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Rising Bond Yields Pressuring Fixed Rates

The 5-year government yield (which leads 5-year fixed mortgage rates) pierced 2.80% today.

It’s risen almost 35 basis points in two weeks.

That’s squeezed gross lender margins on deeply-discounted five-year rates to near 1.00% (1.20% can be considered “normal”). 

As a result, ultra-low fixed rates are in danger of ticking 10+ basis points higher, especially if this yield trend continues.

The 5-year rates we’re seeing in the market seem like aberrations in light of all this.  Depending on what province you live in, there are brokers and/or lenders advertising 3.54% to 3.79% on 5-year money. Those rates are gifts from the heavens. They may not last long (in the short term at least) unless yields drop soon.

Keep in mind, these perspectives refer to fixed rates in the short term. This says nothing about what rates will do further out, and is not a recommendation to lock in (if you’re in a variable). For advice of that sort, the best bet is always to call your mortgage advisor and ask for guidance based on your specific circumstances.


Rate Predictions

Mortgage shoppers crave certainty, so they continually question brokers or bankers about where interest rates are headed. If this is something you’re prone to doing, first ask yourself if your broker or banker can predict the next global catastrophe, war, financial crisis, or sovereign insolvency. If not, you may want to rethink your question.

Unforeseeable events impact mortgage rates at unforeseeable times.

The events of this past week are the latest reminder of how fluid rate expectations can be….

A month ago, some economists were contemplating a BoC rate hike as soon as May.

Now, you see:

the benchmark 5-year yield plummeting Wednesday to 2.43%
deeply discounted 5-year fixed rates falling back to 3.79%
market rate-hike expectations being pushed out to September/October (based on Overnight Index Swap [OIS] yields).
The prediction business is as predictable as it never was.

That’s not to say rate projections are completely worthless. Following the bottom of an economic cycle, rate increases are more probable and it’s useful to consider the magnitude of “reputable” rate hike forecasts. (You can define reputable. Some people use the Big 6 banks’ projections.)

From those forecasts, your mortgage professional can calculate how the expected rate increases might impact your future mortgage costs (and budget). Then they can analyze alternative rate scenarios, apply historical research, and factor in your risk profile & financial picture to recommend a mathematically sound term.

Just try to remember: When you hear a mortgage rate forecast that sounds plausible, distinguish if it’s a short or long-term forecast. Reputable near-term rate calls are more accurate. Moreover, each has different relevance. For example:

Reading that rates may rise next week should have little impact on your long-term mortgage strategy—unless you need a rate lock soon.
Specific rate prognostications like “prime rate will hit 6% by 2016” should go in one ear and out the other, given the enormous margins of error in long-term economics. (Although, that’s not to say you shouldn’t plan for higher rates.)
To put everything in the present context, consider that the Big 6 currently expect prime rate to climb 200+ basis points in the next 24 months. They project 5-year bond yields rising over 125 bps.

Even if these ball gazers happen to be right, it doesn’t mean rates will escalate in a straight line. Long-term rate trends are always speckled with short-term counter-trends (some believe we’re in one now).

What becomes important is keeping short-term market emotion from steering long-term mortgage strategy.

First National’s Option 60

Last week, First National rolled out a 3.79% 5-year fixed offer called “Option 60.”

It’s a fairly decent rate for a nationally-available full-featured mortgage that includes a:

  •  
    • 60-day rate hold [Most competing full-featured mortgages at this rate have only a 30- or 45-day hold.]

  •  
    • 15% lump-sum prepayment privilege
    • 15% payment increase option
    • Double-up payment option
    • Online account portal that’s among the best in the industry
    • One-year home warranty plan [restrictions apply; N/A in BC]

What’s more, there are no onerous restrictions (like once-a-year pre-payment limits, refinance restrictions, or crazy penalties).

The Option 60 is available on both high- and low-ratio mortgages (as long as the mortgage meets CMHC guidelines).

First National offers this rate and product to all of its brokers with no status hurdles to meet. Other things being equal, lenders that provide good rates and service to all brokers without volume minimums deserve some extra support.

First National is Canada’s largest non-bank lender, and the third biggest lender in the broker channel (as of Filogix’s Q3 report).

 Toronto Mortgage Broker, have questions? We can help.


Top 10 Effects Of The New Mortgage Rules

We may not go 10 for 10, but crystal ball-gazing is fun nonetheless.

In this humble of spirits, we present ten trends to watch out for in 2011, courtesy ofFlaherty & Co.’s new mortgage regime:

  1. Lower purchase and refinance demand will depress mortgage volumes, sparking greater rate competition as lenders battle for less business
  2. A small portion of home buyers will sprint to buy homes with a 35-year amortization before March 18, followed by downward pressure on home prices after March 18 as the amortization reduction removes market liquidity
  3. Negative personal consumption and wealth will result thanks to equity take-out restrictions, rising rates and softening home prices
  4. Unsecured debt usage will increase as homeowners are restricted from accessing as much of their equity, leading to even greater bank profits in unsecured lending
  5. Default rates will see no material improvement
  6. No significant improvement will occur in the number of risky borrowers, due to no change inTDS limits or Beacon score requirements
  7. HELOC rate discounts will be less frequent as some non-bank offerings disappear and HELOC funding costs inch higher
  8. Banks will pick up mortgage market share
  9. More private lenders will offer high-interest uninsured 2nd mortgages to 90% LTV
  10. If amortization restrictions accelerate falling home prices, we’ll see somewhat greater default risk and more negative equity situations among low-equity homeowner.

The Reason Bank CEOs are Superheroes (to their shareholders):

BankersIn one epic and brilliantly calculated move, bank CEOs like TD’s Ed Clarke and BMO’s Bill Downe convinced Canadians they had consumers’ interests at heart, and convinced the Finance Department to:

  • Overlook credit card debt, a market that’s yielded double-digit growth for banks and funded $260 billion of purchases last year
  • Ignore the risk of unsecured lines of credit (ULOCs) so banks can continue offering them to their customers when 85% LTV refinances aren’t enough [Brokers don’t generally sell ULOCs.]
  • Quash broker’s primary source of growth (first-time buyers) with amortization restrictions
  • Cut off consumers’ ability to refinance profitable high-interest consumer debt into low-interest mortgage debt
  • Eliminate HELOC competition from non-deposit-taking lenders which rely on securitization (HELOCs have been massive money-makers for banks, with 170% growth over the last decade. HELOCs now account for 12% of household debt. Banks like TD, BMO, and RBC are largely unaffected by the new HELOC rules because they don’t depend on securitization. )
  • Increase HELOC funding costs at banks with broker channels (like Scotiabank and National Bank—both of which securitize some of their readvanceable products, according to sources)
  • Brush aside the consultative recommendations ofCAAMP aimed at permitting well-qualified borrowers to retain mortgage flexibility in exchange for tighter borrower qualification standards
  • Make it harder for more people with collateral charge mortgages to change lenders (Thanks to the lower 85% LTV refi maximum. Bravo to TD’s Ed Clarke on this one.)

In short, the big bank CEOs orchestrated a virtuoso performance for their shareholders, at the expense of sensible mortgage holders. It’s moves like this that justify every crumb of their $5 to $15 million+compensation packages.

Buying a home is about to get tougher

The federal Conservative government is expected on Monday to introduce new rules aimed at toughening up mortgage lending in an effort to curb further growth in record household debt levels.

The key change Finance Minister Jim Flaherty is likely to unveil is a cut in the maximum amortization period, to 30 years from 35 years. Mortgages with amortization periods longer than 30 years will no longer qualify for government-backed mortgage insurance, which is required for buyers with less than a 20% down payment on a home.

Government sources also told the National Post Mr. Flaherty is expected to lower the maximum amount Canadians can borrow against the value of their homes, to 85% from 90%, and remove federal government backing of home equity lines of credit, or so-called HELOCs.

The sources, who spoke on condition of anonymity, add the minimum down payment, at 5%, will remain as is. Further, there will not unveil any plan to target condominium purchases by requiring monthly condo fees be added to the list of expenses that is measured against income to decide whether a buyer can afford a mortgage.

The changes to the country’s mortgage rules — the second in as many years — emerge amid rising concern about the record levels of household debt, which measured as a ratio of money owed to disposable income nears a startling 150% as of the third quarter of last year. That surpasses the level of debt held by American households, whose appetite for borrowing helped stoke the financial crisis of a few years ago.

The Bank of Canada recently warned debt levels are growing faster than income, and the risk posed by consumer indebtedness to the domestic economy would continue to escalate without a “significant change” in how consumers borrow and banks lend.

Bank of Canada governor Mark Carney said policymakers have a “responsibility” to look at the benefits of pre-emptive action. Joining the chorus have been chief executives at the big banks, most notably Ed Clark at Toronto-Dominion Bank, in publicly advocating for tougher mortgage standards.

Last Friday, Prime Minister Stephen Harper acknowledged his government was considering changes to the rules governing mortgages.

He said the government “remains concerned about growth in the level of household debt and will look at taking prudent steps to moderate that growth. We will look at what steps may or may not necessary.

In February of 2010, Mr. Flaherty moved to toughen up the mortgage rules amid worries that Canada was in the midst of a housing market bubble. The reforms, since introduced, compelled borrowers to meet standards for a five-year fixed-rate mortgage, even if the buyer wanted a shorter-term, variable rate loan; reduced the amount Canadian can borrow against their home, to 90% of the property value from 95%; and require purchasers of rental properties to issue a 20% down payment as opposed to 5%. The moves played a role, observers say, in slowing down real estate activity.

The new changes, though, reduce even further the amount people can borrow against their homes, to 85%. Also, the changes target HELOCs, which Mr. Flaherty cited as a source of concern in a recent interview. Home-equity lines of credit surged 170% over the past decade, or twice the rate of mortgage growth, and now represent 12% of overall household debt. With the new rules, Ottawa will no longer back the HELOC, as it was doing up until now through mortgage insurance. Instead, sources say, the government will signal that the banks are on the hook for any default linked to a HELOC it issued.

The cut in the amortization period, or the time required to pay off the home loan, follows a 2008 move by Ottawa to stop insuring 40-year mortgages.

While the federal government looks to curb borrowing, economists say the Bank of Canada may have to follow by raising its key interest rate sooner rather than later. The central bank issues its latest rate statement on Tuesday and it is expected to hold its benchmark rate at its present 1% level as signs indicate the economy may be benefiting from renewed business and consumer confidence in the United States.

Stewart Hall, economist at HSBC Securities Canada, said the extraordinarily low-rate environment “provides all the incentive to consumers to borrow and spend and none of the incentive to save. You can try to [regulate] that away but that is apt to be fraught with significant frustration.”

pvieira@nationalpost.com

Lower Posted Rates – More Than Meets The Eye

Last November the banks decided not to raise their 5-year posted mortgage rates, despite raising their discounted rates.

Their stated reasoning was to bring posted rates more in line with discounted rates. In that way, their posted rates would appear more competitive.

As we wrote before, however, the decision had far greater implications than that. Among other things, it affected qualification rates, penalty calculations, and cash-back down payment mortgages.

Here’s a deeper look at the impact…

Qualification Rates

Lenders use the qualification rate (currently 5.19%) to determine if you can afford a higher payment in the event that rates rise.

The government mandates that the qualification rate be used when approving all high-ratio mortgages with a variable-rate or a 1- to 4-year term.

Had the banks raised posted rates along with discounted rates (as they normally do), posted rates would be 45basis points higher today—5.64% instead of 5.19%.

At 5.64% it would have taken about 5% more income to qualify for a high-ratio variable-rate mortgage. Granted, five percent doesn’t sound like much, but if posted rates were suppressed another 1-2% the qualification rate would lose much more effectiveness.

It will be interesting to see how long banks keep posted rates at 5.19% in the face of further rate increases. As noted, doing so would handicap the government’s qualification rules…..unless, of course, something were done to offset lower posted rates—like implementation of a new qualification formula or a lower amortization limit.

One would have to imagine that the Finance Department is fully aware of the banks’ posted rate intentions at this point.

Penalty Calculations

As posted rates go up, interest rate differential (IRD) penalties often go down.

It was therefore disappointing to many potential refinancers to see banks hold down their posted rates. The move has cost some people literally thousands of dollars.

Mortgage broker Steve Garganis recently ran some numbers on how penalties were affected by the banks’ actions (you can read them here). Garganis used TD’sIRD formula in his example but TD is not alone. Other lenders (e.g., RBCBMO, etc.) also use posted rates in their penalty calculations.

Banks definitely had the penalty effect in mind when deciding to hold down posted rates. On the other hand, today’s 5-year posted-bond spread is still wider than its average prior to the credit crisis.* Therefore, one might say the banks are bringing posted spreads more in line with historical norms. In turn, the higher penalties people are paying today are due more to fatter discounts off of posted rates than to historically small spreads.

While current fixed-rate mortgage holders may not be thrilled by all this, future borrowers might be largely unaffected. That’s because, going forward, spreads and posted rate discounts will likely change at the same pace. In that case, future borrowers shouldn’t have to endure IRD penalty calculations that are significantly worse than today.

Cash-back Down Payment Mortgages

Cash-back down payment mortgages are basically the equivalent of 100% financing, with a few more strings.

First off, the rate is higher.  Today’s cash-back down payment mortgages generally sell at posted rates.

Insured 100% financing was usually offered at or near a lender’s best rates.

Secondly, cash-back mortgages have a clawback on the “free” downpayment. This means the bank takes back a pro-rata share of their cash if you break your mortgage before maturity.

Insured 100% financing ended in Canada on October 15, 2008 (see Goodbye to 100%/40-year Mortgages). Since then, cash-back down payment mortgages have been the only real option for those wanting a mortgage with zero down.

Essentially, the lender “gives” you 5% to use as your down payment, and you then mortgage the other 95%LTV at posted rates.

Therein lies the interesting part: banks have effectively “discounted” posted rates by 45 basis points in the last 7 weeks. That means cash-back down payment mortgages have actually become cheaper since November, relative to 95% financing.

In fact, if you factor in the 5% to 5.5% down payment that the bank is giving you “free,” the effective rate of a cash-back down payment mortgage is roughly 4.09% to 4.20% depending on the lender.

Compared to the banks’ current “special offer” rate of 4.24%, 4.09% seems like a steal. Even compared to a deeply-discounted 3.79% rate, a 40 bps premium for zero down seems reasonable.

Mind you, unless you are relatively debt free, have emergency savings, are well-employed, expect good income growth, and absolutely must own a home now, cash-back downpayment mortgages are a bad idea.

Rent and scrounge up a down payment instead.

Debt Growth is Moderating, BOC Deputy Says

Higher mortgage rates and strictermortgage rules are starting to take effect, though Canadians’ debt levels are still too high for comfort.

That was the message from Agathe Cote in her first public speech as a deputy Bank of Canada governor on Monday.

Here’s a sampling of key points from her address yesterday in Kingston, Ontario:

  • The Bank of Canada’s rate hikes and government’s new mortgage restrictions, including more stringent qualifying conditions, higher down payment requirements on rental properties, and lower LTVs on refinances, are “beginning to have an impact” in moderating debt risk.
  • Since the trough of the recession, household credit has grown about twice as fast as personal disposable income. By the third quarter of 2010, the debt of Canadian households had reached 148% of disposable income.
  • Cote spoke of the financial accelerator effect, whereby increases in home prices increase household spending. The basic premise is that when house prices rise, so too does the amount the owner can borrow against the increased equity (via HELOCs, home equity loans, etc.). The money can be used on home renos or other goods and services that can accelerate the rise in house prices, which in turn creates access to additional borrowing and boosting household spending.
  • Cote cautioned that this can also work in reverse: falling house prices reduce household borrowing capacity and amplify the decline in spending. BOC research suggests the financial accelerator effect is “economically significant,” Cote said, noting that the finding is consistent with evidence of a correlation between consumer spending and housing wealth.
  • Over the last decade, the volume of home-equity lines of credit and loans has risen by upwards of 170% – about double the paceof mortgage debt – and accounts for 12 per cent of overall household debt, Cote said.
  • A sudden weakening in the housing sector would have a “sizable” spill over effect on other parts of the economy.
  • “Credit continues to grow faster than income”
  • A hypothetical 3-percentage-point increase in the unemployment rate would double the proportion of loans that are in arrears three months or more.
    A side note: If this were extrapolated to mortgage debt, the arrears rate would jump from 0.43% today to 0.86%. The highest that our records show was 1.02% in 1983 (source: CMHC).
  • Cote said it is the responsibility of financial institutions to ensure their clients don’t take on debt loads beyond their means.
  • The Bank of Canada recognizes that low interest rates are necessary to achieve its inflation target, but that they also present their own set of risks.

Questions On Home Mortgage Refinancing

Are you now feeling the heavy financial burden on your shoulder? Getting a home is not that easy. Yes, your mortgage lender may have promised you an easy payment scheme several years ago but some problems twisted your fate. This leaves you with no choice but to come up with a solid solution on how you can pay back your existing loan.

Millions of homeowners are actually faced with the same dilemma. Don’t wait for the time that you will run out of options. Before you take any further actions, you must pay attention and be directed into the following frequently asked questions on home mortgage refinancing.

1.) Should I refinance my home?

It is quite burdensome to pay for one mortgage payment for your first loan and then settle another payment for your second loan. You will have to shoulder quite a high interest rate if you will settle for such option. Maybe you want to pay for only one mortgage and then reduce the skyrocketing interest rates into an adjustable or fixed rate.

Or perhaps you want to change the current adjustable rate into a fixed rate. Then, refinancing must be your option. Refinancing your mortgage will save you from the private mortgage insurance or PMI especially if you already enjoy 20% equity in your current home.

2.) How will my monthly mortgage responsibility be determined?

The payment that you have to settle on a monthly basis is determined by computing the total amount that you have loaned, the interest rate scheme that you have agreed to, and the number of years that you have specified to pay it back. If you want the adjusted rate mortgage or ARM, it means that you will pay a fluctuating monthly interest rate. Sometimes it will be too much while at times it will be lesser.

3.) Should I decide for home mortgage refinance now?

Your decision to refinance your mortgage should depend on the interest rate at which you can refinance. Take at look at home much you can save on a monthly basis. If by refinancing you can reduce the interest charges that you have to pay for, then, now is the best time. Also, count the number of years left to finish your first mortgage. If you have only five years left to pay it off, then it is not wise to consider this option now.

4.) Can I refinance with only a very minimal cost?

Yes. There are several loan programs available that offer lower cost on refinance mortgage. By availing one of those programs, you save yourself from pulling out the money left in your bank account or from sacrificing the equity of your home.

5.) What other pertinent details should I know?

Before you avail of any refinancing program, it is best to consult several mortgage lenders. Know what they have to offer and how beneficial it can be to you. Be aware of the assessed value of your property. You may ask for your copy from the local tax assessor’s office. Also, it will be of help to know the current trend in the housing market. These details are important and must be weighed when considering mortgage refinancing.

In reality, home mortgage refinance is the best way to save you more money on a monthly basis, avoid any foreclosure notices, and lose the home that you have long dreamed of.

Four Bad Reasons to Refinance Your Mortgage

The sting of regret runs deep. You know the feeling if you’ve ever bought a stock because it was hot, and then watched its value go tumbling down. A poorly planned mortgage refinance can end up the same way, and you could be a lot poorer and your ego a lot humbler.

Mortgage refinancing is a complex transaction that rarely has a no-lose outcome. Usually, a refinance will increase your total interest costs, extend your pay-off date, and generally make it harder for you to own your home free and clear. Minimally, you’ll incur some upfront costs associated with the transaction. Get some peace of mind before you proceed by checking your motivations against these four worst reasons to refinance.

Lowering your payment

A lower payment is a popular reason to refinance, but it’s not always a good reason. Figure out if a lower payment will actually help you by calculating the potential monthly savings, and dividing this amount into your estimated closing costs. The resulting figure will tell you how many months you’ll have to pay on the refinance before you break even on the closing costs.

Next, consider all the factors that could force you to move between now and the breakeven date. Only proceed with the refinance when you’re certain that your home and work situations are relatively stable.

Keeping up with the Joneses

Your neighbours may have refinanced to build a lovely new kitchen. But most normal people, including you, can still cook dinner without a commercial grade stovetop. Resist the urge to refinance “just because.” If you must refinance and remodel, proceed with a focus on increasing the value of your home—which is different from designing a kitchen that will impress your neighbours.

Putting off budgeting

Are you squeezed by your monthly expenses? Don’t assume a refinance is the answer. A wiser strategy is to run the numbers and identify the real source of your troubles. Is it simple over-spending or mismanagement of credit cards? Refinancing for a lower payment, or to consolidate debt, may provide the breathing room you need. But if you avoid addressing the underlying problem, you’ll continue to spend more than you make. That leads to another refinance and another, until your only option becomes bankruptcy.

Buying something you can’t afford

You certainly could fund a Bora Bora vacation with a cash-out refinance, but it’s a risky financial move. For one, you’re putting your house on the line for an unnecessary, one-time purchase with short-lived pleasure. Refinancing is better suited for investments that return value over time, such as a home remodel or a college education. A vacation never adds value and only dilutes your wealth. A second problem with luxury purchases is that they tend to make regular purchases seem inadequate. Take a trip to Bora Bora once, and you’ll likely be tempted to do it again. You’re better off avoiding luxury purchases entirely, unless you enjoy a luxury income.

Keep your wealth and your ego intact by proceeding cautiously on your mortgage refinance. A regretful refinance cannot be undone. It can only be replaced with more of the same.

Source: Barbara Eisner Bayer

Getting the best refinance mortgage rates

Homeowners who want to refinance their mortgage naturally also want to get the lowest possible interest rate they can on their new loan. That’s because a lower refinance mortgage rate means a lower mortgage payment and potentially lower costs to refinance.

It’s not always easy to capture the lowest refinance mortgage rate, and not every borrower is offered the lowest rate that’s available. That’s why it’s helpful to understand the factors lenders use to determine which of the available rates they offer to borrowers.

Here’s a summary:

Credit score. Borrowers who have a high credit score typically are offered better refinance mortgage rates than borrowers who have a low credit score. That’s because the credit score, a numerical representation of the borrower’s credit report, reflects how well the borrower has handled credit in the past.

Points. Borrowers who pay points can buy down the interest rate of their new loan. Borrowers who choose to pay more points, based on the lender’s chart of various rate and point combinations, usually will be offered a lower rate. A “point” is equal to 1 percent of the loan amount.

Loan term. A 15-year mortgage usually has a lower interest rate than a comparable 30-year loan. That’s because the shorter term involves less risk to the lender.

Fixed or adjustable rate. Adjustable-rate mortgages, or ARMs, typically start out with a lower interest rate for the first few months or years than comparable loans with fixed rates. Borrowers should be aware, however, that the initial rate won’t last for the entire term. In some cases, it can rise and result in a sharply higher payment later on.

Loan amount. Home loans for large amounts of money, known as “jumbo” loans, may involve higher interest rates because lenders can’t as easily sell those loans to investors. Borrowers who stick with “conforming,” i.e., not jumbo, loans typically are offered lower rates.

Keeping these factors in mind can help borrowers qualify for the lowest refinance mortgage rates.

Toronto mortgage refinance is your source for bank and mortgage financing. Visit us today.

Read more: Getting great refinance mortgage rates http://www.bankrate.com/finance/refinance/getting-great-refinance-mortgage-rates.aspx#ixzz15O1KbMUS