Discount Mortgages Dry Up As Canadian Borrowers Face Tough Test

The discount mortgages that stoked the Canadian housing boom are disappearing, increasing the likelihood of a correction in home values.

On Thursday, Royal Bank of Canada will hike its five-year fixed-rate mortgage to 3.89 per cent, one day after the Bank of Montreal raised its rate to 3.79 per cent. The other major lenders are all moving in the same direction.

The increases mean the cost of a new fixed-rate mortgage has climbed by more than a third in five months, signalling what could be the beginning of the end of ultra-cheap credit in Canada – and the start of fiscal pain for consumers who have overburdened themselves with debt.

“I think this is the real thing,” said Benjamin Tal, deputy chief economist at CIBC World Markets. “This is the end of extremely low interest rates. They’re simply unsustainable.”

So far, interest rates on other kinds of consumer debt are not on the rise, since they are often tied to the Bank of Canada’s benchmark rate, still sitting near a record low. Even so, the rise in mortgage rates will strain the ability of borrowers to juggle their debts.

“This is the beginning of a test for the mortgage market,” Mr. Tal said. “It’s a test of how Canadians are able to tolerate higher interest rates.”

And it is a test that came on swiftly and unexpectedly. Just five months ago, Finance Minister Jim Flaherty publicly scolded both BMO and Manulife Financial for offering mortgages he deemed irresponsibly cheap, advising against a “race to the bottom,” as mortgage rates sank as low as 2.89 per cent.

While the inevitable climb of mortgage rates has had false starts over the past couple of years, the recent hikes could be the first phase of a long-term trend.

“They’re going up every time we turn around,” said Paula Roberts, a Toronto mortgage broker. “It’s a shock to clients. Everybody just thinks they’re always going to stay low.”

As developing economies such as China falter, the United States has re-emerged as the likely engine of global economic growth. The improving U.S. outlook is already pushing up some lending rates, and should eventually reduce the need for central banks in the United States and Canada to hold down short-term interest rates to spur the economy. As long as the United States is making progress, mortgages here will probably continue to get more expensive.

The Canadian housing market is also still recoiling from regulatory changes Mr. Flaherty imposed in recent years in a deliberate attempt to engineer a “soft landing” for overpriced residential real estate. Last year, he reduced the maximum amortization period for a government-insured mortgage to 25 years from 30 years.

Speaking with reporters Wednesday outside a policy retreat in Wakefield, Que., Mr. Flaherty indicated that he sees no need at the moment for further intervention. “There are some bumps along the road in Toronto and Vancouver, in particular in the condo markets, but overall, I’m satisfied that the measures we’ve taken over the last several years have adequately calmed the markets.”

With multiple forces colluding on raising Canadian mortgage rates, the stubbornly strong housing market could finally relent. “Buying the same house will be more expensive this fall than this spring,” said Peter Routledge, an analyst at National Bank Financial.

An expected rise in rates could spur some to buy homes immediately to avoid the increased costs. Other prospective buyers will find they can no longer afford home ownership. “It’s going to limit the people that can buy,” Ms. Roberts said. “And it’s going to take longer for people to get into the market.”

Demand for homes could fall as a result. After that, the magnitude of the market’s reaction is difficult to anticipate. “Housing markets are prone to overreaction in both ways, the upside and the downside,” Mr. Routledge said. “The possibility that you get a vicious cycle goes up as rates go up.”

Visit Dominion Lending Centres Mortgage Village to consult a mortgage professional.

Bank of Canada Rate Stance Could Have Adverse Effect On Housing Market

The Bank of Canada is worried about the risk of a hot housing market. Ironically, it’s a risk the central bank is likely to make worse by changing its stance on rate hikes.

The central bank is keeping its key interest rate at 1 per cent, but decided to remove language in its policy statement that had previously implied it was leaning toward a rate hike down the road. Its decision comes as it weighs, among other things, the prospect of weak exports against the risks posed by overvalued real estate.

It warned of both possibilities on Wednesday, and noted that the latest data suggest the housing market is gaining traction again. While that would give the economy a temporary boost, it could increase the probability of a market correction later on. “Such a correction could have sizable spillover effects to other parts of the economy and to inflation,” the Bank of Canada said.

But by insinuating that interest rates will remain low for longer, and might even sink further, the bank could be fuelling the very problem it is warning about.

“At the margin, it will ease consumers’ nervousness about rising interest rates and therefore can add to the overall increase in credit,” Canadian Imperial Bank of Commerce economist Benjamin Tal said in an interview. He noted that the Bank of Canada’s statement led to a reduction in bond rates Wednesday, which could potentially lead to a very slight decrease in mortgage rates. The yield on the five-year government of Canada bond dropped to 1.737 per cent from 1.795 per cent.

But the key issue is how the bank’s decision influences consumer psychology, said Toronto-Dominion Bank chief economist Craig Alexander. Low interest rates have spurred consumers to rack up record debt levels in recent years. The rise in credit has fuelled a rise in house prices.

In an effort to counteract this, former central bank governor Mark Carney and Finance Minister Jim Flaherty have spent much time warning consumers about the risks of high debt loads.

“The Bank, in the past, has used verbal intervention to try to convince Canadians to be more cautious about their finances,” Mr. Alexander said. “By removing the bias, it reduces the voice the Bank has in terms of warning people that rates will rise at some point in the future.”

In a press conference Wednesday, central bank Governor Stephen Poloz said that he thinks the imbalances with respect to housing and household debt “if left on their own, will gradually unwind.

“We see lots of very positive behaviour at the ground level, people doing their arithmetic, self-policing, strong, strong underwriting in banks and other mortgage institutions, so a very positive thing,” he said. The bank noted that the rate at which households are piling on new debt has continued to slow and is below its historical average.

But Mr. Poloz also noted that it was consumers that did the heavy lifting to pull the economy through the crisis without a major downturn, enabling “extra growth in the housing market.”

“So part of that is a bit of a risk that it gets overdone, or that prices get a little higher than fundamentals would suggest,” he told reporters. “In that environment you have to admit that the risk as we outlined there, if it is worsened, that makes you worry about in some sense having a correction.”

His opinion is that, at the moment, it would take a negative shock from outside to spark such a correction.

Canada’s housing market has defied economists’ expectations in recent months, proving to be stronger than they thought possible in the wake of the sales slump that began in the summer of 2012 after Mr. Flaherty tightened mortgage insurance rules to cool the market off.

But many experts don’t think the strength will last. “We don’t expect the recent upward momentum to carry forward into 2014,” TD economists wrote in a recent note. “Some of the strength reflects buyers rushing into the market to beat out recent interest rate increases, which will result in a payback later this year.”

Indeed, the Bank of Canada said Wednesday that “the recent vigour in residential investment may partly reflect activity that has been pulled forward in anticipation of higher interest rates on mortgages.”

Policy makers will be keeping a close eye on the market. Canada’s banking regulator has spent months now considering potential changes to mortgage underwriting rules.

Mr. Poloz declined to weigh in on specific regional markets, suggesting that it’s not clear just how problematic they are.

“It’s true that we have, across the country, pockets of unusual strength in the housing market, unusual in the sense it’s different from the average, but there may be very good fundamental reasons for it,” he told reporters. As examples, he said it’s possible that a sizable portion of net migration is going to Toronto and creating a solid market for condos there, and strong income growth stemming from oil prices will cause strong housing markets in energy-producing areas of the country. Bank of Canada Rate Stance Could Have Adverse Effect On Housing Market

Settling Debt

In times of economic stress, people turn to seemingly simple methods for erasing debt and lessening the monthly stress of bills. One of these relief options is debt settlement. Debt settlement is a promising carrot hanging before an overwrought consumer. It’s the promise that if the consumer can reach the carrot, 40-75% of his/her debt will be forgiven by the credit agencies. That’s a nice prize, if one can reach it.

What Is Debt Settlement?

Debt settlement also goes by the moniker “debt negotiation.” Doing exactly what its name claims, it benefits the creditor in that the company receives the majority of its money back and benefits the consumer by relieving a portion of the debt owed. It’s not a “get out of jail free” option, however. The negotiation will take months, and it’s a risky business.
For those interested in a debt settlement company that works on behalf of the consumer to settle the debt, there’s risk there as well. There’s risk in finding a reputable company that will do just what it says, and these companies will charge 25-35% of the forgiven total, meaning that the consumer is really only forgiving 15-25% of the original debt.

Who Qualifies?

Creditors will not consider debt settlement unless a person is at least three months behind on payments, preferably six. In order to qualify, the consumer must stop payments to the company, banking what would be the monthly payments for the future payoff. Then, negotiations begin. Ultimately, the creditors want all of their owed money, so they will be tough in negotiations.

What’s the difference between debt negotiation and bankruptcy?

The main difference is that debt negotiation doesn’t involve the court. There is no risk of losing your home to pay off a bankruptcy, but you will have to pay off the settled debt. You will also be charged a COD, cancellation of debt, tax on your yearly taxes.
While credit companies are at first unwilling to negotiate debt, they would rather a consumer negotiate than file for bankruptcy. When a consumer files for bankruptcy, the credit companies get paid none of the owed amount. In debt negotiation, they receive an agreeable portion of the total.
Another difference is that only smaller loans such as credit card debts, personal loans, and medical bills qualify. Larger loans such as mortgages and fees such as child support and taxes cannot be forgiven.

Visit Dominion Lending Centres Mortgage Village to consult a mortgage professional.

Home Mortgages 101: What You Need To Know

Owning a home is a huge responsibility which shouldn't be taken lightly. The first step is often to get approved for a mortgage, but there is a lot to learn before you dive right in. People who have taken mortgage in the past have contributed their knowledge to this article so you can learn how to avoid the mistakes they've made, so read on.

Before getting a mortgage, study your credit history. Good credit is what can help you get a mortgage. Obtain copies of your credit history and scores from the three major credit-reporting bureaus. Study your reports carefully to ensure that no issues or errors must be resolved before you apply. Many lenders need a minimum score of 680, which complies with Freddie Mac and Fannie Mae's guidelines. Most lenders want to avoid scores that are lower than 620.

If the idea of a mortgage looming over your head for the next few decades does not appeal to you, consider refinancing over a shorter period. Although your monthly payments will be more, you'll save a lot in terms of interest over the life of the loan. It also means being mortgage-free much sooner, and owning your home outright!

Avoid fudging the numbers on your loan application. It is not unusual for people to consider exaggerating their salary and other sources of income to qualify for a larger home loan. Unfortunately, this is considered froud. You can actually be criminally prosecuted, even though it doesn't seem like a big deal.

Hire an attorney to help you understand your mortgage terms. Even those with degrees in accounting can find it difficult to fully understand the terms of a mortgage loan, and just trusting someone's word on what everything means can cause you problems down the line. Get an attorney to look it over and make everything clear.

Obtain a credit report. It is important to understand your credit rating before you begin any financial undertaking. Order reports from all 3 of the major credit reporting agencies. Compare them and look for any erroneous information that may appear. Once you have a good understanding of your ratings, you will know what to expect from lenders .

Now that you've read about the truth when it comes to getting a mortgage, you will avoid the hurdles which tripped up your peers in the past. Their struggles will make your mortgage application process smooth sailing. Be sure to use these tips, otherwise you will face the same perils they did.

Visit Dominion Lending Centres Mortgage Village to consult a mortgage professional.

Home Mortgages: Top Tips To Get You The Best Deal

If you're looking into home mortgages, then you surely are excited. It's time to buy a home! However, what you might realize is there is quite a lot of information to take in, and how do you sort all of this out to get to the mortgage company and product that you need? Keep reading to find out how to do this.

Understand your credit score and how that affects your chances for a mortgage loan. Most lenders require a certain credit level, and if you fall below, you are going to have a tougher time getting a mortgage loan with reasonable rates. A good idea is for you to try to improve your credit before you apply for mortgage loan.

Be prepared before obtaining your mortgage. Every lender will request certain documents when applying for a mortgage. Do not wait until they ask for it. Have the documents ready when you enter their office. You should have your last two pay stubs, bank statements, income-tax returns, and W-2s. Save all of these documents and any others that the lender needs in an electronic format, so that you are able to easily resend them if they get lost.

Get pre-approved for a home mortgage before shopping for a new house. Nothing is worse than finding the perfect house, only to find out that you can't get approved for a mortgage. By getting pre-approved, you know exactly how much you can afford. Additionally, your offer will be more attractive to a seller.

If you have been wading through the mortgage world wondering what to do, surely now you have a better idea of the type of mortgage you need. It's up to you to pick the best situation for your largest investment. With the tips that have been provided, you should find yourself doing just that.

Visit Dominion Lending Centres Mortgage Village to consult a mortgage professional