Possible rise in mortgage rates pitting couples against one another

Steve Ladurantaye and Carly Weeks From Saturday’s Globe and Mail

When Rae Whitton started house shopping with Dan Madge last year, she agreed to a variable mortgage rate after their broker explained rates were likely to remain low until spring, at which point they could lock into a fixed rate.

But when February came and signs indicated the economy was getting stronger, anxiety kicked in. Ms. Whitton e-mailed Mr. Madge newspaper articles warning of possible mortgage rate hikes, and worried about worst-case scenarios, remembering how her parents paid up to 18 per cent on their mortgage.

“I was just freaking out. Not that I think it will ever be like that again, but what if this happens? What would we do?” she said. “You always think of the worst thing.”

With mortgage rates set to climb in coming months from historic lows, the emotionally charged decision to lock into a predictable fixed-rate mortgage or gamble on a variable rate that could change at any time is pitting couples against each other as they try to plan their future.

Call it the Battle of the Sexes: the Housing Boom Edition.

Ms. Whitton was terrified that rocketing rates would price them out of their new Toronto home and pushed for the certainty of a fixed-rate. Mr. Madge wanted to take a chance that rates would be lower.

“I didn’t like the uncertainty of it,” Ms. Whitton said. “I like knowing how much our payments are going to be every month.”

The conflict is based on fear of the unknown, and the fear of losing a home if circumstances spiral out of control.

A study commissioned by the Bank of Montreal indicated that women were more likely to be overwhelmed when buying a home than men, at 44 per cent versus 28 per cent. Men were also more likely – 39 per cent vs. 26 per cent – to take interest rates into account when deciding whether to buy.

“When it comes to a risky situation which usually involves some kind of uncertainty, women tend to perceive negative consequences to be more likely and perceive negative consequences to be more severe,” says Li-Jun Ji, a psychology professor at Queen’s University in Kingston, Ont., who studies how decisions are made.

After debating for several months, Ms. Whitton and Mr. Madge went to the bank a few weeks ago and locked into a three-year fixed-rate mortgage. And while Ms. Whitton said she knows more of their payment is now going to interest, she’s not going to let it get to her.

“I just try not to look at the statements,” she said.

Variable rate mortgages can be had for about 1.75 per cent right now, while a 5-year fixed-rated can be had for about 4.5 per cent. A homeowner can save thousands by choosing variable, but their monthly payments will get higher every time interest rates increase.

With the Bank of Canada expected to move its key lending rate higher in June, the variable rate will increase as well. And if history is any indication, rates go up a lot faster than they go down. From 1980 to mid-1981, rates gained 67 per cent, making many mortgages unaffordable.

There’s no sense that will happen this time, but even small increases can mess up a tight budget.

For example, a five-year variable rate mortgage at 2.25 per cent on $300,000 would carry a monthly payment of about $1,300, assuming a 25-year amortization period. A move to 5 per cent would boost the payment to $1,750.

It’s that kind of uncertainty women may be hardwired to avoid, said Lise Vesterlund, a professor at the University of Pittsburgh who has studied the role gender plays in financial decisions.

“My own work has shown that women are less confident about their decisions,” she said. “There are evolutionary reasons for that, and you can also argue there are circumstantial reasons as well.”

She said men are natural risk-takers – after all, there was a time when they could reproduce indiscriminately and not worry about consequences, while the women had to be prudent and think about the future.

That sense of risk is still fostered by parents today, she said, with the majority of boys playing games that have measurable results while girls are offered activities that have no discernible conclusion.

“From an evolutionary standpoint, men have always had more to gain by taking gambles,” she said. “Women tend not to get the same kick out of taking risks – part of the reason they like to lock in to something is they want to have more information about what their prospects will be like in the future.”

http://www.theglobeandmail.com/report-on-business/possible-rise-in-mortgage-rates-pitting-couples-against-one-another/article1545411/

Good Morning

Bank of Canada maintains overnight rate target at 1/4 per cent; removes conditional commitment

We suspect prime to to rise in 2010 and 2011 to bring us back to 2007 levels moving forward.

For as long as interest rates have been recorded 88% of the time people pay less interest with a variable rate, when the right mortgage plan is in place. We recently helped a young family reduce there mortgage from 30 years to 18 years even placing into consideration the antisipated increases in future.

What would you do with that additional savings? Call 604-802-3983 or introduce us over an email at acalla@dominionlending.ca to someone that you truly care about to see how we can help you today!

Press release from this morning

OTTAWA —The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/4 per cent. The Bank Rate is unchanged at 1/2 per cent and the deposit rate is 1/4 per cent.

Global economic growth has been somewhat stronger than projected, with momentum in emerging-market economies increasing noticeably. Exceptional stimulus from monetary and fiscal policies continues to provide important support in many countries. The recovery in the major advanced economies is still expected to be relatively subdued, reflecting ongoing balance sheet adjustments and the gradual withdrawal of fiscal stimulus commencing later this year. Despite recent progress, considerable uncertainty remains about the durability of the global recovery.

In Canada, the economic recovery is proceeding somewhat more rapidly than the Bank had projected in its January Monetary Policy Report (MPR). The profile for growth is more front-loaded than that presented in the January MPR. The Bank now projects that the economy will grow by 3.7 per cent in 2010 before slowing to 3.1 per cent in 2011 and 1.9 per cent in 2012.

This profile reflects stronger near-term global growth, very strong housing activity in Canada, and the Bank’s assessment that policy stimulus resulted in more expenditures being brought forward in late 2009 and early 2010 than expected. At the same time, the persistent strength of the Canadian dollar, Canada’s poor relative productivity performance, and the low absolute level of U.S. demand will continue to act as significant drags on economic activity in Canada. The Bank expects the economy to return to full capacity in the second quarter of 2011.

The outlook for inflation reflects the combined influences of stronger domestic demand, slowing wage growth, and overall excess supply. Core inflation, which has been somewhat firmer than projected in January, is expected to ease slightly in the second quarter of 2010 as the effect of temporary factors dissipates, and to remain near 2 per cent throughout the rest of the projection period. Total CPI inflation is expected to be slightly higher than 2 per cent over the coming year, before returning to the target in the second half of 2011.

In response to the sharp, synchronous global recession, the Bank lowered its target rate rapidly over the course of 2008 and early 2009 to its lowest possible level. With its conditional commitment introduced in April 2009, the Bank also provided exceptional guidance on the likely path of its target rate. This unconventional policy provided considerable additional stimulus during a period of very weak economic conditions and major downside risks to the global and Canadian economies. With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus. The extent and timing will depend on the outlook for economic activity and inflation, and will be consistent with achieving the 2 per cent inflation target.
                                                           
In accordance with the removal of the conditional commitment, there will be no additional term Purchase and Resale Agreements issued by the Bank.

Information note:
A full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 22 April 2010. The next scheduled date for announcing the overnight rate target is 1 June 2010.

 Enjoy your week

Below is an article from the Canadian press, the major points that have not been noted in this article are

As Canadians we only have had the privillage of purchasing a rental property with less then a 20% down payment for the last 3 years, so prior to this investors often placed down 25-35% of the purchase price (which most real investors do to promote positive cashflow so they are not adding several hundred dollars a month to top up requirements of debt servicing the rental)

If people have to remain in there condo’s or townhomes longer, they will have a smaller mortgage moving up, which any family would benifit from this is also a great oppertunity to ensure that the right mortgage options have been exicuted to help them own there home faster.

The 80% offset has only became avaliable in recent years also, it has not been mentioned that Genworth, CHMC’s direct competitor has agreed in BC alone to use 100% of the rent to add to income.

Comptition is a wonderful thing, and by using our team you will always have access to the best options to open the most doors for your family. Call 604-802-3983 or tune into The Mortgage Show Saturdays at 7pm on AM980 CKNW.

New rules for rental properties could squeeze first-time homebuyers?

By Derek Scott, The Canadian Press

VANCOUVER, B.C. – Buying a house in the hot housing markets of Vancouver, Toronto and other major cities in recent years has been a possible dream for some first-time homebuyers only because many of those houses had suites they could rent out.

But new rules coming into effect April 19 will all but wipe out that advantage in the eyes of banks handing out mortgages.

“It makes it much more difficult for people with rental properties to qualify for their own mortgage on their personal residence,” said Vancouver mortgage specialist Patrick Mulhern.

The new regulations are designed to prevent speculation in the market, said Jack Aubrey, of the Canada Mortgage and Housing Corporation.

But Vancouver mortgage agent Mike Averbach said the new rules will do little to prevent investors from gambling in the housing market.

“They haven’t decreased risk,” he said. “They’re just not allowing you to use the income.”

Currently, landlords can use 80 per cent of their rental income to offset monthly mortgage payments. That means, if they receive $1,000 per month in rental income, they can use $800 to offset a $1,200 mortgage payment, leaving only $400 to be debt financed.

But under the new rule, only 50 per cent of a landlord’s rental income will be used. Even then, that money will not be used to offset their monthly mortgage payment. It will be added to their total income, forcing them to qualify for the entire monthly mortgage.

For instance, a person earning $100,000 per year in regular income plus $12,000 per year in rental income will have a total income of $106,000 with which to qualify for a mortgage on their own home.

Rental income is essential for many of his clients, Averbach said.

In cities like Vancouver, where the average home price in February was more than $662,000, rental offset is the only way many people can qualify for a mortgage and the new rules will keep many of his clients in condos rather than houses, he said.

“Putting a renter in your basement is not speculative, it’s reality,” he said. “It helps you pay your mortgage.”

The rule changes also make it more difficult for people to buy a property separate property to use as a revenue generator.

CMHC will no longer offer high-ratio financing on rental property not lived in by the owner. That means someone looking to buy a house as a rental investment will have to come up with a 20-per-cent down payment on the property, as opposed to five per cent before the rules changed.

The changes haven’t worried groups advocating for tenants.

Jeordie Dent, of the Federation of Metro Tenants’ Association in Toronto, where vacancy and availability rates have dropped over the last year, said he doesn’t see a negative impact on renters.

Instead, he said his group welcomes the changes.

Dent said too many people become landlords without the financial or intellectual wherewithal to properly manage their properties.

“Anything that strengthens mortgage rules, from our perspective, is a good thing.”

Pain in Australia is a peek at what’s to come Published on Tuesday, Apr. 13, 2010 The Globe and Mail Report on Business  

berman@globeandmail.com

For a glimpse of what the future may feel like in the Great White North, look Down Under.

Faced with a jumping housing market, a steadily improving job market and a commodity boom, all of which sound familiar to Canadians, Australian central bank chief Glenn Stevens is cranking up interest rates hard and fast.

The goal is to unwind emergency cuts and return borrowing costs to the historical average, and fast. Last week Mr. Stevens tightened again, his fifth quarter point move in seven months, leaving home builders furious and retailers begging for mercy because customers are disappearing.

The rapid rate increases have made the Australian central bank chief a controversial figure in a world where most central banks have been standing pat. He is a hero to many who believe that other bankers are leaving rates too low too long and courting inflation. Doubters believe he risks overdoing it and the Australian economy will suffer.

With Bank of Canada Governor Mark Carney widely expected to embark on a path to higher interest rates in coming months, Mr. Stevens’ actions and their consequences are a reminder to Canadians who haven’t had to deal with rising rates in four years just what it feels like. In short, it hurts.

Thanks to the $250 (Australian) a month in interest that the Stevens rate increases now are costing the average homeowner on a $300,000 mortgage, Australia’s roaring housing market is finally showing signs of slowing. Building permits are suddenly unexpectedly soft, price gains are tapering off and home loan approvals have fallen for five straight months. Some analysts are raising the prospect of an outright price decline.

At the same time, even though the country is enjoying a job boom, increasingly strapped consumers are apparently dealing with higher interest payments by cutting back on spending. Retail sales fell in two of the three most recent months.

These are all the aftershocks of a central bank dealing with the difficult transition from easy money that was pushed into the economy to cope with a perceived emergency to a post-crisis world where rates more truly reflect the realities of the business cycle.

The Reserve Bank of Australia is “reaching the point at which the central bank does make tradeoffs between economic growth and its desire to contain inflation pressures, and at the point where those tradeoffs where those tradeoffs become quite fine judgment calls,” said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce’s investment banking arm.

“It’s premature to say they’ve overdone it because they intend to sacrifice growth at this point in the cycle,” he added.

At some point, Mr. Carney will face the same tradeoff.

There are some fundamental differences between the two countries’ economies that mean it will be a while before Canada gets to the same turning point that Australia is now reaching.

While many people view the countries as very similar, Australia has a big head start economically. It skirted the global recession, its housing market didn’t drop as much in the worst of the crisis and the jobs picture is much brighter. The Australian unemployment rate is 5.3 per cent, compared to 8.2 per cent in Canada.

The other big difference is geography – Australia exports more to Asia, which has been fuelling the global recovery, while Canada remains heavily dependent on the hard-hit U.S.

Still, once Canadian rates start rising, they are likely to go up reasonably quickly. The Bank of Canada has a chance to hike at a scheduled rate-setting date next week, but most analysts expect the first increase closer to mid-year. After that, even the most dovish forecasters like Mr. Shenfeld lay out a scenario where Canadian rates climb over the next year and a half by much more than they have in Australia so far.

CIBC anticipates the Bank of Canada will take its benchmark rate up from the current 0.25 per cent to 2.5 per cent by the end of 2011. At the other end of the spectrum, Toronto-Dominion bank expects 3.25 per cent and Royal Bank of Canada forecasts 3.5 per cent.

At that point, as consumers feel the squeeze, having a thick skin becomes a key part of central banking. Mr. Stevens is blunt and seemingly unrepentant about the effects of his increases, judging by his recent statements. The hurt of higher rates is just part of economic life, so better to get it over with.

“If we wait too long do we end up having to do more of that (raising rates), and those people would actually end up in a lot more pain.”

http://www.theglobeandmail.com/report-on-business/pain-in-australia-is-a-peek-at-whats-to-come/article1532435/

Posted to FP: April 12, 2010, Jonathan Ratner

With most agreeing that a rate hike from the Bank of Canada is imminent, the talk now turns to the exact timing and extent of the central bank’s policy changes.

Governor Mark Carney made a “conditional” promise to keep the benchmark interest rate at 0.25% through the end of June 2010. However, one way to keep to this expiry date and provide markets with a jolt would be an initial rate hike of 50 basis points on July 20, according to Bank of America Merrill Lynch economist Sheryl King.

“Futures markets are only partially pricing in that possibility so it would be a shot across the bow to be sure,” she said in a note. “The strongest argument against this tack in our view is that the market would immediately rush to the conclusion that all future hikes will be similar in size.”

The economist thinks a 25 basis point hike on June 1 is the most likely scenario.

Meanwhile, Ms. King feels a 25 basis point hike on July 20 is the least likely scenario. She noted that this expectation is already fully priced into the Eurodollar and overnight index swap (OIS) markets. “If the Bank wants to elevate the risk premium in the bond market, validating market pricing cannot be the way they will go.”

The economist said that with growth running 40% faster than the Bank of Canada’s January forecasts, a rollover in unemployment and core CPI “frustratingly high,” there is justification to move a bit early. She added that moving early rather than large would help build up that needed risk premium without having 10-year notes move above the 6% mark that a normalized risk premium of 1.8% and a neutral overnight rate of roughly 4.5% would command.

The main arguement against a June 1 rate hike is that it comes ahead of the June 30 expiry commitment and puts the Bank’s credibility in the market at risk. Ms. King insists that credibility in achieving the central bank’s 2% inflation target is “very arguably the more important badge to maintain.”

“All along, the Bank has warned investors the commitment to not touch rates was not a promise and earlier rate hikes possible if conditions warranted.” http://network.nationalpost.com/NP/blogs/tradingdesk/archive/2010/04/12/when-will-the-bank-of-canada-raise-interest-rates-and-by-how-much.aspx

By The Canadian Press

TORONTO – Prices for all key housing types were up more than 10 per cent across Canada in the first quarter, although some markets were hotter than others.

That’s according to a national real-estate survey by Royal LePage, which says the Canadian housing market will likely become more moderate as 2010 unfolds.

The survey found that, on a national basis, the average price of a detached bungalow in Canada rose to just over $329,000 in the first three months of this year – up 11 per cent from the first quarter of 2009.

Standard two-storey homes rose 10.3 per cent, to about $365,000, while condominium units increased by 10.9 per cent to just under $229,000.

Royal LePage, which is a national real-estate sales organization, says the national numbers don’t paint the whole picture, however.

It says some local markets, such as Vancouver and Toronto, may be overheated while most others have shown more moderate growth.

There is a small loophole in the new federal mortgage rules that could make it easier for the banks to lend out money to first-time buyers.

The federal government announced last month new requirements for anyone borrowing money for a house and needing mortgage insurance. If you have less than a 20% down payment and are borrowing from a financial institution covered by the Bank Act, you have to take out mortgage default insurance, which ensures the banks are covered for any losses resulting from payment defaults.

For principal residences, the new rules force consumers to qualify for a loan based on being able to make payments on a five-year fixed-rate mortgage, which has a much higher interest rate than variable mortgages, now as low 1.85%.

Clearly, Ottawa’s view was toward rising rates. And this week, two of the major banks raised their posted rate on five-year fixed mortgages to 5.85%.

But one lingering question is how the five-year rate would be calculated in terms of qualifying a customer. In other words, it would obviously be a lot tougher to qualify for a mortgage under the new rules when using the posted rate of 5.85%. But if using the actual rate consumers get — these days as low as 3.75% — that’s a lot less income you’ll need to buy your first home.

Officials in Ottawa have been mum on what numbers should be used.

But an internal document distributed by Canada Mortgage and Housing Corp. to mortgage brokers, obtained by the Financial Post, shows consumers will be able to use their actual rate to qualify for a mortgage if they go for a term five years or longer.

If buyers want a variable-rate mortgage, they will have to qualify based on “the benchmark rate,” which is essentially the posted rate.

So, if you want to go short, you had better be able to make payments based on an interest rate as high as 5.85%, which is where the benchmark rate will likely sit by next week.

“Probably 10% of the overall mortgage population is going to be affected by this rule in the sense they are no longer going to be able to qualify for a variable-rate mortgage or a one- to four-year term,” says Robert McLister, editor of Canadian Mortgage Trends. “The qualifying rate is going to affect the debt ratios of those people.”

The end result may see more people forced to lock in their rate, which is hardly fair given variable-rate mortgages have been a better deal than fixed-rate rate mortgages about 88% of the time over the past 50 years, before the recent credit crisis.

“This will help people become accustomed to making payments based on where mortgage payments are likely to be going,” said Peter Vukanovich, chief executive of Genworth Financial Canada, the mortgage insurer.

He doesn’t think the changes are a major deal, given that most of the major banks have been qualifying consumers based on their four- and five-year rates. His company was already only insuring products based on rates as high as 4%.

“It’s a good rule change when you are situation right now where we are increasing interest rates,” says Jim Smith, vice-president of Scotia Mortgage Authority. “Most lenders, ourselves included, have qualified based on at least the three-year posted rate.”

The discrepancy is, the three-year posted rate at most banks is actually higher than the five-year discounted rate.

And that means it is actually going to get easier to get a mortgage — as long as you do what the government tells you to do and lock in your rate.

Financial Post

Read more: http://www.financialpost.com/personal-finance/your-money/story.html?id=2744894#ixzz0kLOkQZZ6

Read more: http://www.financialpost.com/personal-finance/your-money/story.html?id=2766742#ixzz0kLP4JRrZ

By Julian Beltrame, The Canadian Press

OTTAWA – Canadians could be facing higher interest rates sooner than previously thought as a result of stubborn inflation and stronger economic growth, Bank of Canada Mark Carney said Wednesday.

Carney did not declare higher rates were on the way, but issued his clearest signal to date that his year-old commitment to keep the policy rate at the record 0.25 per cent until July was “expressly conditional” on inflation remaining tame.

In a speech to a business audience, the bank governor noted that both underlying core inflation and economic growth have grown slightly stronger, although broadly proceeding as expected.

The tip-off to economists was that he changed his language on his conditional commitment on interest rates, which has led to historically low rates for both consumers and businesses in Canada and helped the country recover from recession.

“This commitment is expressly conditional on the outlook for inflation,” he told the Ottawa Economic Association.

It was the first time Carney has undercut the commitment in such pointed language.

Later, Carney downplayed the significance, joking with reporters that he needed to used different words to keep the media’s attention.

But economists said the distinction was significant.

“They still have considerable latitude, but the changes that would be required to their forecast are consistent with hiking rates sooner than markets are anticipating,” said Derek Holt, Scotiabank’s vice-president of economics. He said Carney may move as early as June 1.

But Holt stressed that Carney’s overall message to Canadians is that rates will remain low by historical standards for some time.

“No matter what, we emerge from this with lower rates at the end point of the hiking campaign than in past cycles. He’s saying the outlook is clouded with risks and there’s a number of reasons to expect growth to be lower than past cycles.”

Core inflation – which excludes volatile items like energy – has been stubbornly sticky the past few months, with the index rising to 2.1 per cent in February. That’s the first time it has been above the central bank’s target of two per cent in more than a year.

And Carney pointed out that the economy has performed better than he thought when the bank issued its last forecast in January, predicting growth of 2.9 per cent this year. Since then, several private sector economists have increased their projections and Carney is expected to do the same at the next scheduled forecast date on April 22.

At a news conference following his speech, Carney warned against reading in too much optimism in his assessment.

“It wasn’t that rosy a message,” he said.

He cautioned that low U.S. demand and the high Canadian dollar, which was trading below 98 cents US on Wednesday but still high by recent standards, were acting as “significant drags” on the economy.

On a longer term basis, Carney’s message to Canadians was positively dark, warning that the country needs to address its “abysmal” productivity record and that the world needs to follow through with reforms to address global imbalances, particularly China’s undervalued currency.

Carney calculated that unless the country improves its productivity or output per unit of work, Canadians can expect to lose a total of $30,000 in real income over the next decade.

“Canada does underperform,” he said. “We are not as productive as we could be. Our potential growth is slowing. Moreover, this is occurring as the very nature of the global economy … is under threat.”

Canada’s productivity has advanced a meagre 0.7 per cent annually over the last decade, he noted, less than half the rate in the U.S. and half the rate Canada managed between 1980 and 2000.

He placed the blame on the doorstep of Canadian business, which he said needs to make much bigger investments in equipment and machinery and in information technologies.

Canadian workers have about half the information and communication technology at their disposal as their American counterparts, he said, adding that changes must be make quickly because the landscape of the global economy has shifted and it requires a “big response.”

Carney also said a key to future prospects for the Canadian and global economies is adoption of the G20 framework for economic sustainability. That will require addressing global imbalances which, in part, are caused by fixed currencies like China’s yuan which are kept artificially low to boost exports and discourage imports.

He produced a chart showing that unless the G20 measures are adopted, global growth will be about one percentage point lower in the next five years than it might otherwise be. The worse case scenario is a prolonged global recession that triggers protectionism, deepening the crisis. The irony, he said, is that China loses out in the long run as well.

Carney is the second Canadian policy-maker in as many days to warn about the devalued yuan. On Tuesday, Finance Minister Jim Flaherty said Canada will push the issue at the upcoming G20 meetings in Toronto in June. A revaluation of the yuan would likely lead to adjustments in other fixed currencies in Asia, economists said.

The U.S. has taken the lead in pressuring China on the yuan, but so far the emerging economic superpower has dismissed such calls and said it would move on its own schedule.

“An adjustment in global exchange rates is part and parcel of global rebalancing,” said Carney. “What’s at stake here is enormous and the adjustment of those real, effective exchange rates of all major currencies is an important component of rebalancing.” http://ca.news.finance.yahoo.com/s/24032010/2/biz-finance-higher-interest-rates-coming-sooner-says-bank-canada.html