Mortgage Bytes

Commentary

  • Lock-in-Mortgage A prominent lender sent this email out recently:

“We are seeing some borrowers take on the risk of Variable rates, when based on their profile they should be in a fixed rate mortgage.  When the BOC starts increasing interest rates, your customer’s options for locking in may not be as attractive as they are today.  And that could end up costing them more money over the term than it would if they choose to lock–in today.

  • Did you know the Canadian government guarantees 100% of CMHC-insured mortgages and 90% of privately insured mortgages (up to $200 billion)?  That’s according to the Star’s Ellen Roseman.  She thinks Ottawa should cut back its mortgage insurance guarantees because of growing risk.  Star Article

40-Year Amortizations

  • Mark-Carney The Bank of Canada’s Mark Carney told Members of Parliament: “We have concerns with the increased prevalence of very long amortization and higher value mortgage products. They add to momentum in the housing market and if everyone has a 40-year amortization mortgage, then you just have higher housing prices.”  Nonetheless, Carney feels Canada is not following in America’s footsteps.  He said housing problems are “not possible in our system, to the U.S. magnitude.”
  • Scotia’s Derek Holt says 40-year amortization risks are “misunderstood.”  He says “these new products actually extend near-term credit quality and the housing cycle by offering flexibility in a shock environment and bringing in new buyers.”
  • In Jonathan Chevreau’s look at 40-year amortizations he says “If you can’t afford a home, rent and save money for a down payment.”  He suggests couples save $10,000 a year using tax free savings account. Then, “with well-chosen investments, the tax-free growth should [result in] a 25% down payment on a home in a few years.” Sounds good on paper.  But three years of saving $10,000, and a 10% return, yields about $35,000.  If that’s used as a 25% downpayment it implies a house price of $139,000.  With Canada’s average house at $314,279 that isn’t going to buy much.
  • Finance Minister Jim Flaherty said he’s “watching” the recent “tendency…to longer amortizations and smaller down payments.”  He suggests it’s not a problem now but “could become a concern over time.”

Interest Rate Trends

  • Fed Economists think the U.S. is finished cutting rates for a while. If so, and IF Canadian bond yields are also near a bottom, the only way fixed mortgage rates will fall much more is if spreads narrow.
  • “The story for 2009, and potentially 2010, is inflation. With inflation we will have higher interest rates.” — CIBC’s Benjamin Tal.  Globe & Mail
  • Mark Carney says the Bank of Canada has had to cut rates more than it normally would because big banks are hesitant to lower rates much more.  TheStar.com
  • Expect the Bank of Canada to cut rates 1/4% on June 10 before pausing, says BMO Senior Economist Michael Gregory.
  • “Trading in federal funds futures suggests investors expect the (U.S.) Fed to start raising rates again as early as this fall to deal with inflation.”  Globe & Mail
  • According to the Star, TD expects a 1/2% rate cut in both June and July, with no hikes until next year.  (That seems surprisingly aggressive.)

Housing Trends

  • Falling-Home-Prices TD economist Craig Alexander reminds us that home prices can change fast.  “The U.S. went from double-digit gains to outright (price) contraction in a matter of six months. That is a bubble bursting.”
  • “There’s a sense in the market that the worst is over as far as the subprime-mortgage market is concerned in the U.S.” – CIBC’s Benjamin Tal   The Province
  • CMHC forecasts a national rental vacancy rate of 2.8% for 2008.
  • In Alberta, new real estate listings leaped 36% in the first quarter versus last year. Nationally they rose 6%.
  • 48% of Canadians would consider buying a condo.  Last year the number was 39%.

Industry News

  • Lender stock prices might not fare well with a weak economy says Andrew Bell.  BNN Story
  • CHIP reverse mortgage originations were up 10% in its latest quarter, versus the prior year.  CHIP’s average interest rate spread (rate charged – cost of funds) on reverse mortgages is 3.27%.  The average loan-to-value of a CHIP reverse mortgage is 36%.

Miscellaneous

  • supreme-court The Supreme Court of Canada reserved its decision on the Lipson (interest deduction) case in order to write its opinions. A transcript of the decision was announced Tuesday.  We’ll post a copy once received.
  • CAAMP has launched www.mortgageconsumer.ca, its new consumer education site.
  • Ottawa is Canada’s #1 “Best place to live” according to Moneysense.  Victoria, BC is #2 on their list.
  • From the “every-little-bit-helps” department:  Scotiabank will round up debit purchases to the nearest dollar and then deposits the change in your savings account.
  • Canada need not fear stagflation.
  • 40% of Canadians pay interest on their monthly credit card balances.  The Telegram
  1. Hi,
    As a new home owner, I’m finding this site extremely helpful! Thank you.
    Our house doesn’t close for a month and I’ve been on the fence about a variable or fixed rate. Our options are a variable of 4.05% or a 5 year fixed at 5.49%.
    One of your points states, “We are seeing some borrowers take on the risk of Variable rates, when based on their profile they should be in a fixed rate mortgage…”
    I would like to know how I can determine my profile? Our account manager has advised us to take advantage of the variable rate and lock in when things start to move.
    I agree with this plan, however, I’m also very aware that such a large discount on a fixed rate may not be available.
    We have the cash flow to sustain a rate increase of 2-3% and don’t mind absorbing the risk of a variable rate.
    I’ve become fanatical about reading up on market news and I don’t expect to be blindsided but knowing my profile would be helpful.
    Thanks again for your site!
    Colin

  2. Hi Colin,
    Just some comments from another homeowner. I agree with you that you will likely not get the discounted rate should you go with a variable rate and switch to a fixed rate. A mortgage specialist told me that generally, one gets the posted rate in these situations.
    Since you have the cash flow to absorb a 2-3% increase by going with a variable rate, have you considered a longer term than 5 years? The rate may be higher at 7 or more years but with fixed rates being very low, you could likely get some sort of discount and have the extra piece of mind of fixed payments for longer. If fixed rates increase somewhat over the term, what difference would it make since you are willing to allow for higher variable rates? Good luck with your decision.
    Dan
    Thunder Bay

  3. Hi Dan,
    Thanks for your comments. My concern right now is that there’s a $360/month difference between the variable and fixed rate.
    If the BoC opts for a slight rate drop on June 10th, that figure grows.
    Over the course of the year(s), that’s a substantial saving.
    After reading the latest from Dr. Milevsky (April 14th post), it would seem sticking with a variable rate will save a large percentage of homeowners some well deserved income.
    Although, this appears to be a time of great uncertainty so who knows if there’s continued savings to be had in a variable rate…
    Colin

  4. Hi Colin,
    If you’ve got equity in your house, a tolerance for risk, a good job, and the excess cash to handle a 25% hypothetical payment increase, then a variable might be a fit your profile.
    Regarding locking in, you should ask your account manager what his/her conversion rate is. Ask what you’d get today if you locked in your variable rate to a fixed rate. It will almost never be as good as the best fixed rates available at the time.
    Depending on your mortgage size, however, if it’s within ~2/10% of the best fixed rates at the time then it’s pretty good. Most lenders will, in fact, offer discounts to posted rates on conversion, with non-bank lenders offering the best conversion rates by and large.

  5. Rob,
    The email form the “prominent lender” seems strange. Since when do big lenders care about a mortgage “costing [a borrower] more money.”? This lender must really think that the BoC is going to raise rates dramatically in a very short time to issue this warning. The current spread between a 5-year fixed vs variable is about 150 bps.
    Based on their “profile”? Everyone has to qualify at a 3-year fixed.
    Strange.

  6. Hi Jim, Thanks for the note. I’m not sure when this lender expects rates to rise. But they have a point. A trememndous number of people have moved into variable rates lately. Many of them might not be perfect fits for variables, despite the fact that they can qualify at the 3-year fixed rate today. A lot of people have been extrapolating Milevsky’s study to imply that variables are great for everyone. They are not. Yet people have been blindly piling into them like commuters on a Bloor subway at rush hour. Hopefully rates stay low and variables turn out to be a great choice, but no one can see the future.

  7. Hi Rob,
    Thanks for your response. This is our first home (the deal closes mid June), so we really don’t have equity built up. We do have a tolerance for risk and great jobs with steady incomes, though we’re far from being able to handle a 25% payment increase (are most people? I’m just asking).
    We haven’t funded our mortgage yet so we’re still being offered a very attractive fixed rate of 1.5% off posted. We’ve been told that when/if we lock in we’ll be able to receive a discount, just not as high.
    I’m trying to decide if riding a low variable for 6-12 months and then locking in is worth the initial savings even if that means locking in at a reduced discount…

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