In this issue:
* New Canadian Mortgage Rules – what they are, and how they’ll affect you. * Rate Update * Rates: When are they going up, and what should I do about it? * Canadian Mortgage Awards – we need your vote!
New Canadian Mortgage Rules – In Effect April 19th, 2010
1. All high-ratio insured mortgages in Canada that have a variable rate or a fixed rate for a term shorter than five years will need to qualify borrowers based on the higher of the “contract rate” or the 5-year “qualifying rate” set by the Government of Canada, which incidentally, is the same as a chartered bank “posted rate”. This rule change will make the 5 year fixed much more attractive, because you’ll be able to qualify at the contract rate (i.e. 3.69% today) vs. the posted rate (5.25% today).
2. The maximum loan-to-value for a refinance is going to be 90%, which is down from the current maximum 95%. What this means is that, if you own a home worth $100,000 you’ll only be able to refinance up to $90,000 of that, rather than $95,000. (Incidentally, if you own a home worth $100,000 in Edmonton we need to have a talk about upgrading. Seriously.) This rule gives people who refinance a bit of a buffer against values dropping and protects them from going “under water”.
3. If you want to buy a rental property you’ll need to put 20% down, instead of the minimum 5% currently. This is probably the biggest change and the one that will change the face of the market the most in my opinion. It will probably put some of the “get rich quick” seminars out of business because you’ll no longer be able to buy as many rentals as possible with very little down. This rule change was designed to end “speculation” and quick flips because they had a tendency to drive values up quicker than normal and made affordability a problem for people who just wanted to own a home.
Other changes coming:
* CMHC insured “Stated Income” program for self-employed borrowers is changing. If you’ve been self-employed for more than three years you’re going to need to provide verifiable income. This, incidentally, will mean that you’ll probably need to claim a higher income than you currently do and pay more tax in order to qualify for financing in the future. Also, if you apply under this program and are not verifying your income, you have to put a minimum of 10% down rather than the previous 5%. * Commission-based employees are no longer eligible under the CMHC “Stated Income” program. If you earn a commission you’re going to need to prove it…and likely over the average of two years.
Term Mortgage Rates
1 Year 2.37%
2 Year 2.83%
3 Year 3.28%
4 Year 3.57%
5 Year 3.69%
7 Year 4.65%
10 Year 4.99%
ARM / Variable 1.75%
Line of Credit 2.85%
Last updated March 23, 2010
Of note, for the first time since our company was founded, we have a 10 year fixed rate under 5%. If you want the added security of knowing that your interest rate will be under 5% for the next 10 years, consider talking to us about it.
Rates: When are they going up? (And what should I do about it?)
This is the million-dollar question we hear almost every day at First Foundation. Most of the time it’s a very difficult question to answer. Right now it’s a bit easier to answer because there is only one direction for rates to go: up.
There are a few rules of thumb that will help you understand rate movements a bit better:
1. As the economy improves, rates go up. (This is because there are usually inflationary pressures, which drive up rates).
2. As bond yields go up, so do rates.
3. When banks start pushing variable rates, it’s a good sign that fixed rates are going up. Banks will inevitably push the product that is most profitable for them. If fixed-rates are too low, they don’t make as much, so they start promoting the variable. Banks know that most people who take a variable will look to “lock-in” when rates go up – into a HIGHER fixed rate in a few months than they are now. My basic advice is to do the opposite of what the banks are promoting in their advertising. It’s almost always better for you. If you’re not sure though, talk to us.
More specifically, the Bank of Canada has maintained a commitment to start raising rates in July of 2010. Bond traders won’t wait for that to happen. As the economy starts to improve and as inflation hovers around or exceeds the Bank of Canada’s 2% target (which it has exceeded already) bond traders will push yields higher. Fixed rates WILL move higher before July. In fact they’re already under-priced by at least 30 basis points (3/10ths of a percent) and possibly more. I wouldn’t be surprised in the least to see fixed-rates go up by 1/2 of a percent to 3/4 of a percent between now and June.
If you’re in a variable rate at a reasonably low loan-amount, then you’re probably ok to stay in it. But if you’re nervous at all, consider locking-in.
If you’re in a higher fixed rate and are wondering about refinancing to lock-in a lower rate, this is probably good news for you. As rates go up slightly, your penalty will go way down. At some point there will be a sweet spot for you to take a new, lower fixed rate and not have to pay such a huge penalty. Let’s keep an eye on these developments and try to find that sweet spot.
Canadian Mortgage Awards 2010 – We Need Your Vote!
We’re very fortunate to have been nominated for the Canadian Mortgage Awards for the second year in a row. Last year we were finalists for Best Customer Service and this year our firm us a finalist for “Best Internet Presence” and Lisa Last is a finalist for “Best Newcomer” in the industry.
For us it’s a big honour because we’re competing against much larger firms in most cases and to be a finalist three times in two years it speaks to the dedication of our team and reminds us of how grateful we are that we’ve been able to work with so many great clients and friends.
If you have a moment and are so inclined, there is a public vote for the Internet Presence award and we would very much appreciate your support. You can vote here and it only takes 7 seconds. Many thanks!
Enjoy the Spring!
All the best from all of us at First Foundation.