CMHC Released their annual report last week, Tuesday May 8^th.  The Canadian Mortgage and Housing Corporation continues to be an integral player in contributing to the stability of the Canadian marketplace.  In 2011, spending on housing accounted for a whopping 20 per cent of Canada’s GDP last year and CMHC provided $2 billion in support of housing programs. Here’s a summary of the report.

Economic Indicators and Forecasts

Economic growth slowed to 2.5 per cent in 2011 compared to 3.3 percent in 2010. The economy is expected to grow by 2.1 per cent in 2012

The Bank of Canada has indicated that the overnight lending rate is likely to remain consistent at 1 per cent for 2012.  Mortgage rates (both fixed and variable) are expected to remain at low levels and CMHC predicts that there will be no exciting movements to posted mortgage rates.  The posted 1 year fixed mortgage rate is estimated to be between the 3.3 per cent and 3.6 per cent range, whereas the posted 5 year fixed mortgage rate is expected to be between the 5.1 per cent to 5.4 per cent range

The unemployment rate declined from 8.0 per cent in 2010 to 7.5 per cent in 2011, while 2012 will see a rate of about 7.0 per cent

Housing starts were up just over 2 per cent from 2010.  Sales of existing homes are expected to increase slightly in 2012 along with the average price (estimated to be around $368,900 in 2012).

Mortgage Loan Insurance

Back in the beginning of February 2012, CMHC was front and center with their news that they were approaching their $600 billion cap for loan insurance which is set by the Federal Government.

In 2011, CMHC had planned to only increase their insurance in force by 3.7 per cent to $533-billion.  However, they actually increased it over 10.3 per cent to $567-billion and are quickly approaching their $600-billion limit.  As you can see, the largest contributor to this increase is from the multi-unit residential units.  CMHC is the only insurer of loans for large multi-unit rental properties, including nursing and retirement homes.  Increased life expectancy paired with the aging baby-boomer cohort translates to a heightened demand for nursing homes and retirement homes alike.

What the Average CMHC Customer Looks Like

The quality of borrower is the only saving grace to the increasing level of CMHC insurance issued.  The average equity in CMHC’s insured portfolio stands at 44 per cent meaning that the average person is financially stable and could withstand any potential adjustments to housing prices.  To put this into perspective the average home price in Canada is approximately $370,000 and would therefore have a mortgage balance of $207,200.

Thankfully, the average credit score of CMHC-insured high ratio loans is 724!  Since CMHC has sound underwriting practices the majority of homeowner loans are held by consumers with strong credit scores who demonstrate a prudent approach to managing their mortgages.

RateSupermarket.ca’s Expert Mortgage Panel Predicts Status Quo on Mortgage Rates

Toronto, ON – (May 10, 2012): Increased uncertainty in Europe and the wider global economy will cause Canada to sit back and wait before making any major changes to interest rates that could potentially derail its economic growth. While this waiting game plays out, RateSupermarket.ca’s panel of mortgage experts expect both fixed and variable mortgage rates to remain unchanged in the short term.

Fixed mortgage rates: Unchanged

Demand for mortgages is moderating in many parts of the country, and there is decreased need for competitive discounting from big lenders to maintain mortgage market share. All these factors point to one conclusion – little change is on the horizon for fixed mortgage rates. Our panel of experts expect fixed rates to remain level for the next 30-45 days.

Variable mortgage rates: Unchanged

The recent French and Greek elections raise concern for the future stability of the Eurozone. Will Greece exit the European Union?  If so, how many other debt ridden countries will follow? With so many questions unanswered, our Mortgage Rate Outlook Panel members think the Bank of Canada is unlikely to risk rocking the boat by increasing interest rates any time soon.

This, coupled with the fact that discounts to the Prime rate are not expected to budge given the lack of interest in variable rate terms at the moment, means that variable mortgage rates will stay where they are in the short term.

About the Mortgage Rate Outlook Panel

The Panel includes some of the country’s top mortgage experts, and helps Canadian consumers make informed decisions by offering a short-term outlook for fixed and variable mortgage rates.

This month’s panel members:

• Mark Kocaurek, Senior Vice President, Treasury & Lending (Chief Lending Officer) of ING DIRECT Canada
• Dr. Ian Lee, Director of MBA Program, Sprott School of Business, Carleton University
• Wayne Spinney, Mortgage Agent, Centum Mortgage Professionals
• Dan Eisner, MBA. AMP. President, True North Mortgage

About RateSupermarket.ca (www.ratesupermarket.ca)

RateSupermarket.ca is the largest impartial rate comparison service for personal finance products in Canada. Founded in May of 2008, their easy to use comparison engine provides much needed transparency to the Canadian financial market and allows visitors to quickly find the best mortgage rates. Their Mortgage Tool App for the iPhone also allows house hunters to compare mortgage rates using their Smartphone. Over 1.5M Canadians have turned to RateSupermarket.ca to save money on their mortgage, insurance, banking, credit cards and GICs.

The Subprime Market in Canada

There have been talks about Canada’s subprime mortgage industry getting out of control as the banks turn more and more clients away who have less than perfect credit.  Who are these so called less than perfect clients turning to?  In some cases, sure they’re turning to Alt-A lenders (which stands for Alternative A-Paper lenders, also known as subprime or “B” lenders) who often price upwards of 100 basis points over posted rates.

A growing number of mortgages are being funded outside of The Big Five banks.  Speculation suggests that this is due to the recent changes brought on by the CMHC including shortening amortization periods and increasing down payment amounts. Naturally, the banks do not want to lend to anyone that doesn’t qualify for CMHC insurance.

However, there are many qualified individuals who turn to lenders outside of The Big Five for other reasons.  One example of this would be someone who is self-employed and whose taxable income after deductions makes it tough to gain approval through the conventional line up.  It is important to understand that just because it isn’t a prime mortgage through one of The Big Five, does not necessarily mean that it is a sub-prime mortgage.  There is a market out there that has been referred to as a “near prime” mortgage and is nothing close to the literal subprime market that was created in the states.

The NEAR (not sub) Prime Mortgage Market in Canada

There is a misconception that if you don’t qualify for a mortgage at a major bank you can easily just go through a mortgage broker instead.  The decision to call on a mortgage broker and their lenders is different for everyone but the mortgages available through the broker channel are not by any means of a lower quality or riskier (heck, half of the time brokers fund mortgages with major banks).

But if you do find yourself in a tough situation (such as our self-employed friend above), a mortgage broker may have access to alternative lenders that specialize in arranging home loans for ‘near-prime’ borrowers.

It is important to note that loans for the NINJAs (no income, no job and no assets) and negative amortization loans etc. are NOT readily available through a mortgage broker.  These are the true ‘subprime’ mortgages and are typically referred to as private mortgages funded by people with deep pockets who don’t use leveraging techniques to make the deal.  These private mortgages will often help out a client who needs a second mortgage and their current lender will not surpass the 75-85 per cent loan to value level.  This LTV rule of thumb ensures that the lender has a 15-25 per cent cushion on the value of the home before the lender is really at risk.

Is Canada Really Headed for a Meltdown?

I don’t see it that way!  At first glance, the fact that more and more mortgages are being funded outside of RBC, TD, BNS, BMO and CIBC mixed with a decrease in the average price of a home could signal a cause for concern; but experts are saying that Canada has no true subprime market.

Yes monthly home sales are at an all-time high but year over year we are not seeing the same exponential growth in sales nationally.  This is due to moderate gains in major centres (Toronto, Calgary, Montreal, Ottawa and Quebec City) which are offset by declines in Vancouver and the Fraser Valley.  Last year Vancouver ran at unusually strong sales levels and things are just starting to get back to normal vs. the crash that some are suggesting.  *A look at March 2012 versus February 2012 and March 2012 versus March 2011. Statistics taken from CREAstats

The other concern is the decrease in the average sale price of homes nationally.  Again, last year Vancouver had record high-end home sales in their priciest of neighbourhoods.  There definitely has been a decline in the average sale price of homes in Vancouver but this is due to the change in the sales mix, not due to housing deflation by any means.  Overall Toronto is actually stronger than last spring.  The tug of war between Toronto and Vancouver has made it seem that prices are decreasing but it’s really just an adjustment to the marketable properties available.

RateSupermarket.ca Week in Review

The biggest change this week on the Best Mortgage Rates page was for the better!  The 5 year fixed rate and the 3 year variable rate both dropped by 10bps.  Small movements were seen in the 3 year fixed rate (up 5bps) and the 7 and 10 year fixed rates (both up 1bps). Do you want to know when the best mortgage rates change?  Be the first to know and sign up for RateAlert, RateSupermarket.ca will e-mail you a daily digest of the mortgage rates that have changed in your area!

The most popular searched rate remains, still in the lead is the 5 year fixed rate (47.4 per cent of visitors searched for this rate over the last week).  Following the 5 year fixed are the 5 year variable rate (21.8 per cent), 10 year fixed rate (8.4 per cent) and the 3 year fixed (7.0 per cent).

In the News this Week: No Changes to the Overnight Lending Rate

Earlier this week (Tuesday April 17th) the Bank of Canada announced that it will maintain its target for the overnight rate.  This marked the 13^th consecutive time that rates have been left alone over the past 19 months.  Although the Canadian economy has exceeded the Bank’s expectations from January and the U.S.’s own recovery has been on the up and up, it all wasn’t enough to have the BOC increase their overnight lending rate which remains steady at 1 per cent.  This pleases mortgage brokers and consumers alike as the prime lending rate also remains at the 3 per cent level.

BUYER BEWARE … Shedding Some Light on the Cash Back Mortgage

You might be wondering what a cash back mortgage is – it is exactly what it sounds like.  When your mortgage funds you receive a set percentage back in cash to go towards, well whatever you want!  Some will turn around and use a 5 per cent cash back amount as their down payment, a sly move around the minimum down payment required to qualify for a mortgage in Canada, unless you are using a private lender of course.  The pro with this type of mortgage is that you can do whatever you want with the cash back!

The Cons: Nothing Comes for Free

I did some research around cash back mortgage rates among the major banks and found that on the surface, they are priced at par with regular fixed mortgage rates.  This makes them quite attractive to the average consumer.  However, when taking a deeper look I found out that the banks only offer discretionary pricing on their regular mortgage products and not on cash back mortgages; making the effective cash back mortgage rates higher than the standard fixed rates.  No room for negotiating a cash back rate!

If paying the posted rate isn’t bad enough, try getting out of a cash back mortgage.  Is it possible?  Yes!  Is it difficult?  Not really.  Is it expensive?  OH YA!  How do you feel about your first born or an arm and a leg?  These are things you may need to give up in order to pay out the penalty for breaking a cash back mortgage.  Sure the $9,000 in your pocket on closing was nice, but try paying it back on top of the standard IRD/3 month interest penalty charge.  It will most definitely cost you a pretty penny.

Claims to “pay off your mortgage 11 years sooner” with a Cash Back Mortgage?!

One of the major banks has advertised that you can pay off your mortgage 11 years faster with a 5 year fixed cash back mortgage at 4.24 per cent.  Not only will you pay off your mortgage faster but they will even give you $4,000 cash at closing (this is based on a 2 per cent cash back amount on a $200,000 mortgage).  That sounds great doesn’t it, so what’s the catch?

The catch is that their scenario is conditional upon your ability to pay more – funny … when you pay more you pay off your mortgage faster!  So I guess paying off your mortgage 11 years sooner really isn’t dependent on the advertised cash back product, which offers a higher rate and is more expensive if you decide to break it down the road.  With the same suggested principals you could pay off any mortgage faster, so why settle for a higher rate!?

The Offer Under the Microscope

In order to be mortgage free (based on $200,000 principal, 4.24 per cent 5 year fixed rate, 25 year amortization and monthly payments) 11 years earlier you have to increase your monthly payment frequency to accelerated bi-weekly payments, then increase your bi-weekly payments by nearly 9.5 per cent and finally make lump-sum payments of $3,000 per year.

From Scenario One – Two: By increasing the payment frequency from monthly payments to accelerated bi-weekly you can shave over 3 years off of your mortgage (mind you, the equivalent monthly payment translates to $1,168.10 which is nearly $90.00 extra each month).

From Scenario Two – Three: By increasing your bi-weekly accelerated payment to $590.00 (9.44 per cent increase) you can pay off your mortgage nearly 5 and a half years earlier (note: the equivalent monthly payment now translates to $1,278.33 which is over $200.00 extra each month).

From Scenario Three – Four: Now that you’ve increased your total annual principal and interest payments by approximately $2,400.00, this example also requires you to pay an additional lump sum payment of $3,000 per year.  By doing this, you will decrease your total amortization to 14.8 years from the original 25 years.

Bottom line:  It isn’t the mortgage product that is helping you to shave years off of your mortgage, it is taking advantage of pre-payment privileges which you can do with any product!

RateSupermarket.ca Week in Review

Another week of little to no movements in the best mortgage rates across Canada.  Little on the variable front and no movements on the fixed front.  The single change over the last week was an increase in the 5 year variable closed rate, up 5 bps to 2.75 per cent.  Do you want to know when the best mortgage rates change?  Be the first to know and sign up for RateAlert, RateSupermarket.ca will e-mail you a daily digest of the mortgage rates that have changed in your area!

Still remaining in the top 1 and 2 spot for most frequently searched mortgages are 5 year fixed (38.5 per cent of visitors searched for this rate) and the 5 year variable (32.9 per cent).  Gaining in popularity over the last week is the 3 year fixed rate, last week 4.8 per cent of visitors were searching for this rate and this week 5.5 per cent have.  Have you created an account on RateSupermarket.ca yet?  Get to it!  It allows you to save your searches so that you can easily sign-in and see the current best mortgage rate for your needs.

Today the Bank of Canada announced that once again (for the 13^th consecutive time over the past 19 months) that there will be no change to the overnight lending rate.  This pleases variable rate mortgage holders since there are no alterations to the bank’s Prime lending rate and therefore no increase to their own mortgage rate and monthly mortgage payments.

The Canadian economy is exceeding the Bank’s expectations from January.  The U.S. has contributed to the overall healthier economic picture in Canada since their own recovery has been more pronounced in recent months and their financial conditions have improved as well. An improvement in Canadian consumer confidence has unfortunately increased the level of household debt, which remains the greatest domestic risk in Canada.  Net exports are forecasted to remain weak due to increased competition, a diminishing global demand and the strength of the Canadian dollar.

A full update of the Bank’s economic and inflationary outlook will be published tomorrow and the next meeting to discuss changes to the overnight lending rate is scheduled for June 5^th, 2012.

RateSupermarket.ca’s Expert Mortgage Panel Predicts Hike in Fixed Rates, but Stability in Variable Rates This Month

TORONTO, ONTARIO–(April 10, 2012) – The spring real estate frenzy has started early this year, perhaps due in part to record low fixed mortgage rates in March. Sadly for borrowers, all good things must come to an end. To paraphrase the old saying, “what goes down must come back up.” As such, fixed rates are expected to rise this month, according to some experts.

Conversely, RateSupermarket.ca‘s Mortgage Rate Outlook Panel is anticipating variable mortgage rates to remain unchanged in April.

Fixed Mortgage Rates: Up

The price wars that sent fixed mortgage rates to historical lows last month seem to be over (for now). The record low rates were an attempt to snap up market share early in the year and get a jump on the peak home buying season, but those rates were unsustainable according to the Expert Panel.

With the increase in bond yields and persistent political and media attention around house prices and consumer debt levels, we should see fixed mortgage rates increase during the month of April.

Variable Mortgage Rates: Unchanged

RateSupermarket.ca‘s Panel members believe that inflation remains in check, the provincial election is heating up in Alberta, and the risks to global economic growth remain biased to the downside.  All these factors combined mean the Bank of Canada is unlikely to make any change to interest rates when they meet on April 17.  As a result, Prime rates and discounts off of variable rate mortgages will remain stable in the short-term.

To read all the detailed commentary from our Panel Members, please visit:

http://www.ratesupermarket.ca/mortgage_rate_outlook_panel/

About the Mortgage Rate Outlook Panel

The Panel includes some of the country’s top mortgage experts, and helps Canadian consumers make informed decisions by offering a short-term outlook for fixed and variable mortgage rates.

This month’s panel members:

• Mark Kocaurek, Senior Vice President, Treasury & Lending (Chief Lending Officer) of ING DIRECT Canada
• George Hugh, President and Co-founder, Taurus Mortgage Capital.
• Dr. Ian Lee, Director of MBA Program, Sprott School of Business, Carleton University
• Wayne Spinney, Mortgage Agent, Centum Mortgage Professionals
• Dan Eisner, MBA. AMP. President, True North Mortgage

About RateSupermarket.ca (www.ratesupermarket.ca)

RateSupermarket.ca is the largest impartial rate comparison service for personal finance products in Canada. Founded in May of 2008, their easy to use comparison engine provides much needed transparency to the Canadian financial market and allows visitors to quickly find the best mortgage rates. Their Mortgage Tool App for the iPhone also allows house hunters to compare mortgage rates using their Smartphone. Over 2M Canadians have turned to RateSupermarket.ca to save money on their mortgage, insurance, credit cards and GICs.

Recent Study Findings: How Canadians Feel About a 2 per cent Increase in Mortgage Rates

A survey completed by Leger Marketing for BMO, found that 43 per cent of Canadian homeowners would be in a bind if interest rates were to increase.  4 out of 10 claimed they would feel pressure if rates would rise as little as two per cent while 1 out of 5 said the same two per cent increase would hurt their ability to service their mortgage.  23 per cent were unsure how a rate hike would affect them while only 57 per cent felt that their mortgages would still be affordable if mortgage rates increase.

This survey which was completed by 1500 respondents was conducted two weeks prior to BMO dropping their 5 year fixed closed rate to the historically low 2.99 per cent.  The survey results were disclosed the day before this promotional rate ended last week.  Since then, all of the major banks have followed BMO’s suit and ended their own 4 and 5 year promotional pricing as well.  But how likely is a 2 per cent increase in mortgage rates?

What Does the Future Hold?

Banks already began raising variable mortgage rates and offering less of a discount off of prime, long gone are the prime minus 75 bps days.  The changes made to variable rate pricing are independent of the fact that the Bank of Canada hasn’t implemented any changes to the overnight lending rate at this point which directly influences the prime lending rate.

According to economists the overnight rate will likely end up in the 3-4 per cent rage, some estimate by 2013 while others forecast no big movements at least until 2014 when the U.S. Federal Reserve is expected to make their first rate increase.  The idea of rates increasing sooner than later stems from the fact that both Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney have clearly stated their concerns with the heightened levels of household debt levels (recent report stating debt to disposable income levels around 150 per cent).

On the fixed side of things, the promotional 2.99s have rocked recent pricing strategies and created a seemingly unnatural environment in the mortgage market.  Since the beginning of 2012, the 5 year Government of Canada benchmark bond yield has increased over 26 per cent; and although the yield jumps around from day to day there is a notable upward trend which should signal an increase in fixed rates.

Talks of a Crash Should Cease: Stress Testing Canadian Households

The Bank of Canada has developed a “stress test” to evaluate how any adverse economic circumstances (such as an increase in interest rates) would affect the distribution of debt.  The BOC examines each scenario and considers how changes in interest rates and the unemployment rate affects consumer credit and the impact on debt servicing ratios (GDS/TDS).

The most recent stress test came out optimistic, the BOC is confident that Canadian households are in a good position to handle an economic shock.  In 2000, 8.4 per cent of households had debt-service ratios above 40 per cent and at that time Canada didn’t experience a crash like the American economy had.  The BOC ran a scenario for a 3 per cent increase in the unemployment rate and an increase alike in short term interest rates; the outcome is (not surprisingly) an increase in the number of households with high debt-servicing ratios (from 6.4 per cent in 2010, to roughly 7.5 per cent in 2013).

The C.D. Howe Institute suggests that the BOC’s stress test may actually underestimate the effects of tougher economic times on the Canadian economy since the increase in debt (especially for lower-middle income borrowers), means that consumers might be increasingly prone to bankruptcy after a job loss.  However, no one is anticipating a crash like the American housing market experienced.  Canadian lending standards are stricter than those of the U.S.A. and they continue to tighten with recent changes to mortgage insurance rules and reduced access to credit for riskier borrowers.

RateSupermarket.ca Week in Review

Over the last week we have seen movements in half of our rates and all but one were on the rise.  With the exception of the 1 year fixed dropping a mere 5 bps, the 5 year fixed (up 21 bps), 7 year fixed (up 4 bps), 10 year fixed (up 4 bps) and 3 year variable (up 5 bps) all increased.  The biggest mover was the 5 year fixed rate which ended last week on the best mortgage rates page at 2.98 per cent, jumped up 11 bps to 3.09 per cent last Friday, another 5 bps on Monday and a final 5 bps to end at 3.19 per cent on Wednesday.

The 5 year fixed mortgage rate remains the most popular rate, with 40.9 per cent of visitors searching for this rate.  The 5 year variable rate is the runner up with 33.9 per cent of visitors reviewing the offers for this type and term.  And also notable is the 10 year fixed rate with just over 7 per cent of visitors interested in this rate (7.1 per cent).  Since the drastic change over the 12 months in variable pricing from prime minus to in some cases exceeding prime and the fixed rate pricing doing the exact opposite (hitting rock bottom at 2.99 per cent twice since the beginning of this year alone), consumers are locking in and even considering the “insurance” that the 10 year fixed rates provide.  Most people are thinking they are likely going to have a mortgage for the next 10 years, so why not lock in a rate under 4 per cent!?

Canadians Turning Towards Fixed Rates

A recent poll conducted by Harris/Decima has shown that 50 per cent of all Canadians would choose a fixed rate mortgage if they had to decide today, this is up from 39 per cent in 2011; whereas only 32 per cent would choose a variable rate mortgage, no change from last year.  The other 18 per cent aren’t sure which product would be right for them which is much less than the 30 per cent from last year.  Likely the shift in preferences from variable to fixed is due to the fact that the majority (86 per cent) of Canadians believe that mortgage rates will either stay the same or increase within the next year.

This poll suggests that more and more Canadians are looking to lock in at the current low fixed interest rates in order to pay off their debt sooner and protect themselves from rising interest rates.  As a rule, fixed rate mortgages are normally the product of choice amongst first time home buyers as many are working to establish themselves financially and are attracted to the fact that their rate and payments will not change over the term of their mortgage.

Extra! Extra! Read All About It: Fixed Rates on the Rise

Scotia Bank somewhat slipped under the radar when they withdrew their 4 year promo fixed rates last week and returned to the 4.39 per cent level.  This is a little shocking, seeing as it is a huge 140 basis point jump up from the short lived 2.99 per cent rate.

RBC and TD both published a press release earlier this week announcing a number of changes to their pricing strategy, all effective yesterday – Thursday March 29^th:

• Both increased their posted 5 year closed fixed rate by 20 basis points to sit at 5.44 per cent
• Both also increased their 5 year closed variable rate by 10 bps to sit at Prime + 0.20 per cent (effectively 3.20 per cent)
• And both have ended the 4 year special closed fixed rate of 2.99 per cent and returned it to 3.49 per cent (only a 50 bps increase vs. Scotia’s 140 bps increase last week).

Low Interest Rate Environment Paired with High Canadian Debt Levels – What is Canada Doing to Prevent a “Crash”?

With interest rates at an all-time low, house prices on an increase, concerns of consumer debt levels and a slowing growth rate in income levels there have been fears of the housing “bubble” bursting.  Policy makers and governing bodies alike are consistently revising regulations and even implementing new ones in order to protect Canada from following in the footsteps of our American neighbours.

Most recently, OSFI (Office of the Superintendent of Financial Institutions) has started tightening the underwriting process and lending guidelines for institutions, making it increasingly difficult to obtain financing.  Canada generally has stricter guidelines than the States when it comes to qualifying an applicant for a mortgage.  The States have a larger number of mortgages funded through a stated income program (vs. Canada who will verify income levels with paystubs, letters from an employer, NOAs etc.), no minimum down payment (Canada requires a minimum of 5%) and lenient debt servicing ratios (Gross Debt Servicing Ratios cannot exceed the 32% mark in Canada).

There has also been a continuing trend away from the ‘riskier’ HELOCs toward termed debt.  CMHC no longer provides insurance on the revolving HELOC product (therefore only making them available to home owners on a maximum 80 per cent loan to value basis).  HELOCs are generally more difficult to qualify for based on their flexible features like interest only payments and revolving credit limits.  And don’t forget that last year the maximum amortization for new high ratio mortgages decreased from 35 years down to 30 years.

Bottom line, the burst of the American housing bubble should have come to no surprise after reviewing the lenient underwriting guidelines they had in place which made it way too easy for Americans to qualify for a mortgage.  Something big would need to happen in order for Canada to experience a similar crash.

RateSupermarket.ca Week in Review

Small changes in rates over the last week to the best mortgage rates available on RateSupermarket.ca; the only increase was in the 1 year fixed rate which currently sits at 2.44 percent, up from 2.39 per cent.  Although you would expect to see more movement following the major bank’s rate hikes/promotional rate expiry (namely the 4 and 5 year fixed closed rates and the 5 year variable rates), other mortgage professionals are still able to compete and offer their customers preferable rates.

With all of the promotional advertising and exposure that the 2.99 per cent 5 year fixed received, it is no surprise that the 5 year fixed mortgage rate was the most popular product over the last week, with 45.8 per cent of visitors searching for this rate.  A close second was the 5 year variable closed rate (38.47 per cent), 10 year fixed closed rate (4.5 per cent) and the 4 year fixed rate (4.2 per cent).

More Changes to Come

It seems that every month now there are new principles and policies that are being set out by regulatory agencies in Canada which make it increasingly difficult for consumers to qualify for mortgages.  Is this a bad thing?  Not really, in my opinion!  In March 2011 there was a decrease in the maximum amortization for new high ratio mortgages from 35 years down to 30 years and then only a month later in April 2011 CMHC insurance was no longer available for Home Equity Lines of Credit (HELOCs).  And most recently, at the beginning of March 2012 FCAC made changes to the disclosure requirements for penalty calculations.

We all saw what happened to our neighbours south of the boarder when mortgages were granted to every man, woman and child (so it seemed).  When markets cooled off and interest rates went up back to “normal”; foreclosures happened and many Americans were fighting to keep their heads above water.

OSFI Releases Draft Guideline on Mortgage Underwriting Principles

Office of the Superintendent of Financial Institutions (OSFI) is an independent agency of the Government of Canada which reports to the Ministry of Finance and is the primary watchdog of federally regulated deposit taking institutions, insurance companies and pension plans.  They aim to create and maintain a competitive and resilient financial system in Canada.

Earlier this week on March 19^th, OSFI issued a draft aiming to tighten the mortgage underwriting process and lending guidelines and are looking for industry personnel and other parties involved to provide feedback towards these proposed best practice changes.

The Proposal for New Mortgage Underwriting Principles

These enhanced rules would require institutions to take a more in depth look at the borrower and subject property during the underwriting and adjudication process.  Specifically:

• “the borrower’s identity, background and demonstrated willingness to service their debt obligations on a timely basis
• the borrower’s capacity to service their debt obligations on a timely basis
• the underlying property value/collateral and management process”

(To view the entire draft guideline click here).

What Happened in the States Stays in the States!

There were many attributing factors during the U.S. subprime mortgage crises which added to the ultimate demise of the American economy and the repercussions were felt globally.  Stating the obvious, mortgages were approved to those who had less than stellar credit ratings and thus were defaulting on their mortgages.  The inadequate borrower paired with the boom and bust of the housing market in the states was truly devastating and left many drowning in underwater mortgages.

The fear for the Canadian economy lies in the future once all of these 5 year fixed mortgages have matured.  Sure your mortgage payments are affordable today and for the near term while your interest rate lies at an all-time low (2.99 per cent), but what happens 4 and 5 years down the road upon maturity?  What happens if interest rates are higher and your payments increase?  Yes, you could always refinance your mortgage and increase the amortization in order to make your home affordable but then you’re back at square one with a fully amortized mortgage.  The other concern is that the increased interest rates 4 and 5 years down the road will coincide with a correction or burst to the overpriced markets and said housing bubbles namely in Toronto and Vancouver, leaving borrowers up the creek without a paddle.

Do the Math!

Whenever you negotiate a mortgage you should first ask yourself where you think you will be one, three and five years down the road.  Will you be in the same home?  Will your family be larger? Will your income increase?  Will you want or need to upgrade, or maybe even downgrade?  And most importantly: if interest rates increase, can you still afford your home and maintain payments?  You can figure this last one out in two simple steps:

Step One: input your information into our mortgage calculator and see what your balance will be at the end of the said term using the amortization schedule below the amortization graph.  Using an example of $300,000 mortgage amount at 2.99 per cent over 25 years, your balance upon maturity would be $256,374.33.  Your monthly payments would be $1,418.20.

Step Two: take your maturity balance ($256,374.33) and input a higher rate (6.28% – this is the average 5 year fixed rate over the last 10 year period) maintaining the same amortization (now 20 years).  You might be surprised to see that although you’ve paid off nearly $44,000 off of your principal balance your new monthly payment is $1,866.35.  This gives you something to think about!

RateSupermarket.ca Week in Review

No big changes at all in rates after the 2.99 per cent rate hit the market last week.  The only change that we’ve seen over the last week on our best mortgage rates page was the 1 year fixed rate which dropped 0.05 per cent, or 5 basis points.

The 5 year variable rate is still the most popular search.  44.9 per cent of RateSupermarket.ca’s visitors are searching for the 5 year variable rate.  Still holding the number two spot for most frequent searches is the 5 year fixed rate at 40.3 per cent.  Following the 5 year rates are the 1 year fixed closed rate (4.4 per cent), 2 year fixed closed (4.3 per cent) and 10 year fixed (2.3 per cent).

BMO, CIBC, RBC, Scotia and TD All Offering 2.99%

Well, they’ve done it again!  BMO shattered the competition for a second time this year by dropping their 5 year fixed rate to 2.99 per cent (available until March 28^th).  Other lenders are currently offering special discounted rates between 3 and 3.25 per cent for a 5 year term and most of their products offer increased flexibility in terms of prepayment allowances.

How did CIBC, RBC, TD and Scotia respond?  With the same “If you can’t beat ‘em, join ‘em” theory they had back in January 2012; offering the same 2.99 per cent rate on their 4 year fixed products and most promotional rates are good until March 31^st.  Other lenders available through the broker channel are pricing more competitively on the 4 year term with rates ranging between 2.89 per cent and 3.29 per cent.  Who knows how long these offers will really be on the table for, back in January they were revoked prior to their expiry date.

BMO: Under the Microscope

Behind the 2.99 per cent rate from BMO there are (what some would pin as) limitations, when compared to their standard product line.  Here are the parameters:

• Limited to a 25 year amortization (vs. 30 year amortization with standard products)
• 10/10 lump sum/increase regular payment options (vs. regular 20/20) – this means to can top up your monthly payment 10 per cent and make an annual lump sum payment up to 10 percent without incurring any prepayment penalties.
• “Full repayment before maturity can only occur if the property is sold to an unrelated purchaser at fair market value or if the product is refinanced into another BMO mortgage product”

The Canadian Government has clearly voiced their concerns around current consumer debt levels and the seemingly unlimited source of funds available to Canadians.  However the low rate paired with a limited 25 year amortization has alleviated some of the apprehension towards cheap money.  This is an obvious response as a lower amortization makes it increasingly difficult to qualify a client based on their ability to service a higher principle and interest payment.

As far as the 10/10 limited prepayment is concerned, most aren’t actually too concerned.  CAAMP conducted a survey and found that only 17 percent of mortgage holders made lump sum payments to their mortgage in 2011, so to most this allowance is quite acceptable.

Ball and Chained to BMO for the Next 5 Years

The real kicker is the FULLY closed terms.  Meaning that you have no early negotiating power, you can’t refinance with another lender and you are tied to BMO for the full term.  BMO will let you renew into another product of theirs, but what if they do not have the best rates at the time?  Too bad, so sad!  BMO does not have to offer you discretionary pricing at the time of renewal, there will be penalties to refinance with them and they are not obligated to early-renew with you.  The only way that you can get out of the mortgage before the end of the term is with an arm’s length sale of the property.  This offer is only valid for owner occupied homes and is available over the next two weeks.

A Look at the Bond Market

Since the beginning of 2012, there has been over an 18 per cent increase in the 5 year bond yield and nearly a 7 per cent increase over the month of March alone (stats can be found at the Bank of Canada website).  There are many reasons contributing to the bullish trait of the bond yield market; namely economic factors (both in North America and globally), demand for bonds etc.  But I’d like to focus on what’s happening this month – spring has sprung!

There is a seasonal increase in the demand for mortgages in the springtime months and banks hedge against the mortgages they issue with interest rate swap contracts.  The increased demand for mortgage funding and hedging activity could lead to higher bond yields, which could mean an increase in fixed rates accordingly. Historically speaking, the bond yields tend to elevate during the March and April months and mortgage rates (on average) tend to do the same.  Over the last 38 years, the conventional 5 year mortgage rate has increased more times than not in April.  In 20 of the last 38 years the mortgage rate has increased between the March and April, in 10 of the 38 years the mortgage rate has decreased and in only 8 years it stayed the same.  And now with the expiry dates for the major 5 banks scheduled for the end of the month, history will likely repeat itself.

RateSupermarket.ca Week in Review

The biggest mover this week in rates was the 4 year rate.  I know you would expect there to be a drop in the rate considering the big five bank’s announcements, however it was an increase!  Nonetheless, the 4 year fixed closed increased by only 5 basis points.  The only other movement in the best rates was the 7 year fixed closed which dropped 1 bps.

Interestingly enough with the release of the 5 and 4 year fixed rates at 2.99 per cent, we didn’t see a huge change in what RateSupermarket.ca visitors were searching for.  The 5 year variable rate still holds the most popular search at 44.8 per cent (down from 46.3 per cent last week).  The 5 year fixed rate comes in second at 40.5 per cent (slightly up from 39.7 per cent last week) and still maintaining third place position in the popularity contest is the 1 year fixed rate, currently 4.3 per cent of visitors are searching this rate which is up from last week at 4.1 per cent.

The 4 year fixed rate is actually one of the least popular rates searched on RateSupermarket.ca .  Only 1.1 per cent of searches went to the 4 year fixed rate (only ahead of the 6 month and 7 year fixed open rates and the 1 and 3 year variable closed rates).