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It’s time for the federal government to update the mortgage stress test

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It’s time for the federal government to update the mortgage stress test

It has been nearly two years since the federal government’s mortgage stress test was first introduced with the intent to cool the hot Canadian housing market. Since then, particularly in the GTA and Vancouver, there has been a softening of demand in the housing sector as the market adjusted and potential homebuyers looking to purchase a new home have stepped off the sidelines. In the GTA, the stress test did its job in reducing demand, but did so by shutting out hundreds of thousands of potential homebuyers. It did nothing for the real issue, that being that the GTA has a housing supply problem.

The stress test came into effect in 2018 to protect consumers by limiting the amount of money they could borrow for a new home. It meant that all home purchasers have to qualify under the Bank of Canada benchmark five-year rate (5.34 per cent) or the rate offered by the lender plus 200 basis points or two per cent.

Unfortunately, the stress test addressed demand and not supply. Home prices stabilized because tens of thousands of young families and newcomers to Canada were locked out of the housing market. In markets with growing populations, it is very difficult to solve supply side problems with demand side solutions. Furthermore, reducing demand did not improve affordability because any stabilization of pricing was matched with reduced spending/borrowing ability.

Why do we have a supply issue? The GTA’s population is growing at the rate of 115,000 per year and the inability to build enough new homes fast enough is a problem. We are falling short by about 10,000 units a year. The result is the affordability challenge we have seen across the GTA over the last five to 10 years. Demand side measures like the stress test have only proved to be a bandaid solution.

With markets now stabilized, and the cumulative effects of changes now surpassing the original policy goals, it is time for the federal government to update the stress test to better align it with current market conditions, specifically replacing the current “blanket” two-point stress test with a declining rate stress test based on the mortgage term. The Canadian Home Builders’ Association (CHBA) has some recommendations that would see the stress test remain unchanged for mortgages with open terms and variable rates, but reduced for fixed rate, locked-in terms, eventually diminishing to 0.75 for terms of five years, and be eliminated entirely for seven- or 10-year terms.

The CHBA also recommended reintroducing 30-year amortization periods for first-time buyers. First-time homebuyers have been inordinately affected by the federal government’s changes, yet they are amongst the lowest-risk group of buyers. It’s time to reintroduce the 30-year amortization for insured mortgages taken on by well-qualified first-time buyers. This will address growing inequities in mortgage access that disproportionately impact younger first-time homebuyers trying to enter the housing market.

Implementing the CHBA recommendations would return the top 64 per cent most qualified of buyers to the market and would allow 89 per cent of first-time buyers, a low risk group, to re-enter the market with the hope of homeownership. Those returning would still be lower-risk as they would still need to pass the adjusted stress test, debt service ratios, down payment requirements, credit rating scores and mortgage insurance requirements.

Dave Wilkes is President and CEO of the Building Industry and Land Development Association (BILD).

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Canadian mortgages just got a little less stressful

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Canadian mortgages just got a little less stressful

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The mortgages landscape just got a little friendlier toward homebuyers – particularly first-timers – and could get even more favourable in the coming months. The Bank of Canada recently announced a decrease of the five-year benchmark mortgage rate 15 basis points, from 5.34 to 5.19 per cent, as a result of the big banks dropping their five-year posted rates.

The move is significant because BoC’s five-year benchmark is the rate against which Canadian borrowers are stress-tested when applying for a mortgage. Borrowers with a down payment of less than 20 per cent must qualify for a mortgage at the Bank’s posted rate, now 5.19 per cent. Borrowers with a down payment that’s greater than 20 per cent are stress-tested against the higher of either their mortgage rate plus two per cent, or the BoC’s posted rate.

“The change in the Bank of Canada five-year benchmark rate now means Canadians can qualify for more home today compared to earlier this year and 2018,” says James Laird, co-founder of Ratehub Inc. and president of CanWise Financial mortgage brokerage. “This decrease alleviates some of the pressure on first-time homebuyers, who are the most financially strained Canadians entering the housing market.”

Improving affordability

According to ratehub.ca, a borrower with an annual household income of $100,000 with a 20-per-cent down payment and a five-year fixed mortgage of 2.70 per cent amortized over 25 years, would have qualified for a home valued at $589,000 at the previous benchmark rate of 5.34 per cent.

With the new qualifying rate of 5.19 per cent, they can now afford home valued at $597,000 – a difference of $8,000, or 1.4 per cent more home.

More rate cuts on the horizon?

When the Bank of Canada held its influential overnight lending rate at 1.75 per cent on July 10 – where it has been since October 2018 – few economists were surprised. After all, the Bank cites, Canada is still dealing with economic weakness from late 2018 and early 2019.

Hardly time for a rate hike.

“The Bank continues to monitor the Canadian energy sector, as well as the impact of international trade conflicts on the global economic outlook,” says Laird. “On a positive note, the Bank is pleased by indications of strong economic growth including a healthy labour market and stabilizing housing market. The Bank recognizes the positive impact that low long-term mortgage rates have had on housing activity.”

There are other factors besides BoC’s overnight rate that influence mortgage rates, but generally speaking, Canada’s major lenders typically follow the Bank’s lead in raising or lowering rates.

The announcement was welcome news for Canadians considering a variable rate mortgage, as BoC has signaled the current interest rate remains appropriate. In the absence of major economic changes, the Bank seems intent to maintain this policy in the near future.

Expecting a decrease

But should there have been a decrease on July 10? And since there wasn’t, is one on the horizon for the next rate announcement on Sept. 4?

According to a report from financial advice organization Finder, assessing BoC’s July 10 decision, two Canadian economists thought there should have been a rate cut. The majority (62 per cent) of panelists predict the next rate change will be a decrease. Stephen Brown, senior economist at Capital Economics, who is among those who says the Bank should have cut the rate in July, foresees a decrease as early as Oct. 30 – and possibly a second reduction on Dec. 4.

For those looking to secure or renew a mortgage, this is all good news. You now have the peace of mind that rates likely won’t rise until next year, and might even decline in the next few months.

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Fixed mortgage rates hit two-year low

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Fixed mortgage rates hit two-year low

Mortgage rates in Canada have been ultra-low for more than 10 years, but in most cases the variable rate has still beat out the fixed rate. Until now.

Recently, the Canada five-year benchmark bond yield fell to 1.29 per cent – the lowest level in two years. The big banks have responded by slashing fixed rates on mortgages. Anyone shopping for a mortgage right now should take a closer look at the five-year fixed. This could be a big money saving option. That’s because in many cases, it’s cheaper than the variable rate. It also means peace of mind knowing your monthly payments won’t change for the next five years

M2M condos by Aoyuan International.

How low are fixed rates

To put fixed rates into perspective, the five-year benchmark bond yield is lower compared to last year at this time. Then it would cost up to 2.06 per cent. It is also much lower than the long term average of 3.52 per cent. This is leading big banks to ramp up their mortgage business. As is always the case, banks are enthusiastic to sell mortgages and are willing to offer the lowest rate to get your business. With low bond yields, many are offering rates lower than three per cent fixed.

Good for homebuyers

This is all great news for anyone shopping for a mortgage right now. If you have job security, fixing your rate, rather than going variable (for the next five years), could mean better cash flow if rates were to rise.

Looking at variable, too

It’s important to understand how variable rate works as well. The Bank of Canada’s floating benchmark rate is tied to the variable rate. When the Central Bank raises rates, commercial banks raise prime, which affects your floating rate loans, such as variable rate mortgages and lines of credit. The Bank of Canada raised rates five times between the summer of 2017 and the fall of 2018, but has since held rates steady at 1.75 per cent. In the past, the Bank has cited global trade tension between the U.S., low oil prices and record high debt levels as a reason to leave rates unchanged.

Not all good news

It’s important to note that plunging bond yields may be great for borrowers in the market for a mortgage right now, but they do spell trouble for the economy. Low bond yields often indicate a slowing economy. It can also encourage Canadians to pile on more debt. If trade tension were to ease and the new United States, Canada and Mexico agreement was to firm up, bond yields would rise. This would push fixed rates up right away.

Turning attention to the U.S.

So far, the U.S. Federal Reserve has held rates steady, but has indicated it is open to a rate cut if the economic conditions allow it. If the U.S. Federal reserve was to cut rates, that would put pressure on the Bank of Canada to do the same.

Do your own stress test

Regardless of how low of a rate you secure, you still have to pass the federal stress test. That is the higher of the following — a rate two points higher than your contract rate or the Bank of Canada conventional mortgage five-year rate.

It’s important not to get carried away with how low the rate it is; calculate your affordability, not only using the stress test, but also by adding in the cost of emergency repairs and extenuating circumstances. All of these events can cost a lot of money. If you’re already stretched financially, managing them can be difficult. Make sure you can afford the mortgage you’re taking on for the long term.

Rubina Ahmed-Haq is a journalist and personal finance expert. She is HPG’s Finance Editor. She regularly appears on CBC Radio and TV. She is a contributor on CTV Your Morning and Global Toronto. She has a BA from York University, received her post graduate journalism diploma from Humber College and has completed the CSC. Follow her on Twitter @alwayssavemoney.

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Securing a mortgage

Looking to secure a mortgage? Now is the best time to negotiate

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Looking to secure a mortgage? Now is the best time to negotiate

 

Securing a mortgage

The Bank of Canada again held its influential overnight lending rate today at 1.75 per cent, signalling the continuation of a stable interest rate environment – and underlining that now may be the best time to negotiate a mortgage.

Why? We’ll get to that in a second.

First, the BoC held the rate for the fifth straight announcement – it’s been at 1.75 since October 2018 – citing growing evidence that the Canadian economic slowdown in late 2018 and early 2019 is now being followed by a pickup in the second quarter this year. Housing market indicators point to a more stable national market, albeit with continued weakness in some regions.

In addition, the Bank says, continued strong job growth suggests that businesses see the weakness in the past two quarters as temporary, with recent data supporting an increase in both consumer spending and exports in the second quarter, and it appears that overall growth in business investment has firmed.

“The Bank’s language indicates that things will need to change to the positive or negative in order to move from their current rate strategy,” says James Laird, co-founder of Ratehub Inc. and president of CanWise Financial. “Therefore, Canadians can expect a stable rate environment for the foreseeable future.

“This announcement should bring peace of mind to consumers currently in a variable rate mortgage because it is unlikely that the prime rate will increase anytime soon,” he adds. “Going forward, a decrease seems as likely as an increase, which is also good news if you’re in a variable rate.”

Mortgage seasonality

Canadians may also be able to take advantage of seasonality in the mortgage industry to score the best deal on their lending rate. Just like spring is known as traditionally the busy season in real estate, it’s also a very good time of year to secure a mortgage.

Securing a mortgage to buy a condo in Toronto

Ratehub.ca, for example, analyzed historical rate data from 2016 to 2019 to identify the best times of year for Canadians to lock in to a rate, or refinance an existing mortgage.

According to Ratehub.ca’s historical data on the best five-year fixed and variable rates, Canadians have access to the lowest rates during the spring homebuying season – between April and July – every year. The second most competitive time period for mortgage rates occurs between October and December.

A similar story played out in 2017 when the average best five-year fixed rate fell to 2.4 per cent from 3.32 per cent, and the average variable rate dropped from 2.09 per cent to 2.04 per cent.

ALSO READ: Ontario releases plan to address housing affordability and supply issues

ALSO READ: Variable vs fixed mortgages? It’s complicated

A year later, 2018 proved that while a rising rate environment can override the benefits any spring mortgage deals, mortgage holders still benefited from certain promos. The average best five-year fixed rate increased from 2.94 per cent from January to March to 3.07 per cent, but the average best variable rate fell from 2.17 per cent to 1.96 per cent. Lenders actually slashed fixed rates over that period.

Spring promotions

“Lenders and mortgage providers come out with their strongest promotions during the busy spring and summer homebuying season,” Laird says. “Regardless of the interest rate environment, springtime is when lenders are willing to make the smallest margins in order to win business.”

During this period, many lenders will choose at least one rate and term to price very aggressively in order to attract attention to all of their mortgage products. Lenders also come out with special promotion offers to incentivize borrowers to lock in a rate. Consumers can expect to see cash-back deals to help with closing costs and refinance fees. Some lenders offer extra-long rate holds during this period. For example, BMO is currently offering a 130-day rate hold. The “30-day quick close rate” is another promotion many lenders opt for – this is a discounted rate that applies if your mortgage is closing in the next 30 to 45 days.

It’s crucial that lenders remain competitive through the spring market, Ratehub says, to hit their annual mortgage volume targets. In most cases, lenders will hit their targets during the second quarter (April to June) and, as a result, tend to be less competitive with promotions during the latter half of the year.

Consumers will typically see rates fall again in October, in the lead up to Oct. 31, when all of Canada’s major banks end their fiscal year. Lenders that want to get an early start on their targets for the following year often come out with promotions during this time period.

Bank results

Further benefiting the mortgage landscape for Canadians is that Canada’s big banks this week are reporting lower second quarter profits than expected.

“The poor results reported by Canada’s big banks in Q2 2019 could be good news for mortgage consumers,” Laird told Homes Publishing. “In light of these results, it would be unsurprising if the banks aggressively try to win mortgage business by offering lower rates to consumers or promotions to attract more business in the latter half of 2019.”

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Three important questions facing the GTA housing market this year

 

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Three important questions facing the GTA housing market this year

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Three important questions facing the GTA housing market this year

As I predicted last year, our paradigm has shifted due to the government intervention of the stress test as interest rates increased. In a nutshell, the GTA real estate market has since slowed on both the buying and selling sides. All but condo prices have slowed. There is a high demand for the smaller properties, and it appears that first-time homeowners are grasping at the cheapest properties they can get.

There are still three big questions that will determine the playing field for 2019.

1. Where are interest rates going?

The answer is not so simple. In fact, it is almost impossible to answer. Interest rates are the product of the Bank of Canada lending rate, and the BoC determines the lending rate based on the economy. To figure out the economy is like trying to figure out a lock combination with a million different variables. My advice is to play it safe, and if you take a risk, make it a calculated one. I always use the inflation rate for appreciation and worst-case scenarios with my clients.

2. Will the federal government reconsider the stress test?

The stress test was introduced to prevent homebuyers from defaulting on their mortgages in case of an interest rate hike.

Since the stress test was introduced, the real estate market has slowed substantially due to qualification and affordability. This type of government intervention shouldn’t be taken lightly. Although the test was implemented in good faith, the government should have put some measures in place before implementing such a heavy-handed rule. Let me explain why.

Say the stress test was set up when the interest rate was in the low two-per-cent range. The stress test would mean that the qualifying rate was slightly more than four per cent at that time. Fast forward approximately 12 months and at least five interest rate hikes, and we are at a qualifying rate of slightly more than six per cent. Now the same person who qualified a year ago, will have a much lower borrowing power.

Who does this hurt? For starters, buyers who purchased pre-construction and are looking to close in the near future. The original pre-approval they once obtained is no longer valid, and if they can’t borrow the difference or get a co-signer, they won’t be able to close. As a real estate broker, I always warn my clients against such situations, as well as the potential reward if done right.

3. Where is 2019 headed?

Uncertainty is still the driver, but it’s safe to say this is our new normal. Last year, it was pretty shocking for everyone who got caught in the middle of all these new rules and rate hikes. Sellers were refusing to realize price drops, and every few weeks they would slowly introduce a price reduction.

Buyers experienced a harsh reality and were forced to revisit expectations. Although prices dropped, so did borrowing power, which led buyers to go back to renting and attempt to save some more or, as mentioned, lower expectations and purchase the next best property they can afford to get into homeownership.

There are still those who are waiting to close on a purchase and will have to come up with the difference, get a co-signer or go to a B lender and pay higher interest. However, as the dust settles, buyers are finding their confidence again. Sellers are being more realistic, and buyers also have a more practical approach.

Unless we keep seeing interest rate hikes, there is only one way to go, and that is up – as long as the government re-visits the stress test and configures it to adapt to the ever-changing interest rate environment.

ARIE BUZILO is a real estate broker and an investor specializing in buying and selling properties all over the GTA. He works out of Century 21 Leading Edge Realty.

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Variable vs fixed mortgages? It’s complicated

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Variable vs fixed mortgages? It’s complicated

Canadians are now into the busiest season for real estate. More homes change hands during the spring than at any other time of year. One decision homeowners will have to make about their new purchase is the kind of mortgage they will sign up for. Historically, variable rates have saved money, whereas the five-year fixed has provided the stability many conservative homebuyers want.

But that decision is getting complicated. Canada’s biggest bank, RBC, has cut its five-year fixed rate. Several banks, such as TD Bank and BMO Bank of Montreal, have quickly followed and cut their five-year fixed to the same level.

The move by some of Canada’s commercial banks is overdue. Unlike variable rate loans that are affected by the Bank of Canada’s benchmark rate, fixed rates are tied to the bond market. Bond yields have been dropping for the last two months.

Rate savings

The yield for the Government of Canada’s benchmark five-year bond fell from a high of 2.48 per cent on Oct. 5, 2018 to a low of 1.76 per cent on Jan. 3, 2019. This means it’s cheaper for commercial banks to borrow money at a fixed rate. Therefore, they can offer those interest rate savings to their mortgage customers.

The cut to fixed rates has shortened the spread between the variable and fixed rate mortgage. The Bank of Canada usually raises rates by 25 basis points or a 0.25 of a per cent each time. With the BoC hinting at raising rates 2019, one rate hike would mean your variable rate mortgage would become more expensive to service, than if you had locked in at today’s fixed rate.

For the first time in many years Canadian mortgage seekers are faced with a unique challenge. Previously going variable often meant saving money over the long term. Those who had the stomach to handle interest rates going up and down were the perfect candidate for a variable rate mortgage. For those who wanted security of knowing what their payments will look like, the fiveyear fixed has always been popular.

Rock bottom

The other problem is rates have been at rock bottom for so long that for many homebuyers it’s hard to see rates rise anywhere close to normal. But if we look back to before the financial crisis, before rates were slashed to record low levels, the prime rate at commercial banks was 6.25 per cent in July 2007. At that level, rates were considered much more normal.That rate is 2.5 per cent higher than what prime is today.

What new homebuyers and those renewing their mortgage term have to ask themselves is, could I afford this mortgage loan if rates were two to three percentage points higher?

Canadians need to prepare for higher rates, by making lump sum payments and accelerating their regular payments. Take advantage of lower interest rates, and if I was in the market for a mortgage today, I would strongly consider locking into the special fixed rates being offered by banks, because it seems it is almost guaranteed to beat the variable rate in the next five years.

Rubina Ahmed-Haq is a journalist and personal finance expert. She is HPG’s Finance Editor. She regularly appears on CBC Radio and TV. She is a contributor on CTV Your Morning and Global Toronto. She has a BA from York University, received her post graduate journalism diploma from Humber College and has completed the CSC. Follow her on Twitter @alwayssavemoney.

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Canadian interest rates

Fixed mortgage interest rates fall, but future hikes likely

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Fixed mortgage interest rates fall, but future hikes likely

Canadian interest rates

Well, that didn’t take long. We reported on Jan. 9 that mortgage interest rates might actually take a dip in the coming weeks.

“The (Bank of Canada’s) moderated outlook in the last two announcements has caused bond yields in Canada to drop lower than any point in 2018,” James Laird, co-founder of Ratehub Inc. and President of CanWise Financial mortgage brokerage, told HOMES Publishing. “However, we are yet to see a corresponding decrease in mortgage rates. We would advise consumers to keep a close eye on mortgage rates in coming weeks.”

RBC first to lower rates

And sure enough, a week or so later, RBC has done just that – lowering its posted five-year fixed rate to 3.74 per cent from 3.89 per cent. It was the first time RBC has lowered this rate since October 2017.

“RBC is the largest mortgage lender in Canada, so whenever they move their mortgage rates, we can expect that the other four banks will follow suit. We anticipate that the other big banks will soon have a publicly posted rate of 3.74 per cent as well.”

Experts have expected this move from lenders since bond yields dropped in December 2018, Laird says, after the BoC announcement stating that future rate hikes would be slower and less frequent. The most recent Bank on Jan. 9 announcement highlighted policymakers’ concerns with Canada’s energy and housing markets, which suggested that rates will be stable for a longer period of time than had previously been anticipated.

Deep discounts

The Bank of Canada held its target for the overnight rate at 1.75 per cent on Jan. 9, where it has been since October 2018, and is lowering its growth forecast this year for Canada and around the world.

Canadians who need a mortgage this year should frequently check rates and mortgage providers. As the spring homebuying market approaches, says Laird, many lenders will offer deep discounts and promotions in order to attract new customers.

“Anyone looking for a variable rate should act quickly, because the current stable interest rate environment is causing lenders to reduce the discounts being offered on variable rate mortgages,” he says.

Let’s explore a couple different scenarios.

 

Scenario 1: $400,000 mortgage 

According to Ratehub.ca’s mortgage payment calculator, a homeowner with a $400,000 mortgage and five-year fixed rate of 3.89 per cent will have monthly mortgage payments of $2,080.

Comparatively, a homeowner with a five-year fixed rate of 3.74 per cent would have monthly mortgage payments of $2,048.

A 0.15-per-cent difference in their mortgage rate would lower mortgage payments by $32 per month, or $384 per year.

 

Scenario 2: $800,000 mortgage 

A homeowner with an $800,000 mortgage and five-year fixed rate of 3.89 per cent will have monthly mortgage payments of $4,161.

Comparatively, a homeowner with a five-year fixed rate of 3.74 per cent would have monthly mortgage payments of $4,096.

A 0.15-per-cent difference in their mortgage rate would lower mortgage payments by $65 per month, or $780 per year.

 

Hikes likely to come

Personal finance guru and Homes Publishing columnist Rubina Ahmed-Haq says the Bank remains optimistic about Canada’s economy, noting it has performing well overall. In its statement, the Bank says, “Growth has been running close to potential, employment growth has been strong and unemployment is at a 40-year low.” But still not enough to raise rates at this time.

Still, consumers can expect rates to begin to inch higher in the coming months, she says. Forecasters are predicting two hikes this year, down from earlier predictions of as many as three increases in 2019.

 

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Bank of Canada holds interest rate for now, but hikes still to come

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Bank of Canada holds interest rate for now, but hikes still to come

 

Bank of Canada

The Bank of Canada held its target for the overnight rate at 1.75 per cent on Jan. 9, where it has been since October 2018, and is lowering its growth forecast this year for Canada and around the world.

After raising the rate three times last year, some experts expected the Bank would do so again, either in late 2018 or early this year.

So, what does this latest non-action mean, and what can Canadian consumers expect in the coming months?

“The Bank gave several reasons for its decision to keep rates steady,” says Rubina Ahmed-Haq, personal finance guru and Homes Publishing columnist. “This includes lower oil prices, a weaker outlook for the global economy and Canada’s economy slowing more than expected.

Weaker investment

“It was a surprise that market pessimism did not come up,” she adds. “Despite stock market volatility making headlines for the last two months, there was no mention of the wild swings investors have been experiencing. The Bank did talk about weaker consumer spending and housing investment. This could be because of Canadian investors watching their portfolios and not feeling as confident in their spending.”

Sill, Ahmed-Haq says, the Bank remains very rosy on Canada’s economy, noting it has performing well overall. In its statement, the Bank says, “Growth has been running close to potential, employment growth has been strong and unemployment is at a 40-year low.” But still not enough to raise rates at this time.

Energy sector a concern

“The energy sector has been a concern for the Bank for some time now, but there seems to be a new focus on the housing sector, especially on the impact of mortgage guidelines changes and the five rate increases that have happened in the past 18 months,” James Laird, co-founder of Ratehub Inc. and President of CanWise Financial mortgage brokerage, told Homes Publishing.

Ahmed-Haq and Laird agree we should still expect higher rates in the coming months.

“The policy interest rate will need to rise over time into a neutral range to achieve the inflation target,” says Ahmed-Haq.

Rate hikes to come

Forecasters are now predicting two rate hikes this year, down from earlier predictions of as many as three rates hikes in 2019.

“The Bank’s moderated outlook in the last two announcements has caused bond yields in Canada to drop lower than any point in 2018,” says Laird. “However, we are yet to see a corresponding decrease in mortgage rates. We would advise consumers to keep a close eye on mortgage rates in coming weeks.”

 

Highlights from the Bank’s announcement

  • Bank of Canada maintains target for overnight rate at 1.75 per cent
  • Canadian economy performing well overall
  • Employment growth strong
  • Unemployment rate at 40-year low
  • Canadian consumption spending and housing investment weaker than expected
  • Housing markets adjusting to municipal and provincial measures, new mortgage guidelines and higher interest rates
  • Household spending to be dampened by slow growth in oil-producing provinces
  • Real GDP growth forecast at 1.7 per cent for 2019
  • Growth of 2.1 per cent forecast for 2020

 

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Where are interest rates headed in 2019?

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Where are interest rates headed in 2019?

The Bank of Canada has raised interest rates five times since July 2017. As of the Oct. 24 announcement, the overnight lending rate is 1.75 per cent and prime at commercial banks is 3.95 per cent.

Higher rates means money is getting more expensive to borrow and if you have a variable mortgage rate your monthly payments have gone up.

In its latest announcement the Bank of Canada indicated the various reasons they raised rates. This included the finalized trade agreement that replaces NAFTA called the United States Mexico Canada Agreement or USMCA.

In its press release after the announcement the Bank states that the USMCA agreement will help “reduce trade policy uncertainty in North America, which has been an important curb on business confidence and investment.” The trade agreement was the biggest roadblock for the Bank to raise rates. This was evident when they held rates steady for the several past announcements while the U.S. Federal Reserve continued to hike its benchmark rate. Although not always the case, in most instances, if the Fed raises rates, Canada does as well.

The Bank also points to a solid global economic outlook as a reason to hike rates. Here at home it says “The Canadian economy continues to operate close to its potential and the composition of growth is more balanced… Real GDP is projected to grow by 2.1 per cent this year and next before slowing to 1.9 per cent in 2020.”

After the announcement, Bank of Montreal economist Benjamin Reitzes noted that the BoC statement shows, “Policymakers are clearly upbeat on the outlook, and assuming the economy doesn’t face any big speed bumps, expect rates to continue to push higher at least through early 2019.”

BMO economics predicts three rates hikes in 2019. In January, April and July.

So as rates are expected to rise, what costs can Canadians expect to go up?

Mortgages

Anyone with a variable mortgage rate or any loan with a floating rate, like a line of credit, is already seeing their costs rise. Commercial banks usually hike rates as soon as the Central Bank does. If you have a variable rate mortgage on your condominium, you may want to inquire about fixing your rate today. If you’re worried about your affordability, by fixing your rate you will know how much your payments will be for the remainder of the term.

Savings rates

One of the positives of a higher rates is we get better return on the money we’re putting away. This includes money we have in our savings account. Fixed income rates will rise as well and banks are able to offer a higher rate of return on any money you invest with them.

Stronger dollar

A rate hike almost always means our currency gets stronger. This can be great for Canadians travelling abroad as you get more money during currency exchange. But a stronger dollar can spell trouble for companies trying to export their goods and services. The stronger dollar makes it more expensive for any foreign buyer.

Life could cost thousands more

A report by Environics Analytics released after the October rate hike reveals in the long run the interest rate hike could cost Canadians thousands. They say, so far, the effects of higher rates has been limited to short-term debt and variable rate debt. But when fixed rate debt starts to catch up life will get more expensive. They say “the true long-term effect of these interest rate hikes will be approximately $2,516 a year per household or 5.0 per cent of discretionary income.”

The sense from economists is interest rates are expected to rise going into 2019. If you’re concerned you need to stress test your finances, calculate how much your debt would cost if rates were 2 or 3 percentage points higher. If you find that might be unaffordable make the changes now to prepare for what seems to be inevitable.

Rubina Ahmed-Haq is a journalist and personal finance expert. She is HPG’s Finance Editor. She regularly appears on CBC Radio and TV. She is a contributor on CTV Your Morning and Global Toronto. She has a BA from York University, received her post graduate journalism diploma from Humber College and has completed the CSC. Follow her on Twitter @alwayssavemoney

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Mortgage Rates web

Interest rate hikes may not cost you as much as you think

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Interest rate hikes may not cost you as much as you think

Mortgage Rates web

By Wayne Karl

When the Bank of Canada announced an interest rate hike  on Oct. 24 – and within hours all of Canada’s major banks followed suit in hiking their prime lending rates – consumers largely groaned.

All of CIBC, TD Canada Trust, Scotiabank, RBC Royal Bank and BMO Bank of Montreal almost immediately issued virtually the same statement, word for word: “(Insert bank name here) announced that it has increased its prime lending rate by 25 basis points from 3.70 per cent to 3.95 per cent, effective Oct. 25, 2018.”

Yes, the numbers, too, are identical.

BoC had already raised its influential overnight rate target three times since July 2017, to 1.5 per cent from 0.75 per cent, and now this most recent hike to 1.75 per cent, while hinting that further increases are likely.

For mortgage holders, though, the increases may not cost you as much as you fear.

Fixed rates

The majority of Canadian mortgage holders are on fixed-rate products, which is why a more moderate pace of rate increases likely won’t impact the market significantly, according to Canada Mortgage and Housing Corp. (CMHC).

Nearly half of existing mortgages in Canada will come up for renewal in 2018, according to a data release from CIBC Capital Markets. However, despite having to renew their mortgage in a rising interest rate environment, a borrower with a five-year mortgage rate may be able to get a better deal on their mortgage renewal today than when they entered the housing market five years ago.

According to calculations from mortgage rate comparison website  Ratehub.ca:

The best five-year fixed rate in September 2013 was 3.29 per cent. With that rate, a borrower with a $400,000 mortgage amortized over 25 years would have had a monthly mortgage payment of $1,953 over the last five years.

If that same borrower renewed their mortgage at today’s best five-year fixed rate of 3.19 per cent, their monthly mortgage payment would decrease by $17 per month to $1,936.

“Canadians who require a new mortgage in coming months should lock in a fixed rate as soon as possible,” says James Laird, co-founder of Ratehub Inc. and president of CanWise Financial. “This includes those who are purchasing a home, and homeowners whose mortgage is coming up for renewal.

“Remember that, on average, mortgage providers will offer their existing customers a discount of 0.25 per cent off their posted rate on a renewal. However, there may be more competitive rates out there. Be sure to shop around online or use a mortgage broker to negotiate the best rate for your renewal.”

Laird says borrowers should begin shopping around 120 days in advance of their renewal date in order to negotiate a competitive mortgage rate.

A rising interest rate environment could put downward pressure on home prices, he says, but upward pressure will come from predicted economic growth, lack of housing supply, immigration and first-time homebuyers.

Variable rates

“Borrowers should expect variable rates to perfectly correlate with Bank of Canada rate increases,” Laird says. “Variable rate mortgage holders should also be prepared for several increases to their interest rate in coming months and, with general interest rates in Canada on the rise, fixed rates will rise as well. However, those currently in fixed rates have nothing to worry about until their next mortgage renewal date.”

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