Current interest rates, where are they going?

Here in British Columbia specifically; we just had one heck of a storm. Inaccurate fears of HST caused a huge rush of people trying to purchase homes before the introduction HST on July 1st, 2010. What many didn’t realize was that HST doesn’t affect existing homes; it’s only on new construction. June was one of our, if not the busiest months ever on record. So then what happened? HST slapped us across the face and the real estate market slammed its breaks. June’s shockingly cold weather changed almost immediately in July and blessed us with weather one would expect in Hawaii. Summer is already historically slow in real estate but this year something happened that I have not seen in a long time. A tumble weed rolled through my office, true story. One mortgage application came in within a two week time span. My record is eight in one day and we get one in two weeks? Anytime you transition from a Buyer’s to a Seller’s market, you get a dead-zone but with the disastrous parallel timing of HST among other things caused the perfect storm.

So now what? We expect prices to continue to decline for another three to six months before the Spring time. Yes, this is certainly a Buyer’s market now. Things are already starting to pick up nicely and we are getting a health number of people starting to shop again. The difference between now and the recent Spring, you will get a better deal on property.

Where are the mortgage interest rates going? The Bond Yield dictates the fixed rates and it has declined hard. I mean really hard. The current five year fixed should probably be about twenty basis points lower than where it is now. The Bank of Canada’s overnight lending rate dictates Prime. Prime dictates where the variable rate will go. As expect, this recently went up but only a small amount. How much higher will it go? The economy can’t hand a significant increase right now, mortgage interest rates need to raise slowly in order to avoid foreclosures and utter chaos. Likely you will see an interest rate increase of about two percent over the next two or three years. We can thank the current feeble European and American economies for keeping our floating interest rates low at present. Who knows how long their economies will stay weak?

There is a very good chance nothing will happen when the Bank of Canada meet in September to discuss a raise in the overnight lending rate. With interest rates this low and home prices dropping, it’s an excellent recipe for a good deal on property. The most important thing in Real Estate and Stock trading is to have good timing. Is there any way that you can capitalize on the current times? I am not saying you go out a buy a home but perhaps refinancing into a lower rate is a good option for you? Consolidating debt into lower interest rates and preparing yourself for a potential double dip recession isn’t a bad idea. I certainly doubt we will have a double dip recession but you never know. Refinancing your existing home to pull out down payment on a revenue property may or may not be a good idea for you. The interest portion on that top up is tax deductible by the way. If you ask me, things are looking up.

Feel free to comment below and let me know your thoughts. Please call my office if you ever have a questions at 604 628 5040.

Best regards,

Jessi Johnson

The big banks introduced IRD (Interest Rate Differential) penalties in 2005 as a way to earn more profits from fixed terms canceled before completion. The concept sounds reasonably fair except the IRD calculations are not standardized which are controversial. The clear issue here is banks are able to manipulate how they charge their IRD penalties which can become unreasonably expensive for mortgage holder looking to cancel his or her mortgage early. Recently the government has promised to bring forward regulations to govern mortgage pre-payment penalties. We are hoping to have something in place by the end of the year. I think this is a major breakthrough for the mortgage industry and you as a consumer. Stay posted for further details.

Click here to figure out your penalty and run IRD calculations

People will cancel a mortgage early for a number of reasons:

• Sold their property early and aren’t purchasing another property
• Their existing rate is far higher than current mortgage rates
• A refinance is required to consolidate date

Here’s a trick to avoid paying an IRD penalty. When you sell your home before your mortgage term is complete, simply request your mortgage broker to port the mortgage to the new property.

ESN Summer Business Trade Fair

Join us Thursday June 17th with 80 exhibitors and 500 -700 attendees.

DATE:     Thursday, June 17th, 2010.
TIME:      5:30 TO 8:30 PM.
VENUE:  Riverrock Casino, Richmond BC

Over-leveraged Qualification

By Jessi Johnson

There are two types of qualifications in the mortgage industry, overleveraged and non-overleveraged. These night and day qualifications generally sit accurately with two types of mortgage holders; the character who over extends themselves consistently and the individual who is cognizant of his or her financial stability. We don’t generally need to be too concerned with the financially cautious individual however our concerns should be focused on the character that has mastered the art of overleveraging his or her monetary situation.
I like to give people names. That being said, let’s talk about Mr. Credit Maxed and Mr. Money Savvy. A typical year for Mr. Maxed will entail five to ten credit applications to various credit cards and store credit cards, a lower beacon score derived of maxed out cards, a number of embarrassing declines while trying to make a purchase consequent of balances exceeding limits and potentially a mortgage application requesting a home that he can’t afford.

A glance into the life of Mr. Savvy would show a much more pleasant picture. Mr. Savvy only has a few credit cards, all with very low balances. When it comes time to making a rent or mortgage payment, he does this with ease. His credit score and stability could get him anything his income would allow. If he were to apply for a reasonable mortgage, the reflection in his eyes would show an approval. The enjoyment of significantly lower levels of stress is a daily ritual for Mr. Savvy.

As a mortgage broker, it is our responsibility to figure out if our client is a Credit Maxed or Money Savvy. We must be extra cautious with the mortgages we place with our clients. Our goal should be to educate the consumer and not put them in a position for future failure. The best way to do this is by giving them two types of qualifications. The first being a standard (typical) qualification where you show them their max qualification obtained by deducting liabilities from income and calculating in accordance with their down payment. We would call this the Credit Max qualification. Now let’s talk about the Money Savvy qualification. One simple question must be asked, “After reviewing your budget, how much can you honestly afford each month excluding annual property tax or potential strata expenses”? Once you have this number, simply calculate backwards and this is what your client can actually afford, a non-overleveraged mortgage.

Own Your Life,

Jessi Johnson

Article written for the BC Real Estate Convention

Habitat for Humanity (in BC)

Brokers Building Community

This coming June 10th and 11th we are joining as a group of 32 Mortgage Brokers from different companies working together to help build a home in Burnaby BC for a family in need. Our goal is to raise at least $15,000 and work as a team to help construct a home. It will be a tough grueling day, especially because most of us have no idea what we are doing! But, it’s going to be a lot of fun and knowing we helped put a roof over the heads of a family will be priceless.

Please help out our cause my contributing financially with a donation to the Habitat for Humanity. My personal goal is to raise $1,000! Your donations go directly to the Habitat for Humanity for Greater Vancouver. We appreciate all the support we can get.

<< Please CLICK HERE to donate >>

Every bit counts!

Are you a mortgage broker and want to help build? We may still have space left.

Building Homes.  Building Hope.  Building Teams.

Brokers Building Community is partnering with Habitat for Humanity Greater Vancouver on June 10^th and 11th. If you are a mortgage broker and excited about making a tangible, valuable difference in the lives of hard working, low-income families, then come lend us a helping hand! All you need to bring is an enthusiastic and adventurous attitude, along with the desire to contribute some physical effort.   No experience is necessary.

WHO:             A team of 32 enthusiastic volunteers (16 per day) *10 spots remaining

WHEN:          June 10^th and 11th

TIME:             8:00am to 4:00pm (day starts @ 8am sharp)

WHERE:       8745 Government Street, Burnaby – (park at the church next door)

WHY:             There is no greater feeling than helping to build someone’s future

If you are interested in joining our team for this work day please contact Kevin Dear for more details at 604 562 8328.

Note:  Dress for the weather (rain, snow, and/or shine); wear long pants and bring a pair of heavy socks.  If you have a hard hat, steel toed boots and work gloves then please bring them, otherwise all required equipment is available on the build site.  Lunch will be provided and there will also be beverages supplied during scheduled breaks (including bottled water).

Working in the mortgage industry is like cruising on a slow moving roller coaster. Just a short while ago I posted details on the New Mortgage Rules but a few questions were left unanswered: What is the new “qualifying rate” and what is considered “speculation“? Well the government finally made up their mind and the new details are as follows:

• The new qualifying rate for mortgage qualification with a LTV (loan to value) over 80% is the bank posted rate for terms less than 5 years or VRM (variable rate mortgages). Over 80% LTV would be considered a high ratio mortgage. In this circumstance, today’s rate would be 5.39% which is much higher than the discounted broker rate. The bank posted rate is the rate banks would previously attempt to sell you until mortgage brokers came into play. Now most banks have smartened up and seldom insult ones intelligence with such high rates. If you are putting 20% or greater down (purchasing), or have 20% or greater equity (refinancing) then this won’t affect you. This all essentially means when purchasing high ratio and choosing a term less than 5 years or a VRM mortgage, when either rate is below the 5 year post rate, you are still required to qualify your income off the new rules: the bank posted 5 year.
• Buying on speculation and having to put a minimum of 20% down is not when you imagine it to be. Speculation in the governments eyes defines the purchase of revenue property, not presale like most of us suspected.

It’s not a huge surprise that the Canadian government who watches over the worlds most secure banks made changes to the mortgage qualifications. What is a big surprise is that the US government still hasn’t done anything and it’s their sloppy lending that caused this whole mess. Come to think of it, actually that is no surprise at all. Yes the NINJA (no income+ no job=approved) mortgages are down to a dull roar but their mortgage qualification guidelines need serious restructuring.

Enough of the states, let’s focus on the Canadian guidelines. Everyone will have a chance to obtain a mortgage commitment before April 19, 2010 to avoid the changes coming into play.

Here’s are the “non-detailed” changes:

• All borrowers must meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate, shorter term or variable product. This initiative will help Canadians prepare for higher interest rates in the future. The confusion lies with what five year rate? Do they mean 5 year posted or Prime plus 2% (example)? Also, what exactly do they mean my “standards”.
  
• The maximum amount Canadians can withdraw in refinancing their mortgages has been lower to 90 per cent from 95 per cent of the value of their homes. This will help ensure home ownership is a more effective way to save. This has realistically been in place since the recession start in early Spring of 2009 and  I strongly agree with this. This will help people from using their homes as proverbial ATM machines.
• Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation. Ok, so what is their definition of “speculation”? My definition would be pre-sale and if that is the case I STRONGLY agree with this. However their are rumours out there that this will include rental (revenue properties).

You are probably thinking to yourself, well this posting doesn’t help me much and I agree with you. When we tried to dig further into more specific answers, we were told that a more details report was coming. Grrrrrr.

Your thoughts?

I was recently ask an excellent question that at the time I wasn’t able to answer. What does a payment of _______ get me for a mortgage these days with today’s rates? This is a difficult question to have an answer right off the bat because obviously rates change all the time. This is also dependent on the down payment.

For example a first home buyer buying a $200,000 condo with 5% down will incur a mortgage of $195,225 because of the insurance premium ($5,225). Furthermore, if that same buyer wanted a 35 year amortization, then the premium would be even slightly higher. Now lets look at a purchaser with 20% down, the mortgage is only $160,000 with premium. In order to answer this question and provide a nice breakdown, I had to simplify my mortgage calculation. I hope the following breakdown works for you.

Using a current fixed mortgage rate or a frozen VRM rate of 3.89%

Payment:        Mortgage with 25 yr am:        Mortgage with a 35 yr am:

$1,000               $192,500                                             $232,000

$1,500               $290,000                                             $345,000

$2,000               $385,000                                             $462,000

$2,500               $482,000                                             $576,000

$3,000               $577,000                                             $807,000

Disclaimer: Please note, the mortgage does not include any premiums, the client must have clean established credit with regular employment conditions. The 25 and 35 yr am means year and amortization. My calculations are rounded up to the nearest $10 increment.

Canadian Finance Minister Jim Flaherty has come forward to state that regulations for real estate purchases and mortgage amortizations could change soon. In view of the recently meltdown in the US that caused a global recession, he motioned his intentions were to increase the minimum down payment (probably to 10%) and lower the over all amortization from 35 years (high-ratio) and 40 years (conventional) to a lower amount (likely 30 years) amortization. Home owners are taking on too much debt and if they are forced to save more to create a larger down payment, it will help for the overall stability of the country. Unlike the US, our banking system is still very secure and citizens in general have reasonable debt loads. However the American economy is very fragile and could crumble at any time. The more we are prepare with limited debt and the ability to handle larger rates, the better. With a larger initial down payment, we will be able to handle a drop in home prices when it comes to refinancing or selling. The initial concern of these potential changes will affect home values. The amount of buyers will decrease significantly causing more supply and less competition. First home buyers will also be hit hard with this including existing owners and investors. Too many Canadians rely on their home equity as a source of income instead of a retire fund avenue. This is terrible financial planning and many will be impacted down the road. Personally I think they should tighten qualification guidelines prior to resorting to such extreme measures. Please see the below article by CTV for the official release.

CTV.ca News Staff

Date: Sun. Dec. 20 2009 11:05 PM ET

For those who follow the VRM:

The Bank of Canada is meeting this coming Tuesday December 8th for the last time in 2009. We don’t anticipate any change in the over night lending rate which is currently at 0.25%. Once inflation starts to kick in, this will certainly increase but until then we are safe. Ideally inflation is kept at 2% but the current rate of inflation clocked in at 0.1% for October 2009.

For those who follow the fixed rates:

The bond yield has been on the decline over the past few weeks however recently had a large spike. Generally good economic news will cause the bond yield to increase. Canada added 79,000 jobs in November which would certainly be considered good news. This probably caused the bond yield to spike by 0.14% to 2.53%.

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