25 Mar

Interest rates on new mortgages increasing, despite Bank of Canada rate drop

General

Posted by: Alisa Aragon

Fixed mortgage rates hiked, discounts on variable rates slashed as banks desperately seek liquidity, while government intervenes.

With the Bank of Canada dropping its overnight rate by a full percentage point this month in response to the COVID-19 pandemic, it would seem to be a great time to shop for a new mortgage.

Not so, according to mortgage experts. In fact, advertised interest rates for new mortgage applications have been climbing significantly over the past few days.

In its March 19 update, mortgage comparison website RateSpy.com wrote as an example that TD Bank had just increased its advertised rates:
• three-year fixed: from 2.69 per cent to 2.89 per cent
• five-year fixed (high ratio): from 2.69 per cent to 2.79 per cent
• five-year variable: from 2.85 per cent to 2.95 per cent (no discount on the bank’s prime lending rate)

Alisa Aragon, mortgage broker with Dominion Lending Centres Mountain View, told Glacier Media in an interview March 20, “Lenders started increasing rates last Friday [March 13, the same day that the Bank of Canada made its emergency cut to the overnight interest rate]. That includes major lenders such as Scotiabank, TD, RBC. They’ve also been reducing variable-rate mortgage discounts on the prime rate, which is currently 2.95 per cent, so the discount on most variable rates is barely anything. In the future, we could see no discounts at all.”

She added, “The fixed rates are usually connected to the bond market, but because banks need liquidity right now, they’re increasing the rates.” The bond market had previously dropped in line with the central bank’s interest rate, but has also rebounded over the past couple of days.

Liquidity for the banks is a key issue for the federal government right now, which announced March 20 that it is introducing “changes will help provide stable funding and liquidity to financial institutions and mortgage lenders and support continued lending to Canadian businesses and consumers.”

This follows an announcement by the Ministry of Finance that it is launching “a $50 billion Insured Mortgage Purchase Program (IMPP)… The amendments allow mortgage lenders to pool previously uninsured mortgages into National Housing Act Mortgage-Backed Securities for CMHC to purchase these securities through the IMPP.  The impact of this measure will provide financial institutions with more liquidity. This, in turn, will allow financial institutions to continue lending to businesses as well as individuals, while assisting customers who face hardship and need flexibility, on a case by case basis.”

By insuring previously uninsured mortgages, the government is essentially taking on the risk associated with those loans, freeing up banks’ balance sheets to provide more liquidity. The moves are intended to support banks while they offer such programs as six-month deferrals of mortgage payments to customers facing financial hardship due to the COVID-19 pandemic.

However, Aragon said that the program would not necessarily prevent banks from raising mortgage interest rates. “It depends on the bank’s balance sheets, every bank is different,” she said. “These are unprecedented times.”

Even though rates for new mortgages are currently rising, applicants are rushing to get a mortgage on the back of news that the Bank of Canada has slashed its overnight rate.

RateSpy’s March 20 update added, “Nearly every long-time mortgage broker we’ve talked to is swamped, with some saying they’re having their highest application volume ever for a March.”

Aragon is one such busy mortgage professional. She told Glacier Media she is also fielding countless calls from people who are asking about possible mortgage deferrals, even when they haven’t lost their jobs. She added that some are hoping to stop paying their mortgages so they can use the money to invest in the stock market while it is depressed. “That’s not how you do it,” she added. “These deferral programs are really for people who are struggling financially due to the pandemic, and those customers will be required to provide proof of hardship.”

RateSpy’s March 20 update confirmed this trend, saying, “We’re hearing of cases where people are using HELOCs [home equity line of credit] to buy stocks. These are presumably (hopefully) well-qualified, risk-tolerant clients with financial safety nets. It’s definitely not a strategy for the overwhelming majority.”

Joannah Connolly/ Glacier Media Real Estate

March 20, 2020 01:41 PM

23 Mar

10 Spring Cleaning Tips

General

Posted by: Alisa Aragon

10 Spring Cleaning Tips

  1. Create a Playlist
    Everything – including Spring cleaning – is more fun with a great playlist! Not only is music great therapy but it can make the cleaning process go by quicker and make it more enjoyable.
  2. Clean One Room at a Time
    Most people dread Spring cleaning. Everyone likes the aftermath and seeing their home all sparkly and fresh but sometimes it can be an overwhelming process to get to that point. It is best to clean one room at a time, starting with the smaller ones or those that need the least amount of cleaning and work your way up to the larger, project rooms. Another great way to reduce stress over spring cleaning is to tackle one or two rooms each weekend for the month and by the time April comes, you’ll be ready!
  3. Declutter as You Go
    Spring cleaning isn’t just about shining up the brass on the door and dusting. It is just as important to declutter your space as you go! Before you start cleaning the room, it is a good idea to pinpoint items that can be discarded, such as old magazines and papers, as well as to go through closets and cupboards for anything that you can donate (like that sweater you bought and never wore). This will clear up space for new clothing and items and will make you feel that much more accomplished!
  4. Think Green!
    The idea of Spring cleaning is starting the season off on a fresh, clean note. Don’t muddy that up with harsh chemical cleaners. In today’s eco-friendly environment, there are many eco-friendly and safe alternatives to regular cleaners. Vinegar is a great substitute in the bathroom or kitchen as well as combining vinegar, baking soda and water as a deep clean alternative. You can also opt for a steam cleaner to manage tile, hardwood floors, appliances and even outdoor areas as they only use hot water and vapor. While not everything can be cleaned this way, it is best to minimize chemical cleaners as much as possible.
  5. Work From Top to Bottom
    Starting from the ceiling and working your way down just makes sense! This will force debris downward and save you having to re-clean your space. Dusting first will prevent a headache later too!
  6. Save Windows for a Cloudy Day
    Washing your windows after the build-up of winter grime is one of the biggest parts of Spring cleaning as you’ll want to wash them on the inside and outside. However, washing windows in direct sunlight (or using paper towel) can cause streaks. To minimize this and maximize your cleaning efforts, use a microfiber cloth and save this task for a cloudy day!
  7. Plump Up Those Pillows
    Fresh linens is one of the most rewarding things about cleaning, period. There is nothing quite like your face hitting a fresh, plumped up pillow and settling into a freshly flipped mattress. Washing your pillows with ½ cup of baking soda added to the detergent cycle will really get them extra clean! You can fluff them up even more by putting them in the air cycle of your dryer with two tennis balls in socks.
  8. Master Your Closet
    Most of us are guilty of hanging onto old clothes that we haven’t worn in three years or a pair of jeans that we know we will never fit again, but just can’t let go of. Now is the time to say goodbye to those worn out, ill-fitting or stained clothes! There are many opportunities to donate old clothes that are still in good shape too. Not only does that lend a helping hand to individuals who may greatly benefit from them, but it frees up space in your closet for new items that you absolutely LOVE!
  9. Don’t Forget The Fridge & Freezer
    The best time to clean out your fridge and freezer is right before you do your grocery shop, so they will be at their most empty. Take everything out and dispose of anything that is past its expiration date and any almost-empty items you won’t use. Before you restock be sure to wipe down the interior of the fridge with disinfectant and a damp cloth. The same can be done for the freezer but you’ll have to defrost it first!
  10. Clean Air Reduces Allergies
    Replacing furnace and HVAC filters is one of the most overlooked parts of Spring cleaning. Going as far as replacing your standard filter with a more robust one with a higher rating will help keep you even healthier (and allergy free!) this year as they catch smaller particles to ensure your home is void of allergens, chemicals and even odors.

Dominion Lending Centres Inc. March 2020 Newsletter

16 Mar

Stock and Bond Yields Plummet After Sunday Fed Cut

General

Posted by: Alisa Aragon

Fed Cuts Overnight Rate One Percentage Point But Markets Plummet

In an unprecedented Sunday afternoon meeting, the US Federal Reserve cut their key policy rate by 100 basis points (bps) to a level of 0%-to-0.25% (see chart below). Also, the Committee announced increased access to the discount window where the Fed makes loans to banks. The Fed is the lender-of-last-resort and is signalling that it will provide liquidity wherever needed. As well, with interest rates already so low, the Fed is well aware that rate cuts can only do so much. Thus, they are returning to quantitative easing–the buying of large volumes of U.S. government Treasury bills and bonds as well as mortgage-backed securities (MBS), to inject liquidity into the financial system.

The Treasury and US MBS markets are usually the deepest, most liquid markets in the world. But over the past two weeks, liquidity has dried up. Financial instability has risen sharply with the high level of volatility. Banks have experienced significant withdrawals as consumers are hoarding cash like everything else. The cost of funds to banks has risen sharply because of the enhanced perception of risk. With the collapse in oil prices, banks exposed to the oil sector are building up reserves for nonperforming loans. As businesses everywhere in nearly every sector shutdown, the risk of delinquencies rises further. Consumers who are housebound spend less money, and those who are freelancers or hourly wage earners might not get paid. Moreover, the shuttering of schools puts an added burden on parents who have no other daycare options for their kids.

All of this disruption, which according to the Center for Disease Control, could last months–the CDC recommended yesterday the shutdown of meetings of more than 50 people for eight weeks–has led to rising concern about the riskiness of banks. Bank shares have plummeted, and the yields on bank bonds have surged. Besides, banks and other mortgage lenders are fearful of being inundated with requests for refinancings, especially in the US, where penalties for breaking a mortgage are much lower than in Canada. Because of the refinancing surge in the US, the price of MBSs has fallen sharply, raising their yields and making the market highly illiquid.

The rising risk premiums, likely recession and illiquidity are causing banks in Canada and the US to raise some mortgage rates. Lenders are tightening the discount off the prime rate on variable-rate mortgage loans. Some fixed rates have edged higher as well. Such spread widening between mortgage rates and government yields happened during the financial crisis. Bank balance sheets will expand as troubled businesses and consumers extend their borrowings on their open lines of credit. Many will be unable to make timely interest payments. Loan loss reserves, already climbing, will rise further. Liquid deposits will be depleted as many are forced to live off of savings while shying away from selling stocks at markedly depressed prices.

These are not normal times. The Fed’s actions did nothing to calm markets. Indeed, stocks and bond yields plummeted in overnight trade, and the stock markets opened sharply lower in North America. The S&P 500 opened down over 8% while the TSX opened down 11%, triggering a circuit-breaker time out. This is the third time in a week the circuit breaker has hit. The TSX is down roughly 35% from its recent high (see chart below). The S&P 500 is down over 20%. The relative underperfomance of the Canadian stock market reflects our out-sized representation of the energy sector. The two weakest sectors in the TSX are the energy and financial sectors.

The world knows that the Fed and other central banks are running out of ammunition. Governor Powell said yesterday that he would not take the key fed funds rate into negative territory but instead would use “forward guidance” and asset purchases (quantitative easing) going forward.

The good news is that the banks are highly capitalized and much more resilient than during the financial crisis. Central banks since that time have put in place measures to monitor financial stability. Last Friday, the Canadian Office of the Superintendent of Financial Institutions (OSFI) reduced the capital requirements for Canadian banks to free up $300 billion for banks to support troubled borrowers. OSFI warned against the use of these funds to buy back stocks or raise dividends.

OSFI also suspended the proposed revision in the qualifying mortgage rate slated to begin April 6. The posted mortgage rate, published weekly by the Bank of Canada, will remain the qualifying mortgage rate. It is currently 5.19%, but it is expected to fall this week to around 4.95%.

But in these extraordinary times, there is a loss of confidence in the financial system. Some are calling for a full shutdown of the stock markets–but imagine the panic if no one could sell assets. There would truly be a run on the banks. Now is not a time to panic.

 

The Canadian Housing Market

The Canadian Real Estate Association announced this morning that home sales recorded over the Canadian MLS Systems rose 5.9% in February, marking one of the more substantial month-over-month gains of the past decade. Actual (not seasonally adjusted) sales activity stood 26.9% above year-ago levels–keeping in mind that activity was quite weak one year ago. February 2019 marked a decade-low for the month, so a good part of the significant y-o-y gain reflects low levels of activity recorded at the time. February 2020 also benefited from an additional day due to the leap year.

The CREA President, Jason Stephen, said, “Home prices are accelerating in markets where listings are in increasingly short supply, specifically in Ontario, Quebec and the Maritimes which together account for about two-thirds of national sales activity. Meanwhile, ample supply across the Prairies and in Newfoundland and Labrador means increased competition among sellers.”

The number of newly listed homes jumped 7.3% in February compared to January, more than erasing the declines of late last year. New supply gains were posted in some large markets, including the Fraser Valley, Calgary, Edmonton, the GTA, Hamilton-Burlington, Kitchener-Waterloo, Windsor-Essex, Ottawa and Montreal.

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 0.7% in February 2020 compared to January, marking its ninth consecutive monthly gain. The actual (not seasonally adjusted) national average price for homes sold in February 2020 was around $540,000, up 15.2% from the same month the previous year. See the table below for the regional move in prices.

But this is old news, particularly given all that has happened in the past two weeks. What comes next for the housing market? That depends on the course of the pandemic. Lower interest rates would typically be great news for the housing market, particularly for first-time homebuyers. But social distancing is hardly consistent with open houses and home shopping.

Moreover, volatility and instability reduce consumer confidence. Buyers that parked their downpayment savings in the stock markets have lost nearly a third of their money on paper. And how many sellers want a trail of strangers wandering through their homes during the pandemic. So the housing market, like everything else, is likely going to slow over the near term.

The Bank of Canada is hopeful that its rate cuts will stabilize the housing market from what might have otherwise been a substantial shutdown. Lower rates will filter through to lower monthly payments for floating-rate mortgage borrowers. Expect the Bank to cut rates again to near-zero levels, following in the footsteps of the Fed. So far, as of this writing, the Canadian banks have not responded to Friday’s BoC rate cut. The prime rate went down a full 50 bps on March 5 after the Bank cut its key rate by that amount on March 4. But so far, the Big-Six banks have not responded to the 75 bps cut three days ago.

Sherry Cooper,
Chief Economist, DLC

 

12 Mar

How Much Home Can I Afford With My Income?

General

Posted by: Alisa Aragon

Mortgage brokerIn this market, lenders almost always use income to ensure mortgage affordability, regardless of the amount of down payment.  They use the mortgage calculator which helps them to determine calculate affordability  which varies from lender to lender but for the most part, four times your gross income is a good rule of thumb.

How much can you afford more precisely? The shortest answer to that question is: it depends on a number of factors. The most important are:

  • Your gross household income
  • Your down payment
  • The mortgage interest rate
  • The mortgage terms
  • Your mortgage insurance

Lenders will also consider your assets and liabilities. Your own lifestyle and debt comfort zone also come into play here.

Your Maximum Mortgage Calculation is based on two simple rules that lenders use to determine how much of a mortgage you can afford. The first rule is:

  • Your monthly housing costs should not exceed 32% of your gross monthly household income (this can be up to 40% with some banks). Housing costs include monthly mortgage payments, taxes and heating expenses. If applicable, this sum should also include half of monthly condominium fees.
  • Your entire monthly debt load should not be any more than 42% of your gross monthly income. This includes housing costs, and other debts such as car payments, personal loans, credit card payments and the like.

Note: Rules and guidelines are subject to change. Please inquire within. ​​

3 Mar

Federal Emergency 50 BP Rate Cut

General

Posted by: Alisa Aragon

Mortgage rates

The Fed Brings Out The Big Guns

In a remarkable show of force, the US Federal Reserve jumped the gun on its regularly scheduled meeting on March 18 and cut the target overnight fed funds rate by a full 50 basis points (bps) to 1%-to-1.25%. This now stands well below the Bank of Canada’s target rate of 1.75% and may well force the Bank’s hand to cut rates when it meets tomorrow, possibly even by 50 bps.

The Fed has not cut rates outside of its normal cycle of meetings since October 8, 2008, as the collapse of Lehman Brothers roiled financial markets. Such moves are rare, but not unprecedented.

The BoC is conflicted, in that such a dramatic rate cut would fuel household borrowing and the housing market, which the Bank considers to be robust enough.

The Federal Open Market Committee (FOMC, the Fed’s policymaking group) released the following statement: “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.”

In an 11 AM (ET) news conference, Chairman Powell said the broader spread of the virus poses an evolving risk to the economy that required immediate action. The FOMC judged the risk to the economy had worsened. The Fed acted unilaterally, in contrast to the coordinated central bank move taken during the financial crisis in 2008.

However, the Fed is in active discussion with other central banks around the world, and the European Central Bank indicated earlier today that they would take any necessary actions. Central banks in the euro-area and Japan have less scope to follow with rates already in negative territory.

Governor Carney said earlier today that the Bank of England would take steps needed to battle the virus shock. Carney hinted at the complexity of dealing with the trauma for central banks in assessing whether the impact falls on demand — which they have more capacity to address — or supply — which is harder to for central banks to treat.

G-7 finance chiefs and central bankers are scheduled to have a rare conference call today.

With election tensions running strong in the US–after all, today is Super Tuesday–it’s easy to imagine that this move by the Fed is as much political as economic. It comes amid public pressure for a rate cut by President Trump. Moreover, following today’s dramatic move, the president called for more, demanding in a tweet that the Fed “must further ease and, most importantly, come into line with other countries/competitors. We are not playing on a level field. Not fair to USA.”

Politicizing the Fed is dangerous and reduces the global credibility of the US central bank.

Stock markets around the world reversed some of today’s earlier losses on the news. The US stock markets opened today with a significant selloff following a rally yesterday. Bond yields continued to decline on the news.

Bottom Line for Canada: The key government of Canada 5-year bond yield has fallen sharply today to 0.925% and falling at the time of this writing. The 5-year yield was 1.04% before the Fed’s announcement. The Bank of Canada will likely cut overnight rates tomorrow for the first time since October 2018–but by how much? I would guess by 25 bps given Poloz’s concern about household debt.

mortgage broker

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres