What does it mean when RBC lowers it's fixed-rate mortgages?

Driving to work today, I listened to CBC radio announce that RBC has, "quietly" reduced rates on it's fixed-rate mortgages. I listened with a smugness, since most wholesale mortgage lenders in Canada, had already lowered their rates. Those following the Canadian bond market have noticed a trend of lower yields, which directly impact fixed rate mortgages (see the chart below...thanks to the Bank of Canada for this information).

For consumers, it means that the bank's posted rates are decreasing by 0.10%, but when negotiating a mortgage rate directly with a bank, it's difficult to determine the lowest rate.  That's were we can help. As mortgage brokers we work to negotiate the best rates for you, in conjunction with the best features.

On a side-note, if you want to accelerate paying-off your mortgage in the next three years, you'll likely want to choose a variable-rate mortgage. Then you don't have to worry about what's happening in the bond market.

Please contact me directly at lastovic.s@mortgagecentre.com if you need help negotiating a better mortgage rate.

Government of Canada benchmark bond yields - 5 year

GRAPH PERIOD: 17 January 2013 - 17 January 2014

Date	Yield
2014-01-17	1.69
2014-01-16	1.71
2014-01-15	1.76
2014-01-14	1.76
2014-01-13	1.72

What's up for 2014?

I’ve recently heard one of my favourite economists, Benjamin Tal of CIBC World Markets speak about the outlook for the global economy in 2014. How do world affairs affect the housing market? Global events impact people’s inflation expectations. Inflation has a direct impact on the bond market, which is correlated to fixed-rate mortgages. If rates go up, there is less demand for housing as the monthly carrying costs are higher. 

The overall mortgage rates message is relatively boring for 2014: low stable rates. However Benjamin Tal highlighted some interesting bits that are worth sharing:

•  2013 was a year in transition. There is real and sustainable recovery in the U.S. and the Canadian and the U.S. economy are still tied closely together. So as rates remain stable south of the border, they will also remain stable in Canada.

• There will be fewer first-time home buyers in 2014. Young people in Canada are more educated than ever before, but also less financially sound. Those graduating from college or university have higher student debt and lower income as compared to previous generations. The lift in the housing market for those homes appealing to “first-time buyers” will not be the same in the near future.

• Opportunities for real estate investing rest with properties that appeal to a younger demographic who can’t purchase a home, but want to rent a reasonably nice home or condo.

• The demographic trend for those who are 55 or up is easy to follow; investing in this market is a sound decision.

• Facebook and twitter are not driving forces in the economy and should be considered cautiously when long-term investing. However, technological innovations are a key factor in increasing productivity around the world. The U.S. continues to make great strides in this area, while Canada lags behind.

•  The consumer debt Canadians are acquiring through mortgage debt will continue to be a drag in the Canadian economy.

•  The increase in a bank’s prime rate isn’t forecast to move until the first quarter of 2015. This is significant for those who have variable rate mortgages.

It’s critical for those who work in the real estate industry to understand how the global economy affects the housing market. 

Whether you’re a client of a bank or mortgage brokerage, if you’re interested in reviewing your own home purchase or sale and how it will impact you financially please contact me by phone at 519-763-3900 ext. 1001 or via e-mail at lastovic.s@mortgagecentre.com.

Leave your comments below!

Wondering why fixed rates are up but not variable?

 Here's a great explanation on why fixed rates are going up. 

I've been receiving panic calls from clients regarding their variable rate mortgages with the concern that their rates where climbing. Variable rate mortgages are priced off of an institution's prime rate (which can be impacted by the Bank of Canada overnight lending rate), which is a different indicator than the bond market.

Thanks to www.canadianmortgagetrends.com for the below article!

 

 

Yields, Swap Rates & Fixed Rates — Higher Yet Again

Bond yields have been going vertical.
By early Thursday, the 5-year yield—which influences long-term fixed rates—was up as much as 20+ basis points in less than 48 hours. That's an unusual move and it was driven by optimistic economic comments from the U.S. central bank.
This spike in yields has led dozens of lenders to announce fixed rate increases. The most notable today was RBC, which is boosting certain discounted fixed rates by 20 basis points on Monday.
But it’s not only bond yields that are flying. So is the 5-year swap spread, and that also has mortgage rate implications.

Swaps Basics
A “swap” (interest rate swap) is an agreement to exchange two different types of interest payments:  fixed-rate payments and floating-rate payments. Financial institutions buy swaps to hedge interest rate risk and lock in profits.

A simplified example of hedging: A bank with 5-year fixed mortgages receives fixed-rate payments from borrowers. That same bank also has short-term deposits. If short-term rates rise, the bank would have to pay higher rates to depositors, but be left with the same fixed rate payments from its mortgages. To solve that problem, the bank buys a swap that lets it receive floating-rate payments (at a higher rate than it has to pay out to depositors). In exchange, the bank must give its fixed-rate payments to the swap seller.

Why swaps matter
The difference between the 5-year swap rate and the 5-year government yield is called the "swap spread."
When the swap spread gets wider, fixed mortgages can become more expensive to hedge, other things being equal. That often happens when bonds sell off and yields soar. Lenders then pass along that added cost to borrowers.
Here’s a chart of the swap spread from earlier Thursday. As you can see, it has been making new relative highs.

(Click to enlarge)

Swap spreads may continue to widen if Canadians rush to lock in low rates. In that scenario, banks would have even more fixed-rate mortgages to hedge in the swap market.
It’s hard to say how long rising yields and widening swap spreads will exert upward pressure on rates. So if you need a mortgage in the next 180 days, call your broker or banker soon for rate hold. Some protection is better than none, and you can always cancel a rate hold if needed.

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Here's a great tip if you're doing things with a mortgage...

If you're buying your first home or selling and moving to another home, you should always get a interest rate held for you to protect you against increases in the interest rate. In the last two weeks we've seen a increase in the 5-year fixed-rate mortgage.

While most wholesale banks have been offering below 3% on a 5-year fixed mortgage, the rates have bumped up to over 3%. Most mortgage lenders are now at 3.09% and 3.19% on a 5-year fixed-rate mortgage. The reason for this jump is that the forecast for future inflation is up slightly. This has an effect on the bond market. When the bond yield moves up, so do fixed-rate mortgages.

Check with the institution that's helping you with your mortgage to find out when your mortgage rate hold expires. Buying before your low mortgage rate expires can help you save thousands of dollars in interest.

I'd love to hear your experiences on negotiating your own mortgage. Please comment or e-mail me at lastovic.s@mortgagecentre.com.

YIKES...you need to remove your financing condition in two days!

I've recently noticed a trend (especially in Guelph, Ontario, but it may be applicable to your own real estate market) where home buyers are either remove the conditions of financing or need to turn around their financing in only a couple of days.  Although we are in a balanced market in the area, nice homes that are priced correctly sometimes have multiple offers and realtors are advising buyers to remove the financing condition to make their offer "stronger".

Even if the borrower has been pre-approved for the mortgage, getting mortgage financing can still be an issue for buyers as the qualifications for mortgage lending have become more stringent. Borrowers who where once able to qualify (event six months ago) may find themselves in a position where they cannot now get a mortgage.

Here are some recommendations if you want to remove the financing condition from an offer:

1. Speak to a mortgage profession who is confident in explaining the risks. If they cannot clearly explain the risks find someone who can, because they do not understand mortgage-lending as thoroughly as they should. Do you really want to work with a banker/broker who doesn't know what they are doing?

2. If you are selling and buying a home, know exactly how much equity you have available when you sell. I find most people assume that they have more equity than they really do because they haven't accounted for all the costs and debts that need to be paid out. Your mortgage professional should review in detail the numbers with you.

3. If you are putting less than 20% as a down payment, you will likely need to obtain default insurance on the mortgage (sometimes referred to as "CMHC"). What I've found is that in cases where the mortgage financing becomes an issue, the borrower cannot get approved through the requirements of the default insurance provider.  The requirements are clearly laid out so be sure your mortgage professional knows them.  You can also get them at CMHC's web site.

Two e-mail messages that stood out yesterday...

Yesterday I received two e-mails that stood-out in my inbox: one from Scotiabank letting me know that they are discontinuing their no-downpayment mortgage; and, the second message came from MCAP (a wholesale bank) letting me know that their maximum loan-to-value on a secured-line-of-credit would only be to 65% of the value of a home, instead of the 80% value traditionally lent.

While I was anticipating these changes later this year, they've come as a surprise because they happened quickly and without much notice.  Normally, when drastic changes happen in lending there is usually a lead-up of several weeks.  This allows borrowers to get their applications approved before the cut-off dates.  This time there was no far-advance warning.

What are the main implications on these changes?

• For real estate investors who would normally use the equity that they've built up in their homes to purchase investments, the amount that they can use from their home has decreased by 25%. Although there are other lenders who will still allow you to access 80% of the value of your home through a secured-line-of-credit, I think we'll be seeing most lenders drop their maximum loan-to-value to 65% down from 80%.
• For those who wanted to buy a house and had good job stability and credit, but have had difficulty saving for a downpayment, their chances of buying a home and getting good financing is limited.  Although there are lenders who will still do "no downpayment" mortgages, we'll likely see this program being cancelled with most mortgage lenders.

Your feedback and comments are welcomed! If you have any further questions that you'd like to discuss please give me a call or send me an e-mail:

Tel: 519-763-3900 ext.1001
E-mail: lastovic.s@mortgagecentre.com
www.guelphmortgagecentre.com