Courtesy of the Financial Post

Andrew Allentuck, Financial Post  Published: Thursday, May 06, 2010

Taking on a mortgage is a big commitment. Every buyer who uses a mortgage has the choice of floating or going with a fixed rate that often costs a couple of percentage points higher per year. Today, for example, one can get variable rates at an average rate of 2.34% while five year closed rates average 5.27%, according to Fiscal Agents Financial Services Group in Oakville, Ontario. Negotiated rates can be lower.

If rates never changed very much, there would be no contest – the floating rate deal would win. But rates do rise and fall and therein lies the borrower’s dilemma.

Borrowers with kids and an aging car fear that their ability to pay interest rates twice or thrice the current floating rates are limited. “The test is liquidity and risk tolerance,” says Derek Moran, a registered financial planner who heads Smarter Financial Planning Ltd. in Kelowna, B.C. “People with ample liquidity can afford to take a chance on rising mortgage rates. It follows that those who lack liquidity feel some pressure to avoid drastic interest rate increases.”

The point is not merely academic, for Canada, in spite of recent mortgage rate increases, is still at a relatively low point of rates over the last four decades. “There is more room for rates to go up than down,” Moran points out.

The cost of making a decision to float or go fixed varies with the rate differences.

In 2008, Moshe Milevsky, Associate Professor of Finance at the Schulich School of Business at York University, and Brandon Walker, a research associate at the Individual Finance and Insurance Decisions Centre in Toronto, published a study that measured the direct and opportunity costs of going with either choice. “Over the long run, homeowners really do pay extra for fixed rate mortgages,” they concluded.

The reason is intuitive. Lenders do not want to take the chance that when they have to refinance a loan that they will be stuck paying more than they are getting.

Mismatching what they lend with the cost of what they borrow can cut their profits and even lead to insolvency. So lenders attach what amounts to an interest rate insurance fee and bundle that into the price of money they lend on fixed terms.

Milevsky and Walker confirmed this explanation. “The study showed that a positive Maturity Value of Savings [the value of investing the difference between floating and fixed mortgages in 91-day T-bills] was positive the majority of the time, so the homeowner saved by using a variable-rate mortgage.”

The amount of money that the homeowner can save by taking a chance on floating rates varied in the Milevsky and Walker study, depending on the time periods in question. But the average amount was impressive: $20,630 as of 2008. Put another way, floating allowed borrowers to cut the time it would take to pay off the mortgages by a year or more, in some cases as much as five years on 15-year amortizations.

Rational calculation and personal feeling are, of course, different things. A person with a fixed income and a great deal of debt may be reluctant to put a rate casino between himself and the lender and will therefore go with certainty, even at a high price.

It is also a matter of experience. “First time buyers tend to pay close attention to the cost of the mortgage,” says Laura Parsons, Areas Manager of Specialized Sales – which includes mortgages, for the BMO Financial Group in Calgary. For them, the appeal of locking in is relatively high. Their mortgages are new, the amounts they owe are higher than they would be 10 or 15 years in future when the mortgage is substantially reduced, and their incomes, often early in their adult lives, are lower than they will be in future.

“First time home buyers are net debtors and they don’t want to endanger their finances,” suggests Adrian Mastracci, a portfolio manager and financial planner who heads KCM Wealth Management Inc. in Vancouver.

There are other strategies that the buyer can use to provide some rate insurance without taking on what Milevsky and Walker have demonstrated as the high cost of peace of mind.

“The buyer can take a variable rate mortgage but set payments higher than the minimum required” says Parsons. “That could be at the 5 year closed rate, which would mean a faster paydown and growing asset security while still keeping the low cost of the variable rate mortgage. Faster paydown is itself cost insurance if interest rates do rise.”

Banks are nothing if not inventive in helping clients cope with the fixed versus floating dilemma. For example, TD Bank offers to give 5% of the amount borrowed on a five or six year fixed rate residential mortgage to the borrower. The program, aptly dubbed the “5% CashBack Mortgage,” implicitly acknowledges that fixed rate loans can be more costly than variable rate ones.

For its part, RBC has a RateCapper Mortgage that builds on the initial low cost of a variable rate mortgage but limits the cost if rates shoot up. On a five year mortgage, the borrower will never pay more than the capped rate and if the variable rate, based on the prime rate, drops below the RateCapper mortgage maximum, the interest rate charged to the borrower also drops. The plan is a compromise and spreads interest rate risk. Many other lenders allow borrowers to mix fixed and variable rates, thus accomplishing a similar goal.

Plan selection, it turns out, is gender-related. According to a BMO survey, men, 44% of the time, are more likely than women to choose a fixed rate mortgage than women, who make that choice only 28% of the time. Women, it turns out, tend to make the better choice, for as BMO’s analysis shows, “fixed rates were advantageous during only two periods – through the late 1970s and in the late 1980s, in both cases ahead of a period rising interest rates, as is the case now.”

So where are interest rates headed? The yield curve, a line that links interest rates for periods of time from 1 day to 30 years, implies that rates will rise, but not very much.

There is no sense that we are returning to a period of double digit rates. Moreover, there are deflationary forces at work, notes Patricia Croft, chief economist of RBC Global Asset Management in Toronto. “The present crisis in European finance and the potential fizzling out of the present recovery in North American capital markets could presage falling inflation and even disinflation – the subsidence of rising prices and interest rates,” she explains..

BMO forecasts that the rising Canadian dollar will put downward pressure on consumer prices, reflecting the fact that much of what Canadians eat and use is imported. Inflation could flare up, BMO’s economists say, but there is a balanced risk of declining prices. For now, the Bank of Canada is being very cautious in its interest rate management commitments. For those who are strapped for cash, personal circumstance may dictate the choice of a fixed rate. But for everyone else, the folly of trying to make interest rate predictions over a business cycle and to predict both the short term rates and the long term rates along the yield curve should be apparent. No promises, of course, but the odds of saving money are with borrowers who choose variable rate plans or those that emulate them.

April 28th 2010

Royal Bank has raised its mortgage rates three times in a month and other banks are following suit.

What does this mean for your mortgage?

Here’s advice for those who are taking out a mortgage or renewing in the next few months.

Q: Now that rates are rising, should I lock in for five years?

A: Mortgage rates in Canada fell to record low levels. Such low rates were unsustainable, especially now the economy is coming out of a recession.

Even with the three recent increases, RBC’s five-year rate is now 6.25 per cent, compared to 5.5 per cent a month ago. It’s not that steep a climb.

You don’t know how high rates will go, but you can measure your ability to handle higher payments. I use an acronym called IDEAS for my checklist.

Income: Is your income steady and reliable? Is there a chance you’ll be out of a job for a while? Do you earn enough to pay your variable-rate mortgage as if it were a five-year fixed mortgage? (This will offset the effect of rising rates.)

Debt: Do you have a reasonable debt-to-income ratio? Your total debt should be no more than 40 to 42 per cent of your income. Are you close to exceeding this limit if your mortgage payments go up?

Equity: Do you have enough home equity? If you have at least 15 to 20 per cent equity, you can refinance the mortgage if necessary.

Assets: Do you have an emergency fund to act as a payment buffer if needed? The ideal is to have enough, in liquid assets, to cover six months of living expenses. Do you have a line of credit as a backup source of liquidity?

Satisfaction with risk: Can you accept risk? If you already have a variable-rate mortgage, your payments have been stable or going down. Can you handle payments rising by 25 to 30 per cent or more?

Q: I’ve heard that variable-rate mortgages save money over the long term. If I can handle higher payments, should I continue to float?

A: Variable mortgage rates are still very low. The average is 2.25 per cent.

Meanwhile, the gap between fixed and variable rates is widening.

For a five-year closed mortgage, the major banks are charging 6.1 per cent. (Remember that’s a posted rate, which is often discounted when using the services of a mortgage broker.)

Interest rates would have to rise quite substantially before you’d be further ahead with a five-year rate than a variable rate.

An example of a $250,000 mortgage, amortized over 35 years. He uses a five-year fixed rate of 4.39 per cent and a variable rate of 1.70 per cent, “both readily available rates for qualified borrowers.”

If rates rise by 3.25 percentage points over the next five years, who comes out ahead?

The variable-rate borrower wins – just slightly – with a balance of $232,399.92 and an interest cost of $52,376.59 over the five-year period.

This compares to a $233,026.43 balance and $52,631.23 interest cost (about $255 more) for the fixed-rate borrower.

Keep in mind that the rate increase used in this example (3.25 percentage points) exceeds the consensus view of economists by half a percentage point.

“The prime rate would have to rise over 50 basis points more than expected – and stay there – for a fixed mortgage to come out ahead mathematically. Very few are predicting that kind of scenario over the next five years.”

Floating also gives you flexibility. You’ll have to pay a penalty to sell or refinance during the five-year term.

That penalty can add up to thousands of dollars – and eat up much of your home equity – if the lender loses money by letting you out early.

So, don’t lock in if you have any doubts about where your future will take you.

The Globe and Mail Published on Thursday, Apr. 29, 2010

Interest rates are rising – we all get that – but it looks like the Big Banks are pushing things a bit with mortgages.

After a pair of increases in the past two weeks, the posted Big Bank five-year fixed mortgage rate now stands at 6.25 per cent. Does that seem high? In fact, it’s just half a percentage point below the average level for the past decade.

We’re supposed to be in the early phase of what could be a long cycle of rate increases. The Bank of Canada hasn’t even started raising its overnight rate, which sets the trend for borrowing costs other than fixed-rate mortgages. The overnight rate could very well start rising June 1 (that’s the central bank’s next rate-setting date), but even then it’s not dead certain that rates will move.

Mortgage rates are linked to bond yields, which have been rising for a while now. But mortgage rates have been moving faster.

Thanks to the always helpful Bank of Canada online interest rate database, we know that the yield for five-year Government of Canada bonds has averaged 4.03 per cent since the beginning of 2000. Five-year Canada bonds had a yield of 3.02 per cent yesterday, which means they’re three-quarters of the way back to their average of the past decade.

The 10-year average for posted five-year fixed-rate mortgages is 6.75 per cent, which means this rate is almost 93 per cent of the way back to its long-term average. There is zero consensus that things have normalized after the financial crisis, but the banks are just about all the way back to pricing mortgages as if they were.

And, no, this “go big or go home” attitude to rates has not been extended to guaranteed investment certificates, which are one source the banks use for the money they lend out as mortgages. The current posted Big Bank five-year GIC rate tops out at 2.1 per cent, or 63 per cent of its 10-year average rate of 3.31 per cent.

John Turner, director of mortgages at Bank of Montreal, said the banks are simply reacting to the rising rate environment in setting borrowing costs for mortgages.

“It’s not about any of us trying to get ahead of things, because the market won’t let us,” he said. “It’s a very competitive market.”

Mr. Turner cited two factors that have driven fixed-rate mortgages lately. One is an effort by the banks to anticipate higher bond yields and avoid repeated increases in mortgage rates. “We don’t like to move rates because it causes dissatisfaction, and it causes disruption in the sales force.”

The other driver of higher mortgage costs is the rising cost of providing interest-rate guarantees for people who are smart enough to lock in a rate as soon as they start looking for a home. Mr. Turner said these costs haven’t been a factor much in recent years because the general trend for interest rates has been downward. Now, with rates on a definite upward path, rate guarantees are a bigger consideration for lenders.

Banks won’t say this out loud, but their own internal business considerations help set mortgage rates as well. Sometimes, this works in favour of borrowers. In February, for example, the banks lowered mortgage rates even as bond yields rose a tick or two. Now, the banks seem to be in a mood to emphasize profits over market share or, as it’s known in bank land, widen spreads between what they charge and what they pay.

“The banks normally do this when interest rates are moving,” said David McVay, a financial services industry consultant with McVay and Associates. “But their retail profits have been pretty strong, and they widened spreads quite well when they put up line-of-credit rates [in 2008-09]. That was a big boost to profits right there.”

Mr. McVay seconded Mr. Turner’s comment about the mortgage marketplace being too competitive for banks to be out of line with their mortgage rates. In fact, there is a huge variation in rates right now that demands some shopping around from homebuyers and people facing renewals.

Garry Marr, Financial Post  

A new survey says more than four out of five home buyers feel comfortable with their debt, but another hike in interest rates might get Canadians squirming next time they’re polled.

Canada and Mortgage and Housing Corp. surveyed 2,503 mortgage consumers between Feb. 11 and Feb. 28 and found 81% were comfortable with their current debt levels. However, the survey was done before three successive hikes in interest rates that have pushed the five-year, fixed-rate, closed mortgage from 5.25% to 6.25% in less than a month.

“Rates were low throughout most of the time [of the survey],” said Pierre Serré, CMHC vice-president of insurance products and business development, adding it was unclear whether the 81% figure might fall because of the hike.

Based on an average Canadian home-sale price of $340,920 in March and a 5% down payment, the minimum allowed, mortgage payments for a five-year, fixed-rate product have climbed almost 10%.

As it has throughout this rate-hike cycle, Royal Bank of Canada got the ball rolling Monday by adding another 15 basis points to its fixed-rate product. Toronto-Dominion Bank was next, with most of banks expected to follow shortly.

The hike means that a typical Canadian homeowner with a 25-year amortization with that $340,920 home and 5% down is now paying $2,120.54 per month in mortgage costs, up sharply from the $1,930.03 it was costing them before the latest hike in rates. The dramatic shift is likely once again to push people back toward a variable product linked to prime.

The same mortgage based on the current prime rate of 2.25% would cost only $1,410.84 to carry. Still, many economists predict the Bank of Canada will begin raising its rates as early as June, lifting the prime rate.

The survey also found homebuyers are relatively cautious when taking out their mortgages. Only 20% of them took out mortgages based on amortizations of longer than 25 years. CMHC also said 68% of consumers plan to pay off their mortgage sooner than current amortizations.

“In talking to some lenders I’ve heard of lots of people who get extended amortizations but accelerate their payments,” Mr. Serré said.

The survey came out the same day as new statistics from Re/Max which show the high-end of the housing market continues to soar. Re/Max surveyed 13 markets in the first quarter and found records for high-end homes sales in nine of them.

Michael Polzler, executive vice-president of Re/Max Ontario-Atlantic Canada didn’t think the latest hike in rates would do anything to slow the market. “It’s still minor. Interest rates overall, as far as I’m concerned, are still at historic lows,” he said. “Are they climbing up? Yes. It’s time to consider locking in. Are they going to skyrocket? I don’t think so.”

Bernice Dunsby, Royal Bank’s director of home equity, said the one percentage point rise in rates was not that large a leap on a historical basis.

“It has been widely anticipated that rates would be on the rise. The cost of funds just continues to raise,” said Ms. Dunsby. “The thing our clients are looking for is options that provide additional rate protection.”

She said customers have been opting for mortgage products that divide their debt in half, some of it going long and some of it going short. But the percentage of customers just going short continues to slide with variable rate products becoming less popular at Royal Bank.

Read more: http://www.financialpost.com/news-sectors/story.html?id=2952380#ixzz0mIZFfOdu

Julian Beltrame, The Canadian Press

OTTAWA – Inflationary pressures in Canada eased considerably last month, putting into question expectations that the Bank of Canada will be raising interest rates in a matter of weeks.

Statistics Canada reported Friday that Canada’s annual inflation rate slipped by two-tenths of a point to 1.4 per cent, and the closely watched Bank of Canada core rate fell even further — by four-tenths of a point to 1.7 per cent in March.

On a month-to-month basis, Canadians saw no increase in overall prices between February and March.

The agency said the big reason for the drops in both annual indexes was that the price-distorting Olympics ceased being a major contributor to inflation with the conclusion of the Winter Games at the end of February.

Prices for traveller accommodation soared 64.1 per cent in February, but in March they dropped back to earth to a more tame 2.8 per cent increase from March 2009.

Earlier in the week, the Bank of Canada cited inflationary risks for dropping its year-old conditional pledge to leave interest rates at record lows until at least July after the core reached as high as 2.1 per cent in February.

Economists had expected a slight slip in core inflation, once the Olympics ended, but the consensus was that core inflation would be right on the central bank’s target of two per cent.

March’s large fall now puts the core inflation rate, which excludes volatile items such as gasoline prices, well below the central bank’s target.

The March data suggests prices continue to be soft across many sectors with the exception of gasoline and everything else to do with cars.

Prices at gas pumps across Canada were 17.2 per cent higher in March than they had been a year earlier, overall transportation costs were six per cent higher, prices for the passenger vehicles rose 3.9 per cent and the cost of insuring them cost 5.5 per cent more. But food costs only advanced 1.3 per cent, mostly due to a 2.6 per cent hike in restaurant bills.

As well, consumers paid slightly more for household operations and furnishings, for health and personal care, reading, tuition fees, and cable and satellite services. But many items cost less this March than they did a year ago, including shelter costs and mortgage costs, clothing and footwear, as well as fresh vegetables, meat and fresh fruit.

With interest rates at record lows, mortgage costs were a full six per cent less in March than a year ago. Regionally, the agency said all provinces recorded a price increases, with the Atlantic provinces registering the biggest gains. http://news.therecord.com/article/701309

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/