Why Are Some Mortgage Rates Rising?
Fears over the COVID-19 pandemic and plummeting oil prices have caused mortgage rates to plummet to multi-year lows over the past couple of weeks. But now some lenders are actually starting to raise rates. Fixed rates on certain terms have been creeping back up, while some of the big banks have been quietly cutting their discounts on prime rate (which affects floating rates).
Scotiabank, for example, raised its published 5-year closed variable rate 60 percentage points on Saturday, from 3.45% to 4.05%.
A host of other lenders have also been slashing their discounts from prime by anywhere from 20 up to 75 basis points. At one lender, for example, a new borrower could have obtained a high-ratio 5-year variable mortgage at Prime – 1.00%, or 2.45%. Today, that same rate is now Prime – 0.25%, or 3.20%.
So, what’s going on? Fear has saturated the market to the extent that lenders are now concerned about liquidity and rising defaults, according to observers.“I think if you’re a bank, you’re scared of losses right now,” Shawn Stillman, founder of mortgageoutlet.ca, told CMT. “The banks are in this to make money, and if they don’t think that they’re going to be able to make money because all of a sudden their default rate is going to go up, then they’re going to protect themselves by raising rates.”
In addition to the potential for an increase in default rates, Stillman says that with more people facing temporary layoffs due to the coronavirus, more people will start drawing on their available credit. “If you’re a business and you have a line of credit, you’re drawing on that line of credit. If you have credit cards, you’re maxing out those credit cards. You are using your ability to borrow more money and it becomes a shock to the system,” Stillman said. Essentially the banks could face a growing run on available credit facilities, which could challenge their ability to finance all of that credit.
That’s one of the reasons why the Office of the Superintendent of Financial Institutions (OSFI) announced on Friday that it was lowering the capital requirements for banks, which would free up an additional $300 billion of lending capacity. Despite the Bank of Canada’s emergency rate cut on Friday, markets are still pricing in an additional 50-bps cut when the Bank meets next month. That will bring Canada’s overnight lending rate down to 0.25%.
Knowing this, banks are starting to increase the discounts from prime so that the economics of funding variable-rate mortgages continues to make sense. “We’ve seen these shock-and-awe rate moves before,” wrote Rob McLister, founder of RateSpy.com. “On October 6, 2008, in the midst of the credit crisis, TD shocked the market with a massive 100-bps rate increase to prime + 1.00%. It applied to new variable and HELOC customers. TD rates were below prime just days before.”
Advice for Mortgage Shoppers
For those in the market for a new mortgage, and who are leaning towards a variable rate, experts recommend obtaining a rate hold as soon as possible. “I would say act sooner rather than later. Basically, this is not a time to think,” said Stillman. “Lock it in now and if something changes your mind, you can change your mind. But there’s a good chance it’s not going to be available (in a matter of days).”
McLister advises the same, whether you’re shopping for a fixed rate or a variable.
“Fixed rates aren’t rising like variable rates, not yet,” he noted. “But there’s a risk they could. Get a rate guarantee soon if you need a fixed mortgage in the next four months.”
Earlier this month, Bank of Canada Governor Stephen Poloz called on banks and other lenders to start pushing longer-term mortgages. Last week, HSBC responded by offering a record-low 10-year fixed rate of 2.99%.
That means the peace of mind of knowing mortgage payments won’t change for 10 years can be had for just a quarter-point premium above HSBC’s own 5-year fixed rate special.
In a recent post, RateSpy.com’s Rob McLister called HSBC’s 2.99% 10-year fixed rate offer “simply remarkable.”
But despite the competitive pricing for long-term rate stability, he cautioned that decade-long mortgages still aren’t for everyone, especially if 5-year fixed rates continue to fall.
While someone with a 10-year fixed rate could switch into a lower 5-year rate should rates drop, that would entail penalties—three months’ interest if the switch is made after the first five years of the 10-year mortgage, or a more onerous interest rate differential (IRD) penalty if the mortgage is broken in the first five years.
“That risk, and the small market-implied odds of meaningfully higher rates in five years, are largely why 5-year mortgages still have the edge over 10-year terms, for most people,” McLister wrote.
In a previous interview, Ratehub co-founder James Laird told Canadian Mortgage Trends that 10-year rates are most suited for those who are most risk-averse, as it allows them to set their budget over a longer horizon and reduces the risk of renewing into higher rates, given that renewals are more frequent with shorter mortgage terms.
“The 10-year fixed rate is an insurance policy, so if you’re really, really concerned about rates rising, and really want to take the risk out of your borrowing, it’s that type of consumer,” he said. But he noted that BoC Governor Poloz himself indicated that rates weren’t likely to make any major moves for an extended period of time. “That is not a good reason to go with a longer term. That’s justification for taking a variable rate or a short term.”
BCREA calls for B-20 review, return to 30-year amortizations
The body representing real estate agents in BC is urging the federal government to review the B-20 mortgage guidelines and the stress test in particular.
British Columbia Real Estate Association says that the requirements of the rules are negatively affecting housing affordability in the province and harming the ability of credit-worth British Columbians to own their own home.
“We would like to see a review and reconsideration of the current mortgage underwriting ‘stress test,” says BCREA chief executive officer Darlene Hyde. “These rules must be changed now before BC families are left further behind.”
Although the B-20 stress test provision has led to an 18% drop in home sales nationwide, it has hit Vancouver the hardest with a 45% decline since the rule was introduced. In Toronto sales were down 25%.
“The B-20 stress test is also having a negative impact on homeowner equity, family spending and the housing stock itself,” adds Hyde. “There’s a knock-on effect to the overall economy as families who are worried about declining home equity cut back on retail spending, home renovations and other products and services.”
BCREA warns that as housing demand weakens, builders pull back from the market, with a resulting supply crunch down the road.
Mortgage Professionals Canada has renewed calls for changes to the federal government’s stress tests, arguing they pose serious risk to the housing market and overall economy..
READ FULL STORY
The fallout from OSFI’s new mortgage stress test continues to play out across the mortgage industry.
Some mortgage brokers are reporting an increase in their clients’ applications being rejected by the big banks and monoline lenders as a result of the new qualification rules. In some cases, the rejection rate has jumped 20%.
Mortgage Rejection Rate Increases in Wake of Stress Test
More mortgage applications are being rejected by the big banks and monoline lenders in the wake of the new B-20 mortgage stress test, according to some mortgage brokers.
The Financial Post ran a story recently that found some brokers are reporting an increase in application rejection rates by as much as 20%.
That’s driving a large number of borrowers to credit unions and—potentially more risky—private lenders.
Dave Teixeira, Vice President of Operations, Public Relations and Communications for Dominion Lending Centres, told the Post that their brokers have seen an influx in rejections and have had to submit multiple applications to multiple institutions to find one that works. As a result, he estimated that about 20% more of their brokers’ business is now going to credit unions.
“The demand is shifting down the ladder, so you have these less regulated lenders with higher risk tolerance now seeing materially more business,” intelliMortgage broker and RateSpy founder Rob McLister was quoted as saying. “And they can charge more, and they can be pickier with the types of borrowers that they lend to.”
The Post reported that business is up at credit unions across the country, and that many have raised their rates in response to the increased demand.
HELOC Balances Rise 7.2%
Canadians are borrowing against their home equity at the fastest pace in more than five years, Bloomberg News reported on Friday.
According to December data from the Office of the Superintendent of Financial Institutions (OSFI), home equity line of credit (HELOC) balances rose to a record $230 billion for the month, up 7.2% from a year earlier.
All other forms of consumer debt, including personal loans, credit card balances, car loans and overdrafts, increased 3.2% over the same period.
Bloomberg cited a June report from the Financial Consumer Agency of Canada that raised red flags about rising HELOC balances.
“At a time when consumers are carrying record amounts of debt, the persistence of HELOC debt may add stress to the financial well-being of Canadian households,” said Lucie Tedesco, FCAC Commissioner. “HELOCs may lead Canadians to use their homes as ATMs, making it easier for them to borrow more than they can afford.”
Of the 3 million HELOC accounts in Canada, FCAC said the average outstanding balance is $70,000. The agency noted that 25% of consumers pay only the interest portion of the loan, or make the minimum payment, while the majority of HELOCs aren’t paid off in full until the home is sold.
CIMBC Announces New President
The Coalition of Independent Mortgage Brokers of Canada (CIMBC) has named former BMO Bank executive Bob Sinclair as the association’s new president.
Sinclair has held numerous executive roles at BMO, including VP and Head of Specialized Sales, Canada, and was responsible for growth in the loan and mortgage business.
About the challenges ahead, Sinclair said: “There continues to be changes in this industry, we’ve seen changes in the regulatory environment, lender guidelines, the housing market and consumer confidence….Those (companies) that find ways to work within these changes, develop alternative solutions through new products and services for the brokers and agents will be successful in building confidence with their customers.”
Steve Huebl - Mortgage Broker News
Finance minister announces new “stress test” on applicants for all insured mortgages, which will “take lots of people out of the housing market,” according to local mortgage expert..
Canadians applying for a mortgage that requires CMHC insurance will have to qualify under higher interest rates under a new “stress test” announced October 3 by federal finance minister Bill Morneau.
The tougher mortgage rules were announced as part of a wider series of "preventative measures" aimed at “ensuring the long-term stability of the market” and reducing risk, according to Morneau.
Under the proposed new mortgage qualification rules, the current “stress test” that currently applies to some insured, variable-rate mortgages and insured mortgages with terms of less than five years will be applied to all new applications for insured mortgages, as of October 17.
The stress test requires that, even if an applicant can achieve a discounted mortgage rate of 2.79 per cent, for example, they will have to qualify as if they would have to pay the full Bank of Canada posted rate, currently 4.64 per cent.
This new measure will now include all new applicants for insured, fixed-rate mortgages with terms of five years and more, who previously only had to qualify under the discounted interest rate they would actually be paying – which had typically allowed those applicants to qualify for much larger loans than will be possible under the new proposal.
Homeowners that have an existing insured mortgage or those renewing existing insured mortgages will not be affected by this measure. Applicants for uninsured mortgages (those with a down payment of more than 20 per cent) are also not affected.
Mortgage expert Alisa Aragon, a broker with Dominion Lending Centres Mountain View, told REW.ca, “This new measure is going to take so many people out of the market, especially in Vancouver with our high home prices. A lot of people have less than 20 per cent down payment, and a lot of them don’t go for variable or short-term rates because they don’t qualify under the stress test, so they go for fixed-term rates which allows them to qualify under the discounted contract rate. Now if they have to qualify under the posted rate, they will qualify for a much lower mortgage and that could take them out of the market.
“I have a couple that is looking at homes around $630,000 and I have them qualified at the five-year contract rate. Now with the new rules coming into effect, they are going to qualify for a property of $504,000. That is a huge difference and that could mean the difference between buying a house or a condo.”
The ministry also announced that it is levelling the playing field in terms of mortgage eligibility criteria, which is currently less stringent when applied to mortgage applicants with 20 per cent or more down payment (considered a low loan-to-value ratio mortgage). The ministry stated, “To help ensure that taxpayer support for mortgage funding is targeted towards safer lending, effective November 30, 2016, mortgages insured by lenders through portfolio insurance and other low loan-to-value ratio mortgage insurance must meet the same loan eligibility criteria as high loan-to-value insured mortgages.”
The federal government is also closing a tax loophole for foreign real estate speculators to prevent foreign buyers from purchasing a property and selling it again in a given year, and failing to pay capital gains tax on that sale.
Canadian tax rules do not require homeowners to pay tax on any capital gains (the uplift in value) made by the sale of their principal residence. Under current rules, homeowners do not have to declare on their tax returns the sale of properties they used as their principal residence – which has been reported to have resulted in widespread abuse as overseas real estate speculators have failed to pay capital gains tax on the sale of a Canadian property.
Under the new rules, all taxpayers will have to declare on their income tax returns a sale of a property that they claim is their primary residence. To qualify for this, the homeowner or a family member must have lived in the home at some time during the year.
The Department of Finance said the change will ensure that the principal residence exemption is used only by Canadians, who will designate just one property as their principal residence in a given year.
The third key policy announced October 3 was a new consultation with the mortgage lending market on whether mortgage risk is appropriately shared between all involved parties, in an attempt to find ways to share financial risk in the event of mortgage defaults.
Morneau told media at a Toronto press conference: “We have a housing market that is stable. Our market is working. The measures we are taking today are intended to ensure the long-term stability of the market, protect the risk of Canadians as they invest in a home, and make sure the housing market risk is appropriately shared between the government, financial institutions and Canadians.”