rules announced by the Finance Minister last month, which was what is the exact “higher” mortgage rate that clients will now have to qualify for, should be announced soon.

It appears that the new qualifying rate, which goes into effect on April 19, 2010, that all customers with less than a 20% deposit and are trying to secure a variable rate mortgage or any fixed product under 5 years will need to qualify for the higher of:

No official announcement has been made but it appears the qualifying rate will be posted on the Bank of Canada website each Monday at midnight EST.

Many lenders use qualifying rates already for mortgage shoppers looking to get variable or short term fixed rates anyways, but this move will standardize this process across the industry rather than leave it up to each lender themselves.

The odd thing about this qualifying rate is the contract rate. If you wanted a 5 year fixed mortgage, for example, you’d need to qualify based at the 5 year contract rate. The best current mortgage rate 5 year rate is 3.59%, versus the posted 5 year rate of 5.39%. However, if you wanted a 4 year fixed with a best current rate of 3.59%, you’d need to qualify at the 5.39% rate. The monthly payment difference based on a $250K mortgage with a 25 year amortization period is $249.93 or almost $3,000/year. So which would you choose?

We’ll update the post when we see an official announcement.

BMO (Bank of Montreal) has introduced a new 3.75% 5 year fixed mortgage with a maximum amortization period of 25 years. The current maximum amortization period is up to 35 years. Here are the details on this mortgage special:

BMO is still showing their posted 5 year rate at 5.39% on their website, while the 5 year fixed rate in their “special rates” section is stil 4.09%.

This is a major move by one of the big banks and comes as BMO reported a $657M first quarter profit this week and is focusing on growing its mortgage market share after a couple years of losing ground after deciding to stop selling their products through mortgage brokers in early 2007. BMO’s market share fell to 9.2% in the last quarter, down 0.7% from the same time last year.

BMO also released details of a new poll that showed:

The Bank of Canada did as expected this morning and kept interest rates steady. They will maintain their key interest rate, the target for the overnight rate at 0.25%, and reiterated their commitment to hold rates at current levels until the end of Q2 2010.

They cited that the global economic recovery is being fuelled by domestic growth in emerging markets, while the western world’s recovery is due to the monetary and fiscal stimulus by governments.

Closer to home in Canada, economic activity has been higher than expected back in January as the economy grew by an annualized rate of 5% in Q4 2009. The high Canadian dollar and low US demand are acting as the main drags on the economy while inflation seems to be under control.

So no major surprises ahead of the budget announcement on Thursday, and we expect the same from the Finance Minister.

If you’ve just returned from holiday in the Caymans, and didn’t have your BlackBerry with you on the beach, you may not have yet heard that Finance Minister Jim Flaherty announced 3 main mortgage rule changes that will go into effect on April 19, 2010. If you were here, then you know this has been all over the news and there is some confusion with the details, and how they will impact the mortgage industry.

We listed the main points on why these rules won’t have a huge impact, and the biggest question coming out of this is what 5 year rate will be used to qualify applicants?

The government has issued a statement that they will clarify this “shortly”. Although a lot of lenders are saying that they were already using higher rates, such as the 3 year fixed rates, to qualify people on lower variable and fixed rates. The 3 year rate they were using was the one available to them – the lender. Which make sense. You’re not really able to apply a 3 year rate that you don’t have access to.

If that’s the case, then logic presumes, that the same rule will be applied to a 5 year rate. Although as these changes are analyzed more in-depth it seems that they might have been rushed through without a thorough investigation into the effects, and without mortgage expert input.

So we wait and see what happens. There you go – you’re now updated and can go and put some aloe on that burn.

Yesterday was a very busy day as the Finance Minister finally showed his hand and outlined what mortgage regulation changes he is implementing in his efforts to try and cool down the housing market, after months of speculation.

However, it seems that these changes won’t have a huge impact on the mortgage market. Flaherty and Bank of Canada Governor, Mark Carney, were both concerned about the increasing personal debt levels of Canadians, and with the additional pressure of the big bank’s top brass going to Flaherty and saying they were concerned that the housing market is getting out of hand and that mortgage arrears could increase in the future, the Finance Minister had to be seen as taking action and make changes.

Here are the main reasons that each of the changes won’t have a huge impact when they come into effect on April 19, 2010:

1. All borrowers need to qualify for a 5 year fixed rate even if they choose a lower mortgage rate or term

Many of the banks have been qualifying applicants at higher rates anyways. So if you were applying for a crazy, low variable rate at 1.95%, they would make sure you could handle at least the 3 year fixed rate at 3.29% or a higher 5 year fixed rate. Genworth Financial’s COO said they had been qualifying applicants for mortgage default insurance at at least 4% for the last little while.

This makes sense as the mortgage lenders don’t want to give people mortgage loans that they can’t pay back and qualifying people at higher fixed rates is a prudent control. So this change shouldn’t have too big of an impact on people qualifying for mortgages.

The big question that comes out of this is – which 5 year rate will you have to qualify for? Depending on which mortgage lender you apply with, if it’s a big bank, do you have to qualify for their 5 year posted rate (currently 5.39%)? Or do you have to qualify for their “special discounted rate”, or the actual rate where it depends on the amount of investments you have with them and how good your negotiating skills are? If the bank has a 4.09% 5 year fixed special (like RBC), but you can get, 3.99%, due to your other investments with them, which rate is the qualifying rate?

Let’s look at the differences on the monthly payments for various 5 year fixed rates versus a variable rate with a mortgage value of $300,000 and an amortization period of 25 years:

5 year variable rate versus 5 year fixed rate payment differences

As a result, the monthly payment difference for qualifying could be from $256.18 – $556.09 per month or 31%, which is obviously a huge discrepancy. So which 5 year fixed rate is the “qualifying rate”? And each mortgage lender could have a different qualifying rate, so this means comparing products from different lenders could become even more important in the future.

As a result, it will be interesting to see how each mortgage lender defines the qualifying rate and how this is implemented.

2. Lower the maximum amount Canadian homeowners can refinance from 95% to 90% of the value of their homes

This could impact people looking to consolidate higher paying debt into their lower mortgage interest payments, but 5% should only impact a small % of Canadians.

3. Minimum 20% down payment for house buyers looking to buy investment properties and to get government insurance through the CMHC

This may slow down market speculators and real estate investors somewhat, but for the average Canadian looking for a home, the impact could possibly be more supply, so properties on the market, and could tame house prices as well, with less investors buying up large amounts of properties.

So these are our thoughts, we’ll see what else comes out over the next few weeks as more of these questions are answered, and we expect there to be a big rush of pre-approvals before April 19. More to come.

Former Bank of Canada governor David Dodge spoke out this week saying that as the reality is house prices are more likely to go down rather than up in the next few years that the Finance Minister and Bank of Canada need to consider intervening to avoid a housing bubble. He didn’t comment on whether we are in a housing bubble at the moment saying that you don’t know you’re in a bubble until it bursts, but believes house prices are strong enough that Ottawa should take action.

“Whether there’s a bubble or not you can only see after the fact,” he added. But it wouldn’t take a bubble bursting to cause consumers pain. If your house price goes down 10 per cent and you’ve borrowed 95 per cent of its value, all of a sudden you’d be in hot water, Mr. Dodge noted.

His comments come as the debate on whether the Canadian market is in a housing bubble or not, has become a very hot topic since December 2009, especially after Finance Minister Jim Flaherty’s comments that the government may consider adding additional restrictions on the mortgage market to slow down the housing sector. It’s a very fine line as this sector has been performing tremendously well while the economy was in trouble over the past year, and trying to rein in this sector alone while not affecting other struggling parts of the economy will be very difficult.

While it’s clear that low interest rates are heating up the market, it would not be wise to raise them just in order to calm housing because such a move would have other consequences, Mr. Dodge said.

He identified lending standards and the framework default mortgage insurance is issued by companies like the government controlled CMHC and private Genworth Financial, and said they are important tools and stands should probably have been tighter over the last little while. For example, he said that people putting down only 5% for a down payment isn’t enough, and that minimum down payments of 7.5% or 10% is probably better. This would make it tougher for first time home buyers to get on the property ladder and to get their first mortgage, as they would need to save more beforehand for a down payment. With an average house value of $300,000, currently prospective home owners, would need at least $15,000 as a down payment, versus $22,500 (7.5% down payment) or $30,000 (with a 10% down payment).

Genworth Financial’s President has said that the company is already being more prudent by making sure mortgage applicants can handle mortgage rates of about 4%, despite variable rates being under 2% at the moment.

In the last Monetary Policy Committee meeting the Bank of Canada re-iterated their commitment to keep the target for the overnight rate which influences variable mortgage rates, at its current 0.25% until at least July 2010. As a result, that would make you think that variable mortgage rates would stay constant and there would be only way for them to go – up.

Well, think again. Variable rates from the big banks were hovering around Prime, 2.25%, for the past few months, then we saw RBC & TD drop their 5 variable closed rates to Prime – 0.10%, or 2.15%. This is the first time the banks have lowered these rates below Prime since the international economic crisis began.

Mortgage brokers were offering lower variable rates down to Prime – 0.30% (1.90)% for a 5 year term, and then there was a new product introduced by a couple lenders a few weeks ago of a 1 year variable closed rate which was offered at 1.85%.

But we still hadn’t seen the big discounts to Prime that were around 18 months ago, and that our Mortgage Rate Outlook Panel had said would return this month. Then this morning, ING DIRECT came out with a 5 year variable closed rate through one of our broker partners at Prime – 0.45% or 1.80%, with 25% annual pre-payment privileges. This is the lowest mortgage rate we’ve seen thus far.

View the 1.80% 5 year variable closed rate here.

So what happened? Why are variable rates dropping even though the Bank of Canada hasn’t changed its main interest rate? As some of our panel members explained:

Rob McLister, Editor, CanadianMortgageTrends.com: Prime rate won’t drop but discounts to prime will get juicier. Don’t expect anything to celebrate over, but variable-rate discounts should widen slightly from today’s typical prime – 0.15%. An average of prime – 0.25% appears doable in 30 days, and some brokers will likely advertise 10-20 basis points below this number.

George Hugh, Vice-President, Treasury, ING DIRECT: With the threat of increasing interest rates over the next year 12 to 18 months, many banks are in favour of placing their clients into VRM mortgages with the hope of locking them into a higher fixed rate in the future. As a result, you can expect to see VRM rates below 2.00%.

I don’t know if we’ll see the Prime – 1.00% variable rates before Governor Carney increases rates again in Q3 2010, but it looks like the trend is we’ll see larger discounts to prime over the next few months.

To stay on top of things, you can visit our latest mortgage rate changes page or sign up to RateWatch and we’ll fire you over an email whenever the best mortgage rates change on RateSupermarket.ca.

When buying a home it’s easy to forget about all the additional expenses that go into a house purchase, over and above your mortgage costs, so be sure to take into account the following costs as outlined in the book, Investing for Canadians for Dummies:

Inspection fees

It’s a good idea to get a professional to check out your prospective purchase before buying. Inspectors c an tell if you if there’s any issues with the plumbing, heating electrical systems, foundation, roof and if there’s any infestation problems. An inspection will typically cost around $200 – $300.

Appraisal fee

When you get your mortgage, many lenders will require you to get a home appraisal to get an independent view of it’s value. This can cost from $150 and up. Some of our partners on RateSupermarket.ca can cover your appraisal fees, so be sure to ask when you’re speaking to them.

Survey fee

Surveys are done by a registered land surveyor and usually must be done for each sale unless the last survey was done very recently (such as within 6 months). It involves a drawing of the property so that you and the lender ensure everything is on the actual property, your neighbours houses aren’t on your land and all zoning requirements have been followed. Tyical costs are $400 – $500.

Legal fees

Consulting a lawyer before you buy a house is highly advisable. They will help with doing a title search which makes sure the seller owns the home and can actually sell it to you and there aren’t any claims against it. It also helps to protect you because if the lawyer confirms that the seller has the right to sell the property and there are no claims against it (free and marketable title) and its later found they were wrong, you can pursue the lawyer.

Title insurance

As there is a type of insurance for everything, when you buy a home, you can buy title insurance. This protects you financially against the issues listed above of the seller not owning the home and if there are any claims against the property.

Moving costs

Although you think you, a couple of friends and a case of beer will take care of all the moving, if you compare this against the time, cost and stress of doing it yourself, it might be worth it to get some moving quotes. Here is a good place to start to get free moving quotes.

Real estate agents’ commissions

This can be in the region of 5-7%, but can be a waste of money nowadays, as there are so many websites selling homes privately where you can save on these commissions. We just sold a house ourselves and saved $23,500 in commissions! Type in “for sale by owner” in a search engine to at least check out what’s offered before buying.

The book recommends planning to stay in your new home for at least 3 years to ensure that you recoup all these additional costs. Don’t forget the price of maintenance for fixing leaky pipes, flooding basements, painting, and if you’re not a handy DIY-er then it’ll cost even more to get professionals in. The value of the home needs to appreciate by about 15%/annualy over the years you own it to get ahead of where you’d be if you rented – so take careful consideration before buying.

The Canadian real estate market has been doing tremendously well over the past few years, despite the recession, so don’t plan for this to continue indefinitely. Like the old saying about the stock market, you want to buy low and sell high, not buy high and hope it continues going up. Most likely many of the smart property investors are holding fire right now until the market comes down, so be sure to do your research , speak to some professionals and consider your options before buying.

RBC released its Canadian Consumer Outlook Index today which reported that despite continuing reports stating the economy is recovering quickly, Canadians are worried about their debt levels and are anxious about their jobs.

The Bank of Canada reported last week that consumer credit held by the big banks rose in December 2009 to $336B amount of consumer credit held by the country’s chartered banks rose to $335.6-billion in December, up $2B from the previous month and 15% over the previous year. It really has been an odd few years with the global economic crisis bringing down Lehman Brothers, bank bailouts around the world and it was the first recession in which real credit (or the level of debt people are taking on adjusted for inflation) has gone up.

The survey said that 58% of Canadians are concerned about their current level of debt. And when people are worried about having taken on too much debt, the last thing they need is to lose their jobs, and the survey also found that 26% say a member of their household is worried about losing their job or being laid off, which jumped up from 21% the previous month. Job security concerns were up in all provinces with the highest reported in BC (32%) and Alberta (31%).

Conversely, 45% of Canadians expect that their personal financial situation will improve over the next year, and 68% believe that interest rates will increased in the next 6 months while 28% believe they’ll remain the same.

Canadian Imperial Bank of Commerce chief economist Benjamin Tal commented that it looks like many people are over their head in debt and will be in trouble when interest rates rise. With rates at near all time, especially mortgage rates it has brought demand for big ticket items such as houses forward, meaning people looking to buy a house in the next year are rushing to get into the market now, and this will reduce activity in 2011.

The Globe and Mail had a great article about the most popular mortgage rate topic of the moment which is whether to go with a fixed rate or variable rate mortgage.

It looks at the biggest question people are facing right now if they’re in the market for a mortgage: with fixed rates so low, does it makes sense to lock in your mortgage now for 7-10 years, or is the premium over variable mortgage rates too high to make sense?

The lowest 7 year fixed rate listed on RateSupermarket.ca is currently ING @ 5.25% and the best 10 year is 5.35%. With 5 variable rates at 1.95%, you would be paying a hefty premium for the security of knowing your ongoing payments for the next 7-10 years, but the article goes on to say, the best option really depends on what your risk tolerance is.

As always speak to a mortgage expert before making any decisions.