Mortgage Rates & Mortgage Broker News in Canada

New Regulations for LOCs and Mortgages

The Department of Finance (DoF) put new credit card regulations in force yesterday. A few of the rules also apply to credit lines and mortgages.

The DoF says the new regs are designed to “ensure that consumers have access to credit on terms that are fair and transparent.”  It told us the following regulations will now apply to secured and unsecured lines of credit:

• A prominent summary box must now appear on credit contracts, disclosing all material fees, rates, etc.
• New restrictions now apply to debt collection practices (for example, lenders can no longer hound delinquent borrowers after certain times of the day)
• All credit disclosures must be made in language that is “clear, simple and not misleading”
• New rules now specify when statements and rate change notices must be sent to consumers

The following regulations now apply to mortgages:

• The requirement to provide a summary box on the mortgage contract
• The above restrictions on debt collection practices

More Background…

A 1-Year Fixed Strategy

The odds are fair that prime rate is heading 25 basis points higher in one of the next two Bank of Canada meetings. (See this Reuters’ poll)

After that increase, many analysts foresee a pause of at least six months before rates resume higher. Rates are then expected to climb modestly until prime rate gets closer to its 4.65% ten-year average.

This scenario has some people thinking that a variable rate is just what the doctor ordered. If you happen to be in that boat, there’s an even better strategy to consider.

If you do a little digging you’ll find various brokers offering 1-year fixed rates near 2.25%.  These offers are a fantastic alternative to variables, for a few simple reasons:

1. If the BoC hikes rates 1/4% in the next few months, your 2.25% one-year fixed will be equivalent to a prime – 0.75% variable.  (Prime – 0.75% is presently an extremely good rate for a variable.)
2. A 1-year fixed gives you total protection against further rate increases for one whole year. If the BoC hikes again within 12 months (very possible), you’ll instantly save money over a deep-discount variable.
3. Renewing in one year affords the opportunity to switch into a variable at a potentially better discount than you can get today. (There’s no guarantee, but the chances are pretty good.) That switch can be free of charge depending on the mortgage type, lender and/or the broker you’re dealing with.

So, if you’re hunting for a variable, play the odds and have a peek at today’s 1-year fixed terms instead. Your mortgage planner can provide complete details on either option.

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Common Sense Reminder:  Rate predictions are subject to change due to random events. Take the above analyst forecasts for what they’re worth. One-year terms are not suitable for everyone.

BMO Drops 5-Year “Low Frills” Rate To 3.59%

BMO continues to aggressively execute its new discount mortgage strategy.

It just sliced its 5-year fixed "low frills” rate from 3.79% to 3.59%.

It’s the lowest publicly-advertised 5-year fixed rate we can remember from a big bank.

BMO says this deal “saves homeowners over $60,000 in interest costs compared to leading competitors’ five-year special fixed rate at 3.89 per cent and 35-year amortization.” This estimate is based on the total projected interest costs of a $200,000 3.59% and 3.89% mortgage, over 25 and 35 years respectively. (The comparison isn’t wholly accurate because rates will change at renewal in 60 months.)

BMO has a great rate, no doubt.  But if you’re entertaining this offer, remember three things:

1. The fine print. Barring sale, you can’t break BMO’s mortgage and go elsewhere. Most people do break their 5-year terms early. In addition, pre-payments are capped at 10% a year. See: BMO 5-year mortgage special
2. Various competitors will match or beat 3.59% on a 5-year. Shop around!
3. Depending on your rate outlook and risk tolerance, a 5-year term, even at 3.59%, is not necessarily the lowest cost option for the next five years. Talk to your mortgage planner and have him/her line up all the alternatives for you.

Analysts Debate Housing Crash Potential

Housing prices are unsustainably high in Canada’s major centres, says a report from the Canadian Centre for Policy Alternatives (CCPA).

“The steep rise in house prices in so many cities displays all the hallmarks of an accident waiting to happen,” says the author and researcher, David Macdonald.

  (Chart courtesy of C.D. Howe Institute. Click to enlarge.)

Macdonald makes some fair points about the overvaluation of real estate in certain markets (here’s his full report).

He feels the catalyst for any large price declines will be mortgage rates. Canadian real estate bubbles “have historically been burst by relatively small increases in interest in mortgage rates,” he told Business in Vancouver.

“All you need is a 1% increase in the mortgage rate above the two-year average in a given month and that’s what popped every single bubble in Canada, two in Vancouver and one in Toronto.” (For the record, inflation, excess supply, and speculative buying also played a big hand in past bubble burstings.)

The solution, Macdonald says, is to:

A)  “Slowly” go back to 25-year amortizations on insured mortgages;

B)  Ensure the Bank of Canada increases rates by no more than approximately 1% over a rolling 24-month period; and,

C)  Encourage banks to forego mortgage profit and refrain from passing along rate increases when the Bank of Canada hikes its overnight rate.

From a practical standpoint, these “solutions” make little sense.

For one, long-term amortizations are already significantly priced into home prices. Tens of thousands of buyers have used 30- to 40-year amortizations. Therefore, home prices have already been bid up with the aid of longer amortizations. Eliminating long-term amortizations at this point may be too late. It could potentially pull the rug out from demand and accelerate the natural price declines that analysts say are coming.

Secondly, the Bank of Canada has one overriding target: inflation control. All else comes secondary. If inflation is approaching the danger zone, the BoC will raise rates—regardless of the critics, home prices, currency rates, etc.

Thirdly, most borrowers with long-term amortizations are well-qualified and able to withstand price declines and payment increases.  Removing financing flexibility from strong borrowers penalizes responsible Canadians and offers little benefit in return. Remember, 35-year amortizations carry only modestly more default risk than 25-year amzs—statistically speaking.

As for banks taking a hit by not raising rates in the face of soaring funding costs, this could be the most ludicrous proposal we’ve seen in months, for four reasons:

1. Banks have a mandate not to lose money;
2. Bank shareholders would revolt against the resulting compression in interest margins;
3. Postponing rate increases only delays the inevitable. When mortgage funding costs skyrocket (i.e. when market rates for BAs, bond yields, etc. jump higher) banks must raise their rates at some point.
4. Big 6 rate fixing would be predatory to non-bank lenders (who don’t have the balance sheets to withstand extended margin compression). Mortgage rate controls would therefore violate free-market pricing and jeopardize smaller lenders.

Macdonald’s unrealistic “solutions” may be the reason critics call his report a left-wing ploy for headlines. Whatever the case, there are no shortage of counter-opinions to refute impending doom in Canadian housing. One is this report from the C.D. Howe Institute, coincidentally released on the same day.

Report author, Jim MacGee, says: “A comparison of housing market policies in Canada versus the US…suggests that there is little likelihood of a US-style surge in foreclosures or a collapse of house prices in Canada.”

Canadian lenders have “avoided the sharp decline in underwriting standards seen in the U.S…and continue to mitigate the risk of a massive wave of defaults in the future.”

MacGee defines the Canadian government’s exposure to “higher-risk loans” as “small.”

All things considered, few would argue that real estate is not richly valued in our major cities. Accordingly, most believe a natural price correction is coming—anywhere from 5% to 15% (more in some areas and less in others). This correction should likely be sufficient to deflate home prices without any further government or bank intervention.

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CCPA:  Founded in 1980, the Canadian Centre for Policy Alternatives (CCPA) calls itself “an independent, non-partisan research institute concerned with issues of social, economic environmental justice.” The CCPA is a registered non-profit charity and depends largely on the support of its 12,000+ members. More…

C.D. Howe:  The C.D. Howe Institute is a “national, nonpartisan, nonprofit organization.” C.D. Howe began in 1958 to research and promote educational activities on issues related to public economic and social policy. It is currently chaired by former Bank of Canada governor, David Dodge. More…

Mortgage Careers of The Week

This week's featured mortgage careers... 

Company:  Verico CML Canadian Mortgage Lender Inc
Position:  Mortgage Broker
Location:  Saskatchewan

  ***************

Company:  Mortgage Architects
Position:  Residential Underwriter
Location:  Mississauga, ON 

Click on the position title above for more information. 

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Advertise your mortgage career opening today. Click here to post. Or browse CMT's Mortgage Jobs Database.

Talking With John Webster

Scotia Mortgage Authority (SMA) is the broker division of Scotiabank, and it currently originates more than 50% of Scotiabank's residential mortgages.

Last week, SMA became the top-volume lender in the broker channel, based on Davis + Henderson’s first-half 2010 origination statistics. It’s the first time SMA has achieved this ranking on a year-to-date basis.

The company is obviously doing something pretty well to attract the business it has. To find out what, we connected with John Webster, President/CEO, Scotia Mortgage Authority. John is an interesting individual to talk with because he truly knows the business inside out. He was kind enough to share his perspectives here:

John Webster Interview

Average Mortgage Grows 36% In 48 Months

Over the last four years the average Canadian mortgage has increased in size by 36%, according to data from Ipsos Reid’s Canadian Financial Monitor.

There’s also been a slight shift towards variable rates.

	2006	2010
% of Households with a mortgage	34%	34%
Avg. Mortgage Balance	$105,000	$143,000
% with fixed rates	71%	68%
% with variable rates	29%	32%

Going forward, people will be watching to see if rising rates and/or falling home prices reverse the trend. If so, average mortgage balances could drop for a while.

Conversely, there is always a possibility that down payments will shrink and/or people will take out more equity from their homes. Either of these things would counterbalance the above and support mortgage balances to some extent. 

It’s difficult to speculate, though, since historical data on average balances, down payment size and equity take-outs is hard to come by.

Canadian Interest Rate Forecast

Economists are paid handsomely to tell us where interest rates are headed.  They have access to every data source, academic study, historical backtest, and analysis tool imaginable. So if you're creating amortization models based on future rate forecasts, the estimates of bank economists can be a useful guide. 

Below you'll find a summary of the latest year-end interest rate projections from each of Canada’s Big 5 banks. Remember to use them only as a rough guide because rate outlooks have considerable margins of error.

Overnight Rate Forecast

The Bank of Canada's overnight target has a direct impact on variable mortgage rates.

Bank	2010	2011
BMO	1.00	2.50
CIBC	1.00	2.00
RBC	1.25	2.75
Scotia	1.00	2.25
TD	1.00	2.00
Year-end Avg	1.00	2.25
Chg vs Today	+0.25	+1.50

(All figures rounded to the nearest 1/4 point increment.)

5-Year Government Bond Yield Forecast

Government bond yields are major drivers of fixed mortgage rates.

Bank	2010	2011
BMO	2.45	3.58
RBC	2.45	3.50
Scotia	2.70	3.50
TD	2.40	3.05
Year-end Avg	2.50	3.41
Chg vs Today	+0.36	+1.27

(CIBC's 5-year bond forecast was not available.)

Variable-Rate Mortgage Forecast

Big bank economists have chopped their rate-hike forecasts again.  TD made the biggest adjustment earlier today. It slashed its 2011 year-end overnight rate estimate by one whole percentage point.  This underlines how dramatically expectations can change in just a few short months.

On average, major economists now expect a 150 basis point increase in the overnight rate over the next 16 months.  Their outlooks, if accurate, imply a 4.25% prime rate by December 31, 2011. Prime rate is currently 2.75%.

Based on a 70 basis point average discount from prime, this suggests 5-year variable rates in the 3.55% range by year-end 2011.  That's lower than today's typical discounted 5-year fixed rate.

As for the next rate hike, the signals are mixed. Canadian bond dealers are all expecting a 1/4 point increase at the Bank of Canada's September 8 rate meeting. The financial markets, however, are pricing in just a 30% probability of a hike.

After the next rate increase, most analysts now seem to expect the BoC to pause for a while.  "The coming policy pause could now easily last a year," says BMO.

Fixed-Rate Mortgage Forecast

Banks foresee 5-year bond yields climbing 127 basis points in the same 16-month timeframe.  That would put the 5-year yield at 3.41% by the end of next year.

Assuming a typical 120 basis point spread above yields, this suggests deep-discounted 5-year fixed rates could rise to roughly 4.61% by year-end 2011.

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Things To Note:  These forecasts are made by the banks and are subject to frequent change. This data is provided only for general interest.  Always discuss your needs and risk tolerance with a mortgage professional before acting on any information you read online. History has shown that it’s near impossible to accurately predict interest rates long-term so use these figures at your own risk. That said, while economist projections are often wrong, they are still one of the better sources of educated opinion on interest rates.

“Chg” = the expected change in rates from today. In other words, Chg is the average forecast minus today’s rates. All forecasts are based on the respective year-end.

Not all contributors have published updates since CMT's last rate forecast review. For banks providing mean quarterly overnight rate forecasts, we have averaged their Q4 and Q1 forecasts to estimate year-end figures for 2010 and 2011. Results are rounded to the nearest 1/4 point, in keeping with the Bank of Canada's rate setting increments.

Data Sources:  BMO, CIBC, RBC, Scotiabank, TD 

Practical Education

A commenter wrote yesterday about how easy it is to get into the mortgage business, suggesting that we’re not a true “profession” given the low barriers to entry.

We don’t like to admit negatives about the industry we love, but the comment rang somewhat true.

Training and practical experience requirements do need to be strengthened in our business. Consumers' interests are not maximized when:

• A rookie broker can be licensed and provide mortgage advice in as little as 1-4 months, depending on the province.
• A bank teller can move from the counter to selling mortgages with a few days of training, some manuals, and no licensing.

You don't realize how mishandling a mortgage can seriously impact someone's financial life until you've been in the business a year or so and see what can go wrong.

Hopefully, regulators eventually realize the importance of practical education pre-requisites. Experience counts. Many (but not all) new brokers are simply unequipped to advise borrowers on a debt that will cost tens of thousands in interest.  Telltale signs include insufficient knowledge of:

• Lender policies
• Product differences
• Competitors’ products
• Term selection, etc.

Formal internship requirements and greater practical knowledge testing are just two possible solutions.

Whatever the answer may be, it should apply equally to employees of financial institutions (albeit, the disconnected web of federal and provincial laws don't make that easy). At the moment, for example, the playing field between bank reps and mortgage brokers is far from even when it comes to licensing and educational requirements.

The benefit of such changes—if implemented—would be a better-advised consumer and a stronger reputation for the industry as a whole.

BMO’s Pricing Strategy & Market Share

BMO says its mortgage balances grew 0.5% last quarter. It was the first such increase since it exited the broker market in 2007.

“We are successfully replacing the runoff of our broker-channel loans with our branch originated (mortgages),” says BMO, whose quarterly market share decreased once again. 

BMO now owns an estimated 9.3% of the mortgage market, a number that’s been falling for several quarters.

BMO is hungrily trying to recoup that share, partly by slashing advertised rates.  Two examples are its 3.79% low-frills 5-year fixed and its 4.95% 10-year fixed. They’re the lowest advertised rates by any national lender for these terms. (Of course, brokers and branches can and will do better for well-qualified applicants.)

This, of course, begs the question:  Will BMO’s overt rate competition pay off? 

ING Direct is widely credited with starting the deep-discount mortgage rate model in the late 1990s. Since then, TD, RBC, and BMO have each taken a stab at the “no haggle” below-market pricing model. The result was that their margins collapsed, driving each of them back to the more concealed and profitable “selective-discounting” strategy.*

It remains to be seen if BMO sticks it out this time, and if any other Big 6 banks follow its lead. CIBC has come the closest with its cash-back switch program. But, while the switch program had fantastic effective rates, CIBC’s nominal (advertised) rates haven't had the sizzle of BMO’s.

If competitors do join BMO in openly advertising deep-discount rates, margins will fall all around and BMO may be no better off.

So far, however, BMO says it’s “pleased with the success” of its new rate promotions. “Our goal is to grow market share and we remain focused on improving the business through investment in the sales force and achieving productivity gains.”

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Partial Sources: BMO Q3 Report, BMO Q3 Presentation

*  Selective discounting is where a bank provides its best rates only to those who negotiate for them.