Tag Archives: Mortgages

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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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Are American style mortgages coming to Canada?

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Are American style mortgages coming to Canada?

Are American style mortgages coming to Canada? Bank of Canada Governor Stephen Poloz has encouraged financial institutions to start looking at new ways to offer mortgage products – including establishing longer term mortgages, much like those in the U.S.

Poloz recently spoke to a group of finance and mortgage professionals, impressing upon them that mortgage products need to innovate. Among other suggestions, he proposed the idea of longer mortgages. “One basic idea would be to encourage more diversity in mortgage durations. It is true that most financial institutions offer fixed-rate mortgages longer than five years.”

Few Canadians, he says, take advantage of longer mortgages, but that could change. “Forty-five per cent of all mortgage loans have a fixed interest rate and a five-year term. In comparison, just two per cent of all mortgages issued last year were fixed-rate loans with a term longer than five years.”

The U.S. has had 30-year mortgages for decades, but in Canada, most mortgages are still five-year terms that are renewed as we amortize our loan.

So, are these long-term products a good idea for Canadian consumers? There are pros and cons.

Pros

Longer mortgages are a great option for anyone who doesn’t like to spend time renegotiating the terms of their mortgage agreement every five years. Most of us take on a 25-year amortization, but are forced to talk to the bank every five years when the term is up.

Longer mortgages would be especially good for those who don’t shop their mortgage around and stay with the same financial institution until the end of the amortization.

Cons

But for anyone who likes to save money, it’s not a good deal. If you compare the data, in Canada we make smaller interest payments on our loan compared to homeowners in the U.S. The five-year fixed mortgage was created in Canada, albeit in the 1800s, so homeowners had the opportunity to pay more down at the end of the term, without penalty. As anyone who has a mortgage knows, there is a limited sum you can pay above and beyond your regular payment. Also, every five years you can renegotiate the rate – which during an environment of falling rates, is very advantageous.

Poloz also seems to like the idea that was announced in the spring federal budget – that the Canada Mortgage and Housing Corp., beginning this fall, will help first-time homebuyers by taking an equity share in their home, up to 10 per cent to help lower their payments. He calls this an example of how the mortgage industry is innovating.

Still, when it comes to longer term mortgages, don’t expect this change to happen anytime soon. It’s all just talk right now. But coming from the Bank of Canada governor, that is significant. He emphasizes that the system is not broken – it has served Canadians and financial institutions well. But he also says the mortgage industry is pretty much the same now as when he got his first mortgage in the 1980s. And that, he says, feels a little stagnant.

The mortgage experience across Canada is very different, he says. This means there has to be several products available that give homebuyers options, because no one homebuyer is like another.

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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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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Homebuyers undeterred by changes in mortgage landscape

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Homebuyers undeterred by changes in mortgage landscape

Mortgage web

Though 2018 was not the best year for the mortgage landscape, Canadians remain hopeful about buying a home.

A new survey from mortgage rate comparison site Ratehub.ca survey found that, despite recent regulatory changes and interest rate hikes,71 per cent of current non-owners plan to buy a home in the future. And 59 per cent of prospective first-time homebuyers plan to purchase a home within the next two years.

This year saw a number of changes that affected the costs of ownership. In January, the mortgage stress test came into effect, which lowered affordability for Canadians with conventional mortgages by around 20 per cent, Ratehub.ca says. In addition, through 2018, the Bank of Canada announced three 25-basis-point interest rate hikes. (These increases are almost always immediately followed by mortgage rate hikes at Canada’s major banks.) Meanwhile, home prices in large cities continued to edge upwards.

Young Canadians most optimistic

Ratehub.ca, however, says younger Canadians remain the most optimistic about the prospect of homeownership, with Millennial and Generation Z Canadians leading the charge in homebuying intent. According to the survey, homeownership is a goal for:

  • 87 per cent of Generation Zers
  • 81 per cent of Millennials
  • 64 per cent of Generation Xers
  • 54 per cent of Baby Boomers

Canadians’ high intent to purchase is tempered by several possible homeownership hurdles. When first-time buyers were asked about their primary barrier to entering the housing market:

  • 44 per cent cited insufficient down payment funds
  • 17 per cent cited housing market uncertainty
  • 12 per cent said their household income was too low to enter the housing market
  • 9 per cent preferred to maintain housing flexibility
  • 6 per cent said their credit score was too low to qualify for a mortgage

Many Canadians also expect home prices and mortgage rates to continue their upward trend in 2019. Among Canadians who plan on entering the housing market in 2019, 68 per cent believe mortgage rates will increase next year, while 58 per cent believe home prices will rise.

Better understanding needed

An eagerness to enter the housing market, however, hasn’t resulted in a better understanding of mortgage regulations amongst first-time homebuyers, Ratehub.ca says. Forty-seven per centof prospective first-time homebuyers are unaware of mortgage qualification rules that came into effect in 2018.

“The biggest hurdle for first-time homebuyers is saving up for a down payment,” says James Laird, co-founder of Ratehub Inc. and president of CanWise Financial. “While first-time buyers can take advantage of programs like the RRSP Home Buyers’ Plan which are tailored for their needs, buyers can also benefit from building a realistic savings plan to hit their goals.”

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Home prices and affordability still a concern – CMHC Mortgage Consumer Survey

Higher rates and new rules cooling the condo market

 

 

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Home prices and affordability still a concern – CMHC Mortgage Consumer Survey

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Home prices and affordability still a concern – CMHC Mortgage Consumer Survey

Mortgage

Rising home prices and affordability continue to weigh on prospective homebuyers, according to Canada Mortgage Housing Corp., in its 2018 Mortgage Consumer Survey.

Indeed, for first-time buyers, price and affordability are the most important factors they consider when buying a home – more than type of neighbourhood, proximity to work and overall condition of the home.

While decreasing steadily for four consecutive surveys, more than one-third (37 per cent) of homebuyers continue to feel concern or uncertainty when buying a home. “Concerns related to affordability top the list with more than 50 per cent of concerned buyers worrying about paying too much for their home while nearly one-third worry about rising interest rates and mortgage qualification,” the survey says.

Other survey highlights include:

  • Eighty-five per cent of first-time buyers spent the most they could afford on their home purchase.  However, a majority (76 per cent) are confident that they will be able to meet their future mortgage payment obligations.
  • Sixty per cent of first-time buyers and 69 per cent of repeat buyers indicated that, if they were to run into some financial trouble, they would have sufficient assets (such as investments and other property) to supplement their needs.
  • About 50 per cent of homebuyers agreed they would feel comfortable using more technology to arrange their next mortgage transaction. However, the majority agree it is important to meet face-to-face with their mortgage professional when negotiating and finalizing their mortgage.
  • Slightly more than half (52 per cent) of homebuyers were aware of the latest mortgage qualification rules. About one in five first-time buyers indicated the rules impacted their purchase decision with most opting to decrease non-essential expenses, purchase a less expensive home or use savings to increase their down payment.
  • Consumers continue to show confidence in their homebuying and mortgage decisions, with 80 per cent believing that homeownership remains a good long-term financial investment and 66 per cent believing the value of their home will increase in the next 12 months.
  • More than one in five (22 per cent) first-time buyers were newcomers to Canada and almost 50 per cent were millennials (aged of 25 to 34), down from 60 per cent in 2017.

RELATED READING

5 steps to solving the housing affordability issue in Ontario

Build For Growth: Housing Affordability

Higher Rates and New Rules Cooling the Condo Market

 

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BMO chases first-time home buyers with cash-back mortgage promo

BMO chases first-time home buyers with cash-back mortgage promo

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BMO chases first-time home buyers with cash-back mortgage promo

The Globe and Mail

Bank of Montreal is courting potential first-time home buyers with an unconventional offer of up to $1,000 cash back on some new mortgages.

The promotion launches at a moment when the bank, which is Canada’s fourth largest by assets, is keen to boost its share of the mortgage market. But it also appears tailored to help acquire new clients by promising some relief on the costs of a first mortgage, while requiring that the payments be deducted from a BMO chequing account.

Competition for new residential loans is poised to intensify as Canada’s mortgage market shows signs of slowing growth. The pressure comes from several sources: Interest rates have risen from rock-bottom lows, consumers are heavily indebted, and the federal government has introduced stricter rules on new mortgages in an effort to cool overheating prices in Toronto and Vancouver.

http://www.theglobeandmail.com/report-on-business/bmo-chases-first-time-home-buyers-with-cash-back-mortgage-promo/article33810371/


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Canada’s largest private mortgage default insurer is matching CMHC’s premium hikes

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Canada’s largest private mortgage default insurer is matching CMHC’s premium hikes

Financial Post

It took Canada’s second largest mortgage insurer about 12 hours to match premium hikes to mortgage default insurance announced January 17 by Canada Mortgage and Housing Corp, the Crown corporation that controls a majority of the market.

Genworth Canada said January 17 that it would be increasing its transactional mortgage insurance premium rates for homebuyers, essentially duplicating the increases brought in by CMHC. The increase in premiums depends on the down payment — they are rising more dramatically for loans with higher down payments — but the premium for consumers with a loan-to-value ratio up to and including 95 per cent, will rise to four per cent from the current 3.6 per cent on March 17 for both companies.

http://business.financialpost.com/personal-finance/mortgages-real-estate/largest-private-mortgage-default-insurer-is-matching-cmhc-premium-hikes

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