The MBABC has confirmed that the following will be the qualifying interest rate on new high ratio mortgage applications as of April 19th.

For loans with a fixed term of less then 5 years and for all variable rate mortgages, regardless of term, the qualifying interest rate is the greater of:

• the benchmark rate

• the contract interest rate

For loans with a fixed term of 5 years or more, the qualifying interest rate is:

• the contract rate

For mortgages with multiple interest rates, each component must be qualified using the applicable criteria defined above.

CMHC defines the benchmark rate as the chartered bank conventional mortgage 5 year rate that is the most recent interest rate published by the Bank of Canada in the series V121764 as of 12:01 am (Eastern Time) each Monday and which can be found at http://bankofcanada .ca/en/rates/interest-look.html.

The MBABC has also confirmed that the following changes will be implemented to CMHC’s Self-Employed Product without Traditional Third Party Validation of Income as of April 9th.

CMHC is reducing the maximum LTV for self employed products without third party validation of income as follows:

• For purchases and portability transactions , the maximum LTV is being reduced from 95% to 90% and
• For refinance transactions, the maximum LTV is being reduced from 90% to 85%

March 2 (Bloomberg) — The Bank of Canada kept its benchmark interest rate at a record low today, and said that inflation and economic output have been higher than policy makers expected, signaling rate increases in coming months.

The target rate for overnight loans between commercial banks remained at 0.25 percent, where it’s been since April, as predicted by all 22 economists surveyed by Bloomberg. The bank also repeated a pledge to leave it unchanged through June unless the “current” inflation outlook shifts.

The economy grew at a 5 percent pace in the fourth quarter, Statistics Canada said yesterday, faster than the bank’s Jan. 21 prediction of 3.3 percent. Inflation has also accelerated close to the central bank’s 2 percent target, suggesting the bank could raise rates before the June commitment ends, said Derek Holt, an economist at Scotia Capital in Toronto.

“They are signaling a bias shift here that primes the path for rate hikes, potentially earlier than markets are expecting,” Holt said in a telephone interview. “They could hike now as far as I’m concerned.”

The Canadian dollar gained 0.9 percent to C$1.0316 against the U.S. currency at 9:14 a.m. in Toronto, from C$1.0414 yesterday.

Firmer Inflation

“Core inflation has been slightly firmer than projected, the result of both transitory factors and the higher level of economic activity,” the Ottawa-based bank said in a statement. Fourth quarter growth came from “vigorous domestic spending and further recovery in exports.”

The bank said the expansion, which was the fastest in almost a decade, pushed Canada’s output to a level “slightly higher than the Bank had projected.” Governor Mark Carney has said there must be a transition towards private expenditures instead of government stimulus to create a sustained recovery.

The bank’s statement dropped a reference made in January to inflation risks being “tilted slightly to the downside.” The statement also omitted a reference to the central bank having “flexibility” even with the key interest rate close to zero.

“What’s not in the statement is at least as important as what’s in it,” Holt said. “Removing the reference to inflation risks to the downside, that signals the bank is worried that core inflation is overshooting its expectations.”

Sending a Message

“It doesn’t take huge changes in words to send a message,” said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto before the announcement. “They have to slowly but surely set the landscape for rate hikes.”

Canada’s annual inflation rate was 1.9 percent in January, the fastest pace in more than a year, Statistics Canada said Feb. 18. The so-called core inflation rate, which excludes gasoline and seven other volatile items, rose 2 percent, underscoring what Carney has called “stickiness” in that rate.

Carney has also said Canada’s economy will operate with “slack” through the middle of 2011. Growth will be curbed by the Canadian dollar’s strength and a low volume of U.S. orders, the bank reiterated today. Canada’s dollar appreciated 25 percent against the U.S. dollar over the past 12 months to about 96.6 U.S. cents.

“It’s better to move sooner than later but be less aggressive,” said Yanick Desnoyers, assistant chief economist at National Bank Financial in Montreal. He predicts an April rate increase.

Spare Capacity

Statistics Canada also revised its earlier growth figures to show the country’s first recession since 1992 was deeper than thought, with a 7 percent annualized contraction in the first quarter of last year.

The capacity left in the economy means the bank can wait until after its June commitment ends to raise rates by a quarter point, Porter said. “It would take an awful lot to push the bank into an earlier move,” he said.

The bank should raise its key lending rate in half-point moves after June, University of Western Ontario professor Michael Parkin said in a Feb. 23 paper. Taking the rate to 3.75 percent by mid-2011 is needed to keep inflation in check as an economic recovery is “taking hold,” Parkin wrote for the C.D. Howe Institute, a research group chaired by former Bank of Canada Governor David Dodge.

The Bank of Canada will probably raise the key rate to 0.75 percent in the third quarter and to 1.25 percent by the end of the year, according to the median forecast of economists surveyed by Bloomberg News. A separate survey for the U.S. shows economists don’t expect the Federal Reserve to raise its benchmark rate to 0.75 percent until the fourth quarter.

A 300k mortgage can go up $120 a month with the new suggested rate hikes of 50basis point increases that can happen 4-6 times throughout the 2nd half of 2010 and through 2011.

Call 604-802-3983 or tune into The Mortgage Show with AMP of the year Canadawide Angela Calla on CKNW AM980 7pm to learn everything you need to know about our changing mortgage market.

Paul Vieira, Financial Post   

OTTAWA — Pressure on the Bank of Canada to move early on raising interest rates mounted Monday after data on fourth-quarter gross domestic product suggested the economy is roaring its way out of recession after recording the fastest pace of growth in nearly a decade.

The central bank could provide hints of a change Tuesday morning when it releases its latest statement on interest rates. Its plan for almost a year has been to conditionally keep its benchmark rate at 0.25% until July in an effort to pump up economic growth after the great recession.

Data from Statistics Canada suggest the emergency-level rates have worked their magic, perhaps faster and better than anticipated.

The economy expanded 5% in the final three months of 2009, blasting past market expectations for a 4% gain – and the bank’s own 3.3% forecast – and setting the stage for robust growth this quarter. It is also the fastest pace of quarterly economic growth since late 2000. Further, the data were solid across the board, with personal consumption and net trade contributing to the performance.

Third-quarter data were also revised upward, with growth of 0.9% as opposed to the original 0.4% reading.

This comes on top of January inflation data that indicated price increases have moved closer to the central bank’s 2% target earlier than envisaged.

“With growth being stronger than expected and inflation sticky … we remain of the view that the Bank of Canada has the full green light to hike as emergency conditions have passed and with it justification for sticking to the zero lower bound on rates,” said economists Derek Holt and Karen Cordes from Scotia Capital.

Yanick Desnoyers, assistant chief economist at National Bank Financial, said a rate hike could come as early as next month, when data might show the output gap – or the amount of slack in the economy – is narrowing faster than the central bank expected.

He added the headline GDP data might be underestimating how quickly economic slack is being absorbed. For instance, gross domestic income – or the sum of all wages, corporate profits and tax revenue – climbed by 8.5% in the quarter, the best showing since 2005. And that follows a 4.5% gain in the third quarter.

Sheryl King, chief economist and strategist at Bank of America/Merrill Lynch Canada, said she expects a rate hike in June, based on a belief the central bank will want to see through its conditional pledge for as long as possible.

Among the data points she said she found most encouraging was a 4% gain in real wage growth – defined as gains in household income excluding transfers from governments. The last time there was growth in this category was prior to the recession.

“This signals that risk taking and organic growth is coming back in Canada,” she said.

Of course, not all analysts believe the data will push Bank of Canada governor Mark Carney to veer off course. Douglas Porter, deputy chief economist at BMO Capital Markets, said the data surely raises the odds of a July rate rise but anything earlier than that remained remote. Analysts at TD Securities also shared a similar view.

Also, the data contained one key blemish – a 9.2% drop in machinery and equipment investment by Canadian companies, which does not bode well for efforts to boost abysmal productivity levels.

The GDP data attracted investors, as the Canadian dollar gained a full US1¢, to US96.01¢, on the possibility of an early rate hike.

Canadian growth should remain robust as the global recovery takes hold. Business surveys released Monday indicated manufacturers continue to lead the recovery, with factory activity expanding last month across Asia, the United States and Europe.
Read more: http://www.financialpost.com/news-sectors/economy/story.html?id=2628952#ixzz0gySOg5Bz

Mortgage Bytes

New mortgage rules

Paul Vieira, Financial Post with files from Garry Marr in Toronto 

OTTAWA — Jim Flaherty, the Finance Minister, says he is targeting “reckless” speculators who buy up multiple condominium units in the country’s biggest cities with new rules introduced yesterday that will make it tougher for Canadians to get a mortgage.

The reforms were submitted after nearly a week of non-stop warnings from people ranging from a prominent money manager to former Bank of Canada governor David Dodge about an impending housing bubble. The concern was that the real estate market was getting ahead of itself, as buyers took advantage of record-low interest rates to acquire homes.

In introducing the tougher mortgage requirements, Mr. Flaherty said there was “no clear evidence” of a real estate bubble in this country, the kind of which sideswiped the U.S. economy and sparked the worldwide financial crisis.

“The measures will not affect the ability of a Canadian family to buy a house. It will affect those who are speculating,” the Finance Minister said. “What we’re getting at is the speculation in multiple condominium units in particular which we see in Vancouver, Montreal, Toronto and in some other places in Canada.”

Home builders were taken aback by the measures introduced, saying they could result in “severe implications” for the condo and housing markets.

The changes, scheduled to come into effect on April 19, will make it harder for first-time buyers to qualify for government-backed mortgage insurance — from either Crown agency Canada Mortgage and Housing Corp. or private-sector providers — which is required if down payments are less than 20% of the property’s value.

Borrowers now have to meet standards for a five-year fixed-rate mortgage, even if the buyer wants a shorter-term, variable rate product.

Some analysts, however, indicate the shift is not as big as it appears. Eric Lascelles, chief economist at TD Securities, said the revamped rule likely means the minimum household income cutoff for Canadian mortgage applicants would be about $5,000 to $8,000 higher.

Further, Ottawa has raised the minimum down payment on rental income properties — where the buyer does not plan to live — to 20% from 5%.

Mr. Flaherty said one goal is to protect Canadians from overextending themselves financially as interest rates are likely to climb from present historic lows. The other, he added, is to root out speculation in real estate, which he suggested was happening with greater frequency based on prebudget consultations.

“I don’t know how that serves the Canadian people and why the government should insure mortgages like that,” Mr. Flaherty said. “People can do it with their own money and if they can find someone who will lend them the money on an uninsured basis. But I just don’t want CMHC and the Canadian people to be in the business of guaranteeing speculative mortgages.”

Derek Holt, vice-president of economics at Scotia Capital, said the condo market could feel the pinch. Industry experts estimate roughly 40% of condo purchases are investment-related, with buyers looking to rent the units for income and perhaps sell them at a later date at a higher price.

“Evidence of the greatest speculative excess has been in the condo segment in the past few years,” Mr. Holt said.

Others weren’t so sure. Ben Myers, executive vice-president of Urbanation, a Toronto firm that tracks the city’s condo market, said the move would have “very little” impact because most condo builders already require down payments of 15% to 20% for their units once they are occupied.

Still, home builders were shocked by Mr. Flaherty’s contention that the real estate market was at the mercy of speculators.

“I don’t know if they have thought this through as to who a speculator is,” said Peter Simpson, chief executive of the Greater Vancouver Home Builders Association. “Just because someone buys a second property doesn’t make them a speculator.”

He added that these new regulations, combined with the coming harmonized sales tax in British Columbia on July 1, could lead to a “perfect storm” that hits the province’s housing market.

The chief operating officer of the Canadian Home Builders Association, John Kenward, said the rule aimed at condo speculation came as a surprise to his members.

“It had not been the subject of conversation [between the government] and the industry,” said Mr. Kenward. “It could have serious implications going forward. We don’t know why it was introduced.”

Overall, Mr. Lascelles said, the economic implications from the proposed moves “are unlikely to be severe, and we expect the housing market to slow its ascent without crashing back down to Earth.”

SUMMARY OF CHANGES

*Borrowers must qualify for a five-year fixed rate mortgage instead of a three-year loan when calculating gross debt service and total debt service ratios.

*Refinancing will be capped at 90% for government-backed high-ratio mortgages versus 90% previously.

*A down payment of 20%, instead of 5%, will be required for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.

WHAT CHANGES MEAN FOR A $337,000 HOUSE

*The difference between a three-year mortgage rate and a five-year mortgage rate is currently in the range of about 50-100 basis points. The average house in Canada costs $337,000, which means that this change will require that mortgage applicants have the capacity to absorb an extra $2,500 per year in mortgage costs than in the past, according to calculations by Eric Lascelles at TD Securities. Effectively, the minimum household income cut-off for Canadian mortgage applicants is now about $5,000-8,000 higher than it was previously, to fulfill the new rule. 

To hear more tune into The Mortgage Show with AMP of the year Angela Calla on CKNW AM980 Saturdays at 7pm

MORTGAGE INSURANCE RULES ANNOUNCEMENT

This morning, Federal Finance Minister Jim Flaherty announced prudent changes to mortgage insurance rules intended to come into force on April 19, 2010. CAAMP and it’s members was actively engaged in the discussions around these changes which are as follows:

 1. All borrowers must meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term;

2. The maximum amount one can withdraw in refinancing their mortgage will be reduced to 90% from the current 95% of the value of one’s home;

3. Non-owner occupied properties will require a minimum down payment of 20%.

There were no changes to down payment requirements or length of amortizations for owner-occupied residences.

We will continue to monitor developments including transition rules and update you accordingly

If you or anyone that you care about could benifit from being updated or have additional questions, please introduce us over an email acalla@dominionlending.ca or call 604-802-3983

Garry Marr, Financial Post   

Canadian real estate sales and prices are poised to set records this year, according to a new forecast that is bound to reignite calls in some quarters for tighter lending rules.

The Canadian Real Estate Association, which represents 100 boards across the country, said Monday it expects existing-home sales to reach 527,300, a 13.3% increase from a year ago and a 1.2% increase from the record high set in 2007.

The new-home market appears to be picking up steam, too. Canada Mortgage and Housing Corp. said there were 186,300 starts in January on a seasonally adjusted annualized basis, the highest level of new construction since October 2008.

Bank of Canada governor Mark Carney has warned about rising levels of household debt, which is reaching record levels. Finance Minister Jim Flaherty has suggested he is prepared to tighten mortgage requirements and continues to monitor the market.

“One of the legitimate concerns of the Finance Minister might be if you make qualifying for mortgage default insurance prematurely restrictive that it will quell housing activity even as erosion in affordability continues,” said Gregory Klump, chief economist with CREA.

There are have been some rumblings that the government is considering new rules that would require buyers who need mortgage insurance to have at least 10% down and amortize their mortgage over just 25 years instead of the current 35 years.

Anybody with less than a 20% downpayment must get mortgage insurance, if they are borrowing from a financial institution governed by the Bank Act.

Mr. Klump’s group contends the market is going to correct on its own in the second half of 2010. CREA has called for sales to drop 7.1% in 2011. The group says that while prices will rise by 5.4% in 2010, to a record high of $337,500, they will drop by 1.5% in 2011.

That view of the housing market is not out of step with some economists, who say that once interest rates rise and inventory levels increase, price increases will shrink. Year-over-year price increases in some markets, such as Toronto, have been around 20% for the past few months.

“There is still a sense of urgency to get into the market. The market will continue to be strong over the next few months,” said Benjamin Tal, senior economist with CIBC World Markets, adding he could see new construction also touching 200,000 starts before beginning to fall.

Part of that urgency in the housing sector is being driven by the introduction of the harmonized sales tax in Ontario and British Columbia on July 1. The tax would apply to real estate services and could increase the cost of buying a home by a few thousand dollars.

“It’s a factor fuelling a higher level of activity in Ontario and British Columbia,” Mr. Klump said. “What’s more Canadian than avoiding taxes?”

Elton Ash, vice-president of Re/Max of Western Canada, said he thinks the forecast put out Monday was a little optimistic for 2010, specifically the 4.2% price increase for British Columbia. “But I also think the market will be better in 2011 [than CREA].”

Mr. Ash is actually in favour of some measures to cool the market, like reducing the amortization period back to 25 years. But he wonders whether increasing the downpayment will take some people out of the housing market.

“I think leaving it at 5% would be okay,” Mr. Ash said.

Looks like a V shaped recovery afterall

Paul Vieira, Financial Post 

OTTAWA — Despite all the angst in financial markets over sovereign debt and the populist influence on banking reform proposals, the economies in the United States and Canada have chugged along the road to recovery at a pace that’s surprising even the most skeptical of analysts.

Data released Friday indicate U.S. GDP grew in the fourth quarter, an estimated 5.7%, at its fastest pace in six years. Meanwhile in Canada, data show November growth was stronger than expected, at 0.4%, while revisions to September and October figures indicate the economy was much stronger than earlier thought.

“It couldn’t have been that easy, could it?,” asked Stewart Hall, economist at HSBC Securities Canada, who in previous notes had expressed caution about a slow, uneven recovery. “Yet charting out the month over month GDP looks an awful lot like a “V” shaped recovery.”

Prior to the release of this data, markets had been consumed with worries in the aftermath of the financial crisis, be it the debt levels of industrialized countries; a slowdown in Chinese growth as Beijing looks to tighten credit conditions, and measures proposed by the U.S. White House that could scale back the size of U.S. banks, leading them in the meantime to restrict credit growth as given their uncertain future.

“One of the important lessons of the crisis was that it was often helpful to focus squarely on more comprehensible macro-cyclical dynamics than on the noise and complexity of these other areas,” Dominic Wilson, director of global macro and markets research for Goldman Sachs, said in a note this week.

“The latest focus on the banks might inadvertently restrict credit or tighten financial conditions in ways that do alter the macro path. But we think it makes sense to stay more focused on the economic news rather than shifting views too much on the basis of handicapping the twists and turns of possible legislation and the inevitable news from Washington.”

As for the nuts and bolts of the data, analysts had mixed views.

In the U.S., economists at Capital Economics argued the big estimated headline gain was largely due to inventory rebuilding – hence, there’s some skepticism that will kickstart a self-sustaining recovery.

But Dawn Desjardins, assistant chief economist at Royal Bank of Canada, said the U.S. data suggest “the consumer, after being in hiding the previous-six quarters, re-emerged in the second-half of 2009. … This was a reflection of rising confidence that the recession was ending, the effect of government programs and a very low interest rate environment. Going forward, we expect that consumer spending will remain positive but that increases will be moderate as the hangover from the buying binge in previous years constrains activity.”

It is not just the consumer. Business investment also surprised on the strong side, with growth of 2.9% after a 5.9% drop in the previous quarter. Investment in equipment and software jumped 13.3%, well above the 1.5% expansion in the third quarter. Net exports also added to U.S. GDP, in a sign that the country is beginning capitalize on its weaker currency and stellar productivity when it comes to trade.

In Canada, the surprisingly strong November data – and upward revisions to September and October – have economists indicating that the recovery is for real, with some now penciling in growth of at least 4% for the fourth quarter, or above the Bank of Canada’s own projections. And remember, the central bank’s forecast is at the upper end of market projections.

“This is one of the most convincing signs so far that the Canadian recovery is for real, and neatly dovetails with the robust U.S. GDP result,” said Douglas Porter, deputy chief economist at BMO Capital Markets.

Don’t count on it. For the Bank of Canada to raise rates before the middle part of 2011 would be totally inconsistent with its current forecast

David Rosenberg Published on Wednesday, Jan. 27, 2010

David Rosenberg is chief strategist for Gluskin Sheff + Associates Inc. and a guest columnist for Report on Business

Canadian market watchers will get some good news this week. The predictions for a “blowout” reading on fourth-quarter GDP are already out there and it is likely to be an abnormally strong number. But for anyone who thinks a big number is likely to help lock in a rate hike this summer, I would suggest that is not going to happen. In fact, my view is that the Bank of Canada will not be raising rates until mid-2011 – at the earliest.

This is critical to the outlook for Canadian money market and bond yields since futures have priced in nearly 100 per cent odds of a 25 basis point rate hike this June, and another 25 basis points by September. (A basis point is 1/100th of a percentage point.) The central bank has already told us that its base case is for 2.9 per cent real GDP growth this year and 3.5 per cent next year, with the starting point on the “output gap” being 3.7 per cent (“output gap” is the gap between the actual level of real GDP and where real GDP would be if the economy were at full capacity). Remember that an output gap that big in any given quarter classifies as a 1-in-20 event. Moreover, baselining these expected growth rates against the latest estimates of potential growth puts the output gap at a smaller level of 1.55 per cent this year, narrowing further to 0.25 per cent in 2011.

The history of the Bank of Canada is such that – outside of when it had to defend the Canadian dollar – it typically does not embark on its tightening phase until the output gap is close to closing. Even during the aggressive John Crow era, the bank’s modus operandi was to time the first rate hike just as spare capacity was being eliminated, and not much before. On average, the first central bank rate hike following a recession takes place one quarter before the output gap closes (there is still a gap, but it is small at 20 basis points). If such a strategy is replicated this time around – and the cause for being on pause longer in the context of a historic deleveraging cycle is certainly quite strong – then the very earliest the bank will move is the second quarter of 2011.

Under this scenario, based on some back-of-the envelope calculations I just did, the unemployment rate at no time declines below 7.5 per cent through to the end of 2011. The peak in the jobless rate was 8.7 per cent in August, 2009. Going back to prior recessions, the central bank does not begin to tighten rates until the jobless rate is down an average of 150 basis points with a range of 130 basis points to 170 basis points.

Unless the bank wants to be pre-emptive – highly unlikely when it acknowledges in its economic outlook last week that “the recovery continues to depend on exceptional monetary and fiscal stimulus” and that “the overall risks to its inflation projection are tilted slightly to the downside” – then to raise rates before the middle part of 2011 would be totally inconsistent with its current forecast. More to the point, while bored Bay Street economists analyze every word to see if the bank is more or less “hawkish” than in its previous outlook, what is important for investors is to assess the bank forecast and decide what it means for the degree of excess capacity in the economy and what that implies for the future inflation rate.

The bottom line is that even with the fragile recovery, the bank sees more downside than upside risk to its inflation projection, and, to reiterate, for it to start tightening policy until the jobless rate falls below 7.5 per cent would be a break from past post-recession actions.

And whatever future “policy tightening” is needed could also come via the overextended loonie, limiting any need for an interest rate adjustment in the time horizon that the markets have discounted. This is a source of debate on Bay Street, but the bank is still sensitive to the growth-dampening impact of an exchange rate too firm for its own good. To wit: “The persistent strength of the Canadian dollar and the low absolute level of U.S. demand continue to act as significant drags on economic activity in Canada,” the bank says.

In a nutshell, the Canadian market is already braced for 50 basis points of tightening from the Bank of Canada by September. With that in mind, it is difficult to believe that there is any significant rate risk here; if anything, the surprise will be that the bank is on hold for longer. If that proves to be true, then there is actually more downside than upside potential to Canadian bond yields, particularly at the front end of the coupon curve.

The reason the markets think the bank may pull the trigger is because of this one sentence that shows up in every press statement: “Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.”

So the central bank has really only given a pledge to keep rates where they are until mid-year. But June is only five months away and so one would have to think that at one of the next three meetings, the Bank is going to have to update this particular sentence or cut it entirely and leave the market without a de facto time commitment. Either way, the moment the bank changes this sentence is the moment the market will put on hold its expectations of a new rate-hiking cycle coming our way.

Until then, homeowners opting for variable rate mortgage financing will likely not have to face the interest rate music.

To hear more about the changes in the mortgage market, tune into The Mortgage Show, with AMP of the Year Angela Calla on CKNW AM980 Saturdays at 7pm