Rate Hikes: Not If, But When...(but also if)

One headline suggests interest rates are bound to rise soon, the next suggests they may drop to new lows, and a third suggests no changes anytime soon. This has been the case since rates dropped to 50-year record lows in 2009.

Many were adamant that rates could go no lower at that point, and yet they have, with a few short-lived blips upward, in defiance of all who are calling for a return to normal... whatever normal is now.

Keep in mind that a key driver of interest rates is the economy in general. What drives interest rates down? Economic bad news. What will drive rates up? Economic good news.

Economic good news seems in short supply since 2008.

Interest rates are a very large economic lever, far too large to be used simply to cool the arguably overheated real estate markets of two particular cities (Vancouver and Toronto). Cooling of real estate is addressed not through interest rate hikes, but through policy changes. Most commentators forget that only a few short years ago there existed a 40-year amortization, 100% financing not just for owner-occupied but for investment properties, and variable-rate mortgage qualification based on the three-year fixed discounted rate.

All of those things are gone or changed radically, and reality is that borrowers in 2008 – at nearly double the current interest rates – qualified for larger, and arguably riskier, mortgages than borrowers do today.

Interest rates will not be adjusted based on the detached home frenzy of Toronto and Vancouver. Lending guidelines have already been adjusted accordingly.

Nor is it valid to argue that rates have been so low for so long. How long they remain low is a function of inflationary and deflationary forces in the general economy.

The sign on the streets? Watch for a bunch of our peers spending money like those proverbial sailors on shore leave that we mentioned last month. A brand-new truck in each of your neighbours' driveways, each unloading brand new 80" flatscreeen TV’s... that is what will give the economy a strong boost and shift inflationary numbers into the 'exceeding expectations' category.

Until that time the steady stream of lackluster economic news is likely to serve mortgage holders well. The big beneficiaries will be those in fixed rates approaching renewal dates over the next 12 - 18 months, and those enjoying the ride in their variable rate mortgages.

Be sure to start the renewal conversation with me six months out from the mortgage renewal date. Your current lender may suggest that rates are about to move and locking into something early is the right move, but always consult with me first to determine if the move being suggested is right for the lender, or right for you.

Happy summer!

Liz 

(604) 290-4835

Liz@LizReid-Mortgages.ca

Pre-Approvals...More Important & Less Concrete than Ever!

Going through the pre-approval process is more important than ever to both you and your Realtor, but the actual term 'pre-approval' is potentially misleading.

You may be pre-approved for a certain mortgage amount, however there are still a number of variables that can enter the picture once an offer is accepted.  That's why it is imperative that one always include a clause in the offer along the lines of 'subject to receiving and approving financing'.  (There are variations to be discussed around the specific wording.)

Often clients are reluctant to write the initial offer on a property without feeling like they are 100% pre-approved.

An understandable desire.  The risk, though, is that some may falsely believe that they have a guarantee of financing.  They don't.

A lender must review all related documents - not just those of the clients. but also those from the appraiser and the Realtor - as the property itself must meet certain standards and guidelines.

The pre-approval process should be considered a pre-screening - a first step only.

It does involve an analysis of the client's current credit report; it should also include a list for the client of all documents that will be required in the event that an offer is accepted.  Clients should also come away from this initial process with a  clear understanding of the maximum mortgage amount they qualify for, along with various related costs involved in their specific real estate transaction.  Equally important; with the completed application your Broker is able to lock in rates for up to 120 days,

Why won't a lender fully review and underwrite a pre-approval?

• Lenders do not have the staff resources to review 'maybe' applications - they have a hard enough time keeping up with 'live' transactions.
• The job you have today may well not be the job you have by the time you write an offer.
• If more than for weeks pass, all of the documents are out of date - by lender standards - and a fresh batch needs to be ordered and reviewed.
• The conversion rate of pre-approvals to 'live transactions' is less than 10%.

It is this last point that makes it so difficult to get an underwriter to completely review a pre-approval application as a special exception.

The bottom line is that a client's best bet for confidence is the educated and experienced opinion of the front-line individual with whom they are directly speaking - and that's their Mortgage Broker. This individual will not be the same person who underwrites and formally approves the live transaction when the time comes.

This disconnect between intake of application and actual underwriting of a live file makes having a ‘subject to receiving and approving financing’ clause in the purchase sale agreement so very important.

Perhaps the most significant factor in undermining the solidity of a client's pre-approval is the relentless pace of change of lending guidelines and policies – changes implemented not only by the Federal Government but also by the lenders themselves. It is very easy to have a pre-approval for a certain mortgage amount rendered meaningless just a few days later through changes to internal underwriting guidelines. Often these changes arrive with no warning and existing pre-approvals are not grandfathered.

It is absolutely worthwhile going through the pre-approval process before writing offers, and in particular before listing your current property for sale or accepting offers. This will give you a good idea of your maximum mortgage amount as well as securing a rate for you. It is a worthwhile endeavor.

Just be aware that aside from the key advantage of catching small issues early and securing rates, a pre-approval is not a 100% guarantee of financing.

But the good thing is, I can help you with this process!

Give me a call and we can discuss options (604) 290-4835 or lizreid362@gmail.com

2015 Canadian Federal Budget Includes Families, Savers & Seniors

As a Blogger that loves to follow and decipher Canadian financial news, I received the following press release today from the newest addition to the Dominion Lending Centres Team, Dr. Sherry Cooper.  

It is safe to say that am I excited Dr. Cooper has joined us as she is one well educated, accurate and highly respected lady!  

Being that I could not have written this better myself, I decided to share.  Enjoy!

Vancouver, BC - Responding to today’s federal budget announcement, Dr. Sherry Cooper applauds the deficit reducing components of the 2015 Budget, stating that Ottawa’s plan offers a balance between fiscal restraint and targeted spending in key areas.

The budget forecasts a surplus of $1.4 billion this fiscal year, the first surplus in seven years. At the height of the global economic and financial crisis, the deficit was as high as $55.6 billion.

“This is a play-it-safe budget- no big new ideas, but great success in deficit reduction, tax cuts and smaller government,” says Dr. Cooper, Chief Economist for Dominion Lending Centres. “The measures to help families, savers and seniors are worthwhile and affordable.” Budget 2015 continues to shrink the role of government in the Canadian economy, continuing to cut taxes, a trend since the Conservatives took power in 2006. The Harper government is enshrining into law this government shrinkage with balanced budget legislation, allowing no more deficits unless the economy moves into recession, or in the case of extraordinary circumstances. Dr. Cooper stated that the government must be careful around balanced budget legislation. “Balanced budget legislation reduces the flexibility of government to conduct proactive counter-cyclical fiscal policy in a timely manner.” This is particularly relevant in a world where central banks have little room to counteract tight fiscal austerity. Hamstringing government policy in this environment seems untimely, at best. In addition, boomers will benefit from the doubling of the maximum contribution to Tax Free Savings Accounts (TFSAs) to $10,000. According to Dr. Cooper, this is a very good idea given that most boomers haven’t saved enough for retirement and younger people would benefit from the huge compounding effects of tax-free returns. Dr. Cooper added: The measures introduced to enhance personal savings through the TFSAs and RRIFs will help, but the current low interest rates force savers to take more risk to enhance returns.

About Dr. Sherry Cooper: Dr. Sherry Cooper took the position of Chief Economist, for Dominion Lending Centres in early 2015. Prior to joining DLC, Dr. Cooper was the Chief Economist with one of Canada’s largest financial institutions and is well versed in the mortgage sector. Dr. Cooper has an M.A. and Ph.D. in Economics from the University of Pittsburgh. She began her career at the United States Federal Reserve Board in Washington, D.C. where she worked very closely with then-Chairman, Paul Volcker, a relationship she maintains today. After five years at the Federal Reserve, she joined the Federal National Mortgage Association as Director of Financial Economics.

Prime Rate Reduction...What Does This All Mean?

Shock & Awe! 

Yesterday turned out to be a pretty spectacular day for many reasons in the financial world for Canada! I hope you enjoy the read – I've tried to ensure that it is not too technical, but if you have any questions on what is outlined below, I’ll be happy to break it down further!

In a stunning announcement yesterday, the Bank of Canada (BOC) issued a statement that they were cutting their Key Interest rate by 1/4 point - down from 1.00% to 0.75%. This is the first change to the overnight rate since Sept 2010, and a decision that none of the 22 economists in a Bloomberg News survey predicted. 

Note: I was planning on sending this update out immediately after the announcement yesterday, but I wanted to wait to hear if the chartered banks (RBC, BMO, TD, etc) would be following suit in cutting their consumer Prime Rate down accordingly by 1/4 point, to 2.75% (from it’s current level of 3.00%); however there has been very little in the way of updates that this will happen. In fact, there is speculation in the opposite direction that banks may not pass along the rate cut to consumers, thus pocketing the difference for themselves. A tweet from Rate Spy suggested: “Just got official word (direct from TD) that it is not changing it’s prime rate 'at this time’.” -https://twitter.com/RateSpy/status/558298960629366784 

Obviously there are a lot of factors that would go into a decision like that from the banks, but as is the nature of a free market all we would need is one lender to make the call to adjust their consumer Prime Rate downwards, and it’s likely that the rest would follow suit - and thus mortgage rate wars could ensue. 

An interesting point to note for those of you that remember, is that if the banks choose not to pass on this rate cut to consumers, it wouldn't be the first time. The spread between consumer prime rate and the overnight rate was 175 bps (1.75%) back in November 2008, but then grew to 200 bps in December 2008 when banks chose not to pass on a rate cut then. So if they do it again this time, the spread would grow to 225 bps. 

If the banks do choose to pass the rate cut on to consumers, then that would be good news for those of you holding a variable rate mortgage or LOC product as you will see your rate drop - and thus your payment to follow suit as well. Less interest costs would mean it continues to be a great time to pay down your mortgage faster! I would suggest you keep your payments at the same level and enjoy the additional benefits of becoming mortgage free faster! 

It’s tough to predict what the future may bring, because as you all know from reading my updates in the past – 2015 was supposed to be a year that the BOC started to increase the overnight rate, not cut it. But interestingly now, Bloomberg financial markets are now pricing in a 100% change of another rate cut by April. "Source: https://twitter.com/RateSpy/status/557929467151400962 "

There could be a downside to all of this of course. It’s very likely that banks would reduce the spread on their variable rate mortgage discounts. That means that we could potentially see variable rate mortgages reduce from their current level of Prime -.60% (the current average variable mortgage discount). The last time we had a big drop in prime rate, we did see the spreads on mortgage rates change from as low as Prime -.90%, to Prime +.60% within a few short months. It’s all very early on at this point, but there is a very real possibility of this as it would be harder for banks to hit their profit margins. So if you have any interest in securing a variable rate mortgage, it would be a good time to discuss this.

Lastly - one of the most interesting things to happen yesterday, is that it was completely overshadowed by the news of the BOC rate cut, but the Canada 5-year government bond yield dropped below 1.00% for the first time ever in history. At it’s lowest point during the day, it hit 0.799%! Bonds are what our fixed rate mortgages are priced off of, and if these continue to drop (or even stay at the deflated levels they are at) then we can expect further rate drops on the 5-year fixed mortgage rates. Currently the lowest unencumbered 5-year fixed is 2.89%, but it’s worth watching what the next few weeks bring - as I could see this dropping lower should things continue on the path we are on. 

So is it time to start talking about locking in, or is it time to start looking at going variable? I would love the opportunity to discuss this further with any of you!

Some great articles to read on what happened yesterday, and what to expect moving forward:

#1)  Canadian Mortgage Trends 

#2) Rate Spy

As always, I am available at anytime to discuss, plan, help, and listen to your questions, concerns, and feedback. And please forward any of my blogs to anyone who you know would be interested in receiving it, because your referrals of friends, family, and co-workers are the life blood of my business!  

To Gift or Not to Gift, that is the question?

Well, here we are again at that time of year...the holiday season.  Whether you celebrate Hanukkah, Kwanzaa, Christmas or something else, you will find yourself in the mall buying for others.

OR will you?

Many people are opting for the "gift lottery" option, whereby everyone in a family or group puts their name in a hat and you pull out a name for someone you have to buy for...keeping it under a certain $$ amount.

I personally think this is smart.  Not just because it is a time-saver, but also because you can feasibly up the maximum $$ value of the gift you buy, therefore buying something that is useful or wanted  by the recipient.

Obviously everything is not about the money spent...sometimes the best gifts are inexpensive or even FREE, but not always, and to get creative is really the name of the game.

My best gift I ever gave was to my Grandpa when I was 17.  I found an old black and white negative of him in his band uniform (he played in the Vancouver Firefighters Band in the 1930's), and I printed it on large 11" X 17" photo-paper, then hand colored it (I found out all the particulars from Grandma).  It was the first time I really saw him well up...he was so touched and I was too.  Best part was, it cost me next to nothing, but my time and energy!  So simple.

But if you have to buy, I always ask myself the following questions before putting down the cash:

• What has this person been talking about lately that they may like?
• What is something they need?
• What is helpful? (ie. gift certificate for a house cleaning company, spring gardening)
• Is it appropriate? (ie. they may want a video game, but they really need new clothes, etc)
• Do they just want to support charities?  (ie, some people prefer to give to a charity then to get something themselves)

The biggest thing to remember is that it is not for you, that you are buying for.  The holidays are for others and appreciating them and their personal choices.

My main point to this whole blog is consider the reason for the holidays in the first place.

Is it not to celebrate a family/group coming together, to appreciate  the people in your life, and to make note of a special religious or cultural time of the year?

Maybe gifts are overrated, and really we need to just appreciate the little things in life, like who you surround yourself with and making the time to visit each other.

Whatever your reason for celebrating this season, give the gift of you and your time and attention.  This is more valuable than anything!

Happy holidays!

Liz

Please let me know what you are doing for the holidays and do you do gift-exchanges or other forms of gift giving?

Affordable Housing?

Recently I was reading a blog posting on "Comparing Home Costs by City" from one of my favorite Canadian women bloggers Fabulously Broke in the City and it occurred to me that one of the common mistakes that people make is getting in over their heads with a large mortgage, because they may perceive the home purchase cost as cheaper in comparison to others in their city. 

DO NOT get caught up in the real estate web if you haven't done your homework first!  The biggest mistake that most home buyers make, is basing a purchase decision on the market conditions and not on their own personal situation.

By your personal situation I mean that if you are making $30,000/year and are expecting a raise soon, don't count on the raise until you see it.  Also, consider any updates or immediate repairs you may want/need to do on the property you are buying...where will that $$ come from?  Another thought is kids...are you wanting to have them in the next 5 years OR are they teens headed for university soon and are you thinking about helping out with tuition?

As a Mortgage Broker, I generally always ask the client if the rent or mortgage payments that they make monthly are working for them, or could they foreseeably budget more without it turning into a large sacrifice.  You see, you may be "pre-approved" for a certain $$ figure mortgage based on your annual income, but if you don't check the monthly mortgage payment cost, you may setting yourself up for disaster!  ALWAYS check to see what mortgage payments are on a pre-approval BEFORE going house hunting and committing to a purchase on a property, only to find out that the payment may be more than double what your current rent payment is now.  YIKES!

There is nothing worse than the reality that you are house poor, and strapped into a mortgage that is for a 3 or 5 year term (so there is usually a penalty involved to get out of it before the term expires).

Think about what your lifestyle right now is like...consider where you spend most of your $$, and then ponder the thought of if things were to change with your income or spending habits, could you still manage?  Only you know the answer to this question.

 Liz

Should You Skip A Mortgage Payment?

Lenders are advertising the option of skipping a mortgage payment more often these days – with one major bank even creating a TV ad!

But unless this is your only option, it’s not recommended that you skip a payment because, like most ads that sounds too good to be true, this option is as well.

The banks want you to think they’re advertising the option to skip a payment to do you a favour. But it’s important to realize that lenders are in the business of making money. They’re not going to create an ad that doesn’t benefit them in the long run.

And it’s not like you can simply choose to skip any payment at will when you need it most. You actually have to prepay your mortgage in order to take advantage of this mortgage vacation option.

You can miss a regular mortgage payment as long as you have already prepaid that amount by doubling up any mortgage payment, increasing your mortgage payments or making lump sum payments. It’s important to know how much you can prepay each year before making extra payments – this varies from lender to lender.

And if you’re going through the trouble of prepaying your mortgage, you want to make the savings work to your advantage by actually paying your mortgage off quicker – not diminishing those savings by taking a mortgage vacation.

The number of eligible payments covered by your payment vacation will be based on a combination of your prepaid amount and your current regular monthly mortgage payment. There is also typically a maximum payment vacation permitted per mortgage term, regardless of how much you have prepaid your mortgage.

Other considerations to think about when looking at the mortgage vacation option include:

·  Interest is capitalized (ie, interest is added to your outstanding principal balance)
 

·  Borrowers lose the benefit and interest cost savings of prepaying their mortgage once they use the mortgage vacation option

If you happen to already be in arrears on your mortgage, you can’t take advantage of this option.

It’s always important to read the fine print and ask questions when using a tool advertised by your lender. Better yet, speak to your mortgage professional – we know the ins and outs of all the bank offerings and can help advise you on your best options.

As independent, unbiased mortgage professionals, it’s our job to show transparency to ensure you have the right security, product, term and rate for your mortgage needs at the lowest overall cost, and with the most control in homeownership for the security you deserve.

As always, if you have any questions about the information above or your mortgage in general, I’m here to help!

~ Liz  604-290-4835 ~