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Rate Update: Bank of Canada Increases Overnight Rate to 1.50%
The Bank of Canada today increased its target for the overnight rate to 1 ½ per cent. The Bank Rate is correspondingly 1 ¾ per cent and the deposit rate is 1 ¼ per cent. The Bank expects the global economy to grow by about 3 ¾ per cent in 2018 and 3 ½ per […]
Bank of Canada Increases Overnight Rate to 1.25%
Jan 17, 2018 – The Bank of Canada today increased its target for the overnight rate to 1 1/4 per cent. The Bank Rate is correspondingly 1 1/2 per cent and the deposit rate is 1 per cent. Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity. However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economic outlook.
The global economy continues to strengthen, with growth expected to average 3 1/2 per cent over the projection horizon. Growth in advanced economies is projected to be stronger than in the Bank’s October Monetary Policy Report(MPR). In particular, there are signs of increasing momentum in the US economy, which will be boosted further by recent tax changes. Global commodity prices are higher, although the benefits to Canada are being diluted by wider spreads between benchmark world and Canadian oil prices.
In Canada, real GDP growth is expected to slow to 2.2 per cent in 2018 and 1.6 per cent in 2019, following an estimated 3.0 per cent in 2017. Growth is expected to remain above potential through the first quarter of 2018 and then slow to a rate close to potential for the rest of the projection horizon.
Source: Bank of Canada
Picture Source: Financial Post
Bank of Canada Increases Overnight Rate to 1%
Oct 11, 2017 – The Bank of Canada is raising its target for the overnight rate to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.
Recent economic data have been stronger than expected, supporting the Bank’s view that growth in Canada is becoming more broadly-based and self-sustaining. Consumer spending remains robust, underpinned by continued solid employment and income growth. There has also been more widespread strength in business investment and in exports. Meanwhile, the housing sector appears to be cooling in some markets in response to recent changes in tax and housing finance policies. The Bank continues to expect a moderation in the pace of economic growth in the second half of 2017, for the reasons described in the July Monetary Policy Report (MPR), but the level of GDP is now higher than the Bank had expected.
The global economic expansion is becoming more synchronous, as anticipated in July, with stronger-than-expected indicators of growth, including higher industrial commodity prices. However, significant geopolitical risks and uncertainties around international trade and fiscal policies remain, leading to a weaker US dollar against many major currencies. In this context, the Canadian dollar has appreciated, also reflecting the relative strength of Canada’s economy.
While inflation remains below the 2 per cent target, it has evolved largely as expected in July. There has been a slight increase in both total CPI and the Bank’s core measures of inflation, consistent with the dissipating negative impact of temporary price shocks and the absorption of economic slack. Nonetheless, there remains some excess capacity in Canada’s labour market, and wage and price pressures are still more subdued than historical relationships would suggest, as observed in some other advanced economies.
Source: Bank of Canada
Picture Source: Financial Post
2017 Mortgage Consumer Survey
CMHC recently completed an online survey of 3,002 recent mortgage consumers, all prime household decision-makers who had undertaken a mortgage transaction in the past 12 months. Sixty-five percent had undergone a mortgage renewal, 15% had refinanced their mortgage, and 20% had purchased a home with mortgage financing (11% First-Time Buyers and 9% Repeat Buyers). CMHC has conducted this survey since 1999. It is the largest and most comprehensive survey of its kind in Canada.
The Home Buying Process
- Sixty-four percent (64%) of First-Time Buyers indicated they were renting before purchasing, and 34% lived with family.
- Wanting to buy their first home (37%) and feeling financially ready (31%) were the most important reasons First-Time Buyers gave for purchasing a home in the past year.
- Low interest rates (33%) was the most important reason for Repeat Buyers to purchase a home in the past year.
- Fifty-three percent (53%) of buyers were aware of the latest mortgage qualification changes, and 19% noted that it impacted their purchase decision. For example, 11% of buyers said they increased their down payment, 6% purchased a smaller home, 5% purchased in a different location, and 3% delayed their purchase.
- Buyers interact with a wide variety of people, and are most likely to consult a real estate agent (72%), or look to a family member or mortgage lender for advice (both at 57%). Forty-one percent (41%) reported interacting with a mortgage broker. Of all interactions, real estate agents were noted as most valuable.
- Seventy-one percent (71%) of First-Time Buyers accessed savings for their down payment, while 18% received a gift from a family member.
Click to Read More -> [CMHC 2017 Mortgage Consumer Survey]
CMHC Policy Revision: Get Ready for a Busy Weekend
As you enter the weekend, we wanted to provide you with an important update to the stress test implementation guidelines that were initially announced by the Minister of Finance on October 3rd. These changes to the initial announcement will likely result in a flood of buyers trying to beat the end of weekend deadline.
Our understanding of the revisions are as follows:
Updated guidance from CMHC and lenders state that the new stress test rules (i.e., having to qualify at the benchmark rate of 4.64% vs. the lower actual interest rate if you have less than a 20% down payment) will not apply to borrowers that enter into a legally binding agreement of purchase and sale before October 17th, 2016 regardless of the date the borrower applies for financing and/or the closing date of the purchase.
This is in contrast to the initial announcement that stated the submission for financing had to occur prior to October 17th and fund by March 1, 2017.
- Key Impact #1 – if someone purchases a property before or including this weekend, the old lending rules will still apply — even if the borrower submits a financing application after the Oct 17th cut-off date.
- Key Impact #2 – There was some uncertainty around new build purchases and if they have to register before March 1, 2017 to qualify under old lending guidelines. This latest update clarifies the issue as old lending rules should apply if a legally binding purchase and sale agreement is in place prior to Oct 17th (regardless of the occupancy or registration date).
We hope the above is timely and helpful, and we are on stand by should you have clarification questions or would like to discuss.
Please find below a link to our previously issued updates on this topic:
Sincerely,
Outline Financial
How Could the Recent Mortgage Policy Changes Impact You?
What a week — As noted in a previous post, the Minister of Finance caught everyone off guard earlier this week with what could be the most significant changes to the real estate and financing market we’ve seen yet.
While we will continue to post updates on our website, should you have any questions please call or email at any time as our team is on standby to discuss how these changes may impact you and/or any opportunities that may still be available given we are at the lowest interest rate point in history.
What has changed?
We have included a list of key articles at the bottom of this email that describe the changes in detail, but in summary:
- October 17th – the maximum affordability for those with less than a 20% down payment will be reduced dramatically. As an example, someone that could have qualified for an $800,000 purchase on October 16th could see that shrink to $650,000 on October 17th.
- Impact for those with more than 20% down payment (or refinances) – While this area is still in flux, what we do know at this point is that the cost and restrictions for lenders to securitize their mortgages will be increasing – which will ultimately be reflected in higher rates and/or tighter mortgage restrictions for the consumer.
How Could This Impact You?
Depending on your current circumstances and/or goals, you may want to consider the following potential risks or opportunities:
- Qualification Impact – The potential for higher rates (actual and/or qualifying), shorter amortizations, and tougher qualifying guidelines could make it increasingly difficult to purchase at desired price levels or access existing equity in your home. If you have any plans to renovate, consolidate debts for a lower overall interest cost, purchase an investment property, or borrow to invest, it may be an opportune time to look at your options under existing lending rules.
- Rate Impact – to put it bluntly, rates have never been lower. Given the recently announced changes, combined with regulatory statements published earlier this year, we anticipate a steady upward pressure on mortgage rates over the coming weeks, months, and year. If you were/are planning on accessing any additional equity from your home, or would like us to review any opportunity to restructure your current mortgage/rate, we are happy to assist.
- Home Value Impact – consistently high demand and low supply has driven GTA average price increases into the double digits (on pace for 14%+ year over year growth in 2016). The recent changes should slow the demand side of the equation (move some buyers down in price, or out of the market completely) resulting in potential buying opportunities for qualified borrowers. On the flip side, if you are looking to sell or refinance, as the changes will take some time to work through the market this could signal a good opportunity to review your options.
Media Summary:
October 2016
- Link -> [CBC News: Ottawa tightens mortgage requirements and targets foreign money]
- Link -> [Financial Post: Federal government closes tax loophole used by foreign home buyers, hikes mortgage scrutiny]
- Link -> [Bloomberg: Canada Tightens Mortgage Eligibility, Closes Loophole]
- Link -> [The Globe and Mail: Four Major Changes to Canada’s Housing Rules]
September 2016
July 2016
- Link -> [The Globe and Mail: Banking regulator cracking down on mortgage lending as home prices surge]
December 2015
Please contact our team if you have any questions, or would like any additional information.
Sincerely,
Outline Financial
Major Policy Change – Mortgage Qualification Guidelines
While the details are still trickling in, The Minister of Finance potentially dropped a bombshell on the Toronto real estate market as of this morning. While their press release was vague [click here], we understand the changes to be as follows:
Mortgage Qualification Policy Change: Currently, if you select a 5-year fixed mortgage term, you would qualify based on your actual monthly mortgage payment (i.e., calculated on 5-year fixed rates in the low to mid 2% range). Going forward, while your actual mortgage payment would still be based on your contract rate, you would need to qualify using a much higher monthly mortgage payment based on the Bank of Canada “stress-test” Benchmark Rate (currently 4.64%) — resulting in a significantly reduced maximum purchase price (refer to impact section below).
Implementation Dates: It is expected this change will be effective on October 17th for all those with less than 20% down. We are awaiting additional details, but the change may also impact those with greater than 20% down given the banks/lenders use of portfolio insurance. If that is indeed the case, it is expected that change may be implemented on November 30th.
Impact: While every case is different, we have included a sample max purchase price impact calculation for a 10% down buyer. Please contact us if you would like us to run the numbers for any specific scenario:
Impact Example (Max Affordability):
Total household salaried income = $120,000
Down payment available = 10%
Mortgage Product Chosen = 5-year Fixed
Purchase Style / Location = Freehold / Toronto
Debts = limited debts (i.e., credit card, car, etc.)
Current Max Purchase Price = Approx. $800,000*
Max Purchase Price After Oct 17th = Approx. $640,000*
(Note: the above is for illustration only. Please contact a member of The Lang Team to discuss)
Media Coverage: While additional details are expected to be published throughout the week, we have included a few relevant articles that have come out in the media today. We have also reached out the Department of Finance, lenders, and mortgage insurers directly and will pass along any relevant information as/when received.
- CTV News – Plans to Tighten Mortgage Insurance Rules
- The Globe and Mail – New Housing Measures
- CBC – Ottawa Tightens Mortgage Requirements
Should you have any questions regarding the above, please contact any member of our team.
What’s coming for Canada’s economy
VERICO economist Michael Campbell gives us an overview into the current state of the Canadian economy and what you should be aware of.
After continually underestimating the impact of falling resource prices – especially oil, the Bank of Canada has come to realize that this is a major restructuring of the economy that it estimates can take up to 5 years and remove $50 billion out of the economy annually.
While the economic pressures are focused in Alberta, Saskatchewan and Newfoundland – the economy outside resources appears to be moving along.
The big economic hope on the short term rests on a falling loonie that represents a de facto 40% plus pay cut for Canadians over the last 2 ½ years. Given that 75% of our exports go to the States, exporters will be thrilled with the lower dollar.
We’re also looking for a big year in tourism thanks to the low dollar. The drop in the loonie has already spurred a 21% increase in same day visit from the US in the first 10 months of 2015 while same day visits to the States by Canadians dropped 9.3%, which is good news for retail.
[Click here] to review the full report.
Rate Trends: Bank vs. Mono-line Lenders
In response to numerous questions we’ve received about the direction of rates recently, we’ve included an overview of what we believe is happening in the current rate environment and where we are headed.
Current Bank versus Mono-line Lender Rates = Client Opportunity?
While there is never a “right” answer for an economic opinion, one thing is for certain, the major bank mortgage rates have drifted upward over the past number of months resulting in them being significantly higher than what is currently available through mono-line lenders.
While time will tell if mono-line rates follow a similar path, for the immediate term, there may be significant savings available to any client that has or is planning to purchase and will be closing within the next 30 to 90 days.
What has created this interest rate variance?
While others may offer a different opinion, based on our review of the market, we believe the following to hold true:
- 5 year Bank of Canada bond yields have been dropping like a rock. As of today (Jan 15, 2016), the current yield is 0.559% which is by far the lowest range in history (we’ve included a graph of the bond yield history at the bottom of this email).
- 5 year mortgage rates almost always move in a direct relation to the 5 year Bank of Canada Bond Yield.
- Current Rates – while we are seeing this drop reflected in the mono-line lender world (5yr fixed rates in the 2.5%’s to 2.7%’s range are now available), the banks seem to be going in the opposite direction (they have increased their discounted 5yr fixed rates to the 2.8%’s to 3.0%’s range)*.
- Why are bank rates going up? – the general consensus is that the cost of borrowing for banks has increased. Given an expected change in capital requirement by OSFI, along with a market perception that the banks may be in for a tough ride given the economy, investors are requiring a higher return on their money (i.e., banks’ borrowing costs increased).
- Will bank rates continue to rise? – In our opinion, if the bond market stays where it is (which is likely), the banks won’t be able to go much higher. We believe the banks have already increased their rates by a sufficient margin to hedge against their risks, and may pull back as we approach the spring market.
- Should current variable rate clients lock into a fixed rate? While a lot depends on personal preference/risk tolerance, given where the bond yields are, we believe if someone has an existing Variable Rate Mortgage (VRM) at Prime -50bps or better (i.e., 2.2% or lower), we would stay the course and reap the benefits as we don’t anticipate the Prime rate heading up anytime soon – in fact, economists are actually talking about a reduction in the overnight rate which could translate to a further reduction in Prime (assuming bank pass along the savings). Where our opinion may differ is with respect to new mortgages. Given lenders have tightened their VRM formulas recently (due to an increased cost in the short term market), new clients are now looking at variable rate offers as high as 2.6% at many major banks (still 2.2% to 2.3% at most mono-lines). Given the rate gap between fixed and variable is relatively small, new buyers will have to consider how much risk they are prepared to take.
While the rate environment is constantly changing, we hope the above is helpful/timely, and we are happy to discuss in more detail at any time.
* as always, the above rates are meant for illustrative purposes only, subject to qualifying conditions, and could change at any time without notice. Please provide our contact information should a client want to discuss their specific situation.
Outline Financial
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