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Bank of Canada Keeps Prime at 3%

For the 6th consecutive meeting the Bank of Canada has not moved on the prime rate. While during the election there was building anticipation that the BoC would head most economists calls to raise rates, there has been increasing evidence of slowing growth in the US and EU. The continued sovereign debt issues of many EU countries has created a high level of uncertainty. While a rising prime is inevitable it remains to be seen exactly when that is going to happen.

The Up and Down of Rates in 2011 - Below 4% again

My last most, much too long ago indicated that rates were moving up. Which they did. But since then, with persistent pessimistic outlooks for US and EU growth, they have continued to trend back down. It is unlear at this point as to where rates are going from here. But they have broken down pass the 4% level (5YF) for a number of lenders. While I'm still a firm believer that the safety and security of a 5 year fixed is the way to go for many of my clients a fair argument can be made for variable. While riskier, it is hard to see a bright enough light at the end of the tunnel to think that the level of uncertainty about economic growth is going to change any time soon.

Rates Likely to Rise Sooner than Later

Canada's top central banker sounded a warning about inflation over the weekend, suggesting interest rates may not be on hold much past a spring federal election. Carney said that sustained growth from emerging economies means high commodity prices are expected to stick around for a long time. “Everything else being equal, higher commodity prices usually necessitate higher policy rates," Carney told a meeting of Western Hemisphere finance ministers.

Jan 2011 - Bank of Canada Keeps Rate Steady

As largely expected the BoC kept the overnight and thus the prime rate steady at 1%. That leaves prime at 3% for now. There has been increased consensus that with the continued inflation pressure and slow steady recovery that the BoC will raise rates starting in one of the next two meetings. There have been some suggestions that it could rise by as much as 1.5%. I suspect 0.75 to 1% is more likely at this point.

Fixed rates remain stable and in the 3.79% to 4% range for the 5 year closed.

35 Year Amortization Option Ending

The government has set March 18 as the last day for 35 year amortizations. Key points to be aware of:

1. Lenders will likely stop accepting applications for 35 year amortizations in advance of the March 18 cut off.
2. Approved deals that close after March 18 can still have 35 year amortizations as long as the deal is approved by CMHC/Genworth prior to the date (assuming the lender accepts the deal)
3. Longer term amortizations on conventional deals (greater than 20% down payment) will remain an option with many lenders. In fact 40 years is still available.
4. Porting/moving a mortgage to a new property upon sale of an existing property is not impacted as long as new money is not required. If new money is required then a blended amortization may be an option. However taking the new mortgage with a max 30 year amortization may also be required.
5. This change is great news. The biggest mistake the government made was extend amortizations from 25 years in the first place. Expect that in the future we will see it pulled back to 25 years.
6. Prices will adjust (slowely) to the new amortization. While not so much when supply is low and demand is high, but as we move to a more balanced or a buyer's market, prices will adjust. I don't believe this will happen until the full effect of the shorter amortization is implemented - likely the fall/winter 2011 market.

 

Here is the full announcement:

Release: Department of Finance tightens CMHC rules

 

• For the second time in twelve months, the Department of Finance tightened rules on residential mortgages to help slow the pace of household debt accumulation. Changes include shortening the amortization period to 30 years (which had already been shortened from 40 to 35 years in 2008), withdrawing CMHC insurance of home equity lines of credit (HELOC), and a reduction in the maximum refinance percentage from 90% loan-to-value to 85%. Changes to the amortization period and the refinancing ratio will take effect March 18 and the HELOC change will take effect April 18, 2011.

 

Key Implications

 

• The amortization change may alter the quarterly profile of housing market activity as some sales are pulled forward by households to pre-empt it. But the impact is not expected to be large, nor does it lead us to alter our annual forecast. Existing home sales were already forecast to weaken by about 8% compared to 2010, and prices to slip by a modest 1%. On aggregate, our calculations suggest that 20K sales (annually) may be impacted by the amortization change, with the average price likely to weaken a further percentage point. However, while the last few months of data represented upside risk to our December forecast, today’s measures put our forecast back on track.

 

• The other two changes are more likely to impact consumer durables and housing-related spending. Fro instance, household usage of HELOCs is mostly directed towards renovations, vehicle purchases, and debt consolidation. Yet, on that front as well, the impact is not expected to be large. Our macroeconomic forecasts already embedded a significant slowdown in household debt accumulation and consumer durable spending. The withdrawal of HELOC insurance may cause some substitution toward more traditional mortgages, but very few financial institutions insure their HELOC portfolios.  As such, the change is unlikely to register significantly on the aggregate lending scale. Moreover, less than a fifth of refinancing deals are high loan-to-value (LTV >80%), and lowering the LTV threshold to 85% likely impacts less than a tenth of refi loans through lower amounts and/or alternative vehicles. All said, aside from some distortion on the timing of some heavily credit-dependent activities, the policy changes do not alter our forecasts.

• In terms of monetary policy, this helps take some pressure off the Bank of Canada (BoC).  With all the talk about the non-sustainable pace of household debt accumulation, there was speculation about whether or not the BoC would consider hiking interest rates for reasons not directly related to its inflation-targeting mandate. Such speculation can be put to rest for the time being, and we can go back to focusing on the inflation outlook.

Interest Rates Rise Again Into 4% Range

Interest rates moved up to the 4% range again with the increased prices of bonds.

Rates Continue To Drop 3.89% base, 3.69% special (5YF)

The big 1% jump in rates in early April 2010 have all most entirely been wiped away. Fixed rate "specials" are being offered at 3.69% for a 5 year fixed with most lenders allowing 3.89% for rate holds and most deals.

Continued concerns about the global economic recovery have investors stashing money in the safety of Canadian bonds. While it is hard to say how long rates will stay in this range, these lower rates should help boost purchases in the upcoming fall real estate market.

An increase in inventory and slow sales have instilled a higher level of motivation in sellers than we have seen for a while. Combined with low rates should see buyers getting off the side lines and back into the market. While I personally don't expect further runaway prices, I do believe we will find ourselves in a balanced market for much of the fall with sales dropping off late fall into Nov/Dec.

Rates on down ward trend 4.25% (5YF)

Rates have reasonably quickly pulled back with the 5 year fixed approaching 4.25%. There continues to be a high level of uncertainty as to where rates will go from here but indicators are that we will see some further relief before they change directions. I expect the 4% range to be near the bottom for most lenders.

Fixed rates hit 4.69% a 1% jump in under 30 days!

Fixed rates have moved very quickly from their historic lows of 3.69% to 4.69% with Scotiabank. Most lenders are in the general range. While I expect these rates to come back down it is a reminder of just how fast they can change.

Mortgage Rule Changes For April 19 2010

The government of Canada announced a balanced change to mortgage rules. These changes will not impact most consumers but will reduce some of the riskier lending situations.

Summary of changes:

• All consumers must qualify on the 5 year fixed rate. This likely will be the discounted rate but avoids situations where approvals were granted for variable rates. Sadly this will still allow people ill advised or less educated to get themselves into trouble by going into a variable rate mortgage and then facing much higher payments when rates eventually jump up. Just because you qualify for an amount at today's ridiculously low 5 year fixed rate doesn't mean you can afford your mortgage when rates are 2% higher in a few years.
• Investors MUST put at least 20% down payment. This effectively wipes out the high ratio investment property programs. I never had clients take advantage of those programs as the premiums were very high and the properties would never produce cash flow. This is a very good thing in my opinion.
• Refinance to maximum of 90%. Previously you could refinance your property to 95%. In most situations where someone is refinancing to 95% it is because they are struggling with their cost of living relative to their income. In some cases it is short term due to an unexpected situation but more often is is poor spending habits. The new rule is a good thing as it allows for some deflation in values before the property is underwater and possibly enters foreclosure.

Impact of changes on the housing market?

I don't see how any of the above are going to have any kind of significant change on overall demand for housing. It will take a bit of demand off of the highest risk lending which is a very good thing. The 5 yr rate to qualify will help reduce future foreclosures by a modest amount. But none of the above take active buyers of today out of the market. The only way the housing market is going to slow down is by reducing demand.

More to come?

I would not be surprised to see a last minute additional change of reducing the max amortization from 35 to 30 years. I suspect it would be last minute to avoid a rush on beating the deadline. Because parliament is not in session, the changes can be passed yet and have to wait until then. I expect there to be more changes than just the 3 announced today. However the announcement today should be taken as notice that changes are coming.