Maximum amortization drops from 35 to 30 years
The government has been concerned about Canadians’ household debt situation for a while. It moved them to tighten mortgage rules a year ago, but borrowing hasn’t dropped significantly since. So the government has decided to introduce a 2nd wave of tightening aimed specifically at marginal borrowers.
The most significant change is reducing the maximum amortization from 35 to 30 years for government-backed insured mortgages. This isn’t a huge change, and will most likely only reduce mortgage origination by about 2-3%. The maximum amount for refinances has been reduced from 90% to 85% of the house value. The changes to amortization and refinancing will take effect on March 18, 2011.
Average consumers probably won’t notice much impact from these changes. The goal isn’t to discourage people from buying a house. The goal is to make sure that people who shouldn’t be borrowing aren’t borrowing. Only people who want to get into the housing market but can’t really afford to will be impacted, and that may be a good thing all-around.
Deeply-discounted variable rates have historically beat out 5-year fixed rates roughly 77% of the time. But CIBC economist Benjamin Tal suggests the coming five years may “slightly” favour fixed rates. He displayed the following chart at the CAAMP (Canadian Association of Accredited Mortgage Professionals) Forum on Monday, November 22nd:
It projects that the typical variable-rate mortgage (VRM) will be more expensive over five years than the typical 5-year fixed. Benjamin Tal was careful to point out that this isn’t a blanket recommendation of fixed rates; it’s more of a commentary on how narrow the gap has become between fixed and variable mortgages, based on market rate expectations.
Some people will undoubtedly look at this and see no point in assuming the risk of a VRM given the minimal projected cost difference. Whatever the case, rates are near the bottom, and the market is clearly betting on future hikes. However you look at it, going variable is no longer as clear-cut a strategy as it once was.
As your mortgage professional, let me run some rate simulations. If a substantial increase in prime would stress your cash flow, a VRM may not worth the risk. Either way, I’ll be sure to point out the pros & cons of each product and help you choose the product that’s right for you.
As you may or may not have heard, we’ve recently seen a drop in Fixed Rates. Here are a few of the lowest Fixed Rates currently available to Canadians:
5yr @ 3.64%* – 3.79%
4yr @ 3.49%
3yr @ 2.90%
*some conditions apply (i.e. prepayment flexibility etc)
How are Fixed Mortgage Rates determined?
The Canadian government and the Bank of Canada both play a major role in setting fixed mortgage rates. Fixed mortgage rates are influenced by the major bond yields. Bonds have always been considered a safer investment than equities and stocks. This is especially true when considering Government bonds.
When an economy is booming, most investors will invest in stocks and equities because they will earn a higher rate of return. This causes demand for bonds to decrease. When this happens, the bonds must increase the yields of the bonds to entice investors.
When an economy is in a recession (much like today), investors will search for a safe place to store their money. Stocks will decrease or have a negative yield, which will cause investors to put money into bonds. This will cause bond yields to go lower because of the increased demand.
When the economy changes, the government of Canada is forced to increase or decrease long term bond prices. When this happens, it will reduce or increase the lending costs for banks. The banks will then pass on these new rates to borrowers by increasing or decreasing fixed mortgage rates.
For more information about rates and where we currently stand in the grand scheme of things, please don’t hesitate to give me a call.
The Bank of Canada has lifted its key lending rate by 1/4 percentage point, to 0.75%. The bank said any further increases “would have to be weighed carefully against domestic and global economic developments.”
Meaning what? The BoC will now (more than likely) leave well enough alone for the foreseeable future. Although… we’ve heard that before. The next interest rate meeting is September 8th. Below is a chart of where we’ve been over the years. (Click on it for a bigger view)
Lowest rates of this beautiful day:
5yr Fixed @ 4.04%
3yr Variable @ 1.80% (Prime -.70%)
If you’re renewing, refinancing or purchasing… Call me NOW to hold these great rates!
I hope you’re enjoying a great summer so far!
Ever wondered where we stand in the grand scheme of things as far as Interest Rates are concerned?
Please enjoy the following: Historical Rate Charts – Fixed and Variable. (Please click on graphs to open in full-sized window)
(Courtesy of Firstline Mortgages – A Division of CIBC)
The new CMHC rules for self-employed (Business for self or BFS) borrowers take effect tomorrow and pose new challenges for this category of client.
First off, self-employed borrowers with more than three years in the same business who apply for a mortgage using stated income, as well as commissioned-income borrowers, are now required to provide to provide traditional proof of income (or “third party validation”) through regular income documents like financial statements, contracts and T4s.
Those who have recently become self-employed and don’t have third-party validation can still apply for a mortgage, but have to come up with a 10 per cent down payment instead of five per cent. Refinancing will also be cut to 85 per cent loan to value instead of the previous 90 per cent.
Please call to discuss.
