Mortgage Rates & Mortgage Broker News in Canada

CT's "One-and-Only" Mortgage

Canadian Tire is now the newest player in the "all-in-one" mortgage market.  Their recently launched One-and-Only product combines your mortgage, chequing and savings, loans, and credit cards into one account.

Here's how it works:

• Your incoming funds (like your paycheque) are immediately deposited into a variable-interest-rate "combined" account. 
• Interest on the "variable" account is calculated daily.  CT says this can reduce the interest you pay by lowering your total debt level all at once--even if temporarily.
• Interest on all debt in the "variable" account is at prime rate, currently 6.25%.
• You can lock in up to 10 amounts over $10,000 (like a mortgage, car loan, etc.) at a fixed rate--currently 5.84%.  This rate is non-negotiable.
• Credit is automatically readvanceable.  Therefore, once you pay down your debt, you can run it up again. This is handy for the Smith Manoeuvre.
• The One-and-Only is currently only available in Ontario, BC, and Alberta. 
• CT charges no monthly fees
• There are no appraisal or legal fees if you use CT's partner First Canadian Title to close (instead of your lawyer).

On the downside, the interest rates could definitely be better.  While CT charges 6.25% on the combined account, most people can get 5.35% or less with a traditional variable mortgage.  As Canadian Capitalist notes, "your 'savings' from a combined account does not make up for the cost of not opting for a traditional mortgage."

Nonetheless, CT, which acquired its banking license in 2003, has an eye for growth.  All-in-one products are held by 1/3 of all mortgagors in Britain and Australia and CT think's it can popularize them here as well.  Last quarter, it spent $18 million marketing its new banking products. 

As long as the combined interest rate is at prime, however, the One-and-Only (and similar products like Manulife's "One") might not be adopted as fast in Canada.  There are simply too many alternatives available at rates less than prime.

In any case, if you'd like more information, contact Canadian Tire directly here.  Mortgage planners do not deal in this product.

Mortgage Bytes

• In Thursday's National Post Invis's Neil Glasberg suggested locking in your mortgage rate for piece of mind.  The story flouts research that supports the benefit of variable mortgages, calling that benefit "marginal" over the past 20-years. 
• The difference between variable and 5-year fixed rates is currently about 0.44%.
• In the same story above, the National Post quotes Glasberg as saying half of Canada's mortgage holders have variable rate mortgages.  I'm guessing this is a misprint or misquote.  CAAMP's research suggests 73% of Canadians have fixed rate mortgages.
• Your credit score is the major factor in getting a mortgage.  Yet, only 15% of Canadians have ever requested a copy of their credit report says the Windsor Star.
• With few rentals available, Nunavut is one of the worst places in Canada to be foreclosed on.
• Million Dollar Journey provides some guidelines on what it costs to build a house in Canada.
• Would you pay $202,000 to save $288 a month?  Read this post by HouseHuntVictoria.
• Real Estate Intelligence writes that Toronto is still setting real estate records.
• Canada's subprime mortgage default rate is 3% versus 13% in the States, according to the Financial Post.
• Will financial turmoil keep the Bank of Canada from raising rates?

Why Aren't Rates Going Down?

People have been asking why fixed mortgage rates aren't going down, even though bond rates have dropped over 1/2% since their June high.

MyNext Mortgage's VP of Capital Markets and Treasurer, Boris Kogut, offers this explanation:

“…..all the credit spreads have widened, while the Government of Canada (GOC) bond yields have fallen.  This has resulted in a disconnect of the historical relationship between mortgage rates and GOC rates.  The impact of widening credit spreads is that all mortgage lenders are now paying a higher spread over the GOC rates to borrow funds (and lend these funds to mortgagors.) 

The credit spreads have widened most for non-conforming mortgages, but have only impacted conforming mortgage rates by 20 – 30bp’s (i.e. if credit spreads had not widened, current conforming mortgage rates would have been 20-30bp’s lower.)   This is not just a Canadian phenomenon – it is also taking place in the US and Europe and the expectation is that this will go on for months to come….”

How long will this situation take to resolve itself?  Our industry sources predict from 3 to 12 months. 

In the meantime, 5-year bond rates keep going down, settling Friday near a 4-month low.

What is Interest Capitalization?

By Melany Eastman -- Financial Advisor
Bick Financial Security Corporation

For the past several years Fraser Smith has popularized a strategy called the Smith Manoeuvre. The Smith Manoeuvre essentially transforms your mortgage into an investment loan, so that your interest can be tax deductible. The result is that you pay off your mortgage faster and invest more for your retirement.

One question we get asked from time to time pertains to interest capitalization, a technique used in the Smith Manoeuvre. Here is how interest capitalization works.

Suppose you have a $1400 per month mortgage payment and you want to implement the Smith Manoeuvre. In the first month you would make your $1400 payment as you normally do. Roughly $1,150 of it would go to the bank for interest and $250 would be paid towards your mortgage principal.

You would then immediately borrow back that $250 from a line of credit (LOC) secured against your home. Then you’d invest it. Doing so would yield tax deductions because the interest on an investment loan is tax deductible.

The next month you would make the same $1,400 mortgage payment. However, this time, more would go towards principal reduction (say $252). On your LOC, you would now have access to another $252 with which to invest.

Of course, you need to pay interest on a line of credit. So, in our example, you would pay roughly $2 of interest in the 2^nd month to cover the $250 you borrowed the previous month.

Now comes the point of this article.  Fraser Smith recommends that you “capitalize” this interest. In other words, you would need to leave $2 in your LOC to pay the LOC interest.

Each month you would therefore invest a flat $250. You would likely never need additional cash because the interest on your investment loan would be paid by the extra money you leave in your LOC each month.

This process continues all the way until your mortgage debt has been fully converted to an investment loan. In the end, interest capitalization serves to keep everything in balance.

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A leveraging strategy involves added risks as it is apparent that leveraging magnifies gains or losses. It is important that an investor undertaking a leveraged purchase of mutual funds be aware that a leveraged purchase involves greater risk than a purchase using cash resources only. The information provided is intended for information purposes only and is not, and under any circumstances, to be construed as investment advice. Any numerical values have been described for illustrative purposes. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Consult with your financial advisor before acting on this and/or any investment.

Bank of Canada Holds Interest Rates

Canada's key interest rate remains unchanged after today's Bank of Canada (BoC) meeting.  As a result, variable mortgage rates will likely hold steady for at least six more weeks.

The BoC was conflicted, though, saying that Canada's economy has been strong but that it may be threatened by a weakening U.S. outlook. 

They gave no hint of their interest rate bias for the next meeting on October 16.  However, several economists now feel the Bank's indecision may help keep rates the same through the end of 2007.

Mortgage Bytes II

• "The polls are unanimous in calling for the Bank of Canada to [keep interest rates] steady tomorrow," says BMO economist Douglas Porter. (Financial Post)
• Here's a comparison of Ontario title insurance companies.  The author says TitlePLUS offers the lowest cost and best coverage.  However, he is affiliated with the company. (Toronto Star)
• National Bank's Clement Gignac predicts a 50% chance of recession in the U.S. (Vancouver Sun)
• A U.S. recession would be a speed bump for Canada's economy and lower the chances of rising interest rates next year.  (Financial Post)
• Here are some tips on buying property in the U.S. (Vancouver Sun)

Mortgage Bytes

• The Bank of Canada is expected to leave interest rates unchanged at its next meeting on Wednesday.  However, ABN Amro's Dustin Reid says, "The bank will want to tighten rates before the year is out, and September's meeting will only serve as a temporary reprieve."
• The worst may be yet to come in the U.S. subprime mortgage industry.  U.S. subprime defaults are expected to peak in February or March. 
• Over the past year, U.S. home prices have dropped the most since World War II.
• According to CIBC's Benjamin Tal, "We expect over the next six months, we will see a noticeable softening in the subprime activity in Canada."  Unlike the U.S., however, Canada's subprime mortgage sector has grown 40% year-to-date.  It grew 50% last year.
• According to CHIP, the average new reverse mortgage in Canada is for $85,000, or 30% of a home's value.  Seniors Money International says Canada has a potential $8 billion reverse mortgage market.

New Reverse Mortgage Option

Canada will soon have a 2nd company offering reverse mortgages.  Seniors Money International (SMI) will launch Monday in Toronto and then go national next year. 

Canadian Home Income Plan Corp. (CHIP) is the only mainstream reverse mortgage option currently available in Canada.  CHIP has 6,560 reverse mortgages outstanding.

SMI will compete in several ways with the biggest difference being its roughly 0.75% lower interest rates.

It will be interesting to see how CHIP responds.

Toronto Star Article