The secret to the sudden increase in variable rate mortgages

Why could I get Prime minus .90 last week and today it is Prime minus .25?

September 22, 2011 (Vancouver)

A great question, says the Mortgage Brokers Association of BC (MBABC), especially when fixed interest mortgage rates are remaining the same. The quick answer? As with many things, it all boils down to money.

Over the last couple of months, banks and other lenders have been offering historically low variable interest rates to qualified homebuyers in an effort to attract new clients and mortgage business. In the short term, lenders have been prepared to accept these low profit margins with the knowledge that, as the prime rate inevitably rises, so too will their profit on variable mortgages – a similar ‘loss leader’ tactic used by retailers to get consumers into their door.

“However”, says Geoff Parkin, MBABC’s president, “the recent announcement by Bank of Canada governor, Mark Carney has changed the mortgage lending landscape.” Carney stated that, because of poor performing global markets and continuing economic uncertainty, the benchmark interest rate would remain unchanged. The long-term outlook indicates continuing low fixed interest rates with no significant increases to the Prime rate. “In a nutshell”, says Parkin, “the bank’s theory of anticipating rising profits on variable rates was proven wrong. They’ve had to quickly respond to this situation by reducing the variable rate discount in order to gain back profit.”

What does this mean for consumers who have variable rate mortgages? Much of the same, says Parkin. “We continue to see low fixed rates and the variable rate is under 3.0%. There may still be value in going variable over fixed, but because consumers all have different financial situations and mortgage needs, we recommend they obtain expert financial advice from their MBABC mortgage broker.”

courtesy of MBABC

LawlessBrown.com

HIGHLIGHTS OF THE WEEK

United States

• A coordinated move among leading central banks to provide short-term U.S. dollar funding in Europe helped instill confidence, and contributed to a solid rally in equity markets this week.

• Yet worries about the economy have not changed, so markets will be carefully tuned into the Fed’s policy meeting next week.

• This should prove a most interesting meeting indeed, as the ongoing divergence of opinions at the Fed come to the fore. Proponents of more stimulus will point to a weak economy and sluggish job growth, meanwhile the hawks will point to the ongoing rise in inflation.

Canada

• Stricter mortgage insurance rules have taken some steam out of the Canadian housing market. Home sales fell 0.5% in August, a fifth contraction in the past seven months, while home price pressures eased. However, the impact has not been overly dramatic and the level of housing activity remains healthy.

• Shaky consumer confidence will likely weigh on the housing market in the near term. However, a continued low interest rate environment will likely help support a modest pick up in housing demand in early 2012.

• The key implication of a lower-for-longer interest rate environment, and the resulting elevated level of housing demand is that the Canadian household debt-to-income ratio is likely to rise further.

Courtesy of TD

lawlessbrown.com

BoC holds key rate at 1 percent

* Cites Europe, U.S. woes as backdrop for policy shift

* Sees Canadian growth resuming in second half of year

* Says inflation pressures dampened

* Cdn dollar gains, markets pare rate cut expectations (Adds details)

By Louise Egan and Randall Palmer

OTTAWA, Sept 7 (Reuters) - In a dramatic policy shift, the Bank of Canada said on Wednesday it saw less need to raise interest rates, becoming the latest major central bank to take a more cautious stance about the worsening global economy.

The bank held its overnight rate unchanged at 1 percent, where it has been for the past year, and took its previous talk of a rate hike off the table.

"In light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished," the central bank said in a statement.

In its July interest rate announcement, the bank said stimulus "will be withdrawn" provided the economy kept growing, leading markets to expect a rate hike later this year.

That forecast looks outdated now, given the European debt crisis, slowing U.S. growth and volatile markets.

Investors were not surprised by the more dovish tone, although many had expected a sharper policy reversal. Most economists still expect the next move in rates to be up rather than down, but it could be a year or more before that happens, and the bank's cautious language left the door open to an eventual move in either direction.

Goldman Sachs this week became the first major financial institution to forecast a Canadian rate cut later this year.

"There is really not much hint that the bank is considering cutting rates, but at the same time, they've pretty much put rate hikes firmly on the shelf," said Doug Porter, deputy chief economist at BMO Capital Markets.

Courtesy of Reuters

LawlessBrown.com

Misconceptions about mortgage brokers

A Few Misconceptions

Misconceptions occur in every business and the mortgage business is no different.

A recent example is this post by Boomer & Echo (B&E), a prominent blog that we typically enjoy. In it, B&E opines on why not to use a mortgage broker.

In the piece, the author gets some stuff wrong. As often happens, we came across it in our weekly blog scan and feel obliged to offer some counterpoints.

B&E makes four claims. They are:

1. Brokers push 5-year fixed rates.
   
   Counterpoint: Brokers sell a higher ratio of variable-rate mortgages than bank salespeople, and have for quite some time. That’s per executives we’ve questioned at banks with both broker and retail channels (e.g. CIBC and Scotiabank). In general, however, all mortgage professionals (bank or broker) sell a lot of 5-year fixed product. It’s the most popular term (has been for decades), it’s the easiest to qualify for, and it has the most competitive discounting (albeit, not presently).
   
2. Loyalty to your bank pays.
   
   Counterpoint: The Bank of Canada concluded exactly the opposite (more). To summarize, it’s research found that existing customers pay more than new customers. What’s more, no one lender continually has the best mortgage options. By comparison shopping, good brokers can save homeowners interest and identify the lender with the right flexibility/value tradeoff. The best brokers provide expert term analysis, proper deal structuring and helpful strategies to reduce a borrower’s amortization.
   
3. Bankers have better reputations
   
   Facts: The RBC specialist incident last April proved that reputation should be judged individually, not by virtue of where a mortgage advisor works. Generally, brokers and bank specialists are both paid by commission and the commission is similar whether they sell a 5-year fixed or variable. Neither is holier that the other in that respect, except that bank reps are hired to push only one brand.
   
4. Your better off doing it yourself
   
   Counterpoint: We have visions that people will someday get a mortgage online like they buy a stock at iTrade. But we’re not there yet. Good brokers provide counsel that saves time and money. Do-it-yourselfers sometimes discount the value of advice, mesmerized instead by brokers/bankers who can save them a few basis points in rate. For most, that’s a mistake because:
• Few individuals grasp the mortgage math needed to perform proper term selection. Term selection impacts borrowing cost far more than rate selection. A “good rate” alone does not equal a “good deal.”
• There are lots of creative techniques that skilled advisors can use to help people whittle down principal quicker.
• Lenders rarely disclose all of their mortgage restrictions until you sign their contracts. Brokers know the benefits and pitfalls of multiple lenders, and advise borrowers in advance.

It is possible to pick your own investments, do your own taxes or write your own will, but people still hire financial planners, accountants, and lawyers. There’s only so much time in a day and we can’t specialize in everything.

In all of those industries there are great and not-so-great practitioners. Brokers are no different. Interview several before picking one. Ask questions like:

• Which lenders they use most often and why
• How long they’ve been in business full-time
• Why their term recommendation is mathematically sound for your specific needs.

Sense if you can trust them. If they seem to care about you, and are competent, and make you feel comfortable, you’ll be glad to have them on your side

Courtesy of Canadian Mortgage Trends

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