To kick off 2017, in today’s post we’ll take a look at how the world’s largest economies are likely to impact Canadian mortgage rates in the year ahead. While it may not seem obvious at first glance, events in far off places can and do impact the rates we pay on our mortgages.
The global economy is more interconnected than ever and a small, open economy like ours is influenced by many factors beyond our borders. It is readily apparent that developments in the U.S. will have a significant impact on our economic momentum and mortgage rates in the year ahead, but so too might the next euro-zone crisis (this time involving Italian banks) or the growing pains of China as it continues to undergo its fundamental (and unprecedented) transition from an export-based manufacturing economy to one that is service-based and domestically focused instead.
Here is a look at the key factors in the world’s largest economies that mortgage borrowers should be keeping an eye on, with a brief look at the Canadian economy as well. This will serve as an outline of the themes that we will be returning to as we try to interpret and forecast mortgage-rate movements in the year ahead. read more…David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
The U.S. Federal Reserve raised its policy rate from 0.50% to 0.75% last week, as expected. And while the Fed essentially left its previous projections for the U.S. economy intact, it is now positioning the U.S. bond market for three additional rate hikes in 2017 (up from two hikes in its prior forecast).
The Fed’s forecasts have been wide of the mark for years (it had previously forecast three hikes in 2016) but bond-market investors seem to be buying the Fed’s view more so now than they have over the past several years, and that has pushed U.S. bond yields sharply higher.
The current narrative is that President-elect Trump will push through corporate tax cuts that will spur business investment and increase the demand for (and cost of) labour, and that he will also introduce massive new infrastructure-spending initiatives. If these developments play out as expected they will portend higher inflation, and investors are driving up U.S. bond yields in anticipation of this outcome (and they are taking Canadian bond yields, and our fixed mortgage rates, along for the ride).
Time to scratch my contrarian itch. read more…David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
Last week the Bank of Canada (BoC) announced that it would leave its overnight rate unchanged, as was widely expected, and in its accompanying statement the Bank explained how current economic momentum, both at home and abroad, has contributed to its cautious overall view.
Here are the highlights from the BoC’s latest statement, along with my take on the implications for both our fixed and variable mortgage rates: read more…David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
The latest round of mortgage rule changes kicked in last week and lenders wasted no time in adjusting their product offerings, in some cases by adding new rate premiums and in others by pulling products altogether.
While these changes were not welcomed by borrowers, or by many people who work in mortgage-related fields, our policy makers got exactly the result they were looking for. They had become increasingly concerned that an extended period of ultra-low mortgage rates was fueling an unsustainable rise in house prices in hot regional markets and was exacerbating our average household debt levels, which today stand at record levels.
Ideally, our mortgage rates would have risen naturally, but aside from the short-term post-U.S. election spike that pushed them a little higher, that just hasn’t happened. And since market forces weren’t going to materially raise mortgage rates on their own, our policy makers decided to implement another round of mortgage rule changes to make them rise, this time by limiting the availability of government default-insurance on specific mortgage products. (Bluntly put, it was either that or close your eyes, cross your fingers and hope for the best – an approach that too many of my colleagues continue to espouse.)
Now that the latest changes have been implemented, here are the answers to five key questions to help borrowers understand how the residential Canadian mortgage landscape has now changed. read more…David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
The futures market is now giving 94% odds that the U.S. Federal Reserve will raise its policy rate when it next meets on December 13, 2016. While there is still much debate about whether the U.S. economy is ready for higher rates, the Fed seems determined to follow through, if only to restore some policy flexibility for fighting the U.S. economy’s next recession.
This sets up an interesting test for Government of Canada (GoC) bond yields, which have moved in virtual lockstep with their U.S. equivalents since the start of the Great Recession in 2008.
The Canadian economy continues to hover at just above stall speed and if the Bank of Canada changes its policy rate anytime soon, all indications are that it will move it lower. Given that dovish bias, will the growing divergence in our monetary policies finally lead to a decoupling in the direction of our bond yields?
If the answer seems obvious, it isn’t. The near 100% correlation between U.S. and Canadian bond yields over the past eight years is no accident. read more…David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
In a little over a week, on Wednesday, November 30, the next round of mortgage-rule changes will take effect, and while we can’t predict exactly what the impacts will be for every lender, we do know that our mortgage market will begin to look different.
My recent post on the latest round of mortgage-rule changes provided a detailed explanation of the coming restrictions, but to quickly recap, our policy makers will now restrict the types of low-ratio mortgages that are eligible for default insurance. Affected borrowers, such as refinancers and investors who want to buy single-unit rental properties, will still have access to financing, but since their loans will no longer be eligible for default insurance, the number of lenders who can offer solutions to these borrowers will decrease, and the cost of these types of loans will increase.
Over the very short term then, if you’re a home owner who is contemplating a refinance of your existing mortgage, this is your last week to get your application in before the new changes take effect. (Purchasers who will be affected seem less likely to be able to accelerate their buying plans to get in under the wire, especially this late in the game, but they should be forewarned as well.)
Since the upcoming rule changes will be top of mind this week, here are three key questions relating to them that will be answered in the fullness of time: read more…David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
It’s true that U.S. bond yields have surged higher since President-elect Trump’s victory, taking Government of Canada (GoC) bond yields along for the ride. But does this recent sell-off signal that the bottom for bond yields is in, or will it prove just a temporary blip?
In the immediate aftermath of the election, we just don’t know. Dow futures plunged 800 points in after-hours trading on election night, and the next day finished up 250 points, so while volatility certainly ruled the day, the market’s true conviction was not clear.
That said, contrary to what many market watchers seem to have now concluded, I think it’s going to take more than just a Trump election win to signal the end of the longest bond bull market in U.S. history. It will be Mr. Trump’s actual governing, moderated by the next U.S. Congress that will determine the direction of U.S. bond yields.
To that end, let’s take a look at the main arguments being made by those who think that a Trump presidency (I can’t lie, it still feels weird to type that) will lead to materially higher rates, with my take on why these views may be proven wrong in the fullness of time. read more…David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
Last Tuesday, TD Canada Trust increased its mortgage prime rate (which is the rate that it uses to price its variable-rate mortgages) from 2.70% to 2.85%. In today’s post, I’ll provide a quick example to illustrate the impact of this change, and offer an insider’s point-of-view on why there was more to it than first meets the eye.
Let’s assume that a TD borrower has an existing $300,000 five-year variable-rate mortgage at prime minus 0.50%, and that this loan is amortized over twenty-five years.
Prior to last Tuesday, his rate would have been 2.20% (which we calculate by taking the TD’s previous mortgage prime rate of 2.70% minus his discount of 0.50%), and his monthly payment would have been set at $1,299. As of last Tuesday, his variable rate has now risen to 2.35%, but whereas most borrowers would expect the bank to increase his mortgage payment by the additional $22.10/month that would be needed to maintain his original amortization, TD’s standard practice is to hold his payment steady and extend his amortization period instead.
To understand the impact that this extension in amortization will have over time, let’s look at the borrower’s mortgage balance at renewal both before and after TD’s most recent rate hike.
Before the rate increase, the borrower’s balance at renewal would have been $252,363, assuming that his rate had held steady over his mortgage term. After the rate hike, because TD didn’t increase his monthly payment by the additional $22.10 and extended his amortization period instead (which is TD’s standard approach unless specifically instructed otherwise), his balance at renewal will increase to $253,763, which is $1,400 more than it would have been had TD not raised its rate.
To be clear, if you are a TD variable-rate borrower you can call the bank and have your payment increased to account for last week’s rate hike, but you have to initiate the call. Otherwise, expect to have a higher balance at renewal.
Most market watchers quickly concluded that this rate hike was tied to the Department of Finance’s latest mortgage rule changes, but I don’t see it that way. These changes reduce the availability of mortgage insurance going forward, and will thus raise a lender’s cost to fund some of its mortgages in the future. But TD’s mortgage prime-rate hike raises borrowing costs for all of its existing customers, even though their mortgages were set up prior to the latest rule changes. read more…David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
Last week the Bank of Canada (BoC) and our federal government agreed to extend the Bank’s existing inflation target of 2% and to maintain its existing inflation-control range of 1% to 3% for a new five-year period.
This was largely expected and on its own might not warrant mention in my weekly Monday updates. But the Bank also announced a significant change in the measures that it will use to monitor our overall inflation as part of its formal inflation review, and that is noteworthy for anyone keeping an eye on Canadian mortgage rates.
The BoC’s primary mandate is to maintain price stability, which is otherwise referred to as keeping inflation under control, and it uses specific measures to gauge whether this is happening. So if you are trying to figure out where mortgage rates may be headed, these measures provide the clearest indication of the Bank’s current bias (toward raising rates, lowering them, or standing pat).
In future, instead of relying on the traditional Consumer Price Index (CPI) total inflation and core inflation statistics, the Bank will now use three more detailed measures called CPI-common, CPI-trim and CPI-median. The Bank believes that these core measures will: 1) more “closely track long-run movements in total CPI inflation”, 2) “be less volatile than total inflation and capture persistent movements in inflation”, 3) “be related to the underlying drivers of inflation, notably the output gap”, and 4) “be easy to understand and explain to the public”.
Of all of the Bank’s justifications for adopting what it feels are more accurate measures, I thought the point about wanting to use measures that more closely relate to the output gap was the most important. The output gap measures the difference between our actual output and our maximum potential output, and the Bank would typically be expected to raise rates on or about the time that this gap closes. Our traditional inflation gauges, core and total CPI, have not tracked as closely to the output gap in recent years as would be expected, and I suspect that this was the main impetus for seeking more accurate gauges. read more…David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
The Bank of Canada (BoC) left its policy rate unchanged last week, as was expected, but it surprised markets by offering a decidedly dovish outlook in its latest Monetary Policy Report (MPR).
The most recent MPR was best summed up by BoC Governor Poloz during his press conference, when he said that the report forecasted “a lower profile for economic growth, an extended period of economic slack, and a later return of inflation to the 2% target.” His statement, at the accompanying press conference, provided us with another example of the Bank’s favourite monetary-policy tool of late: jawboning.
Jawboning is a term that describes using words instead of actions to produce desired outcomes. When central bankers jawbone, they use their bully pulpit to move markets in a certain direction. In last week’s case, the BoC used its dovish language to help keep the Loonie from appreciating, and to buy some time until the U.S. Federal Reserve hikes its policy rate and the Greenback rises in response (which will weaken the Loonie and provide further stimulus to our exporters).
As far as monetary-policy tools go, jawboning, if effective, is a preferred option. It replaces quantitative easing and other more permanent forms of central-bank balance-sheet expansion, and while cutting rates is a more sure-fire way to devalue your currency, when your overnight rate sits at 0.50% (as ours does now) you don’t have much dry powder left and you don’t want to make more cuts until you have no other choice.
Also, if you do end up having to cut your policy rate later, the Loonie is likely to sell off again, taking it down another notch, so your jawboning plus an eventual rate cut should give you two currency devaluations for the price of one actual move.
Here are the highlights from the latest MPR, with my comments added: read more…David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
In Part One of my four-part series covering our Department of Finance’s latest round of mortgage-rule changes, we focused on the change that took effect on October 17, and in Part Two, we covered the changes that will take place on November 30.
In Part Three, I explained why I believe that another round of changes was necessary, I offered my view on the changes’ longer-term impacts for Canadian borrowers, lenders and our housing markets, and I closed with my take on whether our policy makers got these changes right.
Today, in Part Four, I propose three tweaks that I think our policy makers should make to these latest rounds of mortgage rule changes. Not that they asked mind you – I haven’t found any industry insiders who were consulted before these changes were announced, but here’s hoping they’re open to suggestions and that they read my posts!
- Change How the Mortgage Qualifying Rate Is Set
Today, the Bank of Canada (BoC) calculates the Mortgage Qualifying Rate (MQR) by taking the mode of the posted five-year fixed rates listed by the Big Six banks (RBC, TD, Scotia, CIBC, BMO and National Bank). To the best of my knowledge, these rates are not used for actual lending. Instead, their sole purpose seems to be to inflate the size of the fixed-rate penalties that banks charge their customers.
It would make much more sense to base the MQR on some sort of real-market rate. For example, the BoC could use an average of the Government of Canada (GoC) five-year bond yield over the past twelve months with an additional premium added on top, and it could then reset this rate on the first business day of each month if the underlying average GoC bond yield moved by more than 10 basis points in the interim. Basing the MQR on a real-world rate would represent an enormous step forward without compromising the Department of Finance’s objectives in any way.
Without this tweak, our policy makers will continue to surrender de facto control of the MQR rate to the Big Six, thus giving them the power to determine how many borrowers can qualify for an insured mortgage. Since non-bank lenders rely on insured-mortgage funding much more than the banks do, it doesn’t take much imagination to envision the Big Six keeping their artificial posted rates high in order to starve out some of their competition, only to lower them once they have more of the playing field to themselves.
Changing the way in which the MQR is calculated would also eliminate the potential for conflicts of interest, which are inherent whenever a sub-group of market participants is given control over the setting of a key policy rate.
Given that the MQR has grown in importance, using a market-based rate that is determined by the BoC seems like a more logical, and fair, approach. read more…David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
In today’s post, Part Three, I’ll explain why I support the view that more changes were necessary and I’ll offer my take on the longer-term impacts that these specific changes will have on our borrowers, lenders, and housing markets. Then I’ll close by offering my opinion on whether our policy makers got these changes right.
(I will also provide my usual weekly interest-rate update at the bottom of this post.)
Canada, like several of the world’s other developed countries, has a growing debt problem. Our economic growth rates have hovered just above stall speed since the start of the Great Recession in 2008, and much of the meagre growth that we have enjoyed over the past nine years can be tied to a sharp rise in our household debt levels.
This debt-for-growth trade off was initially easy to make in 2008, when the world teetered on the brink of depression and policy makers were willing to pay almost any price to avoid that outcome. At that time, allowing debt to expand further while the U.S. economy regained traction and our export demand recovered made sense, especially if it fuelled a rise in business investment that would help our exporters reposition themselves in the bargain. But our export recovery has been much slower to materialize than expected, and that hoped-for rise in business investment just hasn’t happened.
Instead, households have used ultra-low interest rates to increase their borrowings to record levels, and since the collapse in the price of oil last year, household-debt fuelled growth has been just about the only thing keeping our economy out of recession. (A recent Stats Can report showed that our real estate sector now accounts for about half of our total GDP growth.)
In 2008 , we had room to allow household borrowing levels to rise, but the period of ultra-low rates that has continued from then until now has fuelled a steady expansion of our debt ever since. For example, our debt-to-disposable-income ratio, which measures the average Canadian household’s ability to service its debt, hovers at about 165%, which is just a shade below its all-time high – and that is with interest rates at record lows. If significant rate increases were to occur, distant as that prospect may seem for the time being, that ratio could rise much higher (and in a hurry).
Meanwhile, asset prices in general, and more specifically, house prices in major markets like Vancouver and Toronto, have skyrocketed, and that rapid appreciation has gradually spread to surrounding markets. Our policy makers have grown increasingly concerned about speculative real-estate investment that is based on the belief that prices will continue to rise in perpetuity. History has shown that if hot real-estate markets are allowed to run unchecked, the situation always ends in tears, and as Winston Churchill famously said, “Those who do not learn from history are doomed to repeat it.“
Today, total Canadian household debt outstanding has risen to just a shade below $2 trillion, and in the second quarter of this year, that number exceeded our country’s overall GDP for the first time ever. Of that total, our current mortgage debt outstanding accounts for about $1.3 trillion, and that number is skewed toward relatively new housing-market entrants because about one-third of Canadian home owners are mortgage free.
As our overall household debt level has continued to expand, so too have the vulnerabilities associated with it, and against that backdrop, I believe that our policy makers’ instinct to take further action was prudent. (The question about whether they took the right action is still up for debate, and I’ll offer my take on that question below.) read more…David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
** Update on the new mortgage rules that will be implemented on November 30 – The Department of Finance has modified its original announcement that it will no longer default insure rental-property mortgages. After November 30, rental properties with two to four units will now still be eligible for mortgage insurance (but one-unit rental properties will not).**
Today, in Part Two, we’ll focus on the additional rule changes that will take place on November 30, 2016. Then, in Part Three, I’ll offer my take on the longer-term impacts that these changes will have on Canadian borrowers and our housing markets across Canada.
(I will also provide my usual weekly interest-rate update at the bottom of this post.)
The first change our regulators announced was that, as of October 17, all default-insured borrowers would have to be qualified using the Mortgage Qualifying Rate (MQR), which stands at 4.64% currently, or slightly more than double today’s typical five-year fixed-rate. That change was made to enhance the safety of insured-mortgages portfolios by ensuring that, in future, only those who can afford significant mortgage-rate increases will be eligible for the ultra-low rates that insured mortgages provide.
If the first rule change raised the qualifying bar for mortgage insurance, the second wave of rule changes completely eliminates mortgage insurance for certain categories of borrowers. To be clear, these changes don’t mean that affected borrowers won’t still have access to mortgages, but they do mean that these borrowers will have fewer options than before and should expect to pay rates that are higher than the lowest available.
First, a quick refresher. An “insured mortgage” is backed against default by the full faith and credit of the federal government (otherwise known as the Canadian taxpayers). Once an insurance policy is in place, a properly underwritten mortgage is basically bullet proof. If an insured borrower stops paying their mortgage and the lender has to seize and sell their property, and if the sale proceeds are less than the outstanding balance of the mortgage, the insurer reimburses the lender for any shortfall.
With this default protection in place, insured mortgages can be sold to investors who will accept interest rates that are only slightly higher than those paid by our federal government when it borrows money. That insurance protection also reduces the amount of capital that lenders must set aside for each loan they make, which further reduces the lenders’ cost of the funds.
Our policy makers are now worried that the substantial benefits provided by readily available mortgage insurance may have become too much of a good thing for our housing markets, and that the current $450 billion in insured mortgage-backed debt outstanding represents too much risk for Canadian taxpayers.
When most people think of mortgage insurance, they think of a buyer who is putting down less than 20% of the purchase price of a property. This type of buyer is referred to as a “high-ratio” borrower, and they are required to pay a one-time fee that covers the cost of insuring their mortgage against default. Conversely, buyers who are putting down more than 20% of the purchase price of a property, or existing home owners who have more than 20% equity built up in their property, referred to as “low-ratio” borrowers, are not typically required to pay for mortgage default insurance, but it is still used widely on these types of mortgages today.
“Portfolio insurance” for low-ratio mortgages has become increasingly popular with lenders. They pay for the default coverage themselves because the benefits of reduced securitization costs and lower capital requirements that come with this protection are worth more to them than the cost of the coverage. Today, low-ratio portfolio-insured loans account for 35% of our total residential insured mortgages outstanding, and the vast majority of the borrowers whose mortgages are portfolio insured don’t even know it.
Nonetheless, it is this group of low-ratio borrowers who will impacted by the changes that will take effect on November 30, 2016. read more…David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
** Update on the Mortgage Qualifying Rate stress-test that was to be implemented on Oct 17th – The Department of Finance just announced that while the MQR stress-test will be implemented for all high-ratio borrowers, effective October 17, the test will now not be implemented for low-ratio borrowers until the next round of mortgage-rule changes takes effect on November 30.**
Yesterday Canada’s Finance Minister Bill Morneau announced a series of changes to the rules used to underwrite insured mortgages. There is a lot to unpack so I’ll do it in three installments: Part One will focus on the change that will take place on October 17, Part Two will cover the changes that will take place on November 30, and Part Three will offer my take on the longer-term impacts that these changes will have on Canadian borrowers and our housing markets across Canada.
Let’s start with the first change, which will be implemented less than two weeks from today.
Effective Oct 17, all insured mortgage applications will be underwritten using the Bank of Canada’s Mortgage Qualifying Rate (MQR).
The MQR was first implemented on April 19, 2010 as an intelligent response to the lessons learned from the U.S. housing crisis (here is a post I wrote that explains how it works in detail). In short, the MQR requires high-ratio borrowers who want to take out either variable-rate loans or fixed-rate loans with terms of less than five years to qualify using a rate that is higher than the actual rate on their mortgage.
Today, the MQR is set at 4.64%, which is about double what you would actually pay for a market five-year variable-rate mortgage, and that gap helps ensure that the borrowers most vulnerable to rate rises can afford higher payments when the time comes.
Two Mondays from now, the MQR “stress test” will be applied to all insured loans, including fixed-rate terms of five years or longer. This will have a much greater impact than you might at first think because, these days, “insured” doesn’t just refer to the usual high-ratios borrowers who have down payments of less than 20%. A significant percentage of low-ratio mortgages (where down payments are 20% or more) are also now insured, but because the lender typically bears this cost, most affected borrowers never even know it. (Lenders buy low-ratio mortgage insurance, called “portfolio insurance”, because once these mortgages are insured against default they can be securitized more cheaply.)
Here is where the rubber meets that road. I get an email every morning with mortgage rates from twenty-two lenders. Half of them will now have to use the MQR to underwrite every loan they make, regardless of the size, mortgage type or down payment. The other half have funding alternatives that don’t require mortgage insurance, but they cost more to use and their increased usage will push mortgage rates higher. (Also, if our policy makers have real conviction, these balance-sheet lenders should be getting an MQR update from OSFI in the near future as well.) read more…David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
With mortgage rates at record lows, everyone can afford to borrow more, and when ultra-cheap borrowing costs are combined with housing markets where there is much more demand than supply, prices rise quickly. Over time, rising prices and rising mortgage debt levels feed each other in a self-reinforcing cycle, especially in places like Vancouver and Toronto, where demand has outpaced supply for some time. The longer this continues, the greater the risk that borrowers will not be able to afford their mortgages at renewal.
To their credit, the majority of borrowers I work with are well aware of the risk that mortgage rates could be higher when they renew, and as part of our discussions, we often stress test their prospective loan to assess the cost of having to renew at a higher rate. To that end, in today’s post I’ll provide an example of what this analysis looks like in our current rate environment. read more…David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.