| Qualifying Rate | 5.79% |
| Prime Rate | 2.75% |
| Next BOC Mtg. | Sep 8 |
« May 2009 | Main | July 2009 »
Genworth Financial Canada announced the details of its initial public offering today.
Canada’s 2nd largest mortgage default insurer will sell 44.7 million shares at $19 each. The target issue date is July 7, 2009. Thereafter, Genworth Canada will trade on the TSX under the symbol MIC.
The IPO will line Genworth’s coffers with about $635-$730 million.
That’s how a recent IMF paper characterized Canada’s mortgage market.
Among other things, it compared Canadian and American mortgages and listed several key differences. Here are the big ones:
Some other notable statistics and conclusions:
National Bank already has one of the top readvanceable mortgages in Canada. Now it’s better.
NBC has cut its line of credit (LOC) rate down to prime + 0.85% (3.10% as of today). This is the lowest fully-open LOC rate that we’re aware of.
If you add a 4, 5, 6, 7, or 10-year fixed portion, or a variable-rate portion, you can get the AIO LOC rate even lower--to prime + 0.75%. (The AIO can be split into multiple portions.)
National is the 2nd bank that’s reduced its HELOC rate below prime + 1%. That’s good to see. Hopefully it inspires other lenders to price their LOCs more competitively.
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Sidebar: Here are additional details on the All-in-One. For more information, contact a mortgage planner near you.
When breaking mortgage news hits, it will now be posted in near-real-time on CMT’s left sidebar.
This nifty little feature is powered by Twitter. It lets us post news anywhere, anytime, using our cell phones or any Internet connection. Fun stuff.
5-year bond yields are slowly dropping. The yield is now 2.54%. That’s down from the 7-month closing high of 2.81%, set on June 10.
5-year yields are a key driver of fixed mortgage rates. Typically, when yields drop, 5-year mortgage rates drop. In the past few days we’ve seen a handful of lenders lower rates, but just 0.05% or so.
The Big 5 last raised mortgage rates on June 9, when the 5-year yield was 2.68%.
We heard from a bank rep today that one or more lenders are considering charging cancellation fees when a client cancels an approval. (We’re not sure if the fee would be charged to the broker or the borrower.)
Hearing this was both surprising, and unsurprising, at the same time.
It was surprising because some might consider cancellation fees a gutsy move for a lender.
It wasn’t surprising because this is arguably a logical progression in the trend towards lender efficiency.
The idea behind a cancellation fee is to recoup underwriting costs and discourage frivolous applications. Lenders we’ve talked to say it costs them at least $150 to $200 to underwrite a mortgage application. Moreover, cancellations add delays to the system, which disadvantages other customers.
From our own perspective, cancellation fees would be a tough pill to swallow unless the lender’s offerings were clearly superior to the competition. For example, suppose today’s best 5-year fixed rate was 4.15%. Then suppose a lender comes along and offers the option of 4.09% (the best rate in the market), on two conditions:
These are just random numbers but the point is this. Lenders will get creative to gain efficiencies. Some will likely implement a derivation of the above in the months or years to come. As long as the client/broker is given the option of saving money, in exchange for helping the lender improve efficiency, the model could be viable.
If you’re concerned about prime rate rising, you don’t have to worry about inflation—for now anyway.
Headline inflation recently posted its biggest annual drop since 1950, down 1.3%. As for core inflation (which excludes volatile food and energy prices), it rose an acceptable 2% in the last 12 months.
So, with inflation foreseeably in check, what else could push up prime? Well, fortune tellers we are not, but the following can be said for sure. Bond traders will know before we do.
The bond market is where people bet billions of dollars on interest rate movements. It’s a fascinating market to watch. The two-year bond yield can be especially telling. Over time, it’s demonstrated a tendency to lead prime rate. Here’s a chart that illustrates that effect.
The 2-year yield typically rises 3/4% to 1% before prime increases, and it usually does so at least a few months in advance. The exceptions occur when the Bank of Canada makes surprise rate hikes. In these cases, multiple prime-rate increases often follow.
This is all great, but here’s the thing. None of this is probably relevant to your mortgage. That’s because there are problems with using the 2-year bond as a leading indicator:
1) It’s not foolproof. While it may only happen in a minority of cases, there will be headfakes (times when the 2-year rises and prime doesn’t follow). Bond expert, Hank Cunningham, also suggests that the 2-year bond may have less “predictive ability” until the BoC’s current “emergency rate policy” is over.
2) Knowing when prime will rise may not help you.
Let’s examine that last point.
Suppose you were timing when to lock in and you knew with certainty that prime rate would rise in six months. Would that save you money? Yes, you say. It would tell me when I’d need to lock in.
Okay, but what if fixed rates are notably higher in six months? In that case, you’d be worse off by sitting in a variable-rate mortgage and waiting to lock in.
If you’re timing when to lock in a variable-rate mortgage, not only do you need to predict prime rate, you need to accurately predict fixed rates as well. Unfortunately, your chances of being right about both are only 25% (based on random probability).
You’re better off basing your decisions on things you can reasonably foresee. That includes things like your job stability, savings rate, anticipated debts, home equity, your sensitivity to rate changes, historical interest rate relationships, etc. These are the main factors a mortgage professional will assess when advising between fixed or variable rates.
For most people, their odds of success are better if they don’t try to outguess the rate market. Their chances improve even further if they don’t go it alone. Getting professional advice from a licensed mortgage planner increases one’s chances of success regardless of where rates go.
After posting yesterday’s pre-approval story, one reader asked:
Will you undertake to provide your readers with more information regarding the process of hedging?
We surely will. Here’s the gist of it…
Lenders hedge pre-approvals in a variety of ways. Among them, they may do so by buying listed or over-the-counter bond options (puts), or by short-selling bonds.
The cost of doing this can be massive. One industry exec we spoke with said it costs his lender $900 to $1,200 to hedge a 120-day rate hold on a $100,000 mortgage. It’s basically a linear relationship so the costs on a $300,000 mortgage are three times higher.
With pre-approval funding ratios as low as 15%, at some lenders, you can see why these costs are a concern for the industry. That doesn’t include the human resource and other expenses that apply to underwriting and supporting pre-approvals.
By the way, for whatever reason, bank-branch funding ratios are higher than broker-funding ratios. If that doesn’t correct itself, it is very possible that the best pre-approval choices will someday be limited to the big banks. That would really be unfortunate because it would mean far less choice for consumers.
Pre-approvals are something many lenders could do without. The problem (from a lender’s perspective) is that people get pre-approved and then frequently don’t close.
One bank that recently did away with pre-approvals in the broker channel was rumoured to be losing $20 million a year on them.
Pre-approvals are pretty expensive, and the return for lenders is debateable. In most cases, less than one-third of pre-approvals actually close. Meanwhile, the lender is tying up human resources to process the applications, as well as capital to hedge the rates (if rates move adversely, the lender is on the hook, so lenders pay to lock-in the interest rates using derivatives).
In recent weeks, some very big-name lenders have halted pre-approvals--either altogether, or in the broker channel. Two of the most prominent have been FirstLine (a division of CIBC) and TD.
There are still some good lenders doing pre-approvals but their numbers are dwindling. Among the best is ING. ING has solid rates, great perks, and they do a full rate look-back (meaning: if rates fall and then rise again, you automatically get the lowest rate during the pre-approval period).
It’ll be interesting to see what the future holds for pre-approvals. If we had to guess, more lenders may eventually either:
A) Eliminate them; or,
B) Start charging rate premiums (some lenders, for example, already charge 0.10% more for pre-approvals).
We’d love to hear your thoughts and predictions!
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CMHC recently surveyed 2,507 new mortgage consumers. Here’s what they found:
What matters to homeowners:
Other interesting market share stats:
Click to enlarge.
Source: The chart and all data are courtesy of CMHC. For a summary of CMHC’s complete findings, click here.
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“I do think that interest rates will rise, I don't think it will happen in the very near future but three, four, five months from now they will be higher. Definitely a year from now they will be higher. And in two years, they could be notably higher.”
That’s what noted CIBC economist, Benjamin Tal, told the Globe & Mail yesterday. The Globe’s piece questioned whether people have missed the boat on historically-low fixed mortgage rates.
If one had to guess, there’s a good chance that boat has indeed sailed. Perhaps we won’t see 3.50% on a 5-year fixed again for a decade or more. Albeit, no one really knows.
What we do know is that greed can be expensive. Greed makes people wait for rate drops when the trend is clearly up. Greed makes people want something better when today’s rates are absolutely fantastic on a historical basis.
A 5-year fixed mortgage can be had nationally for around 4.35% right now. That’s 1.85% below the average 5-year fixed rate over the last 18 years. (The average is 6.20%, based on 1.5% off posted rates.)
Today’s 4.35% is therefore not a bad boat to catch, especially given the rate risk out there. If the economy rebounds and/or federal budget deficits persist and/or inflation runs up to 3%, five-year fixed rates could easily rise towards their long-term median. It could take a few years, but it’s nonetheless a real possibility. (Click on the above chart to expand it. It shows how rates can easily rise 2% in a typical cycle.)
Given that risk, and given the bargain rates available today, nervous Nellies should keep a tight leash on things.
If you want (or need) to lock in, keep watching 5-year bond yields. If they close above 2.90-3.00%, fixed mortgage rates may rise again.
If bond yields do not break above this level, and there are no new credit market shocks, long-term fixed mortgage rates will probably stay where they are or drift lower.
That’s what it all comes down to in the short-term. Mind you, there’s also the long-term to think about. In the long-term, the bond market is full of headfakes and predicting interest rates long-term is like forecasting the temperature of Christmas 2010. There’s also a host of other factors to consider, like your current mortgage terms and financial situation. This is where good professional advice pays off.
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Sidebar: The first chart above plots rates back to 1991. 1991 was a key turning point in monetary policy because the Bank of Canada adopted explicit targets for inflation reduction. Since then, rates have been on a long-term downtrend. Some people like to include the 1980’s in rate comparisons but doing that is rather dubious. Most economist would argue that the catalysts for 80’s-style 20%+ interest rates no longer exist. Therefore, we’ve decided not to inflate our average interest rates with 80’s data and skew the comparison.
Bank of Canada chief, Mark Carney, repeated his pledge to keep rates low, saying today:
“Conditional on the outlook for inflation, the Bank expects the policy rate to remain at its current level until the end of the second quarter of 2010…”
That “inflation” caveat means there is a chance rates will rise beforehand, but few are brave enough to predict it. Nonetheless, Carney stressed that things can change.
Carney also said people shouldn’t get overly excited about an economic recovery just yet. He noted lots of uncertainty on the horizon, including the Canadian dollar. It’s virtually unprecedented 2-month rise (see chart) is offsetting much of the government’s economic stimulus.
In conjunction with this news, Canada’s 5-year bond yield promptly bounced off of technical resistance and closed near the day’s lows, at 2.75%. It will be interesting to see if it can get through the 3% level. Perhaps we’ll have a respite from rising mortgage rates for a little while. Or perhaps we’re wishful thinkers.
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Sidebar: For those unaware, the BoC sets Canada’s overnight target rate, which guides prime rate. That, in turn, influences variable mortgage rates.
Fixed mortgage rates, on the other hand, are driven primarily by bond yields.
With so many people rushing to lock in fixed rates, many lenders are seeing record volumes. As a result, underwriting delays are widespread.
In many cases, application turnaround times are five or more business days. We’ve heard reports of certain low-rate lenders with 2-week backlogs in their queues.
Normal approval times vary, but have traditionally been 1-2 days, sometimes even same-day.
Tips when applying:
On the plus side, once your application is submitted to a lender, that lender will guarantee you get that day’s rate if you are approved. This generally applies regardless of how long it takes for the lender to issue an approval.
With the leap in bond yields yesterday, a bunch of lenders are once again raising fixed mortgage rates.
TD was the first of the Big 5 today to announce a rate increase. Canada’s second largest bank is hiking rates as follows:
That 5-year move is the biggest increase in almost a year.
TD also announced it is lowering its 1-year rate by 0.15%.
If history is a guide, the other large banks will likely announce their own increases in the next 24 hours.
Assuming the banks all move their 5-year posted rates to 5.85%, that will amount to a 0.60% increase in the last nine days. On a $200,000 5-year mortgage with 25-year amortization, that equates to over $5,700 more interest over five years.
If there’s one bright side, it’s that IRD penalties will potentially fall for certain people who are breaking their fixed-rate mortgages early.
Canadian Mortgage Trends (CMT) delivers the latest mortgage news in Canada for homeowners, online mortgage brokers, and real estate professionals. Legal Information: Consult a qualified mortgage advisor before making any mortgage decision based on information you read here. Similarly, if you see a financial or tax strategy discussed here, always consult a licensed and qualified investment or tax advisor to ensure the strategy is right for you. Mortgages, investment, and tax strategies mentioned on this website are not appropriate for everyone. In many cases, they may not be feasible at all and/or entail serious risks. While reasonable effort is made to ensure the accuracy of information and data contained herein, accuracy, facts, completeness, and suitability can not be guaranteed. Past performance is not a good predictor of future performance. Results, rates, strategies, and terms are not guaranteed and CMT and its affiliates assume no liability for any losses that may occur from your reliance on such information. The information on this site reflects purely our opinions, and not necessarily the opinions of any other party. Readers are welcome and encouraged to leave comments. However, comments that are off-topic, quarrelsome, accusatory without evidence, racially insensitive, profane, slanderous, misleading, made under different names from the same IP address, or otherwise rude or deemed inappropriate by CMT, may be removed without notice. CMT is a news site, and not affiliated with most of the people or companies mentioned. Company logos and trade-marks displayed herein are the property of their respective owners, are displayed for commentary purposes only, are not intended to be used in a competitive manner with said owner, and should not imply an association or affiliation between CMT and said trade-mark owner or its products or services. Information herein is not intended to be, nor does it constitute, mortgage advice, investment advice, tax advise, financial advice, recommendations, or solicitations to buy or sell securities. CMT personnel and related parties may have an interest in the mortgages, services, companies, products, or securities mentioned on this site. Please contact us if you require clarifications of the above. CMT is owned and operated by McLister Enterprises Inc. For questions about the news you see here, mortgages, copyright, or republishing CMT content, please contact us at (800) 280-2460 or info@canadianmortgagetrends.com. Thank you for reading CMT. Copyright 2010. All rights reserved.
Civility Lost
When someone criticizes real estate pundit, Garth Turner, their blog often gets inundated with not-so-friendly comments from Garth’s followers. Case in point are these comments left on Greg Williamson’s blog recently.
It seems Greg put out a web video about future mortgage payment shocks that questioned Garth Turner’s grim real estate views. Turner’s followers barraged Williamson with some of the rudest blog comments we’ve ever seen.
This is not meant to be a commentary on Turner or Williamson’s viewpoints. Each have their own valid beliefs. The point is this. There’s no place for hate-filled commentary in a rational debate. If adults can’t get across their points with civility, they don’t deserve the airtime.
Props to Greg for standing up and publicly defending himself. He did not delete one post (that we could see), despite commentators hurling expletives and making numerous tasteless references. Greg is far more tolerant than we would have been.
Posted at 01:35 PM in Mortgage Commentary | Permalink | Comments (19)