Thursday Mortgage Round Up: April 5th, 2012

Summary of Mortgage News in April

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. 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!?

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