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

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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

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HIGHLIGHTS OF THE WEEK

United States

• The Fed’s acknowledgement that underlying inflation is no longer perceived as subdued was an important signal to the markets and highlighted that core inflation is gradually inching higher.

• At the same time, the Fed trimmed its economic growth forecasts for 2011 and 2012, but left its 2013 unchanged. While growth forecasts came down, the view remains that the slowdown is transient.

• The troubled housing market will remain the major domestic downside risk to economic growth. In May, the demand for housing weakened as both new and existing home sales declined.

• On a positive note, the stronger than expected durable goods orders offers a positive sign about economic growth as we head into the second half of the year.

Canada

• Risk remained the dominate theme in Canadian financial markets this week.

• The Bank of Canada issued a publication this week stating that some risks were more heightened than they were in the spring. Examples of the top risks on the central bank’s list include: (1) European sovereign debt concerns; (2) U.S. fiscal and debt challenges; and (3) elevated household debt levels here at home.

• Markets responded well at week’s end to developments in Europe, but a resolution to the crisis remains fleeting. A plunge in crude oil prices on Thursday didn’t help matters either.

Courtesy of TD

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Bank says it will raise rates if economy continues to expand as expected

By Julian Beltrame, The Canadian Press

OTTAWA — The Bank of Canada has signaled that interest rates will likely rise later this year, as long as the still-fragile economic recovery continues to build.

For the sixth straight announcement date the central bank on Tuesday delayed the tightening regime it had begun almost a year ago to the day and kept its trendsetting policy interest rate at one per cent. But in an accompanying statement, the bank did alter its advisory on future action, indicating it will start moving rates closer to their normal levels if the recovery continues on track.

"To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn," it said.

"Such reduction would need to be carefully considered."

It's the first time the bank has signalled in an interest rate announcement that it will eventually have to raise rates, although governor Mark Carney has been warning Canadians in speeches and news conferences that higher rates are coming for more than a year.

Financial markets appeared to react to the new language — the loonie jumped nearly a cent to 103.28 cents US following release of the statement at 9 a.m.

But analysts also said nothing was carved in stone.

The bank's ambiguous phrasing in adding "carefully considered" to its signal of monetary tightening, said CIBC chief economist Avery Shenfeld, puts the odds of a move in July at less than 50 per cent. He predicted the bank will begin tightening in September — about where most economists were prior to the announcement — with the overnight rate being raised to 1.75 per cent by the end of the year.

Another analyst, Scotiabank's Derek Holt, said he was sticking to his prediction of an October restart date but recognized that Carney would feel the need to signal that ultra-low rates would not be around forever.

The markets were starting to think that the Bank of Canada had already given up on this year for moving rates north, and Carney wanted to disabuse investors of the notion, Holt said.

"In the last few weeks we'd seen markets move toward taking out any expected Bank of Canada moves at all this year and I think the bank was getting a little uncomfortable with that."

Holt said the bank seems to be as uncertain about how the recovery will unfold as is most of the world. Policy-makers, including Carney, have of late taken to setting off warning flares about rising risks to the world economy, although the tone in the bank's statement was less alarmist this time.

The bank statement Tuesday appeared to take a slightly darker view of the modest nature of the U.S. recovery and the European debt crisis than it did in April, while repeating its concerns about Japan's dual natural and nuclear disasters

But it continued to say that the global recovery is proceeding broadly as outlined in its last policy review, and so is Canada's. While supply chain disruptions emanating from Japan will cause Canada's second-quarter growth to fall sharply, the negative impacts will be short-lived.

"Although temporary supply chain disruptions are expected to restrain growth sharply in the current quarter, this is expected to be unwound in subsequent quarters," the bank reasoned.

As well, Carney remains convinced that inflation pressures caused by high commodity prices are a temporary phenomenon, at least in Canada.

"The bank expects that high energy prices and changes in provincial indirect taxes will keep total CPI inflation above three per cent in the short term," it says. "Total CPI inflation is expected to converge with core inflation at two per cent by the middle of 2012 as excess supply in the economy is gradually absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored."

The risk to higher inflation is that household borrowing grows, given low rates, but on the other hand, the bank says, the strong Canadian dollar should keep prices of imports in check.

Lawlessbrown.com

RBC Specialist Fires Low Blows & Goes

Courtesy of canadianmortgagetrends.com

Banks have extensive policies governing what their representatives can tell the public. The alleged actions of RBC mortgage rep Corinne Schindler demonstrate why.

Schindler has reportedly been circulating this flyer, which grossly mischaracterizes mortgage brokers in relation to bank specialists. It’s a document that demonstrates a stunning lack of knowledge, professionalism and discretion.

The piece, which displays RBC’s logo and web address, has gone viral and caused a PR embarrassment at the nation’s biggest bank. Incensed brokers from across the country have demanded that RBC retract the misstatements on the specialist’s behalf.

Here is a sample of the distortions attributed to Ms. Schindler (our perspectives follow each line):

1. Brokers charge “set-up fees" and "other hidden costs"

· Truth: Broker fees are exceedingly rare on prime residential mortgages. When fees or borrowing costs are warranted, provincial regulations require full disclosure.

2. “Ask a broker what their compensation will be for completing your mortgage.”

· Truth: Broker compensation is geared primarily to the term and secondarily to the rate. As with any incentive-based model, conflicts can exist, but no more so than with various bank rep models that pay more commission for selling a higher rate.

3. Brokers pick lenders "based on only the lowest rate, no other factors"

· Truth: Rates are commodities so successful brokers always prefer to leverage trusted advice and relationships. To build each, brokers become experts in their craft, which includes term selection, product comparison (from multiple lenders...key point) and strategic mortgage planning.

4. Brokers…"cannot fit your mortgage solution together with your overall financial plan."

· Truth: Needs assessments are a fundamental tool that brokers utilize. Brokers are trained to uncover future needs that financing might have to address.

5. "Brokers will not be there in a few months when you need to ask questions about your mortgage or change the terms of conditions"

· Truth: Referrals are a broker’s lifeblood and maintaining relationships is impossible without exceptional post-closing support.

6. “You have to be careful to deal with an institution that will give you a great rate term after term."

· Truth: Banks’ renewal models are designed to maximize profit. That’s done through selective pricing (i.e. not offering the best rate to everyone up front). It’s a fallacy that banks reward loyalty with great rates. (Here’s some relevant research).

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After poking around at RBC, this piece appears to be Schindler’s own doing. This advertorial is definitely not in RBC’s marketing library we’re told. Moreover, RBC’s corporate materials are far more polished (i.e., generally no grammar or formatting issues, missing slogans, mistruths, etc.).

From what we hear, Schindler violated RBC compliance guidelines and sent it out without RBC’s or her manager’s consent.

In response to all this, RBC provided us with a comment:

“The opinions expressed in the document by the mortgage specialist do not reflect the positions, strategies or opinions of RBC. We are following up directly with this mortgage specialist to ensure future collateral accurately reflects the RBC brand.”

We have a better idea. How about no “future collateral” from this individual period?

Fiduciaries that mislead the public for personal gain are hazards and liabilities to their employers. Anyone who would author this sort of content should be sent packing because Lord only knows what she's telling clients in private.

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Incidentally: We’ve been holding this story since last Wednesday, awaiting comment from RBC and trying to get Schindler’s side of the story to give her the benefit of the doubt. On the two occasions we did reach her, she hurried off the line, promising to call back. Needless to say, after multiple contact attempts, we never heard back.

www.lawlessbrown.com

Window closing’ on ultra-low mortgage rates

Tim Shufelt, Financial Post · Monday, Feb. 7, 2011

Amid the noise of volatile-but-improving economic indicators, mortgage rate hikes are likely to repeat like a chorus in the coming months.

Canadian banks are raising interest rates on mortgages, marking the beginning of a trend as they correlate with rising bond yields and expected monetary tightening.

That’s making a strong case for borrowers to lock into fixed rates before it’s too late, said Benjamin Tal, deputy chief economist with CIBC World Markets. “The window is closing.”

TD Canada Trust and CIBC both announced Monday hikes to their residential mortgage rates, the first increases since changes to the rules of borrowing were announced by the federal government last month. The other big banks where expected to follow the moves shortly.

Effective Feb. 8, the interest rate on the banks’ benchmark five-year closed fixed rate mortgage will increase 25 basis points to 5.44%. The country’s other major lenders are expected to soon follow suit.

Toronto mortgage broker Paula Roberts said rising borrowing costs will compel more of her clients to abandon ultra-low variable rates in favour of higher, fixed-rate mortgages.

That can be a tough decision for borrowers to accept higher payments, but not one that should strain a mortgagee’s finances, she said.

“If you can’t afford [your payments] ... that’s a problem,” Ms. Roberts said. “That’s why the government has changed the rules.”

In two stages over the past year the federal government announced changes to the conditions of mortgage lending — shortening the maximum amortization from 35 years to 30 years and requiring borrowers to qualify for a fixed-rate plan, even if they are opting for a variable rate.

Many who only qualify under the old rules, however, will try to secure mortgages before the shorter maximum amortization periods come into effect next month, Ms. Roberts said.

“There are going to be a lot of people that will enter into their agreements by March 18.”

Much of the momentum in mortgage rates can be attributed to a bond selloff and rising yields across the board. That effect is partly a reflection of building global inflationary pressures as well as a global economy that is proving more robust than expected.

“In my opinion, the bond market will not be the place to be over the next six months, and if that’s the case, you will see mortgage rates continue to rise,” Mr. Tal said.

In addition, anticipation of increases to the Bank of Canada’s benchmark lending rates is building, also contributing to rising yields, which puts pressure on fixed-income mortgages.

If there was any lingering doubt that the Bank will soon raise rates, last week’s jobs report erased them. The report showed Canada added four times more jobs than expected in January.

“[It] creates a fairly powerful story for the Bank of Canada, which is clearly concerned on the domestic front,” said Camilla Sutton, chief currency strategist at the Bank of Nova Scotia. “I think there’s a material change.”

So do investors. The probability that the central bank will boost its key policy rate by May, as measured by overnight index swaps, jumped to almost 75% after the jobs data. http://www.financialpost.com/news/Window+closing+ultra+mortgage+rates/4239243/story.html#ixzz1DMwQzyWP

lawlessbrown.com

Release: Department of Finance tightens CMHC rules

TD Economics

• For the second time in twelve months, the Department of Finance tightened rules on residential mortgages to help slow the pace of household debt accumulation. Changes include shortening the amortization period to 30 years (which had already been shortened from 40 to 35 years in 2008), withdrawing CMHC insurance of home equity lines of credit (HELOC), and a reduction in the maximum refinance percentage from 90% loan-to-value to 85%. Changes to the amortization period and the refinancing ratio will take effect March 18 and the HELOC change will take effect April 18, 2011.

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