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When to get into the housing market, how much to spend, when to renew

Jennifer Stone – Durhamregion.com

Patrick Forbes has seen both sides of the mortgage rate game.

Earlier this year, before rates started to creep up, the Durham resident was looking at whether to refinance to take advantage of historically low rates. But, by the time he got around to doing anything about it, rates had started to rise. Changing his mortgage would no longer save him money.

“What got me was procrastination,” he said. “I missed my moment, if you will.”

But Mr. Forbes has also been the beneficiary of interest rate fluctuation. In the 1970s, when rates hit historic highs, he bought his first home. Rates were stuck around 22%. But, for a few days, almost unbeknownst to him at the time, rates were cut almost in half. It was during those days that Mr. Forbes’s mortgage went through.

With interest rates edging up, tales of houses on the Canadian market being over-valued in double-digit territory, horror stories of foreclosure and seriously delinquent mortgages in the U.S., and changes to mortgage lending rules in Canada, all sorts of questions of affordability could be haunting those looking to buy, and even those already in the market.

There’s no question interest rates will go up, said Finance Minister and Whitby-Oshawa MP Jim Flaherty. But, he also doesn’t think the incredibly high rates — like the 22% Mr. Forbes speaks of seeing in the 1970s — are likely to be seen again.

Mr. Flaherty was a young lawyer during that period of record-high interest rates.

“I remember people coming in (to his office) and handing over their keys” because they simply could no longer afford their homes, given the interest rate of the day, he said.

But, higher interest rates are reality, he said.

“Gradually, interest rates will return to something that’s more like what’s historically normal,” he said.

Ensuring people can continue to afford their homes even when interest rates increase was part of the rationale behind recent changes to mortgage lending rules Mr. Flaherty recently introduced.

“We were seeing more and more insurable mortgages” with a “high ratio” of debt, he said. “We wanted to tighten that up.”

The new rules are lauded by Oshawa-based mortgage agent Elfie Hayes.

“The changes the government have put in place were wise,” Ms. Hayes said.

As it was, Canadian lending rules and practices have tended to be a little more conservative than those of the U.S., and it shows. South of the border, housing prices dropped 33% between 2006 and 2009, said TD Chief Economist Don Drummond, in Oshawa for a recent City-run event. That didn’t happen in Canada.

“Almost 10% of mortgages in the U.S. are seriously delinquent, meaning more than three months behind in payments,” Mr. Drummond said, noting history has shown about 50% of those who land in the “seriously delinquent” category wind up defaulting on their mortgages.

It’s different in Canada, where far fewer mortgages have ended in default, he said. Less than half a per cent of Canadian mortgages “are delinquent at all, never mind seriously delinquent,” he said. That means there’s not been over-supply, and house prices have remained strong.

But the new rules are a little more conservative yet. One of the key changes relates to variable versus fixed-rate mortgages, Ms. Hayes said. While mortgage-takers previously could have pre-qualified based on interest at the usually lower, but subject to fluctuation, variable rate, now, even if they’re taking a variable mortgage, they have to qualify based on the fixed rate.

“It’s decreased people’s buying capacity and that’s not a bad thing,” noted Ms. Hayes.

The vast majority of mortgage holders who have in past opted for variable rate mortgages have traditionally locked in within two years, Ms. Hayes said.

The variable rate mortgage is something Ms. Hayes often steers her clients away from anyway, unless they’re very financially solid, she said.

“If a new couple, recently married, with 5% (down payment), were talking about a variable rate mortgage, I would discourage them,” she said, noting the potential for fluctuation of payment, along with the possibility of increased expenses or decreased earning — after all, young newlyweds are “more likely to have mat leave” — make the variable rate less of a good idea.

A good real estate agent will also employ strategies to help buyers remain within their realm of affordability, said Dierdre Mullen, president of the Durham Region Association of Realtors. Often, it’s unnecessary, though, she noted.

“Buyers are really savvy,” she said. “They understand the costs involved in buying a home.”

Still, realtors will point out potential costs, like landscaping for a newer home, or roof or other high-dollar replacements that may be necessary for an older home, she said.

Real estate professionals “absolutely” counsel clients to ensure they stay within their affordability range, Ms. Mullen said.

“Your job as a realtor is to do what’s in the best interest of your client,” she said.

Most of the experts expect a slow rise in interest rates — though not to anywhere near the historic highs Mr. Forbes was able to avoid three or more decades ago — and a similarly gradual decrease in housing prices and a slight softening of the real estate market. But homes will always be bought and sold, they say. And it’s almost impossible to say when the best time to buy, sell or renew a mortgage will be.

Mr. Forbes thinks he may have missed to boat to renew under the historically low levels; already, rates have inched up over what he’s paying on his existing mortgage.

“I had oodles of time,” he said. “The rates were very low and very stable. They were very low and I did nothing . . . and it cost me.”

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Contact the Jeffrey Team for more information  -  416-388-1960

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Marcel Beaudry, vice-president of ING Direct, says there is no question the new rules will have an impact on consumers looking to switch banks

Garry Marr, Financial Post

A headlock would be the wrestling term to describe the hold Canadian banks will have on some consumers because of new, more strict mortgage rules.

We are already seeing the impact of the changes that came into effect on April 19, but were put in place well in advance by Canadian financial institutions. Consumers are increasingly selecting fixed-rate mortgages of five years or more because it’s easier to qualify for them.

On mortgages for terms of four years or less, including variable-rate mortgages, consumers must be able to pay based on the five-year fixed posted rate, which is now 6.1%. Go longer and you can use the rate on your contract, as low as 4.6%. No more than 32% of your gross income can cover principal and interest, property taxes and heat.

Peter Vukanovich, president of Genworth Financial Canada, the largest private provider of mortgage-default insurance, says only 5% of new high-ratio mortgages are going variable versus 15% just six months ago.

But there is another wrinkle to the new rules: Anybody shopping around for a better rate has to requalify based on their current credit situation. Stay with the same bank and there’s no check.

“It’s definitely a headlock and not a loophole because a loophole you can get out of,” says Vince Gaetano, a mortgage broker with Monster Mortgage.

There is a large percentage of Canadians who get a renewal notice from their bank and just sign on the dotted line. The Canadian Association of Accredited Mortgage Professional has found only 22% of Canadians switch banks at renewal time. A significant portion of the remaining 78% are sheep being led around by their financial institutions.

Those looking for some choice may find what was good enough to get into the market a month ago may not meet the test today.

Consider that as recently as two years ago, consumers were able to buy a house with no money down and a 40-year amortization schedule. If that consumer was making regular monthly payments, they would have paid down only 4.7% of their principal after five years. Today, that customer would still be high ratio and subject to requalifying if they switched banks.

“It’s not all of them, but a majority of first-time buyers with just 5% down or less won’t be able to qualify if they go to another bank,” Mr. Gaetano says. Many of those buyers were qualifying based on the three-year rate – about 200 basis points lower than the current qualification rate.

If house prices went down, something many in the real estate community have suggested could happen, that would be an even bigger blow for consumers. It would mean an even larger percentage of homeowners would still be considered high ratio upon renewal because they wouldn’t meet the test of having 20% equity in their home.

Martin Beaudry, vice-president of lending at ING Direct, says there is no question the new rules will have an impact on consumers looking to switch banks, but noted anyone who had a 40-year amortization and changed institutions also had to requalify and there hasn’t been a huge impact.

“There will be a segment of the population tied down by the new rules to their bank,” Mr. Beaudry says.

That’s a position nobody should be in.

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Contact the Jeffrey Team for more information  -  416-388-1960

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Others expected to follow Canada’s largest bank with lower rates

CBC News

Canada’s largest bank is lowering its five-year fixed mortgage rate, the second reduction this month.

RBC Royal Bank says the posted rate for five-year mortgages will be reduced by about one-10th of a percentage point to 5.99 per cent, effective Friday. Later in the day, Toronto-Dominion bank announced it, too, was cutting its benchmark five-year rate to 5.99.

Banks routinely discount from their posted rate, but other banks are expected to follow suit.

RBC’s rate started the month at 6.25 per cent, but it was lowered by 15 basis points on May 11 along with a range of other rate cuts. A basis point is one 100th of a percentage point. Prior to this month, Canadian mortgage rates had been on the rise.

Variable-rate and fixed-rate mortgages can often move in opposite directions. Most lenders are still offering variable-rate mortgages under two per cent. That’s because those rates are directly tied to the Bank of Canada’s lending rate, which currently sits at 0.25 per cent.

Fixed-rate mortgages, however, are less based on the central bank’s rate, and are more dependent on the bond market, where lenders sell bonds to raise money to lend to prospective home-buyers.

Responding to higher costs to borrow on the bond market, the big banks moved to raise their fixed-rate interest rates, peaking at 6.1 per cent in April. The Greek debt crisis, however, has brought those costs back down for Canadian banks, which led to the rate drop.

The fixed-rate change is also significant because under new mortgage rules in place since April 19, borrowers must qualify for a bank’s posted, five-year fixed rate mortgage, no matter what the term and nature of mortgage they end up choosing.